15 April 2021

Below-threshold referrals to Commission may make all M&A deals subject to review

Jolling de Pree
Bart de Rijke
Helen Gornall
+ 1 other expert

The European Commission is mending the tears in its jurisdictional net by targeting deals falling below EU and national quantitative thresholds while potentially being anti-competitive. Until recently, the Commission discouraged national competition authorities (NCAs) from referring transactions that did need to be notified in the member states. However, a recent merger control case as well as recently published Commission guidance indicate a change of direction. This new policy undermines the idea that jurisdictional thresholds ensure legal certainty, and it remains to be seen whether the European Court of Justice will consider the policy change to be legitimate. Meanwhile, parties involved in deals with a potential impact on European markets that fall below EU and national quantitative thresholds are well advised to inform all European NCAs upfront to avoid a Commission review post-closing.

Background

Merger control within the EU is a review system based on a division of competence between the Commission and individual member states. Transactions meeting specific turnover-linked quantitative thresholds – deemed to have a “community dimension” – fall under the Commission’s sole jurisdiction. Others qualify for review at the national level, provided they satisfy the national thresholds of the member states. Concentrations not meeting thresholds at either level do not have to be notified anywhere in the EU and do not face a standstill obligation or gun-jumping penalties. This apportionment of merger review competence is tempered by various referral systems. A case may be referred, on the initiative of the Commission, a member state, or a party, to ensure that the most appropriately placed authority is charged with a particular case.

Article 22 of the EU Merger Regulation (EUMR) facilitates referral by a member state to the Commission if a transaction: (a) affects trade between member states, and (b) threatens to significantly affect competition within the territory of the requesting member state(s). This provision, also known as the “Dutch clause”, was originally conceived as an enabling provision. It allowed states without a domestic merger control regime to forward potentially problematic cases to the Commission for review. A request meeting criteria (a) and (b) would create competence for the Commission to review the case.

With the progressive establishment of national regimes – all 27 member states now have a system of domestic merger control, except for Luxembourg, the Commission has, until recently, only taken up cases that exceeded the domestic threshold of at least one member state. Consequently, it generally did not accept any concentration case that did not have to be notified anywhere in the EU. This policy was based on the assumption that these non-notifiable transactions were of limited size (in terms of turnover or market share) and unlikely to have an impact significant enough to warrant review at the EU level.

Policy change already put into practice

The new policy has changed this assumption and makes clear that transactions which do not have a community dimension and are not notifiable in any member state may also be referred under article 22 EUMR. This new policy, which follows attempts by NCAs of member states to actively cast their jurisdictional net wider (see our previous article), has recently been put into practice, even before the Commission published its new policy: the Commission was already actively reaching out to member states, asking that they refer an M&A transaction between two companies located in the US.

In this case, Illumina, a US-based medical company, had made a bid for Grail, an also US-based start-up which had developed but not yet commercialised a new medical technique. Grail has no turnover or any other market presence, neither in Europe nor elsewhere. This means that the transaction did not pass any turnover or market share threshold and was not notifiable. Nevertheless, the Commission sent letters to member states asking that they refer the case to it. France made a referral request and the Netherlands and a few other EU and EFTA member states joined. Subsequent legal action in France and the Netherlands, aimed at attacking the referrals, were dismissed by the respective national courts. It is now up to the Commission to decide whether those requests for referral meet the two criteria of Article 22 EUMR. On 26 March 2021, after the Commission had shown its policy change by pursuing the Illumina/Grail-case, it confirmed this position in its Article 22 guidance. The implication of the policy change is that previously risk-insulated transactions lose their jurisdictional safe harbour and accompanying legal certainty. With the publication of the guidance, this shift in stance has been formalised; paradoxically, with the stated object of increasing legal certainty. From now on, transactions may be liable to scrutiny by the Commission via a member state’s referral – regardless of the parties’ turnover or deal value.

Killer acquisitions and nascent markets

The main reason for this change in practice is the Commission’s increased focus on protecting future innovation and potential competition. It is widely believed that

these days, the effect an undertaking has on competition is not necessarily reflected by the size of its revenue. Think of online platforms that offer zero-price services to consumers, with a view to generating revenues at a later stage. Or vaccine developers with future value. These type of transactions often fall outside merger control. The Commission aims to use the referral system of Article 22 EUMR to fill the enforcement vacuum in relation to:

  • acquisitions that target low revenue-generating, yet disruptive, entrants/emerging rivals; or
  • “killer acquisitions” of nascent companies by entrenched players.

Article 22’s EUMR complexity

Reapplying Article 22’s jurisdictional remit makes it a powerful residuary clause, wide enough in range and effect to envelope those concentrations missed by conventional quantitative thresholds. A member state can request the Commission to assume jurisdiction over a concentration without community dimension if two criteria are met. The concentration must:

  1. affect trade between member states; and
  2. threaten to significantly affect competition within the territory of the member state making the request.

Reading the Commission’s new article 22 guidance alongside the Commission’s existing notice on case referral reconfirms that the two-pronged criteria allowing referral by a Member state are broadly interpreted, as can also be seen in the Illumina/Grail example.

As regards the first condition, trade (patterns of trade) between member states may readily be viewed as being influenced if, for example, intellectual property rights have the possibility of being commercialised in more than one member state. The second condition would be met if an NCA may prima facie demonstrate, through preliminary analysis, that there is a risk of a transaction having a significant adverse impact on competition. Adverse competitive impact could include, for example, the elimination of a recent or future entrant, or a merger between two important innovators.

The new guidance includes a non-exhaustive list of cases that might especially require careful attention, with the caveat that these examples are purely illustrative and not limited to any specific economic sector. Examples include a start-up with competitive potential that is still has to implement a viable business model; an important innovator; an actual or potential competitor; a business enjoying access to competitively advantageous assets (raw materials, data, etc.), and firms providing key inputs for other industries.

Effect on the timeline of a transaction

In addition to the broad application of Article 22’s qualifying criteria, the guidance makes clear that even if a transaction has already closed, a member state could still request a referral. The guidance does explain that the Commission will generally not consider referrals for deals that closed more than six months before. However, this time-bar is not absolute, and the Commission can take referrals for deals that closed more than six months before if the magnitude of potential competition issues justify an exception. As long as a referral is made within 15 working days after the deal is “made known” to an NCA, whether the transaction has been implemented or not is immaterial. The Commission notice on case referral makes clear that, in order to ensure that a transaction is “made known”, sufficient information to conduct a preliminary competition assessment must be made available to the NCA.

Practical solution to voluntary “notification”

If parties involved in a deal with a potential impact on European markets require certainty upfront and cannot wait for a possible Article 22 referral after signing (or after closing), a good approach would be to provide NCAs with information about the competitive impact of the proposed transaction. If the information provided is deemed “sufficient”, the 15-day clock within which a referral may be made will start. And if no referral has been made within that period, then the parties can be rest assured that their transaction will not be subject to the Commission’s scrutiny.

What next?

Time will tell how many of these voluntary notifications made out of caution will be submitted to NCAs and how often member states will make use of the new option to refer cases to the Commission. It also remains unclear for now whether the Commission’s new Article 22 policy will pass scrutiny by the European Court of Justice. Meanwhile, it has certainly reduced legal certainty for parties involved in transactions that do not need to be notified at EU or national level.