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European Commission Extends Reach Over Non-Reportable Transactions4월 6, 2021
The European Commission (“EC” or “Commission”) has called on EU Member States to increase their monitoring of transactions that might harm effective competition across the EU. Similar to last year’s move to encourage Member States to make “full use” of their foreign direct investment (“FDI”) screening tools, with this latest initiative the EC is relying on Member States to help increase its enforcement reach - this time to review and potentially prohibit mergers and acquisitions that do not meet the jurisdictional thresholds of the EU merger regulation (Council Regulation (EC) No 139/2004; “EUMR”) and that the EC on its own would not, therefore, have the power to investigate.
According to the EC’s recent Guidance Paper, the key to this expansion of competences is Article 22 EUMR, under which Member States can request the EC to review a transaction as long as it affects trade between Member States and threatens to significantly affect competition within the territory of the Member State making the referral request. The Article 22 referral mechanism has long been part of the EUMR tool box, having been introduced since the beginning in 1989 at a time when a number of Member States still lacked the legal means and/or the practical expertise to effectively scrutinize problematic transactions. The idea was, that those Member States should be able to utilize the EC’s resources in order to avoid problematic - but under the EUMR not reportable - transactions from falling through the cracks. What is new is that, under the EC’s Guidance Paper, Member States are asked to use the referral mechanism in the future also to ‘refer’ cases that do not fall within their own jurisdiction.
While technically covered by the broad wording of Article 22, encouraging the referral of cases that are not reportable at Member State level represents a veritable paradigm shift. Indeed, up until now, the EC actively discouraged the referral of such non-reportable transactions. So much so that in 2014, the EC proposed to amend Article 22 to expressly limit the use of the referral mechanism to those Member States who are competent to review the transaction in question under their national laws. According to the Guidance Paper, this previously stated reluctance to accept referrals from Member States who had no jurisdictions under their national legislation, is said to have been driven by “the experience that such transactions were not generally likely to have a significant impact on the internal market.” Another relevant consideration could be that the argument that Article 22 (more than 30 years after its introduction) should be used to close a regulatory gap seems hardly convincing, when today all Member States apart from Luxembourg have their own merger control laws.
Yet, it appears the Commission now feels that its cause is just and justified. There is little doubt that these days the EC and other antitrust enforcers around the world are faced with markets and business models that pose novel and complex challenges, which traditional antitrust laws might seem ill-equipped to address. In the area of merger control, “killer acquisitions” (i.e., acquisitions of small, emerging competitors with “high competitive potential” who are taken out from the market by their established peers long before they can become a competitive constraint) and those that lead markets to “tip” (i.e., where the accumulation of, for example, data, users or IP in the hands of one company creates network effects that may result in long-term monopoly concerns) are the new frontier. Missing the opportunity to intervene and possibly prohibit such transactions before they can harm competition (for example, because the target company does not yet generate sufficient revenues to trigger traditional merger control filing requirements, such as the one under the EUMR) means that regulators might have to invest their scarce resources into protracted ex-post investigations. More importantly, it may not actually be possible to restore the pre-merger market equilibrium with reactive measures, for example, because it may not be feasible to unwind a consummated merger or because network effects are self-enforcing and largely immune to a regulator’s remedial orders. Even though these issues are particularly prominent in the digital and pharmaceutical markets, the Commission has made it clear in the Guidance Paper that Article 22 referrals should be used across all economic sectors.
While the EC’s objectives seem legitimate, an expansive use of the Article 22 referral mechanism raises a number of serious questions. From a practical perspective, the possibility of having a non-reportable transaction pulled into the EC’s jurisdiction disrupts transactional timelines and undermines deal certainty. Despite the fact that the Guidance Paper “aims to increase transparency, predictability and legal certainty as regards a wider application of Article 22”, it is difficult to see how this objective can be met when the Commission defines the assessment parameters as broadly as it does in the Guidance Paper. In fact, there is little to suggest that Member States (and transaction parties) could use a shortlist of key questions to earmark or discard a transaction for Article 22 referral.
Unclear Intervention Threshold
As for the first criterion (namely whether or not a transaction is liable to affect trade between Member States), this one is notoriously easy to meet, given that “’trade’ covers all cross-border economic activity and encompasses cases where the transaction affects the competitive structure of the market[, for example, because it] may have an influence, direct or indirect, actual or potential, on the pattern of trade between Member States[, for example, because of] the location of (potential) customers, the availability and offering of the products or services at stake, the collection of data in several Member States, or the development and implementation of R&D projects whose results, including intellectual property rights, if successful, may be commercialised in more than one Member State.” As for the second criterion (namely whether “there is a real risk that the transaction may have a significant adverse impact on competition”), it is questionable whether a “real risk” is something other than what nowadays keeps most transactions in pre-notification discussions with the EC for weeks (if not months) before a formal Phase I review process of 25 working days even starts. After all, the Guidance Paper refers in a rather non-specific way to the Commission’s Horizontal and Non-Horizontal Merger Guidelines - which contain the entire range of possible and impossible theories of harm that the EC could use to object to any given transaction. The statement that “relevant considerations for deciding whether the transaction threatens to significantly affect competition may include the creation or strengthening of a dominant position […]; the elimination of an important competitive force […]; the reduction of competitors’ ability and/or incentive to compete […]; or the ability and incentive to leverage a strong market position from one market to another by means of tying or bundling or other exclusionary practices” is of equally limited value in terms of increasing legal certainty. After all, these concepts are the standard theories that need to be explored in every horizontal or non-horizontal merger (i.e., all transactions that involve either competitors or companies active on different but closely related markets). Moreover, these concepts are complex and require careful analysis. It is not unheard of that even the Commission itself is found to have misapplied these tests, including, for example, the one on the elimination of an important competitive force. How then is a Member State authority supposed to make a robust decision on whether or not to make an Article 22 referral request - especially if that authority does not have jurisdiction over the transaction and, therefore, no powers to force the transaction parties to produce the kind of information that would be included in a merger notification and that could serve to make an informed decision?
According to the Guidance Paper, the answer is simple: “Merging parties may voluntarily come forward with information about their intended transactions. Where appropriate, the Commission may in such cases give them an early indication that it does not consider that their concentration would constitute a good candidate for a referral under Article 22 of the Merger Regulation, if sufficient information to make such a preliminary assessment has been submitted” [emphasis added]. This might well be interpreted as an invitation to notify non-reportable transactions straight to the EC despite the Guidance Paper’s assurance that Article 22 referrals should be a “corrective mechanism” “without imposing a notification obligation on transactions that would not warrant such review.”
Under Article 22, Member States only have 15 working days to lodge a referral request, counted from the date “on which the concentration was notified, or if no notification is required, otherwise made known to the Member State concerned.” This might suggest that transaction parties remain in limbo only for a short period of time, especially if their transactions are a matter of public record, for example, because they are reported in the companies’ press releases. However, here, too, the Guidance Paper cautions that “‘made known’ should be interpreted as implying sufficient information to make a preliminary assessment as to the existence of the criteria relevant for the assessment of the referral.” It is true that this interpretation would be consistent with what the Commission’s Notice on Case Referral already stipulated back in 2005. However, back then the idea was that the Article 22 mechanism should only really be used by Member State authorities who would have competence to review a transaction and who would have received a notification from the transaction parties. The old language from the Notice on Case Referral sits uneasily in the new Guidance Paper because the latter is intended to capture first and foremost non-reportable transactions. Again, in order to get the clock ticking, companies might be incentivized to file a sufficiently complete ‘notice’ (if not a full-blown notification). Alternatively, they might take their chances and rush the transaction to completion before the EC steps in and informs the transaction parties that a referral request has been made. At that point, a pending transaction becomes subject to the standstill obligation under Article 7 EUMR which prevents parties from closing until EC approval is obtained. While the Guidance Paper stresses that “the fact that a transaction has already been closed does not preclude a Member State from requesting a referral” it does raise hopes that “the time elapsed since the closing is a factor that the Commission may consider when exercising its discretion to accept or reject a referral request.” Although the Guidance Paper indicates that a referral request may not be appropriate where more than six months have passed after the closing of the transaction, the Commission however leaves the door open to a referral beyond this time in “exceptional situations” (based on the degree of competition concerns or the potential detrimental effect on consumers).
Just One Small Issue
As Member States appear eager to make good use of the new mechanism (the Netherlands, France, Belgium, Greece, as well as EEA member countries Iceland and Norway are reported to have already followed an invitation by the Commission and they have just referred the first case to the EC, Illumina’s proposed acquisition of Grail, a pharmaceutical developer), the Guidance Paper is set to attract heavy criticism not only from the legal community but also from businesses, unsure how to handle the referral threat. While the Commission’s motivation is legitimate, the execution is questionable. Using Article 22 to create jurisdiction out of nothing is a magic trick (nemo plus iuris transfere potest quam ipse habet) that may not work in court unless one can argue that such a move is warranted because of a regulatory gap. If challenged, the EC might struggle to show a relevant gap, since traditionally only unintentional and unforeseen omissions would qualify as such. Yet, the fact that the EUMR might require a facelift is no news; it is only that the legislator’s will for change is missing. The Commission is aware that amending the EUMR (for example, by adding a transaction value threshold just like those recently introduced in Germany and Austria) requires unanimity amongst the EU Member States, which currently appears unattainable. Tweaking what is already in existence by using executive ‘clarifications’ must have been appealing, even though Commissioner Vestager clearly was aware of the inevitable opposition. When presenting the plan back in September 2020, she already noted that “[t]here’s just one small issue. Like the Commission, most of Europe’s national competition authorities can only review cases where the companies’ turnover meets a certain threshold.” It might turn out that this was a bit of an understatement.
For now, companies will have to brace themselves and find ways to adapt to the growing regulatory burden that the Commission’s recent policies in the fields of FDI and antitrust enforcement have created. For third-party complainants trying to frustrate their rivals’ expansion plans, the new Article 22 mechanism promises to be a new powerful tool.
At O’Melveny, our antitrust experts are experienced in appraising and managing merger cases. Our in-depth understanding of how the EC and other agencies around the world work, and our established relationships with these agencies’ staff, enable us to help our clients navigate today’s regulatory landscape.
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