On May 31, 2018, the Court of Justice of the EU made a preliminary ruling in the Ernst&Young P/S v Konkurrencer ä det case. 2 The European Court held that the control of concentration of operators in Article 7, paragraph 1, of the EU Regulation on Mergers and Acquisitions ("preemptive"), It should be interpreted as "a certain concentration should be implemented by only one exchange, and the transaction will lead to the transfer of control of the target enterprise in whole or in part, in fact, or in law. Regardless of whether the termination of the cooperation agreement has had market effects, the termination of the cooperation agreement in this case should not be considered as a situation that can lead to a certain concentration implementation.". Therefore, the European Court of Justice held that the termination of the cooperation agreement involved in this case should not be regarded as a "preemption".

 

（1） Background of the case

 

On November 18, 2013, the KPMG DK companies signed a merger agreement with the EY companies. In Denmark, KPMG Denmark and Ernst&Young are both audit companies that provide audit and accounting services. At the time of the signing of the merger agreement, KPMG Denmark remained a member of KPMG International, a global network of independent audit firms. Due to the fact that KPMG Denmark is not structurally part of the KPMG international network, on February 15, 2010, KPMG Denmark signed a cooperation agreement with KPMG International. According to the agreement, KPMG Denmark has the exclusive right to join KPMG International in Denmark, and has the exclusive right to use KPMG International's trademarks for marketing activities in Denmark.

 

After the signing of the merger agreement, KPMG Denmark announced that it would withdraw from the cooperation agreement before September 30, 2014. According to the provisions of the cooperation agreement, if one party terminates the agreement, it shall notify the other party at least 6 months before the end of the KPMG international accounting year. After signing the merger and acquisition agreement on November 18, 2013, KPMG Denmark announced the termination of the cooperation agreement on the same day, which will officially terminate on September 30, 2014.

 

On December 13, 2013, KPMG Denmark and Ernst&Young filed an antitrust filing procedure with the Danish antitrust review body, the Danish Competition Commission. The transaction was conditionally approved on May 29, 2014. On December 17, 2014, the Danish Competition Commission announced that the unilateral termination of the cooperation agreement implemented by KPMG Denmark on November 18, 2013 occurred before the transaction was approved by the Competition Commission. Therefore, it violated the provisions of the Danish Competition Law that concentration should not be implemented before approval, constituting a "preemptive" act in the Competition Law. Before making this decision, the Danish Competition Commission evaluated the factual situation of the termination of the cooperation agreement and believed that during the period between the termination of the cooperation agreement and the approval of this merger, the termination of the cooperation agreement may have market effects that are not conducive to competition.

 

1. See:

 

http://curia.europa.eu/juris/document/document.jsf?text=&docid=202404&pageIndex=0&doclang=EN&mode=req&dir=&occ=first&part=1&cid=814870

 

On June 1, 2015, Ernst&Young filed a lawsuit with the Danish Maritime and Commercial Court, requesting that the court determine that the above decision of the Danish Competition Commission in this case is invalid. In addition, Ernst&Young also questioned the Danish Competition Commission's interpretation of the scope of the preemption in this case, the reasons for the decision, and the effectiveness of the cooperation agreement on the market. As Denmark is a member of the European Union, its legislation on concentration of operators is formulated on the basis of the EU Regulation on Mergers and Acquisitions (Regulation No 139/2004), and the Danish Competition Commission referred to the relevant practical operations of the European Commission and EU level jurisprudence in its decision in this case, so it applied to the court, namely the Danish Maritime and Commercial Court, for issues related to the interpretation of Article 7, paragraph 1, of the EU Regulation on Mergers and Acquisitions, Request an advance ruling from the European Court of Justice.

 

Specifically, the Danish Maritime and Commercial Court mainly applies to the European Court for a preliminary ruling on the following issues involved in this case: First, what are the criteria for assessing whether the conduct of an operator constitutes a "preemptive" act as stipulated in Article 7, paragraph 1, of the Regulations on Mergers and Acquisitions of Enterprises? Secondly, as stated in this case, does the act of terminating the cooperation agreement constitute a "preemptive" act as stipulated in Article 7, paragraph 1, of the Regulations on Mergers and Acquisitions? Thirdly, does terminating a cooperation agreement actually lead to market effects related to competition law have an impact on the answer to question 2?

 

（2） Case Trial Ideas

 

First of all, the European Court of Justice believes that the three questions requested by the court should be examined together. The European Court of Justice held that when a provision of EU law does not allow for the evaluation of its precise scope of application, the interpretation of the provision should take into account the purpose of the provision itself and the overall purpose.

 

The European Court of Justice emphasized that Article 7, paragraph 1, of the Regulations on Mergers and Acquisitions only stipulates that a concentration cannot be implemented before the declaration or approval is passed. Therefore, Article 7, paragraph 1 does not specify under what circumstances a concentration should be considered to have been implemented, nor does it specify whether the implementation of a concentration can be implemented after a transaction that does not result in a transfer of control of the target company. In addition, Article 7 of the Regulations on Mergers and Acquisitions itself does not clarify the scope of "preemption". The "preemptive" behavior prohibited by Article 7 of the Regulations on Enterprise Mergers and Acquisitions is limited to the concentration behavior defined in Article 3 of the Regulations. Therefore, the concentration behavior referred to in Article 7 should be considered as the execution of a transaction by the merger participant that can lead to a continuous transfer of control of the target company (i.e., the definition of concentration in Article 3). According to Article 20 of the fact statement section of the Corporate Mergers and Acquisitions Ordinance, when many transactions are closely related to each other, they should be considered as the same concentration. However, if multiple transactions are implemented in the context of a concentration but do not result in a transfer of control of the operators under the concentration, the transaction should not be subject to Article 7 of the Mergers and Acquisitions Ordinance; Such transactions generally play a supportive or preparatory role in "concentration", and there is no direct functional link between them and implementation.

 

Secondly, the fact that a transaction can produce adverse competitive market effects does not in itself prove that Article 7 of the Mergers and Acquisitions Ordinance can provide other interpretations. "Because the evaluation of the market effect of a transaction falls within the scope of conducting an entity review of the concentration, and the purpose of the stand still obligation under Article 7 of the Regulations on Mergers and Acquisitions is to ensure that the European Commission effectively controls all concentration activities, without any relationship to whether the transaction has the effect of restricting or eliminating competition.". Similarly, a transaction that does not produce any market effect may also lead to the transfer of control of the target company. In this case, the possibility of partial implementation of the concentration cannot be ruled out. Therefore, it cannot be considered that the conduct of operators that do not produce adverse effects on market competition falls outside the jurisdiction of the European Commission or the competition law enforcement agencies of member States. The European Court of Justice held that extending the scope of application of Article 7 of the Regulations on Mergers and Acquisitions to transactions that would not result in a centralized implementation not only constitutes a violation of Article 1 of the Regulations on Mergers and Acquisitions, but also correspondingly narrows the scope of application of Regulation No 1/2003.

 

The European Court of Justice concluded as follows: Article 7, paragraph 1, of the Regulations on Mergers and Acquisitions should be interpreted as saying that a concentration should be implemented by only one exchange, and that the transaction will result in the transfer of control of the target enterprise, in whole or in part, in fact or in law. In other words, the substantive significance of this sentence lies in the premise that an act constitutes a "preemption" for EU competition law, which is that the act can lead to the transfer of control.

 

2. Is the termination of the cooperation agreement involved in the case considered as an act of centralized implementation? In response to this issue, the European Court of Justice held that although there is a conditional connection between the termination of the cooperation agreement and the concentration, for the concentration, it has more auxiliary or preparatory characteristics to the concentration, and there is no direct functional connection with "implementation". Therefore, although the termination of the cooperation agreement may have market effects that are not conducive to competition, However, it will not in itself lead to the transfer of control of the target company. Because the transaction only involves a party to the merger and a third party (i.e., KPMG International), Ernst&Young will not have the possibility of exerting any influence on KPMG Denmark due to the termination; In addition, according to the arrangement of the above cooperation agreement, KPMG International operates independently before and after the termination of the cooperation agreement.

 

The European Court of Justice finally reached the following conclusion on the above issue: Regardless of whether the termination of the cooperation agreement has had market effects, the termination of the cooperation agreement in this case should not be considered as a situation that can lead to a centralized implementation. In short, the termination of the cooperation agreement in this case should not be considered a "preemption". Due to the possibility that the pre approval measures implemented by the trading party may not result in the transfer of control of the target company, the judgment in this case provides greater explanatory space for the legality of the pre approval measures implemented by the trading party.

 

（3） Enlightenment on the scope of "preemption" in China's anti monopoly declaration

 

1. Introduction to the "Race" Case

 

As of the completion of this article, the Anti monopoly Bureau of the Ministry of Commerce has announced a total of 22 preemptive cases. From the perspective of the type of concentration of business operators, among the 22 cases of preemptive action, 11 involve the establishment of new joint ventures, and the remaining 11 involve equity acquisitions. According to Paragraph 3 of Article 20 of the Anti monopoly Law, the situation of concentration of business operators includes "business operators obtaining control over other business operators through contracts or other means or being able to exert decisive influence on other business operators.". The legal basis for a newly established joint venture to constitute a concentration of business operators comes from the provisions of this paragraph. In the early stages after the implementation of the Anti monopoly Law, due to the fact that the legislation does not explicitly list newly established joint ventures as a concentration of operators, many enterprises have questions about whether they need to initiate the anti monopoly declaration process. As more and more cases of newly established joint ventures are reported, Chinese and foreign enterprises have gradually realized that newly established joint ventures belong to a type of concentration declaration. For the sake of clarity, Article 4 of the Guiding Opinions on the Declaration of Concentration of Business Operators promulgated by the Ministry of Commerce in 2014 stipulates that newly established joint ventures belong to a type of concentration of business operators.

 

In terms of the type of "preemption", of the 22 announced preemption cases, 18 involved the applicant filing an antitrust complaint with the Ministry of Commerce after the transaction was implemented (for example, the case of a new joint venture between CSR Puzhen and Bombardier in Sweden) or partially implemented (for example, the case of Canon Corporation acquiring all the equity interests of Toshiba Medical System Co., Ltd.)

 

Note: At the time of drafting this article, the authority of the Anti monopoly Bureau of the Ministry of Commerce to review business concentration has been transferred to the State Administration of Market Supervision and Administration. The bureau made a supplementary report, but in the remaining four cases, the declarant did not make any supplementary reports. Among the 18 preemptive cases involving the declarant's declaration after the transaction was implemented or partially implemented, there were 3 cases, namely, the case of a new joint venture between Blockbuster New Media Co., Ltd. and Microsoft Corporation, the case of Canon Co., Ltd. acquiring all of the equity of Toshiba Medical System Co., Ltd., and the case of Meinian Health and its affiliated enterprises acquiring 100% of the equity of Ciming Medical Examination. As a result of the reporting, the Anti monopoly Bureau of the Ministry of Commerce intervened in the investigation. It can be seen that up to now, the investigation of preemptive cases by the Anti monopoly Bureau of the Ministry of Commerce has largely been triggered by the declarant's ex post basis.

 

According to Article 21 of the Anti monopoly Law, if the concentration of business operators meets the reporting standards prescribed by the State Council, the business operators should report to the anti monopoly law enforcement agency of the State Council in advance, and those who fail to report shall not be subject to concentration. In violation of this provision, concentration of business operators that are not declared in accordance with the law will be considered as "preemptive".

 

Among the 22 preemptive cases announced by the Anti monopoly Bureau of the Ministry of Commerce, the "implementation" methods are mainly divided into the following types: obtaining a business license (such as the case of establishing a joint venture between China Merchants Qingdao and Qingdao Xinqian Bay), completing equity transfer activities (such as the case of Fuxing Pharmaceutical acquiring Erye Pharmaceutical), and completing industrial and commercial change registration for equity transfer (the case of Dade Holdings acquiring Jilin Sichang), Appoint directors and management personnel and obtain business licenses (such as the case of a new joint venture between Xinyu Group and Bombardier in Sweden).

 

In terms of the "preemptive" methods disclosed by the Ministry of Commerce, they all belong to relatively typical acts of centralized implementation without declaration, such as completing the equity change registration procedures, obtaining a business license, and so on. Therefore, for the Ministry of Commerce, such preemptive actions are relatively easy to identify, and there is little controversy about whether there is an enforcement action. In addition, in terms of whether "appointing directors and management personnel" constitutes a race, according to the published cases, the Ministry of Commerce has not separately analyzed this issue, but believes that it constitutes a "race" together with obtaining a business license. Therefore, if only "appointing directors and management personnel" without obtaining a business license constitutes a preemptive issue, the Ministry of Commerce has not explained this.

 

My understanding of this issue is that even if there is only the act of appointing directors and management personnel without obtaining a business license, it is likely to be considered as a preemptive act, because directors and management personnel have a significant impact on the operating decisions of the target company, and the appointment of directors and management personnel itself means that the acquirer has the possibility of exerting decisive influence on the operating decisions of the target company, Therefore, the appointment of directors and management personnel has actually "implemented" the concentration.

 

As shown above, the enlightenment of the Ernst&Young P/S v Konkurrencer ä det case indicates that the situation of preemptive cases that have been identified by the Anti monopoly Bureau of the Ministry of Commerce belongs to a relatively typical act of concentration without declaration. However, it is difficult for us to find an answer in the case disclosed by the Anti monopoly Bureau of the Ministry of Commerce to the question whether such auxiliary or preparatory behaviors as the termination of cooperation agreements in the Ernst&Young P/S v Konkurrencer ä det case fall within the scope of "preemption". The biggest enlightenment of the Ernst&Young P/S v Konkurrencer å det case on the determination of "preemption" in China's antitrust declaration is that it provides a reference basis for China's antitrust review authorities to define the scope of "preemption".

 

Firstly, according to the judgment of the European Court of Justice in this case, the premise for constituting the preemptive act under Article 7, paragraph 1, of the EU Regulation on Mergers and Acquisitions is that the implementation of this act on a certain concentration will lead to the transfer of control of the target company. In other words, prior to the approval of the antitrust application, actions that do not result in the transfer of control of the target company should not be considered a preemptive move. Therefore, the European Court of Justice, in the Ernst&Young P/S v Konkurrencer ä det case, made a relatively clear definition of the scope of "preemption", and did not support the broad interpretation of "standing obligation" before antitrust approval advocated by the European Commission. Given that the specific scope of "preemption" has not been clearly defined in the current preemption cases and relevant laws and regulations promulgated by the Ministry of Commerce, and that domestic judicial institutions have not yet conducted relevant judicial review on the specific scope of "preemption", there is room for ambiguity regarding the legality of actions taken by enterprises with antitrust reporting obligations in practical operations before antitrust approval. The decision of the European Court of Justice in the Ernst&Young P/S v Konkurrencer ä det case can provide some reference for defining the scope of "preemption" in domestic antitrust declarations.

 

Secondly, according to the judgment of the Ernst&Young P/S v Konkurrencer ä det case, when the implementation of an action prior to the antitrust approval is not considered to lead to the transfer of control of the target company, even if the action may have market effects that are not conducive to concentration, it should not be considered as "running away". This conclusion is based on reasonable logical reasoning. The analysis of market effects belongs to the substantive review section, and there is no necessary internal correlation between it and whether a certain behavior constitutes a "preemption". Therefore, the market effect of a certain behavior that is not conducive to concentration does not necessarily infer that the behavior must constitute a "preemption".

 

Finally, acts that have only auxiliary or preparatory characteristics for a concentration and do not have a direct functional relationship with "implementation" should not be considered as actions that can lead to the transfer of control. Therefore, implementing such acts before the approval of the antitrust review body should not be considered as "preemptive". Of course, how to determine whether a certain act has auxiliary or preparatory characteristics and there is no direct functional connection with its implementation? The antitrust review authority has a great deal of discretion in this regard, and needs to make a judgment based on the specific situation of the case.

 

(This article is translated by software translator for reference only.)