Merger control – The standstill obligation does not apply to ancillary or preparatory transactions with no direct functional link to the concentration

The 19 July 2018

On 18 November 2013 the KPMG DK companies entered into a merger agreement with the Ernst & Young (EY) companies and withdrew from the cooperation agreement tying them to the international network of independent auditing firms, known as KPMG International. The merger in question did not have a Community dimension and was notified to the competent Danish authorities and was approved by the Competition Council subject to commitments on 28 May 2014. In a subsequent decision of 17 December 2014, the Competition Council declared that the withdrawal from the cooperation agreement, in accordance with the merger agreement, i.e., before the merger had been authorized, constituted an irreversible operation likely to have market effects and had disregarded the prohibition, under the Danish Law on competition, of implementing a concentration prior to authorization.

EY brought an action for annulment of the contested decision before the Danish Maritime and Commercial Court which decided to stay the proceedings and refer to the Court for a preliminary ruling on the scope of the standstill obligation under Article 7 of Regulation No 139/2004 on which the prohibition of implementation of the concentration under Danish law was based.

The Court of Justice assumed jurisdiction to give a preliminary ruling on the question referred even though the facts were outside the direct scope of EU law insofar as the Danish provisions adopted, for internal situations, the same approach as that provided for under EU law and it was clearly in the interest of the European Union that, in order to forestall future differences of interpretation, provisions or concepts taken from EU law should be interpreted uniformly. In this case, although the Danish law contains no direct reference to the provisions of EU law and does not exactly reproduce the provisions corresponding to Regulation No 139/2004, the preparatory works resulting in the Danish Law on competition shows that the legislature’s intention was to harmonize national merger control law with that of the European Union.

As Article 7(1) of Regulation No 139/2004 merely provides that a concentration cannot be implemented prior to its notification and approval but gives no indication as to the circumstances in which a concentration is deemed to be implemented, the Court found that the provision in question must be interpreted by reference to its purpose and general scheme, which is to ensure the effective control of concentrations. Furthermore, as that prohibition is limited only to transactions implementing a concentration, the scope of Article 7 cannot be detached from the concept of concentration set out in Article 3, which assumes a lasting change in the control of the target undertaking. If, according to the Court, the standstill obligation applies to the implementation of a concentration, in whole or in part, in fact or in law, it does not, however, apply to transactions which are ancillary or preparatory to the concentration and do not present a direct functional link with its implementation, regardless of whether they have produced market effects, insofar as the standstill obligation applies irrespective of whether or not the merger is compatible with the internal market. In this case, despite the fact that the termination of the cooperation agreement is linked by condition to the concentration and is ancillary and preparatory to it, it does not contribute to the lasting change of control over the target undertakings despite any effects it may have produced on the market: indeed, apart from the fact that it is a transaction concerning only one of the merging parties and a third party, the acquiring companies (EY) have not acquired the possibility of exercising any influence on the KPMG DK companies by that termination as the latter companies were independent both before and after the termination. The withdrawal from the cooperation agreement does not, therefore, constitute “gun jumping” which would fall within the scope of the prohibition of implementation of mergers prior to notification or authorization, as laid down in Article 7.

CJEU Case C-633/16 Ernst & Young P/S v Konkurrencerådet, Judgment of 31 May 2018, LawLex20180000877JBJ

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