Gun Jumping in Merger Cases - Important Clarifications by the ECJ
Simonsen Vogt Wiig Press
What can be done by the parties before closing post signing, and what cannot be done prior to implementation? The judgment in case C-633/16 Ernst & Young P/S v. The Danish Competition and Consumer Authority provides some important clarifications.
The request for a preliminary ruling concerned the interpretation of Article 7(1) of the EC Merger Regulation. Article 7 of the regulation, entitled "Suspension of concentrations," provides in paragraph 1:
"1. A concentration (…) shall not be implemented either before its notification or until it has been declared compatible with the common market (…)" (My emphasis added.)
In the matter at hand, the Danish KPMG companies had entered into a merger agreement with the EY companies in Denmark. At the time, the Danish KPMG and EY companies were both auditing firms active in Denmark. In accordance with the merger agreement, immediately after its signature (before merger control clearance), the KPMG DK companies were to announce that, with a view to the merger with the EY companies, they were withdrawing from KPMG International. The termination of the cooperation agreement was not in itself subject to approval by the competition authorities.
The Danish Competition Council declared that the KPMG DK companies, by terminating the cooperation before the Competition Council approved the merger, had disregarded the prohibition, under the Danish Law on competition, of implementing a concentration before that approval. The Competition Council based the contested decision on an overall assessment of the factual circumstances, according to which the termination of the cooperation agreement is, among other things, merger-specific, irreversible and likely to have market effects in the period between the notice of termination itself and the approval of the merger. In particular, the Competition Council held that it was not necessary to establish that that termination gave rise to market effects; the fact that it is likely to produce them was deemed sufficient.
In its ruling, the ECJ first recalled that it "must be borne in mind that Article 7(1) of Regulation No 139/2004 merely provides that a concentration is not to be implemented either prior to its notification or until it has been declared compatible with the common market." The court then continued stating that "in order to define the scope of Article 7 of Regulation No 139/2004, account must be taken of the definition of the concept of concentration set out in Article 3. Under that provision, a concentration is deemed to arise where a change of control on a lasting basis results from the merger of two or more previously independent undertakings or parts of undertakings, or the acquisition, by one or more persons already controlling at least one undertaking, or by one or more undertakings of direct or indirect control of the whole or parts of one or more other undertakings, that control being constituted by the possibility, conferred by rights, contracts or any other means, of exercising decisive influence on an undertaking."
The ECJ concluded that Article 7(1) must be interpreted as meaning that a concentration is implemented only by a transaction which, in whole or in part, in fact or in law, contributes to the change in control of the target undertaking. This means that there must be a casual link between the actions taken in the implementation/preparatory phase and the change of control itself.
As regards the question whether the termination of a cooperation agreement may be regarded as bringing about the implementation of a concentration, the ECJ observed that, even though that withdrawal is subject to a conditional link with the concentration in question and is likely to be of ancillary and preparatory nature, the fact remains that, despite the effects it is likely to have on the market, it does not contribute, as such, to the change of control of the target undertaking.
Apart from the fact that it is a transaction concerning only one of the merging parties and a third party, namely KPMG International, the EY companies had not acquired the possibility of exercising any influence on the KPMG DK companies by the termination of the cooperation agreement. The latter companies were, in the context of competition law, still fully independent both before and after that termination.
This means that the parties to a merger may implement preparatory measures to quite a far extent as long as they are not exercising any influence on the target company, even if the actions taken are directly linked to the agreement establishing the concentration.
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