‘New’ guidance on the application of the referral mechanism: a warning to watch out!

On 26 March 2021, the European Commission issued new guidance on the interpretation of the upward referral mechanism set out in Article 22 of the EU Merger Regulation. (1)

As a result, EU Member States can now submit concentrations (i.e. mergers, joint-ventures, acquisitions…) to the Commission for assessment even though such transactions fall below the national turnover thresholds. The reason for this new guidance is clear: in some sectors a transaction may have a high impact on competition even though the turnovers are fairly low (e.g. a digital disruptive scale up company), therefore, market power is being built up while there is technically no need to file an EU merger notification. A ruling on a landmark case relating to this has been issued by the Commission on 6 September 2022.

As general M&A practitioners we recommend that enterprises who are planning a transaction pay special attention to this matter in connection with their internal or external competition law counsel. Here follows our analysis of this new guidance and its impact on M&A practice in a nutshell.

Why a new interpretation?

The Commission found that a number of transactions where companies had a low turnover but a strong competitive potential in the internal market had not been assessed by the Commission or the national competition authorities. As a result, it found that there was an enforcement gap between national and EU merger control. 

It seems that the Commission wants to ensure that the referral mechanism of Article 22 of the EU Regulation is used more often. This should stop such enforcement gaps from occurring and should limit the subsequent potential significant effects on competition and the internal market.

In its new interpretation, the Commission mainly targets so-called ‘killer acquisitions’, i.e. acquisitions where an established competitor acquires an innovative company/start-up company with strong competitive potential but little to no turnover in the early stages of its development.

It is apparently more and more common to see competing and innovative companies merge. The Commission notes that this is particularly common in the digital and pharmaceutical sectors. 

Such mergers which may have an impact on competition or eliminate an important competitive force, but which fall below the national turnover thresholds, can now be submitted to the Commission for assessment. 

What are the consequences?

The adverse consequences for companies are very clear, for example, if we look at the first case linked to this new interpretation – the acquisition of Grail by Illumina. Grail is a US company focused on detecting multiple early-stage cancers, Illumina is a US based gene sequencing specialist. In this case, the Commission imposed interim measures to ‘suspend’ the acquisition whilst it scrutinised the transaction and threatened to impose fines for breach of the standstill obligation (Illumina announced the closing of the deal on 18 August 2021). 

The Commission stated that the interim measures aim to prevent the potentially irreparable detrimental impact of the transaction on competition, as well as the possible irreversible integration of the vertically integrating parties, pending the outcome of the Commission's merger investigation.

Illumina, unpleased by the Commission’s investigation as the transaction did not meet any of the EU/national antitrust thresholds, fought the referral to the Commission in front of the General Court. On 13 July 2022, the General Court upheld that the Commission’s antitrust case was legal. It also confirmed the Commission’s authority to examine a transaction that does not have a European dimension, but which is the subject of a referral request made by a Member State under Article 22 of the EU merger Regulation – even if the transaction is not notifiable in that Member State (see Illumina v. Commission case). (2)

The outcome of the referral and the Commission’s decision on the acquisition of Grail by Illumina was issued on 6 September 2022 (3). Indeed, the Commission has decided that the remedies offered by Illumina were not sufficient to address its competition concerns. As a result, it has prohibited the transaction and requires Illumina to dissolve the concentration or to take other appropriate measures. In addition, the Commission is still assessing whether the companies have violated their standstill obligation. In the event it finds so, both companies could face a fine of up to 10% of their global revenue. It is to be noted, however, that Illumina can still appeal the Commission’s decision.