EU merger control – new guidance brings uncertainty - particularly for tech and pharma acquisitions

Illumina’s acquisition of cancer testing start-up, Grail, looks set to be the testing ground for the Commission’s first application of its new Guidance on the Article 22 referral mechanism of the EU Merger Regulation (Council Regulation EC No 139/2004) allowing it to review deals that meet neither EU or national thresholds^[1].  While Illumina operates in the EU, Grail has, as yet, no active products let alone EU sales that could trigger an EU notification nor was there an obligation to notify the transaction in any of the EU Member States.

The merger is also facing scrutiny from the US Federal Trade Commission (FTC), which is the only authority the companies notified the deal to. The FTC has filed a lawsuit to block the deal, alleging that because Illumina is the only provider of DNA sequencing for multi-cancer early detection (MCED) tests in the US, the deal will diminish innovation in the market for these tests. It is also of interest to note that Illumina originally founded Grail in 2015 but in 2017 it reduced its ownership below a 20% voting interest and currently owns 14.5% of Grail voting shares.  Having sold its controlling interest, the FTC treats the proposed $7.1 billion acquisition without regard to that history.  Illumina is no stranger to merger control issues on both sides of the pond having abandoned its proposed acquisition of DNA-sequencing rival, Pacific Biosciences in January 2020 following opposition from both the FTC and the UK’s Competition and Markets Authority. 

Essentially, for pharmaceutical and/or technology firms seeking to acquire a highly innovative player, merger analysis has just got considerably more complex in Europe, even if the target is small and its acquisition meets neither EU nor national merger control thresholds. It is worth remembering that when the Commission accepts a referral under Article 22, its competence is restricted to Member States making the request and any others who join in. Accepting  a referral request does not result in the Commission having a full (one-stop-shop) control over the transaction. 

An “elegant solution” that was hiding in plain sight? Or a power-grab?

There has been much debate at EU level as the extent of a perceived merger enforcement gap, allowing acquisitions by incumbents of nascent competitors or innovative start-ups that could play a significant competitive role in the market despite generating little revenue at the moment of the transaction.  This policy shift is the Commission’s response to fears that EU merger control is not up to the task of dealing with “killer acquisitions” that allow large companies to acquire promising smaller players that generate little or no turnover/sales as a means of heading off a future competitive threat. This can be aimed at either “killing” their research projects or their operations before they grow into a significant competitive threat in the same market where the acquiror is already active but also by encapsulating the innovation and using it to strengthen their own market power. A disproportionate acquisition price in relation to the target’s turnover or current value is often seen as a tell-tale that an acquisition falls in this category.  

You will not however find a reference to “killer acquisitions” in the Commission’s new guidance.  Countries such as Germany and Austria have already revised their national rules to capture the “value of the transaction” in addition to turnover thresholds. Doubting the effectiveness of introducing new non-revenue-based thresholds, the Commission chose instead to rely on its existing powers under Article 22 of the Merger Regulation, enabling its new guidance on Article 22 referrals to take effect immediately and without any input from legislators.  

Controversially, the Commission’s  updated guidance (published 26 March 2021) on the referral mechanism of Article 22 seeks to utilise an existing provision of the EU Merger Regulation. Article 22 allows a Member State to request the Commission to examine a concentration (merger or acquisition of control) that (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.  It is commonly known as “the Dutch clause” on the basis that it was originally requested by the Netherlands in 1989, when it had no merger control regime at the time of introduction of the first EU merger control regulation and wanted to be able to ask the Commission to review deals that might harm competition on its territory.  

Although the long-standing policy of the Commission was not to accept referrals of transactions that did not trigger national merger control rules, the Commission has now reversed course, and solicited  referral requests, relying on the new approach set out in its Guidance. In hindsight, the recent use of Article 22 of the EUMR in the Mastercard/Nets^[2] and Apple/Shazam^[3] cases may have been a hint of its potential. In those cases, a national competition authority, which had jurisdiction to assess a notified concentration, requested the Commission to assess the case at EU level in view of its possible cross-border effects. In both cases, the requests by the Danish and Austrian authorities were supported by several other competition authorities and the Commission indeed assessed both acquisitions as if they had an EU dimension. 

In the Illumina/Grail case, the Commission takes the application of Article 22 one step further. Despite the fact that this transaction was notified nowhere in the EU under local merger control regimes, the Commission explicitly invited referral requests from national competition authorities.  The Commission also indicates in its Guidance on Article 22 that third parties may inform them of candidate transactions for referral, whereas previously the mechanism operated between the Commission and national competition authorities (NCAs) only. Not only does this add complexity to a merger analysis, it also extends a new meddling tool to unhappy customers, suppliers or competitors. 

Attempts to challenge the Article 22 referral before French and Dutch national courts fail but reveal significant divergence across the EU 

Legal challenges before both French and Dutch courts to prevent the Article 22 referral of the Illumina/Grail transaction failed. France's Council of State rejected applications from both Illumina and Grail challenging the French Competition Authority’s Article 22 decision to refer on the basis that it was not competent to hear the case. It took the position that the referral request could not be separated from the EU merger review procedure and could only be challenged before the EU courts once the Commission reaches a decision on the merger. With such reasoning likely to be applied to any future Article 22 referral requests by the French Competition Authority, the door to future referrals of mergers below French financial thresholds is wide open. 

Such uncertainty is really not conducive to businesses on an acquisition trail, particularly those engaged in flying below the radar of national merger control regimes.

The Dutch ACM agreed to join in the French referral request. A legal challenge before a Dutch provisional-relief judge to prohibit the Netherlands from joining France’s referral request was not successful.  Here Illumina and Grail argued, inter alia, that Article 22 requires Member States to have national jurisdiction to assess the transaction before they can make a referral or support a referral request. However, the court took the view that the actual text of Article 22 did not support such a reading and that there was no such limitation to be found in the text of the article. The court also took the view that by supporting France’s referral¬ request, the ACM was not acting in conflict with its own merger guidance on this point and had reserved considerable discretion in such cases. So, even if the ACM had no jurisdiction to assess the transaction, it can still submit a referral request. 

A controversial and as yet untested question is the extent to which Commission Article 22(3) decisions are judicially reviewable before the EU Courts.  Illumina could certainly claim legal effects emanating from the Commission’s decision to accept the referral request (prior to the referral request, the Commission had no jurisdiction to examine the deal at all) and that the parties are directly and individually concerned by it. On the other hand, the Commission is likely to argue that accepting the Article 22 referral request from France is just a preliminary stage in the review and the companies can still challenge the final decision. It is understood that Illumina and Grail have chosen to appeal the Commission’s decision (to accept the referral from France) before the General Court, so some clarity may be provided in due course.^[4]

A patchwork quilt of merger regimes?

What this first case to be dealt with under the Commission’s new policy clearly demonstrates is the considerable divergence between approaches by NCAs to the Commission’s referral request, such as: 

• those in support of the Commission’s new policy (France, the Netherlands, Belgium, Greece, Luxembourg + EEA countries Iceland and Norway); 
  
  
• those who considered they had a competence issue (e.g. Spain, Austria, Slovenia, Lithuania); 
  
  
• those who did not have enough information on the likely effects in their country (Ireland, Latvia, Slovakia); and  
  
  
• those NCA’s (Germany and Sweden) who did not explain their reasoning. 

With such a divided front, more legal challenges before national courts can be expected together with the increased possibility of requests being made by national courts and tribunals for preliminary references^[5] before EU courts. 

Instead of a one-stop-shop, merging and acquiring companies can expect to find a patchwork quilt as the Commission’s jurisdiction to examine a transaction will be limited to Member States who make a referral request and those who join such requests.    

Other means to challenge?

Lawyers seeking avenues to challenge the Commission’s revised policy via its Guidance will be interested to see if the EU Court follows Advocate General Bobek’s Opinion (15 April 2021)^[6] in C-911/19 Fédération bancaire française (FBF) v Autorité de contrôle prudentiel et de resolution, which advocates the use of the preliminary reference procedure (TFEU Article 267) to review the validity of soft law EU acts (non-binding). In this case, the Advocate General proposes that a professional federation may, by means of a plea of illegality lodged before a national court (in accordance with national standing rules), challenge guidelines intended for the members whose interests it protects even where such guidelines may not be of direct and individual concern to the professional federation. If this Opinion is followed, the Commission’s “elegant solution” may find its way to the Luxembourg Court by way of a preliminary reference. 

Just how much uncertainty does this guidance bring?

Brightline revenue thresholds at both EU and national level can no longer be relied on to exclude merger control filing requirements. In the Illumina/Grail merger case, even before the Guidance was adopted or published, the Commission invited Member States to make a referral request. The French NCA obliged and other NCAs joined its request but broad divergences emerged between others. With this kind of uncertainty emerging, merging parties will need to carefully consider, on a case-by-case basis, whether their transaction presents an Article 22 referral risk, regardless of whether the transaction is notifiable in any Member State. 

Factors that may trigger an Article 22 referral

Appropriate referral cases include transactions where the turnover of at least one of the parties does not reflect its actual or future competitive potential.  The Commission may also take account of whether the value of the consideration received by the seller is particularly high compared to the current turnover of the target (Illumina offered US$ 7 billion to acquire Grail). Other factors include where the target: 

1. is a start-up or recent entrant with significant competitive potential that has yet to develop or implement a business model generating significant revenues (or is still in the initial phase of implementing such business model); 
   
   
2. is an important innovator or is conducting potentially important research; 
   
   
3. is an actual or potential important competitive force; 
   
   
4. has access to competitively significant assets (such as for instance raw materials, infrastructure, data or intellectual property rights); and/or 
   
   
5. provides products or services that are key inputs/components for other industries. 

The guidance is careful to note that this list is “purely illustrative” leaving the Commission with very wide discretion, and parties with even less legal certainty. For example, how do you decide what is significant competitive potential? How do you define an important innovator? Exactly what are competitively significant assets or key inputs? What constitutes a high consideration if the turnover is currently zero? No explanation is provided for any of these factors.   

Worryingly – even closed transactions can be referred 

As a general rule, referrals will not be considered appropriate when more than 6 months have passed from the completion date, but later referrals can be made in exceptional cases, such as, the magnitude of the potential competition concerns and the potential detrimental effect on consumers.  In the context of completed transactions, the standstill obligation only applies as of the date on which the Commission informs the parties that a referral request has been made. There is nonetheless a broad hint of caveat emptor here. Encouraging the parties to voluntarily come forward with sufficient information in return for an early indication of the prospect of a referral appears to be the game.  

NCAs have 15 working days from when the transaction is made known (if no notification). “Made known” is considered sufficient information to make a preliminary assessment on the relevant criteria. This is far from clear and different NCAs are likely to have different concepts of what constitutes sufficient information. A press release may not cut the mustard.  Other Member States may join the initial request within 15 working days of being informed by the Commission and the Commission has a further 10 working days in which to decide. If no decision is taken, it is deemed to have adopted a decision to examine the request. 

There is little clarity on the process here which will add to the complexity of the merger analysis and timeframes. 

Some increased potential for mischief?

As mentioned above, the Commission will also allow third parties to indicate candidates for referral.   This is a one-way communication channel, the Commission having complete discretion whether or not to consider any action, such as to invite Member States to refer a candidate transaction. While the Commission cannot compel NCAs to make a request (and as indicated above there, some NCAs question whether they can refer a transaction that does not trigger domestic financial thresholds), the risk of parallel fragmented reviews of the same transaction in Brussels and one or more Member States is feasible. This does not fit at all with the EU doctrine of enabling the best placed authority to review a deal. It is also unclear what happens if an Article 22 referral request is made after another Member State has actually cleared the deal. 

The risk of an Article 22 referral adds complexity to the merger analysis. This will require consideration with regard to closing conditions, long stop dates, risk allocation as well as timetables. 

What does this mean for tech and pharma acquisitions?

With this new Guidance, the legal certainty provided in the past through clear cut revenue thresholds no longer holds, with a substantive assessment replacing the definitive assessment based on formal quantitative thresholds.  One of the main attractions of the EU “one-stop-shop” will be lost for transactions falling within the new parameters, so it is goodbye “one-stop-shop” and hello patchwork quilt. Under Article 22, concurrent (parallel) reviews are allowed as only Member States having either requested or joined a referral request are required to suspend application of their national competition law. Thus, a transaction notified and already under investigation by a Member State will continue. 

Early assessment will be required as to whether a transaction may be deemed a candidate for a referral request and whether a briefing to the Commission is advisable. It is fair to say that one can expect more Article 22 referral requests, increased costs and delays associated with this.  Legal challenges to the Commission’s new interpretation of Article 22 seem likely.  

[1] Commission Guidance on the application of the referral mechanism set out in Article 22 of the Merger Regulation to certain categories of cases (published 26.03.2021, C(2021), 1959 final). ;

[2] European Commission decision of 2 April 2020, Case M.9744 (Mastercard / Nets). The Nets transaction started out as a Danish notification and was referred under Article 22 (3) of the Merger Regulation. The referral was subsequently joined by Austria, Finland, Norway, Sweden and the UK.  

[3] European Commission decision of 6 February 2018, Case M.8788 (Apple / Shazam). The proposed transaction was initially notified to Austria for regulatory clearance, as the transaction did not meet the turnover thresholds of the EU Merger Regulation. Austria submitted a referral request to the Commission pursuant to Article 22(1) of the EU Merger Regulation on 21 December 2017.  The Commission then accepted requests from Austria, France, Iceland, Italy, Norway, Spain and Sweden to assess the acquisition.

[4] At the time of writing this article, only the case number (Case T-227/21) could be found on the ECJ’s website.

[5] A reference for a preliminary ruling allows the courts and tribunals of the Member States, in disputes which have been brought before them, to refer questions to the Court of Justice about the interpretation of European Union law or the validity of a European Union act. The Court of Justice does not decide the dispute itself. It is for the national court or tribunal to dispose of the case in accordance with the Court’s decision, which is similarly binding on other national courts or tribunals before which a similar issue is raised.

[6] Two days earlier (13 April 2021), AG Bobek proposed a “constitutional earthquake” that would change the Court’s CILFIT case law in C-561/19 Consorzio Italian Management and Catania Multiservizi SpA / Rete Ferroviaria Italiana SpA. In this case, he proposes that under the third paragraph of Article 267 TFEU, a court or a tribunal of a Member State against whose decisions there is no judicial remedy under national law is to refer the case to the Court of Justice, provided that, first, that case raises a general issue of interpretation of EU law, which may, second, be reasonably interpreted in more than one possible way and, third, the way in which the EU law at issue is to be interpreted cannot be inferred from the existing case-law of the Court of Justice. Should such a national court or tribunal, before which an issue of interpretation of EU law has been raised, decide not to submit a request for a preliminary ruling pursuant to that provision, it is obliged to state adequate reasons to explain which of the three conditions is not met and why.