Jettisoning the jurisdictional holy Grail? General Court upholds the Commission’s new approach to reviewing below-threshold deals
The EU’s General Court has ruled that national competition authorities can rely on Article 22 of the EU Merger Regulation (EUMR) to refer a transaction to the Commission for merger control review where the transaction does not meet the EU or Member State thresholds. The much-anticipated judgment in Illumina/Grail delivered a ringing endorsement of the Commission’s new approach under its Article 22 Guidance, aimed at giving it the power to review acquisitions of targets falling below the relevant thresholds, particularly in the tech and healthcare sectors.
The turning of the tide
The judgment is a boost for the Commission’s revised approach to Article 22, which was conceived to address a perceived enforcement-gap in EU merger control and has been in the spotlight since September 2020, when Commissioner Vestager publicly announced that the Commission would change from its previous policy, which discouraged national competition authorities from referring cases that did not reach the national jurisdictional thresholds. In a previous LinkingCompetition post, we analysed in-depth the repercussions of this change in approach.
In short, the Commission’s main objective was to catch deals that have neither a European dimension under the EUMR nor meet the national thresholds but which it considers nonetheless would have an effect on competition in the EU (due, in Illumina/Grail, to vertical foreclosure issues - but not limited to these). The new approach would also give it the ability to review so-called “killer acquisitions”, i.e. transactions where an incumbent acquires an innovative target solely to discontinue its innovation and eliminate a competitive threat. Conventional wisdom suggests that such transactions are more likely to take place in technology, pharmaceutical and life sciences markets, in which highly innovative new entrants can quickly disrupt and dislodge the incumbent given technology cycles and limitations on the duration of patent protection. Commissioner Vestager has already indicated that the Commission has potential killer acquisitions on its radar following the court ruling.
A US-on-US deal caught in the crosshairs
And within this new approach to deals that do not meet the thresholds, fits the case of Grail; a US-based company with no presence in Europe that develops blood tests for cancer detection using an innovative technology based on genomic sequencing and data science. It was the (re)acquisition of Grail by Illumina, a global genomics company which was spun out of Illumina four years earlier, and is also based in the US (but with operations in Europe as well), that piqued the Commission’s interest. Given that Grail had no turnover in the EU, neither the Commission nor any Member State was competent to review the transaction, at least under the Commission’s previous stance on Article 22. However, in April 2021 - and some 7 months after the deal was publicly announced- the French competition authority, following an invitation from the Commission, took advantage of the new guidance on Article 22 (issued in March 2021) to make a referral request. Five other authorities (the Greek, Belgian, Norwegian, Icelandic and Dutch competition authorities) joined the request for referral, which was accepted by the Commission.
The decisions to accept this referral were contested by Illumina and Grail in an appeal that struck at the heart of the Commission’s new approach to Article 22, which, according to the Parties, was incompatible with the objective of the EUMR and contrary to the principles of subsidiarity, legal certainty, and proportionality. The General Court, however, upheld the Commission’s decisions, dismissing all three grounds of appeal.
The key takeaways from the General Court
- The General Court dismissed the idea that, as put forward by the claimants, the main objective of the EUMR was to improve the efficiency and effectiveness of the EU merger control system by establishing a one-stop-shop principle. Rather, the objective is to “permit effective control of all concentrations with significant effects on the structure of competition in the EU” and referral mechanisms including Article 22 are an instrument intended to remedy decisions inherent in the system based principally on turnover thresholds “which, because of its rigid nature, is not capable of covering all concentrations which merit examination at a European level.”.
- In addition, the wording of Article 22, in particular the use of the expression ‘any concentration’, makes it clear that “a Member State is entitled to refer any concentration to the Commission which satisfies the cumulative conditions set out therein, irrespective of the existence or scope of national merger control rules” (emphasis added). Further, a historical interpretation of the provision indicates that the referral mechanism was originally to be used by Member States without their own merger control system (it was once known as the ‘Dutch clause’ at a time when the Netherlands did not have merger control rules), without limiting its applicability to that situation alone.
- The Court also rejected the plea alleging the breach of principles of subsidiarity (since Article 22 is, as stated above, is a corrective mechanism that also protects the interests of Member States) expectations and legal certainty (since the Commission’s new approach is the only one that ensures uniform application of Article 22). With regard to the plea alleging breach of legitimate expectations, the fact that the Commission’s previous practice was not to accept referrals below national thresholds did not qualify as a precise, unconditional and consistent assurance given to the persons concerned, which are, according to established case law, the requirements to trigger a legitimate expectation.
- Finally, the claimants had alleged that the referral had been submitted out of time, given Article 22 establishes a 15-day deadline from the moment the concentration is “made known” to the referring authority. The General Court found that, in cases where there is no notification obligation at national level, “making known” should be understood as actively transmitting to the Member State enough information so it is capable of assessing, on a preliminary basis, whether the necessary conditions for the purposes of a referral have been satisfied. The Court considered that the 47 working days which elapsed between the complaint and the Commission’s letter inviting Member States to trigger Article 22 “does not appear to be justified”. Despite the reproach, however, the General Court concluded that this could not justify the annulment of the contested decisions.
Approach with caution: the practical implications
The judgment has wide-ranging and important implications for dealmakers, particularly those acquiring nascent competitors in innovative industries.
Where until now the Commission might have been reticent to use its new approach to Article 22 to invite Member States to submit referral requests, pending the General Court’s judgment, the judicial endorsement of this approach will likely embolden the Commission to take a more robust approach to reviewing other deals.
While Illumina has already announced its intention to appeal further to the Court of Justice, this will likely take several years and in the interim period, companies will need to contend with the enhanced jurisdiction of the European Commission. Given the equally flexible jurisdiction and appetite of the UK’s Competition and Markets Authority to review similar deals, this judgment signals choppy waters for deal timings and outcomes. But there are also perhaps some lessons to be learned from the approach to assessing and dealing with intervention risk across the channel.
In that regard, dealmakers will need to carefully assess antitrust risk before considering themselves immune from the Commission’s scrutiny where previously they would have been able to do so on the basis that the deal did not meet the EU or Member State thresholds because it had little or no EU nexus. The factors they will need to consider include:
- First, the sector involved will be important. As mentioned above, while the Commission’s Guidance is not limited to any specific sectors, the pharmaceutical, life science and tech sectors are squarely within its sights – as are any sectors where innovation is an important parameter of competition. The Guidance also mentions transactions involving companies conducting R&D and companies with access to competitively valuable assets, such as raw materials, intellectual property rights, data or infrastructure. Therefore, while we anticipate that the Commission will mainly be focused on innovative sectors, the scope for application of Article 22 is broader and we will keep a close eye on the types of deals it calls in.
- In addition, the new approach inevitably requires engaging with the substantive analysis at the same time or even prior to the jurisdictional analysis. As is already the case in the UK, the substantive assessment of the transaction is now an integral part of determining whether jurisdiction is likely to be asserted by the regulator and can no longer take a back seat to a desktop analysis based on monetary thresholds.
- Further, dealmakers will need to carefully consider the likelihood of potential complainants. Third parties such as competitors, interlopers, customers, and associations could potentially encourage the Commission to request referral requests, including to further their own interests. Complaint risks will need to be factored in when deciding on engagement strategy – as in the UK, where they form an integral part of the risk analysis.
- Depending on the assessment of the points above, the parties will need to consider their strategy regarding engagement with the Commission (or lack thereof). In the UK, the submission of a ‘briefing paper’ to the CMA is aimed at pre-empting a CMA call in and can be a useful, fast and cheaper alternative to formal filing in appropriate cases. However, it does not provide complete legal certainty, as even though it rarely occurs in practice (we are aware of a handful of cases), the CMA reserves the right to investigate the deal at a later stage, usually if further information comes to light or it receives a complaint. While engaging with the Commission in this manner could also be of benefit in trying to pre-empt any concerns or referral risks, and the Guidance indicates that the parties can reach out to the EC in a similar manner to request an “early indication” that it does not consider that the deal would be a good candidate for an Article 22 referral, the Commission (like the CMA) could still change its mind, and from a legal certainty and deal condition precedent perspective (see below), it would be preferable if it were willing to issue written and binding opinions on referral risk.
- In terms of deal mechanics and conditionality, parties may now need to provide for an Article 22 referral in their deal documents, where the deal does not trigger any national filing requirements, and potentially also in their antitrust feasibility statement in an auction procedure (if requested).
- Finally, parties will need to consider the potential impact of an Article 22 referral on timing and implementation of their transactions. The Commission has now sent a Statement of Objections to Illumina alleging that it breached the suspension obligation under the EUMR by completing the transaction while the Commission’s investigation was ongoing. If the Commission concludes that there was a breach, it could impose a fine of up to 10% of each companies' annual worldwide turnover.
The next few months will be telling in light of comments from Commissioner Vestager last week, regarding deals already within the Commission’s sights. Now that the General Court has endorsed the Commission’s approach to moving the goalposts on jurisdiction, the Commission and indeed Member States will be on the hunt for candidate referral cases that would have previously escaped merger control scrutiny.