In March 2021, the Commission adopted a Communication (the “Guidance”)[1] on the application of the referral mechanism pursuant to Article 22 of the EU Merger Regulation (“EUMR”). The Guidance encourages national competition authorities (“NCAs”) to refer to the Commission certain transactions[2] that do not meet national merger control thresholds and would otherwise escape merger control review in the EU. The Commission had long discouraged the referral of such cases, considering that they were generally unlikely to have a significant impact on the internal market.
While the impact of the new policy will vary by industry, mergers in the digital and pharmaceutical sectors are likely to be among the most affected. Since this policy shift became effective, two cases, Illumina/GRAIL and Facebook/Kustomer, have been referred to the Commission under Article 22 EUMR, both of which have now triggered a Phase II investigation.
Illumina/GRAIL: the Commission launches Phase II review of the first effective Article 22 EUMR upward referral
On April 19, 2021, after encouraging national competition authorities to make Article 22 EUMR referrals,[3] the Commission accepted a request by several NCAs of genomic sequencing company Illumina’s proposed acquisition of cancer detection test maker GRAIL, a transaction that did not meet notification thresholds in any Member State.[4]
On July 22, 2021, the Commission opened an in-depth investigation into the transaction, expressing concerns that the transaction may reduce competition and innovation in the emerging market for the development and commercialization of cancer detection tests based on sequencing technologies.[5]
According to the Commission, Illumina could have the ability and incentive to engage in vertical input foreclosure strategies following its acquisition of GRAIL. In particular, Illumina has a leading position in the market for next-generation genomic sequencers, which are crucial inputs for the development and commercialization of sequencer-based cancer detection tests of the type developed by GRAIL. Consequently, the Commission suspects that Illumina could leverage its market position to foreclose potential GRAIL competitors after this acquisition, denying them access to these crucial inputs.
While the Commission has until the end of November to adopt a decision,[6] Illumina decided, on August 18, 2021, to close the transaction because, according to Illumina, its agreement to acquire GRAIL would otherwise expire before the end of the Commission’s review. The Commission is now investigating, in parallel to its merger control review of the transaction, whether Illumina’s conduct amounted to gun-jumping, i.e., a breach of the EUMR standstill obligation.[7]
On September 20, 2021, the Commission sent Illumina and GRAIL a Statement of Objections informing them of interim measures it contemplated adopting pursuant to their alleged infringement of the standstill obligation,[8] to which the response remains pending. Illumina has in parallel challenged, before the General Court, the Commission’s jurisdiction in the proceedings.[9]
The Commission launches Phase II review of referred Facebook/Kustomer transaction
On May 12, 2021, the Commission accepted, at the request of a number of NCAs, the referral of Facebook’s proposed acquisition of Kustomer, a Customer Relationship Management (“CRM”) services provider.[10] Unlike Illumina/GRAIL, the Facebook/Kustomer transaction was reportable to the Austrian Competition Authority.
The Commission opened an in-depth investigation into the transaction on August 2, 2021, alleging, first, that it could reduce competition in the markets for the supply of CRM software and for the supply of customer service and support CRM software. The Commission suspects that Facebook may have the ability to degrade or foreclose access of potential Kustomer competitors to its B2C over-the-top (“OTT”) messaging channels post- acquisition, whereas these messaging channels account for a large portion of the B2C OTT messaging market, which is in turn an important input for the supply of CRM software services.
Second, the proposed transaction could strengthen Facebook’s market position in the online display advertising market, on which Facebook might—according to the Commission— already hold a dominant position in several Member States. The acquisition of Kustomer could in particular facilitate Facebook’s collection of valuable data from businesses using Kustomer’s CRM software.[11] The transaction could thus raise barriers to entry and expansion for Facebook’s competitors for these advertising services, impacting publishers that would face higher prices and less choice.
Conclusion
The Illumina/GRAIL referral is the first illustration of the Commission’s Article 22 EUMR policy shift, as it involves the referral of a vertical acquisition of a developing undertaking active in an innovation-focused field that would otherwise not have been reportable anywhere in the EU. By contrast, Facebook/Kustomer is a more conventional horizontal Article 22 EUMR referral of a transaction that met a national notification threshold.
The Commission’s new policy has run into criticism due to the regulatory uncertainty it creates.[12] Interestingly, pending the General Court’s Illumina judgment and absent any official guidance, merging companies have begun anticipating the risk of Article 22 EUMR referrals in their deals. For example, in its recent offer to acquire computer software company Avast, antivirus maker NortonLifeLock envisaged the possibility of an Article 22 EUMR referral despite emphasizing that the projected transaction should not meet EUMR thresholds.[13]
[1] Communication Commission Guidance on the application of the referral mechanism set out in Article 22 of the Merger Regulation to certain categories of cases, C(2021) 1959 final of March 26, 2021. See, for reporting on the broader application of Article 22 EUMR and its practical implications, our April 23, 2021 Alert Memorandum “European Commission Implements New Policy To Investigate Transactions That Would Otherwise Escape Merger Review.”
[2] Including cases where the target is a nascent competitor, important innovator, actual or potential important competitive force, has access to competitively significant assets, and/or provides products or services that are key inputs/components for other industries (Guidance, para. 19). In the Commission’s view, transactions that may be appropriate for a referral include transactions where the turnover of at least one of the parties “does not reflect its actual or future competitive potential.”
[3] See Commission Press Release IP/21/1384 “Mergers: Commission announces evaluation results and follow-up measures on jurisdictional and procedural aspects of EU merger control,” March 26, 2021.
[4] France submitted a referral request to the Commission pursuant to Article 22 EUMR and was subsequently joined by Belgium, Greece, Iceland, the Netherlands, and Norway. See Commission Press Release MEX/21/1846 “Commission to assess proposed acquisition of GRAIL by Illumina,” April 20, 2021. For reporting on the referral process in Illumina/GRAIL, see also our April 2021 EU Competition Law Newsletter.
[5] See Commission Press Release IP/21/3844, “Commission opens in-depth investigation into proposed acquisition of GRAIL by Illumina,” July 22, 2021.
[6] At the time of the writing of the article, the proceedings’ clock had been stopped since August 11, 2021, after the Commission found that the parties had failed to provide essential information. See update on the Commission’s website page dedicated to Illumina/GRAIL (Case COMP/M.10188), available at: https:// ec.europa.eu/competition/elojade/isef/case_details.cfm?proc_code=2_M_10188.
[7] Article 7(1) EUMR. See Commission Press Release IP/21/4322, “Commission starts investigation for possible breach of the standstill obligation in Illumina/ GRAIL transaction,” August 20, 2021.
[8] See, Commission Press Release IP/21/4804, “The Commission adopts a Statement of Objections in view of adopting interim measures following Illumina’s early acquisition of GRAIL,” September 20, 2021.
[9] Illumina v Commission (Case T-227/21) EU:T:2021:672, case pending.
[10] Austria submitted a referral request to the Commission pursuant to Article 22 EUMR and was subsequently joined by Belgium, Bulgaria, France, Iceland, Italy, Ireland, the Netherlands, Portugal, and Romania. See Commission Press Release MEX/21/2464, “Commission to assess proposed acquisition of Kustomer by Facebook,” May 12, 2021.
[11] Including data on gender, order and purchase history, website views, wish lists and store visits. Business store this data in Kustomer’s CRM software and may decide to share it with Facebook. In the online display advertising market, the Commission opines that such data could provide Facebook with an important competitive advantage, making it more difficult for rivals to match Facebook’s online advertising services.
[12] See, for example, the August 2, 2021, position paper of the Association of In-House Competition Lawyers (ICLA), stating that the Commission’s policy is “incompatible with the spirit of the EUMR and goes against a number of EU legal principles, […] in particular legal certainty, legitimate expectation and the subsidiarity principle.” See, for reporting on the regulatory uncertainty generated by this policy shift, our April 23, 2021, Alert Memorandum “European Commission Implements New Policy To Investigate Transactions That Would Otherwise Escape Merger Review.”
[13] See NortonLifeLock Inc.’s offer to acquire Avast Plc, August 10, 2021, available at: https://www.investegate.co.uk/nortonlifelock-inc./rns/recommended- merger-of-avast-with-nortonlifelock/202108110700092221I/.