On 31 May 2018, the European Court of Justice (the "ECJ") issued its much anticipated judgment in the Danish gun-jumping case.1 The case concerned the acquisition by EY Denmark of KPMG Denmark. The ECJ clarified that the termination of the cooperation agreement between KMPG Denmark and KPMG International did not violate gun-jumping rules.
Jumping the gun
"Gun-jumping" generally refers to the situation where merging parties close or otherwise implement a transaction which must be notified to a competition authority, without obtaining the prior approval of that authority. Gun-jumping constitutes an infringement of the standstill obligation under Danish merger control law.2 Standstill obligations also exist on the European level3 and in most of the EU Member States.4
Very often, as the present case shows, it is not very straightforward to assess whether parties to a transaction have infringed the prohibition on gun-jumping. For example, situations in which only a minority shareholding is acquired could already trigger the standstill obligation. This was clarified again in the recent Marine Harvest/Morpol judgment.5 In that case the General Court confirmed that, following an acquisition by Marine Harvest of a minority stake (48.5%) in Morpol, it was likely that the former would be able to control Morpol's shareholders' meeting, taking into account the low attendance level of other shareholders.
Violations of the gun-jumping rules also expose companies to increasingly high fines. As recent as April 2018, the Commission fined Altice with a record EUR 125 million fine for breaching the standstill obligation in the take-over of Portugal Telecom.6 The Commission held that the sale and purchase agreement already transferred control prior to Commission approval, as it inter alia allowed Altice to instruct Portugal Telecom on marketing campaigns and to veto ordinary business decisions. Altice has indicated that it will appeal the decision.
A tale of two auditing firms
The EY/KPMG case concerns the concentration between EY and KPMG Denmark. On 18 November 2013, the two auditing firms entered into a merger agreement and began pre-notification discussions with Konkurrence- og Forbrugerstyrelsen (the Danish Competition and Consumer Authority). The transaction was notified to the Danish Competition and Consumer Authorities on 7 February 2014, accepted as complete on 21 February 2014 by the Authorities, and the merger was approved by the Danish Competition Council on28 May 2014 with remedies in phase II.
Prior to the merger, KPMG Denmark was a member of KPMG's international network. That cooperation was formalised via a cooperation agreement between KPMG Denmark and KPMG International, which established a voluntary and integrated cooperation, under which the firms operated according to the same standards and norms and presented themselves to clients as a combined network. The different KPMG offices however remained autonomous and independent from a competition law perspective.
On 18 November 2013, the date of signing of the merger agreement, KPMG Denmark terminated the cooperation agreement with KPMG International, effective as of 30 September 2014. The Danish Competition Council found that this termination infringed the standstill obligation under Danish law. The Danish Competition Authorities based this on the fact that the termination:
- was unconditional and did not await the merger decision;
- was carried out as a result of and in the context of the merger and could not be considered as a one-sided act by KPMG Denmark;
- was irreversible;
- was strategically essential to the activities which continued in the new EY and subsequently a precondition for the continuing business;
- was a commercial strategic decision that led to great uncertainty for KPMG Denmark's future as audit firm in Denmark if the merger with EY was not completed;
- created potential for structural market changes during the period between termination and merger approval;
- actually created structural changes that made it impossible for the market situation at the time of the merger could be restored; and
- created a risk of affecting the effective merger control procedure.
After the decision was passed, the Danish Competition and Consumer Authority forwarded the case to the Danish Prosecutor with a view to impose sanctions. The decision on gun jumping was appealed to the Danish Maritime and Commercial Court by KPMG Denmark and EY.
The Sø- og Handelsretten (the Danish Maritime and Commercial Court) referred the case to the ECJ for a preliminary ruling. The ECJ concluded that the termination of the cooperation agreement between KPMG Denmark and KPMG International is not subject to the prohibition of gun-jumping. The ECJ considered that the termination does not contribute, as such, to the change of control over KPMG Denmark. The ECJ indicated that no regard should be had to the effects which the termination is likely to have on the market as long as the termination did not change the control over KPMG Denmark.
Three things to take away from recent cases:
- Preparatory acts which do not, in and of themselves contribute to the change of control, are not subject to the standstill obligation;
- However, a commitment to sever existing ties could still constitute gun-jumping, for example, if such a commitment effectively allows the acquiring company to dictate how the target company should amend its existing business practice; and
- Violating gun-jumping laws may expose companies to increasingly high penalties. It is therefore necessary to act cautiously in M&A situations.