The Advocate General delivers Opinion in pre-implementation action against EY

Opinion of the Advocate General delivered 18 January 2018 in Case C-633/16, Ernst & Young P/S vs the Danish Competition Council

By assistant attorney Simon Fasterkjær Kjeldsen

Background

The background to Wahl’s Opinion is the Danish Competition Council (DCC) decision of 17 December 2014. In its decision, the DCC held that KPMG Danmark (KPMG DK) had infringed the stand still obligation by terminating its cooperation with the international KPMG network at the same time as KPMG DK concluded, on 18 November 2013, a merger agreement with Ernst & Young (EY). 

The DCC decision was appealed to the Maritime and Commercial High Court in Copenhagen, which then referred a number of questions to the European Court of Justice for a preliminary ruling.  

The Danish Competition Council's decision

The merger of KMPG DK and EY was subject to notification and was approved by the DCC on 28 May 2014.

Subsequently, however, the DCC issued a decision which held that KMPG DK had infringed the stand still obligation (prohibiting pre-implementation) under Section 12(c)(5) by giving notice to terminate its cooperation agreement with KPMG International before the DCC had approved the merger.

The decision was based on a legal test which applied an overall assessment that laid particular emphasis on three criteria, though those three elements were stated not to be exhaustive. According to the decision, the termination of the agreement was

1. merger-specific,
2. irreversible, and
3. had the potential to have market effects in the period between the notice of termination and the approval of the merger.

Questions submitted to the European Court of Justice

The decision was brought before the Maritime and Commercial High Court in Copenhagen.

In those proceedings the Maritime and Commercial High Court referred four questions to the European Court of Justice, requesting a preliminary ruling on the proper interpretation of the stand still obligation under European law.

The questions referred concern especially what criteria are to be applied when competition authorities enforce the stand still obligation, and whether the stand still obligation can be extended to comprise actions that do not in themselves, wholly or in part, form part of the actual change of control or merging of the activities of the participating undertakings.

Questions on the extent of the stand still obligation arise in practically all mergers subject to notification, and any violation of the obligation will generally carry a penalty. For that reason the case is interesting. The Commission has fined violations quite severely recently, and the latest decision by the European Court of Justice in T-704/11, Marine Harvest, also upheld a EUR 20 million fine for a Norwegian seafood producer for violating the prohibition against pre-implementation (that case, though, concerned implementation without proper notification). 

Opinion of Advocate General Wahl

Advocate General  Wahl delivered his Opinion on 18 January 2018. In it, he initially explains why, in his opinion, the criteria applied by the DCC do not lend themselves to delimiting the scope of the stand still obligation. Wahl states in this regard that all three suggested criteria are inherently flawed (paras. 46ff). He acknowledges that the obligation cannot be positively demarcated, but suggests instead a negative definition of it, based on the concept of a ‘concentration’, which is also what triggers the duty of notification of the merger (para. 68):

"[...] an interpretation of the scope of the stand still obligation under Article 7 of Regulation No 139/2004 which is disconnected from that of the concept of ‘concentration’ would create a grey area where certain measures which, although within the periphery of a concentration but not in and of themselves inextricably linked to the transfer of control, would be caught thereby. However, if the reach of that grey area were greater than the scope of the concept of a ‘concentration’, it would imply extending that obligation beyond the scope of the regulation itself as expressed in Article 1 thereof. That would be unsustainable."

In summary, therefore, Advocate General Wahl proposes that the stand still obligation be interpreted so as to not apply to measures which, although taken in connection with the process leading to a merger, precede and are severable from the measures actually leading to the acquisition of the possibility of exercising decisive influence on a target undertaking (para. 98). Judged on that test, the termination of KPMG DK’s agreement with the KPMG network, as agreed in the merger agreement with EY, would not have violated the stand still obligation.

Next, the European Court of Justice will deliver judgment in the matter. Judgment is expected to be passed in the course of the coming months.

Advising EY are Kromann Reumert and Plesner, represented by partners Jens Munk Plum and Gitte Holtsø, respectively.

See the Opinion of the Advocate General.