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On 29 April 2021, US-based biotechnology company Illumina lodged an action before the General Court of the European Union (the "General Court"), seeking the annulment of a decision from the European Commission (the "Commission") to accept a referral under Article 22 of the EU Merger Regulation (the "EUMR") to assess Illumina's acquisition of GRAIL, on the grounds that the Commission doesn't have the power to accept such referral and thus assert jurisdiction.
Background to the action
On 19 April 2021, the Commission accepted the request made by France – subsequently joined by Belgium, Greece, Iceland, the Netherlands, and Norway – to assert jurisdiction pursuant to Article 22 EUMR and to assess the $7.1 billion acquisition of GRAIL by Illumina, a global genomics company and leading supplier of next generation sequencing systems for genetic and genomic analysis.
The Commission acknowledged that none of the national or EU turnover thresholds requiring prior notification were met in the present case – meaning that, in principle, the transaction should not have been notified anywhere in the EU. However, it decided to assert jurisdiction and thus to assess the case following notification on the grounds that "GRAIL's competitive significance is not reflected in its turnover" because the product developed by GRAIL (in essence, genomic cancer tests) "are expected to be game-changers in the fight against cancer. It is therefore important to ensure that patients get access to this technology as quickly as possible, from as wide sources as possible, and at a fair price".
Illumina is now asking the General Court to annul the Commission's decision, arguing that it is illegal because (i) the Commission never accepted before a referral under Article 22 EUMR when none of the Member States have jurisdiction; and (ii) Illumina was not informed of the investigation in a timely manner (i.e., it was informed only just before the referral actually took place). The case reference is Case T-227/21, Illumina v. Commission.
The Article 22 EUMR Guidance
The Commission decision was adopted less than a month after the Commission published its new Guidance on the application of Article 22 EUMR (the "Guidance"), in which it brings an important change to the whole regime of EU merger control enforcement.
With Article 22 EUMR, the Commission provides for a so-called "referral mechanism", that allows Member States to request the Commission to investigate a concentration despite the fact that the transaction does not meet the thresholds contained in Article 1(2) and (3) EUMR to actually be notified to the Commission. This mechanism comes as an exception to the general principle according to which concentrations considered as having an EU dimension (i.e., involving high turnovers) should be notified to the Commission and smaller transactions should be notified at national level.
In the past, the Commission discouraged the application of Article 22 EUMR (there have been only 30 Article 22 EUMR referrals since the adoption of the EUMR in 2004), on the basis that transactions that didn't have an EU dimension "were not generally likely to have a significant impact on the internal market".
However, on 26 March 2021, the Commission published its Guidance, in which it specifically recognized that it would accept not only referrals of concentrations that do not meet the EU thresholds, but also referrals of transactions that fall below the national merger control thresholds. The key criterion to accept such referrals is whether the concentration would affect trade between Member States and would threaten to significantly affect competition within the territory of the Member State or States making the request.
The rationale behind the adoption of the Guidance is to tackle "killer acquisitions" that have emerged over the last decade. The term "killer acquisitions" usually refers to the situation where a dominant firm acquires a much smaller target which is developing a new product line or technology (and hence has small revenues because it is a nascent competitor), with the main purpose of preventing the target, which is currently only a potential competitor, from developing into an actual competitor. As a result of the small revenues of the target, a significant amount of transactions fall below the required thresholds and thus escape scrutiny from the National Competition Authorities and the Commission. With its Guidance, the Commission is therefore trying to rectify this issue, which particularly arises in innovation-driven sectors (such as the digital and pharmaceutical sectors).
New referral policy to be put to the test before the General Court
The Illumina judgment will be eagerly awaited because it is hoped that it will bring clarity concerning certain issues contained in the Guidance and surrounding the adoption of the Guidance. We have the following critical remarks:
Background to the action
On 19 April 2021, the Commission accepted the request made by France – subsequently joined by Belgium, Greece, Iceland, the Netherlands, and Norway – to assert jurisdiction pursuant to Article 22 EUMR and to assess the $7.1 billion acquisition of GRAIL by Illumina, a global genomics company and leading supplier of next generation sequencing systems for genetic and genomic analysis.
The Commission acknowledged that none of the national or EU turnover thresholds requiring prior notification were met in the present case – meaning that, in principle, the transaction should not have been notified anywhere in the EU. However, it decided to assert jurisdiction and thus to assess the case following notification on the grounds that "GRAIL's competitive significance is not reflected in its turnover" because the product developed by GRAIL (in essence, genomic cancer tests) "are expected to be game-changers in the fight against cancer. It is therefore important to ensure that patients get access to this technology as quickly as possible, from as wide sources as possible, and at a fair price".
Illumina is now asking the General Court to annul the Commission's decision, arguing that it is illegal because (i) the Commission never accepted before a referral under Article 22 EUMR when none of the Member States have jurisdiction; and (ii) Illumina was not informed of the investigation in a timely manner (i.e., it was informed only just before the referral actually took place). The case reference is Case T-227/21, Illumina v. Commission.
The Article 22 EUMR Guidance
The Commission decision was adopted less than a month after the Commission published its new Guidance on the application of Article 22 EUMR (the "Guidance"), in which it brings an important change to the whole regime of EU merger control enforcement.
With Article 22 EUMR, the Commission provides for a so-called "referral mechanism", that allows Member States to request the Commission to investigate a concentration despite the fact that the transaction does not meet the thresholds contained in Article 1(2) and (3) EUMR to actually be notified to the Commission. This mechanism comes as an exception to the general principle according to which concentrations considered as having an EU dimension (i.e., involving high turnovers) should be notified to the Commission and smaller transactions should be notified at national level.
In the past, the Commission discouraged the application of Article 22 EUMR (there have been only 30 Article 22 EUMR referrals since the adoption of the EUMR in 2004), on the basis that transactions that didn't have an EU dimension "were not generally likely to have a significant impact on the internal market".
However, on 26 March 2021, the Commission published its Guidance, in which it specifically recognized that it would accept not only referrals of concentrations that do not meet the EU thresholds, but also referrals of transactions that fall below the national merger control thresholds. The key criterion to accept such referrals is whether the concentration would affect trade between Member States and would threaten to significantly affect competition within the territory of the Member State or States making the request.
The rationale behind the adoption of the Guidance is to tackle "killer acquisitions" that have emerged over the last decade. The term "killer acquisitions" usually refers to the situation where a dominant firm acquires a much smaller target which is developing a new product line or technology (and hence has small revenues because it is a nascent competitor), with the main purpose of preventing the target, which is currently only a potential competitor, from developing into an actual competitor. As a result of the small revenues of the target, a significant amount of transactions fall below the required thresholds and thus escape scrutiny from the National Competition Authorities and the Commission. With its Guidance, the Commission is therefore trying to rectify this issue, which particularly arises in innovation-driven sectors (such as the digital and pharmaceutical sectors).
New referral policy to be put to the test before the General Court
The Illumina judgment will be eagerly awaited because it is hoped that it will bring clarity concerning certain issues contained in the Guidance and surrounding the adoption of the Guidance. We have the following critical remarks:
- Firstly, the Guidance makes it clear that there is always a risk of referral, irrespective of whether the merger is notifiable in one or several Member States. This significant broadening of the Commission's scope of jurisdiction is a source of great legal uncertainty for companies operating in Europe. It means that they are now at risk of their deals being pulled in for review by the Commission even if no merger filing requirements at Member State level exist.
This comes in addition to the fact that it will be very difficult for companies to assess properly by themselves whether their transaction could possibly be a candidate for a referral. It should be noted in this respect that the Commission only set out very broad criteria that could arguably apply to any transaction, such as the elimination of a recent or future entrant, the merger between two important innovators or the ability and incentive to leverage a strong market position from one market to another by means of tying or bundling.
- Secondly, the Guidance also creates uncertainty as regards time limits for referrals in two respects. First, there is no clear deadline for a referral request to be made by Member States. The Guidance explains that the referral should be made within 15 working days of the date on which the transaction is "made known" to the Member State concerned. The Commission interprets the notion of "made known" as "sufficient information to make a preliminary assessment", but does not further elaborate. Second, the Guidance specifically mentions that a transaction can be referred to the Commission even after the transaction has been closed. While the Commission "would generally not consider a referral appropriate" more than 6 months post-closing, this deadline is also blurry and does not allow merging companies to assess until when their transactions could actually be subject to referral.
- Finally, the lack of transparency in the adoption of the Guidance deserves criticism. Indeed, the Guidance has been adopted without prior consultation or implementation period and, while these are not mandatory legal requirements, it is part of the Commission's common practice to do so. The fact that the Commission did not consider useful to adopt the Guidance in an open and transparent process is surprising, to say the least.
Concluding Remarks
The Guidance is out in the open so companies must learn to live with the extension of the Commission's jurisdiction. From a practical perspective it will be important for companies and their advisors to factor in a potential referral risk early on in the transaction process and as part of the contractual exercise.
It is obviously too early to say what the real impact of the new Article 22 EUMR referral regime will be and it is hoped that the General Court (and possibly the Court of Justice of the European Union on further appeal) will clarify some of the critical issues mentioned in this article. Apart from that, the authors certainly hope that the Commission will be approachable for guidance in grey area cases, something that will be important certainly in the beginning.
This article was authored by: Tom Pick and Iseult Dereme. Please do not hesitate to reach out if you have any questions.
The Guidance is out in the open so companies must learn to live with the extension of the Commission's jurisdiction. From a practical perspective it will be important for companies and their advisors to factor in a potential referral risk early on in the transaction process and as part of the contractual exercise.
It is obviously too early to say what the real impact of the new Article 22 EUMR referral regime will be and it is hoped that the General Court (and possibly the Court of Justice of the European Union on further appeal) will clarify some of the critical issues mentioned in this article. Apart from that, the authors certainly hope that the Commission will be approachable for guidance in grey area cases, something that will be important certainly in the beginning.
This article was authored by: Tom Pick and Iseult Dereme. Please do not hesitate to reach out if you have any questions.