Pursuant to the EU merger control rules, a transaction that falls within the purview of the EU Merger Regulation (EUMR) must be notified to the European Commission (Commission) in advance (Article 4(1) EUMR), and must not be implemented until cleared by the Commission, known as the “standstill” obligation (Article 7 EUMR). A principal rationale behind the standstill obligation is to prevent the potentially negative impact of transactions on the market, pending the outcome of the Commission’s investigation.
While the standstill obligation represents a clear-cut rule, it can often be a significant challenge for businesses to apply in practice. Failure to get it right, however, can result in draconian penalties. Indeed, the Commission’s recent €124.5 million fine on Altice, which comes in the wake of a spate of enforcement actions in this arena, bears testimony to an increasingly hard stance against companies flouting the notification requirement/standstill obligation.
The Court of Justice of the European Union (CJEU) judgment of 31 May 2018 in Case C-633/16 (Ernst & Young P/S v Konkurrenceradet) therefore provides welcomed guidance on how to interpret the scope of the standstill obligation enshrined in the EUMR. The ruling, which is in line with the Opinion of AG Wahl of 18 January 2018, provides in essence that the standstill obligation prohibits measures which contribute to a lasting change of control over another undertaking.
KPMG Denmark and EY decided to merge in 2013. Immediately after having signed the merger agreement, KPMG Denmark gave notice to terminate its cooperation agreement with KPMG International with a view to becoming part of EY. The KPMG Denmark/EY transaction was subsequently notified to the Danish Competition Council and conditionally approved in May 2014.
The Danish Competition Council opened a subsequent investigation and concluded that the termination of KPMG Denmark’s cooperation agreement with the international KPMG group constituted unlawful pre-implementation of the merger. In June 2015, EY appealed the Competition Council’s decision before the Maritime and Commercial Court, which submitted a request for a preliminary ruling to the CJEU in December 2016.
At its core, the Danish Court asked whether Article 7(1) EUMR 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. In particular, it sought to ascertain whether the termination of a cooperation agreement may be regarded as bringing about the implementation of a concentration and whether, in that regard, the question whether such a termination has produced market effects is relevant.
In response the CJEU ruled that:
- A concentration within the meaning of the EUMR 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.
- In the present case, the termination of a cooperation agreement may not be regarded as bringing about the implementation of a concentration, irrespective of whether that termination produced market effects, because the termination of the agreement did not lead to a change of control to the effect that EY did not have the possibility of exercising “decisive influence” over KPMG Denmark.
WHAT THIS MEANS:
In sum, the following principles can be gleaned from the CJEU’s judgment:
- First, the standstill obligation covers partial, as well as full, implementation of a concentration.
- Second, a measure taken prior to clearance of a concentration will not breach the standstill obligation unless such measure is such as to contribute to a lasting change in control of the target undertaking. A corollary of this is that the obligation cannot apply to merely internal preparatory measures preceding a concentration. In specie, the termination of the cooperation agreement did not, in any way, contribute to a shift in control between KPMG DK and Ernst & Young.
- Third, whether a measure produces market effects is of limited importance in the assessment of whether a measure is in breach of the EUMR standstill obligation.
To date, there has been very limited guidance in the grey area of pre-clearance (partial) implementation. There is no blacklist as to what companies can or cannot do prior to EU merger control clearance, with each case very much turning on the facts of the particular case at hand. That being said, the CJEU has provided a clear marker in this context: as a long as a particular measure does not contribute to a lasting change of control over another undertaking it will not breach the standstill obligation.