Merging Parties Beware: Deals That Do Not Meet Merger Control Thresholds in the EEA Can Still Be Reviewed by European Commission
- The EU General Court confirms that deals that do not meet EU or EEA Member States’ merger control thresholds can still be reviewed by the European Commission (EC) following member states’ referral requests.
- The judgment is a vindication of the EC’s new approach to its review powers under Article 22 EUMR, as set out in guidelines issued in March 2021. It may embolden member states to refer deals falling below national merger control thresholds and the EC to review them.
- Although the judgment provides clarity (for now) on a key jurisdictional issue, it is likely to lead to greater uncertainty for merging companies and should be taken into account in future deal planning, at least in the key sectors identified by the EC (technology, digital and life sciences).
In a recent high-profile judgment, the EU’s General Court confirmed that the European Commission (“EC”) can, upon referral by a national competition authority in the European Economic Area (“EEA”), review deals that do not meet the EU merger control thresholds or the merger control thresholds of any EEA member state. The General Court found that the EC was justified to take jurisdiction over Illumina’s acquisition of Grail following several such referral requests. The judgment is being heralded as a vindication of the EC’s new approach to its review powers, as set out in guidelines it issued in March 2021. Although the judgment brings clarity (for the time being) on a key jurisdictional question, it is expected to lead to greater uncertainty for merging parties and should be taken into account in deal documentation going forward, at least in the key sectors identified by the EC (tech, digital and life sciences).
The Case of Illumina/Grail
On 21 September 2020, Illumina’s acquisition of Grail was announced. Illumina is a US company, specializing in genomic sequencing. Grail is a biotechnology company that utilizes genome sequencing to develop screening tests for cancer prevention. As a factual matter, the transaction did not meet the relevant EU merger control thresholds as Grail did not yet generate sales in the EEA. Nor was it notifiable under any national merger control regime in the EEA.
Nevertheless, in response to a complaint about the transaction, the EC called on member states to request that the Commission review the case. France submitted the initial request, subsequently joined by other member states, including Belgium, the Netherlands, Greece, Norway, and Iceland. Illumina challenged the EC’s competence and decision to review the transaction, arguing that member states cannot refer transactions that do not meet their own national merger control thresholds to the EC.
Although subject to a duty of suspension, Illumina and Grail later implemented the transaction (valued at approx. US$7 billion) while the EC’s investigation was still ongoing.
Article 22 of the EU Merger Regulation (“EUMR”) provides that member states may ask the EC to examine a transaction that affects trade between member states and threatens to significantly affect competition within the territory of the member state(s) making the request. In its origins, the purpose of Article 22 is well known and undisputed namely, to allow member states lacking any system of domestic review to ask for merger cases to be examined instead by the EC. With the adoption of national reviews in almost all member states, though, the EC adopted the explicit position that it would only accept referrals from member states where the transaction in question met the merger control thresholds in at least one of the referring jurisdictions.
The language of Article 22 is, however, more generally permissive, and with the concern to catch “killer acquisitions” otherwise escaping review, the EC seized upon a literal interpretation of Article 22 as a means to that end. Accordingly in September 2020 it announced plans to revise this approach, and subsequently published new guidelines in March 2021, which provided that acquisitions below the notification thresholds of national competition authorities in the EEA could still be referred to and reviewed by the EC. The EC made use of this power for the first time in the Illumina/Grail case.
The General Court’s Decision
Illumina’s main claim was that the EC had no jurisdiction to review the transaction. On literal, historical, contextual and teleological grounds, the General Court held that Article 22 EUMR can be interpreted broadly, allowing the Commission to review transactions that do not meet EU or national merger control thresholds but are subject to claims that they could significantly impede effective competition. One argument put forward by the General Court was the much-discussed consideration that thresholds are not at all times appropriate to cover all transactions that require scrutiny because of their competitive potential and risk of distortion of competition. Therefore, they should not be rigidly adhered to according to the General Court.
The General Court also examined the question of whether the member states' request was made within 15 working days of the date on which the transaction was "made known". In this regard, it found that, even though the merger had been announced many months prior, for reasons of legal certainty, the relevant point in time could only be of a tangible, objective nature, such as the EC’s letter of 19 February 2021 to the member states, and that subjective criteria were irrelevant.
In addition, the General Court rejected Illumina's claim that its legitimate expectations had been violated because the EC had changed its previous approach to Article 22 referrals. The General Court found that the EC’s change of course was not enough; rather, Illumina would have needed to demonstrate that it had received precise, unconditional and consistent assurances from the EC in connection with the transaction, in order to succeed in this claim.
Impact on Future Transactions
Illumina has already announced that it will appeal the judgment to the European Court of Justice. The story therefore continues, as does the legal uncertainty for companies. For the time being, companies will need to consider that even acquisitions that fall below the national merger control thresholds can still be referred to and reviewed by the EC under the new approach. Indeed, member states may feel emboldened by the recent judgement to do so. If the European Court of Justice does not overturn the EC’s decision, it opens the floodgates for the EC to review any transaction that it deems to be of competitive relevance, regardless of turnover or market share. In addition to national and EU merger control rules, companies should therefore keep an eye on whether transactions could reach the EC by other means, namely via an Article 22 referral. In particular, companies involved in transactions in the tech, digital and pharmaceutical industries should exercise caution, as the EC’s public comments suggest that is likely to focus on those sectors.