European Union: The European Court Of Justice Restores Companies' Freedom To Implement Preparatory Operations For M&A Transactions By Limiting The Scope Of The Standstill Obligation Under EU Merger Control Rules

In a judgment of 31 May 2018 (Case C-633/16, Ernst & Young), the European Court of Justice (ECJ) ruled that the termination of a cooperation agreement with a view to implementing a M&A transaction prior to its clearing under merger control rules by competition authorities does not constitute gun jumping.

KPMG Denmark companies were members of the KPMG International network based on a cooperation agreement concluded in 2010. Under that cooperation agreement, KPMG Denmark companies were granted different rights (territorial exclusivity, allocation of clients, use of the KPMG trademark etc.) and were subject to specific network obligations (annual compensation for participation in the network, obligation to service clients from other EU states etc.). The termination of this agreement was subject to a six-month notice period.

On 18 November 2013, KPMG Denmark companies entered into a merger agreement with EY companies. In accordance with the merger agreement, immediately after its signature, KPMG Denmark companies terminated the KPMG International cooperation agreement with effect as of 30 September 2014, the expected date of closing.

The transaction was notified to the Danish Competition Authority (NCA) and the NCA cleared the concentration on 28 May 2014. However, by a decision of 17 December 2014, the NCA ruled that by giving notice to terminate the KPMG International cooperation agreement on 18 November 2013, KPMG Denmark companies had implemented the concentration without having obtained prior clearance and infringed the standstill obligation under applicable merger control rules. The parties were so sanctioned for 'gun jumping' practices.

EY, which had taken control over KPMG Denmark companies, appealed the decision of the NCA. In connection with this appeal, the Danish Court referred a question to the ECJ for a preliminary ruling on the scope of the prohibition of implementation prior to approval under EU merger control rules.

The EU Commission challenged the jurisdiction of the ECJ to rule on the preliminary question by arguing that the NCA had applied only Danish law and not EU law in this case. On the merits, the Commission further argued that the influence exercised by the acquirer (EY) on the behavior of the target (KPMG) in connection with the termination of the KPMG International cooperation agreement should be considered as sufficient to conclude that the concentration was actually implemented prior to the clearing.

Considering the increasingly frequent condemnations of gun jumping practices and the willingness of certain competition authorities (in particular the EU Commission) to follow an excessively severe approach in these matters, the ECJ ruling in this case notwithstanding the objections raised by the EU Commission on its jurisdiction is so highly welcomed .

Following an implacable reasoning, the ECJ ruled in its judgment of May 31, 2018 that any unilateral decision of a party, or any agreement between the parties, to a concentration that, despite having been carried out in the context of a concentration, does not reflect a change of control of any of the parties does not present a "direct functional link with the implementation" of the concentration. Therefore, it cannot be considered as falling within the scope of the prohibition of implementation prior to approval under the EU merger control regulation (Art. 7 Regulation No 139/2004). Such conducts are only subject to a scrutiny under antitrust laws prohibiting restrictive agreements and abuse of dominance, if any.

The judgment of the ECJ puts an end to the extremely severe approach followed by European competition authorities in gun jumping practices in the last years. Such approach was based on a (too) extensive interpretation of the standstill obligation which is now reversed by the ECJ.

For instance, in 2016 the French Competition Authority (FCA) fined ALTICE € 80 million for gun jumping in connection with the SFR/OTL acquisition (Decision No 16-D-24, which was not appealed). In this case, the FCA ruled that the implementation of the concentration prior to the approval resulted from various facts (considered jointly), including (i) several contractual commitments limiting the target's commercial autonomy and granting the acquirer control rights over its commercial policy, (ii) the appointment of a managing director in the target, and (iii) the exchange of sensitive commercial information between the parties. It was already highly questionable whether an exchange of sensitive commercial information can be considered as leading to the implementation of a concentration. In the light of the Ernst & Young case law this is definitively not the case because the "direct functional link" test considered as relevant by the ECJ is clearly not satisfied in this case. Therefore, the question whether an exchange of sensitive commercial information between the parties to a proposed merger is likely to raise competition concerns has to be assessed solely under general antitrust rules prohibiting restrictive practices.

Except with respect to the latter point, the decision of the FCA in the Altice/SFR – OTL case may not be further criticized even in the light of the Ernst & Young case law. The appointment of a managing director by the acquirer clearly reflects a change of control of the target. With respect to the control of the target's commercial policies by the acquirer pre-closing, the "direct functional link" with the implementation of the concentration can also be considered as established in this case since the relevant rights granted to the acquirer resulted from the Memorandum of Understanding and the scope of such control was very broad and not limited to certain restrictively listed decisions likely to adversely impact the target's business.

In the Ernst & Young case, it is interesting to note that if the KPMG Denmark companies had postponed the delivery of the termination notice until the clearance of the transaction by the NCA, the parties would not have been able to meet the September 30, 2014 deadline for the expected closing of the merger due to the obligation to comply with  the six-month notice period provided for the KPMG International cooperation agreement.

The solution adopted by the ECJ in the Ernst & Young case can clearly be transposed to other ancillary or preparatory transactions to a concentration, such as R&D, joint production, joint marketing or joint purchasing agreements concluded in order to prepare a merger. This may facilitate a more progressive implementation of mergers between companies, in particular those having different business cultures. This kind of preparatory agreements will still have to be analyzed under general antitrust laws, in particular under the European Commission's guidelines on horizontal cooperation agreements. However, under such rules, if the combined market shares of the parties are below the relevant thresholds (25, 20 or 15% depending on the case) only clearly unnecessary price fixing or clients allocations arrangements are prohibited.

Eventually, if companies are certainly not allowed to disregard merger control rules, it is also clear that under such rules the parties to a concentration subject to premerger clearance may not be prevented from doing what companies which are not involved in a concentration are allowed to do. In other words, the fact that the parties are involved in a proposed merger shall not impact their rights and obligations under the competition laws, provided only that no change of control occurs prior to the clearance of the transaction by the relevant competition authority, if the transaction is subject to premerger filing obligations. This approach is all the more justified as gun jumping is sanctioned regardless of the market shares of the merging parties.

Read the Judgment here

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