It was breach of the prohibition against pre-merger implementation when the Danish KPMG terminated its cooperation with the international KPMG network before the merger between Ernst & Young Europe LLP and the Danish KPMG had been approved. This has now been established by the Danish Competition Council.
On 18 November 2013, Ernst & Young Europe LLP (”EY”) entered into agreement with the Danish KPMG (“KPMG DK”) on joining their activities in Denmark. On the same day, KPMG DK withdrew from the international KPMG network ("KPMG International") with effect from 30 September 2014.
Because the joining of the activities constituted a merger, it could not be carried out before the Danish Competition Council had approved the merger. The merger was approved on 28 May 2014, but as KPMG DK had already before the approval withdrawn from KPMG International, the Competition Council has now decided that KPMG DK in this way has violated the prohibition against pre-merger implementation.
The decision makes an important contribution to the interpretation of the extent of the prohibition, as you can read below.
The Competition Council’s evaluation of the termination The Competition Council shall on the basis of an overall assessment decide whether an arrangement in connection with at merger has exceeded the limit of lawful preparatory acts and thereby constitutes a violation of the prohibition against pre-merger implementation.
According to the Competition Council, importance can be attached to the following in connection with this assessment, whether an act
- is merger specific, i.e. is carried out as a part of the overall merger
- is irreversible
- has potential for having an impact on the market.
KPMG DK was under the merger agreement obliged towards EY to terminate the cooperation with KPMG International. According to the Competition Council’s evaluation, the termination of KPMG International was merger specific as the termination was directly connected to the merger agreement. KPMG DK would therefore not have terminated the cooperation without having entered into the agreement with EY at the same time.
The Competition Council further found that the termination was irreversible as the termination was final and unconditional. It was therefore impossible for KMPG DK unilaterally to undo the termination later, and it was also unlikely that KPMG DK and KPMG International would establish a new cooperation if the merger had not been implemented.
The Competition Council finally found that the termination was an evidence of coordination between the two merger parties concerning the future strategy of the relationship to external cooperative partners. The termination was therefore not a legal preparatory step in the form of internal arrangement without market effects. According to the Competition Council’s assessment, the act implied such an important strategic arrangement that the act in itself had an independent potential for having an effect on the market. The termination created uncertainty about KPMG DK’s future as audit and consultancy company in Denmark and was a manifestation of influence on the parties’ situation and negotiation position. The act had an independent potential for having an effect on the competition – an effect which was beyond ordinary reactions to the publication of the merger.
The consequence of the termination was that the effect on the market had been advanced in terms of time compared to what would have been the case without the termination. Thus, the termination had also potential for having an effect on the market.
Overall, the Competition Council found that the prohibition against pre-merger implementation had been violated.
Prohibition against pre-merger implementation
The purpose of the prohibition against pre-merger implementation is to ensure an effective prior merger control. The prohibition means that the merging undertakings may not conduct any acts that entail that the control of the merging undertakings is transferred before approval of the merger. Similarly, the merger parties may not prior to the approval make arrangements which not necessarily entail a transfer of control but which can be considered as a partial implementation of the merger.
The prohibition against pre-merger implementation does not prohibit the merger parties from making certain preparatory acts in connection with the implementation of the merger. However, in order for the preparatory acts to be legal, they must be internal, conditioned on approval and have no effects on the market.
The provisions on merger control and the prohibition against pre-merger implementation in the Danish competition law should be construed on the basis of case law of the European Commission, The General Court and the Court of Justice.
The extent of the prohibition against pre-merger implementation
Case law from the Danish competition authorities and the Commission concerning the prohibition against pre-merger implementation is scarce. There is no previous case law for whether termination of an important cooperation agreement constitutes illegal pre-merger implementation.
On the basis of previous EU case law, the Competition Counsel has identified circumstances which are of importance for the evaluation of whether an arrangement constitutes a breach of the prohibition against pre-merger implementation.
The Competition Council states that an actual change of control before a merger approval is contrary to the prohibition against pre-merger implementation. The same applies to arrangements that can be designated as partial implementation which hinders effective merger control. Such arrangements mainly include strategically important arrangements. It is not decisive whether the arrangement in question has actually harmed competition in the market, but whether there is a potential effect on the competition situation which might harm the effective merger control.
The Competition Council’s decision stresses the importance of the fact that the parties in a notifiable merger should carefully consider all market-facing acts carried out as part of the merger.
The decision contains useful interpretative input to define the scope of the prohibition against pre-merger implementation. The evaluation of which acts that may be conducted legally before approval of the merger is often very complex.
A violation of the prohibition against pre-merger implementation can be fined, see section 23(1)(vii) of the Danish Competition Act.
The Competition and Consumer Authority’s focus on the prohibition against pre-merger implementation should be seen in the light of several European competition authorities having taken actions against illegal pre-merger implementations. The tendency is also seen in our neighbouring countries. The latest case in Norway, where the Norwegian Konkurransetilsyn in 2014 fined Norgesgruppen NOK 25m for violation of the prohibition against pre-merger implementation in connection with Norgesgruppen’s acquisition of a number of grocery shops.