On 26 March 2021, the European Commission (“EC”) published its “Guidance on the application of the referral mechanism set out in Article 22 of the Merger Regulation to certain categories of cases (“Guidance”). Driven by concerns that certain competitively significant transactions escape merger control review, the EC, via the Guidance and in contradistinction to its previous policy under Art. 22 of the EU Merger Regulation (“EUMR”), now actively encourages Member States to refer certain transactions to it even if they do not meet national merger control thresholds (turnover-based or otherwise). This is particularly the case with respect to deals in the digital and pharma sectors which often involve the acquisition of nascent, yet highly promising, competitors. The EC’s remarkably swift adoption of the Guidance (it was not subject to public consultation) has already borne fruit – witness in this respect the French Competition Authority’s recent request for and the EC’s acceptance of a referral of the Illumina/Grail transaction. However, the Guidance arguably seriously undermines the legal certainty traditionally afforded to companies by the EUMR by virtue of the bright-line turnover thresholds and deadlines enshrined therein. In tandem with this significant expansion of the EC’s ability to review transactions, companies contemplating the acquisition of smaller companies with significant competitive potential (particularly in the digital pharma sectors) are therefore advised to exercise caution going forward. Where simultaneous signing and closing without more was once realistic for such deals, this is no longer always a feasible option.
II. Art. 22 EUMR – the “Dutch clause”
A) Preliminary observations
For many years, a core tenet of the EU’s merger control architecture has been that the EC and its Member States cannot concurrently assert jurisdiction over the same transactions. The EC, which sits at the apex of the EU’s merger control enforcement structure, has sole competence over concentrations with an EU dimension (the “one-stop-shop” principle). Conversely, the EC cannot assert jurisdiction over concentrations that do not have an EU dimension – such concentrations are subject to review under applicable Member State merger control law(s). One principal derogation from this bright-line allocation of powers between the EC and its Member States is enshrined in Art. 22 EUMR, however. Art. 22(1) EUMR provides that: “one or more Member States may request the [EC] to examine any concentration […] that does not have a[n] [EU] dimension […] but [i] affects trade between Member States and [ii] threatens to significantly affect competition within the territory of the Member State or States making the request” ((i) and (ii) are hereinafter referred to as “Art. 22 Conditions)”. Where the Art. 22 Conditions are met, the EC may in its discretion decide whether to examine the transaction at hand.
It bears note, however, that while the fulfilment of the Art. 22 Conditions ensures that a merger has a sufficient nexus with the EU and a referring Member State, the legal requirements of Art. 22 EUMR do not in fact make reference to, or draw a distinction between, concentrations capable of being reviewed under national merger control rules or transactions that do not satisfy the jurisdictional thresholds of the Member States: Art. 22 simply requires that the Art. 22 Conditions be met. Where this is the case – and in line with the guiding principle that a transaction should be looked at by the authority best placed to investigate – the EC may, pursuant to Art. 22(5) also “invite” a Member State or States to make a referral request. According to the EC’s Case Referral Notice (2005), all decisions with regard to the referral of a case should, however, take due account of the importance of legal certainty regarding jurisdiction “from the perspective of all concerned”. This is despite the fact that the decision by one or more Member States to make a referral does not serve as an impediment to other Member States to review the transaction which may, depending on the facts, reach a different conclusion from that reached by the EC. It is noted in this regard that if the EC accepts a referral under Art. 22, it only obtains jurisdiction for the territory of a Member State that has requested the referral or joined another Member State’s request.
B) Art. 22 EUMR: a rarely invoked provision whose use the EC has historically discouraged
At the time of the EUMR’s inception in 1989, the referral mechanism enshrined in Art. 22 was known as the “Dutch clause”. This is because the insertion of this provision into the EUMR came at the request of the Netherlands which, at the time, did not have a merger control regime in place. A corollary of this development was that throughout the ensuing years, Art. 22 was generally triggered in situations where a Member State did not have an operational system of merger control review – see e.g. British Airways/Danair (1993) (request by the Belgian Government), RTL/Veronica/Endemol (1995) (request by the Dutch Government), Kesko/Tuko (1996) (request by the Finnish Office of Free Competition), and Blokker/Toys “R” Us (II) (1997) (request by the Dutch Government).
All Member States have since, however, established a national merger control regime (with the exception of Luxembourg). In view of this development, the EC has traditionally sought to discourage Member States from requesting the referral of transactions under Art. 22 for which they did not have original jurisdiction on the basis of their domestic thresholds. This practice was principally based on the notion that such transactions were limited in size and were generally unlikely to have a significant impact on the EU internal market. As such, the EC’s practice in recent years has been limited to referrals of transactions that fell under the jurisdiction of at least one referring Member State. With that said, even in such latter scenario, the EC has sought to constrain the use of Art. 22 in all but the most exceptional cases given the risk of “additional cost and time delay for the merging parties” – testimony of which is borne by the fact that since 2004 only 34 Art. 22 referrals (0.6% of total notified cases) have been made. To date, therefore, referrals pursuant to Art. 22 have been rare – notable recent examples being Johnson & Johnson/Tachosil (2020) (withdrawn because of regulatory concerns), and Apple/Shazam (2018). The EC’s traditional reticence towards the invocation of Art. 22 may, however, be about to change with the recent promulgation of the Guidance.
III. The Guidance – nascent competitor transactions now fall within the EUMR’s ambit
a) Preliminary observations
Over the last years, a principal concern of the EC has been the wave of mergers involving companies that play, or may develop into playing, a significant competitive role on the market despite generating little or no turnover at the time of the merger. This development has been found to be particularly significant in (i) the digital economy, where services regularly launch with the aim of developing a significant user base and/or commercially valuable data inventories, before the business is monetised and (ii) in the pharma sector, where transactions have involved innovative companies conducting R&D with strong competitive potential, even if such companies have not yet finalised, let alone exploited commercially, the results of their R&D activities. Because of the absence of, or low, turnover of one of the parties to such transactions, they have invariably escaped merger control review.
Whether, therefore, the turnover-based thresholds of the EUMR were sufficient to capture transactions that would in fact merit review by the EC has in recent years been the subject of vociferous debate – particularly since Facebook’s 2014 acquisition of WhatsApp for USD 19 billion and which only fell to be assessed by the EC because the transaction was notifiable in three Member States (referral pursuant to Art. 4(5) EUMR). Post Facebook/WhatsApp, and to address the risk of competitively significant transactions escaping its review, the EC therefore entertained the idea of introducing a new complementary threshold based on the value of the merger – as both Austria and Germany did in 2017. This idea was ultimately shelved by the EC, however, in light of the difficulties of setting a value-based threshold at the right level and the risk that the clarity provided by the turnover-based thresholds of the EUMR would be diminished. Instead, the EC has deemed it more appropriate to reverse its historical policy of discouraging the referral of cases under Art. 22 when a Member State does not have jurisdiction. With the adoption of its Guidance, the EC, in what can only be described as an abrupt about turn, now actively encourages Member States to refer mergers to it, particularly, but not necessarily limited to, mergers in the healthcare and tech sectors – witness in this respect the French Competition Authority’s recent request for and the EC’s acceptance of a referral of the Illumina/Grail transaction.
B) Candidate cases – mergers in the digital and pharma sectors a priority
The EC encourages, and is more amenable to accepting, referrals in (certain types of) cases where the referring Member State does not have initial jurisdiction over the case, but where the Article 22 Conditions are met. By way of elaboration on the Art. 22 Conditions enshrined in the EUMR, the EC’s new Guidance provides that the EC will in particular assess whether the transaction “may have an influence, direct or indirect, actual or potential, on the pattern of trade between Member States” taking into account, for example, the development and implementation of R&D projects the results of which, if successful, may be marketed in more than one Member State. As such, candidate transactions for referral are particularly, although not necessarily limited to, those where 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);
- Is an important innovator or is conducting potentially important research;
- Is an actual or potential important competitive force;
- Has access to competitively significant assets (such as raw materials, infrastructure, data or intellectual property rights);
- Provides products or services that are key inputs/components for other industries.
In exercising its discretion whether to encourage or accept a referral, the EC may also take into account whether the value of the transaction is particularly high compared to the current turn-over of the target. This was exactly the case in Illumina/Grail as the EC considered that Grail’s competitive significance was not reflected in its turnover, especially in light of the USD 7.1 billion deal value. A value-based threshold is therefore (cleverly) introduced through the backdoor of Art. 22 without the need for legislative change and therefore renders nugatory any further discussion on whether the EUMR should have a value-based threshold.
C) Procedure – significant deal uncertainty on the cards
The EC will cooperate closely with the Member States to identify transactions that may constitute potential candidates for referral under Art. 22 but do not trigger a notification under applicable Member State law. Merging parties may voluntarily approach the EC with a view to obtaining an “early indication” of whether a proposed transaction represents a candidate for referral (“Early Indication”). Conversely, where the EC becomes aware of a transaction considered to meet the criteria for a referral, it may inform the Member State(s) potentially concerned and “invite” them to make a referral request – a decision whether to refer lying within the discretion of such Member State(s). Further, third parties are encouraged to draw the EC’s and the Member State’s attention to potential candidate cases (and third parties may be able to do so on the basis of relatively scant information).
If a referral request is being considered, the EC will inform the merging parties thereof “as soon as possible”. While the merging parties are not required to delay closing upon receipt of such information, they may choose to do so until a decision has been rendered on whether a referral request will actually be made. Once the merging parties have been informed by the EC of a referral request, however, they cannot close the transaction and must wait until EC clearance.
Under the Guidance, a Member State that does not have jurisdiction to review the relevant merger must make a referral request within 15 working days of the merger being “made known” to it – a notion which is (arguably unacceptably) vague, and clearly goes beyond mere knowledge of the merger. In this respect, the Guidance states that the Member State should possess sufficient information to make a preliminary assessment as to the existence of the criteria relevant for the assessment of the referral. Once a referral request has been made, the EC will “without delay” inform the other Member States and the merging parties thereof, and other Member States may then join the initial request within 15 working days of being informed by the EC of the initial request. At the latest 10 working days thereafter, the EC may decide to assert jurisdiction to examine the impact of the transaction within each of the Member States for which the referral request is accepted. If the EC does not take a decision within this period, it will be deemed to have adopted a decision to review the transaction in accordance with the request.
While the referral is subject to the aforementioned deadlines, it bears note that a transaction that has already been closed does not preclude a Member State from requesting a referral. That being said, the EC will generally not consider a referral appropriate where more than six months after closing has passed – though a later referral cannot be ruled out depending on the magnitude of any potential competition concerns, for example. Further, where a transaction has already been notified in one or more Member States that did not request a referral (or join such initial request) this may constitute a factor that militates against the EC accepting a referral.
Transactions involving nascent competitors – especially in the digital economy and pharma sectors – are now firmly in the EC’s crosshairs. As such, mergers that until recently were unlikely to face antitrust scrutiny because of the absence of, or low, turnover of the target now may be referred upwards to the EC for merger control review. Simultaneous signing and closing without more in certain types of cases is no longer a realistic option. Indeed, a potential eight week delay may now have to be factored into any deal timeline in certain types of nascent competitor acquisitions. Further delays cannot be ruled out – when exactly is a merger “made known” to a Member State for the purposes of triggering the 15 working day period to make a request for referral? Moreover, there is always the risk that the transaction in question will be referred to the EC post-closing. It is therefore safe to say that the Guidance has instilled a considerable degree of uncertainty into the EU merger control regime and, by way of logical corollary, into dealmaking.
With this risk on the horizon, and with a view to avoiding (potentially significant) business disruption, increased prudence is called for. Merging parties may wish to approach the EC pre-emptively regarding their intended transaction with a view to soliciting an Early Indication from the EC. This is important not only in view of deal timing implications, but an upward referral has in the past often required remedies as a quid pro quo for clearance. On the other hand, the Guidance may also be the bearer of gifts for third parties. Third parties that have misgivings about a transaction which, up until now, would not have been reviewed and which, absent review, may have a negative impact on their business may see strategic merit to informing the EC of a candidate case with a view to picking up any “low-hanging fruit” as a potential purchaser for any remedies that are offered. The risk of third-party intervention should therefore also be factored into any assessment of whether to approach the EC for an “Early Indication”. Companies that blindly close a transaction involving a nascent competitor – particularly in the digital and pharma sectors – in the hope that it will fly under the enforcement radar do so at their peril. Caution is therefore the order of the day!