Further guidance from the European Commission on powers to intervene in below-threshold M&A deals

• Europe

• Competition, EU and Trade
• Mergers and acquisitions

17-01-2023

Following on from our briefing last year regarding Article 22 of the EU Merger Regulation and its application in the Illumina/Grail case, in December 2022, the European Commission (the “Commission”) has recently published a Frequently Asked Questions and Answers (“Q&A”) document which aims to provide practical information on the implementation of its guidance on the application of the Article 22 referral mechanism. 

The Commission’s approach to Article 22 has been controversial as it provides a mechanism for the Commission to investigate transactions which are not required to be notified to the Commission or to individual Member States.  There has been a concern that this adds to deal uncertainty for M&A transactions and reflects the broader trend towards more regulation of M&A, with more deals potentially being subject to merger control scrutiny.  The Q&A has been seen as an opportunity to clarify the Commission’s approach to Article 22.  The key aspects of the Q&A are discussed below.

What is Article 22? A reminder

Article 22 allows Member States to request that the Commission examine transactions which fall below the standard EU financial thresholds for review where they (i) affect trade between Member States, and (ii) threaten to significantly affect competition within the territory of the Member States making the request.  It was originally conceived as a corrective mechanism where Member States did not have their own regime, meaning that the relevance of Article 22 gradually diminished and the Commission developed a practice of discouraging referral requests from Member States.

In recent years, however, the Commission (and merger control authorities more generally) have become increasingly concerned about a perceived enforcement gap relating to transactions which raise competition concerns despite the target generating little-to-no turnover at the time of the transaction.  In such cases, the concern is that the Target’s turnover is not reflective of its actual or future competitive potential.  This is often deemed to be the case where the value of the consideration received by the seller is particularly high compared to the current turnover of the target.  The Commission has highlighted the digital and pharmaceutical sectors as being particularly at risk of these so-called “killer acquisitions”, where innovation is a key parameter of competition. 

As a result, the Commission 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 set of guidance which was released on 26 March 2021, and the Q&A is intended to complement this guidance.  The Commission’s revised approach was notably tested and endorsed by the General Court in the Illumina/Grail case, where it held that the use of Article 22 in this way was an important means of addressing deficiencies inherent in a turnover threshold-based system.   

The Commission’s change in policy towards the Article 22 referral mechanism is problematic for transaction parties because it adds a layer of complexity to the assessment of where mandatory merger control filings are required.  The previous, relatively straightforward question of whether the acquirer and target have revenues above specified thresholds is in many cases no longer sufficient, and the question of whether the transaction raises substantive competition concerns now has to be considered and factored in appropriately. 

We understand that as of December 2022, the Commission has considered around 30 deals which were not notifiable either under the EU Merger Regulation or in any Member State since it published its 2021 guidance, and that of these cases, only one has been pursued (Illumnia/Grail).  The Commission has also opened investigations into three deals which were originally notified by the parties to a Member State, but which were subsequently referred to the Commission by the Member State in question (and a number of other Member States) under Article 22 (Meta/Kustomer, Inmarsat/Viasat, and Oticon Medical/Cochlear). 

Technology/digital and health and life sciences sectors remain a key focus, but Commission’s approach to Article 22 can apply to transactions across all sectors

The Q&A highlights the specific factors in the Illumina/Grail case which led to the acceptance by the Commission of the reference, and provides five hypothetical examples of cases that the Commission may consider as suitable candidates for a referral.  These are examples of cases where turnover is not reflective of actual or future competitive potential, and include:

• the proposed acquisition by a multinational social networking company of a target in its infancy, but with a fast-growing base of monthly active users;

• the proposed acquisition by a multinational pharmaceutical company of a target with an advanced pipeline product for a drug that competes with the acquirer’s best-seller;

• the proposed acquisition by a biotech company of a target with a competing DNA sequencing system that has been improved significantly in the two years leading up to the transaction, and to which the acquirer’s customers could consider migrating;

• the proposed acquisition by a company offering one of the top digital music distribution services of a target with important data regarding user preferences; and

• the proposed acquisition by a multi-national company which offers laboratory equipment of a target which is one of few suppliers of a key input.

These hypothetical examples are helpful in reiterating the Commission’s focus on the tech/digital and health and life sciences sectors, which aligns with our experience.

However, these are not the only sectors covered by Article 22 and in fact, the Commission’s 2021 guidance makes clear that the Commission’s new approach to Article 22 is not limited to any specific sector. 

This therefore means that although the focus may be on some sectors, Article 22 does need to be considered for a broader range of deals in other sectors as well. 

Seeking guidance from the Commission

As mentioned above, Article 22 introduces a degree of uncertainty which previously did not exist. 

However, it is open for merging parties to seek guidance from the Commission as to whether or not a transaction could be subject to an Article 22 referral, and the Q&A provides further clarity on this.  It is important to note that whilst a good indicator that a transaction will not be subject to an Article 22 referral, any such guidance is not binding on the Commission or Member States.

Merging parties are advised in the Q&A to submit a case team allocation request to the Merger Registry, and to follow this up with a short briefing paper.  There is no prescribed form for such a briefing paper, but the Q&A provides a list of points which should be covered off.  In addition to fairly straightforward details about the parties and the transaction, merging parties are encouraged to provide substantive information concerning the relevant markets and the competitive situation, substantiated by data and evidence, and this includes:

• elements that could suggest that the transaction would not threaten to significantly affect competition within the territory of one or more Member States; and

• whether turnover properly reflects actual or future competitive potential.

Whilst it remains to be seen in practice what level of information the Commission will typically regard as sufficient in order for it to provide the requested guidance, the concern is that given the nature of the cases the Commission is interested in, it may require a material amount of analysis of the competition issues and associated information to be provided upfront by way of the briefing paper.  This raises the question of the extent to which a briefing paper will materially differ from making a formal notification.    

In terms of timing, the Q&A states that the Commission will normally strive to carry out a first review of the information provided by the merging parties within five working days from receipt.  Following this, the Commission will either request further information, or confirm that it does not have any further questions at that stage and provide an indication of the approximate timeframe within which it will revert with its guidance. 

There is, however, no legal deadline for the Commission to finalise its assessment which creates further uncertainty for parties seeking guidance.  As such, it remains difficult to predict how much additional time needs to be built into deal timetables in order to allow for the requisite assurances to be sought from the Commission, and this is likely to vary on a case-by-case basis depending on the complexity of the transaction and the completeness of the information provided by the merging parties.

Third party complaints

Whilst the Commission has a market screening function whereby it reviews general and specialised press and sector-specific databases, an important way in which it finds out about transactions which might be suitable for an Article 22 referral is through third party complaints. 

The Q&A provides further information on how third parties should contact the Commission in order to bring potentially suitable transactions to its attention.  Third parties wishing to inform the Commission of such a transaction are told to contact the Head of Unit of the merger unit in charge of the relevant industry/sector.  Whilst there is no specific form for third parties to complete, they are advised in the Q&A to submit a short briefing paper addressing the same points as set out in relation to merging parties seeking guidance from the Commission (see above). 

The Commission will acknowledge receipt of the third party’s submission and, where needed, send follow-up questions to better understand its claims. 

Key takeaways

The Commission’s revised approach to Article 22, and the General Court’s support of this, adds a new layer of complexity to transactions because merging parties can no longer assume that a deal is not subject to a merger control investigation in the EU because the thresholds triggering an EU or Member State filing are not met.

Whilst the numbers to-date suggest that the Commission appears to be exercising its powers under Article 22 with an element of restraint, and only a very limited number of transactions have been affected, and the true impact of the policy shift remains to be seen.  One of the key questions arising from the Q&A is whether the further details on voluntarily briefing the Commission, and in particular the clarity around how third parties may complain about a transaction, will prompt greater use of the Article 22 mechanism. 

The new guidance in the form of the Q&A document aims to restore an element of certainty to proceedings by elaborating on the types of transactions which are likely to be caught by Article 22, and by fleshing out the process for seeking guidance from the Commission.  Whilst the Q&A takes a small step towards achieving this, there remains considerable uncertainty because the 2021 guidance makes clear that the new approach can apply to any sector.    

It is helpful that the Commission has provided more clarity around the timeline it expects to adopt when responding to briefing papers, particularly given the General Court’s criticisms in the Illumina/Grail case around the time taken by the Commission to act after becoming aware of the transaction.  It is also helpful that the Q&A elaborates on the types of information that should be included in a briefing paper, but deal parties should not underestimate the level of detail that the Commission may require in order to give guidance on the likely application of Article 22.