On 16 March 2023, the Court of Justice of the European Union (CJEU) issued its keenly anticipated judgment in Towercast1(Judgment), following a request for a preliminary ruling by the Court of Appeal, Paris (Court of Appeal). The Judgment clarifies that acquisitions by dominant companies that do not meet the EU or national merger control thresholds can still be reviewed by national competition authorities (NCAs) following completion under the rules prohibiting the abuse of a dominant position.
The Judgment marks a further increase in the regulatory scrutiny of M&A deals. It potentially heightens deal execution risks faced by dominant companies, particularly when acquiring businesses in highly concentrated or innovation-driven markets (e.g., technology, life sciences or pharmaceutical markets).
This Judgment follows the landmark ruling in Illumina/Grail2 in 2022, in which the General Court endorsed the European Commission’s (EC) broader interpretation of the merger referral system under Article 22 of the EU Merger Regulation (EUMR) (see our previous coverage of Illumina/Grail, here, here and here). This policy initiative, enabling NCAs to refer non-notifiable transactions to the EC for review under the EUMR, was adopted to address a perceived enforcement gap in relation to so-called “killer acquisitions” (i.e., acquisitions by incumbent players of start-ups or nascent rivals with a view to eliminating competition, with acquired businesses having insufficient turnover to trigger merger notification requirements).
The Judgment provides NCAs with an alternative means of exercising jurisdiction over non-notifiable deals (and also provides third-party complainants with a basis to challenge deals post-completion, as was the case in Towercast). Indeed, on 22 March 2023, less than a week after the CJEU’s Towercast ruling, the Belgian Competition Authority launched an investigation under the rules prohibiting the abuse of a dominant position against a below-the-thresholds acquisition by a telecommunications company, citing the Judgment as a basis for its probe.3
As a result, when evaluating M&A opportunities, dominant companies may now need to conduct more detailed and extensive deal planning in respect of transactions falling below the EU and national merger control thresholds, including a careful assessment of the likely impact of a relevant acquisition on the structure of competition on an affected market.
Towercast S.A.S.U. (Towercast), a French company, lodged a complaint before the French Competition Authority alleging an abuse of a dominant position by TDF Infrastructure Holdings S.A.S. (TDF). Towercast claimed that TDF enjoyed a dominant position on the French market for terrestrial television broadcasting and abused its dominant position by acquiring the only company operating on this market other than TDF and Towercast: Itas S.A.S. (Itas). This acquisition—according to Towercast—constituted an abuse of a dominant position, contrary to Article 102 of the Treaty of the Functioning of the European Union (TFEU). This was on the basis that TDF significantly strengthened its dominant position through the acquisition, which adversely impacted competition on the upstream and downstream wholesale markets for digital transmission of terrestrial television services.
The French Competition Authority rejected Towercast’s complaint on the basis that there is a clear division between merger control and the control of anti-competitive conduct. The EUMR applies solely and exclusively to concentrations as defined in Article 3 EUMR and Article 102 TFEU does not apply where there is no anti-competitive conduct distinct from the concentration. The French Competition Authority rejected Towercast’s argument that the CJEU’s ruling in Continental Can (Case 6/72) allows a competition authority to apply the rules prohibiting the abuse of a dominant position to concentrations. The French Competition Authority took the view that the Continental Can case became redundant following the introduction of the EUMR.
Towercast appealed this decision before the Court of Appeal and the Court of Appeal requested that the CJEU make a preliminary ruling on the following point:
“Is Article 21(1) of [the Merger Regulation] to be interpreted as precluding a national competition authority from regarding a concentration which has no Community dimension within the meaning of Article 1 of that Regulation, is below the thresholds for mandatory ex ante assessment laid down in national law, and has not been referred to the European Commission under Article 22 of [that Regulation], as constituting an abuse of a dominant position prohibited by Article 102 TFEU, in the light of the structure of competition on a market which is national in scope?”
Advocate General Kokott’s opinion (“AG Opinion”)
In an Opinion delivered in October 2022, AG Kokott concluded that a concentration that is not notifiable under the EUMR or national merger control rules and has not been referred to the EC under Article 22 EUMR may still be reviewed by an NCA under Article 102 TFEU.
The reasoning underlying this conclusion was as follows:
- General principle of primacy of primary law over secondary law: A secondary law provision such as Article 21(1) of the EUMR, which precludes the application of EU antitrust regulations under Articles 101 and 102 TFEU to mergers as defined under Article 3 EUMR, cannot restrict or contradict the scope of an EU treaty provision such as Article 102 TFEU. In this regard, the AG Opinion refers to the EUMR’s legal bases and in particular, Article 103 TFEU which allows for “appropriate regulations or directives to give effect to the principles set out in Articles 101 and 102” to be adopted. The EUMR is an implementing tool of Article 101 and 102 TFEU which is limited by direct applicability and primacy and therefore cannot exclude the applicability of Article 102. Paragraph 36 of the AG Opinion is noteworthy in that it states that the EUMR is a “part of a legislative whole intended to ensure the protection of competition in the internal market in a comprehensive manner“, and therefore, does not preclude the use of other tools.
- The direct applicability of Article 102 TFEU: The CJEU has consistently reiterated the importance of this principle and imposes on NCAs a duty to protect the direct applicability of the provisions of the TFEU and to disapply any national legislation that is in breach of these provisions.
The AG Opinion, however, cautions that the application of Article 102 TFEU should be limited to those transactions that have not been subject to ex-ante merger control reviews (i.e., notification and assessment under either the EUMR or applicable national merger control rules, including in instances where reviews have been conducted following an Article 22 EUMR referral). This limitation is essential in order to preserve the principle of legal certainty. Companies should be able to rely on a merger control approval, which entails an assessment of the effects of a transaction on competition, and a transaction should not be subject to a “double assessment” under both merger control rules and Article 102 TFEU. The AG Opinion is however silent as to the applicability of Article 102 TFEU in case the parties to the concentration have informed the NCAs or the EC of their non-notifiable transaction and no referral under Article 22 EUMR has been made.
AG Kokott also tempered the impact of her opinion on M&A transactions and legal certainty, observing that when concentrations are subject to an ex-post review under Article 102 TFEU, “in view of the primacy of behavioural remedies and the principle of proportionality, there is not usually a threat of subsequent dissolution of the concentration, but rather only the imposition of a fine“.4
THE CJEU’S JUDGMENT
Consistent with the AG’s Opinion, the CJEU held that a transaction that is not notifiable under the EUMR (i.e., concentration without an EU dimension) or under national merger control rules, and which is not subject to a referral to the EC under Article 22 EUMR, may still be assessed by an NCA under Article 102 TFEU.
More specifically, the CJEU reiterated that the prohibition of an abuse of dominance in Article 102 TFEU is a provision of primary EU law, and is unconditional, and directly applicable law. Therefore, the provisions in the EUMR, which is secondary EU legislation, cannot restrict the applicability of Article 102 to transactions which do not have an EU dimension.5 Although the EUMR is the only Regulation applicable to concentrations with an EU dimension (Article 21(1) EUMR), NCAs and national courts may review concentrations with a non-EU dimension, on the basis of the direct effect of Article 102 TFEU and their own procedural rules.6
The ‘one-stop shop’ system introduced by the EUMR is exclusively applicable to concentrations involving significant structural changes, the impact of which goes beyond the national borders of any one Member State. The CJEU expressly refers to recital 7 EUMR which states that ” Articles 81 and 82 [now Articles 101 and 102 TFEU], while applicable, according to the case-law of the Court of Justice, to certain concentrations, are not sufficient to control all operations which may prove to be incompatible with the system of undistorted competition envisaged in the Treaty” (emphasis added).Thus, it cannot be deduced from the EUMR that the EU legislator intended to deprive of purpose the review of mergers under Article 102 TFEU at national level.7
Referring to its case law as established in the Ernst & Young8 and Austria Asphalt9 judgments, and siding with the AG’s view, the CJEU underlined that the EUMR forms part of a legislative whole intended to implement Articles 101 and 102 TFEU and to establish a system of merger control ensuring that competition is not distorted in the EU internal market.
Consequently, although the EUMR introduces an ex-ante control for concentrations with an EU dimension, it does not preclude the ex-post control of concentrations that do not meet that threshold.10
In addition, the CJEU explained that when carrying out an assessment of a transaction under Article 102 TFEU, the NCA must establish whether the acquirer who is in a dominant position on a given market substantially impeded competition on that market through the acquisition under review. An abuse can be established if, as a result of the acquisition, the level of dominance achieved by the acquirer is such that only companies whose behaviour depends on the dominant company would remain in the market post-transaction. The mere fact that a company’s position has been strengthened post-transaction does not necessarily constitute an abuse.11
The CJEU’s ruling in Towercast can be seen as part of a pattern of increasingly rigorous scrutiny of mergers and acquisitions, with the regulatory environment in the EU becoming ever more challenging. The judgment provides scope for increased intervention by NCAs in respect of non-notifiable transactions, as did the adoption by the EC of its Guidance on the application of the referral mechanism set out in Article 22 EUMR (Article 22 EUMR Guidance).12 Since this policy change, it is notable that the Article 22 referral mechanism has been used only rarely: the EC has received and accepted 5 Article 22 requests for referral (until February 2023).13 In addition, in September 2022, Illumina appealed the General Court’s judgment which dismissed its action against the EC’s decision to accept an Article 22 referral of its proposed acquisition of Grail. The appeal is currently pending before the CJEU.
Businesses and other affected stakeholders will have to wait-and-see whether NCAs will, in practice, apply Article 102 TFEU to non-notifiable transactions and, if so, with what frequency and in what particular circumstances (noting that a spectrum of views may emerge among NCAs, as was the case in relation to the revised use of Article 22 EUMR). It is not yet clear whether NCAs will have recourse to Article 102 TFEU or rather rely on Article 22 EUMR referrals to target potentially problematic, non-notifiable transactions. The CJEU’s judgment on appeal in Illumina/Grail may affect the evolution of these relevant policies and the NCA’s conduct.
Another grey area is also whether NCAs and the EC will consider that Article 102 TFEU is not applicable in cases where the parties, mindful of the risk of Article 22 referral, have substantially informed the EC and/or the NCAs of the existence of a non-notifiable transaction (i.e., through submission of a briefing paper), with a decision around referral pending.
While much will turn on the practical application of the Judgment, the ruling threatens to further reduce legal certainty and increase risks associated with M&A. For instance, the ex-post evaluation of deals raises significant legal and commercial concerns. When revising the Article 22 referral policy – which also permits examination of non-notifiable deals post-completion – the EC provided an assurance that it would not generally investigate a transaction six-months after completion. The period during which an acquisition may be at risk of challenge by an NCA applying Article 102 TFEU is not clear – in principle, it is likely to be appreciable longer – and different NCAs may adopt different policies in this regard. Similarly, it is notable that the Judgment does not expressly stipulate what penalty might be appropriate where an acquisition is held to be an abuse of dominance (in contrast, in the AG Opinion it is indicated that fines would be appropriate, rather than the dissolution of a merger).
Bearing in mind these risk factors and uncertainties, dominant companies will need to undertake additional diligence and deal planning to evaluate the potential impact of contemplated transactions and consider appropriate safeguards in deal documentation. Companies should also consider carefully the potential risk of any complaints from rivals, suppliers and customers against the transaction. In addition, monitoring of relevant developments and the sectors which are more likely to trigger the attention of NCAs is recommended.