On 7 October 2016, the European Commission launched a public consultation entitled the “Evaluation of procedural and jurisdictional aspects of EU merger control” as part of its plans to refine the EU merger control framework. Proposed key changes include the introduction of a size-of-transaction test for mergers and a simplification of the merger notification system. Apart from cutting red tape, the changes are likely to affect in particular the technology and pharmaceutical sectors as well as start-ups.
Following a public announcement by European Commissioner for Competition, Margrethe Vestager, in March last year, the Commission is considering filling a significant enforcement gap for high value transactions. In particular, this means that certain important mergers in the technology and pharmaceutical sectors which do not meet the current EU jurisdictional merger thresholds may become subject to merger control proceedings under revised thresholds. Furthermore, there are plans to assess to what extent the procedural aspects of EU merger control can be simplified. We provide below an update on the main proposed changes and how they could affect businesses in the future.
The introduction of a size-of-transaction test
Although there is widespread consensus that the EU merger control regime operates efficiently and generally serves its purpose, there are concerns that it has struggled to keep up with certain business trends, notably in respect of takeovers of companies which own disruptive technology.
The EU merger control framework
In order to prevent distortion of competition in the EU, concentrations with a Union dimension are subject to an ex-ante review and approval by the European Commission. Whether or not a transaction has to be notified to the Commission is determined by applying the turnover test set by the EU Merger Regulation (EUMR)1. The test is predominantly aimed at identifying mergers and full-function joint ventures between companies with high turnovers within the EU and reviewing these transactions to ensure that they would not lead to a substantial lessening of competition.
A case for reform – technology sector/start-ups
In the words of Director-General of DG Competition Johannes Laitenberger, “not every merger is about a company’s turnover today; sometimes, it’s about the potential to make money tomorrow.”2
What the turnover test does not capture are mergers between businesses which do not meet the EUMR turnover thresholds but are of a high value. A key example is start-ups which develop around an idea, invention, patent or application and are, at very early stages of their existence, acquired by a large corporation for a high price. At present, concentrations that fall below the EUMR turnover thresholds are still open to review by national competition authorities if the relevant national thresholds are exceeded. Under Article 22 EUMR, if a transaction does not meet the EUMR turnover thresholds, but “affects trade between Member States and threatens to significantly affect competition”, one or more Member States can, on their own initiative or at the Commission’s invitation, refer the proposed acquisition to the Commission for merger review. Equally, if a transaction meets the notification thresholds under the national competition laws of at least three Member States, the parties themselves may make a reasoned submission to the Commission requesting it to examine the transaction (Article 4(5) EUMR). Thus in 2014 the US$19 billion Facebook/WhatsApp acquisition was below the turnover thresholds for application of the EUMR, but Facebook itself applied for a referral under Article 4(5) EUMR. As this referral mechanism is not mandatory, there are concerns that Article 4(5) and Article 22 EUMR may not be sufficient to subject high-value transactions to merger review by the Commission.
A case for reform – pharmaceutical sector
Similarly, in the pharmaceutical sector, a merger which escaped review by the Commission was the 2015 acquisition of the oncology firm Pharmacyclics and its treatment for blood cancers, ibrutinib, by pharmaceutical company, AbbVie, for US$21 billion. Equally, the acquisition of US biotech company Dyax with a high-value rare heart disease treatment by London-listed drug maker Shire for US$5.9 billion escaped scrutiny by the Commission. Given the enhanced importance of ensuring effective competition on price in the pharmaceutical sector, it is arguable that it is significant that the Commission was unable to review these transactions.
Potential solution – a ‘size-of-transaction’ test
The introduction of a size-of-transaction test had been on the Commission’s table for a long time, after fruitless consultations in 2009 and 2013, a size-of-transaction test was considered in the Commission’s 2014 White Paper and has now been revived.
While a size-of-transaction test is not the norm, many countries have integrated it into their merger control frameworks - the US for instance operates a three-part test consisting of a size-of-transaction test, as well as a jurisdictional test, which seeks to determine whether at least one party is engaged in an activity that may affect commerce in the US, and a turnover test. Canada also has a size-of-transaction test which sits alongside a turnover test.
In the EU, Germany recently revealed plans to introduce a size-of-transaction test into its national merger control framework. With its ninth proposed legislative amendment to the German Act against Restraint of Competition3, the Federal Ministry of Economics intends to subject to merger review the acquisition of high value target companies whose sales potential has not yet been realised.
Currently, concentrations have to be notified in Germany if all of the following conditions are met:
- The aggregate global turnover of all undertakings involved was at least €500m in the last financial year.
- One undertaking generated a German turnover of at least €25 million.
- Another undertaking generated a German turnover of at least €5 million in the last financial year.
Under the proposal notification will also be required if all of the following conditions are met:
- The price for the target exceeds €400 million.
- The worldwide turnover of all the undertakings concerned exceeds €500 million.
- One undertaking generated a German turnover of at least €25 million.
- The target is ‘active in Germany to a considerable extent’.
The dangers of casting the net too widely
The consultation period closed on 13 January this year and the Commission has yet to publish any draft legislative proposal. While there appears to be a strong case in favour of an introduction of the size-of-transaction test, it is by no means undisputed. The International Bar Association Antitrust Committee for instance has voiced concerns that the size-of-transaction test would raise legal and practical issues of implementation that would likely outweigh any perceived benefits, especially since the exact extent of the enforcement gap has not been quantified.
It is also unclear how the transaction should best be linked to the EU. If the geographical nexus is defined too broadly, foreign-to-foreign mergers with limited impact in the EU could potentially be subjected to merger review by European authorities. The proposed German size-of-transaction test has been criticised for causing uncertainty in this regard as there is no definitive guidance on what the target being ‘active in Germany to a considerable extent’ means.
This emphasises the need for careful yet business-focused wording: the thresholds will have to be set at the right level, the turnover thresholds lowered but the value of the transaction set highly enough so as to ensure that only those transactions that have the potential to restrict competition are caught and reviewed in more detail. In addition, any size-of-transaction test should be phrased in as precise a way as possible so it should be relatively simple for businesses to establish whether their transaction should be reviewed by the Commission with certainty.
Simplification of the merger notification framework
Whilst the size-of-transaction test may introduce further regulation into the merger control framework, the Commission also consulted on a further possible simplification of the merger notification framework. After successfully adopting the first extensive package of simplification measures in December 2013, the Commission is considering whether certain categories of cases which generally do not raise any competition concerns could be freed from the EU merger review procedure. Under the current simplified procedure, companies are required to submit less information to the Commission than required under a full merger procedure. The Commission introduced a range of transactions which will usually qualify for the simplified procedure. Examples include:
- Where the individual merging entities operate in different product and different geographical markets and no merging entity operates in a market that is upstream or downstream from another merging entity.
- Where the parties’ overlapping activities are below an aggregate horizontal market share of 20% and below an aggregate vertical market share of 30%.
- Where a party acquires sole control of another party over which it already has joint control.
The Commission is now exploring possibilities to simplify further the simplified procedure, including potentially exempting some transactions that currently qualify for the simplified procedure from the EU merger control net completely. While this could alleviate the administrative burden on some businesses and enable the Commission’s resources to be channelled to other areas where they are needed more, we expect the Commission to be very careful and extensively consider the impact on consumers before making a decision to loosen the framework.
As technology develops so do purchasing strategies and so, therefore, must the merger control framework. It is evident that there are gaps in the EU’s merger control net. Market power is no longer exclusively defined by quantitative business strength – turnover – but also by the perceived business strength – value. To preserve a fair and open market, high-profile high-value acquisitions must not be treated any differently from equivalent transactions which have to be notified under the current rules, and the Commission is correct to consider adapting its merger control framework accordingly. Technology companies and pharmaceutical companies in particular should keep abreast of any upcoming reforms.
Should the reforms go ahead, it will be for the EU Institutions to ensure that the line between refining European merger control on the one side and imposing additional administrative burdens on businesses on the other is not crossed. Whilst it is inevitable that the net will have to be mended from time-to-time, it should not catch the wrong fish.