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Parties to a merger agreement are prohibited under US and EU antitrust laws from closing a deal that is subject to antitrust review – or taking certain preparatory steps to combine the two businesses – prior to receiving appropriate antitrust clearances. In recent years, EU authorities have taken an increasingly hard line on these “gun jumping” issues, and have imposed substantial fines on a number of companies for violating these restrictions.

This Cleary Gottlieb memo says that a recent decision by the European Court of Justice arising out of a 2013 merger between certain former KPMG affiliates in Denmark & EY provides some additional clarity on the scope of the EU’s prohibitions on gun jumping. At issue in the case was whether the KPMG affiliates’ decision to terminate their cooperation agreement with KPMG shortly after entering into the merger agreement with EY constituted gun jumping. As this excerpt explains, the ECJ concluded that it did not:

The ECJ held that KPMG DK had not violated the standstill obligation in Article 7(1) EUMR by giving notice to terminate the cooperation agreement. The ECJ recalled that the standstill obligation only applies to the implementation or closing of “concentrations” as defined in Article 3 EUMR. According to this provision, a concentration arises as a result of a “change of control on a lasting basis” resulting from a merger or acquisition by actions that either separately or together “confer the possibility of exercising decisive influence on an undertaking.”

On this basis, the ECJ held that steps taken by merging parties to implement or close a transaction before clearance will only amount to gun jumping if such steps can be viewed as “contributing to a lasting change in control of the target undertaking.”

The ECJ concluded that KPMG DK’s termination of its cooperation agreement did not result in a “concentration,” because that action itself did not confer upon EY any possibility of exercising control over KPMG DK, which was independent of EY both before and after taking that action.

The memo notes that the ECJ’s action confirms that merging parties can take certain preparatory steps in advance of a closing without running afoul of EU regulations, but that the test remains somewhat vague as to what actions might be permissible. In light of he recent enforcement trend, the memo cautions that the room for interpretation that this vague standard implies may be applied in a broad manner by the European Commission.

– John Jenkins