The context

There has been increasing concern over the number of “killer acquisitions” of innovative target companies that are not subject to merger control review. Some members of the European antitrust community have argued for an expansion of the EUMR’s mandatory notification requirement (as, for example, has taken place in Germany). However, there was insufficient political support to reopen the primary legislation in this way. Instead, the Commission decided to increase its use of Article 22, which allows Member States to request the referral of transactions that affect trade between Member States and “threaten to significantly affect competition” within their territory, irrespective of the extent of the target’s sales or assets. Requests must be made within 15 working days of the transaction being “made known” to the Member State.

This provision, commonly known as the Dutch clause, was included in the EUMR at the request of the Netherlands to provide cover for Member States without a national merger control regime. It has not been used frequently in recent years, as the Commission discouraged its use when merger control laws became endemic in Europe. However, following an announcement by Commissioner Vestager in September 2020, the Commission issued new guidance in March 2021 encouraging Member States to refer transactions under Article 22 where they involved a target whose competitive potential is not reflected in its turnover.

An opportunity to test this new approach came in the form of Illumina’s proposed acquisition of Grail, a healthcare company developing cancer detection tests based on next generation sequencing systems, which are expected to provide significant benefits to oncology. A third-party complainant prompted concerns on both sides of the Atlantic over the possibility that Illumina could foreclose its rivals’ access to Grail’s technology. The deal was announced in September 2020 just as Commissioner Vestager was floating the Commission’s new Article 22 doctrine. Despite Grail not generating any revenues in Europe, the Commission invited Member States to request a referral under Article 22 in February 2021 (before the publication of the Commission’s new guidelines), ultimately leading to the referral of the case to Brussels in April. 

The judgment

Illumina appealed the Commission’s actions to the General Court, which dismissed the appeal on Wednesday:

• the core of the judgment focuses on Illumina’s argument that Article 22 was inapplicable, including because the referring Member States had their own merger control regimes (unlike the Netherlands when the EUMR was adopted). The Court rejected these arguments, finding that a plain reading of the provision allowed for the referral of any concentration that affects trade between Member States and threatens to significantly affect competition and that this was consistent with the broader objectives and historical context of the EUMR;
• Illumina also argued that the referral requests were submitted outside of the 15 working day time limit (which runs from when the transaction is “made known” to the Member States). The Court disagreed, holding that the clock does not start with the announcement of a transaction, but only by the “active transmission of … sufficient information to enable that Member State to carry out a preliminary appraisal” (in this case, the Commission’s February 2021 letter that invited the referral requests). On that basis, the requests were made in due time; and
• finally, the Court agreed with Illumina that the Commission should not have waited so long before inviting the referrals (47 days from when the Commission had enough information to do so). However, the Court found that this delay did not undermine Illumina’s rights of defence (which would be ensured through the standard EUMR review process) so held that it did not justify the annulment of the contested decision.

Observations

Illumina may well appeal to the European Court of Justice. In the meantime, the following points bear mention:

1. the judgment gives a green light to the Commission’s ability to use Article 22 to review transactions that would otherwise fall between the cracks of the EUMR. Illumina’s frustration at being the test case for this new doctrine is understandable, in particular because the Commission had not issued its new guidance when the Commission invited the referral requests. However, the wording of the primary legislation is straightforward and this aspect of the Court’s reasoning appears robust, even if its implications for M&A may be significant;
2. it now seems clear that the Commission can accept a referral under Article 22 in any case that affects trade between Member States and that threatens to significantly affect competition. The Commission’s new Article 102 guidance focuses on cases where the target’s turnover does not reflect its actual or future competitive potential (e.g., where it is a start-up or recent entrant, is conducting potentially important research, is an important competitive force, has access to competitively significant assets, or provides products or services that are key inputs/components for other industries). This creates another addition to the heightened levels of regulatory scrutiny we are seeing in Europe, alongside the Digital Markets Act, the growth of FDI review, and the foreign subsidies regime;
3. the Court’s handling of the statutory time limit and the Commission’s delay in inviting a referral creates a particularly unsatisfactory outcome for merging parties. Based on this ruling, the 15 working day time period only starts with the “active transmission” of “sufficient information” to each Member State. This appears to mean that the clock might never start ticking in some cases, absent a Commission invitation, a third-party complaint, or some form of proactive outreach by the merging parties to every EU Member State. Together with the finding that the Commission’s delay in requesting the referrals was not enough to overturn the decision, this provides the Commission with significant latitude to review deals (including after completion), with more discretion than applies to transactions that meet the EUMR’s mandatory notification thresholds. There is plenty to chew on for M&A lawyers drafting conditions precedent; and
4. there is a lot for the European Court of Justice to unpack in any appeal. In the meantime, the judgment will embolden the Commission’s approach to acquisitions of innovative targets. It may also increases the firepower of third-party complainants, who may leverage the Court’s criticisms of the Commission’s delay in issuing its invitation letter, to pressure the Commission to take their concerns seriously early on in the process.