On 26 March, the European Commission (“EC”) published its findings of the evaluation of procedural and jurisdictional aspects of EU merger control, and new guidance on the application of Article 22 of the EU Merger Regulation (“EUMR”) 1, encouraging Member States to refer more transactions to the EC for review, even where the transaction does not meet any EU or national thresholds. The EC explicitly singled out the digital and pharma/biotech sectors as areas in which potentially anticompetitive mergers have escaped scrutiny, leading the EC to revise its policy on Article 22 EUMR 2. Referrals may be requested in relation to both proposed and completed transactions. Baker Botts’ Life Sciences Antitrust and Competition team noted this abrupt shift in EU merger control policy and discusses below its particularly broad implications for deal makers in the life sciences sector, with a particular focus on deal certainty and timing implications.
Under Article 22 EUMR, Member States may request the EC to examine any concentration that does not meet any of the EU (turnover-based) thresholds but (1) “affects trade between Member States”, and (2) “threatens to significantly affect competition within the territory of the Member State or States making the request” 3. The EC may also directly call-in deals by ‘inviting’ Member States to refer a concentration which it considers fulfils these criteria. 4
The EC’s new policy regarding Article 22 EUMR has already led to a first noteworthy precedent in the life sciences sector, i.e. the referral to the EC of the proposed Illumina/GRAIL transaction.
1. The original context around Article 22 EUMR
Article 22 EUMR was introduced in the 1989 EUMR, as the “Dutch clause”, to ensure that transactions falling below EU thresholds but potentially impacting Member States which did not have their own merger control regimes (such as the Netherlands at the time) could be reviewed. The language of Article 22 EUMR therefore does not require the Member State(s) making the request to have original jurisdiction over the transaction at stake. However - with the progressive implementation of national merger control regimes throughout the EU 5 - the EC started discouraging the use of Article 22 EUMR where none of the referring Member States was competent to examine the transaction under national law. The EC’s policy was then notably based on the experience that such transactions were generally not likely to have any significant impact on the EU market. 6 This logically resulted in a very small number of Article 22 referrals; according to the EC’s own statistics, only three digital and pharmaceutical cases were reviewed by the EC pursuant to this provision between 2004-2020. 7
A debate progressively emerged on the effectiveness of the EU turnover-based merger control thresholds and whether these thresholds were appropriate to capture an increasing number of transactions involving high-value firms that had generated limited turnover at the time of the acquisition (e.g., Facebook’s acquisition of WhatsApp in 2014 for a purchase price of USD 19 billion). This market development appeared particularly significant in the digital sector, where companies regularly launch services with the aim of building up a significant user base and/or commercially valuable data inventories before implementing a business model that could result in significant revenues. Similar developments were observed in the pharmaceutical industry, where firms would sometimes pay a high price to acquire innovative R&D targets, even if these companies had not yet finalised, let alone exploited commercially, the results of their innovation activities. The same considerations apply to companies with access to or impact on competitively valuable assets, such as raw materials, intellectual property rights, data or infrastructure.
2. The EC’s revised policy
In the new Article 22 Guidance, the EC notes that a number of cross-border transactions in the digital and pharmaceutical sectors have escaped review by both the EC and the Member States , despite there being a potentially significant risk of anticompetitive effects within the EU. Such transactions typically involved firms that already play or would likely play “a significant competitive role on the market(s) at stake despite generating little or no turnover at the moment of the concentration”; in particular in the digital economy and pharmaceutical industry, as well as sectors “where innovation is an important parameter of competition”. 8
As a result – and while rejecting any modification to the current EU revenue-based thresholds and the introduction of value-based threshold – the EC decided to ‘resuscitate’ the original mechanism of Article 22 EUMR, with a view to plug-in a perceived lack of enforcement for high-value acquisitions of smaller innovative firm, in particular in the life sciences sector.
Under the EC’s new practice, Member States may refer any proposed or closed transaction which satisfies requirements a. and b. below. The EC may also consider whether the value of the consideration received by the seller is particularly high compared to the current turnover of the target.
The EC however indicates that circumstances where the transaction has already been notified in one or several Member States that did not request/join a referral may constitute a factor against accepting the referral.
Finally, the EC may also on its own motion call-in relevant transactions and invite Member States to submit a referral request.
a. The transaction must affect trade between Member States
As regards the concept of “trade”, the EC notes that Article 22 EUMR covers all cross-border economic activity and encompasses cases where the transaction affects the competitive structure of the market, or has an influence, direct or indirect, actual or potential, on the pattern of trade between Member States.
Specific factors which could be relevant may include the location of (potential) customers, the availability and offering of the products or services at stake, the collection of data in several Member States, or the development and implementation of R&D projects whose results, including intellectual property rights, if successful, may be commercialised in more than one Member State. 9
b. The transaction must threaten to significantly affect competition within the territory of the Member State or States making the request.
Referring Member States will satisfy this criterion if they demonstrate – based on a preliminary analysis – that there is an actual prima facie risk that the transaction may have a significant adverse impact on competition in their territory.
The EC provided examples of relevant theories of harm, which include: the creation or strengthening of a dominant position of one of the undertakings concerned; the elimination of an important competitive force, including the elimination of a recent or future entrant or the merger between two important innovators; the reduction of competitors’ ability and/or incentive to compete, including by making their entry or expansion more difficult or by hampering their access to supplies or markets; or the ability and incentive to leverage a strong market position from one market to another by means of tying or bundling or other exclusionary practices.10
Once the EC accepts a referral under Article 22 EUMR, the scope of its review will be limited to markets of the referring Member State(s), which may result in parallel reviews within the EU (e.g., when the transaction is notifiable in other Member States which did not join the referral request). For example, the German competition authority (‘Bundeskartellamt’) is currently assessing whether the Facebook/Kustomer transaction would be notifiable under German law. If so, the Bundeskartellamt indicated that it would require “Facebook to submit the respective documents for examination immediately”, despite the fact the EC already started reviewing the deal, following an Article 22 EUMR referral request from the Austrian competition authority.11
c. Examples of relevant cases
Both the EC and the Member State(s) requesting the referral retain a considerable margin of discretion in deciding whether to refer transactions or accept such referrals. In a recent statement on the Facebook/Kustomer proposed transaction, the Bundeskartellamt indicated that it would maintain its general practice of not referring cases which are not “subject to notification based on national competition law”.12
The EC however already identified a number of cases where a referral would be particularly appropriate, namely cases where the undertaking:
- is a start-up or recent entrant with significant competitive potential that has yet to develop or implement a business model generating significant revenues (or is still in the initial phase of implementing such business model);
- is an important innovator or is conducting potentially important research;
- is an actual or potential important competitive force;
- has access to competitively significant assets (such as for instance raw materials, infrastructure, data or intellectual property rights); and/or
- provides products or services that are key inputs/components for other industries. 13
This proposed list of scenarios confirms that the EC particularly targets acquisitions of innovative or emergent life sciences firms.
d. Timing issues for the merging parties
Timing for Article 22 EURM referrals adds another challenge for the merging parties: national authorities have 15 working days from the date when the concentration is “made known” to the Member State concerned to request a referral (when no notification is required).
The EC provided little guidance on how the concept of “made known” should be interpreted. It indicated that this notion implies that the Member State has sufficient information to make a prima facie assessment that the transaction affects trade between Member States and threatens to significantly affect competition within its territory.
In practice, this means that the 15-days limitation period may not be triggered by the mere publication of the merging parties’ press releases, and the parties may face an open-ended referral period in cases where no EU national merger filing is required. In order to accelerate the process, merging parties may voluntarily contact the EC or national competition authorities with information on their proposed transaction to try and trigger the 15-days limitation period and determine whether the deal could be subject to a referral. The Article 22 Guidance however does not specify under which timeframe the EC will respond to such initial contact 14, nor the level of details that it will provide.
The General Court will hopefully clarify such timing considerations when reviewing the process followed in the Illumina/GRAIL matter (see below).
Once notified of the request, other Member States have 15 working days to join the referral request and the EC then has 10 working days to decide on whether it will accept the referral, bringing the potential total duration of the process before the EC decides to review the deal to almost 2 months.
e. Impact on closed transactions
The EC notes that it would generally not consider referrals requested more than six months after the implementation of the concentration, or after the concentration have been made public in the EU, but that it may accept – in exceptional situations - later referrals based on, for example, the magnitude of the potential competition concerns and of the potential detrimental effect on consumers. 15
3. Early implementation of the new guidance: the Illumina/GRAIL matter
The EC surprisingly started to implement its new policy on Article 22 EUMR referrals about a month before actually publishing the new Article 22 Guidance, by calling-in a controversial biotech deal, namely Illumina, Inc.’s $7.1 billion proposed acquisition of GRAIL, Inc.
a. Background of the Illumina/GRAIL deal
GRAIL is currently developing liquid biopsy tests for screening multiple types of cancer in asymptomatic patients at very early stages (so-called “multi-cancer early detection tests” or “MCED tests”) using DNA sequencing. Illumina is the market leader in the provisions of next-generation sequencing (“NGS”) system 16, and currently the only supplier of DNA sequencing technologies for these MCED tests.17
The transaction is already being challenged is the U.S. where the FTC filed an administrative complaint to block the proposed acquisition, claiming that it would substantially lessen competition in the U.S. MCED market by diminishing innovation and potentially increasing prices and reducing the choice and quality of MCED tests. 18
b. The EU referral process
On 19 February the EC sent a letter to EU national competition authorities inviting them to refer the transaction under Article 22 EUMR (despite none of them having jurisdiction over the matter due to GRAIL’s absence of activity in the EU). The French competition authority was the first to do it and it was later joined by authorities in Belgium, Greece, the Netherlands, Iceland and Norway. On the other hand, the Spanish, Austrian and Slovenian competition authorities considered that they did not have the power to refer the transaction to Brussels, in particular because the transaction was not notifiable in their respective countries. For the same reasons, the Irish, Lithuanian and Latvian competition authorities stated that there were no grounds to send the merger to the EC, while the Hungarian competition authority expressed concerns over legal certainty for companies. The German and Swedish competition authorities also declined to send the deal for review.
On 11 March, the EC informed Illumina that it had received the French referral request and prohibited the merging parties from closing the transaction. The EC subsequently accepted the referral on 19 April, which led Illumina to formally notify the transaction in the EU on 16 June.
On 22 July, the EC opened an in-depth investigation of the matter (so-called “Phase II” review) to assess whether the proposed transaction “would threaten the ability of developers of cancer detection tests to effectively compete in this area and bring innovative products to the market.” 19 At the time this article was written, the provisional deadline for the EC’s Phase II review period was 29 November 2021.
c. Illumina’s appeal before the EU General Court
In parallel of the EC’s review of the matter, Illumina filed an appeal before the EU General Court seeking the annulment of the EC’s decisions to accept the referral request, and to prohibit closing of the transaction. 20 Illumina’s appeal is developed around four pleas:
1. the EC is not competent to review the transaction, and misinterpreted / misused Article 22 EUMR;
2. the EC’s decision to examine the concentration is invalid because the relevant request for a referral was out of time and/or the decision is contrary to legal certainty and good administration by reason of delays by the Commission;
3. the EC pursued its new policy in relation to Article 22 EUMR prior to publishing the relevant guidance, contrary to Illumina’s legitimate expectations and legal certainty; and
4. the EC made errors of fact and assessment which undermine the basis for its decision to examine the Proposed Transaction (including lack of proper evidence that the concentration threatens to significantly affect competition).
The General Court granted Illumina’s request for an expedited review process. This is a rare step taken by EU judges, which illustrates the importance of the matter. While it remains difficult at this stage to predict the outcome of the proceedings, the General Court is expected to render a judgment by early 2022. 21
Both the appeal challenging the EC’s jurisdiction, and the EC investigation of the merger will continue in parallel.
4. Strategic implications regarding deal certainty
Article 22 Guidance certainly increases the antitrust risk for deal makers in the life science sector. In particular, companies acquiring an emergent competitor which generates only little – if any – turnover in the EU, can no longer safely assume that their transaction won’t be reviewed at the EU level if it does not meet any of the national or EU thresholds. The fact that the transaction is notifiable in certain Member States also does not mean that it won’t be referred to the EC.
As a result, merging parties will have to conduct a complex and uncertain substantive assessment of the transaction to determine whether the requirements set out in Article 22 EUMR are met in any EU Member State, and assess the risk of having the deal referred to or called-in by the EC. Given the EC’s stated interest for transactions affecting the digital and pharma/biotech industries, companies active in these markets will need to be particularly cautious when preparing their deal documents and reflect the risk of such referral in e.g., conditions precedents and long-stop-date provisions. Merging parties should also keep in mind that the risk of referral will remain after closing.
1. Commission Staff Working Document Evaluation of procedural and jurisdictional aspects of EU merger control, SWD(2021) 66 final; and Commission Guidance on the application of the referral mechanism set out in Article 22 of the Merger Regulation to certain categories of cases, C(2021) 1959 final (the “Article 22 Guidance”).
2. Article 22 Guidance, paragraph 9.
3. Article 22 of Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings, OJ L 24, 29.1.2004, p. 18.
4. Article 22, paragraph 5, of Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings, OJ L 24, 29.1.2004, p. 18.
5. Today, national merger control regimes are in place in all EU Member States, except Luxembourg.
6. In practice, the EC nonetheless accepted referrals under Article 22 where only one of the Member States making/joining the request was competent to review the transaction at stake.
7. Case M.9547 – J&J/Tachosil (2019); Case M.8788 – Apple/Shazam (2018); and Case M.7802 – Amadeus/Navitaire (2015). Source: Commission Staff Working Document Evaluation of procedural and jurisdictional aspects of EU merger control, SWD(2021) 66 final, p. 38.
8. Article 22 Guidance, paragraph 9.
9. Article 22 Guidance, paragraph 14.
10. Article 22 Guidance, paragraph 15.
11. Bundeskartellamt examines whether Facebook / Kustomer merger is subject to notification, Bundeskartellamt’s press release dated 23 July 2021.
12. Bundeskartellamt examines whether Facebook / Kustomer merger is subject to notification, Bundeskartellamt’s press release dated 23 July 2021.
13. Article 22 Guidance, paragraph 19.
14. Where a referral request is considered, the EC will inform the merging parties “as soon as possible” (cf. Article 22 Guidance, paragraph 25).
15. Article 22 Guidance, paragraph 21.
16. ccording to the UK CMA, “Illumina has over 80% share of the NGS systems market” on a global basis. Source: paragraph 8.270 of the CMA provisional findings report on the Anticipated acquisition by Illumina, Inc. of Pacific Biosciences of California, Inc, 24 October 2019).
17. See U.S. FTC’s case summary available at https://www.ftc.gov/enforcement/cases-proceedings/201-0144/illumina-inc-grail-inc-matter.
18. According to the FTC’s complaint filed on 30 March 2021, “MCED tests are poised to revolutionise how cancer is detected and treated, having the potential to save millions of lives in the United States and around the world […] Illumina’s NGS platforms are an essential input for the development and commercialization of MCED tests. Grail’s Galleri test, along with its rivals’ MCED tests in development,
must and do rely on Illumina’s NGS platforms […] Grail’s rivals have no alternative to using Illumina’s NGS platforms to develop and commercialize their MCED tests, therefore, they will be unable to divert away from Illumina if the combined firm raises their costs or otherwise forecloses or disadvantages them. As a result, after the Acquisition, Illumina will control the fate of every potential rival to Grail for the foreseeable future.”
19. Mergers: Commission opens in-depth investigation into proposed acquisition of GRAIL by Illumina, European Commission’s press release dated 22 July 2021.
20. Action brought on 28 April 2021, Illumina v Commission, T-227/21
21. In 2020, the average duration of cases subject to the General Court’s expedited review process was 6-10 months.
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