News Update Competition

16 April 2021

The European Commission ("Commission") recently provided guidance on the referral mechanism laid down in Article 22 of the Merger Regulation. The guidance, which is effective immediately, clarifies that Member States may refer all concentrations to the Commission.

The Commission will start directly accepting referrals – even if the referring Member State has its own merger control regime and if the concentration falls below the national thresholds. In addition, the Commission may also agree to revise transactions that have closed. The wide and immediate scope of application of the guidance will undoubtedly have an important impact on the timing and viability of business transactions.

Background

On 26 March 2021, the Commission published a Staff Working Document on the results of its evaluation of procedural and jurisdictional aspects of EU merger control. The evaluation showed that the turnover-based jurisdictional thresholds, together with the mechanisms for the referral of cases between the Commission and the Member States, have generally proved effective in capturing significant concentrations. However, a number of concentrations where a very strong or even dominant player acquires a company with little to no turnover, but which plays or could have played a significant competitive role in the markets absent the acquisition (also called 'killer acquisitions') have escaped review by both the Commission and the Member States according to the Staff Working Document. This allegedly includes transactions in the digital and pharma sectors.

To address this perceived problem, the Commission has issued new guidance in which it reconsiders the application of Article 22 of the European Merger Regulation ("EUMR"). It intends to encourage referrals by Member States in cases where the national merger thresholds are not met but the remaining requirements of Article 22 are fulfilled.

The Article 22 referral mechanism in a nutshell

EU merger control aims to prevent corporate reorganisations harming competition in the internal market. The Commission has exclusive jurisdiction to assess whether a given transaction may significantly impede effective competition in the internal market if the EUMR turnover thresholds are met. Concentrations without a 'Community dimension' may still fall within the jurisdiction of Member States. The delineation between the Commission's competence and the Member States' competence is based on turnover thresholds. Merging companies must notify their operation to the Commission if their turnover exceeds certain thresholds. The idea behind this is that these cases are better dealt with at EU level as they are likely to impact several Member States.

The EUMR contains referral mechanisms to redistribute cases between the Commission and national competition authorities. Under specific circumstances, the review of individual cases can be referred from the Commission to Member States and vice versa. More specifically, Article 22 EUMR allows Member States to refer a concentration to the Commission if the concentration does not have a Community dimension but affects cross-border trade and threatens to significantly affect competition within the territory of the Member State making the request. With its new guidance, the Commission has clarified that referral is possible – and will be taken serious by the Commission – irrespective of whether the concentration is notifiable under the national merger control rules of the referring Member State.

Key aspects of the guidance

Appropriate cases
The Commission intends the guidance to facilitate and encourage Article 22 referrals. Potential candidates for referral include transactions between companies that:

• are start-ups or recent or future entrants with significant competitive potential;
• are innovators;
• conduct important research;
• have access to competitively significant assets (such as raw materials, infrastructure, or data); and/or
• provide products or services that are key components for other industries.

If the consideration for the transaction is very high, this is an indication that the target may have a big potential for competitive disruption that that acquirer wants to eliminate.

Timing
When a concentration falls below the national thresholds, a referral request must be made within 15 working days from the date on which concentration is made known to the relevant Member State. Other Member States may join the request within a period of 15 working days which starts counting at the moment the Commission informed them of the initial request. The Commission may decide to examine the concentration by no later than ten working days after the expiry of the 15-working day period for Member States to join the referral request.

Suspension obligation
If the referral request is being considered, the Commission will inform the parties concerned as soon as possible. This does not oblige the parties to take or refrain from taking actions regarding implementing the transaction. However, the suspension obligation applies from the date on which the Commission informs the undertakings concerned that a referral request has been accepted.

Closed transactions
Member States can request a referral of transactions that are already closed. As a general rule, the Commission will consider that a referral is not appropriate if the conclusion of a transaction become publicly know more than six months ago.

Cooperation with national competition authorities
The Commission will closely cooperate with the authorities of the Member States to identify concentrations that may be candidates for referral. To this end, they may exchange information.

Doubts about instrument

Article 22 is also called the Dutch clause, as it was originally inserted in the Merger Regulation at the request of notably the Netherlands, that did not have a merger control regime at the time: it wanted the ability to refer cases that it could not (yet) review to the Commission.

The policy change initiated by the guidance blatantly expands the use of Article 22 beyond what it was arguably meant for, creating extreme legal uncertainty because even transactions that do not meet any merger notification thresholds and transactions that are already concluded may be reviewed by the Commission. It is suggested that if the Commission wants to attack perceived killer acquisitions, it should have introduced a transaction value threshold in the EUMR. The procedural steps involved in such amendment seem appropriate considering the radical changes involved as well as the fact that a transaction value threshold would have provided more legal certainly.

Practical implications

In practical terms, companies planning transactions will have to carefully assess the risk of their deal being subsequently referred to the Commission. While it will be difficult to fully predict the risk of referral, companies may address uncertainty by including specific clauses in their agreements to deal with potential delays, remedies or even the possibility that the operation is rejected by the Commission. Alternatively, they may contact the relevant national competition authority to gain a better insight into the chances of referral. This may give comfort but also carries the risk that the parties actually create interest in their transaction.

What does the future hold?

Pursuant to the evaluation, the Commission has initiated an impact assessment on revising certain procedural aspects of EU merger control. Its focus is further targeting and simplifying the procedures through a revision of the Merger Implementing Regulation and the Notice on the Simplified Procedure. Stakeholders can submit their views until 18 June 2021.