All Things Newz
Law \ Legal

EU General Court Backs The European Commission’s Right To Review Non-Reportable Deals – Antitrust, EU Competition


The EU General Court (“General
Court
“) has confirmed that the European Commission
(“Commission“) can examine deals that do
not trigger merger control thresholds in the EU or any EEA Member
State1 following a referral request from national
competition authorities. This ruling, which upholds the
Commission’s stance in the Illumina/Grail deal, confirms the
broad reach of the Commission’s jurisdiction to review a
transaction even if the merger control thresholds are not met. This
significantly reduces legal certainty for companies engaged in
M&A activity.

Background

Deals that fall below merger control thresholds but which could
potentially give rise to competition risks have been a focus of
recent debate in Europe. The Commission has become concerned that
there is an enforcement gap which means that potentially
anticompetitive mergers (especially in the technology and
pharmaceutical sectors) fall below all merger thresholds in the EU
and so cannot be reviewed. These transactions – which involve
the acquisition of a highly valued but not yet significantly
revenue generating new business – are sometimes referred to
as “killer acquisitions”.

Until recently, the Commission discouraged national competition
authorities from referring transactions under Article 22 of the EU
Merger Regulation (“EUMR”) that the authorities lacked
jurisdiction to review themselves. The Commission considered that
these transactions were generally unlikely to have a significant
impact on the internal market.

However, in March 2021, the Commission issued practical guidance
reversing this well-established practice by encouraging national
competition authorities to refer to the Commission certain
transactions that do not trigger national merger control thresholds
and would otherwise be non-reportable in the EU.2 To
qualify, transactions must affect trade between Member States and
threaten significantly to affect competition within the territory
of the requesting Member State. While mergers in the digital and
pharmaceutical sectors are likely to be among the most commonly
referred up, this new policy approach is not limited to those
sectors.

The Dispute

In September 2020, Illumina agreed to acquire sole control of
Grail, which develops blood tests for the early detection of
cancers. The parties did not meet any merger control thresholds in
the EEA (Grail did not generate any revenue at all) so they did not
notify the merger to the Commission or to any Member State.

The Commission subsequently received a complaint about the deal
and in February 2021 – before issuing its new guidance
– the Commission wrote to Member States explaining why the
deal appeared to satisfy the conditions for an Article 22 referral
and inviting Member States to submit a referral.

In March 2021, the Commission received a referral request from
the French Competition Authority to review Illumina’s
acquisition of Grail. The Commission accepted the request, which
was later joined by further requests from Belgium, France, Greece,
Iceland, the Netherlands and Norway.

Illumina appealed, but on 13 July 2022 the General
Court3 upheld the Commission’s decision.

Illumina closed the transaction in August 2021 before the
Commission had completed its investigation, despite the EUMR
prohibition on closing transactions before Commission approval.
This prompted the Commission to open a gun-jumping
investigation4 and adopt hold-separate and interim
measures.5 On 19 July 2022, having waited for the
General Court judgment, the Commission sent Illumina a Statement of
Objections setting out the Commission’s preliminary view that
the transaction was implemented in breach of the gun jumping
prohibition.6 The Commission can impose a fine of up to
10% of Illumina’s turnover.

The judgment

The appeal was based on three grounds: the Commission’s
competence to accept the referral request under Article 22; the
timing of the decision, and; a violation of legitimate
expectations.

Commission’s competence to accept the referral request

The main ground of Illumina’s appeal was that the Commission
misinterpreted the EUMR by accepting a referral request under
Article 22 even though the national merger control thresholds were
not triggered in any Member State.

Following an extensive analysis, the General Court concluded
that Article 22 gives the Commission jurisdiction in these
circumstances. The General Court referred primarily to the wording
of Article 22 which, by using the expression “any
concentration”, allows Member States to refer to the
Commission any concentration that affects trade between Member
States and that threatens significantly to affect competition in
the Member State making the request, irrespective of the existence
or scope of national merger control rules. Moreover, the General
Court referenced the original rationale of the provision
establishing the referral mechanism, which was to allow Member
States without a merger control system (such as the Netherlands, at
the time) to refer to the Commission deals which could harm
competition. However, the Court found that this did not preclude
other Member States from also having recourse to the mechanism.

The timing of the decision

Illumina also argued that the referral request was submitted
after the expiry of the time limit set out in Article 22 –
i.e. 15 working days after the transaction was “made
known” to the Member States. According to Illumina, this
happened significantly earlier than 19 February 2021, because the
deal had been publicly announced in September 2020.

The General Court dismissed this argument, concluding that
making a deal known to Member States requires the active
transmission of information to Member States, allowing them to make
an assessment of whether the necessary conditions for the purposes
of an Article 22 referral are met. The General Court specified that
active transmission happened through the Commission’s
invitation letter sent in February 2021, and so the referral
request was made in good time.

The General Court did consider that a period of 47 days between
receipt of the complaint and dispatch of the invitation letter was
unreasonable. However, it concluded that the Commission’s
failure to comply with a reasonable time limit did not affect
Illumina’s rights of defence.

The protection of legitimate expectations

The General Court also rejected Illumina’s plea alleging
that the new Article 22 approach and guidance violated legal
certainty and its legitimate expectations. Relying on existing case
law, the General Court held that Illumina had failed to demonstrate
that it had obtained precise, unconditional, and consistent
assurances from the Commission in relation to the merger at issue
or in relation to mergers that did not fall within the scope of
national merger control rules in general.

What to expect

By validating the Commission’s policy reversal, the General
Court’s judgment introduces a new layer of regulatory
complexity for parties engaging in M&A transactions with a
potential EU nexus. The EU Competition Commissioner Margrethe
Vestager has already announced that there are a few other
acquisitions on the Commission’s merger control radar, so more
enforcement of this kind is likely to follow.7 The
separate question of whether or not Illumina will be found to have
engaged in gun jumping will also be key in confirming the level of
risk to which parties will be exposed.

Even though the Commission is likely to focus on the digital and
pharmaceutical sectors, the new approach potentially applies to any
transaction not meeting merger control thresholds, particularly
where the turnover of the target does not reflect its actual or
future competitive potential. While Article 22 requires that
transactions must affect trade between Member States and threaten
significantly to affect competition within the territory of the
Member States making the request, the test gives the Commission
considerable flexibility to find jurisdiction if it wants to review
a merger. The Commission’s new approach aligns with
pre-existing risks of intervention from other regulators with more
flexible merger control thresholds, for example, the UK Competition
and Markets Authority (“CMA“).

As the risk of referral may have strategic impact on
transactions, parties to non-reportable deals (especially in the
digital and pharmaceutical sectors) should assess the risk of the
Commission seeking to assert jurisdiction under Article 22. Where
there is a material risk of intervention, it may be necessary to
consider providing for intervention risk in transaction documents
(in particular including efforts clauses to ensure timely
cooperation and closing conditions and risk allocation provisions
that can accommodate a possible referral process). A contractual
ability to suspend completion could be especially important to
prevent exposure to gun jumping risk. Companies also have the
option to engage with national competition authorities and the
Commission on an upfront basis in order to assess and manage the
risk of intervention.

Although Article 22 intervention will not be used extensively,
we expect to see more examples of this in the future, especially in
technology markets, where transactions often fall beneath merger
control thresholds. This tool could become particularly attractive
to the Commission upon entry into force of the forthcoming Digital
Markets Act, which will require companies with
“gatekeeper” status to notify the Commission when
acquiring any targets that provide “core platform
services”. Article 22 could then be used to create a basis for
jurisdiction in circumstances where the deals might otherwise have
never have come to the Commission’s attention.

Footnotes

1. The EEA includes EU countries and also Iceland,
Liechtenstein, and Norway.

2. See Commission Guidance on the application of the
referral mechanism set out in Article 22 of the Merger Regulation
to certain categories of cases.

3. See Judgment of the General Court in Case T-227/21
Illumina v European Commission
, of July 13,
2022.

4. See Commission’s press release.

5. See Commission’s press release.

Illumina (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.

6. See Commission’s press release.

7. See
MLex | Illumina ruling clears way for EU to seize more killer
acquisitions, says Vestager.

Because of the generality of this update, the information
provided herein may not be applicable in all situations and should
not be acted upon without specific legal advice based on particular
situations.

© Morrison & Foerster LLP. All rights reserved



Source link

Related posts

President Biden To Nominate New IRS Commissioner – Tax Authorities

Putting Sure-footed VAT Compliance At The Heart Of ERP Localisation – Sales Taxes: VAT, GST

In This Tight Labor Market, Interest In Funeral Services Work Is Growing – Employee Rights/ Labour Relations