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EU General Court upholds European Commission’s intervention in below-threshold merger

  • Europe
  • Competition, EU and Trade

26-07-2022

Summary

This month the EU’s General Court has affirmed the approach taken by the European Commission (Commission) in opening an investigation into the completed acquisition by Illumina Inc. (a US-based genomics company) of Grail LLC (a US-based healthcare company developing technologies for early cancer detection). The transaction did not meet the jurisdictional thresholds for review by the Commission or by individual Member State national competition authorities, but was called in for review under Article 22 of the EU Merger Regulation on the basis that it threatened to significantly affect competition.

The General Court’s decision supports a recent policy shift by the Commission in using Article 22 to address a perceived enforcement gap for acquisitions of target companies who may have a much greater competitive significance that their limited EU turnover would suggest (e.g. as a result of holding important intellectual property rights).

This policy shift means that the previously relatively straightforward question of whether a mandatory filing to the Commission or one or more EU Member States is required has become somewhat more complicated, given the risk of the Commission requesting referrals on a given deal (including after completion). Combined with the roll out of new and expanding national security and foreign direct investment regimes, the regulatory landscape for M&A appears increasingly complex. Businesses are advised to consider merger control and FDI analysis early on in a transaction.

The case is also notable as the Commission has recently announced it is pursuing enforcement action against Illumina for completing the transaction prior to the Commission’s final decision (the review was stalled pending the General Court’s decision, but has now resumed).

What is Article 22?

Article 22 was originally introduced at a time when a number of Member States – in particular the Netherlands at the time - did not have their own merger control regimes, and so was designed to function as a “corrective mechanism” which allows one or more Member States to request that the Commission examine (for those Member States) any concentration that does not have an EU dimension but which (i) affects trade between Member States; and (ii) threatens to significantly affect competition within the territory of the Member States making the request. As more Member States introduced their own regimes, the relevance of Article 22 gradually diminished and the Commission developed a practice of discouraging referral requests from Member States.

However, in recent years the Commission (and merger control authorities more generally) have become increasingly concerned about an enforcement gap relating to transactions which raise competition concerns despite the target generating little-to-no turnover at the time of the transaction. The Commission has highlighted the digital and pharmaceutical sectors as being at risk of the effect of these so-called ‘killer acquisitions’, where innovation is a key parameter of competition.

As a result, the Commission has reversed its earlier policy of discouraging referrals where national turnover thresholds are not met, and announced an intention to “encourage and accept referrals in cases where the referring Member State does not have initial jurisdiction over the case (but where the criteria of Article 22 are met).” This intention culminated in a new set of guidance, released on 26 March 2021.

Despite the Commission’s new intended approach however, there remains some debate around the extent to which Member States will make referral requests where their own national competition authorities do not have jurisdiction to review a transaction. In particular, the Federal Cartel Office (FCO) in Germany has indicated that, where a merger control regime exists but there is no jurisdiction due to a failure to meet the relevant criteria, there should be nothing to refer. This diverging approach was highlighted in Facebook’s acquisition of Kustomer, where nine Member States referred the deal to the Commission, but the FCO chose to consider investigating the deal itself noting “Germany did not join the application for referral to the EU Commission because in the Bundeskartellamt's general practice a referral requires a merger to be subject to notification based on national competition law, which still has to be clarified in the present case”.

Background to the transaction

Illumina announced its planned $7.1 billion acquisition of Grail in September 2020. Following a complaint from a third party, the Commission invited Member States to submit referral requests under Article 22 in February 2021, and subsequently received referral requests from competition authorities first in France and subsequently from Belgium, Greece, Iceland, the Netherlands and Norway.

Further to third party complaint on the planned transaction, the Commission’s concern was that Grail’s competitive significance was not reflected in its turnover (as evidenced by the high value of the deal), and that the combined entity could potentially have the ability to restrict access to or increase the price of genomic cancer tests – it was further noted that such tests were expected to be significant developments in the field of cancer treatment, and that as a result it was important to ensure that patients could continue to access them from a wide variety of sources at a fair price.

On the back of the referral requests, the Commission directed Illumina to formally notify the transaction, and prohibited the parties from completing the transaction before clearance was obtained. The transaction was notified to the Commission in June 2021 and the Commission subsequently opened an in-depth Phase II investigation.

Despite the referral decision, Illumina made the decision in August 2021 to complete the deal. As a result, the Commission imposed interim measures requiring that Grail is run separately and independently from until the Commission had completed its investigation. The Commission’s investigation was paused pending the outcome of the General Court’s decision, but following the decision on 13 July it has resumed its investigation and a final outcome is expected in September 2022.

It was further announced on 19 July 2022 that the Commission has issued a formal Statement of Objections in connection with Illumina’s decision to close the deal without clearance, alleging that the move amounted to a breach of the EU Merger Regulation. If the Commission concludes that Illumina and Grail breached the Merger Regulation by closing the deal without clearance, the companies could face significant penalties including a fine of up to 10% of each companies' annual worldwide turnover.

Case before the General Court

Illumina had argued that the Commission’s decision to accept referrals from Member States breached the principal of legal certainty, as the Commission had previously stated that its revised Article 22 policy would not commence until after the applicable guidance had been published in April 2021. As a result, Illumina argued that the Commission could not review mergers under Article 22 before that date.

However, the General Court held that Illumina failed to show that the Commission had given “precise and unconditional” assurances that its Article 22 policy would not be enforced until the guidance was issued, and therefore Illumina’s argument could not succeed.

Illumina also argued that the Commission had taken an unreasonable amount of time to invite referrals, given that the Commission had been made aware of the deal in December 2020 and that the “invitation letter” was only sent to national competition authorities in February 2021. Illumina’s argument was based on the wording of Article 22, which states that such a referral request “shall be made at most within 15 working days of the date on which the concentration was notified, or if no notification is required, otherwise made known to the Member State concerned.” Illumina therefore argued that the Commission had failed to act within the 15 working day timeframe stipulated within Article 22 of the Merger Regulation.

While the General Court agreed that the Commission had taken an unreasonable time to act after becoming aware of the transaction (47 days), it held that the 15 working day period only began from the date on which the Commission issued its invitation letter to the Member States (thereby making the transaction known to the Member States concerned). The Member States referral requests were made within 15 working days of the invitation letter – accordingly, the General Court held that Illumina’s argument failed.

Eversheds Sutherland Comment

It remains to be seen how often the Commission will open cases based on referrals. It has only utilised the mechanism in a handful of cases so far. However, this decision may be expected to bolster the Commission’s confidence in requesting referrals for below-threshold transactions, particularly in but not limited to the pharmaceutical/biotech and digital space, where there is a risk that any transaction may end up in front of the Commission (including after completion) regardless of the turnover of the target business and including where the parties have limited nexus to or presence in the EU.

This necessarily adds a level of complexity to multi-jurisdictional analysis of where mandatory merger control filings are required. The previous, relatively straightforward question of whether the acquirer and target had revenues above specified thresholds will no longer be sufficient, and the question of whether the transaction raises substantive competition concerns should be considered and factored in appropriately.

Furthermore, while the General Court’s decision has provided clarification on the meaning of “made known” in the context of Article 22, a potential difficulty arises from this interpretation in so far as it could result in businesses facing (potentially lengthy) periods of uncertainty while they wait to see whether or not the Commission chooses to issue an invitation letter to Member States inviting referrals. Although the General Court’s criticism of the Commission in Illumina/Grail for failing to take action within a reasonable time may prompt the Commission to act with greater speed in future cases, at present the position remains unclear.

Depending on the circumstances of the transaction and the question of whether substantive concerns may arise, one approach to mitigate the risk if any may be to proactively contact the Commission regarding an upcoming deal to determine if it is of the sort the Commission may request referrals on.

As a result, it is ever more important to consider merger control at an early stage in a transaction.

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Summary

 

This month the EU’s General Court has affirmed the approach taken by the European Commission (Commission) in opening an investigation into the completed acquisition by Illumina Inc. (a US-based genomics company) of Grail LLC (a US-based healthcare company developing technologies for early cancer detection).  The transaction did not meet the jurisdictional thresholds for review by the Commission or by individual Member State national competition authorities, but was called in for review under Article 22 of the EU Merger Regulation on the basis that it threatened to significantly affect competition. 

 

The General Court’s decision supports a recent policy shift by the Commission in using Article 22 to address a perceived enforcement gap for acquisitions of target companies who may have a much greater competitive significance that their limited EU turnover would suggest (e.g. as a result of holding important intellectual property rights). 

 

This policy shift means that the previously relatively straightforward question of whether a mandatory filing to the Commission or one or more EU Member States is required has become somewhat more complicated, given the risk of the Commission requesting referrals on a given deal (including after completion). Combined with the roll out of new and expanding national security and foreign direct investment regimes, the regulatory landscape for M&A appears increasingly complex.  Businesses are advised to consider merger control and FDI analysis early on in a transaction.

 

The case is also notable as the Commission has recently announced it is pursuing enforcement action against Illumina for completing the transaction prior to the Commission’s final decision (the review was stalled pending the General Court’s decision, but has now resumed). 

 

What is Article 22?

 

Article 22 was originally introduced at a time when a number of Member States did not have their own merger control regimes, and so was designed to function as a “corrective mechanism” which allows one or more Member States to request that the Commission examine (for those Member States) any concentration that does not have an EU dimension but which (i) affects trade between Member States; and (ii) threatens to significantly affect competition within the territory of the Member States making the request.  As more Member States introduced their own regimes, the relevance of Article 22 gradually diminished and the Commission developed a practice of discouraging referral requests from Member States.

 

However, in recent years the Commission (and merger control authorities more generally) have become increasingly concerned about an enforcement gap relating to transactions which raise competition concerns despite the target generating little-to-no turnover at the time of the transaction.  The Commission has highlighted the digital and pharmaceutical sectors as being at risk of the effect of these so-called ‘killer acquisitions’, where innovation is a key parameter of competition.

 

As a result, the Commission has reversed its earlier policy of discouraging referrals where national turnover thresholds are not met, and announced an intention to “encourage and accept referrals in cases where the referring Member State does not have initial jurisdiction over the case (but where the criteria of Article 22 are met).” This intention culminated in a new set of guidance, released on 26 March 2021.

 

Despite the Commission’s new intended approach however, there remains some debate around the extent to which Member States will make referral requests where their own national competition authorities do not have jurisdiction to review a transaction. In particular, the Federal Cartel Office (FCO) in Germany has indicated that, where a merger control regime exists but there is no jurisdiction due to a failure to meet the relevant criteria, there should be nothing to refer.  This diverging approach was highlighted in Facebook’s acquisition of Kustomer, where nine Member States referred the deal to the Commission, but the FCO chose to consider investigating the deal itself noting “Germany did not join the application for referral to the EU Commission because in the Bundeskartellamt's general practice a referral requires a merger to be subject to notification based on national competition law, which still has to be clarified in the present case”.

 

Background to the transaction

 

Illumina announced its planned $7.1 billion acquisition of Grail in September 2020.  Following a complaint from a third party, the Commission invited Member States to submit referral requests under Article 22 in February 2021, and subsequently received referral requests from competition authorities in France, Belgium, Greece, Iceland, the Netherlands and Norway.

 

The Commission’s concern was that Grail’s competitive significance was not reflected in its turnover (as evidenced by the high value of the deal), and that the combined entity could potentially have the ability to restrict access to or increase the price of genomic cancer tests – it was further noted that such tests were expected to be significant developments in the field of cancer treatment, and that as a result it was important to ensure that patients could continue to access them from a wide variety of sources at a fair price.  

 

On the back of the referral requests, the Commission directed Illumina to formally notify the transaction, and prohibited the parties from completing the transaction before clearance was obtained. The transaction was notified to the Commission in June 2021 and the Commission subsequently opened an in-depth Phase II investigation.

 

Despite the referral decision, Illumina made the decision in August 2021 to complete the deal.  As a result, the Commission imposed interim measures requiring that Grail is run separately and independently from until the Commission had completed its investigation.  The Commission’s investigation was paused pending the outcome of the General Court’s decision, but following the decision on 13 July it has resumed its investigation and a final outcome is expected in September 2022. 

 

It was further announced on 19 July 2022 that the Commission has issued a formal Statement of Objections in connection with Illumina’s decision to close the deal without clearance, alleging that the move amounted to a breach of the EU Merger Regulation.  If the Commission concludes that Illumina and Grail breached the Merger Regulation by closing the deal without clearance, the companies could face significant penalties including a fine of up to 10% of each companies' annual worldwide turnover.

 

Case before the General Court

 

Illumina had argued that the Commission’s decision to accept referrals from Member States breached the principal of legal certainty, as the Commission had previously stated that its revised Article 22 policy would not commence until after the applicable guidance had been published in April 2021.  As a result, Illumina argued that the Commission could not review mergers under Article 22 before that date.

 

However, the General Court held that Illumina failed to show that the Commission had given “precise and unconditional” assurances that its Article 22 policy would not be enforced until the guidance was issued, and therefore Illumina’s argument could not succeed.

 

Illumina also argued that the Commission had taken an unreasonable amount of time to invite referrals, given that the Commission had been made aware of the deal in December 2020 and that the “invitation letter” was only sent in February 2021. Illumina’s argument was based on the wording of Article 22, which states that such a referral request “shall be made at most within 15 working days

of the date on which the concentration was notified, or if no notification is required, otherwise made known to the Member State concerned.” Illumina therefore argued that the Commission had failed to act within the 15 working day timeframe stipulated within Article 22 of the Merger Regulation.

 

While the General Court agreed that the Commission had taken an unreasonable time to act after becoming aware of the transaction (47 days), it held that the 15 working day period began from the date on which the Commission issued its invitation letter to the Member States (thereby making the transaction known to the Member States concerned).  The Member States referral requests were made within 15 working days of the invitation letter – accordingly, the General Court held that Illumina’s argument failed.

 

Comment

 

It remains to be seen how often the Commission will open cases based on referrals.  It has only utilised the mechanism in a handful of cases so far.  However, this decision may be expected to bolster the Commission’s confidence in requesting referrals for below-threshold transactions, particularly in the pharmaceutical/biotech and digital space, where there is a risk that any transaction may end up in front of the Commission (including after completion) regardless of the turnover of the target business and including where the parties have limited nexus to or presence in the EU.

 

This necessarily adds a level of complexity to multi-jurisdictional analysis of where mandatory merger control filings are required.  The previous, relatively straightforward question of whether the acquirer and target had revenues above specified thresholds will no longer be sufficient, and the question of whether the transaction raises substantive competition concerns should be considered and factored in appropriately.

 

Furthermore, while the General Court’s decision has provided clarification on the meaning of “made known” in the context of Article 22, a potential difficulty arises from this interpretation in so far as it could result in businesses facing (potentially lengthy) periods of uncertainty while they wait to see whether or not the Commission choses to issue an invitation letter to Member States inviting referrals. Although the General Court’s criticism of the Commission in Illumina/Grail for failing to take action within a reasonable time may prompt the Commission to act with greater

Summary

 

This month the EU’s General Court has affirmed the approach taken by the European Commission (Commission) in opening an investigation into the completed acquisition by Illumina Inc. (a US-based genomics company) of Grail LLC (a US-based healthcare company developing technologies for early cancer detection).  The transaction did not meet the jurisdictional thresholds for review by the Commission or by individual Member State national competition authorities, but was called in for review under Article 22 of the EU Merger Regulation on the basis that it threatened to significantly affect competition. 

 

The General Court’s decision supports a recent policy shift by the Commission in using Article 22 to address a perceived enforcement gap for acquisitions of target companies who may have a much greater competitive significance that their limited EU turnover would suggest (e.g. as a result of holding important intellectual property rights). 

 

This policy shift means that the previously relatively straightforward question of whether a mandatory filing to the Commission or one or more EU Member States is required has become somewhat more complicated, given the risk of the Commission requesting referrals on a given deal (including after completion). Combined with the roll out of new and expanding national security and foreign direct investment regimes, the regulatory landscape for M&A appears increasingly complex.  Businesses are advised to consider merger control and FDI analysis early on in a transaction.

 

The case is also notable as the Commission has recently announced it is pursuing enforcement action against Illumina for completing the transaction prior to the Commission’s final decision (the review was stalled pending the General Court’s decision, but has now resumed). 

 

What is Article 22?

 

Article 22 was originally introduced at a time when a number of Member States did not have their own merger control regimes, and so was designed to function as a “corrective mechanism” which allows one or more Member States to request that the Commission examine (for those Member States) any concentration that does not have an EU dimension but which (i) affects trade between Member States; and (ii) threatens to significantly affect competition within the territory of the Member States making the request.  As more Member States introduced their own regimes, the relevance of Article 22 gradually diminished and the Commission developed a practice of discouraging referral requests from Member States.

 

However, in recent years the Commission (and merger control authorities more generally) have become increasingly concerned about an enforcement gap relating to transactions which raise competition concerns despite the target generating little-to-no turnover at the time of the transaction.  The Commission has highlighted the digital and pharmaceutical sectors as being at risk of the effect of these so-called ‘killer acquisitions’, where innovation is a key parameter of competition.

 

As a result, the Commission has reversed its earlier policy of discouraging referrals where national turnover thresholds are not met, and announced an intention to “encourage and accept referrals in cases where the referring Member State does not have initial jurisdiction over the case (but where the criteria of Article 22 are met).” This intention culminated in a new set of guidance, released on 26 March 2021.

 

Despite the Commission’s new intended approach however, there remains some debate around the extent to which Member States will make referral requests where their own national competition authorities do not have jurisdiction to review a transaction. In particular, the Federal Cartel Office (FCO) in Germany has indicated that, where a merger control regime exists but there is no jurisdiction due to a failure to meet the relevant criteria, there should be nothing to refer.  This diverging approach was highlighted in Facebook’s acquisition of Kustomer, where nine Member States referred the deal to the Commission, but the FCO chose to consider investigating the deal itself noting “Germany did not join the application for referral to the EU Commission because in the Bundeskartellamt's general practice a referral requires a merger to be subject to notification based on national competition law, which still has to be clarified in the present case”.

 

Background to the transaction

 

Illumina announced its planned $7.1 billion acquisition of Grail in September 2020.  Following a complaint from a third party, the Commission invited Member States to submit referral requests under Article 22 in February 2021, and subsequently received referral requests from competition authorities in France, Belgium, Greece, Iceland, the Netherlands and Norway.

 

The Commission’s concern was that Grail’s competitive significance was not reflected in its turnover (as evidenced by the high value of the deal), and that the combined entity could potentially have the ability to restrict access to or increase the price of genomic cancer tests – it was further noted that such tests were expected to be significant developments in the field of cancer treatment, and that as a result it was important to ensure that patients could continue to access them from a wide variety of sources at a fair price.  

 

On the back of the referral requests, the Commission directed Illumina to formally notify the transaction, and prohibited the parties from completing the transaction before clearance was obtained. The transaction was notified to the Commission in June 2021 and the Commission subsequently opened an in-depth Phase II investigation.

 

Despite the referral decision, Illumina made the decision in August 2021 to complete the deal.  As a result, the Commission imposed interim measures requiring that Grail is run separately and independently from until the Commission had completed its investigation.  The Commission’s investigation was paused pending the outcome of the General Court’s decision, but following the decision on 13 July it has resumed its investigation and a final outcome is expected in September 2022. 

 

It was further announced on 19 July 2022 that the Commission has issued a formal Statement of Objections in connection with Illumina’s decision to close the deal without clearance, alleging that the move amounted to a breach of the EU Merger Regulation.  If the Commission concludes that Illumina and Grail breached the Merger Regulation by closing the deal without clearance, the companies could face significant penalties including a fine of up to 10% of each companies' annual worldwide turnover.

 

Case before the General Court

 

Illumina had argued that the Commission’s decision to accept referrals from Member States breached the principal of legal certainty, as the Commission had previously stated that its revised Article 22 policy would not commence until after the applicable guidance had been published in April 2021.  As a result, Illumina argued that the Commission could not review mergers under Article 22 before that date.

 

However, the General Court held that Illumina failed to show that the Commission had given “precise and unconditional” assurances that its Article 22 policy would not be enforced until the guidance was issued, and therefore Illumina’s argument could not succeed.

 

Illumina also argued that the Commission had taken an unreasonable amount of time to invite referrals, given that the Commission had been made aware of the deal in December 2020 and that the “invitation letter” was only sent in February 2021. Illumina’s argument was based on the wording of Article 22, which states that such a referral request “shall be made at most within 15 working days

of the date on which the concentration was notified, or if no notification is required, otherwise made known to the Member State concerned.” Illumina therefore argued that the Commission had failed to act within the 15 working day timeframe stipulated within Article 22 of the Merger Regulation.

 

While the General Court agreed that the Commission had taken an unreasonable time to act after becoming aware of the transaction (47 days), it held that the 15 working day period began from the date on which the Commission issued its invitation letter to the Member States (thereby making the transaction known to the Member States concerned).  The Member States referral requests were made within 15 working days of the invitation letter – accordingly, the General Court held that Illumina’s argument failed.

 

Comment

 

It remains to be seen how often the Commission will open cases based on referrals.  It has only utilised the mechanism in a handful of cases so far.  However, this decision may be expected to bolster the Commission’s confidence in requesting referrals for below-threshold transactions, particularly in the pharmaceutical/biotech and digital space, where there is a risk that any transaction may end up in front of the Commission (including after completion) regardless of the turnover of the target business and including where the parties have limited nexus to or presence in the EU.

 

This necessarily adds a level of complexity to multi-jurisdictional analysis of where mandatory merger control filings are required.  The previous, relatively straightforward question of whether the acquirer and target had revenues above specified thresholds will no longer be sufficient, and the question of whether the transaction raises substantive competition concerns should be considered and factored in appropriately.

 

Furthermore, while the General Court’s decision has provided clarification on the meaning of “made known” in the context of Article 22, a potential difficulty arises from this interpretation in so far as it could result in businesses facing (potentially lengthy) periods of uncertainty while they wait to see whether or not the Commission choses to issue an invitation letter to Member States inviting referrals. Although the General Court’s criticism of the Commission in Illumina/Grail for failing to take action within a reasonable time may prompt the Commission to act with greater speed in future cases, at present the position remains unclear.

 

Depending on the circumstances of the transaction and the question of whether substantive concerns may arise, one approach to mitigate the risk may be to proactively contact the Commission regarding an upcoming deal to determine if it is of the sort the Commission may request referrals on. 

 

As a result, it is ever more important to consider merger control at an early stage in a transaction. 

 

 

speed in future cases, at present the position remains unclear.

 

Depending on the circumstances of the transaction and the question of whether substantive concerns may arise, one approach to mitigate the risk may be to proactively contact the Commission regarding an upcoming deal to determine if it is of the sort the Commission may request referrals on. 

 

As a result, it is ever more important to consider merger control at an early stage in a transaction.