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Guidance on “Gun-Jumping” from the European Court of Justice6월 5, 2018
On May 31, 2018, the European Court of Justice (ECJ) ruled that gun-jumping—when an acquiring company seeks to exercise control over a target company’s business operations pre-close—can only occur when the acquiring company’s action results in a lasting change in the control of the target business and not simply because the target company takes unilateral actions in anticipation of the merger. The ECJ’s decision is an important clarification of the scope of the gun-jumping prohibition under EU merger-control law and has application to all mergers subject to review by the European Commission (EC) (and most European Union Member State competition authorities).
In 2013, Ernst & Young entered into a merger agreement with KPMG Denmark. Danish law—like EU merger-control law—prohibits the parties to a transaction from taking any steps to implement the transaction prior to receiving clearance from the Danish Competition Council—the “standstill obligation.” Violations of the standstill obligation are considered to be “gun-jumping.”
KPMG Denmark gave notice to terminate its cooperation agreement with KPMG International on the day that the merger agreement was signed, before the companies had even notified the Danish competition authority of their proposed merger, much less received clearance for it. While the notice was effective immediately, the termination did not take effect until the transaction closed.
In December 2014, the Denmark Competition Council ruled that KPMG Denmark had breached its standstill obligation—had jumped the gun in implementing the merger—by terminating its cooperation agreement with KPMG International, a decision that was irreversible and likely to affect the relevant market in Denmark.
The parties appealed that decision, and the case was referred to the ECJ for a preliminary ruling.
The ECJ held that providing notice of termination of the cooperation agreement between KPMG Denmark and KPMG International did not constitute gun-jumping. According to the ECJ, gun-jumping can only occur where a business decision contributes to a lasting change in the control of the target business.
The ECJ found that KPMG Denmark’s withdrawal from its cooperation agreement with KPMG International did not change the level of control Ernst & Young exercised over KPMG Denmark. In other words, notice of termination of that cooperation agreement did not result in Ernst & Young gaining any influence over KPMG Denmark.
The ECJ further stated that whether an alleged gun-jumping violation causes market effects is irrelevant. The fact that a business decision may affect competition in a particular market is insufficient to constitute gun-jumping without a lasting change in control of the target company. However, a business decision that results in a change in control of the target company would still violate the standstill obligation even if it had no measurable effect on the market.
The ECJ’s ruling has general application to all transactions under review by the EC and those under review by EU member states with equivalent gun-jumping laws, like Denmark.
The ECJ judgment provides some helpful clarification regarding the scope of the gun-jumping prohibition. Nevertheless, parties to a proposed transaction should still proceed with caution when determining which steps they can take in preparation for implementing a transaction. If the parties are unsure whether a contemplated action may run afoul of the standstill obligation, they should seek the advice of legal counsel.
For their part, US antitrust agencies have traditionally been more active that the EC in detecting and punishing pre-close conduct. But it is unclear whether the US agencies would have taken the same view with respect to KPMG Denmark’s withdrawal from its cooperation agreement—finding that it was a unilateral business decision rather than interference by the acquiring company in the target’s ordinary course of business. Indeed, the US Federal Trade Commission’s March 2018 detailed guidelines on pre-close antitrust pitfalls focus almost entirely on the implications of the exchange of competitively sensitive information pre-close but not on other types of pre-close conduct. Parties to proposed transactions under review by the US agencies would do well to remember that gun-jumping inquiries by US authorities are based on each transaction’s specific set of facts and circumstances. When in doubt as to whether pre-conduct action is permissible, the parties should consult counsel.
This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Christian Riis-Madsen, an O'Melveny partner licensed to practice law in Denmark, Advokat, Courtney Dyer, an O'Melveny partner licensed to practice law in the District of Columbia and New York, and Courtney C. Byrd, an O'Melveny counsel licensed to practice law in the District of Columbia and Maryland, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.
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