The European Commission (EC) has published new guidance on the application of Article 22 of the European Merger Regulation (EUMR) which will allow for the EC and Member States to refer transactions that do not meet existing EC or national jurisdictional thresholds for EC review.
On March 26, 2021, the EC published its Staff Working Document (Working Document) on the Evaluation of Procedural and Jurisdictional Aspects of EU Merger Control,1 the latest step in its evaluation of proposed reforms of the EUMR.2 The EC also launched an accompanying impact assessment designed to solicit stakeholder input on policy options for the further targeting and simplification of merger procedures. While the Working Document considers that the EC's 2013 merger simplification package was effective,3 further changes to streamline the review process for unproblematic deals will be consulted on. On the same date, the EC published a guidance communication on Article 22 of the EUMR, the referral mechanism between Member States and the EC, which reflects its findings regarding the current jurisdictional thresholds (Article 22 Guidance).4
The Working Paper focuses on two main areas of reform: i) the revision of jurisdictional thresholds and the expansion of the Article 22 Referral Mechanism in order to enable the EC to review mergers that would not previously have fallen within the scope of its review; and ii) the simplification of merger procedures. The Article 22 Guidance aims to address concerns of an "enforcement gap" to ensure oversight of potentially problematic deals (rather than through legislative change) regardless of target size, valuation level, or whether the deal has closed.
The End of Jurisdictional Thresholds
The effectiveness of the current jurisdictional thresholds has been under consideration for some years now.5 Spotting an enforcement gap in relation to "potentially problematic" high-value transactions that fail to meet the EUMR's jurisdictional thresholds due to low target turnover, a debate emerged as to whether the turnover-based thresholds were fit for purpose—particularly for the digital economy.
The Working Document addresses this debate and the EC's concerns over an enforcement gap, particularly as regards acquisitions of nascent competitors and innovative companies in the digital, pharmaceutical, biotechnology, and other industrial sectors. The EC examines whether the turnover-based thresholds, complemented by the referral system, sufficiently capture deals which potentially have an impact on the internal market and highlights several such deals which escaped review by the EC, and, in some cases, by any Member State.6
In regard to proposals for complementary value-based thresholds at an EC-level to close this gap, the Working Document notably considers that transaction value may not be the most relevant measure as it is not always "sufficiently correlated" with the potential competitive significance of a target, and the new value thresholds in Germany and Austria do not appear to have captured additional anticompetitive transactions. The EC notes that its enforcement practice shows that the referral mechanisms under Article 4(5) (request by the parties) and Article 22 (request by Member State(s)) have allowed it to review important deals which did not meet the EUMR thresholds, but that their effectiveness as a corrective mechanism to the turnover-based thresholds is limited in part by the EC's long-standing approach of discouraging Article 22 referrals from national authorities for deals over which they have no jurisdiction under national rules—despite the EC having the power to review such referrals since the EUMR came into force in 1990. In September 2020, however, the Commissioner for Competition, Margrethe Vestager, announced a policy reversal and stated that the EC would start accepting referrals of mergers "that are worth reviewing" at the EC level.7 The Working Document endorses this, noting that it would give the EC and Member States the flexibility to target deals "that merit review at EU level, without imposing the notification of transactions that do not."
Article 22 Referral Mechanism
Along with its Working Document, the EC has published revised guidance which essentially renders jurisdictional thresholds defunct. Article 22 of the EUMR enables Member States to request that the EC review any merger that does not meet the EU merger thresholds, but "affects trade between Member States" and "threatens to significantly affect competition" within the territory of that Member State(s), regardless of whether it meets the thresholds in that Member State. Article 22 is often referred to as the "Dutch clause" as it was introduced to give Member States which did not have national merger control regimes (like the Netherlands at that time) a legal basis to ensure potentially problematic mergers could still be reviewed. The EC's policy refresh stretches the mechanism significantly beyond its original purpose.
The newly published Article 22 Guidance clarifies appropriate cases for such referrals in light of the EC's policy reversal and complements the EC's 2005 Notice on Case Referral.8 It also makes clear that the EC intends to actively encourage referrals even where a Member State does not have initial jurisdiction over the case, but the conditions of Article 22 are met.
The Article 22 Guidance points to developments in recent years, whereby an increased number of transactions involved companies with little to no turnover, but which could play a significant role in the market. The EC also specifically flags access to larger data sets in digital sectors, as well as transactions involving innovative companies with active R&D projects. It outlines that below-threshold deals may be appropriate for referral where the turnover of one of the companies "does not reflect its actual or future competitive potential," such as: i) startups with "significant competitive potential"; ii) important innovators, or companies conducting important research; iii) companies which are an "actual or potential competitive force"; iv) companies with access to competitively significant assets, including data; and v) companies providing key inputs or components for other industries. Notably, the EC may also consider a transaction value that is particularly high relative to the target's turnover at the time of the transaction. The Guidance outlines that not only can the EC inform the Member State concerned of a transaction it considers appropriate for referral, but also for the potential for third parties to inform either Member States or the EC about a transaction that they believe is a good candidate.
The Referral Timeline
Article 22 sets out the timeline for Member State referrals (i.e., Member State request to examine a notification within 15 working days from the date of national notification or, where no notification is required, the date when the transaction was "made known" to that Member State, a 15-working day period for other member States to opt to join the referral request, and then the EC's 10-working day review to decide whether to accept the request). The Guidance states that "made known" should be taken to mean "sufficient information to make a preliminary assessment as to the existence of the criteria relevant for the assessment of the referral." This definition does not provide much clarity and is likely to lead to a large number of questions in the early days of the EC's refresh of enforcement practice. The Article 22 Guidance states that where a referral is being considered, the EC will inform the merging parties as soon as possible. If the EC does not take a decision within this period, it will be deemed to have adopted a decision to examine the transaction.
Post-Closing Reviews
Significantly, the Article 22 Guidance also provides for post-closing referrals by Member States to the EC, notwithstanding the deadlines set out in Article 22. The Guidance outlines that the EC will review post-closing referrals on a "case by case basis" but will generally not consider appropriate a referral where "more than six months has passed after the implementation of the concentration." If the implementation of the deal was not public, this period would run from the moment when "material facts about the concentration have been made public in the EU." A later referral could be appropriate, based on the "magnitude of the potential competition concerns" and "potential detrimental effect on consumers." The EC may consider rejecting a referral where the transaction was notified in one or more Member States that did not request a referral.
Standstill Obligations
Article 7 of the EUMR prevents a transaction from being implemented, or closing, for as long it is subject to EC review. In the Article 22 Guidance, the EC confirms that Article 7 will apply "to the extent the concentration has not been implemented" on the date on which the merging parties are informed that by the EC of a referral request. This standstill obligation ceases when the EC decides not to examine the transaction. However, if the EC is considering a referral request, the Article 22 Guidance encourages the merging parties to take measures they deem appropriate, including "delaying the transaction's implementation" until it is decided whether referral request has been made.
Takeaways
Lack of legal certainty. This change in policy now means that companies which could previously rely on the bright-line test of a jurisdictional threshold to eliminate the possibility of an EC merger filing can no longer do so. As a result of this Guidance, merging parties will instead have to verify whether the substantive conditions of Article 22 have been met in one or more Member States, even where they do not meet the national jurisdictional thresholds. The elements to consider outlined by the EC are largely subjective and will make for difficult determinations.
The policy reversal also means that a deal can now be reviewed at national level and by the EC where certain conditions are met—contrary to the spirit of the "one-stop-shop" principle—as the EC only acquires jurisdiction in respect of the Member States that have made and joined the Article 22 referral request. Companies should also be aware of the possibility of parallel reviews with the Competition and Markets Authority (CMA), as the UK enforcer also has broad powers to call in non-notified deals (including post-completion) and stretches its jurisdictional reach to its limits with its controversial "share of supply" test (including taking jurisdiction over deals where the target has no UK turnover). Failing to anticipate these dual risks could lead to costly deal delays or even prove fatal.
Merging parties could attempt to mitigate the risk of a referral by consulting the Member States or the EC in order to trigger the 15-day review. The Guidance states the EC will inform the parties "as soon as possible" about whether a referral is planned, but this gives rise to significant timing uncertainty. In regard to potential post-closing reviews, the EC will "generally" not consider a referral beyond six months of a deal closing, but this tentative language means that merging parties cannot eliminate this possibility.
Spotlight on killer acquisitions. The EC's Working Paper is the latest pinpoint of focus of international antitrust agencies on transactions involving nascent competitors, or "killer acquisitions." The EC's expansion of the Article 22 referral mechanism to permit national regulators to refer deals to it—even where they do not have jurisdiction—will allow EC oversight of acquisitions of nascent or innovative players.
Risk allocation and deal documents. In addition to the initial antitrust risk assessment, companies should consider the impact that a referral could make on deal closing provisions such as conditions precedent, break fees, and long-stop dates in order to take account of the potential for a referral to the EC even by Member States without jurisdiction.
Deal timetables and integration planning. Companies should also consider their post-closing implementation and integration plans, since the EC also makes provision for post-closing referrals, and such a referral could prove costly to implementation or closing plans that are already underway. The Guidance advises companies to take measures they consider "appropriate," including delaying implementation, where a referral request may be in question. This imposes considerable uncertainty upon businesses, even where they may have believed they had safely secured closing without antitrust concerns. Where companies are in doubt, the EC has stated that it will engage as to the potential for a referral. This appears to be the most sensible approach from an early reading of the Guidance, in order to avoid potential sudden delays or complications in closing and implementing the transaction.
For more information, please contact Beau Buffier, Gorka Navea, or another member of the firm's antitrust and competition practice.
Sarah Taheny and Deirdre Carroll contributed to the preparation of this Wilson Sonsini Alert.
[1] EC Staff Working Document (SWD (2021) 67) on the evaluation of procedural and jurisdictional aspects of EU merger control (March 26, 2021), available at: https://ec.europa.eu/competition/consultations/2021_merger_control/SWD_findings_of_evaluation.pdf.
[2] Council Regulation (EC) No. 139/2004 of January 20, 2004 on the control of concentrations between undertakings (EUMR), available at: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32004R0139&from=EN.
[3] ‘Mergers: Commission cuts red tape for businesses’, EC News Section (December 5, 2013), available at: https://ec.europa.eu/commission/presscorner/detail/en/IP_13_1214.
[4] EC 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 (March 26, 2021), available at: https://ec.europa.eu/competition/consultations/2021_merger_control/guidance_article_22_referrals.pdf.
[5] See EC Staff Working Document (SWD (2014) 221 final) accompanying the White Paper Towards More Effective EU Merger Control (July 9, 2014), available at: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52014SC0221&from=EN. See also EC White Paper Towards More Effective EU Merger Control (July 9, 2014), available at: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52014DC0449&from=EN.
[6] See, e.g., VMWare/Pivotal (2019), Salesforce/Mulesoft (2019), and Pfizer/Array BioPharma (2019).
[7] ‘The future of EU merger control’, IBA 24thAnnual Competition Conference (September 11, 2020), available at: https://ec.europa.eu/commission/commissioners/2019-2024/vestager/announcements/future-eu-merger-control_en.
[1] Commission Notice on Case Referral in Respect of Concentrations (2005/C 56/02), available at: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52005XC0305(01)&from=EN.
