Last Updated on Wednesday, 2 June, 2021 at 11:07 am by Andre Camilleri
Thomas Bugeja, Senior Associate, Fenech & Fenech Advocates
On 26 March the European Commission (EC) announced follow-up measures to its jurisdictional and procedural review of the EU Merger Regulation (EUMR), in particular by publishing its new Guidance on the application of the referral mechanism set out in Article 22 of the Merger Regulation to certain categories of cases (Article 22 Guidance). This confirms a significant policy change towards tech and pharma M&As and significantly widens the jurisdictional reach of the EUMR without a change in the actual text of the same regulation.
In terms of the EUMR, the EC has exclusive jurisdiction and acts as a one-stop-shop for merger control when a proposed “concentration”, typically a merger, acquisition or full-function Joint Venture has an “EU Dimension”.
The “EU Dimension” is established when the undertakings in the proposed concentration fulfil the jurisdictional turnover thresholds, being the primary thresholds (€5bn combined worldwide turnover of the undertakings and EU turnover for at least two of the undertakings concerned of at least €250m) or the secondary turnover thresholds. An EU Dimension will be established in these cases unless each of the undertakings concerned achieves more than 2/3 of its aggregate EU-wide turnover within one and the same EU member state.
In recent years however, digital and pharma markets have developed through acquisitions of undertakings with the potential of becoming important players in the market, before they reach significant turnovers. This happens mostly in “digital economies, where services regularly launch with the aim of building up a significant user base and/or commercially valuable data inventories, before seeking to monetise[1]”.
This has led to a situation where large firms acquire small start-ups with a view of eliminating future or potential competition (known as “killer acquisitions”), escaping the EUMR’s notification and review process because they do not (yet) meet the jurisdictional thresholds. This was the case when the acquisitions of Instagram and WhatsApp (in 2012 and 2014) went under the radar despite significant competition concerns. This is also prone to happen in the pharmaceutical industry where undertakings with unmonetized R&D with huge potential may be acquired by bigger market players avoiding merger control rules.
Given that lowering the turnover thresholds could potentially lead the EUMR to capture insignificant concentrations, the Guidance seeks to capture and review “killer acquisitions” and broaden the EUMR’s jurisdiction without changing the text of the EUMR.
The Article 22 mechanism allows EU member states to ask the EC to review a concentration that does not fulfil the EU thresholds, but which (a) affects trade between member states and (b) threatens to significantly affect competition within the territory of the member states making the request.
Whereas until now, the EC’s practice has been mainly to discourage referrals from member states that did not have jurisdiction over the proposed concentration, through this Guidance the EC is now reformulating its appreciation and application of Article 22, EUMR, stating that it now intends to encourage member states to refer these transactions to it.
In practice this means that any deal, irrespective of EU or national filings required in terms of merger-control law, may be referred for review to the EC when it fulfils the Article 22 requirements.
The EC makes it clear in its Notice that it will use its discretion to investigate deals where the “turnover of at least one of the undertakings concerned does not reflect its actual or future competition potential,”[2]start-ups which haven’t yet monetized, important players in innovation and R&D, undertakings with significant assets (such as raw materials, infrastructure, data or IP), and undertakings which provide key inputs for other industries. The list is clearly aimed at widening the jurisdiction of EU Merger control to transactions which might have potential effects on competition but which are not yet reflected in significant turnovers at the time.
This approach signifies a shift from turnover-based thresholds to a more subjective and qualitative approach grounded in “theories of harm”. For companies in pharma and tech, it significantly decreases legal certainty exposing them to pre-merger and post-completion review, where turnover thresholds would previously give them legal certainty. M&A planning will also need to reflect this new reality and include not only turnover-assessments, but a more in-depth review on whether an Article 22 referral is possible. In some cases undertakings may find it necessary to approach the EC with their proposed plans in order to obtain an informal Article 22 “clearance”, as also suggested by the EC in the Notice itself.
Thomas Bugeja is a Senior Associate at Fenech & Fenech Advocates specialising in commercial, competition and employment law. Thomas assists clients in litigious and non-litigious matters and on cross-border recognition and enforcement of foreign judgments.
[1] Article 22 Guidance, Para 9
[2] Article 22 Guidance, para 19
