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The “standstill obligation” under Article 7 of the Regulation 139/2004 on Merger Control (EUMR) prevents parties from implementing their transaction before receiving merger clearance from the European Commission (EC). Failure to comply with this obligation (known as “gun-jumping”) may result in fines up to 10% of their aggregate worldwide turnover and the obligation to reverse any step taken by the parties.
Given the scale of the fines that can be involved, there is to date surprisingly little guidance on what steps parties may take without jumping the gun under the EUMR. With the EC expressing their intention to actively pursue procedural violations in merger control, it is important to have legal certainty and clarification on the circumstances in which a transaction is to be considered implemented prematurely.
The EC’s recent Altice decision has provided some helpful insights. After having cleared Altice’s acquisition of PT Portugal subject to conditions, the EC imposed a record-breaking fine of almost €125 million on Altice for prematurely implementing the transaction. This was because in the purchase agreement, Altice obtained rights that were linked to the exercise of control: vetoing contracts to be entered into by PT Portugal, deciding on marketing campaigns to be carried out by PT Portugal and receiving detailed commercially sensitive information about PT Portugal outside of the confines of any confidentiality protections. As a result of these provisions, Altice had acquired “the legal right to exercise decisive influence over PT Portugal.”
In a speech given shortly after the Altice decision, Commissioner Vestager further clarified that: “[Y]ou can’t say a buyer has jumped the gun, just because it can stop decisions that would affect the value of its purchase. But there have to be limits on how far that can go. It’s one thing to insist that the seller of a house doesn’t knock down a wall without checking with you. But that doesn’t mean you need a say in how the flowers are arranged.”
The issue of control was also central to the Ernst & Young judgment issued by the Court of Justice of the European Union (CJEU) on May 31, 2018, responding to the Danish courts’ request for a preliminary ruling on the concept of the implementation of a concentration.
The CJEU has confirmed in the Ernst & Young case that the key factor in determining the scope of the standstill obligation is whether the action in question would grant the acquiring party control over the target business.
The transaction involved KPMG and Ernst & Young. Ernst & Young was seeking to acquire the Danish business of KPMG, which operated as a separate legal entity under the terms of a cooperation agreement with KPMG International Cooperative (the “Cooperation Agreement”).
On November 18, 2013, KPMG DK companies (KPMG Denmark) and Ernst & Young companies (EY) entered into a merger agreement. The same day KPMG Denmark gave notice to terminate the Cooperation Agreement. The merger between KPMG Denmark and EY was notified to the Konkurrence-og Forbrugerstyrelsen (the Danish Competition and Consumer Authority) and authorized by the Konkurrencerådet (the Danish Competition Council) in May 2014. However, in December 2014 the Konkurrencerådet issued a decision declaring that KPMG Denmark had breached the standstill obligation by terminating the Cooperation Agreement.
According to the Danish Competition Council, the criteria for establishing whether a step taken by the parties to a transaction was to be considered gun-jumping under Danish Competition Law (which mirrors the EU regime) were whether the act in question was (i) merger specific, (ii) irreversible and (iii) likely to have effects in the market. The termination of the Cooperation Agreement satisfied these three criteria.
EY appealed the Danish Competition Council’s decision before the Sø- og Handelsretten (the Maritime and Commercial Court) on the basis that the Council had wrongly interpreted the scope of the standstill obligation. In this context, and given that Danish merger control law is based on the EUMR, the Danish Maritime and Commercial Court asked the CJEU to rule on the scope and application of the standstill obligation.
The CJEU, following the Opinion of Advocate General Wahl, ruled that the termination of the Cooperation Agreement was not gun-jumping and rejected the three criteria proposed by the Danish Competition Council for assessing the scope of the standstill obligation.
Importantly, the CJEU referred to the relationship between the concept of a “concentration” as established in Article 3 of the EUMR and the standstill obligation of Article 7(1). It considered that the scope of the standstill obligation should not be wider than the scope of the concept of a concentration.
Article 3 of the EUMR provides that a concentration takes place where there is “a change of control on a lasting basis.” The crucial element here is the ability to exercise control over the target or joint venture business.
The CJEU’s ruling is clear: “A concentration is implemented only by a transaction which, in whole or in part, in fact or in law, contributes to the change in control of the target undertaking.”
Furthermore, it made clear that it was not necessary to consider whether the preliminary transaction (i.e., the cooperation agreement) would have any effects on the market as that would be a matter of applying Regulation 1/2003. The CJEU considered that even if the preliminary transaction did have an impact on the market, it would not run afoul of the gun-jumping test if it did not create a change in control of the undertakings concerned.
It ruled that, “even though that withdrawal [the termination of the Cooperation Agreement] is subject to a conditional link with the concentration in question and is likely to be of ancillary and preparatory nature, the fact remains that, despite the effects it is likely to have on the market, it does not contribute, as such, to the change of control of the target undertaking.”
The CJEU’s ruling provides further guidance for businesses to understand upfront what will be tolerated within the confines of the standstill obligation. Central to the assessment of possible gun jumping is whether the acquirer obtains (legally or de facto) the opportunity to exercise decisive influence over the target prior to the clearance of the transaction. Steps which are taken in the context of the transaction by one of the parties, but which do not confer such decisive influence, do not amount to gun jumping.
In practice, however, it will need to be carefully examined on a case-by-case basis whether or not an envisaged preliminary step (or series of steps) to be taken in a transaction falling under the EUMR prematurely creates a change of control. In particular, while the CJEU’s decision adds a helpful clarification, further guidance is needed to determine where the boundary lies between measures necessary to protect the value of the business to be acquired (which are allowed), and measures which overshoot this aim and confer on the acquirer the ability to interfere, or obtain insight, into the strategic running of the target business (amounting to gun jumping).
 Opinion of Advocate General Wahl, delivered on January 18, 2018 in case C-633/16 Ernst & Young P/S v Konkurrencerådet
 Council Regulation (EC) No 139/2004 of January 20, 2004 on the control of concentrations between undertakings
 Council Regulation (EC) No 139/2004 of January 20, 2004 on the control of concentrations between undertakings, Article 8 and Article 14(2)
 See speech by Director General Laitenberge on April 27, 2017 at the International Competition Law Forum in St. Gallen.
 European Commission Press Release IP/18/3522 in case M.7993 Altice / PT Portugal (under Article 14(2) EUMR), April 24, 2018
 “Competition and a fair deal for consumers online”, Netherlands Authority for Consumers and Markets Fifth Anniversary Conference, The Hague, April 26, 2018
 Judgement of the CJEU of May 31, 2018 in case C-633/16 Ernst & Young P/S v Konkurrencerådet