European Union: Illumina/Grail – EU General Court Recognizes Extended EU Jurisdiction Over Transactions That Trigger No Merger Control Filing Requirement

In short

On July 13, 2022, the General Court of the European Union endorsed the ability of the European Commission to exercise its jurisdiction over transactions that do not trigger merger control thresholds, neither European nor national, by virtue of the referral mechanism known as of article 22 (Case T-227/21). By this judgment, the General Court effectively validated a hybrid ex ante/ex post EU merger control regime. It is to be hoped that any future intervention under Article 22 will remain exceptional.

Contents

  1. Key Court Statements
  2. Consequences

Key Court Statements

The Court gave a literal, contextual, purposive and historical interpretation of Article 22(1) of the EU Merger Regulation which allows (1) one or more Member States to request the Commission to review any concentration which (2) does not meet EU notification thresholds, but which (3) affects trade between member states and (4) threatens to significantly affect competition within the state(s) requesting members.

The Court concluded that these four cumulative conditions considerably restricted the Commission’s freedom of action, in accordance with the general principles of EU law of subsidiarity and proportionality. The referral mechanism aims to remedy the shortcomings of a system based mainly on rigid turnover thresholds. As such, it is a ‘corrective mechanism’ and represents a subsidiary power of the Commission, giving it the flexibility to intervene in cases which could significantly impede effective competition in the internal market.

The fact that national concentration thresholds may deprive national competition authorities of the power to examine such transactions under their national law does not mean that Member States have lost or declined their general jurisdiction over all concentrations which do not trigger not the EU deposit thresholds.

Although in places the Court’s reasoning is quite tortuous, its conclusions are not unexpected. The novelty lies in its statements on the procedural aspects of the referral process.

Any request for referral under Article 22 must be made within 15 working days of the date on which the concentration was notified to the Member State(s) in question or, if no notification is required because the national thresholds are not triggered, within 15 working days of the transaction being “brought to the attention” of the Member State(s) concerned.

The Court concludes that “to make known” implies the active transmission of information allowing the Member States to assess whether the four cumulative conditions of Article 22 are fulfilled. Press releases and media coverage of the deal are not sufficient triggers – they are foreign to the EU merger control system and neither the Commission nor national competition authorities are required to actively seek information on concentrations likely to trigger Article 22. Any other interpretation, according to the Court, would risk depriving the referral mechanism of its practical effect.

In this case, the agreement was signed and announced on September 20, 2020. In November, the UK competition authority conducted a preliminary review and the US FTC issued a second request. The Commission was apparently not made aware of these developments until it received a third-party complaint about the deal on December 7. On February 19, 2021, the Commission sent an “invitation letter” to the competition authorities of the Member States, encouraging them to seize the transaction under Article 22; this letter constitutes the active transmission, the act of “making known”.

On March 9, the French authority submitted a referral request and the parties were informed by an information letter of March 11. Five other Member States wished to join the French request and, by decisions of 19 April, the Commission accepted their requests. The Court held that these decisions were challengeable acts since they put an end to the Article 22 referral procedure (which is separate from the merits assessment procedure) and affected the legal situation of the parties. She did not admit that the newsletter was a challengeable act.

The Court criticizes the Commission for the delay of 47 working days between the receipt of the complaint on December 7, 2020 and the sending of the letter of invitation on February 19, and the delay of 90 working days between the complaint and the adoption of the contested decisions on 19 April. These discrepancies were not justified by the end-of-year celebrations, nor mitigated by the continuous activity of the Commission throughout the process. Nevertheless, the Court held that the violation of the “reasonable time principle” only justifies the annulment of the contested decisions when it constitutes a violation of the rights of the defence. In the present case, there was no such violation since the parties had several opportunities to make known their point of view during the administrative procedure which led to the adoption of the contested decisions.

The parties argued that by making an unexpected policy reversal, abandoning its previous policy of discouraging Article 22 referrals where national merger regimes did not apply, the Commission had infringes the principles of the protection of legitimate expectations and legal certainty. They also referred to public statements by Competition Commissioner Vestager that there would be no change in policy until the promised guidelines that the Commission unexpectedly issued on March 30, 2021.

These arguments have been ignored. The Court found that the protection of legitimate expectations presupposes that precise, unconditional and consistent assurances from authorized and reliable sources have been given to the data subject by the competition authorities of the European Union. The speeches of commissioners and the haphazard conclusions of the DCI and the OECD are irrelevant.

The Court also acknowledged that the Commission had recently accepted that Member States join requests for referral when they were not competent to examine the operation under their national law. This fact was not necessarily in the public domain but happened Apple/Shazam (2018), Knauf/Armstrong (2019), JnJ/Tachosil (2019), and Mastercard/Nets (2020). Thus, the change of policy in the present case, and as subsequently formalized in the revised non-binding guidelines of March 30, 2021, was fully within the discretion of the Commission.

Consequences

Illumina reportedly signaled that it would appeal the Tribunal’s ruling, but the Commission has made it clear that it is already considering a number of potential candidates for the Article 22 review.

As the Commission made clear in its March 2021 guidelines, it will continue to focus on large tech and pharma acquisitions of promising start-ups and innovators, as well as companies with access to or impact on assets of competitive value such as raw materials, intellectual property rights, data or infrastructure, and companies supplying key inputs/components for other industries.

The fact that a transaction is already closed does not prevent a Member State from requesting a referral under Article 22. The Commission will generally not consider a referral appropriate if more than six months have elapsed since the closure or from the time material facts about the concentration have become public in the EU. However, in exceptional situations, such as the scale of the potential harm, the Commission does not rule out intervention beyond six months.

This latest development is part of a broader trend reflecting political concerns that lax merger control has facilitated increased profits and increased market power, which is correlated with an alleged decline in market dynamism. This has led to the adoption of lower intervention thresholds, such as the transaction value thresholds in Germany and Austria, and the new Turkish law which, from May 2022, applies to all transactions involving technology companies (broadly defined) where the worldwide revenue of any party exceeds TRY 3 billion (approximately USD 190 million). It also fueled the ongoing debate over “killful acquisitions” and other innovative theories of harm as explored during the virtual conference in mid-June. FTC/DOJ Workshop on pharmaceutical mergers.

This development also comes at a time when we see, in practice, a significantly increased Commission control over transactions (with very extensive and onerous requests for information and documentation); a lack of willingness to take risks on the part of the Commission in its assessment (shares in the lower to mid-30s bracket being seen as problematic relative to other factors); and very demanding demands from the Commission on the design of remedies.

Combined with the agency’s proactive scanning of the industry news to identify potentially problematic deals, burgeoning foreign investment controls and the prospect of a third layer of regulatory clearance if/when the subsidy regime EU Foreign Affairs will enter into force in 2023, the regulatory environment for transactions becomes much more difficult than at any time in the past.

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Thelma J. Longworth