The EU General Court (“General Court”) has confirmed that the European Commission (“Commission”) can examine deals that do not trigger merger control thresholds in the EU or any EEA Member State following a referral request from national competition authorities. This ruling, which upholds the Commission’s stance in the Illumina/Grail deal, confirms the broad reach of the Commission’s jurisdiction to review a transaction, even if the merger control thresholds are not met. This significantly reduces legal certainty for companies engaged in M&A activity.
Deals that fall below merger control thresholds but which could potentially give rise to competition risks have been a focus of recent debate in Europe. The Commission has become concerned that there is an enforcement gap, which means that potentially anticompetitive mergers (especially in the technology and pharmaceutical sectors) fall below all merger thresholds in the EU and so cannot be reviewed. These transactions – which involve the acquisition of a highly valued but not yet significantly revenue-generating new business – are sometimes referred to as “killer acquisitions.”
Until recently, the Commission discouraged national competition authorities from referring transactions under Article 22 of the EU Merger Regulation (“EUMR”) that the authorities lacked jurisdiction to review themselves. The Commission considered that these transactions were generally unlikely to have a significant impact on the internal market.
However, in March 2021, the Commission reversed this well-established practice by issuing practical guidance encouraging national competition authorities to refer to the Commission certain transactions that do not trigger national merger control thresholds and would otherwise be non-reportable in the EU. To qualify, transactions must affect trade between Member States and significantly threaten to affect competition within the territory of the requesting Member State. While mergers in the digital and pharmaceutical sectors are likely to be among the most commonly referred up, this new policy approach is not limited to those specific sectors.
In September 2020, Illumina agreed to acquire sole control of Grail, which develops blood tests for the early detection of cancers. The parties did not meet any merger control thresholds in the EEA (Grail did not generate any revenue at all), so they did not notify the Commission or any Member State of the merger.
The Commission subsequently received a complaint about the deal, and in February 2021 – before issuing its new guidance – the Commission wrote to Member States explaining why the deal appeared to satisfy the conditions for an Article 22 referral and inviting Member States to submit a referral.
In March 2021, the Commission received a referral request from the French Competition Authority to review Illumina’s acquisition of Grail. The Commission accepted the request, which was later joined by further requests from Belgium, France, Greece, Iceland, the Netherlands, and Norway.
Illumina appealed, but on July 13, 2022, the General Court upheld the Commission’s decision.
Illumina closed the transaction in August 2021, before the Commission had completed its investigation, despite the EUMR prohibition on closing transactions before Commission approval. This prompted the Commission to open a gun-jumping investigation and adopt hold-separate and interim measures. On July 19, 2022, having waited for the General Court judgment, the Commission sent Illumina a Statement of Objections setting out the Commission’s preliminary view that the transaction was implemented in breach of the gun-jumping prohibition. The Commission can impose a fine of up to 10% of Illumina’s turnover.
The appeal was based on three grounds: the Commission’s competence to accept the referral request under Article 22, the timing of the decision, and a violation of legitimate expectations.
Commission’s competence to accept the referral request
The main ground of Illumina’s appeal was that the Commission misinterpreted the EUMR by accepting a referral request under Article 22 even though the national merger control thresholds were not triggered in any Member State.
Following an extensive analysis, the General Court concluded that Article 22 gives the Commission jurisdiction in these circumstances. The General Court referred primarily to the wording of Article 22, which, by using the expression “any concentration,” allows Member States to refer to the Commission any concentration that affects trade between Member States and that significantly threatens to affect competition in the Member State making the request, irrespective of the existence or scope of national merger control rules. Moreover, the General Court referenced the original rationale of the provision establishing the referral mechanism, which was to allow Member States without a merger control system (such as the Netherlands, at the time) to refer to the Commission deals that could harm competition. However, the Court found that this did not preclude other Member States from also having recourse to the mechanism.
The timing of the decision
Illumina also argued that the referral request was submitted after the expiry of the time limit set out in Article 22 – i.e., 15 working days after the transaction was “made known” to the Member States. According to Illumina, this happened significantly earlier than February 19 2021, because the deal had been publicly announced in September 2020.
The General Court dismissed this argument, concluding that making a deal known to Member States requires the active transmission of information to Member States, allowing them to make an assessment of whether the necessary conditions for the purposes of an Article 22 referral are met. The General Court specified that active transmission had happened through the Commission’s invitation letter sent in February 2021, and so the referral request was made in good time.
The General Court did consider that a period of 47 days between receipt of the complaint and dispatch of the invitation letter was unreasonable. However, it concluded that the Commission’s failure to comply with a reasonable time limit did not affect Illumina’s rights of defense.
The protection of legitimate expectations
The General Court also rejected Illumina’s plea alleging that the new Article 22 approach and guidance violated legal certainty and its legitimate expectations. Relying on existing case law, the General Court held that Illumina had failed to demonstrate that it had obtained precise, unconditional, and consistent assurances from the Commission in relation to the merger at issue or in relation to mergers that did not fall within the scope of national merger control rules in general.
What to expect
By validating the Commission’s policy reversal, the General Court’s judgment introduces a new layer of regulatory complexity for parties engaging in M&A transactions with a potential EU nexus. The EU Competition Commissioner Margrethe Vestager has already announced that there are a few other acquisitions on the Commission’s merger control radar, so more enforcement of this kind is likely to follow. The separate question of whether or not Illumina will be found to have engaged in gun jumping will also be key in confirming the level of risk to which parties will be exposed.
Even though the Commission is likely to focus on the digital and pharmaceutical sectors, the new approach potentially applies to any transaction not meeting merger control thresholds, particularly where the turnover of the target does not reflect its actual or future competitive potential. While Article 22 requires that transactions must affect trade between Member States and significantly threaten to affect competition within the territory of the Member States making the request, the test gives the Commission considerable flexibility to find jurisdiction if it wants to review a merger. The Commission’s new approach aligns with pre-existing risks of intervention from other regulators with more flexible merger control thresholds, for example, the UK Competition and Markets Authority (“CMA”).
As the risk of referral may have strategic impact on transactions, parties to non-reportable deals (especially in the digital and pharmaceutical sectors) should assess the risk of the Commission seeking to assert jurisdiction under Article 22. Where there is a material risk of intervention, it may be necessary to consider providing for intervention risk in transaction documents (in particular, including efforts clauses to ensure timely cooperation and closing conditions and risk allocation provisions that can accommodate a possible referral process). A contractual ability to suspend completion could be especially important to prevent exposure to gun-jumping risk. Companies also have the option to engage with national competition authorities and the Commission on an upfront basis in order to assess and manage the risk of intervention.
Although Article 22 intervention is expected to be relatively rare, we expect to see more examples of this in the future, especially in technology markets, where transactions often fall beneath merger control thresholds. This could become particularly interesting upon entry into force of the forthcoming Digital Markets Act, which will require companies with “gatekeeper” status to notify the Commission when acquiring any targets that provide “core platform services” – Article 22 could then be used to create a basis for jurisdiction in circumstances where the deals might otherwise have never come to the Commission’s attention.