Key takeaways
- The European Commission (EC) recently issued guidance encouraging Member States to make use of the option, foreseen in the EU Merger Regulation (EUMR), to request the EC to review transactions that do not meet either the EU or national merger control thresholds.
- This guidance seeks to fill the enforcement gap many stakeholders have identified in relation to so-called “killer acquisitions” of nascent companies by incumbents, especially in the digital and pharmaceutical sectors – although it applies to all industries. The initiative repurposes existing EUMR powers to address the gap, without the need for fresh legislation.
- Article 22 EUMR referrals may lead to review of completed deals, and parallel reviews at national and EU levels.
- All companies, includings funds and their portfolio companies, will need to consider whether an otherwise non-notifiable transaction (at the EU and national level) may become subject to approval by the EC. This is especially the case when acquiring a start-up, a particularly innovative target, or one holding competitively sensitive assets such as data, IP rights, raw materials or infrastructure. If parties are in doubt, the EC is open to discuss whether a specific transaction could be a candidate for referral to the EC.
The revival of Article 22 EUMR referrals
The EUMR provides for several types of referrals between Member States and the EC. When the EUMR was originally adopted, Article 22 was conceived as a tool enabling Member States with no system of merger control to refer transactions to the EC for review. The conditions to be met were (i) the transaction is a concentration in the EUMR sense, (ii) it affects trade between Member States, and (iii) it threatens to significantly affect competition in the relevant Member State.
With Member States progressively adopting domestic merger control powers (all bar Luxembourg), Article 22 was to an extent redundant. The EC adopted the position that it would discourage use of the power in relation to deals falling below national merger control thresholds - although nothing in the text of Article 22 imposes such a limitation. But Article 22 underwent a first re-purposing in 1998, as a means for the Commission to take over in cases where multiple national reviews were in hand. In this way Member States could by coordination enable the EC to conduct a single centralized review. Prominent examples of this use of Article 22 include SC Johnson/Sara Lee and recently MasterCard/Nets. Thirty decisions were adopted by the EC after referral by one or several Member States since 2004.
Breaking with the past, Margrethe Vestager announced in September 2020 that the EC would now start to welcome again referrals by Member States for transactions not meeting national filing thresholds but likely affecting competition in Europe. This change in approach is triggered by increasing concerns that deals having a significant impact on competition are escaping European merger review, in particular in the digital sector.
The communication published on 26 March 2021 provides some (limited) insight as to the cases that will be prioritized by the EC and the subsequent process.
Deals targeted by the new EC guidance
Although the Article 22 referral mechanism applies to all sectors without distinction, the guidance indicates that the EC should mostly focus on sectors in which innovation is key, such as the digital and life science areas, which are considered to have the highest risk of incumbents acquiring start-ups with strong competitive potential but minimal revenues.
Under the guidance, concentrations that may be suitable for such referrals are deals where the target is (i) a start-up or recent entrant with low turnover but significant competitive potential, or (ii) an important innovator or a company conducting potentially important research, or (iii) an undertaking with access to competitively significant assets (such as e.g. raw materials, infrastructure, data or intellectual property rights), or that provides products or services that are key for other industries. When deciding on whether to accept a referral request, the EC may also take into account whether the purchase price is particularly high in comparison to the target’s revenues. Such high prices have often been the talisman of deals that should trigger concerns.
Practical consequences for deal making
While the new Notice provides some guidelines which the Member States and EC will use to determine whether to make use of the Article 22 referral mechanism for non-notifiable transactions, no legal certainty is provided. And some of the major National Competition Authorities (NCA) in Europe have already indicated their willingness to make broad use of that tool; the French Competition Authority for instance has already referred to the EC, on 9 March 2021, the acquisition by an incumbent of a start-up company developing advanced blood tests.1
In that context, merging parties now face heightened uncertainty. While in some cases it will be clear that the risk of referral is low, in most cases, the parties to a transaction will need to assess from the start the potential competitive impact of their deal, in addition to the current turnover-based analysis. In particular, it would seem that when a target satisfies one of the criteria listed above in relation to transactions that could be suitable for referral, the likelihood of referral will be high, certainly in the digital and pharmaceutical sectors. Another factor to consider is whether third parties may be critical of the transaction, as the guidance encourages all stakeholders to inform the EC about potential candidates for referral.
Recognizing the uncertainty, the guidelines provide that companies can consult the EC about particular acquisitions. However, parties to a transaction will need to make a strategic decision whether to approach the authorities pro-actively, and so stimulate the risk of their deal being referred to the EC, or wait – with the risk that the EC becomes involved at a later stage, potentially after the transaction has closed.
Importantly, the fact that a deal has completed is no bar to use of the Article 22 referral mechanism. Referral requests can be made within 15 working days after a transaction becomes known to them, regardless of whether or not the deal has been implemented. While the guidelines suggest that the EC will not accept referral requests made more than six months after closing, and DG Competition’s Director General Olivier Guersent recently confirmed that the EC does not intend to revisit mergers ex post indefinitely, this will obviously constitute another element of uncertainty for deal-makers.
Another complicating factor is that the guidance does not provide for any coordination mechanism in relation to parallel reviews by a Member State under domestic powers, and by the EC on the basis of a referral request by another Member State. This may lead to contradictory outcomes within the EU. The guidance recognizes this issue, as it notes that a deal notified in a Member State that did not request or did not join a referral may constitute a factor against the EC reviewing the transaction, but it does not formally preclude the EC from doing so.
It remains to be seen how practice will develop but companies acquiring certain types of targets, in particular in the digital and pharmaceutical sector, will need to carefully consider the impact of an Article 22 EUMR referral on the transaction structure, timetable and deal communication.
Footnotes
1) This referral is currently facing an emergency suspension procedure before the French administrative Supreme Court, after being challenged by the parties to the transaction.
