Navigating EU and national regulatory scrutiny in so called “killer acquisitions”

EXECUTIVE SUMMARY

In a landmark EU judgment, on 3 September 2024, the Court of Justice has strongly rejected the European Commission’s approach to assuming jurisdiction under Article 22 of the EU Merger Regulation to review any transaction referred up to it by a National Competition Authority (NCAs) which does not meet the mandatory thresholds for notification under either the EU Merger Regulation or equivalent Member State regimes. The Court of Justice’s judgment has, in robust terms, held that the need for predictability and legal certainty for merging parties underpinning the EU merger control system would be significantly undermined if the Commission and NCAs could freely refer non-notifiable transactions. Accordingly, this judgment overturns the expansionist merger control approach adopted by the European Commission since early 2021. Despite this, it seems likely that the Commission and NCAs will seek to find new and unpredictable ways to address the perceived enforcement gap of what some regulators refer to as killer acquisitions.

 

BACKGROUND

In Europe, the Commission and NCAs have been increasingly concerned about potentially anti-competitive, strategic acquisitions that, due to the lack of any, or de minimis turnover of a target, do not meet the jurisdictional thresholds requiring a mandatory pre-merger filing. Regulators have had a shared concern that some of these transactions may adversely impact future market developments (and hence their nickname as “killer acquisitions”). Various different approaches have been developed to try to ensure jurisdiction for competition authorities to assess the competitive impact of these transactions.

One approach has raised major controversy: the expansive use of Article 22 of the EUMR to refer deals to the European Commission which did not meet any notification thresholds. Today, the European Court of Justice has overturned this approach and ruled in favour of legal certainty for merging parties.

The issue of so-called killer acquisitions is particularly prevalent in the context of tech and life science deals. In the tech environment, a target may currently have de minimis turnover but exhibit potential strong network effects when combined with the strength of the purchaser in a neighbouring market. This may raise an initial competition concern. For example, this was the case in Qualcomm’s 2023 proposed acquisition of Autotalks (M.11212), an Israeli semiconductor manufacturer of “vehicles to everything communications”, which was abandoned after 15 Member States referred it up for review to the EU Commission under Article 22 of the EU Merger Regulation (despite it not meeting any national notification thresholds), with the UK Competition Authority also claiming jurisdiction (one assumes on the basis of its share of supply test). Due to the inability to obtain regulatory approvals on a timely basis this transaction was abandoned a year later (March 2024).  

Similarly, in the life sciences sector, the acquisition of R&D companies which may not yet have any turnover can present risks. Illumina’s acquisition of Grail (M. 10188) was one of those transactions, which showcased the inherent difficulties of managing regulatory risk.

 

The EUMR landscape

When the EU Merger Regulation 4064/89 (EUMR) came into force in September 1990, it aimed to provide a one-stop shop for larger transactions and those which had significant cross border effects, with definitive and easy to apply turnover thresholds to determine which cases had a “Community dimension” and fell to be reviewed by the EU Commission, leaving it to the individual Member States to set their own national thresholds, many of them adopting a two-tier turnover based test (typically the combined worldwide turnover of the parties and at least two parties achieving  sufficient local turnover).

However, in 1989, there were still a few Members States that did not have any merger control legislation and so the EUMR under Article 22 provided a mechanism to allow a Member State to request the Commission to review a transaction which might have had an impact on that Member State but no power of review. Since 1989, all Member States (bar Luxembourg) have implemented national merger control legislation, and all require mandatory pre-merger filings (except UK). In addition, the EUMR also allows for some notifiable cases to be either referred “up” to the Commission for review, or referred “down”, at the request of the Parties or the NCAs, thereby seeking to ensure there is a balance between the benefits of a one stop shop review and allowing the NCAs most concerned about the impact of a transaction to assess relevant transaction.   

 

A new approach in 2021

In March 2021, the Commission sought to close a perceived enforcement gap regarding potentially anti-competitive mergers by issuing a Communication on the application of the Article 22 referral mechanism in which it claimed a broad jurisdiction to accept “referral up” of transactions below EUMR thresholds and those of the Member States (hereafter the “EU Guidance”). The EU Guidance noted the type of transactions that would typically be appropriate for an Article 22 referral include cases where the Target:

• 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 for instance raw materials, infrastructure, data or intellectual property rights).
• Provides products or services that are key inputs/components for other industries.

Note that the EU Guidance is merely a clarification of the Commission’s approach, it is not a legally binding decision, and is now likely rendered irrelevant.

In April 2021, the Commission promptly had its EU Guidance called into action and Illumina was the first transaction to be referred up. Since then there have been several others, including the QCOM/Autotalks (M.11212), EEX/Nasdaq Power Trading Business (M. 11241) (referred to the EU in August 2023 by 3 EU NCAs and one EFTA Member State and also abandoned June 2024) and Adobe/Figma (M.11033) (referred in Feb 2023 by 15 NCAs and aborted in December 2023, although in this case the transaction has met the notification thresholds in Austria and Germany, who initiated the referral process which was then joined by the other NCAs who did not have jurisdiction over this transaction).

 

Wider powers for regulators to review deals

Following the Commission’s new approach, certain Member States also enacted changes to their primary merger control legislation to enable mandatory “call in” at national level of any transaction that did not meet the local mandatory notification thresholds. These include, for example, Ireland, The Netherlands and Hungary. In the US, this is also potentially possible. It is not yet certain how these new “hybrid” national regimes will interact with the EU Merger Regulation – but given the democratic changes at legislative level, one suspects that Member States which have chosen to provide for national “call in” powers will be lawfully empowered to refer cases to the Commission (although there are also compelling reasons why this might not be the case).

In addition, under the EU Digital Markets Act (DMA), specifically for those undertakings designated as “Gatekeepers”, there is an obligation to report any acquisition to the Commission, to ensure that any acquisition can be potentially subjected to a merger control review. The UK has similarly adopted such a requirement in its Digital Markets, Competition and Consumers Act 2024 (due to come into force imminently).

 

The Illumina/Grail Saga Begins

In September 2020, Illumina announced its proposal to reacquire its former subsidiary, Grail. Illumina is a leading global supplier of next generation sequencing systems for genetic and genomic analysis. Grail is a healthcare company which develops cancer detection tests, relying on next generation sequencing systems. The deal did not meet the EUMR thresholds, nor was it notifiable in any Member State. The transaction value was USD 7.1 billion, which hinted at the potential for Grail’s tests to be a game changer in the fight against cancer. Clearance by the Commission had not been foreseen as a requirement in the Purchase Agreement and was not a condition precedent to closing.

From an early stage, regulators were concerned that the deal might lead to the vertical foreclosure of Grail’s rivals from access to Illumina’s leading sequencing systems. Following the hastily adopted EU Guidance, France submitted a referral request under Article 22 EUMR, and was joined by 5 other NCAs. The referral was accepted by the Commission in April 2021. In parallel, the deal was notified to the US FTC and DOJ, on the basis of the size of transaction notification threshold (given that the target had not yet generated any revenues in the US or elsewhere). 

A token of the hostility by which the Commission regarded the deal is clear from the fact that in October 2021, the Commission for the first time ever imposed far-reaching interim measures under Article 8(5) of the EUMR against both Illumina and Grail to require the firms to remain separate pending the final outcome of its in-depth merger investigation.

After a Phase 2 investigation, the Commission prohibited the transaction in September 2022, rejecting the offer of behavioural remedies. The transaction was similarly subject to a Second Request in the US and ultimately found to be anticompetitive. However, nearly a year after the deal was announced, the parties proceeded to close the transaction arguing that neither the Commission nor the Member States had jurisdiction as Grail has no business in the EU.

In response, the Commission imposed a large fine on both merging parties for completing the transaction (in effect for “gun jumping” and closing before the final decision was obtained). On first appeal, in July 2022, the General Court accepted the Commission’s jurisdiction to review Illumina/Grail based on Article 22 EUMR.

That has now all changed.

 

The Court of Justice Judgment

On 3 September 2024, the Court of Justice has held that the General Court fundamentally erred in its interpretation of Article 22 EUMR. The Court of Justice has been guided by an earlier Opinion of AG Emilou – which strongly advocated overturning the approach of the General Court. 

The Court of Justice’s review of the General Court’s judgment focused on the four ways in EU law to understand legislation, namely the literal, historical, contextual, and purposive approach to interpret Article 22 EUMR.

In terms of literal interpretation, the General Court had concluded that a Member State could refer any concentration to the Commission under Article 22, irrespective of the existence or scope of national merger control rules. Interestingly, the Court of Justice found this interpretation in itself to be correct but indicated that the analysis did not stop there because other ways to read Article 22 actually pointed to an entirely different conclusion.

On an historical interpretation, the Court of Justice noted that the General Court’s reliance on historical documents did not support the Commission’s “right to call in” any deal because the historical documents (ie the so-called travaux préparatoires for the EUMR) actually contradicted this interpretation. Rather, these showed that the EU legislature had not at all envisaged the referral mechanism in Article 22 as a ‘corrective mechanism’, to act as a back-door to allow a referral up to the Commission of any merger.

In terms of context, the Court of Justice found that the factors specifically considered by the General Court in its contextual interpretation were actually inconclusive from the perspective of the Commission’s jurisdiction – while in fact other factors actually militated against the General Court’s interpretation. For example, the Court of Justice established that in case of an Article 22 referral, the competence conferred on the Commission is based on that body being appropriate to “replace” the given national authority. This “replacement theory”, however, clearly presupposes that the national authority already has competence to review the transaction under the national rules. This condition is clearly not present if the transaction falls below the national turnover thresholds such as in the case of the Illumina/Grail transaction. As a result, the Court of Justice ruled once again against the General Court’s interpretation.

Finally, in terms of a purposive reading (or teleological interpretation), the General Court had inferred that Article 22’s referral mechanism could actually serve a ‘corrective mechanism’ to ensure effective control of concentrations with significant effects on competition in the EU especially based on various provisions in the preamble of the EUMR. The Court of Justice entirely disagreed, indicating that such provisions did not justify expanding the Commission’s competence to examine referrals from Member States that could not review the concentration under their national rules. In fact, the Court of Justice took the view that allowing Article 22 to serve as a ‘corrective mechanism’ in such cases would be very much inconsistent with the stated goals of the EUMR, especially the aim to establish an “effective and predicable” system of merger control. In other words, the well-known turnover thresholds are of “cardinal importance” because they form a predictable basis for parties to assess whether or not a deal requires notification. Here, the Court of Justice took great care to underline the practical difficulties notifying parties would face in case the EU Commission’s interpretation were to be adopted (eg an informal notification of a concentration to each of the NCAs in the EU was expressly found to be inconsistent with the objective of effectiveness).

Consequently, the Court of Justice finally concluded that the Commission did not have competence to accept the referrals under Article 22 EUMR. As a result, it has now set aside not only the General Court’s judgment but also effectively annulled various Commission decisions accepting the Member States’ referrals of the Illumina/Grail transaction.

 

Next Steps

This judgment overturns the expansionist merger control approach of the European Commission for the past four years. Despite this, it seems likely that the Commission and NCAs will find new and unpredictable ways to address the perceived enforcement gap of killer acquisitions. These might include:

•  a renewed discussion on the calibration of the EUMR thresholds, and notably the possibility of introducing a transaction value threshold (like Germany and Austria);
• the possibility to coordinate with “Baywatch” jurisdictions that introduced new call-in powers (like Denmark, Hungary, Italy, Iceland, Ireland, The Netherlands, Norway, Sweden etc) or Luxembourg (which has no merger regime at all and thus may apply Article 22 in the manner originally designed), might throw a lifeline to the Commission in specific contested cases;
• the evolving position in certain Member States which have or will enact legislation to allow for mandatory call in of deals which rise competition concerns, despite not meeting national turnover thresholds.

Despite the outcome of the Illumina case, significant uncertainty as to deal execution will still remain. Parties may diligently carry out a multijurisdictional merger control assessment to verify whether any merger filings are required, and then (long) after signing when the transaction is in the public domain, it could nevertheless be subject to regulatory intervention. This may result in significant delays to closing, deals being abandoned, and the risk of certain transactions (including completed ones) being prohibited. This places a great emphasis on ensuring one carries out a proper jurisdictional and substantive merger control risk assessment, and where necessary that one adopts a strategy of proactive engagement with the relevant regulators to head off any surprises post signing.

 

Key Considerations for Corporate Transactions

1. The Illumina/Grail ECJ judgment has helpfully come down in favour of efficiency and legal certainty for the transaction parties, who will no longer be open to the risk of a referral of a transaction which does not meet any notification thresholds, whether under the EUMR or any national ones within Europe. Nevertheless navigating regulatory risks remain a tricky proposition to manage for any transactions that might be deemed a “killer transaction”.
2. While negotiating a new transaction always carry out a preliminary merger control assessment to check whether there are any mandatory or voluntary merger filings required. 
3. Beware that not just mergers with direct competitors (which can be with actual competitors or with potential entrants), but also vertical transactions can raise concerns (as illustrated by Illumina/Grail), and non-traditional theories of harm.
4. If the transaction does meet national filing threshold(s), consider whether it would benefit from the EUMR “one stop shop” and the Parties should consider requesting a reference “up”.
5. If the transaction does not meet any national thresholds consider whether any potentially relevant Member States has a call in power, even if one no longer faces the risk of an Article 22 referral.
6. Assume that the regulators are likely to cooperate in their review and insist on waivers to allow them to freely discuss their assessments, such that a global transaction needs a global regulatory strategy.
7. Where there is uncertainty as to which regulator(s) may end up reviewing the transaction, consider carefully the agreed conditions precedent to closing and the Long Stop Date and risk associated with long delays (including criticism from shareholder activists and other stakeholders such as employees and customers).

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