WILLEMSTAD - EY is required to pay a fine of 400,000 Antillean guilders to the Curaçao regulator for failing to report its intention to acquire local KPMG operations in 2018, which would have pushed its market share above 30 percent. The court has ruled that the imposed penalty is valid.
Reports in the media about a potential merger between KPMG Dutch Caribbean and Ernst & Young Dutch Caribbean in late 2018 prompted the Fair-Trade Authority Curaçao (FTAC) to send a letter to EY inquiring about their precise plans. EY's response came the next day: according to EY, there was no intention of a merger or acquisition. However, the international holding did withdraw the license to use the KPMG name, and the company entered 2019 under the name KDC.
By the end of January, due to continued media coverage, the FTAC raised concerns again. This time, EY sent a series of conditional accession and employment agreements for several former KPMG employees. Consequently, the regulator initiated an investigation into the failure to report a concentration before its establishment. This investigation culminated in the imposition of a fine, as EY's market share had grown to at least 30 percent due to the acquisition of KPMG personnel and clients.
Concentration or not?
However, EY contends that there was no concentration and takes the matter to court. This revolved around a failed attempt by partners of KPMG Dutch Caribbean to salvage their practice after KPMG International withdrew the license. This led to the hiring of several employees as partners. Furthermore, EY argues that the agreements regarding this were terminated in February 2019.
Yet, the court disagrees. A concentration occurs when the parties involved undertake transactions that lead to a lasting change in control within the target company. The fact that the agreements were later terminated does not preclude the possibility of a concentration. These agreements allowed EY partners to exert decisive influence over the target company.
Decisive Influence
The court refers to agreements that stipulate that the management companies of former KPMG executives are admitted as partners of Ernst & Young Caribbean and that the relevant executives are appointed as executive directors. 'The court is of the opinion that the plaintiffs, before, during, and after the signing of the agreements, took measures and undertook transactions that contribute to a change in control. These measures and transactions enabled the plaintiffs to exert decisive influence over the target company. The target company constitutes a portion of KPMG's clients and employees.'
For instance, by the end of 2018, a thorough analysis had already been conducted on KPMG clients, aimed at achieving a tailored transition for each client. Moreover, discussions were held about transferring 15 full-time employees from KPMG to EY, and it was agreed that clients would remain with EY even if the agreements did not materialize. While there was no outright acquisition, the court does rule that a concentration did indeed take place.
Market Share Above Threshold
Furthermore, the court concludes that the agreement did result in EY obtaining a market share above 30 percent. The court disagrees with the notion that the General Audit Office (Soab), foreign accounting firms, and small accounting firms belonging to an international network should have been involved in determining the relevant market. 'In the court's view, these firms are not an alternative for medium-sized and large Curaçao enterprises to switch to.' The fine imposed on EY is upheld; however, the court does not make a ruling on its amount.
Source: Accountancy Vanmorgen