In a landmark ruling of 31 May 2018, the European Court of Justice held that the obligation under EU Merger Control rules not to implement a transaction prior to obtaining merger control clearance (the “standstill obligation”) should, in principle, be confined to (i) the actual acquisition of control; or (ii) measures that contribute to the acquisition of control. This is a significant limitation of the scope of the standstill obligation as it has been interpreted by Competition Authorities so far in the EU.
In this particular case, KPMG Denmark (“KPMG DK”) had given a notice of termination of its co-operation agreement with KPMG International Cooperative (“KMPG International”), following the conclusion of a merger agreement with Ernst & Young (“EY”). The termination notice was given before the receipt of the merger control clearance, and the termination would not become effective until after 6 months, when merger clearance would have been obtained. The termination notice had produced market effects, given that it prompted KPMG International to launch a new auditing business in Denmark before merger approval.
The Court, which to a large extent followed the Opinion of Advocate General Wahl, clarified that the scope of the standstill obligation1 should be confined to measures that rise to the level of control, within the meaning of the EU Merger Regulation. In this particular case, KPMG DK had not "jumped the gun" (and breached the standstill obligation) by giving pre-merger termination notice, as the notice did not give EY control over KPMG DK.
This judgment could have far-reaching implications for integration planning and deal structuring. It gives more leeway for merging parties to agree and implement preparatory measures that do not confer control or directly contribute to the eventual acquisition of control. However, parties should remain cautious, as it remains to be seen how Competition Authorities will interpret this judgment in practice, and the general rules on anticompetitive practices (for instance, exchange of sensitive information) also apply in transaction settings.
Background and Procedural Posture
The ruling was issued in the context of EY’s appeal to a Danish Court against a decision by the Danish Competition and Consumer Authority (“DCCA”). The DCCA had decided that KPMG DK had "jumped the gun" and breached the standstill obligation under Danish merger control law by giving notice to terminate its co-operation agreement with KPMG International before merger clearance. The standstill obligation in Danish law is equivalent to that provided for in the EU Merger Regulation.
The termination of the co-operation agreement was necessary for the merger to proceed. While the termination notice would only take legal effect 6 months later (well after merger control clearance), its exercise also had a market impact as it prompted KPMG International to launch a new auditing business in Denmark in the same month. This prompted several of KPMG DK’s clients to switch auditors ahead of the formal termination of the co-operation agreement.
The DCCA had concluded that the termination notice was merger-specific, irreversible and likely to have market effects before merger approval (noting that it was not necessary to establish market effects). The DCCA had also referred the case to the criminal prosecutor, so the question of whether the standstill obligation was breached was of crucial importance. The Danish Court requested the European Court of Justice to rule on the scope of this obligation.
Key Points from Advocate General Wahl’s Opinion
AG Wahl noted, at the outset of the Opinion which preceded the Court's ruling, that “while the standstill obligation might be useful, it would seem excessive, as the Commission does, to classify it as an indispensable tool for merger control”, and that “the lack of judicial review seems to have allowed [the Commission] to continue its regulatory activities unchecked”. This set the tone of his Opinion.
AG Wahl advised that the Court should set out a “negative definition of the standstill obligation” and agreed with EY’s argument that the scope of the standstill obligation cannot go beyond the concept of "control" under the EU Merger Regulation, which presupposes that an acquirer has the possibility of exercising "decisive influence" over the target company.
In his view, any measure that falls short of the acquisition of control and is “severable” from the measures leading to the acquisition of control, should not infringe the standstill obligation. According to AG Wahl, the question of whether a measure potentially produced market effects, or was irreversible, is irrelevant in this regard.
AG Wahl concluded that the standstill obligation should be limited to actions that actually confer “control” over the target company. On that basis, KPMG DK’s termination notice was not in breach, since the notice did not give EY control over KPMG DK.
The Court’s judgment
The Court noted that the wording of the standstill obligation does not give a clear indication of its exact scope, and that, as a result, the provision should be interpreted in light of its purpose and general scheme. The Court considered the purpose of the EU Merger Regulation (permit effective control of all concentrations) and the role of the standstill obligation in that context (ensuring that such control remains effective). The Court agreed with AG Wahl that the standstill obligation should not extend to measures that do not contribute to the implementation of a concentration. An extension of the standstill obligation beyond that boundary would unduly expand the scope of the EU Merger Regulation, and, thereby, encroach upon the scope of Regulation 1/2003 (on anticompetitive practices).
The Court also acknowledged that the scope of the standstill obligation should apply to “partial implementation” of concentrations. Otherwise, merging parties could easily by-pass the standstill by a series of partial transactions. However, the Court set a limit on its application to partial implementation by including only measures that present a “direct functional link” to implementation of the concentration, i.e. measures that are “necessary to achieve a change of control”. Purely ancillary or preparatory measures, even if they have been adopted as part of the overall transaction, do not constitute “gun-jumping” if they do not confer control or influence over the target.
The Court also held that it is irrelevant whether such preparatory steps were irreversible or produced market effects. The Court reiterated that the standstill obligation is a procedural safeguard that applies regardless of whether substantive concerns arise from the merger; an implementation measure could breach the standstill obligation even if it does not produce any market effects.
Against this background, the Court ruled that KPMG DK’s notice of termination does not involve a breach of the standstill obligation, given that the notice did not confer on EY any degree of control over KPMG DK. The notice only concerned the relationship between KPMG DK and a third party, and the fact that it produced some market effects was irrelevant, as both KPMG DK and EY remained independent even after the termination notice was given.
The alignment of the standstill obligation to the concept of control is a positive development that increases legal certainty for deal structuring and integration planning. A reasonable reading of this judgment suggests that measures taken in preparation of the merger should not raise “gun jumping” concerns if it is clear that they do not confer any influence over the target business prior to merger clearance.
While it remains to be seen how Competition Authorities, including the European Commission, will apply the standstill obligation in practice in situations that involve “partial implementation”, this ruling clearly provides welcome guidance.