On 31 May 2017, the European Court of Justice (ECJ) handed down its preliminary ruling on the interpretation of the stand-still obligation in Article 7(1) of Regulation 139/2004 on EU merger control. The judgment clarifies the steps that parties to a concentration can take before a transaction is approved by the regulator without risking allegations of gun-jumping. According to the ECJ, a transaction would only be considered prematurely implemented when a change of control takes place.
The main proceedings
The case concerns the merger between several companies of the KPMG group and of the EY group active in auditing and accountancy services in Denmark (respectively ‘KMPG DK’ and ‘EY’) in November 2013.
At the time, the KPMG DK companies were part of a cooperation agreement with other KPMG independent auditing firms but they announced that, with a view to the merger, the agreement was going to be terminated as of 30 September 2014 at the latest.
Subsequently, KPMG DK and EY notified the deal to the Danish regulator which was approved in February 2014. However, the Danish Competition Counsel found fault with the termination of the cooperation agreement and fined the companies for gun-jumping. The termination of the agreement was considered merger-specific, irreversible and with the potential to produce market effects prior to regulatory approval being granted.
EY appealed the decision and the national court asked questions to the ECJ on the interpretation of the stand-still obligation and its application to the present case.
Jurisdiction of the ECJ
The European Commission had argued that the ECJ had no competence to rule on the case because it was a matter of Danish merger control law. However, the Court confirmed its jurisdiction. This was because the referring court, in its assessment of the case pending before it, and in particular of the reference to EU merger control in the travaux préparatoires to the applicable national law, had held that Danish merger control should be interpreted in light of the case law of the European courts; and it had doubts about this.
The answers to the questions on EU Merger Control
On the substance, the ECJ replied to the referring court that the stand-still obligation should be interpreted as ¨prohibiting the implementation by the parties to the concentration of any transaction which contributes to a lasting change of control over one of the undertakings concerned by the concentration¨.
Since Article 7(1) of Regulation 139/2004 does not estipulate under which circumstances a transaction must be considered prematurely implemented, the Court turned to the purpose and objectives sought by the EU Merger Regulation for guidance to reply the questions.
In its reasoning, the ECJ first considered that EU Merger Control only applies to transactions that fall under the definition of the concept of concentration. Further, under the EU Merger rules, a concentration is only deemed to arise where a transaction results in a change of control of an undertaking (or parts thereof) on a lasting basis, and control is defined as the possibility to exercise decisive influence on an undertaking.
In the present case, the Court concluded that the termination of the cooperation agreement by KPMG DK, even though ancillary and preparatory to the merger, did not contribute, as such, to the change of control of the target despite of the effects that it was likely to have in the market. The Court added, in line with the AG Wahl´s opinion that came out earlier this year (see our post in Spanish on the AG´s opinion here), that the termination of the cooperation agreement did not provide EY with the possibility to exercise decisive influence on KMPG DK and the parties remain independent both before and after the termination.
The enforcement of merger control procedural rules has toughened up around Europe, with a number of investigations being launched and fines being imposed including a €125 million fine imposed on Altice for gun-jumping last month (see our post on this here). In this context, the clarification of the stand-still obligation is a welcome development that brings legal certainty to the business community.
By Irene Moreno-Tapia y María López Ridruejo