Below the thresholds but on the radar | What’s next after the ECJ's Illumina/Grail judgment?

With its eagerly-awaited Illumina/Grail judgment on 3 September 2024, the Court of Justice of the European Union (“ECJ”) closed a transatlantic saga and rejected the European Commission's ("Commission") extended interpretation of Article 22 of the EU Merger Control Regulation ("EUMR") by finding that the Commission had no right to receive referrals of proposed concentrations not meeting the thresholds of the national competition authorities.

While this highly anticipated ruling enshrines the importance of foreseeability and legal certainty for businesses, it is also a significant step into new territory. There is indeed little doubt that enforcers will be seeking to bridge the gap created by the loss of that tool to review mergers below national jurisdictional thresholds, with possibly important implications on M&A deal certainty.

What’s new?

Four years after the Commission started to accept referrals by national competition authorities ("NCAs") of transactions meeting neither the European nor the national merger control thresholds (see here), the EU’s highest court issued a landmark judgment rejecting the Commission's ability to do so.

In this ruling, the Court found in particular that “it has not been established that that mechanism was intended to remedy deficiencies in the control system inherent in a scheme based principally on turnover thresholds” (§ 200 of the ruling) and to the contrary, that such an “interpretation undermines the effectiveness, predictability and legal certainty that must be guaranteed to the parties to a concentration” (§ 206 of the ruling).

At first glance, the judgment can be perceived as a bulwark against legal and deal uncertainty and as a strong signal dampening the enforcer's increasing creativity leading to the enlargement of its toolbox used to review M&A transactions, which was heavily discussed among practitioners, as it was perceived as frustrating to companies and led to increased deal uncertainty.

However, foreseeing the potential enforcement gap this ruling could in their view create, enforcers have already made it clear over the last few months that they will continue making sure to bring transactions potentially harmful to competition under their review, notably through the use of ex post procedures which, ironically enough, gives rise to even more unpredictability than Article 22 referrals.

Thus, companies have to continue to make sure that they are well equipped to ensure merger control compliance monitoring at the stage of the preparation of a transaction, but also broader competition law compliance after closing due to authorities' increasing appetite for ex post enforcement applied to mergers.

Companies may also want their voices to be heard in any future potential initiative undertaken at EU and/or Member State level to update the thresholds to capture additional transactions. However, as stressed by the Court, this is ultimately for the EU legislature and/or Member States to revise downwards their respective thresholds (§§ 183, 216-217 of the ruling).

Article 22's merger control referral mechanism was considered an important tool to capture potentially harmful transactions below the thresholds

Essentially, the Commission, supported by most NCAs, justified its change of approach in 2020 by the need to review and vet transactions that fell short of the usual turnover or market share-based thresholds because it considered that they could still lead to anticompetitive effects. This change of interpretation of Article 22 route was a quick and easy fix for the Commission and national enforcers, as it did require neither a political consensus among Member States, nor to reform merger control regimes at the national level.

While companies had no other choice than to factor in this uncertainty in transactional documentation by including additional M&A mechanisms and adapting deal timelines accordingly where a referral risk was conceivable, the situation was concerning from a deal-certainty and investment policy perspective.

More specifically, while the Commission tried to reassure businesses that its “corrective mechanism” would only be used in a handful of mergers each year, companies felt it differently. According to the Commission, the mechanism was intended to target deals in certain sectors that could seriously affect competition, such as by stifling innovation (see here). It is true that since 2020, the Commission only agreed to open proceedings in relation to three referrals (against the c. 80 requests for referrals it received).

This policy change has been experienced by companies as another regulatory hurdle in an ever-increasingly complex regulatory landscape (alongside new Foreign Direct Investment and Foreign Subsidies review regimes). Companies struggled to anticipate and gauge a call-in risk which added a further layer of complexity and uncertainty for companies engaging in strategic M&A transactions.

Indeed, when being referred to the Commission, the closing of a transaction could at best be delayed. At worst, the deal could be prohibited (requiring to unwind already closed transactions, such as for Illumina/Grail) or abandoned when potential remedies ironing out the competition concerns would kill the rationale of the transaction.

For NCAs, such as the French Competition Authority, the novel interpretation of Article 22 allowed an enforcement gap to be bridged and was seen as "an initial response to the issue of predatory and consolidating acquisitions" (see here).

Since then, other Member States have introduced similar merger control-based call-in mechanisms (such as Italy and Ireland) and the so-called gatekeepers are compelled by the EU Digital Markets Act to inform the Commission about contemplated transactions regardless of whether they trigger any filing requirements or not, but other types of sub-threshold scrutiny recently flourished.

The use of ex post antitrust tools to review mergers also interferes with deal certainty

Essentially, the boundaries between traditional merger control and antitrust enforcement have been blurred over the last few months. Also, at Member State level, NCAs are using their ex post antitrust toolbox with increasing frequency to capture what might be perceived as predatory and consolidating acquisitions falling below the usual merger control thresholds.

As a consequence of the ECJ's Illumina/Grail ruling, companies should anticipate an increase in review of already closed transactions.

The increase of the use of non merger-specific tools to review transactions is however somewhat puzzling, as the nature of these tools conflicts with the pace of the M&A calendar and investors' need for certainty – which is usually received with a clearance decision based on a jurisdiction which can objectively be identified.

This new trend can also be seen as contradicting with one of the objectives of merger control regulations, recalled by the Court, which have the purpose of “limiting the duration of the control procedures [in order] to ensure a control of mergers within deadlines compatible with both the requirement of sound administration and the requirement of the business world” (§ 204 of the ruling).

Another factor increasing uncertainty is the active role third parties can take in triggering antitrust procedures, such as competitors (e.g., an unsuccessful bidder) or clients which may complain to competition authorities.

Similar to what we observed in the context of Article 22 referrals, the possibility for NCAs to review and order the unwinding of transactions based on antirust provisions leaves another sword of Damocles hanging above the parties.

More specifically, after an approval of a transaction under merger control rules, competition authorities are able to initiate antitrust proceedings if the merging parties subsequently behaved in breach of abuse of dominance or cartel provisions. However, what can be perceived as a novelty is the use by competition authorities of these classical ex post antitrust tools to review the parties' decision to enter into a transaction in the first place. With this in mind, businesses enjoying a strong position on a market should be mindful that enforcers may consider that the acquisition of a competitor can amount to an abuse of their dominant position.

In the context of a proceeding in front of the French Competition Authority, the ECJ confirmed that provisions prohibiting the abuse of a dominant position may be used to scrutinize already closed transactions, including below the thresholds ones, specifying that the existence of an ex ante merger control regime does not preclude from doing so (see Towercast judgment, also mentioned at § 214 of the Illumina/Grail ruling). The ECJ however conditioned the use of this ex post tool to the finding that behaviour of other companies (e.g., clients) remaining on the market are dependent on the dominant undertaking.

Enforcers in the EU welcomed the outcome of the Towercast judgment. This is seen by the proceedings launched by the Belgian Competition Authority only six days after the publication of the Towercast judgment against Proximus for its alleged abuse of dominance on the wholesale and retail broadband internet access services market stemming from a recent acquisition, and ultimately closed after Proximus decided to divest its newly-acquired business (see here).

It is also worth noting that in France, a specific complementary merger control provision allows the French Competition Authority to order merging parties abusing their dominant position through a behaviour which can be separated from the merger itself, to amend, supplement or even terminate “all the agreements and acts by which the concentration of economic power making the abuse possible was implemented” (see article L.430-9 of the French Commercial Code). However, given the requirement of a behaviour which can be separated from the merger itself, this provision has so far only be applied once (see here) but it remains to be seen if the recent trend of ex post scrutiny of transactions will bring the spotlight on this provision.

Furthermore, even absent a dominant position, parties to a transaction should pay close attention to the legitimate rationale of their transaction with enforcers on the look out for transactions being used as a vehicle of collusion. This risk might be illustrated by a recent case in France, where the French Competition Authority which, only one month after the Towecast judgment, issued its first decision in which it examined whether a merger falling below the thresholds could be considered as an anticompetitive market sharing allocation agreement. The French Competition Authority checked whether the 21 cross-divestitures of business assets that took place in 2015 between three major groups in the meat-cutting industry amounted to an infringement.

After even having carried out dawn raids at the merging parties' premises and assessed the case, the French Competition Authority ultimately dismissed the matter because it could not establish from the documents reviewed that the mergers had an anticompetitive purpose (see here).

Companies should take this dismissal as a warning and make sure that their compliance procedures kick-in as soon as possible to ensure that their deal rationale is antitrust compliant and that this is reflected in the deal documents, such as board presentations. 

Following the Illumina/Grail ruling, national enforcers can be expected to seek to make more use of such grounds, or the creation of new tools. However, a too systematic use of those tools could also draw criticisms should they “undermin[e] the effectiveness, predictability and legal certainty that must be guaranteed to the parties to a concentration” (§ 206 of the ruling).

The use of sectoral inquiries to review mergers amounts to regulatory intervention

Sectoral inquiries are another tool used by NCAs to review transactions that are not reportable under merger rules. Parties to a transaction should thus be mindful of the level of concentration of the market on which they operate, irrespective of their own post-transaction share, especially in sectors prone to this kind of intervention (e.g., energy, pharmaceuticals, retail, tech, utilities). 

A first example is the recent reform in Germany enabling the German Competition Authority, which already had some form of call-in powers, to review transactions following sectoral inquiries in which it identifies a “malfunctioning of competition”, even in cases where the transaction did not meet the thresholds (see recent amendments to the German competition regime, November 2023, GWB Section 32(f)).

The President of the German Competition Authority specified that this tool "addresses cases of significant and continuing malfunctioning of competition without first having to demonstrate a violation of the law. The amendment thus expands our competition law toolbox" (see here). Under this new regime the German Competition Authority can - even after closing - impose behavioral and structural remedies to address its concerns, which can range from granting access to data to divestitures.

A second example comes from the UK Competition and Markets Authority (“CMA”), which is currently using its broad “market study and investigation” powers to look at the veterinary sector, with a noted focus on “rolls-up” (i.e., a situation normally involving a private equity firm, where they have gradually acquired several players in the same or related markets. Other authorities around the world are also undertaking similar investigations – for a US example, see press release and here).

The interest in “roll-ups” is a particularly concerning slant on the control of below jurisdiction mergers, since the ex post nature of the review means that not only a single transaction can come under scrutiny months after a lawful transaction took place, but so can all the transactions considered as part of the same bolt-on strategy.

The flexible interpretation of market share-based thresholds increases unpredictability

Notifications may be triggered in some jurisdictions based on a test relying on the parties' position on the market (and not just their turnover). Experience shows that some of these tests are purportedly broadly interpreted to capture potentially problematic transactions, that would otherwise not have been scrutinized, but it is especially hard for businesses to gather and access accurate information on their market positions.

In this context, companies should for instance be mindful of the UK angle of their transactions. The UK share of supply test is applied purposefully by the CMA which has increasingly applied its discretion use of its call-in powers over the past few years and, has emphasised that “this is a flexible test which, in practice, has meant that the CMA has consistently been able to exert jurisdiction over transactions in digital markets, for example where the turnover of the target was limited, but the value of the deal was high” (see here).

To add a layer of complication to this, the UK Digital Markets, Competition and Consumers Act (“DMCC”) contains new rules which are due to enter into force this autumn, which will introduce an additional jurisdictional option for the CMA to rely on to control mergers. The DMCC introduces an upgraded version of the abovementioned share of supply test that, under certain conditions, removes the need for one party’s share of supply to be incrementally increased. Such a provision will likely make it easier for the CMA to capture so called “killer acquisitions” as well as more vertical and conglomerate mergers than have not fallen into scope to date.

The Antitrust & Competition team of Mayer Brown in Europe comprises lawyers who have a thorough knowledge of EU and UK law and its procedures as well as an extensive experience of dealing with enforcers at Member State and EU level. Mayer Brown is regularly assisting companies in all competition law-related matters before National Competition Authorities and Courts, the European Commission and the Court of Justice of the European Union.