EU's General Court confirms Commission's new merger referral policy in Illumina/Grail case

Under Article 22 of the EU Merger Regulation (EUMR), national competition authorities have the possibility to request referral to the Commission of any merger, which does not meet the thresholds of the EUMR, but which affects trade between member states and threatens significantly to affect competition in the territory of the member state. In March 2021, the Commission introduced a new policy for Article 22 EUMR, starting to accept Article 22 EUMR referrals from national competition authorities even if the referring authorities have no power to review the cases under their national merger-control rules. With this new policy, the Commission significantly expands its competence in merger-control cases. In principle, the policy allows the Commission – subject to a referral request by at least one member state – to review any merger. The Commission's aim is to catch transactions involving smaller target companies, in particular in the digital and biotech sectors and so-called killer acquisitions, which in the past have escaped merger-control review. On 13 July 2022, the Commission's Article 22 EUMR policy was confirmed by the General Court in the Illumina/Grail case as compatible with the EUMR. With this backing by the judges in Luxembourg, the Commission is now expected to apply Article 22 EUMR policy regularly. This has also important implications for the recently passed Digital Markets Act (DMA), which requires gatekeepers to report acquisitions – an obligation, which only makes sense when the Commission has such acquisitions referred to Brussels for review.

Referral of Illumina/Grail

The Illumina/Grail transaction (acquisition of Grail, a US biotechnology company working on cancer screening tests, by Illumina, another US biotechnology company and global leader in genomics) was the first case in which the Commission applied its new Article 22 EUMR policy. In April 2021, less than one month after presenting its new policy, the Commission accepted a request from France, joined by other member states, to review the acquisition of Grail by Illumina. The deal neither reached the turnover thresholds of the EUMR nor was in the scope of merger-control law of any EU member state and was therefore not reported in the EU or at member-state level. However, France asked the Commission to review the deal following a referral based on its new Article 22 EUMR policy. Belgium, Greece and the Netherlands as well as the EFTA states Norway and Iceland (which also lacked the competence under their national merger control regimes to review the case) joined France’s request, which the Commission accepted on 19 April 2021, quoting concerns of market foreclosure and price increases. The Commission had in December 2020 received a complaint concerning the Illumina/Grail transaction and in February 2021 had sent "invitation letters" to national competition authorities informing them of the transaction and inviting them to request a referral under Article 22 EUMR.

Illumina on 28 April 2021 filed an action in the General Court of the EU, asking for annulment of the Commission's decision to accept the referral request as well as of the "information letters" by the Commission inviting the member states to refer the case. This immediately put the new Article 22 EUMR policy to a legal test. On 13 July the General Court, deciding in extended composition and under the expedited procedure, rejected Illumina's action and upheld the decisions of the Commission accepting the referral request from France, as joined by other member states, asking it to assess the Illumina/Grail transaction. Moreover, the General Court gave clarification concerning important procedural questions.

Article 22 EUMR

Article 22 EUMR allows member states to refer mergers to Brussels for review under certain circumstances. Known as the “Dutch Clause”, this article was already part of the first EUMR adopted in 1989 at a time when some member states – notably the Netherlands – did not yet have merger control rules in place. In this situation, Article 22 EUMR allows these member states to request the Commission to examine mergers for them that do not meet the relatively high threshold of the EUMR, but affects intra-EU trade and threatens competition within the referring member state. However, almost all member states subsequently introduced their own national merger control rules (today only Luxembourg has no merger control regime) and the Commission adopted a practice of “discouraging” referral requests under Article 22 EUMR from member states that did not have original jurisdiction over the transaction at stake. While the Commission never rejected a referral from a member state without reviewing the referred merger, it was clear that it would in principle not accept such requests. This policy followed the simple rationale that mergers, which are not considered relevant for merger control review by national law, are generally not likely to have a significant impact on the internal market and thus do not justify a review at the EU level. Consequently, the only function of Article 22 EUMR in recent years was to allow two or more member states, which were competent for the review of a merger under their own merger-control rules, to make a joint request for referral to the Commission in cases where Brussels was better placed to review a merger because the merger impacted more than a national market or markets.

Article 22 referral policy by the Commission

Commission policy regarding Article 22 referrals took a 180-degree turn in 2021. The Commission published the “Guidance on the application of the referral mechanism set out in Article 22 of the Merger Regulation to certain categories of cases”, which under certain circumstances now “encourages and accepts” referrals in situations where the referring member state does not have initial jurisdiction over a merger. The aim is to allow the Commission to examine mergers, which in its view merit EU merger review, but do not meet the thresholds of the EUMR or national merger control rules.

This drastic policy change came as part of the conclusion the Commission drew from its evaluation of the EUMR, which started in 2016. One of the issues the Commission looked at during this evaluation was how to review mergers involving companies that play a significant competitive role despite generating little or no turnover and are not caught by traditional turnover-based thresholds. In particular, this concerns "killer acquisitions" – dominant players that acquire nascent, innovative companies with the intention of eliminating future competition. Studies estimate that a significant share of acquisitions in the pharmaceutical industry is carried out with the sole purpose of discontinuing the target companies' drug projects. Alarms have also been raised in the digital sector about the high number of start-ups that large companies are acquiring.

To address the problem that such transactions may escape merger-control scrutiny because of the target's low turnover, the Commission decided to adjust the Article 22 EUMR referral policy to pick up “certain cases” in collaboration with member states. By encouraging member states to refer cases to Brussels – irrespective of their own competence – the Commission can in principle ascertain jurisdiction for any transaction it finds worthy of review. In its Guidance paper of 26 March 2021, the Commission defines the categories of cases generally considered appropriate for referral under Article 22 EUMR. Firstly, the transaction needs to meet the criteria of Article 22 EUMR, which means it must not be a purely national case and there must be the risk of a serious competition problem. If these criteria are met, the Commission has the discretion to encourage and accept a referral. The overarching principle guiding this discretion is whether the turnover of at least one party in the merger (normally the target) does not reflect its actual or future competitive potential. According to the Commission, candidates for such “underestimated competitive potential” include start-ups or recent entrants, important innovators, important competitive forces, companies with access to competitively significant assets or suppliers of products or services that are key inputs or components for other industries. The Commission will also take into account whether the value of the consideration received by the seller is particularly high compared to the target's current turnover. Overall, this framework gives the Commission great discretion to select cases, which creates considerable legal uncertainty. The Article 22 EUMR referral policy also raises tricky procedural questions, such as when and for how long member states are able to make referral requests in cases in which they lack competence under their own merger-control laws.

General Court confirms Commission's referral policy

The decision by the General Court of 13 July confirms the new Article 22 EUMR policy by the Commission as set out in the guidelines of March 2021. According to the press release by the General Court, this "opens the way for the EU merger control rules to better take into account transactions involving innovative undertakings with significant competitive potential."

The key substantive question the General Court had to answer was whether the Commission is competent under Article 22 EUMR to examine a concentration, which is the subject of a referral request made by a member state with a national merger control system, but where that concentration does not fall within the scope of that national legislation. In other words: must a member state with merger-control rules in place be competent under these merger-control rules be able to refer a case to the Commission? To answer this question, the General Court interprets Art. 22 EUMR by applying the classic canon of legal interpretation:

• First, in a literal interpretation the General Court points out that the wording of Article 22 EUMR and in particular the reference to ‘any concentration’ allows a member state to refer any concentration, which satisfies the cumulative conditions set out in the provision, to the Commission irrespective of the existence or scope of national merger-control rules. Limitations are not to be inferred from the wording.
• Secondly, the judges carry out a historical interpretation, considering the intention of the EU legislature when it enacted Article 22 EUMR. The General Court confirms that the referral mechanism was originally established – following a wish of the Netherlands – to be used in respect of member states without their own merger-control system. However, according to the General Court, the EU lawmakers had no intention of limiting the applicability of Article 22 EUMR to that situation alone as is demonstrated by the use of the term "member state", without drawing a distinction whether a merger-control regime existed or not in the respective member state. Moreover, since the number of national merger-control systems increased within the European Union, that referral mechanism is in the meantime also regarded as a means of strengthening the application of Community competition law to transactions with cross-border effects and of ensuring the ‘one stop shop’ principle and avoiding a parallel examination of the same concentration. The development of the objectives of the referral mechanism therefore cannot be understood as restricting the scope of that regulation, but rather as emphasising the objective of Article 22 TFEU to allow the examination of concentrations with cross-border effect. In the light of this, the historical interpretation confirms in the view of the General Court that Article 22 EUMR enables a member state, irrespective of the scope of its national merger control rules, to refer to the Commission concentrations, which may have significant cross-border effects.
• In its contextual interpretation, the General Court emphasises that Article 22 EUMR forms part of the provisions of the EUMR regulation, which determine the Commission’s competence concerning the control of transactions. Furthermore, Article 22 EUMR cannot be interpreted in light of the referral mechanisms provided for in Article 4(4) and Article 9 EUMR as the provision differs in its wording and scope of application. In particular, Article 22 EUMR does not expressly require either the national competition authority to be competent to examine the concentration that is the subject of the referral or that that concentration must be notified. Accordingly, the General Court concludes from the contextual interpretation that a referral request under Article 22 EUMR may be submitted irrespective of the scope of national merger-control rule.
• Probably the most important part of the General Court's interpretation of Article 22 EUMR is the teleological interpretation. Here, the General Court finds that the goal of the EUMR is to permit effective control of all concentrations with significant effects on the structure of competition in the European Union. The judges further explain that referral mechanisms are an instrument intended to remedy control deficiencies inherent in a system based principally on turnover thresholds. Those mechanisms therefore create, as emphasised by the expression ‘corrective mechanism’ used in recital 11 of the EUMR, a subsidiary power of the Commission, which confers on it the flexibility necessary to achieve the objective of that regulation, permitting the control of concentrations likely significantly to impede effective competition in the internal market. Against this background, the General Court finds that Article 22 EUMR provides the Commission with the "flexibility" to examine mergers that are likely to significantly impede effective competition in the internal market, but would escape control under the merger-control systems of both the European Union and the member states because the turnover thresholds have not been met.

Consequently, the General Court concludes from its interpretation that it is in line with Article 22 EUMR if the Commission regards itself as competent to examine cases such as Illumina/Grail, which are referred to Brussels without the referring member states being competent under their own merger rules themselves. The General Court also considers that this interpretation is not in conflict with the principles of conferral of competences, subsidiarity or proportionality. The judgment explains in this respect that national legislation is irrelevant for the application of Article 22 EUMR. Furthermore, respect of the interests of the member states is ensured by the fact that under Article 22 EUMR the Commission may examine a concentration only if a referral is requested from a member state. Finally, Article 22 EUMR allows the Commission to examine a case under Article 22 EUMR if the conditions of this provision are met. In the view of the judges, the "clear and precise conditions of application" of Article 22 EUMR significantly restrict the Commission’s "freedom of action" and the interpretation is therefore not inappropriate for achieving the objective of examining concentrations, which may have a significantly negative impact on competition in the EU.

Given the considerable legal uncertainty caused by the Commission's Article 22 EUMR policy – virtually any transaction can be referred for review by the Commission – Illumina had criticised the Commission's approach as being inconsistent with the principle of legal certainty. The General Court rebutted this. In the judges' view, the interpretation adopted by the Commission is to the contrary the only interpretation which ensures the necessary legal certainty and the uniform application of Article 22 EUMR because the applicability does not depend on national merger-control law and its interpretation but only on the fulfilment of the conditions of Article 22 EUMR.

Procedural questions

Article 22 EUMR requires that the referral request by the member state must be made within 15 working days of the transaction being ‘made known’ to the member state, if no notification of that concentration is required. Illumina had claimed that the referral request by France regarding the Grail acquisition was submitted out of time, which gave the General Court the opportunity to clarify important practical details regarding the application of the 15 working days deadline.

The General Court first finds that the notion of ‘making known’ should be understood (i) as regards its form, as the active transmission of relevant information to the member state concerned, and (ii) as regards its content, required to contain sufficient information to enable that member state to carry out a preliminary assessment of the conditions laid down Article 22 EUMR. Based on this interpretation, the Illumina/Grail transaction was only "made know" to the member states by the Commission's invitation letter (and not previously by the public announcement of the transaction or media reports) and the referral request was made in due time.

However, considering the decisive role of information of the member states by the Commission (by means of invitation letter) for the triggering of the deadline, the General Court stresses that the Commission is required to comply with a reasonable time limit in the conduct of its administrative procedure. In the Illumina/Grail case, it took the Commission a period of 47 days after it received complaints concerning the transaction before it sent out invitation letters to the member states – unreasonably long in the General Court's view. Nevertheless, since the parties could not demonstrate that this unreasonable time limit affected their capacity themselves effectively, it could not justify the annulment of the decision to accept the referrals.

Practical consequences

With the General Court's comprehensive backing of the Commission's Article 22 policy in the Illumina/Grail decision, it can be assumed that the Commission will now make regular use of the possibility to have transactions not caught by the thresholds of the EUMR, but considered worthy of review, referred to Brussels. This is particularly relevant for transactions involving smaller targets such as start-ups in the digital and biotechnology industries, which often remain under the radar of revenue-based merger-control thresholds. Art. 22 EUMR and the Commission's referral policy will also become important for digital gatekeepers, which in the future will be obliged under Article 14 Digital Markets Act (DMA) to report their transactions to the Commission, which will then have the possibility to invite member states to refer the cases to Brussels. Procedurally, the General Court clarified that only an "active transmission" of all relevant information triggers the 15-day deadline for member states to file a referral request. In order to create legal certainty, companies could be forced to send notifications to all member states to ensure that (after the 15-day deadline) a referral to the Commission and an obligation to file is excluded – a situation that is hardly compatible with the one-stop-shop-system the EUMR promises.

For more information on conducting a merger in the EU, contact your CMS client partner or these CMS experts: Dr Björn Herbers and Christoff Soltau.