The EU Commission’s bold move to expand its merger review powers – legitimate policy shift or excessive power grab?

June 2021 | EXPERT BRIEFING | MERGERS & ACQUISITIONS

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Merger control is a critical part of the European Commission’s (EC’s) enforcement powers to ensure competition throughout the common market. The European Union (EU) merger review overlayers the national control regimes operated by all member states except one. Companies engaging in M&A activity know that that their transactions will often be subject to national or EU merger control clearances, and until recently they could rely on a relatively clear framework to establish which antitrust regulators to liaise with to get a deal cleared. The EC’s latest announcements and enforcement actions have changed the landscape in quite a significant way.

Following announcements made by commissioner Margrethe Vestager and Olivier Guersent, the EC published on 26 March 2021 a guidance paper on its new approach to accepting requests from member states to review certain transactions based on Article 22 of the EU Merger Regulation. The guidance represents a material departure from the EC’s previous practice, and significantly broadens the remits of EU merger control. It will likely affect the timeline and legal certainty for a number of deals.

Background: EU merger control and Article 22

Under member states’ national or EU rules, a filing is triggered if certain thresholds (generally based on turnover of market shares) are met.

A cornerstone of EU merger control rules is the ‘one-stop shop’ principle, meaning that if a transaction triggers an EU filing, it will not be notifiable at national level within the EU.

However, EU rules also provide for referral mechanisms between the EC and national competition authorities (NCAs), with a view to ensuring efficient review by the best placed competition authority.

For instance, a deal subject to review in several member states may be best reviewed by the EC. Similarly, a deal triggering a filing in only one member state may nonetheless have an impact across the EU, and thus be best reviewed by the EC. Conversely, if a transaction triggering an EU filing due to the parties’ high turnover only has an effect within the territory of one member state, the NCA of that member state may be best placed to review the deal.

Article 22 allows NCAs to request the EC to review a transaction where the following conditions are met: (i) it affects trade between member states; and (ii) it threatens to significantly affect competition within the territory of the member states making the request – two conditions which have a rather broad remit. Any other NCA may join such a request.

Once it accepts the referral, the EC has jurisdiction to review the impact of the transaction in the territories of the referring member states. NCAs that did not join the referral request remain competent to review the same transaction in parallel if their national filing thresholds are met.

The provision was initially introduced when several member states had yet to establish national merger control regimes, to ensure that such member states could refer potentially problematic transactions for review by the EC.

So far, the EC’s informal policy had been to discourage NCAs from requesting referrals in relation to transactions that did not meet their national merger control thresholds.

According to the guidance, the EC from now on intends to accept referrals by NCAs even regarding transactions which do not meet the thresholds at national level. Further, while referrals are at the discretion of member states, the EC states in the guidance that it may invite NCAs to make a request in respect of transactions that it considers meet the relevant criteria.

This shift in policy is driven by a perceived ‘enforcement gap’ which allowed potentially problematic transactions (especially ‘killer acquisitions’ of nascent competitors) that fell below EU and national merger control thresholds to complete without review.

Catching transactions involving companies with significant (actual, potential or future) market power but low turnover

Unsurprisingly, the digital and pharmaceutical sectors are at the centre of the revised referral policy: competition in these sectors is often driven by new products or services, and regulators seek to preserve the biggest risks of acquisitions killing innovation.

But the new approach will not be limited to these sectors. Rather, it will be used more generally to ensure that transactions involving companies whose importance in the market is not reflected in their turnover do not escape scrutiny.

According to the guidance, good candidates for a referral would include transactions where one of the parties: (i) is a start-up entrant with a significant competitive potential; (ii) is an important innovator; (iii) is an actual or potential important competitive force; (iv) has access to competitively significant assets (such as raw materials, infrastructure, data or intellectual property rights); and (v) provides products or services that are key inputs or components for other industries.

What are the main implications for transactions?

First, the new approach will increase the complexity of the assessment as to whether a transaction triggers filing requirements.

Indeed, falling below the EU and national merger control thresholds will no longer suffice to exclude merger filing requirements. Instead, especially where companies have existing or potential market power but low revenues, it may be necessary to assess whether the proposed merger could be deemed to “significantly affect competition”, even in EU member states where there is no or very limited presence at the time.

Based on the guidance the effect of competition should be assessed in the light of a long yet non-exhaustive list of factors. Would the transaction lead to the elimination of future or recent entrants, or an important innovator? Would it reduce competitors’ ability and incentive to compete? Depending on the facts of the case, such an assessment may be far from clear-cut.

While certain jurisdictions such as the US and the UK already operate ex post control, and even control of transactions below thresholds (in the US), the situation in the EU will be significantly more complex for companies, with up to 25 competition authorities being able to request a referral for review, based on potentially widely diverging interests.

The new approach also leads to reduced legal certainty for the parties. Indeed, NCAs may submit a referral within 15 days from having “sufficient information to make a preliminary assessment as to whether the criteria for making an Article 22 referral request are met”, which may occur very late in the process. Once the EC informs the parties that a referral request has been made, the transaction may not complete prior to receiving clearance. Further, according to the guidelines, the EC will accept referrals from NCAs even if these are submitted after the transaction has closed. This means that the parties may have to unwind (part of) the transaction or be required to takes measures (such as divestments) after closing.

Further, under the new approach, there will likely be more instances of the EC and one or more NCAs reviewing a transaction in parallel, thus increasing the burden on the notifying parties.

Finally, the guidance confirms that third parties may contact the EC or NCAs to inform them of transactions which may be a candidate for referral under Article 22. While the EC and NCAs have no obligation under Article 22 to take action following such communications, the possibility of third-party intervention nevertheless adds an additional element of uncertainty to deal considerations.

With this new approach to Article 22, the EC has succeeded in considerably expanding the reach of its merger control regime, without amending the text of the EU Merger Regulation.

The significance of this new approach should also be considered in light of the EC’s draft Digital Markets Act (DMA), which proposes a duty for so-called ‘digital gatekeepers’ to inform the EC of all their transactions in the digital sector.

While the DMA reduces uncertainty regarding filing obligations for digital gatekeepers, other businesses will face a choice between approaching the EC or NCAs to obtain comfort on whether a filing may be warranted (but without much legal certainty) or simply waiting (with no legal certainty).

Parties to a transaction therefore need to consider the likelihood of referrals being submitted by one or more NCAs, either on their own motion or upon the EC’s invitation, and the risks related to completing the transaction prior to the EC accepting the referral. Parties will need to take this risk into account in the transaction documents (e.g., in determining the closing conditions or the transaction’s long-stop date), which makes receiving antitrust advice early in the process critical.

Next steps

The guidance undoubtably constitutes a significant departure in the EC’s practice and opens the door to increased complexity and legal uncertainty for M&A activity.

In practice, much will still depend on the proactivity of the EC in inviting NCAs to request referrals and on the NCAs’ appetite to request referrals of transactions that fall below the national thresholds.

That said, the first test case is already underway. The French Competition Authority, joined by the Belgian, Dutch, Icelandic and Norwegian NCAs, have referred to the EC the review of the proposed acquisition by Illumina of biotech start-up Grail, which did not trigger any filing at national level in the EU. Even though it was challenged unsuccessfully before several national courts, the referral was accepted by the EC.

This shows that the EC and NCAs will not hesitate to capture ongoing transactions under the new approach and that companies will have to adapt quickly to this radical change of the EU merger control framework.

Katrin Schallenberg is a partner and Amélie Lavenir is a senior associate at Clifford Chance Europe LLP. Ms Schallenberg can be contacted on +33 (1) 4405 2457 or by email: katrin.schallenberg@cliffordchance.com. Ms Lavenir can be contacted on +33 (1) 4405 5917 or by email: amelie.lavenir@cliffordchance.com.

Katrin Schallenberg and Amélie Lavenir

Clifford Chance Europe LLP