In a significant judgment rendered on July 13, 2022 (“Judgment”), the EU’s General Court validated the position taken by the European Commission (“EC”) in a March 2021 Guidance Paper encouraging national competition authorities (“NCAs”) to use Article 22 of the EU Merger Regulation (“EUMR”) to refer transactions to the EC that do not meet national merger control thresholds, but which they believe may threaten to significantly affect competition within the EU.
The EC’s adoption of the Guidance Paper followed criticism that the jurisdictional scope of EU merger control was insufficiently broad to capture all anti-competitive transactions. The EC was particularly concerned about “killer acquisitions” (i.e., acquisitions of nascent competitors by dominant incumbents), especially in the digital and pharmaceutical sectors, that might otherwise have escaped review because the target’s revenues were below national merger control thresholds.
The EC’s decision to apply Article 22 of the EUMR to plug this perceived enforcement gap was, however, controversial, as it blurred the EUMR’s brightline jurisdictional rules, introduced a degree of uncertainty into the determination of whether a given transaction may be subject to merger control in the EU, and allowed the EC to investigate transactions that had completed. The Judgment’s validation of the Guidance Paper is therefore significant in conferring important new powers on the EC to assess transactions that might previously have not been subject to merger control review in the EU.
The transaction at issue concerns an acquisition announced in September 2021 by Illumina, a U.S. company specialising in genomic sequencing, of GRAIL, a U.S.-based start-up developing blood tests for the early detection of cancer, which is a nascent field. At the time of referral, GRAIL had not launched a product on the market and had no sales in the EEA. The transaction was not therefore reportable at EU or national levels.
In February 2021, following receipt of a complaint, the EC invited NCAs to refer the transaction so that it might be investigated by the EC in parallel to the U.S. Federal Trade Commission and the UK Competition & Markets Authority. The French competition authority submitted a referral request in March 2021, which was then joined by the competition authorities of Belgium, Greece, Iceland, the Netherlands, and Norway, and accepted by the EC in April 2021. Following unsuccessful preliminary challenges in France and the Netherlands, Illumina appealed the EC’s decision to take jurisdiction, arguing that the EUMR was not intended to allow for the referral of transactions that do not meet national merger control thresholds.
In the meantime, Illumina closed the transaction in August 2021 before the EC had completed its investigation. This led the EC to adopt, in October 2021, hold-separate and interim measures. Illumina’s (Case T-755/21) and GRAIL’s (Case T-23/22) appeals against the interim measures are pending before the General Court in separate proceedings.
Illumina’s Grounds of Appeal
Illumina maintained that the EC’s decision to review the transaction was contrary to “legitimate expectations and legal certainty,” in particular because the EC’s invitation to refer the transaction “was sent prior to the publication of new guidance,” and that Article 22 referrals may only be made in situations where the referring NCA is competent under its national merger rules to review the transaction in question. Illumina advanced three substantive pleas in law, alleging that the EC’s decision to examine the Illumina/GRAIL transaction was:
- outside its competence, as the EC had misinterpreted the EUMR by accepting an Article 22 referral request from NCAs that were not authorised under their respective national merger control regimes to examine the transaction,
- invalid, including because the French NCA’s referral request was out of time, or in the alternative, delayed such that it undermined the principles of legal certainty and the right to good administration, and
- contrary to Illumina’s legitimate expectations and legal certainty, as the Vice President of the EC indicated in a speech that until the EC’s new Article 22 guidance was in place, the EC would continue to discourage referral requests from NCAs in respect of transactions that do not fall within the scope of national merger control rules.
The General Court rejected each plea in full.
The General Court’s Judgment
- Companies can appeal an EC decision to accept an Article 22 referral (and to request notification of a transaction). There had been uncertainty as to whether the EC’s decision to take jurisdiction under Article 22 was capable of being appealed to the EU Courts (or could be reviewed only as part of the EC’s final decision on whether a transaction was compatible with EU competition rules). Relying on established precedent that merging parties cannot appeal an EC decision to open a Phase 2 review, the EC maintained that Illumina had no standing to contest a decision by the EC to accept jurisdiction following an Article 22 reference. The General Court rejected this argument and upheld Illumina’s standing to challenge the EC’s decision.
- The EC can assert jurisdiction over transactions that have “significant effects on the structure of competition in the European Union” even if they do not meet national merger control thresholds. Article 22 was originally designed to address a situation that existed at the time of the EUMR’s adoption where a number of NCAs did not have effective systems of merger control (including the Netherlands, which led to the provision being known as the ‘Dutch clause’). As a result, it did not specify that NCAs may only refer transactions over which they have jurisdiction under their national merger control rules. Accordingly, so the Court found, the EC is competent to review transactions referred by NCAs whose jurisdictional thresholds are not met. This interpretation was consistent with Article 22’s wording, historical context, and purpose, which the Court determined constituted a corrective mechanism “intended to remedy control deficiencies inherent in a system based principally on turnover thresholds which, because of its rigid, is not capable of covering all concentrations which merit examination at European level.” As a result, an NCA may refer to the EC a transaction that affects trade between Member States and threatens to significantly affect competition within the EU irrespective of whether that transaction meets the NCA’s jurisdictional thresholds.
- The 15 working day referral period is not easily triggered. Article 22 provides that an NCA must lodge a referral request within 15 working days from the date on which a transaction is “made known” to that NCA. Illumina maintained that the referral request in question was out-of-time. The General Court rejected that plea, holding held that “mere knowledge of the existence” of a transaction is insufficient and that an NCA must have “sufficient information to enable that Member State to carry out a preliminary assessment of the conditions laid down in…Article 22(1).” In the case at hand, the 15 working day referral period commenced on February 19, 2021, when the EC informed NCAs about the transaction. This date was nearly five months after the transaction had been announced, approximately three months after the U.S. Federal Trade Commission issued a second request on November 9, 2020, and more than one month after the EC learnt of the transaction through a complaint filed on December 7, 2020. According to the General Court, the 47 working days that it took the EC to inform NCAs of the transaction and invite a referral request after it received a complaint was “unreasonable” and “[un]justified”, but did not infringe Illumina’s rights of defence and was therefore insufficient to justify annulment of the EC’s decision.
- Policy speeches are unlikely to create legitimate expectations. Illumina maintained that a speech made by Commissioner Vestager in September 2020 in which she said that “the Commission has had a practice of discouraging national authorities from referring cases to [it] which they didn’t have the power to review themselves” created a legitimate expectation that the EC would not entertain a referral of a transaction that was not reportable at the national level. The General Court dismissed Illumina’s plea on the ground that the speech in question did not mention the Illumina/GRAIL transaction and its use of the term ‘discouraged’ did not mean that such referrals were precluded as a matter of principle. Accordingly, the speech did not provide “precise, unconditional and consistent assurances in relation to the treatment” of the specific transaction. The General Court further held that the principle of legitimate expectations was not violated by the EC’s adoption of the Guidance Paper after having invited NCAs to refer the Illumina/GRAIL
Legal & Practical Implications
In the short term, although Illumina has said it will appeal the Judgment to the European Court of Justice, the EU’s highest court, the EC will continue its review of the Illumina/GRAIL transaction (the EC’s Phase 2 review had been paused since February 2022). Beyond the case at issue, a number of implications can be identified.
- First, in validating the EC’s approach, the General Court confirmed that transactions previously expected to avoid merger control review in the EU may lawfully be referred to the EC. While the appeal was pending, no transaction was referred to the EC by an NCA that did not have jurisdiction under its respective merger control rules to review that transaction. Following the Judgment, the EC is expected to seek Article 22 referrals. Last month, a senior EC official predicted that, should the General Court uphold the EC’s policy, the EC would look to expand its use of the Article 22 referral mechanism, particularly in innovation driven markets. He indicated that the EC would be actively monitoring the markets for non-notifiable transactions that they view as having the potential to result in a significant reduction in competition and to encourage referrals from NCAs where they have concerns.
- Second, the Judgment, and the EC policy that underlies it, introduces a degree of uncertainty as to whether transactions that do not meet national merger control thresholds may nevertheless be subject to review by the EC (even if they have closed). Companies and their advisors will therefore need to assess the risk of referral. The Illumina/GRAIL transaction was referred even though GRAIL generated no EU revenues, suggesting that the bar for determining whether a transaction may “affect trade between Member States” and “threaten to significantly affect competition” may be low. Buyers will need to decide whether they are ready to complete transactions without securing comfort they will not be subject to EC review that could result in remedies or, in the worst case, an order compelling the unwinding of the transaction.
- Third, companies will need to decide whether to seek guidance as to whether a referral is likely. The Guidance Paper encourages companies to provide information about transactions that could be suitable candidates for referral. Companies and their advisors will need to assess the benefits of voluntarily informing the EC about a given transaction in an effort to obtain comfort that the EC does not consider it to be a good referral candidate. Even if the EC is open to providing such guidance, it is unclear how much information a company will need to provide and how long it will take for the EC to give its indicative view. To date, EC guidance has been limited, although presumably in time an established practice may develop.
- Fourth, as a practical matter, it may be difficult to determine whether an NCA, still less all NCAs, have exhausted their rights to make a reference to the EC. Determining when a transaction has been “made known” to an NCA, still less to all NCAs, may not be straightforward. The Judgment confirms that publication of a press release or media report does not commence NCAs’ 15 working day period to make referral requests. Informing multiple NCAs about the transaction will likely be necessary. Even in a relatively streamlined process, this may take time and incur costs, in particular if there is a need to translate internal documents and grant confidentiality waivers allowing NCAs to exchange information.
- Fifth, an NCA may refer a transaction to the EC at any time, including after closing. In recent years, because Article 22 was generally applied to transactions that were subject to notification to one or more NCAs, there was little risk that a reference would be made in respect of a transaction that had closed. As a general guideline, the EC’s new Article 22 policy suggests that the EC would not consider a referral request ‘appropriate’ where more than six months had elapsed since the implementation of a concentration. If information about closing has not been in the public domain, the six-month period will run from the moment when “material facts about the concentration have been made public in the EU.” In ‘exceptional situations,’ the EC has indicated that it may accept a referral beyond this deadline, for example, due to “the magnitude of the potential competition concerns and of the potential detrimental effect on consumers.” Notwithstanding this guidance, merging parties may in some cases have to accept the risk of post-closing review by the EC.
- Finally, businesses subject to the notification obligations under Article 14 of the upcoming Digital Markets Act (“DMA”) will have to inform the EC of all intended mergers and acquisitions involving “another provider of core platform services or of any other services provided in the digital sector” regardless of whether these transactions meet EU merger control thresholds. The Article is designed to facilitate the possibility of Article 22 referrals enabling the EC to take jurisdiction over transactions of which they are informed pursuant to the DMA.