The European Commission (the “Commission”) is making it possible for Member States to refer transactions to the Commission also if they fall below the national turnover thresholds. The Commission’s aim in doing so is to review killer acquisitions that currently remain untested. Although the power of referral is not new, it has been dormant for years. That is about to change. This blog addresses the consequences of that change for the M&A practice.
Merger control in the Netherlands and the EU
So how is merger control organised within the European Union? If two or more companies wish to merge, or in the case of an acquisition or the establishment of certain joint ventures, the question is whether certain turnover and other thresholds are exceeded. If so, the transaction must be notified in advance to the competent competition authority, which then assesses whether the transaction will give rise to competition problems.
The answer to the question to which authority a transaction must be notified in advance usually depends on the turnover of the companies involved. In sum, the European Commission investigates transactions of companies with a high turnover or transactions that must be notified to national authorities in several EU Member States. The national competition authorities assess transactions that exceed the lower national turnover and other thresholds. They may also assess transactions that meet the European thresholds but primarily affect one EU Member State. A transaction in which the companies involved do not meet the European or national thresholds therefore does not have to be notified to the Commission or the national competition authorities. The same applies in the case of high market shares. In the Commission’s opinion this makes it possible for certain transactions, known as killer acquisitions, to avoid notification.
Killer acquisitions: a loophole in merger control?
That is about to come to an end. EU Commissioner Margrethe Vestager, in charge of competition, announced that the Commission will from now on also assess mergers below the national turnover thresholds. Her proposal is that national competition authorities that do not have the authority to assess a transaction may nevertheless refer it to the Commission for assessment under Article 22 of the Merger Regulation.
That proposal forms part of a larger plan to revamp merger control within the EU. On 26 March 2021, the Commission published the findings of an evaluation of the procedural and jurisdictional aspects of European merger control. One of the conclusions is that the turnover thresholds are insufficiently effective to assess small but nevertheless significant transactions. The Commission is referring in particular to the acquisitions of promising small companies by large companies, known as killer acquisitions. A case in point is a small innovative start-up that is taken over by a large tech company. Verstager reports: “A number of transactions involving companies with a low turnover but high competitive potential on the internal market are not assessed by either the Commission or the Member States." The Commission is concerned that this way a killer merger, acquisition or joint venture will remain under the radar of competition authorities in the EU. In the Commission’s opinion these killer acquisitions restrict competition because, if no acquisition took place, these innovative companies could compete with the big (tech) companies.
German and Austrian example: additional notification requirement for acquisitions
The lack of assessment of killer acquisitions has been an issue in the past already, for instance in Germany, when Facebook acquired WhatsApp in 2014. WhatsApp still had a relatively low annual turnover of 10 million euros at the time, but Facebook nevertheless paid 19 billion dollars for the acquisition. Due to WhatsApp’s low turnover, the German Bundeskartellamt was unable to assess the transaction. The merger was eventually assessed by the Commission, however, because the turnover thresholds were met in other EU Member States. That case gave rise to the question in Germany whether certain transactions should be assessed when they represent a certain transaction value.
As a result, both the German Bundeskartellamt and the Austrian Bundeswettbewerbsbehörde have applied a transaction value threshold since 2017, in addition to the turnover thresholds that already existed. Other EU Member States and the Commission also seemed intent on introducing a similar transaction value threshold, but that has not happened yet. The Commission now seems to be seizing on another means of ensuring that killer acquisitions do not slip through the merger control net.
The Commission is using an old instrument for this purpose: Article 22 of the Merger Regulation allows an EU Member State to request the Commission to assess a potentially problematic transaction even if it falls below the national turnover thresholds. Article 22 of the Merger Regulation is also known as the “Dutch clause”: Article 22 of the Merger Regulation was introduced in the past to make merger control possible in countries, including the Netherlands, where no merger control existed at the time. After many EU Member States had introduced a merger control system, the Commission decided, for the sake of legal certainty, that Article 22 of the Merger Regulation would no longer be actively used. The Commission is now reversing that decision, to ensure that killer acquisitions do not remain untested.
A serious intention: Commission accepts French referral request
The seriousness of the Commission’s intention once again to actively implement Article 22 of the Merger Regulation is already apparent in practice. On 20 April 2021, following a request from several Member States, the Commission announced that it would investigate the acquisition of GRAIL by Illumina. That acquisition bears similarities to the merger between Facebook and WhatsApp addressed above. GRAIL, which, like Illumina, is engaged in producing tests that can be used to detect cancer, is a small company with almost no turnover, but is nevertheless involved in a multi-billion-euro acquisition. Despite the fact that the national turnover thresholds for this acquisition are not met, several Member States have expressed their concern that the acquisition may distort competition. To quote ACM chairman Martijn Snoep: “There are many examples in the pharmaceutical industry and in the digital economy that demonstrate that this type of acquisition may negatively impact innovation in the longer term.”
In light of this concern, France has requested the Commission under Article 22 of the Merger Regulation to assess the non-notifiable acquisition after all. Several Member States, including the Netherlands, have joined in that referral request. The two US companies involved in the acquisition have requested the Dutch preliminary relief court to prohibit the Netherlands from joining France’s referral request, but the court rejected that request. The Commission has now announced that it will accept the referral request and assess the acquisition. That decision is the first step in the announced change of course.
Impact on M&A practice
There is no doubt that this change of course of the Commission may have a major impact on the merger and acquisition practice in the EU. In particular, the plan is giving rise to considerable legal uncertainty among companies:
- First, it is creating legal uncertainty regarding the announcement of non-notifiable mergers. Member States may refer a transaction to the Commission within 15 days after its announcement under of Article 22 of the Merger Regulation. According to the Commission Notice on Case Referral in respect of concentrations, a notification must be sufficiently comprehensive to enable a preliminary analysis to be made by the Member State in question. With the Commission calling on EU Member States to refer more small, problematic mergers, Member States will have to scrutinise notifications more thoroughly. For companies, the question presents itself as to how much information a notification must contain. A simple press release would in any event appear to be insufficient. Indicating that no killer acquisition is involved will obviously do no harm.
- Second, there may be a delay in the speedy completion of a non-notifiable transaction. Companies now have certainty in advance that if their transaction remains below the national turnover thresholds and other thresholds for notification to the Commission, there is no need to notify the competition authorities before they can close the transaction. This will change, because , under Article 22 of the Merger Regulation, a transaction that may be considered a killer acquisition may be referred to the Commission for its review within 15 days of its notification. If the transaction is then nevertheless closed quickly, but is found to have been referred to the Commission for its review, the Commission can still throw a spanner in the works. The Commission may attach conditions to its approval of the transaction or may even prohibit it.
When will Brussels clarify the situation?
By accepting France’s referral request regarding Illumina’s acquisition of GRAIL, the Commission has taken a first step towards putting its announced change of course into practice. It therefore appears that Article 22 of the Merger Regulation will once again become an important enforcement tool in European merger practice in the coming years.
This of course raises the question what exactly the Commission regards as a killer acquisition and whether the announced policy applies to all sectors of the economy. And how will the Commission deal with the two points above? Whereas in Germany guidance on the new transaction value threshold was provided in advance, the Commission has not yet done so. But Commissioner Vestager has promised in her speech soon to provide more clarity regarding the announced policy. Legal certainty will require that, because that is what is needed in practice. To be continued!
This blog was also published on M&A Community
Update: after the publication of this blog, there was another successful referral of a 'killer acquisition' to the Commission, view here. The commission will investigate the acquisition of Kustomer by Facebook. Several European competition authorities, including ACM, supported Austria's request to the Commission to assess this acquisition.