The European Commission (EC) has taken steps to assert jurisdiction over transactions targeting low revenue-generating/pre-commercial, yet disruptive, entrants. 

Back in September 2020, Commissioner Vestager announced that the EC planned “to start accepting referrals from national competition authorities of mergers that are worth reviewing at the EU level, whether or not those authorities have the power to review the case themselves” (see here).  Only six months later, the EC issued Guidance on referrals under Article 22 of the EU Merger Regulation (see here).

Article 22 already permitted referrals from Member States lacking jurisdiction to review a transaction under their national merger control rules. However, the EC has had a long-standing practice of discouraging referrals, recognising that “such transactions were not generally likely to have a significant impact on the internal market” (see para. 8 here ). The new guidance reverses the EC’s policy by indicating that Article 22 is applicable to all concentrations, not only those that meet the jurisdictional criteria of the referring Member State(s).  This change is a significant development for dealmakers and legal advisers: any transaction that may be perceived as raising competition concerns could end up being reviewed by the EC (no matter how small the target), even after the deal has closed.  While the Guidance states that “the EC would generally not consider a referral appropriate where more than six months has passed after the implementation of the concentration” (see para. 21 here), the six-month period only starts from when the EC learns “material facts” about the deal.

Transactions at risk

The Guidance applies to all transactions, but primarily targets deals in the digital economy and pharmaceutical/life sciences sectors. Transactions more likely to attract scrutiny are those where:

  1. One party is a start-up or recent entrant with significant competitive potential that has yet to develop or implement a business model generating significant revenues (or is still in the initial phase of implementing such business model);
  2. One party is an important innovator or is conducting potentially important research;
  3. One party is an actual or potential important competitive force;
  4. One party has access to competitively significant assets (such as, for instance, raw materials, infrastructure, data or intellectual property rights); and/or
  5. One party provides products or services that are key inputs/components for other industries.

NCAs in France and the Netherlands have already relied on the new Guidance and referred Illumina/Grail, a deal in the genomic cancer testing space, to the EC.  The EC has accepted the referral request – despite the fact that the transaction did not trigger merger control filings in any EU Member State – and has since announced that authorities in Belgium, Greece, Iceland and Norway have joined the referral. The EC considered that the transaction met the criteria for referral under Article 22 and considered it appropriate to refer because Grail’s competitive significance is not reflected in its turnover, as notably evidenced by the US$7.1 billion dollar deal value.

lllumina and Grail challenged the move in courts in the Netherlands and France. Illumina appealed the Dutch and French NCAs’ decisions before national courts, which dismissed Illumina’s appeals on March 31 and April 1, 2021.  In France, the Conseil d’État held that the parties’ claim was inadmissible because the referral decision is “inseparable from the EC’s review of the transaction,” which “falls under the control of the [EU] Court of Justice” (see para 4 here).  In the Netherlands, the Hague District Court reviewed the parties’ appeal on the merits, but dismissed the claim that the Dutch NCA lacked the power to join the French NCA’s request on the ground that the transaction does not meet the jurisdictional thresholds in the Netherlands (see here).

Illumina also filed an appeal before the European General Court seeking the annulment of the EC’s decision to accept the referral under Article 22, on the ground that the EC does not have the power to accept such referral and to assert jurisdiction.  The General Court’s response is awaited and will hopefully bring clarity to the scope of the revised Article 22 guidance.

Some NCAs expressly considered that they were not empowered to make a referral request (Slovenia, Spain and Austria) or that the conditions for referral under Article 22 EUMR were not met in their Member State (Latvia, Lithuania). It is reported that some NCAs (Ireland, Slovakia) also argued they did not have sufficient information to decide on a referral and others (Germany and Sweden) who did not explain their reasoning but were not in support of the EC’s new policy. It is clear that there is a degree of divergence between NCA’s approaches to the EC’s new referral request.

What does this mean in practice?

It is yet to be seen whether the EC’s new policy is a safeguard against truly anti-competitive deals, or a tool to scrutinise more transactions involving Big Pharma that would otherwise escape review.  As referrals may affect the timing and feasibility of transactions, parties to a concentration falling below national thresholds will systematically need to assess whether their deal can affect competition in any EU Member State.  Parties will also have to balance the risks involved with closing quickly and challenging a possible post-closing referral, or seeking reassurance from the EC and relevant National Competition Authorities (NCAs) that they will not refer.

We are hopeful that the GC’s (pending) response will bring much needed clarity on the application of the Guidance.

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