On 31 May 2018, the European Court of Justice (ECJ) issued its preliminary ruling inthe Ernst & Young/KPMG Denmark case on the standstill obligation in mergers prior to authorisation. The ruling clarifies that a merger is only implemented by a transaction that contributes to a change in control. The termination of a cooperation agreement – even if it gives rise to market effects – may not be regarded as bringing about the implementation of a concentration.
KPMG Denmark was a member of the KPMG International network by virtue of a cooperation agreement. On 18 November 2013 KPMG Denmark and Ernst & Young (EY) agreed to merge in Denmark. In accordance with the merger agreement, immediately after its signature, KPMG Denmark gave notice to KPMG International to terminate their cooperation agreement with effect from 30 September 2014. The merger was notified to the Danish competition authority a month later and was approved in May 2014.
In December 2014 the Danish competition authority decided that KPMG Denmark’s termination of the cooperation agreement constituted a premature implementation of the merger. It found that this infringed the “standstill obligation” in Danish competition law, which prohibits businesses from taking steps to implement their merger before it is approved by the authority. EY appealed this decision and the Danish Court asked the ECJ to rule on the scope of the standstill obligation and whether the termination of the cooperation agreement meant the parties had infringed this obligation.
When Has a Transaction Been Implemented Under EU Merger Control Rules?
EU law, specifically Article 7 (1) of the EU Merger Regulation (EUMR), requires companies not to implement their deal before it is approved by the Commission. This obligation is transposed in the legislation of several EU Member States, including Denmark.
According to the ECJ ruling, a transaction has been implemented when there is a change in control of the target business. If a change in control takes place before the transaction is approved, the merging parties have “jumped the gun” on the prohibition on implementing the deal and are likely to be subject to a fine.
In Ernst & Young, the ECJ found that the termination of the cooperation agreement did not result in a change in control, despite the effects that the termination may have had on the market. The termination was likely an ancillary and preparatory measure for the transaction and not its implementation, although this is left to the Danish court to decide.
The ECJ ruled that no change in control means no implementation, even if the transaction produces effects on the market. Conversely, in the absence of market effects, a transaction could still result in a change in control and be caught by the standstill provision.
 Judgment of 31 May 2018 in Case C-633/16, Ernst & Young v Konkurrenceradet.
Miglena Vucheva, a Stagiaire in our Brussels office, contributed to the writing of this alert.
©1996-2019 Morrison & Foerster LLP. All rights reserved.