General Court Green Lights European Commission's New Approach to Article 22 Referrals

Key Takeaways

• Concentrations that do not meet either the EUMR or national jurisdictional thresholds can nevertheless be reviewed by the EC if one or more NCAs request that the EC accept a referral. The EC can encourage NCAs to make referral requests. 
• The potential for referral of any concentration, including those with little to no nexus to the EU (as was the case in Illumina/Grail) reduces predictability for the parties to concentrations, in terms of transaction timeline, conditions precedent to closing (including measures enjoining closing or implementation), appropriate triggers for break-up fees and other important deal parameters.
• It is not yet clear whether the EC will use Article 22 sparingly to cover corner cases falling within a perceived enforcement gap or whether it will become a regular feature of EU merger control. In any event, the possibility of referral under Article 22 will need to be considered in the context of deal negotiations and documentation. 

Background

On 26 March 2021, the EC published new guidance on the referral mechanism set out in Article 22 of the EUMR (the “Article 22 Guidance”),¹ addressing the circumstances in which a Member State may request the EC to accept referral of a concentration over which the Member State does not have jurisdiction. 

Although the EC historically discouraged referrals of concentrations over which NCAs did not have jurisdiction, the Article 22 Guidance encourages such referrals in certain cases.  Essentially, the Article 22 Guidance is intended to deal with a perceived enforcement gap, to enable review of so-called “killer acquisitions” – those concentrations where “the turnover of at least one of the undertakings concerned does not reflect its actual or future competitive potential” (e.g., start-ups or recent entrants with significant competitive potential that have yet to generate significant revenues, which represent actual or potential important competitive forces).  The EC’s view is that recent market developments mean that concentrations that could significantly affect competition have escaped review, particularly in the pharmaceutical and digital sectors (although nothing prevents it from being applied in other sectors). 

The first application of this approach to Article 22 referrals was triggered when the French Competition Authority ("FCA") sought to refer Illumina’s USD$8bn acquisition of GRAIL.  On 1 April 2021, the French Council of State (Conseil d'Etat) rejected an application from Illumina to suspend referral.

Illumina, a global developer, manufacturer and supplier of next generation genetic sequencers, consumables and related services, has significant European turnover.  However, GRAIL, a U.S. company developing blood-based cancer tests for sequencing, had supplied no products, generated no revenue, and had not employed personnel to prepare for regulatory approvals or distribution in the EEA. 

On 19 April 2021, the EC accepted the Article 22 EUMR referral². The proposed concentration did not meet the EUMR turnover thresholds, and was not subject to the jurisdiction of any Member State. Nonetheless, the EC found that it could affect trade within the single market and threatened to significantly affect competition within the territory of France, and that a referral was appropriate, as GRAIL's competitive significance was not reflected in its (lack of) turnover. 

Illumina sought to annul the EC’s decision to accept the referral, on the basis that the EC did not have the right to accept an Article 22 EUMR referral from a Member State that did not have jurisdiction over the proposed concentration³. The General Court’s (GC) judgment was delivered on 13 July 2022,⁴ supporting the EC’s position. 

The General Court Judgment

First finding (admissibility of the action)

The GC found Illumina’s action admissible on the basis that decisions to accept referrals are binding and cause a change in the legal system, which is applicable to the examination of the concentration. Further, by accepting the referral requests, the EC acknowledged its own authority to examine the concentration, and the applicability of the substantive and procedural rules laid down for that purpose (including the standstill obligation under Article 7 EUMR). 

Second finding (substance of the case)

The GC confirmed that the EC correctly interpreted Article 22 EUMR, as the language of that provision, particularly the use of the words “any concentration”, make it clear that a Member State has the right to refer any concentration to the EC (if it satisfies the cumulative conditions), irrespective of whether the concentration is notifiable under national law. 

The General Court characterises this as a “corrective mechanism”⁵ to ensure effective review of all concentrations with significant effects on competition in the EU, including those concentrations that would otherwise escape being reviewed at either EU or national level.

The GC also examined Illumina’s submission that the referral request was submitted out of time, noting that a referral request must be made within 15 working days of a concentration being “made known” to the Member State concerned, if no notification of that concentration is required. The GC held that the expression “made known” should be understood as the active transmission of information to the Member State concerned. Such information should be appropriate for the NCA to be able to assess, on a preliminary basis, whether the necessary conditions for the purposes of a referral have been satisfied. As such, in the case at issue, the invitation letter, sent by the EC on 19 February 2021 to inform the Member States of this concentration⁶, constituted the concentration being “made known”. Therefore, in these circumstances, the General Court held that the referral request was made in due time.

Additionally, the GC found that the principles of legal certainty and “good administration” require the EC to comply with a reasonable time limit in the conduct of administrative procedure, including merger control. That said, it concluded that, while a period of 47 days between the complaint⁷ being received on 7 December 2020 by the EC and the invitation letter being sent on 19 February 2021 by the EC was unreasonable, the EC’s failure to act within a reasonable time limit did not affect the capacity of the undertakings concerned to defend themselves effectively. 

Finally, the GC considered Illumina’s assertions regarding the alleged breach of the principles of the protection of legitimate expectations and of legal certainty, focusing on the former (having found Illumina’s claims relating to the latter to be insufficiently substantiated). The GC recalled that, in order to rely on the principle of legitimate expectation, the party concerned should establish that it has received precise, unconditional and consistent assurances, originating from authorised, reliable sources, which would lead it to entertain well-founded expectations.  Here, the GC found that, because Illumina had failed to demonstrate this, it could not rely on the EC’s prior decision-making practice.

Final Thoughts

Illumina has announced that it will appeal the GC’s judgment to the European Court of Justice (which is likely to take years).  In the meantime, the EC’s review of Illumina/GRAIL will continue, and the EC has had its broad approach to Article 22 judicially endorsed. 

Beyond the implications of the EC’s broad discretion for deal certainty generally, it is worth noting that, for digital concentrations, the combined effect of Article 14 of the Digital Markets Act (which requires “gatekeepers” to inform the EC of transactions “where the merging entities or the target of concentration provide any services in the digital sector or enable the collection of data”) and the EC’s Article 22 discretion, will be that the EC will have no difficulty identifying concentrations that it wants to review. The bigger question will be whether a “gatekeeper” meeting its DMA obligation to “inform” constitutes the concentration being “made known” under Article 22. 

Finally, as noted above, the uncertainty created by the EC’s broad discretion under Article 22 also needs to be viewed alongside the changes that have already been made to accommodate the UK CMA’s jurisdiction (recently confirmed by the CAT in connection with both Sabre/Farelogix and Meta/Giphy). Unfortunately, the two review regimes are not aligned (e.g., as the EC made clear in Illumina/GRAIL, that it will issue interim measures enforcing the stand-still obligation under the EUMR, while the CMA’s IEO permits transactions to close, but prohibits implementation), requiring coordination between the corporate and competition teams, and appropriate drafting to accommodate the differences in procedure (as well as the timing, antitrust risk and break fee issues identified above).

The authors wish to thank Julien Haverals and Luca Ghafelehbashi, International Trainees at Norton Rose Fulbright LLP (Brussels) for their contribution.