The European Commission’s repurposing of Article 22 EUMR to capture any deal with adverse competitive effects irrespective of EU turnover introduces a further layer of potential uncertainty for dealmakers. Investors will need to consider carefully the associated call-in risk and how best to address the potentially significant impact for candidate transactions.

The European Commission’s new Article 22 policy encourages (what was previously discouraged) national competition authorities (NCAs) to refer deals to the EC even if they fall below both EU turnover thresholds and national jurisdictional thresholds, as long as:

1. The concentration affects trade between Member States (easily satisfied), and;
2. The concentration threatens to significantly affect competition within the territory of the Member State or States making the request (as per the EC’s guidance, also as regards future competition).

This evolution means that any transaction which (even potentially) may raise competition concerns in the EU can end up being reviewed by the EC – regardless of how small the target business’ EU revenues may be. Such a review can be initiated both prior to and after closing thereby significantly impacting deal certainty. This risk is particularly acute in cases where the target is in ”start-up phase”; an important innovator; has access to competitively significant assets; or provides key inputs/components for other industries.

How might this apply

From a practical perspective, NCAs have 15 working days from when the transaction is notified with or “made known” to them to refer a merger to the EC. It is noteworthy that this can still occur after the deal has closed - although the EC has stated that after six months this is unlikely (albeit not excluded). The EC will then inform all other NCAs of the deal, allowing them a period of 15 working days to join the initial request if they so choose. Once this period has expired, the EC has 10 working days to decide whether to examine the referred deal or not.

Of particular relevance is that transaction parties are prohibited from closing the deal as of the date they are notified that the EC is considering a request until either (i) the request is rejected or (ii) the deal is approved by the EC (with or without remedies). Based on the timelines noted above this would imply a standstill obligation of at least 25 working days.

The implications are potentially significant

The Illumina / Grail deal has since become the guinea pig for the EC’s new approach. In September 2020, Illumina announced its USD 7.1 billion acquisition of cancer-screening company, Grail. In April 2021, the EC accepted a referral by the French NCA (joined by Belgium, Greece, Iceland, the Netherlands and Norway) and opened an in-depth (Phase 2) investigation in July 2021. Notwithstanding the ongoing inquiry, Illumina completed the acquisition in August 2021 – in the EC’s view, in breach of the standstill obligation. This was, in part, driven by a requirement for Illumina to pay a USD 300 million termination fee if it failed to close the deal by 20 December 2021 (the EC’s review is ongoing).

Illumina’s action prompted the EC to adopt interim measures (a first in EU merger control history) to stop Illumina from further implementing the deal before the EC has completed its review, demonstrating that an Article 22 EUMR referral can be a serious risk to deal timetable/implementation. In particular, the interim measures require Illumina to:

• hold Grail separate from Illumina under the control of one or more independent managers responsible for ensuring segregation of the businesses; 
• limit the disclosure of confidential business information (except as required by law or in line with the ordinary course of their supplier-customer relationship); and
• provide additional funds necessary for the continued operation and development of Grail.

Illumina and Grail are also required to interact under competitive arm's length conditions (i.e. without favouring Grail to the detriment of competitors). And Grail must actively seek alternatives to the Illumina acqusition should the merger ultimately be prohibited by the EC.

The referral decision is subject to Illumina’s appeal before the EU’s General Court (challenging the EC’s jurisdiction), which will hopefully provide much needed clarity on the conditions for a referral and its subsequent consequences. The EC’s interim measure decision is subject to Illumina’s appeal before the EU’s General Court as well.

The EC’s new Article 22 referral policy brings a number of new considerations that transaction parties now need to take into consideration:

• There will always be uncertainty about the risk of a limited-nexus deal being referred: this is especially true for potential ”killer acquisitions” in the digital and pharmaceutical sectors (specifically mentioned in the new EC guidance) – but no sector is exempt. Parties can no longer exclude review by the EC on the basis that neither the EU nor national level thresholds are met, and a comprehensive risk analysis will become increasingly important for deals with substantive overlaps and/or vertical links.
• A referral could cause serious delay to the M&A process: even if the EC were to decline the request for referral, it could still add anywhere up to eight weeks to the deal timeline. And should the EC accept a referral, the delay would be much longer. This will need to be considered when negotiating the long-stop-date and appropriate provisions made in the SPA conditions for the potential imposition of a suspension obligation at a late stage in the process (to avoid being put in possible gun-jumping jeopardy). The EC’s guidance also opens a new venue for complainants and/or hostile targets to delay the deal process by nudging the transaction into jurisdictional limbo.
• Referrals can occur post-closing with material consequences: the new EC’s guidance foresees “exceptional situations” where it could accept referrals beyond the six-month point post-closing. This will leave buyers with a degree of deal uncertainty even after closing (i.e. potential for divestment orders if concerns are identified) coupled with the prospect of interim measures halting integration work and imposing significant costs while the EC’s review is conducted.
• Pro-active engagement may be needed to mitigate these risks: To ”start the clock” (i.e. make authorities fully aware of the deal), we expect more and more dealmakers will opt to submit briefing papers to the EC (and possibly relevant NCAs) – allowing them to have (i) greater control over timing and (ii) a greater degree of deal certainty, knowing whether the relevant authorities have any interest in the deal. Such an engagement strategy will likely be coupled with conditions precedent as buyers seek to preserve their position pending feedback from relevant regulators. It remains to be seen which NCAs will establish themselves as the more trigger-happy when it comes to Article 22 referrals.