Merger referrals under Article 22 of the EU Merger Regulation (EUMR)
EU merger control aims to prevent cross-border M&A deals that hamper competition in the EU internal market. The EC has exclusive jurisdiction to assess concentrations provided the turnover of the parties exceeds the relevant EU turnover thresholds so that the transaction is considered to have an “EU dimension”. Absent an EU dimension, transactions do not benefit from the one-stop shop review before the EC but may still require merger control approval at Member State level provided the relevant national thresholds are met.
Article 22 of the EUMR allows Member States to ask the EC to review M&A deals that do not have an EU dimension if the following requirements are met:
- First, the transaction must constitute a concentration under the EUMR (i.e., a merger or an acquisition of (sole or joint) control over another business). In contrast, the acquisition of a non-controlling minority stake in another business that may trigger merger review at national level (e.g., in Austria and Germany) is not subject to referral and cannot be reviewed by the EC.
- Second, it must affect trade between Member States.
- Third, the transaction must threaten to significantly affect competition within the territory of the Member State or Member States making the request. For this, there must be a prima facie risk that the transaction could significantly impede competition by (i) eliminating an important competitive force (e.g., elimination of a recent or future entrant or a merger between two important innovators); (ii) reducing competitors’ ability and/or incentive to compete, including by making their entry or expansion more difficult or by hampering access to supplies or markets; and/or (iii) leveraging a strong market position from one market to another by means of tying or bundling or other exclusionary practices.
In the past, the EC discouraged Article 22 referrals in transactions that fell outside the referring Member State’s national merger control thresholds on the basis that cross-border effects were unlikely to arise in these circumstances. This afforded businesses significant comfort that their deals would not trigger merger review in the EU, where the EU and national merger control thresholds were not exceeded.
This policy has now changed. The EC will now actively encourage and accept referrals even in cases where the transaction is not notifiable at EU and national level. The EC sees this as a necessary tool to close a (perceived) enforcement gap and to react to “a gradual increase of concentrations involving companies with low turnover, but with high competitive potential in the internal market”.1 The EC’s Guidance Paper of 26 March 2021 describes the types of cases that may be suitable candidates for an Article 22 referral and the criteria the EC may take into account when exercising its discretion to accept such referrals.2
The EC’s rationale to close the (perceived) enforcement gap
The EC’s new referral policy is driven by its concern that some M&A deals, especially in the digital economy as well as the pharmaceutical and biotech sectors, have merited close scrutiny by the EC in recent years. The EC’s Staff Working Paper of 26 March 20213 summarises the EC’s key considerations:
- Bloomberg data report a total of 87 cross-border M&A deals for the period 2015-2019 that, in the EC’s view, potentially merited review under EU merger control rules. This is approximately 17 deals per year, on average, and most deals related to the digital sector (42), followed by pharmaceutical & biotech (24) and other sectors (21).
- In 27 of these transactions, the deal value exceeded the target’s turnover by a multiple of 10 or more, indicating a significant competitive potential of the target involved.
- The EC further observes that large tech companies have made hundreds of acquisitions during recent years of which the vast majority escaped merger control review in Europe. For the pharmaceutical sector, the EC refers to a U.S.-centred study on M&A deals that found an average of 50 sectoral acquisitions where an incumbent may acquire innovative targets solely to discontinue the target’s innovation projects and pre-empt future competition.
The EC’s new referral policy seeks to close this enforcement gap. The EC did not further consider its initial plan to introduce a complementary transaction value threshold to capture potentially problematic killer acquisitions in which firms acquire nascent competitors only to discontinue the target’s innovation projects. The main reasons for changing its referral policy instead were to avoid the risk of over-capturing non-problematic deals (and related red tape) and the concern that the value of a transaction may not always be sufficiently correlated with the deal’s potential competitive significance. Another reason might have been that amending the EU merger control thresholds would have involved a lengthy and complex legislative process. The change in policy (without further public consultation) allowed the EC to act fast as it accepted its first referral only one month later (see above).
Practical implications for cross-border M&A deals in Europe
The EC’s new Article 22 referral policy increases legal uncertainty for businesses and has significant practical implications for cross-border deals in Europe.
The referral policy is applicable to all sectors, but with particular focus on the digital economy/tech and pharmaceutical/biotech sectors: the EC encourages Member States to request referrals for transactions even if they are not notifiable in the referring Member State(s) in cases where the turnover of at least one of the parties does not reflect its actual or future competitive potential.
Potential candidates for referral include transactions involving businesses that (i) are start-up or recent market entrants with significant competitive potential that have yet to develop or implement a business model generating significant revenues (or are still in the initial phase of implementing such a business model); (ii) involve an important innovator or businesses conducting potentially important research; or (iii) have access to competitively significant assets (such as raw materials, infrastructure, data or IP rights); and/or (iv) provide products or services that are key inputs/components for other industries.
If the value of the consideration for the deal is particularly high compared to the current turnover, the EC is likely to consider this as an indicator of significant competitive potential. The EC thereby focuses on transactions in the digital/tech sector as well as the pharmaceutical and biotech sectors. Importantly, however, the EC’s new guidance highlights that these criteria are only illustrative and, in any event, not limited to any specific sector, leaving the EC with significant room for intervention in deals in a wide range of other sectors.
The legal requirements for referral do not present a high hurdle: to request and accept a referral, there must only be prima facie evidence of a possible significant adverse impact on competition. In other words, even if a deal does not meet any of the national thresholds, it can still be reviewed by the EC as long as it is considered potentially problematic by any Member State (and the EC). Consequently, a discretionary prima facie substantive assessment has replaced the clear-cut assessment based on formal, quantitative thresholds.
Deal timing can slip significantly: Article 22 referrals can have a significant impact on deal timing, in particular for those that do not trigger the EU and national turnover thresholds:
- Member States have 15 working days from the date on which the concentration was notified by the merging parties. If, however, a deal does not require notification at Member State level, the 15-working-day period only starts running when the deal is “made known” to the relevant Member State. In the EC’s view, this is only the case once it has “sufficient information to make a preliminary assessment as to the existence of the criteria relevant for the assessment of the referral”. This is a vague test and leaves merging parties with significant uncertainty as to how long precisely Member States can de facto request referral (a corporate press release announcing the signing of a deal is, in any event, not sufficient to trigger the 15-working-day period).
- Once notified of the request by the EC, other Member States have 15 working days to join the referral request, and the EC then has up to 10 extra working days to decide whether it will accept the referral or not. The referral process alone can therefore lead to significant delays. On 20 April 2021, the EC formally accepted a referral request from the French competition authority (joined by competition authorities from Belgium, Greece, Iceland, the Netherlands and Norway) for a transaction that had been announced seven (!) months earlier. And this is even before the clock starts running on the actual merger review process.
- Once accepted, the EC will start its standard merger control process and require the parties to start pre-notification contacts (which can take several more months) and subsequently submit a complete notification (a so-called Form CO), which kicks-off the formal review period that can last from 25 working days (standard Phase I without remedies) to up to one year in case of an in-depth investigation (Phase II). The EC’s new referral policy can therefore result in the EC reviewing a deal for more than a year in circumstances where the deal was not notifiable at EU or Member State level in the first place.
Parties may not implement the deal once the EC accepts a referral (standstill obligation): the parties remain free to close a transaction at their will while referral requests are being considered. However, once the EC informs the parties that a referral request has been accepted, the parties are subject to a suspension obligation, meaning that they may not take any action to implement the transaction without facing significant fines.
Early closing does not prevent the EC from intervening: Member States can request the referral of transactions that have already been closed. In general, the EC will not consider a referral appropriate if the transaction became publicly known to the EC more than six months prior (but the EC’s new guidance does not explicitly exclude the possibility of the EC accepting referrals for even “older” cases). If the EC accepts a referral of a transaction and ultimately finds that it significantly impedes competition, the EC has the power to impose remedies and, at least in theory, to unwind the deal.
The EC is to be more active in enforcement in the future: Article 22 referrals are generally initiated by Member States, but the EC may also take the initiative of contacting the Member State(s) concerned in a transaction it identifies as a potential candidate for referral. The close cooperation between the EC and Member States generally increases the risk of deals being identified as potential candidates for referral. Additional regulatory tools further increase the likelihood of the EC obtaining knowledge of potentially sensitive transactions. For the tech sector in particular, the new draft Digital Markets Act (DMA)4 obliges so-called gatekeepers to inform the EC of any intended acquisition of providers of core platform services or any other services in the digital sector, irrespective of whether it is notifiable under EU or national merger control rules. Other deals may fall under the EC’s radar through information exchanges in the context of the new Foreign Direct Investment Screening Regulation (see also our recent alert).
Furthermore, the EC is seeking to free up additional EC resources to focus on (and increase intervention in) more problematic deals, including those deals that do not trigger the EU or national thresholds and are subject to the EC’s new referral policy. On the same day it announced its new referral practice, the EC opened a public consultation on certain revisions to the EU merger control process with a view to further simplify and cut red tape for non-problematic deals that require EC merger approval (the consultation is open until 18 June 2021).
Article 22 referrals are a strategic tool for third parties: under the old referral policy, third parties had little or no chances of convincing the EC or national authorities to refer a case to the EC that did not meet the EU and national filing thresholds. This has now changed, and it can be expected that third parties will increasingly use the Article 22 referral mechanism as a sword to oppose deals that are not in their strategic interest.
Extra antirust diligence is warranted: Given the significant uncertainty resulting from the EC’s new Article 22 referral policy, businesses and their advisors have no choice but to take extra antitrust caution when planning cross-border deals in the EU. Simply relying on the fact that a deal does not require merger approval in the EU just because the EU and national filing thresholds are not met is no longer an option. Instead, a careful analysis of the potential competitive impact on competition in the EU is needed on a case-by-case basis to assess the potential risk of an Article 22 referral. If such risk cannot be excluded, transaction documentation will need to be adapted to accommodate potential delays in the referral process, the risk of remedies or, in the worst-case scenario, even a prohibition and unwinding of the deal.
Voluntary consultation is possible, but there is a risk of delays and no guarantee of legal certainty: helpfully, the EC invites parties to approach the EC upfront to obtain an “early indication” of whether their case is a good candidate for an Article 22 referral. While this can bring significant comfort to merging parties, it is not a “quick fix”. The consultation process is not subject to formal deadlines, which could easily result in a lengthy process until the EC is comfortable that it has “sufficient information” to make a decision, in particular in transactions that concern complex or new markets of which the EC has no prior knowledge. Also, even if the EC gives an early indication, it is not legally binding, and the EC may take a different view at a later stage. In addition (or alternatively), it will often be advisable for parties to proactively engage with the relevant national competition authorities to gain a better insight into the chances of referral. Extra time and diligence are needed upfront to structure the consultation process to ensure it runs as smoothly as possible. While this proactive approach will increase legal certainty in many cases, it naturally bears the risk that parties will actually attract specific interest in a transaction, and businesses may instead prefer to rely on a more robust self-assessment than taking the risk that the EC may, if in doubt, take jurisdiction and review a deal.
Legal doubts about the new policy remain: as explained, the legal test for Article 22 referrals is easy to meet and the EC’s new guidance leaves the EC (and Member States) significant discretion to potentially use the Article 22 referral mechanism as a (standard?) tool to screen and investigate cross-border deals by strong market players, in particular in the digital economy and the pharmaceutical space. It is at least disputable whether such far-reaching practice is still within the boundaries of the Article 22 referral mechanism that was historically designed as a “safety net” to allow Member States that did not (yet) have an own merger control regime to request a referral of potentially problematic deals to the EC. The EU court in Luxembourg will soon have the opportunity to opine on the EC’s new referral practice (an appeal against the EC’s first referral decision under the new policy is pending since 29 April 2021).5 For the time being, however, merging parties have no other choice than to play safe, live with the EC’s new referral practice and plan their deals with even more antitrust diligence than before.
- Statement of Executive Vice-President Margrethe Vestager in the EC’s press release dated 26 March 2021, available at ec.europa.eu.
- EC Communication, 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.
- EC Staff Working Document, Evaluation of procedural and jurisdictional aspects of EU merger control, SWD (2021) 67 final.
- EC Proposal for a Regulation of the European Parliament and of the Council on contestable and fair markets in the digital sector (Digital Markets Act), 15 December 2020, COM(2020) 842 final.
- MLex, Illumina confirms EU court appeal of Grail decision (29 April 2021).
In-depth 2021-133
