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In a judgment of 31 May 2018, the European Court of Justice (ECJ) found that KMPG DK’s termination of a cooperation agreement with KPMG International prior to the Competition Council’s approval of a merger with Ernst & Young was not gun jumping contrary to the competition rules’ prohibition against pre-implementation.
On 18 November 2013, the Danish KPMG companies at that time (KPMG DK) and the Ernst & Young group (EY) concluded an agreement to merge KPMG DK with EY. As part of the agreement, KPMG DK terminated its cooperation agreement with KPMG International, which established the cooperation in the KPMG network between the participating independent audit firms. The cooperation agreement was terminated prior to the approval of the merger.
The merger was approved and a gun jumping investigation initiated
The Danish Competition Council approved the merger between KPMG DK and EY, but subsequently initiated an investigation of the termination of the cooperation agreement with KPMG International. The investigation concerned whether the termination constituted pre-implementation contrary to the prohibition against completion of a merger prior to approval, so-called gun jumping or unlawful pre-implementation. On 17 December 2014, the Danish Competition Council decided that EY had violated the prohibition against pre-implementation. The Competition Council’s decision was based on an overall assessment as to whether the termination was 1) merger-specific, 2) irreversible, and 3) had the potential to create market effects.
The Danish Competition and Consumer Authority has passed the matter on to the Public Prosecutor to assess and pursue criminal prosecution.
On 1 June 2015, EY brought action before the Maritime and Commercial High Court claiming cancellation of the Danish Competition Council’s decision. The Court requested for a preliminary ruling concerning the scope of the prohibition against pre-implementation in Article 7 (1) to the ECJ, including which criteria should be taken into account when assessing whether a transaction is covered by the prohibition.
The ECJ’s preliminary ruling on the gun jumping prohibition
The ECJ found that the prohibition against pre-implementation must be interpreted only to cover actions which in whole or in part, in fact or in law contribute to a change of the control of the target company.
In addition, the ECJ concluded that KPMG DK’s termination of the cooperation agreement with KPMG International did not give EY access to any influence on KPMG DK which was independent of EY both before and after the termination. Consequently, the termination of the cooperation agreement did not result in a change of the lasting control of KPMG DK. The termination did therefore not constitute gun jumping contrary to the prohibition against pre-implementation irrespective of whether that termination has produced market effects.
This is in line with Advocate-General Wahl’s opinion which was published on 18 January 2018. In this decision, the Advocate-General stated the following concerning the prohibition against pre-implementation in Article 7 (1):
“… does not affect measures which, although taken in connection with the process leading to a concentration, precede and are severable from the measures actually leading to the acquisition of the possibility of exercising decisive influence on a target undertaking.”
Like the Advocate-General, the ECJ attaches importance to the fact that the prohibition against pre-implementation concerns transaction which contribute to a change of the control of the target company.
Wahl’s opinion was critical of the Danish Competition Council’s assessment of the scope of the pre-implementation prohibition. This was because there was no connection with the concept of ‘concentration’, which results in a grey area in relation to the merging parties’ actions that do not relate to the change of control.
The judgment of the ECJ contributes to clearer rules on the standstill obligation and the line between lawful preparatory steps and unlawful pre-implementation.
On the basis of the preliminary ruling from the ECJ, the Danish Maritime and Commercial High Court is now to deliver a judgment in the case.
Gun jumping: a focus area for the authorities in many EU Member States
Competition authorities have a general focus on compliance with the standstill obligation in mergers. In recent years, German and French authorities have issued fines in cases concerning gun jumping. The hard-line approach also applies on EU-level, which was reflected in the Marine Harvest case where fines exceeding Euro 20 million were issued for violation of the prohibition against pre-implementation as well as other infringements.