Moving the goal posts: European Commission new guidance on merger referral policy to catch non-reportable deals
In September last year, Competition Commissioner Margrethe Vestager announced plans to use the referral mechanism under Article 22 of the EU Merger Regulation to address a perceived enforcement gap in present day EU merger control. This gap meant that it was deemed impossible for competition authorities in the EU to review acquisitions by incumbents of nascent competitors, particularly in the tech and pharma industries. Especially now that the Member State with the most jurisdictional flexibility, the UK, has left the EU.
Last week the EC published its much anticipated Guidance on the application of the Article 22 referral mechanism. The Guidance is part of a broader package including a Staff Working Document foreshadowing a somewhat broader reform of the EUMR. This blog post focuses on the new Article 22 Guidance.
The EC’s policy reversal – closing the gap
A classic example of the aforementioned enforcement gap is the acquisition of a start-up company developing a new innovative therapy (still at the pipeline stage) by an established competitor with market power against whose therapy the new drug would compete – eliminating the competitive threat to its market position. Because in EU Member States, merger control jurisdiction typically requires minimum domestic target turnover or a market share increment as a nexus requirement, such a deal would unlikely be notifiable anywhere in the EU and thus “fly under the radar”.
This phenomenon has gotten a lot of attention in recent months and the European Commission has been looking for ways to be able to review such deals -- some of which are referred to as ‘killer acquisitions’.
The Guidance paper clarifies the position that the EC will work together with national competition authorities to use the Article 22 EUMR referral mechanism to gain jurisdiction. This is a plain revocation of the EC’s previous position (that favoured legal certainty) to discourage national competition authorities from asking for a referral up to the EC if they do not themselves have jurisdiction.
Impact for companies
The Guidance throws out the net potentially widely and creates additional uncertainty about deal timing and outcome where previously a deal was not reportable in the EU. In one respect, this new policy brings the European merger review system more in line with the US where deals which were not reportable under the Hart-Scott-Rodino Premerger Notification Act, could still be reviewed by the US agencies. However, the fact that the agency needs to sue in federal court to challenge deals in the US acts as a brake on large-scale calling in of non-reportable deals in a way that does not directly transfer to the administrative model of the EC. Where the agency has the discretion to decide whether to block a deal, subject to review by the EU courts after the fact.
There is already a live case causing controversy. The EC wants to review the Illumina/Grail deal which has also been challenged by the U.S. Federal Trade Commission. But this deal would not be reportable anywhere within the EU. France, the Netherlands and potentially some other Member States have responded to an invitation by the EC to refer the case up using Article 22. Illumina is challenging in court the referral in France and the Netherlands.
Companies acquiring nascent competitors in innovative industries now need to face the fact that the EC can call-in transactions which were previously not reportable. That may happen even after a transaction has closed. Typically, the fact pattern of an “incumbent vs. challenger” deal deemed problematic means the only likely structural remedy is a deal unwind – divestiture of the target – rather than divesting the overlap business in a larger transaction as is common in EUMR-sized deals, so the remedial stakes will be high.
The use of Article 22 to date
Article 22 is not new but, as we explained in our previous blog post, the EC has actively discouraged its use beyond the specific circumstances set out in the Notice on Case Referrals. A referral up of deals which were not notifiable in a Member State was not explicitly foreseen in the Notice.
Member States have only made 34 referrals under Article 22 (0.6% of total notified cases) since 2004. This compares with 384 pre-notification referral-ups requested by the notifying parties. So Article 22 referrals have been rather seldomly be made and, as far as we are aware, involved always the referring national authority having had jurisdiction over the merger (even though those joining might not have had jurisdiction).
Consequently, calling in a transaction which does not meet the EC merger control thresholds or the merger control thresholds of any EU Member State merger had not to date been a realistic threat in the EU system.
Policy reversal - call-in now possible in the EU
The new Guidance reverses this policy of discouraging referral-ups if the Member State does not have jurisdiction over the deal. It clarifies that the EC will actively cooperate with national competition authorities to identify candidate cases with no or limited turnover in the EU for review by the EC based on elimination of potential competition grounds.
There is also a new option for companies who are interested in challenging merger transactions. Third parties may contact the EC (or a national competition authority) to suggest a referral request. The merging parties are invited to come forward with information about an intended transaction if they believe the conditions for an Article 22 referral up are met.
Once parties are informed that a referral request has been made by a Member State, the suspension obligation applies and closing of the deal cannot take place until clearance is obtained. So, whilst in the US and UK a call-in is viewed as a buyer risk, in the EU, referral-up by a Member State before close will also present a seller risk.
In practice, it seems unlikely that a Member State would refuse an invitation by the EC since, contrary to other Article 22 referrals involving a transfer of jurisdiction, the national competition authority does not give up jurisdiction. Several national authorities have reacted enthusiastically to the new EC policy. So while it remains to be seen how many cases will be brought to the EC under this new policy, it is far from a theoretical risk, as already shown in the Illumina case.
What are the limitations: which cases are reviewable?
The EC is bound by the wording of Article 22 and so can only review transactions which affect trade between Member States and threaten to significantly affect competition within the territory of the referring State(s).
The requirement of effect on trade will be easily satisfied by the type of cases which the EC envisages because the markets will often be markets broader than national and potentially even worldwide markets.
As regards the condition of a significant adverse effect on competition, the Guidance (and the Notice) gives the EC and the Member States wide discretion, in particular as regards future competition. The intention being, as stated in the introductory paragraphs of the Guidance, to capture concentrations involving firms that play or may develop into playing a significant competitive role on the market despite generating little or no turnover at the time of the concentration. A referring Member State is required to demonstrate that, based on a preliminary analysis, there is a real risk that the transaction may have a significant adverse impact on competition. Prima facie evidence is sufficient and is without prejudice to the outcome of a full investigation.
Certain categories of transactions
The Guidance is not limited to any specific sectors but clearly targets healthcare and tech. It makes specific reference to the digital economy, sectors such as pharmaceuticals and others where innovation is an important parameter of competition. But it goes further and mentions, generally, transactions involving innovative companies conducting R&D projects and companies with access to competitively valuable assets, such as raw materials, intellectual property rights, data or infrastructure.
It provides an illustrative list of categories of cases that will normally be appropriate. It refers specifically to cases where the target is a:
- start-up or recent entrant with significant competitive potential
- an important innovator or is conducting potentially important research
- an actual or potential important competitive force
- has access to competitively significant assets (raw materials, infrastructure, data or intellectual property rights) and/or
- provides products or services that are key inputs/components for other industries
Call-in after closing
The Guidance states that the fact that a non-reportable deal has already closed does not preclude a Member State from requesting a referral to the EC under Article 22. The time elapsed since closing will be taken into account by the EC when deciding to accept or reject the referral request. Generally, if more than six months has passed, the Guidance says that referral would not be appropriate. But this will be decided on a case by case basis and the EC does not exclude a scenario where it is allowed to intervene later, depending, for example, on the magnitude of potential competition concerns.
Unlike in traditional gun jumping or failure to notify cases, the EC will not be able to fine parties for failure to notify if the referral takes place after closing. But the implications for parties are nevertheless significant given the power of the EC to order the transaction to be undone.
Serious timing issues
If a transaction falls below the notification thresholds in a Member State, that Member State is able to make a referral within 15 working days of the “concentration being made known to the Member State”. The Guidance says that this requires “sufficient information to make a preliminary assessment” of the criteria for making a referral request. It mirrors the wording of the EC’s Notice on Case Referral.
What this means is that it goes beyond mere knowledge of the merger and required knowledge that the merger (potentially) significantly affects competition.
So a press announcement may not be enough to start the clock. The national authorities and, in turn, the EC are left with a significant degree of discretion here. The UK, for example, has in the past set a high standard before it accepted that the 15 working day deadline could start running. If parties want to avoid being caught by surprise, they are encouraged to contact the EC.
Emboldening enforcement in Europe?
Joining forces, especially for deals that impact global markets, may lead to emboldened enforcement in incumbent/challenger deals. The US and UK authorities were of a common view in challenging Illumina/PacBio and Sabre/Farelogix. With the difference being that the UK administrative model gives the CMA the upper hand relative to the US agencies in terms of discretion to block a deal (or cause it to be abandoned). Fundamentally the same applies to the EC even if ex post judicial review by the EU courts may be more stringent than in the UK. And while the UK has not been shy on this side of the Atlantic, there is no question that the EC has singular geopolitical heft in antitrust enforcement if it (also) chooses to direct its weight towards acquisitions of small but nascent competitors.
In practical terms
For certain deals (falling within the fairly broad categories set out in the Guidance) which are not reportable in Europe, the parties may now need to consider the risk of a referral request to the EC, bearing in mind that:
- The EC and Member States are likely to hunt (or at least be on the look out) for candidate deals
- Contrary to a traditional Article 22 case, Member States have nothing to lose asking/joining a referral when they have no jurisdiction in the first place.
- Third parties may contact the EC of Member State authority and advocate in favour of a referral request – this may be a bidder who lost out in seeking to acquire the target.
- For some deals, the parties will need to consider whether to contact the EC themselves and get a view
- The deadline of 15 working days before which Member States need to make a referral is uncertain and parties may not know (unless if they are in contact with the authorities) when it arrives. This deadline is critical because it determines the possibility for the EC to prevent closing.
Parties may now need to provide for an Article 22 referral in their deal documents and potentially in their antitrust feasibility statement in an auction procedure (if requested). Article 22 may already be dealt with where the deal triggers national filings within the EU. But probably not in agreements which do not trigger any filing requirements within the EU.