European Commission policy change: transactions below merger filing thresholds no longer safe from scrutiny
On March 26, 2021, the European Commission adopted a communication providing guidance on the application of a mechanism that allows EU Member States to refer certain transactions to the Commission for review. Under the guidance, the Commission will, in certain circumstances, encourage and accept referrals in cases where the referring Member State does not have jurisdiction over the case. This approach represents a significant change compared with previous practice. It implies that deals that were previously not notifiable because they did not meet the filing thresholds may now be exposed to the risk of a post-factum competition law review by the European Commission. Moreover, that potential risk continues to exist until several months after closing.
EU merger control aims to ensure that major corporate restructurings do not significantly impede effective competition in the internal market. To achieve this aim, the EU Merger Regulation grants the Commission exclusive jurisdiction to review concentrations where the merging companies' turnover at worldwide, EU and/or Member State level exceeds certain thresholds. Concentrations not captured by EU merger control may still come within the jurisdiction of one or several EU Member States. To ensure that the most appropriate authority carries out the assessment, the review can be referred from the Commission to the Member States or vice versa.
Article 22 of the Merger Regulation allows Member States to ask the Commission to examine concentrations that do not have an EU dimension but which affect cross-border trade and threaten to significantly affect competition within the territory of the Member State. The Commission has in the past used its discretion to discourage referrals where the concentration fell outside the referring Member State's jurisdiction. This practice was based on the experience that these transactions were not likely to have a significant impact on competition. The Commission has, however, decided to change its approach. This change was triggered by the finding that a number of concentrations involving companies with low turnover, but high competitive potential, were not subject to review by either national competition authorities or the European Commission.
In light of these developments, the Commission now encourages and accepts referrals for certain categories of cases where the referring Member State does not have initial jurisdiction over the case. For Article 22 to apply, the concentration must:
(1) affect trade between Member States, i.e., have a cross-border dimension; and
(2) threaten to significantly affect competition within the territory of the Member State(s) making the request. There has to be prima facie evidence of a possible adverse effect on competition.
The Article 22 Guidance describes the categories of cases which may constitute suitable candidates for a referral in situations where the transaction is not notifiable under the laws of the referring Member State. It also sets out the criteria that the Commission may consider in exercising its discretion to accept such referrals. More specifically, cases that will normally be appropriate for such a referral will be transactions where the turnover of at least one of the companies concerned does not reflect its actual or future competitive potential. This would include, for example, cases where the company:
(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;
(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. In its assessment, the Commission may also take into account the value of the consideration received by the seller compared to the current turnover of the target. It is believed that the Commission is likely to focus primarily on companies in the digital and pharmaceutical sectors.
A. Procedural aspects and timing
In cases where no notification is required, a referral request must be made within 15 working days of the date on which the concentration is made known to the Member State. Accordingly, parties to a transaction that is at risk of being a candidate for referral may want to inform the relevant competition authorities of all key aspects of their transaction so as to make sure that the 15 working days’ period starts running and the period of legal uncertainty regarding the reportability of the transaction is kept as short as possible.
Once a referral request has been made, the implementation of the transaction must be suspended. In such case, the parties cannot close or implement the concentration until a decision has been made on the referral request. The fact that a transaction has already been closed does not preclude a Member State from requesting a referral. However, the Commission would generally not consider a referral appropriate in cases where more than six months have passed after the implementation of the concentration.
B. A first test case: the Illumina/Grail case
On September 21, 2020, Ilumina, a gene sequencing company, announced its plan to acquire Grail, a company focused on the early detection of cancer. Six months later, the U.S. Federal Trade Commission filed a complaint in order to block the $7.1 billion acquisition. This transaction has also come under review in Europe, although the transaction does not meet the EU or the national merger thresholds, since both companies are U.S.-based and Grail has no sales in the EU.
The French competition authority, encouraged by the European Commission, and supported by the Dutch and Belgian competition authorities, requested a referral of the transaction to the Commission. Illumina challenged the referral requests before the French and Dutch courts, but lost. Supported by Belgium, Greece, Iceland, the Netherlands and Norway, the referral was confirmed by the Commission on April 20, 2021. Illumina was notified of a standstill obligation preventing it from proceeding with the merger.
Although declaring itself opposed to the Commission’s decision, Illumina decided to work with the Commission during its investigation and challenged it before the General Court on April 29, 2021.
C. Key takeaways
The Commission’s new approach to merger referrals will increase the unpredictability of merger control in the EU, in particular for transactions involving nascent competitors or innovators that have little or no turnover at the time of the transaction. Until recently, any review by the Commission of such transactions could be excluded as they did not meet the revenue-based jurisdictional threshold for notification. Building on a trend initiated by the German and Austrian authorities that introduced transaction value-based merger control thresholds in 2017, the Commission is now availing itself of the means to review such transactions, even post-closing, and regardless of the value of the transaction and the turnover generated by the companies involved.
The new approach of the Commission leaves a few blind spots:
- Its scope might reach beyond the digital and pharmaceutical sectors it was initially intended to cover;
- It leaves companies with legal uncertainty concerning the modalities of the jurisdictional controls and consequently as to the sustainability of their deal;
- The new “voluntary” merger control regime that is closer to the UK’s regime provides for fewer safeguards for legal certainty;
- The degree of discretion conferred on the Commission and the national competition authorities might result in divergent approaches.
Crowell & Moring LLP will cover this topic in its webinar “Competition Law Aspects of M&A Transactions” on June 17, 2021 for which you can register here.
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