- The EU’s jurisdiction to review mergers is no longer linked to notification. This is a big change and sharply reduces parties’ ability to predict antitrust hurdles to closing based on notification thresholds.
- The European Commission (“Commission”) can now assert jurisdiction over deals that do not meet filing thresholds in any of its Member States or the EU itself.
- There are currently few hard limits on the Commission’s ability to catch deals (including closed deals). The Commission has issued guidance, but this gives itself a wide discretion to assert jurisdiction and spongy time limits.
- Some hard limits (especially with respect to closed deals) are likely to emerge for legal certainty reasons, but it will take years for case experience and litigation to flesh these out.
In September 2020, Illumina announced its acquisition of Grail. Both are U.S. biotechnology companies, with Illumina manufacturing systems for genetic analysis, while Grail develops cancer screening tests.
Grail has no sales within the European Union (and in fact within any country outside of the U.S.) which resulted in the transaction falling below notification thresholds in the EU—both at the Commission and Member State level.
In an assertive move, the Commission revived an old mechanism provided for in Article 22 of the European Union Merger Regulation (EUMR). This provision was inserted in 1989 to enable Member States without national merger control to refer a case to the Commission—so a gap in national level enforcement didn’t emerge. It was historically referred to as the Dutch clause on the basis that the Netherlands was the main Member State this issue applied to.
Article 22 has been regularly used by Member States with merger jurisdiction to refer a deal to the Commission where the latter is better placed. However, since all Member States (except Luxembourg) now have national merger regimes, a practice had developed that the Commission did not take Article 22 referrals unless the referring Member State had its own jurisdiction—on the basis that there was no longer a gap at national level for Article 22 to cure. In a speech a few weeks before the Illumina/Grail deal was announced in September 2020, Commissioner Vestager signalled that the Commission was considering abandoning this practice so as to catch global below-threshold mergers.
On 19 February 2021, the Commission sent an ‘invitation letter’ to Member States informing them of the Illumina/Grail transaction and inviting referral requests. Oddly, this letter was sent over two months after the Commission had first received a complaint and five months after the deal was announced. Then, in what was apparently a co-ordinated move, the Autorité de la concurrence (French Competition Authority) sent a referral request under Article 22 EUMR, joined by several other national authorities. The Commission accepted the referral request and declared itself competent to review the transaction.
On 26 March 2021, the Commission published new Guidance setting out its revised interpretation of Article 22. Meanwhile, the U.S. FTC dropped its application for a federal injunction against the deal closing, presumably because it felt that an injunction was unnecessary given that the EU now had jurisdiction and would prevent closing.
In August 2021, Illumina/Grail took the bold decision to close despite not receiving Commission clearance—deliberately breaching the EU’s standstill obligation in the process. The companies publicly anticipated a gun-jumping fine but justified the decision on moral grounds—bringing Grail’s life-saving test to as many patients as possible as quickly as possible. Also relevant was that the termination fee of US$300 million owed to Grail in the event the deal didn’t close on time was more than the maximum possible fine.
Illumina, joined by Grail, challenged the Commission’s acceptance of the referral before the General Court in December 2021. In the 13 July 2022, judgment reported in this note, the General Court rejected all pleas and dismissed the action in its entirety. Illumina has announced that it will appeal.
In parallel, the Commission’s review of the merger entered into Phase II (in-depth review) and the Commission launched an investigation into a possible breach of the standstill obligation by Illumina, and this now seems likely to lead to a fine.
The General Court’s Analysis
In its action for annulment, Illumina claimed that the Commission lacked competence under Article 22 EUMR, that the referral had been made out of time, and that the Commission’s change of policy as regards referrals from Member States under Article 22 violated its legitimate expectations and legal certainty.
- Illumina argued that the Commission lacked competence because the use of Article 22 by Member States without their own national jurisdiction over a deal is a residual mechanism only. It enables a Member State having no merger control system to submit a referral request to prevent a concentration affecting its territory from being subject to any scrutiny. This would only apply to Luxembourg now that all other Member States have their own system of merger control. The General Court rejected this argument on any interpretation—on plain reading as well as after a historical, contextual and theological interpretation.
- In relation to time limits, Article 22 requires Member States to make a referral within 15 days after a concentration was ‘made known’ to it. Illumina argued that due to the public announcement of the transaction in September 2020, the involvement by U.S. and U.K. authorities in reviewing the deal and the market monitoring it undertakes, the French competition authority was very well aware of the concentration long before it received the Commission’s invitation letter, making the referral request out of time. The General Court rejected such claims; it considered that for the clock to start, a Member State authority must be in a position to carry out a preliminary assessment of the situation to assess whether the requirements for the referral are satisfied. This requires an “active transmission” of relevant information to the authority. The active nature of the ‘made known’ test is a new requirement the Court has just created. It was only fulfilled following the reception of the Commission’s invitation letter.
- Next, the General Court analysed whether the Commission had breached its duty under the EUMR to act within a ‘reasonable’ period of time, given that the Commission had sent its invitation letter to the Member States over two months after it had been aware of the concentration through a complaint. The Court considered that the 47 working days’ period between the complaint and the invitation letter did breach that requirement. However, such infringement leads to the annulment of a decision only where it leads to a breach of the applicant’s rights of defence. The General Court considered that Illumina did not sufficiently demonstrate such a breach and, in particular, that the undue delay had not caused its views to not be heard.
- As regards the infringement of the principle of protection of legitimate expectation, the General Court applied the traditional legal standard that such expectations must rely on precise, unconditional and consistence assurance from competent authority. Absent such an element, the General Court rejected that plea, thereby validating the possibility for the Commission to concomitantly announce and apply a change of policy approach without prior notice.
Many EU competition commentators have reacted strongly saying, the decision undermines the legal certainty that came from jurisdiction being strictly confined to notifiable transactions. With the collaboration of a Member State, the Commission can now effectively review whatever deal it chooses, provided it meets a (low) threshold of effects on intra-EU trade. This is undoubtedly a big expansion of EU jurisdictional reach. How much changes in practice, however, will depend on which transactions the Commission seeks to target and how the outer limits—particularly with respect to timing—get defined.
Our view is that the Illumina/Grail case is unlikely to trigger a big wave of intervention. The Commission does not have the resources or inclination to call in large numbers of additional deals—even in response to complaints—which will now inevitably increase.
But in the interim, and before the exceptional nature of this new approach becomes established, there are some key practical measures for parties:
- Authorities focus on ‘mismatch’ between deal value and EBITDA. High transaction prices paid by a strategic player for a target generating low (or no) revenue or EBITDA and operating in global markets are the strongest indicators of intervention using this new approach. The agencies see this mismatch as an indication by a strategic player of the target’s future competitive significance. In some cases, this assumption substantially influences the competitive assessment itself (not just jurisdiction), such in as the U.K. CMA’s assessment of PayPal/iZettle.
- The current focus is on tech and pharma deals. Although the legal principles in the case are not sector specific, all the Commission’s commentary on how this will be used focused on tech and pharma. In particular, this policy is necessary to make the requirement for certain companies to ‘report’ transactions to the Commission under the new Digital Markets Act work as intended. That only works if the Commission has the power to subsequently review them. It could, however, also apply to other fast growth industries, e.g., those relating to the energy transition or those with particularly strong network effects or high barriers to entry.
- Consider proactively notifying the Commission and/or National Competition Authorities (NCA). This would in theory activate the 15 working day deadline for an Article 22 referral and would at least provide a degree of certainty. Given that the Court has now interpreted the ‘make known’ requirement of Article 22 as actively make known, parties need to proactively contact the NCAs—they can’t rely on press releases. Parties already regularly submit informal briefing papers to the CMA to get (informal) “sign-off” with boilerplate caveats. It may become market practice to send similar briefing papers to the NCAs to trigger the 15 working day deadline. The primary reason to do this is not to avoid a call-in (it probably makes it more likely) but to ensure any Article 22 review does not come unexpectedly and mess up deal timelines.
- Make allowance for Article 22 in your contracts. Where Commission or Member State notification is not required but there is some EU nexus or regulator interest, parties should include “springing” clauses in transaction documents—clauses which make Commission clearance a condition to the transaction in the event a referral is made. These clauses are already used to cover off the risk of CMA call-in for deals with U.K. nexus, and similar provisions are common in the U.S. The clauses avoid parties being contractually obligated to close over a potential Commission investigation if referral is made.
- Account for Article 22 in your timetable. A request will add weeks or even months of uncertainty onto a deal timeline. Long-stop dates will need adjusting for those transactions where this is a realistic risk.
- Watch for use of Article 22 by complainants. Jealous competitors or jaded bidders may decide to contact the Commission or NCA advocating for a referral. Article 22 is an attractive route to try and attack deals, both because of its uncertainty and also because of its potential procedural length which can trip long-stops and break-fee payment obligations.
Much of the above resembles current market practice in handling the U.K. CMA and U.S. DOJ FTC. In fact, all the hallmarks of CMA’s enfant terrible status in international merger control—unexpected intervention, super wide jurisdictional reach, uncomfortable hold-separate obligations after closing—are present in the Commission’s intervention in Illumina/Grail. If the U.K. CMA (and increasingly the U.S. FTC/ DOJ) approach becomes precedent-setting then deal-makers worldwide will have to acclimatise to ever greater levels of antitrust risk and legal uncertainty.