6. Illumina/Grail and Towercast – a coherent Standard of Merger Control (?) and what’s left for the national Legislator
Eva Fischer
7. The Aftermath of Illumina/Grail – Time to change the EU Merger Regulation?
Dr Andreas Schwab and Dr Björn Herbers
8. European Court of Justice curbs Commission’s Ambition to review non-notifiable Mergers
Dr Andrea Pomana, Alejandro Guerrero and Jonathan Saké
Introduction
Article 22 EUMR: The Impact of the Illumina/Grail Judgment
Lena Hornkohl, Lewis Reed and Pablo Solano
Beneath the surface of concerns about legal certainty (or even uncertainty), the Illumina v Commission case (C-611/22 P and C-625/22 P, the ‘Judgment’) addresses questions of constitutional, even existential, importance. From the perspective of horizontal allocation of competences, to what extent should the European Commission, rather than the European Union (‘EU’) legislators, solve the loopholes in a system already somewhat precariously founded (partially) on the EU’s implicit powers under Article 352 TFEU? From the perspective of vertical allocation of competences, would it be appropriate, in light of the principle of subsidiarity, for the EU to bear the consequences of Member States’ failure to fully exploit the leeway afforded by the higher Union dimension thresholds? What is the role of the merger control carve-out within the broader competition enforcement framework, especially given that its legal basis includes Article 103 TFEU, which is designed to bridge the gaps of Articles 101 and 102 TFEU in dealing with restrictions? Those gaps arise, in particular, because Articles 101 and 102 cannot pre-empt restrictions before they materialise in anticompetitive agreements or concerted practices, or abuses of dominance, as required by the principle of undistorted competition (Recital 7 EUMR and para. 155 of the Judgment).
The wording of Article 22 of Council Regulation (EC) No 139/2004 on the control of concentrations between undertakings (EUMR), along with its predecessors, was ambiguously—perhaps deliberately— drafted. The General Court found (Illumina v Commission, T-227/21) that this ambiguity allows national competition authorities to refer concentrations that are not subject to national review, whether due to the absence of a merger control regime or because notification thresholds are not met. In fact, the Court of Justice acknowledges that Article 22 and its predecessors were originally devised to compensate for some Member States’ lack of a merger control system, particularly the Netherlands at the time—hence its epithet, the ‘Dutch clause’ (para. 147). Now, however, all Member States either have or are in the process of establishing their own merger control regimes.
Yet, if this expansive interpretation of Article 22 is not tempered by historical, contextual, and teleological considerations, it risks exposing the cracks in the merger control framework, as suggested by the questions posed earlier. This might explain the Commission’s enforcement policy strategy. While the Commission could have proposed an amendment to the EUMR, negotiations with the Council might have resulted in an outcome less favourable to the delicate balance of competences between the EU and Member States. After all, the EUMR’s high thresholds were arguably set to give Member States sufficient space to implement their own regimes. Therefore, if they fail to do so effectively, is enhancing the Commission’s powers through legislative reform a better solution than making Member States take responsibility for setting appropriate thresholds? It now appears there may be no other way.
Chloé Djamdji and Nathalie Nielson have indicated that the Illumina Judgment could impact the credibility of national merger control systems, particularly in their ability to address market realities such as ‘killer
acquisitions’. On a more optimistic note, Frédéric Louis, Cormac O’Daly, Anne Vallery, Sophie de Schepper, Hartmut Schneider, and Leon B. Greenfield argue that the Judgment has placed limits on the Commission’s review powers, increased legal certainty, and highlighted the need for new legislative or regulatory tools to address cases where turnover does not adequately reflect market power. In contrast, Anna Tzanaki examines the issue from the perspective of the two balances that underpin the EU’s merger control regime—between the EU and Member States and between the regime’s objectives—arguing that these should not be sacrificed for the sake of effectiveness. Concentrations that fall below national thresholds may also encounter other challenges such as Member States strengthening their call-in powers or addressing ‘killer acquisitions’ as abuses of dominance, as noted by Sebastian Reiter. Eva Fischer expands on this idea, suggesting that this type of ex-post control could be a viable solution, while Member States may ultimately be compelled to amend their own merger control thresholds. Finally, Björn Herbers and Andreas Schwab and Andrea Pomana insist on the consequences of the Judgement in terms of the need to amend the EUMR and national reactions.
This symposium and the views set out by the authors are meant to be reactive. A myriad of comments and opinions followed in the days subsequent to the Judgment. This exercise has been about gathering some of those views, to explain the Judgment and its importance going forward. As editors, we are incredibly grateful to the authors for their contributions, as well as their celerity and their flexibility in putting pen to paper, so that we could release this special symposium in the wake of the Judgment.
In no way can the views set out in this symposium be attributed to the editors or their employers/clients.
Illumina/Grail: Facilitating Acquisitions Strategies for the Future?
Nathalie Nielson and Chloé Djamdji
In 2022, the General Court had upheld the Commission’s interpretation that Article 22 of Regulation 139/2004 (Regulation 139/2004) allowed the referral of a concentration below European and national thresholds if it threatened to significantly affect competition, subject to four cumulative conditions, in a decision that has caused much controversy (Illumina (Case T-227/21, para. 89)). To the question of whether a concentration below thresholds can be controlled ex ante using the referral mechanism provided by the aforementioned article, the Court of Justice this week finally replied in the negative in a critical judgment on 3rd September 2024 (Illumina/Grail (Cases C -611/22 P and C -625/22 P)), following Advocate General Emiliou’s Opinion (see here). It thus ‘sets aside the judgment of the General Court of the European Union of 13th July 2022 and annuls the Commission’s decisions from 19th April 2021, accepting national authorities’ requests to examine Illumina’s acquisition of Grail despite their respective turnovers not exceeding any thresholds.
The ECJ’s reasoning
According to the European Court of Justice, the broad interpretation that had been adopted of the referral mechanism ‘undermines the effectiveness, predictability and legal certainty that must be guaranteed to the parties to a concentration’ (Illumina/Grail (Cases C -611/22 P and C -625/22 P, para 206)). In a strict and ‘to the letter’ reading of Article 22 and the Regulation’s goals, the Court recalled that the mentioned Article had initially been drafted for Member States which did not have a merger control legal system (hence the name ‘Dutch clause’; E.g. para 147 -179) and that the historical (E.g. para 148 - 150), contextual (E.g. para 185) and teleological development of the Article did not allow it to be asserted that it ‘constituted a ‘corrective mechanism’’ (E.g. para 201). Accordingly, the purpose of Article 22 is either to allow control of a transaction in a Member State that does not have a merger control legal system, or to ‘extend the ‘one-stop shop’ principle so as to enable the Commission to examine a concentration that is notified or notifiable in several Member States, in order to avoid multiple notifications at national level’ (E.g. para 182; 199). Indeed, the Regulation was not intended to cover ‘any’ mergers - as in the entirety of mergers happeningbut only those that are likely to affect competition because they exceed the thresholds, which was not the case here (E.g. para 194-195). The Court of Justice therefore reiterated that the merger control regime is based on a system of quantitative thresholds and that the Commission is therefore not empowered to ‘accept a request under Article 22 of that regulation in a situation where Member States making that request are not entitled, under their national merger control rules, to examine the concentration which is the subject of that request’ (E.g. para 222).
Analysis
• A potential problematic interpretation
From a strictly legal point of view, the reasoning is quite coherent and rational. However, since the Regulation’s adoption, almost all Member States have implemented a national merger system, one of the
only Member States not to have done so yet being Luxembourg, which is currently introducing one (See here). It is therefore questionable whether there is any point in maintaining Article 22 of Regulation 139/2004 as it stands following such an interpretation.
Moreover, pragmatically, this decision will pose various difficulties and may prove controversial insofar as the Court of Justice ignores the reality of practices such as killer acquisitions and reverse killer acquisitions (Cunningham & al, 2021), presumed of causing a major impact on market efficiency by impoverishing innovation and the development of start-ups.
Additionally, this decision has an impact on national competition’s authorities’ credibility, as they become unable to implement appropriate measures. This is what the French Competition Authority (“FCA”) emphasises in particular, stressing that ‘while taking care to preserve the legal certainty of businesses, it will also consider the advisability of strengthening the merger control instruments at its disposal on the basis of national law in order to apprehend potentially problematic mergers that do not cross the notification thresholds in force in France’ (Press release, 3rd September 2024). Faced with the tipping point of hyperscalers, traditional sanctions are becoming less effective and for this reason, reinforcement of ex ante control would tend to alleviate this problem. However, this interpretation of Article 22 opens the way for companies to challenge merger rules as it offers the opportunity for companies to adapt and give rise to new strategies, as they can take advantage of legal loopholes. In other words, companies could simply carry out their mergers and acquisitions in the Member States where the merger threshold rules are more favourable to them.
As a result, the implementation of killer acquisitions or reverse killer acquisitions targeting start-ups specialising in the new technologies sector such as AI remains possible in these States. Furthermore, companies may make disguised acquisitions through investments. In this regard, the investment may be examined as part of a merger operation, as it was the case, for instance in an FCA decision (dec. 22DDC-35 of 27th April 2022) in which it was ‘ruled for the first time that a non-controlling minority stake acquiring a non-controlling minority stake at the same time as acquiring sole control was likely to harm competition’ (dec. 22-DDC-35 of 27th April 2022, para 303). However, a strict interpretation of an ex-ante control of concentrations might make it difficult to embrace these practices and specially in innovative markets. For instance, in the field of AI, ‘investments make it possible to diversify or to have access to innovative technologies likely to improve the quality of its services. Nevertheless, they present competitive risks that call for vigilance on the part of the competition authorities. Minority shareholdings, which generally do not confer control, are rarely examined ex ante as part of merger control. They can, however, be examined ex post from the point of view of anti-competitive practices’ (FCA opinion 24-A-05 of 28th June 2024). These disguised acquisitions are used by certain structuring platforms such as Microsoft through its major investments in Open AI. What’s more, these investments are often supplemented by the canvassing and/or poaching of data scientists, which is causing concern among the authorities (E.g. FTC in the generative AI sector).
• Exploring complementary tools
However, a closer reading of the judgment shows that the Court considers these concerns, which may explain the rigidity of the solution. Firstly, paragraph 214 refers to article 102 TFEU ex post sanction of abuse of dominance (Towercast (Case C-449/21), stating that ‘Regulation No 139/2004 cannot preclude a concentration operation with a non-European dimension, such as the concentration at issue,
from being subject to a control by the national competition authorities and by the national courts, on the basis of the direct effect of Article 102 TFEU’. Nevertheless, even if this ex-post sanction can be subsidiary, it is best to prevent market harm if possible.
The DoJ and FTC (2023 Merger Guidelines) thus recommend considering situations in which ‘mergers can violate the law when they entrench or extend a dominant position’. An amendment of Article 22 along these lines could be considered by adding a paragraph setting out exceptional control below the merger thresholds, detailing precisely the conditions of applicability even if the Court of Justice strongly dismissed this possibility for now, one of the motivations being that the regulation ‘provides for a simplified procedure with a view to reviewing the thresholds’ (Illumina/Grail ((Cases C -611/22 P and C -625/22 P, paras 183-184)). This eventuality however raises the question of whether a general lowering of the European thresholds would not end up increasing the companies’ burden more than an exceptional referral mechanism. Rather than carrying out an exceptional review based on strict cumulative conditions, the review would be extended to a set of non-problematic transactions.
To prevent this, one could think of regulation targeting specific firms, such as Article 14 of the DMA (Regulation (EU) 2022/1925). Gatekeepers of essential platform services are obliged to notify any merger to the Commission, thereby remedying the shortcomings of control of concentration in digital markets. However, the issue of killer acquisitions has emerged in the pharmaceutical industry, as illustrated by the judgment, Illumina and Grail operating in this sector and thus not entering the scope of the DMA.
Conclusion
This strict, to the word, reading is faithful to ex ante control based on thresholds mechanisms, but it does not sufficiently take into account the economic reality of markets. Some companies use acquisitions to seize technologies and innovation that could either strengthen their dominant position or enable them to expand into related markets. These leveraging practices have a major impact on markets but are still not entirely understood. The richness of competition law lies in its adaptability and flexibility, and although this judgement strongly recalls the legal basis of control of concentration, it does not offer any real solution to fill the gaps that have emerged in the past few years, going back to square one for now. As the lowering of the European thresholds does not seem to be the best option – as previously mentioned – the amendment of Article 22 by directly including the conditions under which a referral could be made regarding a problematic acquisition could be desirable to tackle these practices once and for all and operate an ex ante control on these acquisition strategies.
SUGGESTED CITATION: Djamdji, C. and Nielson, N. ; “Illumina/Grail: Facilitating acquisitions strategies for the future? (C 611/22 P & C 625/22 P)”, EU Law Live, 06/09/2024, https://eulawlive.com/competition-corner/illumina-grail-facilitatingacquisitions-strategies-for-the-future-c-611-22-p-c-625-22-p-by-nathalie-nielson-and-chloe-djamdji/
Two Negatives don’t make a Positive
Frédéric Louis, Cormac O’Daly, Anne Vallery, Sophie De Schepper, Hartmut Schneider, and Leon B. Greenfield
In a landmark decision, the European Court of Justice (ECJ) has limited the European Commission’s (EC) ability to review mergers that fall outside thresholds at the EC level and in the Member States seeking to refer the review to the EC, emphasising the need for clear jurisdictional boundaries. For now, the decision removes significant regulatory uncertainty, especially for transactions involving targets with little or no revenue in the EU but that may have emerging competitive significance as an innovator or otherwise.
The 3rd September 2024 ECJ judgment held that the EC had exceeded its authority by asserting jurisdiction over the Illumina/Grail merger under Article 22 EU Merger Regulation (EUMR). The ECJ overturned the judgment of the General Court (GC) of 13 July 2022 and annulled the EC’s decision to accept requests from national European competition authorities that the EC review the proposed Illumina/Grail merger (see also here and here for more background).
Under Article 22 EUMR, a Member State may request the EC to review a transaction (in EUMR parlance “a concentration”) that does not meet EU merger control thresholds but affects trade between Member States and threatens to significantly affect competition within the territory of the Member State(s) making the request. In a departure from past practice, the EC’s 2021 guidance on the application of Article 22 had sought to make referrals possible not only for transactions that meet the notification thresholds of the referring Member States. The ECJ held that the EC had overstepped its jurisdiction by attempting to review Illumina’s acquisition of Grail, which met neither the EU merger control thresholds nor the domestic thresholds for national merger control review in the referring Member States. The EC’s 2021 guidance sought to catch these types of transactions through a broad interpretation of Article 22 EUMR.
The judgment has important implications for parties to transactions. It removes the uncertainty caused by the EC’s attempt to widen Article 22 EUMR’s scope. More concretely, Illumina announced in December 2023 that it had abandoned its attempt to acquire Grail but, because of the judgment, it is no longer liable for the €432 million fine that had been imposed by the EC for gun jumping.
The ECJ’s Illumina/Grail Judgment
The EU merger review system differs from some other jurisdictions, including the United States and China, in that the merger filing thresholds are jurisdictional. That is, the EC (and most Member States) cannot review a merger when the applicable thresholds are not met. Most such thresholds are turnover-based. This led some to have concerns that acquisitions involving small companies with significant future competitive potential sometimes fell through the cracks of the merger review system. That issue came to a head in Illumina/Grail.
Act 1: EC Jurisdictional Claims are Supported by the GC
After receiving a complaint regarding the Illumina/Grail transaction, the EC invited Member States’ competition authorities to submit requests for the EC to examine the proposed deal. Five Member States submitted such a request, citing Article 22 as the applicable legal basis.
The EC’s decision to intervene was controversial and Illumina challenged the EC’s jurisdiction. The GC dismissed Illumina’s legal action. This judgment broadened the scope of Article 22 referrals and led potentially to scrutiny of transactions that otherwise would not have been reportable in the EU.1 These would include so-called killer acquisitions, where the buyer acquires a target with little or no turnover but significant future competitive potential.
Illumina and Grail each appealed the GC’s judgment.
Act 2: Key Takeaways from the ECJ’s Reversal
On 3rd September, the ECJ annulled the GC’s judgment and, in turn, the EC’s decision to review the proposed Grail acquisition. The ECJ found that Article 22 EUMR did not allow national competition authorities to refer to the EC mergers that do not meet national thresholds for review. The ECJ accordingly ruled that the EC had overstepped its authority by attempting to review the merger.
In its press release, the ECJ stated that “The Commission is not authorised to encourage or accept referrals of proposed concentrations without a European dimension from national competition authorities where those authorities are not competent to examine those proposed concentrations under their own national law.” The judgment emphasises that the EC’s overly-broad construction of Article 22 could undermine the legal certainty that companies need when planning mergers.
It is common ground that Article 22 allows a Member State that does not have its own system of merger control to request that the EC review a transaction/concentration that affects its territory despite it not meeting the thresholds for EUMR application. The question at issue in Illumina/Grail was whether a Member State may refer such a concentration to the EC despite the Member State having its own domestic merger control review system and the concentration not meeting the threshold for review under that national system.
The ECJ’s judgment turns on the interpretation of Article 22 and relies on the complete arsenal of interpretative tools offered by EU law:
• Literal Interpretation.
The GC and ECJ agreed that the text of Article 22 itself is inconclusive: Although a literal reading of Article 22 EUMR allows a Member State to refer to the EC “any concentration” that satisfies the conditions of referral under that Article, this still required determining what exactly these conditions were.
In this regard, the GC considered it appropriate to carry out a historical interpretation to determine the intent of the EU legislature when it enacted Article 22 EUMR.
• Historical Interpretation and Corrective Mechanism.
The ECJ found, that it was clear from the supporting documents and from the travaux préparatoires invoked by the GC, that the EU legislature had accepted that certain concentrations which could affect the internal market would nonetheless escape an ex-ante review by the EC under the EUMR because they failed to meet its thresholds. None of those documents envisaged the referral mechanism as a “corrective mechanism” that would allow referral of any concentration falling below the EUMR thresholds, irrespective of whether that concentration fell within the national merger control system of the Member State making the request.
• Contextual Interpretation.
The ECJ next concluded that all the factors that the GC had considered as part of its “contextual interpretation” were inconclusive.
By contrast, siding with the interpretation advocated by Illumina and Grail, the ECJ highlighted that the replacement of a national authority by the EC under Article 22 EUMR presupposes that the authority responsible domestically for the ex-ante control of concentrations has jurisdiction to review the referred concentration, in particular because the transaction meets the applicable national thresholds.
• Teleological Interpretation.
The ECJ then analysed the GC’s “teleological” or purposive interpretation of the EUMR.
• Corrective Mechanism. The ECJ rejected the GC’s assumption that Article 22 EUMR should be regarded as a “corrective mechanism” intended to remedy deficiencies in the merger control system, by enabling the scrutiny of transactions that do not meet either the EU or national thresholds.
• Primary Objectives. The ECJ highlighted the two primary objectives of the referral mechanism under Article 22 EUMR. First, the mechanism was introduced to permit the scrutiny of concentrations that could distort competition locally, where the Member State in question did not have any national merger control rules. Second, the mechanism intended to extend the “one-stop shop” principle to enable the EC to examine concentrations notifiable in several Member States, thereby enhancing legal certainty and efficiency. In light of these two primary objectives, the ECJ repeated once more that the Article 22 EUMR mechanism was not intended to remedy deficiencies in the merger control system.
• Legal Certainty. The ECJ focused on the goals of the EUMR. It emphasised the importance of an effective and predictable merger review system, taking into account the need for legal certainty (e.g., by limiting the duration of the review procedures or by determining jurisdiction by reference to turnover) and considering the benefits of the “one-stop shop” principle. The interpretation of Article 22 EUMR advocated by the EC and the GC would go against these core principles and undermine effectiveness, predictability and legal certainty.
• Institutional Balance. The ECJ recalled that a broad interpretation of Article 22 EUMR clashes with the principle of institutional balance arising from Article 13(2) TEU, which
requires that each of the EU institutions must exercise its powers with due regard for the powers of the other institutions. The ECJ refused to apply the principle of effectiveness to justify an expansion by the EC of its review powers: It pointed out that even if the EUMR thresholds determining competence based on turnover were to prove insufficient to enable review of some transactions capable of significantly affecting competition, it would then be for the EU legislature alone to amend the EUMR by introducing other thresholds or by providing for a safeguard mechanism enabling the EC to review such a transaction. The ECJ went further and stated that Member States are free to revise their own thresholds, as laid down by their national legislation.
The ECJ’s ruling also nullifies the €432 million fine imposed on Illumina by the EC for gun jumping, a financial penalty that had been another point of contention in the case. Indeed, all the subsequent decisions taken by the EC in the course of its investigation, including the fining decision, have been deprived of their legal basis by the ECJ’s judgment invalidating the EC decision to accept the requests to investigate the merger.
Implications of the Judgment for EU Merger Control
The ECJ’s judgment has several significant implications for EU Merger Control and the broader regulatory landscape.
• Limits on EC’s Authority. The judgment prohibits the EC from reviewing mergers that do not meet the revenue-based thresholds for EC or Member State review.
• Increased Legal Certainty. The ECJ’s judgment enhances legal certainty for companies engaging in mergers and acquisitions within the EU. There is no longer a possibility that a transaction that is not reportable at the EC or Member State level can be subject to EC review under the EUMR.
• Reassessment of Merger Control Strategies. The EC’s broader use of Article 22 EUMR had been seen as a tool to capture potentially anti-competitive mergers in fast-evolving sectors where companies might not yet meet traditional financial thresholds. Following the ECJ’s ruling, the EC may need to explore new legislative or regulatory frameworks to address these concerns, especially in cases where market power may not adequately be reflected by revenue figures alone.
Indeed, outgoing Executive Vice-President Margrete Vestager released a statement only minutes after the publication of the ECJ’s judgment. She highlighted that there continues to be a need to review mergers that have a competitive impact in Europe regardless of their size. She referred to “killer acquisitions” and companies with limited turnover which may still play a significant competitive role on the market, as a start-up with significant potential, or as an important innovator.
Vestager also observed that the EC will continue to accept referrals made under Article 22 EUMR by Member States that do have jurisdiction over a concentration under their national rules where the applicable legal requirements are met. She referred to several Member States having introduced provisions allowing them to request the notification of transactions that do not meet national thresholds, in situations where they might have a significant competitive impact. This development could mean that there is no need to revise the EUMR because many Member States will have jurisdiction to review mergers that do not meet turnover-based thresholds, and the EC therefore can accept referrals of such mergers. However, it should
Article 22 EUMR: The Impact of the Illumina/Grail Judgment
be noted that certain Member States such as Germany and Austria, which have amended their national rules to include transaction value-based thresholds to catch more deals falling below turnover thresholds, have indicated that they were not generally inclined to refer such transactions to the EC under Article 22 EUMR.
More interesting therefore is the reaction by France’s competition authority,2 which announced mere hours after the publication of the ECJ’s judgment that it will pursue mergers that harm competition in France with all tools available to it, including antitrust laws and that it would consider revisiting its own jurisdictional thresholds (although this would require a legislative amendment). This is in line with the judgment itself where the ECJ explicitly stated that Member States could always revise their own thresholds.
• Potential Review of Non-Notifiable Mergers on Abuse of Dominance Grounds. The ECJ, in its Towercast judgment of 16th March 2023, ruled that national competition authorities and courts could review acquisitions by dominant entities under abuse of dominance rules, even if the acquisition is not notifiable under EU or national merger control laws. Following Illumina/Grail, we may see more merger reviews on this basis.This could therefore mark a return to using abuse of dominance rules to tackle below-threshold killer acquisitions, albeit ex-post.
• Future Mergers in High-Growth Sectors. Both the Towercast judgment and the GC’s decision in Illumina/Grail increased the risk of merger reviews for transactions, especially in digital and innovative markets where traditional revenue-based thresholds might not always fully capture the competitive impact of certain deals. The ECJ’s judgment partly reverses this, leading to fewer interventions in such sectors unless new legal tools to enable reviews are developed, which is bound to take some time.
• Impact on DMA. Article 14(1) of the EU Digital Markets Act imposes an obligation on designated “gatekeepers” to inform the EC of any concentrations to which they are party. Part of the rationale for that obligation was to allow the EC to trigger references, under Article 22 EUMR, from Member States of transactions falling under the EUMR thresholds. The Judgment of the ECJ therefore deprives this provision of part of its intended bite.
Frédéric Louis, Cormac O’Daly, Anne Vallery, Sophie De Schepper, Hartmut Schneider, and Leon B. Greenfield are attorneys at an international law firm in its offices in the UK, Belgium, and the US.
Louis, F., O’Daly, C., Vallery, A., De Schepper, S., Schneider, H., and Greenfield, L.B.: “Two Negatives don’t make a Positive”, EU Law Live, 11/09/2024, https://eulawlive.com/competition-corner/two-negatives-dont-make-a-positive-by-frederic-louiscormac-odaly-anne-vallery-sophie-de-schepper-hartmut-schneider-and-leon-b-greenfield/
The
Article 22 EUMR Illumina-ted:
Commission’s
killer Solution for below-threshold Mergers is dead – long live the ‘double
Dutch’
Anna Tzanaki
On 3 September 2024, the Court of Justice delivered its much-awaited judgment in the Illumina and Grail cases (C-611/22 P and C-625/22 P). In a high-stake judgment reversing the General Court’s earlier decision (T-227/21), the EU’s highest Court found that the Commission’s attempt to extend its merger review powers over below-threshold transactions by ‘repurposing’ Article 22 of the EU Merger Regulation (EUMR) was unlawful. But the future remains uncertain.
The Commission’s expansive interpretation of Article 22
At the center of the dispute was a new policy, crystallised in a Commission Guidance of March 2021, that sought to significantly expand the scope for ‘upward’ referral to the Commission of mergers with no ‘EU dimension’ under Article 22 EUMR, also known as the ‘Dutch clause’. In sharp contrast to past practice, this ‘recalibrated’ approach to Article 22 could enable the Commission to examine ‘via the back door’ nonreportable mergers both at EU and national level: transactions that fell below the EUMR’s turnover-based jurisdictional thresholds and national thresholds of referring Member States with domestic merger control laws in place. The Commission’s policy accepting referrals from any Member State, even if non-competent, was first put to use in the Illumina/ Grail merger.
It is this novel interpretation of Article 22 that the Court of Justice has now declared dead. In summary, the Court made explicit that the Commission cannot ‘encourage or accept referrals of proposed concentrations without a European dimension from national competition authorities where those authorities are not competent to examine those proposed concentrations under their own national law.’ Or in the words of Advocate General Emiliou, ‘no one can give what they do not have’ (para 65): EU jurisdiction cannot be created relying on referral from Member States with no original jurisdiction in the first place.
An EU solution for killer mergers?
The Commission’s intention with the new policy was to flex its jurisdictional muscle over ‘ killer acquisitions’ that could affect competition and innovation in the EU especially in digital and pharmaceutical sectors. Killer mergers driven by the motive to eliminate future competitive threats typically involve acquisitions by large incumbent firms of small-size targets such as innovative startups with no or limited turnover. According to Commissioner Vestager, ‘killer acquisition’ is a shorthand for any problematic below-threshold merger that may escape ex ante merger review under the EUMR. In addition, the Commission’s implicit fear was that any void left by the EUMR could be covered by disparate and expanding Member State laws leading to potential fragmentation of the internal market.
Article
Unmoved by these valid policy concerns, the Court rejected a broad reading of Article 22 as a ‘targeted’ solution to the EUMR’s perceived enforcement gap due to the operation of its rigid turnover thresholds. Contrary to the Commission’s and the General Court’s interpretation, with its Illumina judgment the Court of Justice settled that Article 22 EUMR cannot serve as a general-purpose ‘corrective mechanism’ intended to remedy deficiencies in the merger control system, by enabling the scrutiny of transactions that do not meet either the EU or the national thresholds’ (para 192).
The origins and narrow rationale of Article 22
The Court’s conclusion in favor of a narrow scope of Article 22 is based on the history, context and purpose of the provision and the EUMR as a whole. In particular, it is made clear that the Article 22 referral mechanism ‘pursues only two primary objectives:’ first, the original rationale for the ‘Dutch clause’ in 1989 was ‘to permit the scrutiny of concentrations that could distort competition locally, where the Member State in question does not have any national merger control rules’ (such as Netherlands at the time, and only Luxembourg at present); and second, with the 1997 amendment of the EUMR, ‘to extend the ‘one-stop shop’ principle so as to enable the Commission to examine a concentration that is notified or notifiable in several Member States, in order to avoid multiple notifications at national level’ (para 199). In other words, the Commission were to act ‘on behalf of’ non-competent Member States (para 197) or ‘replace’ competent Member States (paras 179-180) in merger cases with cross-border effects to ensure a more effective and efficient merger review at EU level.
Effectiveness of EU merger control and its political bounds
Effectiveness however has had clear limits. The Commission’s competence under the EUMR was confined to reviewing ‘concentrations’ with an ‘EU dimension’ determined by clear-cut turnover thresholds (Article 1 EUMR). The threshold-based rules of competence allocation were at the heart of the political bargain struck between the Commission and Member States that were eventually convinced to cede part of their national powers for pan-European merger control to arise. As such, the EUMR was founded on the principle of a ‘clear allocation of powers’ (para 207): ‘centralised’ ex ante EU merger control were to capture only transactions above the EUMR thresholds whereas below-threshold transactions were left to Member States to regulate under national law.
The Commission’s recent attempt to creatively expand the scope of Article 22 more liberally enabling upward referrals would ultimately entail seizing powers from Member States and antagonising their competence without an amendment of the EUMR that would involve their agreement. The competence game would thus be transformed from a ‘zero sum’ to a ‘non-zero sum’ game with difficult to predict consequences.
EU merger control as a balance of various principles
Unlike past reform initiatives regarding case referrals under Articles 4(5) or 22 EUMR that promoted the principles of subsidiarity and ‘one-stop shop’ that animate the EU merger control and case referral system and aimed to improve rather than undermine the threshold-based rules, this policy shift was not disciplined by such principles. Short of a better solution, the Commission prioritised effectiveness and expediency by unilaterally ‘repurposing’ Article 22 over other considerations.
The Court however was not persuaded that the ‘end’ of effectiveness justified the Commission’s assertive means (para 211). It aptly understood that an expansive interpretation of Article 22 would upset not only the clear division of tasks between the Commission and Member States but also ‘the balance between the various objectives’ pursued by the EUMR (paras 202-205). Most notably, the effectiveness, predictability and legal certainty guaranteed to parties would be disproportionately threatened if the threshold-based system of mandatory ex ante EU merger control were to be overridden by an unlimited and unprincipled use of Article 22 that would leave room for (potentially multiple) informal and unclear procedures and lingering uncertainty about jurisdiction over a given merger (paras 206-210). In that context, ‘the thresholds set for determining whether or not a transaction must be notified are of cardinal importance’ (para 208), the Court proclaimed.
Back to the future – systemic reform or doubling down on the ‘Dutch clause’?
For the time being, the Commission’s aiming at problematic below-thresholds mergers seems to have failed. So, what can be done? The Court reflected on available solutions, yet none of these places the Commission in the driving seat. One route is the revision of the EUMR according to the simplified procedure provided for under Article 1(5) EUMR with a view to lower the turnover thresholds or introduce additional criteria (e.g. based on transaction value) that expand the EUMR’s scope and the Commission’s competence (paras 216 and 183-184). Alternatively, the EU legislature could ‘provide for a safeguard mechanism enabling the Commission to scrutinise such a transaction’ (para 216). A second route is for legislative change at the level of Member States that are free ‘to revise downwards their own thresholds’ under national law (para 217). A third route is antitrust enforcement and potential ex post review of mergers based on Article 102 TFEU abuse of dominance rules that are directly applicable by national competition authorities and courts as confirmed in Towercast (C -449/21) (para 214).
Reacting to the Illumina judgment, the Commission reiterated that the need for a killer solution remains and that it will continue to accept referrals from Member States competent to review the referred mergers. As several Member States have recently expanded their own jurisdictions, more referrals under a ‘traditional approach’ to Article 22 are said to be possible. On the other hand, an amendment of the EUMR introducing a ‘safeguard mechanism’ that empowers the Commission could take the form of a revision of Article 22 ‘to allow for the referral of sub-threshold mergers by Member States without jurisdiction in defined circumstances.’
The Commission may have lost this battle, but it appears unwilling to surrender the arms in the long and strategic fight over competence to review killer acquisitions. The Court has left open options and questions that next time may turn to the EU executive’s advantage. For instance, is a merger falling within a Member State’s competence merely a necessary or also a sufficient condition for referral under Article 22? Can a Member State trigger an Article 22 referral relying on ‘call-in’ powers or should it be competent under ex ante national merger control rules? Until these questions are settled or standalone EU ‘call-in’ merger powers are introduced, more creative flexing by the Commission doubling down on Article 22 as a jurisdictional basis may be expected. This in turn may provoke (mixed) reactions by Member States – contrast e.g. Germany and Austria to France – about the competence allocation game… Alas, we are now in a ‘non-zero sum’ state of the world!
Article 22 EUMR: The Impact of the Illumina/Grail Judgment
Anna Tzanaki is a Lecturer in Law at the University of Leeds. She is also an Affiliate Fellow of the Stigler Center for the Study of the Economy and the State, University of Chicago Booth School of Business; a Senior Research Fellow of the UCL Centre of Law, Economics & Society; and an Affiliated Scholar of the Dynamic Competition Initiative. Her forthcoming article in the Antitrust Law Journal on ‘Dynamism and Politics in EU Merger Control: The Perils and Promise of a Killer Acquisitions Solution Through a Law & Economics Lens’ explores in detail many of the issues raised by the Illumina judgment and touched upon in this op-ed.
SUGGESTED CITATION: Tzanaki, A.; “Article 22 EUMR Illumina-ted: The Commission’s killer Solution for below-threshold Mergers is dead – long live the ‘double Dutch’”, EU Law Live, 09/09/2024, https://eulawlive.com/competition-corner/ article-22-eumr-illumina-ted-the-commissions-killer-solution-for-below-threshold-mergers-is-dead-long-live-the-doubledutch-by-anna-tzanaki/
In its Grand Chamber Judgment, Illumina/Grail (C-611/22 P and C-625/22 P) of 3 September 2024 the Court of Justice reversed the General Court’s decision (Illumina v Commission (T-227/21)): Article 22 Merger Regulation 139/2004 (‘EUMR’) is not a ‘corrective mechanism’ to allow for the review of concentrations below EU and national merger control thresholds. Previously, the General Court had confirmed the European Commission’s competence to review mergers based on requests by national competition authorities (‘NCAs’) under Article 22 EUMR; notably, even if these authorities did not have competence based on national law.
Going forward, NCAs of EU Member States can only submit a request to review a concentration to the European Commission if they have jurisdiction to review a merger under their national regimes. In addition, NCAs, whose jurisdictions do not provide for merger control rules, can also submit a request (for now: the Luxembourgian NCA, although merger control might be introduced in Luxembourg soon).
A recap of the facts
The factual background to the decision is well-known in the competition community: After a complainant voiced concerns about Illumina Inc.’s (‘Illumina’) intended acquisition of sole control over Grail LLC (‘Grail’), a developer of blood tests for the early detection of cancer, the European Commission had invited NCAs to submit requests that the Commission examine the concentration pursuant to Article 22 (1) EUMR. The French Autorité de la concurrence submitted such a request in which the Belgian, Greek, Icelandic, Dutch and Norwegian NCAs joined. The Commission accepted the request, blocked the concentration on the grounds that Grail’s integration into Illumina would have incentivised and enabled Illumina to foreclose Grail’s rivals, imposed fines of € 432 million on Illumina and a symbolic € 1,000 fine on Grail for intentionally breaching the standstill obligation and asserted its new-found powers through a Guidance on the application of Article 22 EUMR .
European Commission response
On the same day, that the Court of Justice rejected the Commission’s approach, Executive Vice-President Vestager published a statement announcing that the Commission will continue to accept referrals from NCAs, including cases which transactions that do meet national thresholds, but can be called in by national authorities under their merger control regimes regardless. The Commission’s approach to the Illumina/ Grail merger and its Guidance on Article 22 EUMR were motivated by a perceived need to review acquisitions of companies with limited turnover that may nonetheless play a significant role, including start-ups with significant potential (killer-acquisitions). Such companies should be protected against the
risk of elimination. The Commission will now look toward finding a way to review mergers in cases that do not meet the EU notification threshold, but nonetheless would have an impact in Europe, noting that the regulatory landscape in the EU today is more extensive than at the time of the Illumina/Grail referral.
A few general observations help situate the most-pressing question: what’s next?
First, Italy now authorises its NCA to call-in below-threshold mergers, in particular, if there are real risks for competition in the Italian market, taking into account detrimental effects on innovative startups. Ireland, more generally, provides for a call-in option, while Denmark allows for the call-in of lowturnover mergers. In an immediate reaction to VP Vestager’s statement, the heads of the Austrian and German NCAs affirmed that they would continue submitting referrals under Art 22 EUMR if the national thresholds, including the turnover-independent transaction value based thresholds, are met. The Court of Justice (Illumina/Grail (C-611/22 P and C-625/22 P, para 217)), pointed Member States to the possibility to lower their turnover-based thresholds, should they observe a need to review mergers involving ‘innovative undertakings which play or are capable of playing an important competitive role despite the fact that they generate little or not turnover’.
Second, the wisdom of an ex-ante screening of below-threshold mergers for killer-acquisitions is not self-evident. Insofar as killer-acquisitions justify competition concerns, it is not clear why ex-ante merger control should be preferred to ex-post abuse of dominance enforcement. Absent explicit internal documents, distinguishing real killer acquisitions from pro-competitive mergers faces a significant evidentiary burden. Curiously, Illumina / Grail was not a killer acquisition. The Commission’s theory of harm was the threat that Illumina might have incentives and the capacity to foreclose Grail’s competitors from accessing Illumina’s next generation sequencing systems for the development of NGS-based cancer detection tests.
Third, killer acquisitions are rare (cf. Ivaldi, et al). There is a trade-off between the risks imposed on all businesses by reducing legal certainty through an extension of merger control to below-threshold transactions and the dynamic efficiencies associated with the prevention of killer acquisitions. Notably, the Court of Justices emphasised in Illumina/Grail, para 208 et seq that ‘the thresholds set for determining whether or not a transaction must be notified are of cardinal importance’.
Fourth, gatekeepers must notify the Commission of intended mergers if the merging parties or the target provide core platform services, any other services in the digital sector or enable the collection of data irrespective of any notification requirement under merger control rules (Article 14 DMA).
Towercast to the rescue?
Against this backdrop, parties to below-threshold transactions will continue having to navigate significant merger control risks.
Citing its Towercast (C-449/21) judgment, the Court of Justice emphasised in Illumina/Grail, para 214 that the EUMR ‘does not preclude the competition authority of a Member State from regarding a concentration of undertakings which has no European dimension […] and which is below the thresholds for mandatory ex ante control laid down in national law, as constituting, for example, an abuse of a dominant position prohibited under Article 102 TFEU.’ The Court of Justice does not mention its additional reasoning in Towercast (C449/21), para 53, that the review under Article 102 TFEU may take place for below-threshold mergers
Article 22 EUMR: The Impact of the Illumina/Grail Judgment
that ‘ha[ve] not been referred to the Commission under Article 22’. Through this omission, the Court of Justice at the same time affirmed Towercast, while updating it to the ruling in Illumina/Grail. Since below-threshold mergers (without other grounds for jurisdiction) can no longer be referred pursuant to Article 22 EU Merger Regulation, the application of Article 102 TFEU can no longer turn on whether an NCA had referred such a case to the Commission or not. NCAs continue to have authority to review non-notifiable mergers with a non-European dimension under Article 102 TFEU.
What about mergers that are non-notifiable because they fall below all thresholds, but that have an EU-wide dimension?
While the Commission is searching for ways to review non-notifiable mergers, the public consultation on its Draft Guidelines on the application of Article 102 of the Treaty on the Functioning of the European Union to abusive exclusionary conduct by dominant undertakings (‘Draft Guidelines on Article 102 TFEU’) is ongoing. At this time, the Draft Guidelines on Article 102 TFEU, paras 10 and 12 quote Towercast (C449/21) solely to state that the types of abuses mentioned in Article 102 TFEU is exemplary only and that the Guidelines are without prejudice to the application of other provision of EU law to the same facts.
The reasoning of Austria-Asphalt (C-248/16, para 32) speaks against extending the Commission’s powers to review non-notifiable mergers via Article 102 TFEU based on the Towercast-judgment: ‘As follows from Article 21(1) of Regulation No 139/2004 [EU Merger Regulation], that regulation alone is to apply to concentrations as defined in Article 3 of the regulation, to which Regulation No 1/2003 is not, in principle, applicable.’ The qualifier ‘in principle’, could, theoretically, open up space for the Commission to apply Article 102 TFEU to nonnotifiable mergers more generally. But the Court of Justice’s reasoning in Illumina/Grail (C-611/22 P and C-625/22 P, paras 211 et seq.) points in another direction: Referencing Austria Asphalt, (C -248/16, para 31), the Court of Justice reasoned that the ‘need to permit effective control of all concentrations with significant effects on the structure of competition in the European Union’ cannot justify extending the scope of the EU Merger Regulation, that the EU Merger Regulation provides ‘for prior control, based on a system of mandatory notification’ and that it is ‘part of a legislative whole intended to implement Articles 101 and 102 TFEU and to establish a system of control ensuring that competition is not distorted’. If the EU Merger Regulation and Articles 101 and 102 TFEU form a legislative whole and the EU Merger Regulation alone is to apply to mergers, an extension of Towercast to authorise the Commission to review mergers based on Article 102 TFEU is doctrinally difficult.
Does that preclude the Commission from reviewing (true) killer acquisitions? The reasoning from Austria Asphalt that the Court of Justice relied on in Illumina/Grail relates to the review of mergers but does not relate to the review of the conduct of a dominant undertaking. However, the theory of harm behind killer acquisitions is not that a (perhaps dominant) company acquires a challenger. It’s that a dominant undertaking acquires a challenger and abandons the challenger’s innovation, i.e., the conduct after the acquisition constitutes the (potential) abuse. While Illumina/Grail likely limits the Commission’s powers to review mergers ex ante based on Towercast, it does not prevent the Commission from building a cased based on a killer acquisition theory of harm under Article 102 TFEU ex post.
Considering the altered regulatory landscape that allows Italy, Ireland and potentially Denmark to call-in mergers, parties will do well to strategically structure their regulatory filings within the EU.
Sebastian Reiter is an attorney based in Vienna and a Lecturer of Private Law Theory at the University of Vienna. Most recently, Sebastian published (in German) on the interplay of the EU Data Act and the Horizontal Guidelines on access to non-personal data (ÖBl 2023/74) and the extension of Austria’s antitrust sustainability exemption to its merger control regime (ÖBl 2022/32).
SUGGESTED CITATION: Reiter, S.; “Illumina/Grail: Killer acquisition detection tool fails trial”, EU Law Live, 06/09/2024, https://eulawlive.com/competition-corner/illumina-grail-killer-acquisition-detection-tool-fails-trial-by-sebastian-reiter/
Illumina/Grail and Towercast – a coherent Standard of Merger Control (?) and
what’s left for the national
Legislator
Eva Fischer
Illumina/Grail (C -611/22 P and C-625/22 P) offers a coherent framework for merger control – especially when read in conjunction with Towercast (C -449/21), and points at the national level for either ex-post merger control by national competition authorities (NCA) or for ex-ante legislative reforms.
In essence: Illumina/Grail (C -611/22 P and C -625/22 P)
Much to the surprise of the competition law community the European Court of Justice (‘ECJ’) refrained from granting the European Commission (‘EC’) jurisdiction for below-threshold ex-ante merger control in the Illumina/Grail case. According to the ECJ, if the threshold for merger control is neither met on the EU nor on the Member States’ level, the EC cannot be competent to review a merger case by referral (Art. 22 EUMR) of one of the Member States authorities (C-611/22 P and C-625/22 P, paras. 196, 201). The (more) intrusive instrument of merger control is therefore only applicable if one of the national competition authorities has jurisdiction according to the Court of Justice, thus restricting the far-reaching interpretation of Art. 22 EUMR adopted by the EC to justify intervention, without having jurisdiction based on EUMR or on national merger control upon referral. The ECJ thereby clarifies that Art. 22 EUMR serves only two purposes:
• The first one being to establish jurisdiction on the EU level, where such ex-ante competencies for national authorities are not (yet) established on the national level. With Luxembourg being the only Member State not having a merger regime adopted until today, one could argue this purpose is of historical significance.
• The second purpose is to prevent diverging decisions of Member States’ authorities by assigning the case to the EU level. This also saves resources on all sides (private parties and competition authorities) by undergoing only one single procedure of ex-ante merger control. Also, a binding decision of the EC on the EU level clarifies for the internal market whether the merger is cleared, creating legal certainty for merging parties (the so-called “one-stop shop” principle).
Merger control for below-threshold mergers does not fit to one of the two purposes of the provision.
A coherent framework of ex-ante and ex-post rules
Below-thresholds mergers, however, create a growing need for competition authorities to intervene. The EC’s attempts to establish jurisdiction in the Illumina/Grail case makes this clear, as does the Towercast case. In Towercast, a formal complaint was filed after the merger due to restrictive effects on competition.
Article
Neither the national competition authorities nor the EC had jurisdiction to review ex-ante. The answer of the ECJ, though, is different when it comes to (less intrusive) ex-post merger control. If neither Member States merger rules nor the EUMR grants jurisdiction for ex-ante review, the Towercast case offers ex-post control of the actual impact of the merger on the national markets. This is convincing – at least under the current legal framework – because the ex-post standard can rely on proven anti-competitive effects on competition on the relevant market while the ex-ante approach has to presume such effects. It is therefore – one may argue – the less intrusive instrument in terms of competition authorities’ competencies to design the competition on the market by competition law instruments. As argued elsewhere (Fischer, Double checking mergers: Ex-ante and ex-post competition law enforcement and its implications for third parties, JECLAP 2024), this approach is also favourable when looking at third-party rights. Art. 102 TFEU – contrary to most merger control regimes – offers third parties to initiate proceedings by the competition authorities (by complaints or by informal means), which in turn also uses their market insights for competition law enforcement.
NCAs’ ex-post competences
The competence for ex-post review of merger cases, though, lies with the national competition authorities. If ex-ante merger rules are not applicable, the authorities can react to detrimental effects on competition expost. This also (alongside the EC’s intervention in the Illumina-case, rejected C-611/22 P and C-625/22 P, para. 206) reduces legal certainty because the merging parties must fear ex-post competition law rules while not being forbidden to merge. However, Art. 102 TFEU procedures also allow for a wide range of remedy options, not necessarily forcing the merged parties to untie. In the absence of more elaborate merger control regimes for below-threshold merger regulation, an ex-post standard with reasonable remedies seems convincing (see in this vein also Fischer, Double checking mergers: Ex-ante and ex-post competition law enforcement and its implications for third parties, JECLAP 2024). As aforementioned, the Towercast standard requires that the purchaser gains control over the acquired entity that does not longer act autonomously, that it reaches a certain degree of dominance that impede competition on the market and that the purchaser has a certain dominant position when acquiring. This is now reinforced by the Illumina/Grail judgement: All cases, that could potentially have been referred under Art. 22 EUMR are now only subject to the Towercast ex-post standard applied by national competition authorities.
What’s left for the legislator?
Member States’ legislators are free to adopt amendments to their merger control regimes. Especially cases of below-threshold mergers that can create detrimental effects on competition might be more effectively regulated ex-ante. Such amendments are easier agreed upon on the national level as on the EU level, where reforms of EUMR are unrealistic in the foreseeable future. It is because ex-post rules may lead to additional costs and creates long-lasting procedures, the ECJ indirectly asks for Member States’ legislators to modernise their merger control rules. Member States’ legislators therefore need to ask whether the threshold-based merger control system (alone) is still a good fit for the current market and whether new tools are needed especially with regard to small but extremely innovative companies with potential disruptive impacts on markets (e.g. killer acquisitions).
There are already some Member States that have created additional frameworks. In some, national competition authorities can pick cases of significance that do not fall under the threshold-based merger regulation (e.g. Italy). Also, Member States have adopted criteria for merger control that do not solely
Article 22 EUMR: The Impact of the Illumina/Grail Judgment
rely on turnover but allow ex-ante merger control based on additional factors such as the size of transaction test (e.g. § 35 para. 1a National Competition Code, Germany). Such additional national competencies are in turn favorable for the EC because they enable Art. 22 EUMR. As a result, the ECJ tells Member States to amend their national merger control frameworks, so as to allow for referrals to the EC based on law, but prohibits referrals based on case-law standards.
To conclude: There will not be any ad-hoc competence for the EC – a statement very convincing when looking at the division of power between the executive powers of competition authorities and legislative powers of national and EU legislators.
SUGGESTED CITATION: Fischer, E.; “Illumina/Grail and Towercast – a coherent Standard of Merger Control (?) and what’s left for the national Legislator”, EU Law Live, 10/10/2024, https://eulawlive.com/competition-corner/illumina-grail-and-towercast-a-coherent-standard-of-merger-control-and-whats-left-for-the-national-legislator-by-eva-fischer/
Eva Fischer is a PhD Candidate at LMU Munich.
The Aftermath of Illumina/Grail –Time to change the EU Merger Regulation?
Dr Andreas Schwab and Dr Björn Herbers
On 3 September, the European Court of Justice (“ECJ” or “the Court”) handed down its judgment in Illumina/Grail (C-611/22) and since then the newsletters, client alerts and comments in the press and on social media have been buzzing. What’s the excitement all about? In March 2021, the Commission made a significant policy change (“recalibration”) to its policy regarding referrals under Article 22 of the EU Merger Regulation (EUMR) in order to fill gaps in the scope of EU merger control.
Like (still) most merger control regimes, the EUMR is based on turnover thresholds that must be met by the merging parties in order for the competition authorities to be able to assess them. The aim of thresholds is generally to identify economically significant transactions that require an ex-ante control and delineate them from those that do not1. However, equating turnover with economic significance means that transactions involving small, still growing companies, in particular start-ups, or companies focusing on R&D may not be subject to merger control, even if the companies involved have a high competitive potential. Turnover in the last financial tells something about the current competitive potential, but the purpose of merger control is to control the market structure and to make predictions; it is the future, not the past, that is relevant. This concern has been discussed in the EU for a while. In the legislative process of the Digital Markets Act (“DMA”) transactions involving tech start-ups played an important role as the Facebook/WhatsApp merger (Comp/M.7217) (which was reviewed by the Commission only following a referral) has been politically considered a failure of the EUMR by showing that the jurisdictional thresholds often struggle to capture acquisitions involving emerging companies and start-ups. More recently these struggles were seen as a problem in the pharmaceutical markets; it is estimated that almost 6% of all acquisitions of firms with drug projects in development are killer acquisitions aiming to prevent future competition.2
In its 2016 evaluation of procedural and jurisdictional aspects of the EUMR , the Commission had considered how it could catch transactions involving companies with competitive potential but without the corresponding turnover. The results showed that the Commission did not consider it appropriate introducing transaction value thresholds as Austria and Germany have done. Instead, it chose the trick of amending its policy on Article 22 EUMR.
The wording of Article 22 EUMR allows Member States that do not have jurisdiction under their own merger control rules to refer transactions to the Commission for review because of their EU-wide impact. However, traditionally the Commission had pursued a practice of discouraging referral requests under Article 22
1. Given the Commission’s role as a supra-national authority the EUMR thresholds have the additional purpose of allocating cases between the Commission and the competition authorities of the Member States. If a transaction does not meet the EU thresholds it may face merger control in the member states. The EUMR turnover thresholds are designed to govern jurisdiction and not to assess the market position of the parties to the concentration nor the impact of the operation, see Commission, Consolidated Jurisdictional Notice, paragraph 127.
2. OECD, Start-ups, Killer Acquisitions and Merger Control, 2020, p. 8 (retrievable at: https://one.oecd.org/document/DAF/COMP(2020)5/ en/pdf )
Article
EUMR from Member States that did not have original jurisdiction over the transaction at stake. Now, in 2021 the Commission announced in its Communication that it would from now accept such referrals in certain circumstances and would also invite Member States to make such referrals even when even if they lacked jurisdiction under their own national rules, in order to capture competitively relevant transactions below threshold deals. This gave the Commission in its view, in cooperation with the Member States, the de facto power to call in any transaction for review especially in digital markets and the pharmaceutical sector. Indeed, a Commission team was subsequently tasked with monitoring the market for possible referral candidates. Article 14 DMA, which requires gatekeepers to report transactions in the digital and data related markets, is also based on the assumption of such a call-in possibility. Article 22 EUMR was thus well on its way to becoming a central element of EU merger control.
However, the ECJ has now thwarted the Commission’s approach. The Illumina/Grail transaction was the first case in which the Commission established its jurisdiction through referring non-competent member states. Illumina immediately challenged the referral decision and so the Commission policy come under judicial review. And while the General Court sided with the Commission and upheld the Article 22 policy in its Illumina/Grail judgment, the judges of the Court of Justice only confirmed that the wording of the provision allowed for such referrals by Member States without jurisdiction. With regard to history and context the ECJ fund that they did not provide a basis for the Commission’s practice, but most importantly the ECJ found that Commission’s policy could not be reconciled with the telos of the EUMR. The judges pointed that the purpose of the ECMR was to provide a predictable system of control that reflected the principle of legal certainty and was based on the one-stop shop system. Turnover thresholds were considered by the Court as a central element of such system as they allow a simple and clear assessment. Article 22 can be used to establish which authority (the Commission or a national competition authority) should assess a notifiable transaction but cannot serve as a means to determine whether a transaction will be scrutinised at all. In the context the Court explains that EU merger control provides a specific system for mandatory control of transactions above certain thresholds; recourse to Article 102 TFEU was possible for the case-by-case control of potentially abusive traditions (Tower Cast jurisprudence).
However, it appears the key point for the Court was that the Commission could not simply extend the scope of merger control if it considered that further transactions should be subject to EU merger control. That would be a matter for the EU legislator. Member States, on the other hand, were free to lower the thresholds of their own merger control rules if they consider that the level of control is not high enough for their markets.
The ECJ has received much praise for its judgment overruling the General Court and annulling the Commission’s decision. And it is indeed legally convincing that the Commission cannot create a call-in option by making use of the broad wording of Article 22 EUMR. Article 22 EUMR, as interpreted by the Commission, was no longer a correction of the division of competences between the Member States and the Commission in individual cases but a competence rule. This is confirmed by Article 14 DMA. Article 14 of the DMA stipulates that designated gatekeepers are obliged to report all digital transactions to the Commission and provide detailed information. The further provisions in this provision allow the Commission to share this information with the member states and to invite them to make an Article 22 EUMR referral. This “merger control element” in the DMA was obviously based on the assumption that the Commission’s Article 22 EUMR policy would provide the Commission a de facto call in right.
So far so good. However, the rejection of the Commission’s solution means that the EU must once again ask itself whether and how it can and must extend the scope of merger control to potentially problematic transactions involving companies without high turnover. In its 2016 evaluation of EU merger control, the Commission found that there is a need to control (not necessarily block) such transactions, and this view is shared by many other member states. But how to achieve such control? The ECJ refers to Tower Cast in this context, but the question is whether the frequent use of Article 102 in merger control cases can really be a solution. This starts with the fact that, unlike in merger control cases, there is no time limit on the procedure for abuse of cases; the legal consequence is more consequence: in merger control cases a transaction can be prohibited without the prohibition having any legal consequences for the companies involved. An abuse under Article 102 constitutes an administrative violation and is punishable by a fine.
The ECJ in Illumina also mentions that Member States could lower their thresholds to cover more transactions. However, the trend is in the opposite direction. Thresholds that are too low lead to a high administrative burden and catch a large number of transactions that are not economically significant and therefore do not require control. Member States such as Austria, which traditionally had low thresholds and a high number of merger control cases, have raised the thresholds or introduced additional thresholds. Germany is currently discussing a significant increase in the thresholds. And it is questionable if an amendment of the turnover thresholds can do the trick at all. How low can you go?
The problem with potentially problematic transactions involving start-ups is precisely that they involve companies with no or very low turnover. Instead of lowering the thresholds, Member States are therefore opting for other solutions. Germany and Austria have introduced transaction value thresholds and a number of other Member States have added call-in options to their merger control rules or are considering to do so. Companies planning a transaction already today are therefore by no means be able to determine whether their transaction is subject to merger control in the EU on the basis of turnover data alone, as the ECJ assumes (and as would be desirable). And the situation could become worse if more member states amend their rules. As correct as the ECJ is in stating that Article 22 EUMR would have required companies to send information letters as de facto “mini-notifications” to all Member States in order to achieve legal certainty, the situation that will arise if the Member States now take matters into their own hands could become even less satisfactory. Under Article 22 EUMR, there are at least time limits for Member States to make referrals. Call-in rights on the contrary can be applied long after closing of a transaction, as the UK example shows. Without a briefing paper or voluntary filing, legal certainty cannot be achieved in jurisdictions with such rules. The absence of a European solution may therefore lead to a situation of diminishing legal certainty in the Member States.
So, is this a case for the European legislator and a mandate to review adapt the EUMR? The hurdles are high. Amendments to the EUMR require unanimity in Council and touching the EUMR could open pandora’s box. But if the Commission would propose a limited amendment focusing on thresholds and if Member States understand that such a small proposal to “quick-fix” a European solution for a limited problem has technically no alternative, the amendment could be done quickly. The risk could come from some of the larger Member States within the Union who might see this as a way for the Commission to grab power.
Dr Bjoern Herbers is a partner at the CMS EU Law Office in Brussels. He focuses his practice on merger control as well competition and regulatory law in digital markets.
Dr. Andreas Schwab is a regulatory lawyer and a Member of the European Parliament (MEP) since 2004. He has steered key legislation on competition policy, consumer rights, services and cybersecurity through Parliament.
Schwab, A. and Herbers, B.: “The Aftermath of Illumina/Grail – Time to change the EU Merger Regulation?”, EU Law Live, 17/09/2024, https://eulawlive.com/competition-corner/the-aftermath-of-illumina-grail-time-to-change-the-eu-mergerregulation-by-dr-andreas-schwab-and-dr-bjorn-herbers/
European Court of Justice curbs Commission’s Ambition to review non-notifiable Mergers
Dr Andrea Pomana, Alejandro Guerrero and Jonathan Saké
Illumina/Grail judgement points to legal certainty, institutional balance and alternative tools.
On 3 September 2024, the European Court of Justice, in a landmark decision, put an end to the Illumina/ GRAIL saga. It ruled that, under the EU Merger Regulation, the European Commission cannot expand its jurisdiction to review mergers that are not notifiable at EU or Member State level. The judgement goes far beyond merger control and is relevant to the application of EU law generally, particularly the principles of legal certainty and the institutional balance within the Union.
The case concerned the planned takeover of the cancer test manufacturer Grail by the biotech company Illumina, which was prohibited by the Commission in 2022. The transaction did not have to be notified to the Commission or any EU Member State. Grail did not generate any turnover in the EU or globally. Therefore, no competition authority within the EU had jurisdiction to review the transaction. Only after the Commission “asked” several Member States to “refer” the case to it, and Member States responded to this request by requesting the Commission to look at the takeover, the Commission called the case “in” for review under the Merger Regulation.
The Court of Justice now strikes down this practice. The Commission may not expand its jurisdiction under Article 22 of the Merger Regulation. The mechanism set therein to refer a merger to the Commission was originally designed for those Member States that did not yet have a merger control regime in place. However, if they do have such a regime and the formal notification thresholds are not met, the Commission may neither suggest nor accept a referral. This would violate the principles of subsidiarity, proportionality and legal certainty.
The judgment of the Court of Justice marks the end of a procedural war that started in June 2021. It now causes a domino effect in the underlying procedure, invalidating all referral decisions and a myriad of follow-on decisions taken by the Commission after the referral, including the prohibition of the merger, the fining of Illumina and GRAIL of c. EUR 432 million for gun-jumping, the order to unwind the merger, etc.
The judgment also brings an end to the Commission’s new policy position published on 2021, by which it aimed to permanently leave open a backdoor for review of mergers (particularly “killer acquisitions”) that did not fall under EU or national merger control rules, but nevertheless were considered to possibly affect competition and trade in the EU.
Legal certainty over regulatory interventionism
With its ruling, the Court of Justice undoubtedly puts legal certainty over regulatory interventionism. It finds that that merger regulation rules and thresholds set for determining whether or not a transaction must be notified are an important guarantee of foreseeability and legal certainty for undertakings concerned. In addition, the Commission’s athletic interpretation of its powers is liable to upset the balance between the
various objectives pursued by that regulation. Undertakings must be able to easily determine whether their proposed transaction must be the subject of a preliminary examination and, if so, by which authority and subject to what procedural requirements.
The judgment of the Court of Justice is highly welcomed by practitioners and investors alike. The broad interpretation of the Commission’s competencies had led to great legal uncertainty in practice. As noted by Advocate General Emiliou in the proceedings, the Commission’s practice, if taken to its logical conclusion, would have required companies to make informal filings with all competition authorities in the EEA (currently 30) to prevent the Commission from taking over the case “at some point in the future”. This scenario was not even intended by the Commission, but would have de facto unfold to avoid regulatory risks.
Division of powers within the Union
The judgement serves as a staunch reminder of the importance of the principle of conferral of powers within the EU legal order. This is one of the key aspects where the Court of Justice clashed with the General Court, in particular as regards the interpretation of recital 11 to the Merger Regulation – the recital that refers to the rules on referral as a “corrective mechanism” to the principle of subsidiarity. The Court of Justice clarified that the recital refers to a mechanism designed to determine which authority is better positioned to review certain deals rather than addressing any perceived enforcement gaps arising from revenue-based thresholds. More broadly, the Court of Justice reiterated that the EU merger control system is based on a “clear allocation of tasks” between the Commission and the Member States, which would be jeopardized by an expansive interpretation of Article 22 of the Merger Regulation.
The judgment is also of particular interest given the Court of Justice’s guidance in relation to the “correct” interpretation of Article 22 of the EU Merger Regulation. In spite of its disagreement on the outcome of the analysis, the Court of Justice endorsed the General Court’s decision to resort to a detailed historical, contextual, and teleological interpretation of Article 22 of the EU Merger Regulation, therefore siding against Advocate General Emiliou’s harsh criticism vis-à-vis the General Court’s interpretational exercise. In doing so, the Court pointed out that even where EU law provisions appear to be clear, EU Courts may still rely on other means of interpretation to clarify the exact scope of the provision. The Court of Justice therefore concludes that the General Court was fully entitled to engage in a lengthy historical, contextual and theoretical interpretation of Article 22 EUMR, which it subsequently dissects (and largely rebuts).
What’s next?
In the short term, the Commission and national competition authorities will need time to review the judgment and extract appropriate conclusions and necessary regulatory changes. In the medium to long term, however, current and new legal changes may be made in order to expand authorities’ powers to call in deals.
The Court of Justice has pointed at three alternative tools or mechanisms that the Commission and Member States can action in order to capture below-threshold deals that may significantly impede effective competition.
First, the Court of Justice has suggested that the revenue thresholds in the Merger Regulation can be adjusted in order to bring more deals to the attention of the Commission and subject them to review.
While this option has been discussed in Brussels in some occasions in the past (e.g., on the occasion of Brexit), it seems like an unfit solution to the fact-pattern put by Illumina/GRAIL, as this deal concerned the acquisition of a company with no actual revenue in the EU. The Commission has historically been reluctant to modify the thresholds for this purpose, as it would significantly increase the regulatory burdens on unproblematic transactions just to capture the occasional “killer acquisition”.
Second, the Court of Justice has pointed to the recent Towercast judgment, where it ruled that belowthreshold transactions can be scrutinised as possible instances of abuse of dominance under Article 102 TFEU. Authorities like the French Competition Authority have already taken the Court’s word on this, indicating that they will rely on rules forbidding both anti-competitive agreements (Article 101 TFEU) and abuses of dominance (Article 102 TFEU) to tackle non-notifiable deals. The Merger Regulation is unclear on the possibility for the Commission to take this kind of action at EU level, so it remains to be seen whether it decides to embrace this possibility and consider future policy or legislative action to make it bullet-proof.
Third, national notification thresholds and competition authorities’ powers to call-in deals can be increased, in order to allow their review at national level and the possible referral of these deals up to the Commission.
Countries like Denmark, Hungary, Ireland, Italy, Latvia, Lithuania, Slovenia and Sweden introduced changes to their legislation to increase the powers of competition authorities to call in deals. This in turn could enable the authorities of these jurisdictions to refer problematic deals to the Commission, and close the loop criticised by the Court of Justice in Illumina/GRAIL. This legal avenue seems to be most in line to address the criticism in relation to the conferral of powers and the subsidiarity principle put forward in the judgment.
Outlook and final remarks
The Court of Justice aims to put a halt to an eager Commission that is overly receptive to below-threshold mergers and brings back legal certainty. It reminds the Commission clearly of the fine delineation and division of competences between itself and the Member States. This is a very important message in times where investors and their transactions are ever more subject to tight regulatory scrutiny – apart from merger control, also the foreign direct investment regimes and the Foreign Subsidies Regulation.
In addition, the judgment provides for interesting reading against the background of Mario Draghi’s report on the future of European competitiveness, which was published mere days following the judgment. The report firmly underlines the need for a more principled application of the subsidiarity principle and the need to reduce the regulatory burden on EU companies to rekindle the competitiveness of the European economy. The report seems to urge the next Commission to limit this type of regulatory intervention against the backdrop of the waning competitiveness and overregulation experienced by European businesses. The Court of Justice judgment can generally be squared with the ideas behind this report.
Dr Andrea Pomana is a partner in the Antitrust and Competition practice of an international law firm based in Frankfurt.
Alejandro Guerrero is a partner and co-head of the EU Competition Law and Tech Regulation practice of an international law firm in Brussels.
Jonathan Saké is an Associate at an international law firm in Brussels and holds an LLM in European Legal Studies from the College of Europe (Bruges).
SUGGESTED CITATION: Pomana, A., Guerrero, A., and Saké, J.; “European Court of Justice curbs Commission’s Ambition to review non-notifiable Mergers”, EU Law Live, 18/09/2024, https://eulawlive.com/competition-corner/european-court-of-justice-curbs-commissions-ambition-to-review-non-notifiable-mergers-by-dr-andrea-pomana-alejandro-guerrero-and-jonathan-sake/
