On 26 March 2021, the European Commission (“EC”) published a new guidance on the application of the referral mechanism set out in Article 22 of the EU Merger Regulation. The main aim is to target so-called killer acquisitions. Effective immediately, the guidance allows Member States to refer transactions to the EC for its review even when the transactions fall below national notification thresholds. Before this new guidance, there was no such referral risk. Furthermore, completing a transaction does not prevent the application of the new interpretation, and a referral may take place even six months post-closing (or, exceptionally, even later). Thus, the controversial new policy significantly increases legal uncertainty and the need to examine closely the competitive effect of a transaction in every Member State, especially in the digital economy and pharmaceutical sector.
In a speech on 11 September 2020, the EC’s Executive Vice-President and Commissioner for Competition Margrethe Vestager announced the EC’s plan to start accepting referrals from Member States of transactions that are worth reviewing at the EU level – whether or not the national competition authorities (NCAs) had the power to review the cases themselves. On 26 March 2021, as a part of the ongoing reform of the EUMR, the EC published a Staff Working Document summarizing the findings of the evaluation of the procedural and jurisdictional aspects of EU merger control. In the document, the EC expressed concerns that certain cases could escape scrutiny because the competitive significance of the target is not yet materialised in its turnover. On the same date – and without any public consultation or transitional period – the EC published its Guidance on the application of the referral mechanism set out in Article 22 of the Merger Regulation to certain categories of cases (the “Guidance”), effective immediately. The Guidance sets out the EC’s position that it has the power to review transactions that fall below the EU and national merger control thresholds by accepting referrals from the NCAs. The new Guidance marks a significant change in the EC’s long-standing policy against referrals of transactions not meeting even the national notification thresholds.
Article 22 referral mechanism
The aim of the EU Merger Regulation of 20 January 2004 (“EUMR”) is to ensure that major corporate reorganisations do not result in lasting damage to competition in the internal market. Article 22 EUMR itself is not new, nor has it been amended now. The EC’s above-mentioned new interpretation set out in the Guidance is the only novel aspect of it.
The original application of Article 22 EUMR was to allow Member States without an own national merger control regime to refer cases to the EC. Principally, this was the situation with the Netherlands, hence the provision was also known as the “Dutch clause”. At present, every Member State with the exception of Luxembourg has merger control provisions in place, and thus the clause is arguably unnecessary for its original purpose.
Article 22 allows Member States to request the EC to examine any concentration that does not have a “community dimension”, i.e. a concentration that does not meet the EUMR turnover thresholds, but (i) affects trade between Member States and (ii) threatens to significantly affect competition within the territory of the Member State or States making the request.
Regarding the first criterion, a transaction is deemed to affect trade between Member States if it is liable to have some discernible influence on the pattern of cross-border trade. Specific factors taken into account in this assessment may include the location of (potential) customers, the availability and offering of the products or services at stake, the collection of data in several Member States, or the development and implementation of R&D projects whose results may be commercialised in more than one Member State.
The second criterion requires that there must be a real risk based on a preliminary analysis that the transaction may have a significant adverse impact on competition within the territory of the Member State or States making the request, and thus it deserves closer scrutiny. With regard to such a preliminary analysis of the threat of a concentration to significantly affect competition, it must be remembered that – on the basis of the new interpretation – there is no notification in any Member State (as the notification thresholds were not met) and consequently no market data or further analysis by the parties on the basis of which such an analysis can be carried out to sufficient detail.
Moreover, the time limit to make the referral request is linked to having sufficient information to make the above-mentioned preliminary assessment. A Member State must make the referral request within 15 working days of either the transaction being notified to it or of the date on which the transaction is otherwise “made known” to it, i.e. when it has sufficient information to make the preliminary assessment of the above-mentioned two criteria. The concept of sufficient information is already vague itself in this context, and the NCAs are likely to interpret it in different ways, creating uncertainties on the time limits of the referrals.
After the EC has informed other Member States (and the undertakings concerned) of the received referral request – which it has to do ‘without delay’ – the other Member States have 15 working days to join the referral request. After this, the EC has 10 working days to decide whether it will accept the request or not.
New approach to the referral of transactions to the EC
As mentioned, the EC’s long-standing position has been to discourage referrals of transactions that do not meet national notification thresholds. The new approach to the referral mechanism is a result of the EC’s consultation from 2016 that looked, among other things, for options to address the issue of “killer acquisitions”. These refer typically to established competitors acquiring innovative companies, such as start-ups, with strong competitive potential but little or no turnover in the early stages of their development, to avoid potential competition in the future. Limited turnover of the target means that such transactions are usually not caught by merger control rules. In its assessment, the EC may also take into account whether the value of the consideration received by the seller is particularly high compared to the current turnover of the target. In some jurisdictions, such as Germany and Austria, value-based notification thresholds have been introduced in order to capture such deals and avoid this problem. The EC’s chief competition economist Pierre Régibeau has also suggested that competition agencies should consider using algorithms to detect potential killer acquisitions, as the Global Competition Review reported on 24 May 2021 here.
This development appears especially significant for the digital economy, where services regularly launch with the aim of building up a significant user base and/or commercially valuable data inventories, before seeking to monetise the business. Similarly, in sectors such as pharmaceuticals and others where innovation is an important parameter of competition, there have been transactions involving innovative companies with strong competitive potential conducting research and development projects, even if these companies have not yet finalised, let alone commercially exploited, the results of their innovation activities.
According to the Guidance, similar considerations apply to cases, where the turnover of at least one of the undertakings concerned does not reflect its actual or future competition potential, such as:
i) recent markets entrants with significant competitive potential that have yet to develop or implement a business model generating significant revenues, or undertakings that are still in the initial phase of implementing such business models;
ii) important innovators or undertakings conducting potentially important research;
iii) actual or potential important competitive forces;
iv) undertakings that have access to or impact on competitively valuable assets, such as raw materials, intellectual property rights, data or infrastructure; and/or
v) undertakings that provide products or services that are key inputs/components for other industries.
With the Guidance, the EC aims to target killer acquisitions and other types of acquisitions that could have an important role in terms of competition and that would otherwise escape merger control, encouraging referrals from a wide array of economic sectors of which – according to it – the above-mentioned ones are only examples.
Significant legal uncertainty for parties to a transaction
In the same vein as the vagueness of the concept of ‘sufficient information’ discussed above, or that the EC has not limited the referral mechanism to certain sectors in the Guidance, the EC has left a backdoor to the time period of making a referral request. According to the Guidance, although assessments are carried out on a case-by-case basis, the EC would generally not consider a referral appropriate where more than six months have passed after the implementation of the concentration. However, the Guidance diverges from this main rule by stating that a later referral may also be appropriate in exceptional circumstances based on, for example, the magnitude of the potential competition concerns and of the potential detrimental effect on consumers. In practice, this means that a transaction may not only have been completed but may have been completed a relatively long time ago, which would not prevent a Member State from requesting a referral and the EC from accepting it.
The Guidance also allows third parties to contact the EC or the NCAs to inform them of a concentration that, in their opinion, could be a candidate for a referral under Article 22 EUMR. Similarly as above, the EC and competent national authorities need to have sufficient information to undertake a preliminary assessment also with regard to third-party contacts. Moreover, it has been argued that the threshold for contacting the EC or the NCAs is lower for third parties, as the requirements for making a referral request do not apply to third-party contacts. Therefore, it is possible that third parties may use this route any time after a deal is made public, which could be extremely burdensome for parties to transactions and likely also for the EC itself.
Referrals in practice
To date, there have been 43 Article 22 referral requests in total according to the EC’s merger statistics. This is a tiny fraction of the over 8,000 transactions that the EC has examined over the years. However, the Guidance is likely to have an increasing effect on the number of referral requests. It is also worth noting that during the over 30 years of Article 22 EUMR operation, there have only been four refusals to referrals that have been made to the EC (i.e. less than 10% of the referral requests that have been made to date). In Finland, at least so far, the Finnish Competition and Consumer Authority has rarely requested referrals to the EC even when the notification thresholds have been met, as can be read from our alert here.
The first transaction falling below national notification thresholds but referred to the EC under the new Guidance is Illumina/GRAIL (deal value USD 7.1 billion). Illumina is a US-based global genomics company that is acquiring GRAIL, a US healthcare company founded by Illumina in 2016. In 2017, GRAIL was spun out as a standalone company, powered by Illumina’s NGS technology, to develop state-of-the-art data science and machine learning and create the atlas of cancer signals in the blood, enabling multi-cancer early detection tests. Peculiar in this case is that the EC applied the Guidance already before publishing it. The EC itself asked (in accordance with Art. 22(5) EUMR) the French competition authority to request a referral of Illumina/GRAIL to the EC on 19 February 2021, i.e. weeks before the publication of the Guidance.
After being prompted by the EC, the French competition authority submitted a referral request on 9 March 2021. The referral request was subsequently joined by the Belgian, Dutch, Greek, Icelandic, and Norwegian competition authorities. Our understanding from several public sources is that the referral request was also examined by the competition authorities of Austria, Germany, Hungary, Ireland, Latvia, Lithuania, Slovenia, Spanish and Sweden, but none of them joined it. Apparently some of the NCAs considered that they did not have the power to refer the transaction, since it was not notifiable in their countries and did not have effects on the markets there.
The concentration in question neither had a ‘community dimension’ nor did it meet the notification thresholds in any Member State, but the EC accepted the referral request. The EC regarded that the proposed transaction met the criteria for referral under Article 22 EUMR as the sales price was particularly high considering that GRAIL did not yet generate turnover and thus indicating that GRAIL’s competitive significance was not reflected in its revenues. In particular, the EC was concerned that the combined entity could restrict access to or increase prices of next generation sequencers and reagents to the detriment of GRAIL’s rivals active in genomic cancer tests following the transaction. The EC further pointed out that genomic cancer tests, having the potential to identify a wide variety of cancers in asymptomatic patients, are expected to be game-changers in the fight against cancer.
Illumina appealed to the French Council of State (Conseil d’Etat) to suspend the referral by the French Competition Authority (“FCA”). However, the French Council of State ruled that Illumina could not challenge the FCA’s request for referral because it lacked jurisdiction to hear the case. In parallel, Illumina and GRAIL sought to prevent the Dutch Competition Authority from joining the referral request, but the Court of Hague rejected their arguments. Following this, Illumina filed an action in the General Court of the European Union (“GC”) on 29 April 2021 asking for annulment of the EC’s decision asserting jurisdiction to review the proposed transaction. At the time of writing, the case is pending in the GC. It is likely that other similar cases will follow as referrals under the Guidance will be challenged.
Practical implications for companies
The EC’s chosen path to unilaterally create a new interpretation is controversial: instead of trying to have the notification thresholds of the EUMR amended e.g. to value-based, as for instance Germany and Austria have done, or, for example, launching a consultation to obtain a wider view of its interpretation, it chose to re-invent its practice suddenly after 30 years. This changed approach brings several implications that companies need to take into account when planning transactions.
The EC’s revised interpretation makes competition analysis in deal planning all the more important: the risk of a merger control review must be assessed also in cases where the EU and national notification thresholds are not met as the thresholds are no longer decisive. In addition, the timeline of possible referral scenarios need to be carefully assessed early on, which is a challenging task in itself given the aforementioned uncertainties. The possibility that a transaction could be referred to the EC even if no national thresholds were met should be carefully considered and addressed in transaction document conditions and timelines. Companies planning a transaction may also consider contacting the relevant NCAs to get their views on the risk of a referral request, but this approach contains the risk of waking the unnecessary interest of the contacted NCAs in the prospective transaction and of parties having to provide significant amounts of information to the NCAs – possibly in different languages – in order to get their views. Furthermore, unfortunately, it seems almost certain that different NCAs will require significantly different amounts of information – and time – before reaching their conclusions in similar situations.
As indicated above, all this also raises the question on whether the EC’s new policy introduces an open-ended referral period for Member States even when a national merger regulation is not triggered. The NCAs may take the view that the 15 working day period for a referral request has not started due to insufficient information in the absence of a notification to make the preliminary assessment, creating a significant risk of further delays for merging parties. National administrative laws may also come to play to prevent unreasonable outcomes for parties. Other open questions concern, for example, the possible different approaches adopted by the NCAs on making the preliminary assessments and their possibility to use investigative tools under the national legislation in the absence of national jurisdiction based on merger control thresholds.
The Guidance opens the way for the EC to review concentrations where the future competitive potential is not yet reflected in targets’ turnover, as we have already witnessed in the Illumina/GRAIL case. Furthermore, the purely illustrative examples in the Guidance open the way for the EC to exercise its discretion to accept referral requests from any sector, and will arguably lead to more litigation in courts. The new policy that the EC chose to adopt unilaterally instead of following a more legislative or open route marks one of the most significant backdoor extensions of jurisdiction in European merger control history, increasing uncertainty for all parties to transactions.