The European Court of Justice (the ECJ), the EU’s highest court, has fully rejected the European Commission’s (the Commission) policy of interpreting Article 22 of the EU Merger Regulation (EUMR)[1] in a way that would allow the Commission to review transactions falling beneath EU and Member State merger control thresholds. This followed a policy change in March 2021, when the Commission issued new guidance on the interpretation of Article 22 EUMR, indicating the Commission’s view that it could be used to refer merger cases to the Commission in circumstances where the referring Member State did not have jurisdiction, particularly in cases where the turnover of the target did not reflect the target’s actual or future competitive potential and/or where the value of the consideration received by the seller was particularly high compared to the revenue of the target (two of the hallmarks of so-called “killer acquisitions”). The Commission’s first high-profile use of the new guidance was in the context of genomics-company Illumina’s attempted acquisition of Grail in April 2021.
Background
Four years have passed since Illumina agreed to acquire Grail, a company involved in early cancer detection. At the time, Grail did not generate turnover anywhere in the world, and the proposed concentration did not trigger merger control filings in the EU or at Member State-level.
Concerned about the possible impact of the transaction on the EU market, the Commission invoked Article 22 EUMR to encourage and subsequently accept a referral from France and other Member States to scrutinize the deal. This marked an unprecedented departure from accepted merger control practice and guidance in Europe, triggering both a lengthy legal dispute and a debate among practitioners and scholars over the limits of the Commission’s powers.
Article 22 was originally intended to be used in circumstances where a Member State did not have its own merger control regime, to ensure that transactions raising competition issues, which could have an impact more broadly in the EU, would not escape review. It was named the “Dutch clause”, as the Netherlands at the time did not have a merger control regime. Prior to its 2021 guidance, and in light of the adoption of merger control regimes across most of the EU, the Commission had developed a policy of actively discouraging referrals from Member States without initial jurisdiction over the relevant merger.
Backlash against overreach
The Commission’s policy about-turn on Article 22 was driven by concern that the merger control regime was not keeping pace with market developments, leading to an enforcement gap, particularly in relation to digital and pharmaceutical sectors. In its 2021 guidance, the Commission highlighted its concerns that “market developments have resulted in a gradual increase of concentrations involving firms that play or may develop into playing a significant competitive role on the market(s) at stake despite generating little or no turnover at the moment of the concentration”[2] and that, despite turnover-based thresholds being largely effective, “a number of cross-border transactions which could potentially also have such an impact have escaped review by both the Commission and the Member States”.[3]
The Commission’s decision that a “reappraisal” of the application of Article 22 EUMR could contribute to addressing this issue was greatly criticized. The parties in the Illumina-Grail case quickly appealed the decision and proceeded to close the transaction, later attracting the Commission’s wrath in the form of gun-jumping fines (see timeline below).
The opinion of Advocate General Emiliou in the Illumina-Grail appeal case earlier this year summed up the concerns with the Commission’s approach:[4]
“In one fell swoop, by means of an original interpretation of Article 22 EUMR, the Commission gains the power to review almost any concentration, occurring anywhere in the world, regardless of the undertakings’ turnover and presence in the European Union and the value of the transaction, and at any moment in time, including well after completion of the merger”. AG Emiliou Opinion, para. 216
The ECJ judgment
In a severe blow to the Commission’s efforts to address this “enforcement gap”, the ECJ’s decision firmly established that Article 22 EUMR cannot be used as a “corrective mechanism” for the control of concentrations that do not meet the notification thresholds of the Member States’ merger control regimes, even if those concentrations could result in significant effects on the structure of competition in the European Union.
The ECJ warned that accepting the Commission’s interpretation of the EUMR would undermine the “effectiveness, predictability and legal certainty that must be guaranteed to the parties to a concentration”,[5] and stressed that companies “must be able easily to determine whether their proposed transaction must be the subject of a preliminary examination and, if so, by which authority, and when a decision of that authority relating to that deal may be expected.”[6]
What’s next?
The ECJ’s judgment has clearly put a stop to the Commission’s ability to use Article 22 EUMR as a tool to review mergers that do not meet the notification thresholds at either the EU- or the Member State-level[7]. However, any legal certainty resulting from this decision may be short-lived.
Potential legislative reforms at the EU-level
In a speech delivered a few days after the ECJ’s judgment was handed down, outgoing Competition Commissioner Vestager made clear that there should now be a debate about how to deal with killer acquisitions from a merger control perspective. While observing that many of the options to address the gap—including lowering the existing monetary thresholds, introducing a new deal-value threshold, or adding a new power to the Commission’s toolbox to call in the notification of transactions where there could be competition risks—would have material downsides in the form of impacting legal certainty or increasing administrative burden, she also sent a clear message that the Commission’s consideration of over 100 below-threshold transactions during the three years of application of the now-defunct Article 22 policy was a worthwhile exercise, and that this enforcement gap should be addressed in the future.[8]
Member States’ new call-in powers
Over the past few years, several Member States have introduced provisions enabling them to request the notification of transactions that fall below national thresholds if these deals could have a significant competitive impact. As a result, the scope for referrals to the Commission under Article 22, in line with the ECJ’s judgment, is considerably broader than it was at the time of the Illumina-Grail referral, and it is likely that such legislative changes will continue to be introduced over time.
The Towercast doctrine
National regulators may also consider assessing transactions that fall outside their merger control regimes by applying Article 102 TFEU (which sanctions abuse of dominance), using their own national rules. Member States’ power to do this was confirmed in the 2023 Towercast ruling.[9] While this clearly has its limits, in particular the need to show that the acquirer had a dominant position before the transaction, it introduces another risk factor to be considered for acquirers who may be dominant.
“Killer acquisitions” in the UK
While the ECJ’s judgment may give some certainty to non-dominant parties to mergers which do not fall within the formal EU or Member State merger control thresholds, parties should be aware that the UK Competition & Markets Authority (CMA) retains very broad powers to call in transactions which it considers likely to raise competition concerns:
- The CMA has long taken the view that its “share of supply” test can be used creatively and expansively to allow it assert jurisdiction; the test only requires the CMA to show that the parties to the transaction, post-merger, would supply or acquire 25% or more of goods or services of a particular description in the UK (or a substantial part of it). The CMA has a very broad discretion to calculate “share of supply”, and this does not have to be tied to a particular product market. In practice, this means that the CMA has little difficulty finding ways to assert jurisdiction when it wants to; and
- The Digital Markets, Competition and Consumers Act (DMCC) will soon reform the UK’s merger control regime and further empower the CMA to review transactions where one party to that transaction has a UK turnover of £350 million and a share of supply of 33% or more of a category of goods or services in the UK (or a substantial part of it) and another party has UK nexus (broadly defined).
The latter amendment was specifically made to address “killer acquisitions” in circumstances where the parties did not horizontally overlap, making it challenging for the CMA to establish an increment to share of supply in these cases.
Conclusion
It remains a clear policy imperative across Europe to effectively police transactions which do not fall within traditional merger control thresholds across all markets where innovation is an important parameter of competition and M&A transactions involve players with high valuations that are driven by competitive potential, whether as a result of strength in R&D or access to assets that are valuable inputs, such as data and IP. While the Commission’s attempt to use Article 22 to address this issue has evidently failed, parties should continue to be vigilant in relation to the risk of intervention where transactions do not trigger traditional merger control thresholds but could be of interest to regulators. We can expect to see continued use of below-threshold review powers where these exist, as well as legislative reform where they do not. This risk is particularly acute in digital and pharmaceutical markets, given the EU’s policy statements in these areas, as well as in any transactions in the AI space.
[1] Article 22 EUMR allows one or more Member States to request that the Commission review a merger or acquisition that does not meet the EU-wide thresholds for mandatory notification. Specifically, it enables Member States to refer cases to the Commission if they believe the transaction affects trade between Member States and could significantly affect competition within their territory.
[2] Paragraph 9, Commission Guidance on the application of the referral mechanism set out in Article 22 of the Merger Regulation to certain categories of cases (2021/C 113/01) [eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52021XC0331(01)].
[3] Paragraph 10, Commission Guidance on the application of the referral mechanism set out in Article 22 of the Merger Regulation to certain categories of cases (2021/C 113/01) [eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52021XC0331(01)].
[4] Joined Cases C-611/22 P, C-625/22 P Illumina and Grail v Commission [2024] ECLI:EU:C:2024:264, Opinion of AG Emiliou https://curia.europa.eu/juris/document/document.jsf?text=&docid=284097&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=3009460
[5] Para. 206.
[6] Para. 208.
[7] Two weeks after the ECJ’s judgment was handed down, the Commission confirmed that all seven Member States that earlier this year submitted an Article 22 referral request for the review of Microsoft’s proposed acquisition of some assets of Inflection AI (a concentration that, like Illumina-Grail, did not meet the monetary thresholds of Article 1 EUMR) had chosen to withdraw their requests, resulting in the end of the EU procedure.
[8] https://ec.europa.eu/commission/presscorner/detail/en/speech_24_4582
[9] Case C‑449/21 Towercast v Autorité de la concurrence and Ministère de l’Économie [2023] ECLI:EU:C:2023:207, Judgment of the Court, https://curia.europa.eu/juris/document/document.jsf?text=&docid=271327&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=3003090. The ECJ’s preliminary ruling in Towercast does not address the question of whether the Commission can apply Article 102 to concentrations that fall below the EU filing thresholds, but this may be tested in the future.
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