It is a common misconception that time stops at the event horizon of a black hole. According to our current understanding of black holes based on general relativity, time does not stop at the event horizon, but rather, it is severely dilated or slowed down.
The event horizon of a black hole is the boundary beyond which nothing can escape, not even light. Once an object or light crosses the event horizon, it is believed to be inexorably drawn toward the singularity at the center of the black hole. From the perspective of an external observer, time appears to slow down as an object approaches the event horizon, but it does not actually stop.
When two black holes merge, the process occurs within the framework of space and time as experienced by the black holes themselves. While it is true that the gravitational time dilation near the event horizons is significant, it does not prevent the merging process from occurring. However, from an external observer's perspective, the time dilation would cause the merger to appear slowed down or "frozen" near the event horizons.
It is important to note that the description of what happens within a black hole, including the physics near the singularity and event horizon, is still an active area of research. The behavior of matter and space-time under such extreme conditions is not yet fully understood and may require a theory that combines quantum mechanics and general relativity, such as a theory of quantum gravity, to provide a complete understanding.