The European Commission has just published its Guidance on the criteria for using the Article 22 referral. Despite its technical and rather vague title, the impact of this document, which heralds a major change in the way merger cases are handled, should not be underestimated. What is it about, why all the fuss, and how to adapt to this new framework in practice?
1. Article 22 becomes a tool for extensive control of non-notifiable mergers
- Article 22 allows national competition authorities to request the Commission to examine a merger, even where the Community thresholds are not met. Such a referral is possible if the transaction is likely to affect (i) trade between Member States and (ii) competition in the territory of the State(s) requesting the referral.
- What is new? Article 22 is not new, but in practice the Commission only accepted to refer a transaction when the Member States requesting the referral were competent, i.e. when the national thresholds were met. What is new is that the Commission has changed its approach and opened up the use of referrals to any transaction, even where no thresholds are met.
- This mechanism is therefore far-reaching because it implies that, for any merger, it is no longer necessary to confine oneself to a "simple" analysis of the control thresholds provided for by the national regulations of the Member States, but also to carry out a prospective analysis of the potential impact of the operation on competition even when the operation is not notifiable.
2. A tool left to the discretion of national authorities, without clear criteria
The Commission's long-awaited Guidance ultimately generates more questions than it answers:
- It confirms that no sector is specifically targeted by this mechanism, although innovative sectors (digital and pharma in particular) are of primary concern. The logic behind this change of approach is that, in sectors where innovation is an important competitive factor, the acquisition of an innovative company can have a significant competitive impact, even if the target's turnover is still limited, and therefore does not trigger the notification thresholds. This is the phenomenon that has been referred to as "killer acquisitions".
- The two criteria of effect on trade between Member States and risk of significant effect on competition are broadly assessed.
For the risk of a significant effect on competition, this is not very different from the prospective competition analysis that must be carried out when a transaction is notifiable, except that the standard of proof is lower: Member States must provide prima facie evidence of an effect on competition, not firm evidence.
Furthermore, the prospective nature of the analysis is particularly important, as it will often involve analysing the potential evolution of innovative targets.
But any type of "classic" competitive risk can be taken into account, including creation or reinforcement of dominance, elimination of an important competitor or new/future entrant, reduction of the ability or incentive of competitors to exert competitive pressure (e.g. if the target holds key assets, infrastructure, inputs or outlets on the market), risks of leverage in case of a strong position on a related market (tying, bundling, exclusionary practices).
- An additional, but illustrative criterion: the turnover of at least one of the parties does not reflect its competitive potential. The acquisition value will be an important indicator if it appears to be much higher than the target's turnover.
This could be the case in particular for start-ups or new entrants with strong potential (promising business model), or targets with significant R&D projects. In this respect, paragraph 19 of the Guidance provides interesting examples.
3. What timing?
- The referral may be requested even if the operation has already been completed.
- In principle, no referral if six months have elapsed after completion, or if the transaction was not public six months after the date on which it became public.
- Exception: the Commission leaves open the possibility of intervening later if competition concerns or negative impacts on consumers arise.
4. Who can refer a case to the Commission?
- Normally, the Article 22 referral procedure is initiated by the Member States, but the Commission may also take the initiative to contact the Member State(s) concerned.
- Most importantly, the Guidance clarifies that notifying parties may approach the competition authorities. This element is in fact at the heart of this new approach: in practice, the parties to a non-notifiable transaction will have to systematically assess the possibility of approaching the authorities. This will be the only way to secure the transactions.
- In addition, the Guidance also highlights the possibility for third parties (e.g. dissatisfied customers) to approach the authorities.
- This raises the question of when the parties to the transaction will be informed of the fact that a referral is pending – on this point the Guidance is vague ("as soon as possible").
5. Practical recommendations:
- Pay particular attention to the economic objectives of the operation: why this particular target, what synergies are envisaged, what benefits are expected, etc.?
- Do a ‘360°’ of the target, focusing on its strengths and what could make it important in the market (R&D projects, assets, infrastructure, atypical profile, key role in the economic chain...), whether as a competitive pressure, a supplier of important inputs for competitors, or a future market opportunity.
- Check whether the acquisition value is consistent with the target's current turnover.
- Carefully analyse the business plan and the resulting growth potential.
- Identify whether the transaction is likely to be challenged by competitors, suppliers or customers, and the reasons why they might complain.
- Ensure that the transaction is not likely to confer or strengthen a dominant position on the acquirer.
- Where appropriate, consider informal contact with the competition authorities.
In short, more than ever, a joint analysis between legal, strategy and operational teams will be decisive in identifying areas of risk and implementing an action plan.