CJEU delivers judgment on EY gun-jumping – and finds EY did not jump the gun
The decision provides a useful clarification of the scope of the standstill obligation in proposed mergers, but questions remain on the practical application of the law.
“Gun-jumping” is the colloquial term used to describe merger parties taking steps to implement a proposed merger prior to receiving approval from the relevant competition authority. The penalties for implementing a merger prior to approval vary by jurisdiction, but they include powers to order the companies involved to de-merge or divest an interest, impose a fine, or order another remedy as appropriate to stabilise the market. In some jurisdictions (such as Denmark in the present case) there may be criminal charges attached to the conduct.
The questions regarding the standstill obligation (set out in full in the Timeline below) were referred by the Danish court to the CJEU. As the Danish competition law is directly derived from its EU equivalent, Article 7(1) of Regulation No 139/2004, the CJEU has jurisdiction to consider the correct interpretation of the law.
Gun-jumping can give rise to a breach even where a merger receives competition clearance
It is a common misconception that gun-jumping will only be a concern if the merger raises competition concerns. If the merger is approved, the merger parties have nothing to worry about. Right?
Wrong. Companies considering mergers and acquisitions should be mindful of heightened European Commission attention on pre-approval conduct. It is a procedural concern, not just a competition concern.
On 28 April this year, the Commission demonstrated its concern with gun-jumping by imposing a €135m fine on Altice regarding its merger with PT Portugal, more than three years after the 2015 merger received clearance. The Commission concluded that Altice had acquired in the purchase agreement the legal right to exercise influence over PT Portugal prior to completion of the merger, and in certain cases had exercised that influence. In relation to the decision, Commissioner Margrethe Vestager noted that gun-jumping undermines the effectiveness of the European merger control system. Altice intends to appeal the decision.
The Commission’s procedural concerns extend further than gun-jumping as demonstrated in May last year, when Facebook was fined €110m for providing incorrect or misleading information during the Commission’s investigation of Facebook’s 2014 acquisition of Whatsapp. The Commission is currently investigating General Electric and Merck and Sigma-Aldrick in relation to alleged misleading information provided during investigations for merger clearance. It is also investigating Canon in relation to gun-jumping implementation prior to notification or clearance.
The EY / KPMG Denmark merger was cleared by the Danish Competition Council. Similarly, Altice and Facebook each received the green light from the Commission, which confirmed that the fines would have no effect on the approvals of either merger.
This means that even where merger parties and their advisors believe that a merger or takeover has a good chance of receiving competition clearance, the parties must take care to observe any applicable notification and standstill obligations that apply.
The facts of the EY / KPMG Denmark case
The merger in question was between EY and KPMG Denmark. As the name suggests, KPMG Denmark was a part of the KPMG International network (formalised in a “co-operation agreement”) at the time of the merger negotiations. In order to complete the merger with EY, KPMG Denmark was required to terminate the co-operation agreement with KPMG International.
The notice to terminate the co-operation agreement was given to KPMG International on the same day that EY and KPMG Denmark entered into a merger agreement (which was subject to competition clearance).
After clearing the merger in May 2014, the Danish Competition Council announced in December 2014 that by terminating the co-operation agreement with KPMG International, KPMG Denmark had “jumped the gun”; noting the act of termination was merger-specific, irreversible and likely to have market effects.
EY appealed the decision to the Danish court, which stayed the decision and referred the question of whether the termination of the co-operation agreement was “gun-jumping” to the CJEU.
In a non-binding opinion, Advocate General (AG) Wahl disagreed with the Danish court’s analysis, noting that he did not consider the factors listed by the Danish Competition Council to be relevant to the question of whether the standstill obligation had been breached. According to the AG, the termination of the co-operation agreement was “severable” from the completion of the merger, and not caught by the non-implementation prohibition.
In the judgment on 31 May, the CJEU essentially agreed with the AG opinion and held that although the termination of the co-operation agreement between KPMG International and KPMG Denmark was an “ancillary and preparatory” act, it did not contribute to a lasting change of control of KPMG Denmark. The control of KPMG Denmark remained the same pre- and post-termination, and importantly, EY did not acquire the possibility of exercising influence over KPMG Denmark.
Two facts regarding the co-operation agreement were particularly relevant:
- First, the co-operation agreement did not give KPMG International control or decisive influence over KPMG Denmark. While the co-operation agreement gave KPMG Denmark the exclusive right to be part of the KPMG International network and to use the trade marks of KPMG, it was structurally separate both before and after notice of termination of the co-operation agreement.
- Second, EY did not gain any control of or influence over KPMG Denmark as a result of the termination of the co-operation agreement.
Key takeaways – what can merger parties do while "standing still"?
The question before the CJEU was essentially, what can parties do to prepare for a merger without breaching the notification or standstill obligations? Or rather, what can they not do?
The element of control in concentrations
The crucial element for the CJEU was the lack of contribution towards the proposed change of control that would occur with the EY / KPMG Denmark merger. The termination of the co-operation agreement did not produce any change in control of KPMG Denmark, nor did it produce a change in the amount of decision-making influence that EY could exert over KPMG Denmark.
From the reasoning of the CJEU it appears that an action or agreement of one of the merger parties may be preparatory, it may even be a condition precedent for the merger, but if it does not directly contribute to a lasting change of control it does not fall within the scope of Regulation No 139/2004.
Although subject to further appeal, the approach taken by the Commission in Altice is consistent with the EY judgment from the CJEU. The Commission considered that prior to obtaining merger approval, Altice had acquired legal rights to exercise decisive influence, and in some cases actually exercised that influence. Once again, the focus is on the control and decision-making influence of the merger parties.
Preparatory steps are permissible – if internal, or “severable”
It is well-settled that parties to a proposed merger may take internal steps to ready themselves for the merger. This means that a potential target, and the buyer, can take steps to implement changes within their existing organisations to prepare for the change.
The judgment in EY appears to go a step further, making it permissible for parties to take steps in relation to their dealings with third parties as long as those steps do not contribute to a change in control, influence, or concentration of the merger parties.
In the course of its judgment, the CJEU also considered the power to review actions that do not amount to a concentration but may lead to co-ordination between undertakings (under Regulation No 1/2003) and how that review power interacted with the gun-jumping power. The Court considered that the two review powers must exist independently to give the Commission the ability to review other potentially anti-competitive behaviours which are not a concentration.
As such, parties to a proposed merger should still take great care in their dealings during the period leading up to completion, particularly in dealings with one another. The influence of one party over another can be easily inferred and could lead to a breach, or it could be a breach of laws against co-ordination between competitors. The Commission has clearly stated that it wants its processes to be respected and it is not shy about enforcing that position.
Timeline of events:
- 2010: KPMG Denmark companies complete a co-operation agreement with KPMG International (co-operation agreement);
- 18 November 2013: KPMG Denmark companies enter into a merger agreement with EY (merger agreement);
- 18 November 2013: KPMG Denmark gives notice to terminate co-operation agreement with KPMG International (to take effect 30 September 2014);
- 19 November 2013: Merger agreement made public;
- 21 November 2013: Pre-notification procedures with the Danish Competition Council;
- 13 December 2013: Merger notified to Danish Competition Council;
- 28 May 2014: Merger approved by Danish Competition Council subject to conditions;
- 17 December 2014: Danish Competition Council declares that KPMG Denmark has disregarded standstill obligation and taken action to merger prior to approval (the contested decision);
- 1 June 2015: EY brings action for annulment of the contested decision in the Danish Maritime and Commercial Court;
- 11 June 2015: Danish Competition Council refers conduct to State Prosecutor for Serious Economic and International Crime to assess criminal law element of EY companies’ conduct. At the same time, the Danish Maritime and Commercial Court referred the following questions to the CJEU:
- What criteria are to be applied in assessing whether the conduct or actions of an undertaking are covered by the prohibition in Article 7(1) of Regulation No 139/200 (the prohibition of implementation prior to approval), and does implementing action within the meaning of that provision presuppose that the action, wholly or in part, factually or legally, forms part of the actual change of control or merging of the continuing activities of the participating undertakings which – provided the quantitative thresholds are met – gives rise to the obligation of notification?
- Can the termination of a co-operation agreement, such as in the present case, which is announced under circumstances corresponding to those described [in the order for reference] constitute an implementing action covered by the prohibition in Article 7(1) of Regulation No 139/2004, and what criteria are then to be applied in making a decision?
- Does it make any difference in answering Question 2 whether the termination has actually given rise to market effects relevant to competition law?
- If the answer to Question 3 is in the affirmative, clarification is requested as to what criteria and what degree of probability should be applied in deciding [in the case in the main proceedings] whether the termination has given rise to such market effects, including the significance of the possibility that those effects could be attributed to other causes.
- 18 January 2018: Non-binding opinion of Advocate General Nils Wahl delivered; and
- 31 May 2018: Judgment of the CJEU delivered.