Legitimately expected: Commission may review Illumina/GRAIL deal

Today the General Court handed down its hotly anticipated judgment in the Illumina/GRAIL merger, deciding that the European Commission has jurisdiction to review the merger.

This judgment is hugely consequential, as it confirms that EU Member States have the power to refer mergers to the Commission even when those mergers do not meet the national notification requirements of the referring Member State. This provides the Commission with significant additional options when it comes to acquisitions of companies that are important to competition or innovation, but that fall outside of merger control because of their low turnover (Facebook’s acquisition of Instagram being the prime example of such a case).

Background

As we reported last year, Illumina/GRAIL is the first case in which the Commission has applied its new guidance in respect of Article 22 of the EU Merger Regulation (EUMR) adopted on 26 March 2021, under which the Commission welcomes EU Member States referring mergers to the Commission that do not meet the notification thresholds of those Member States for investigation. Under Article 22 of the Merger Regulation, a national competition authority can request referral to the Commission for the examination of any concentration that does not have a European dimension, but which affects trade between Member States and threatens significantly to affect competition in the territory of the Member State concerned. However, until recently the Commission discouraged Member States from making such requests where the notification thresholds in their own jurisdictions were not met.

The policy reason for the Commission’s change of approach is that turnover – which under the EUMR and most national regimes dictates whether a notification must be made – is not always a good indicator of the competitive importance of a company. The counter to that is that merging parties need to have legal certainty as to when their deals may be called in.

Illumina challenged the referral in the EU’s General Court, which led to today’s judgment.

Meanwhile, the Commission referred Illumina’s acquisition of GRAIL to an in-depth Phase II investigation in July 2021. Illumina and GRAIL decided to complete the merger in August despite the Commission’s decision. In the EU, merging parties are required to hold off on completing the deal until the Commission clears it, failure of which amounts to “gun jumping” which can lead to significant penalties.

And indeed, the Commission opened a gun jumping inquiry just two days later. In October, the European Commission also took the unprecedented step of adopting interim measures to restore and maintain the conditions of effective competition following the completion of the deal which the Commission says breaches the standstill obligation in the EUMR.

In the United States, the FTC’s case against the merger kicked off in court in August 2021. The FTC is seeking to unwind the merger, arguing that it would give Illumina the ability and incentive to foreclose downstream rivals. The FTC’s case has met with fierce criticism from counsel for Illumina, and the parties are still awaiting judgment.

Today’s General Court judgment

In an admirably clear judgment, the Court approaches Article 22 from four angles: literal, historical, contextual and teleological.

First, the Court points out that four cumulative conditions must be met: (i) the request must be made by one or more Member States; (ii) the transaction must satisfy the definition of a “concentration” in the EUMR without meeting the thresholds for EU notification; (iii) the transaction must affect trade between Member States; and (iv) it must threaten to significantly affect competition in the state or states that made the request. Article 22 literally refers to “any concentration”, which makes it clear that a Member State is entitled to refer any concentration to the Commission which satisfies the cumulative conditions set out in the Article, irrespective of the existence or scope of national merger control rules.

Second, the Court notes that Article 22 was originally to be used in respect of Member States without their own merger control system. However, as the Court points out, nothing in the legislative history indicates that the referral mechanism was only to be used by Member States that did not have their own merger control rules. On the contrary, the various green papers and proposals that the Court assesses in detail in its judgement all point to a historical interpretation that confirms that Article 22 enables a Member State to refer transactions that may have significant cross-border effects to the Commission, irrespective of the scope of that Member State’s national merger control rules.

Third, the Court holds that both Article 4(5) and Article 22 of the EUMR permit referrals to the Commission of transactions that do not meet the EU notification thresholds. These provisions are not based on turnover thresholds, but on other conditions. As a result, the Commission’s power of examination of mergers depends on the exceeding of turnover thresholds and, in the alternative, on the referral mechanisms in Articles 4(5) and 22. Article 22 therefore forms part of the provisions that determine the Commission’s competence. It is, in other words, one of three gateways for the Commission to review deals.

Finally, the Court expresses an important endorsement of the Commission’s approach in this case. In no uncertain terms, the Court holds that the referral mechanism in Article 22 is “a corrective mechanism” that forms part of the objective to permit effective control of all concentrations with significant effects on the structure of competition in the EU. Article 22 provides the flexibility necessary for the examination of mergers which are likely significantly to impede effective competition which, because the turnover thresholds have not been exceeded, would otherwise escape review.

The Court added that insofar as Article 22 pursues the objective of being such a “corrective mechanism”, it requires clear and precise conditions of application which are based on EU law. Only the interpretation adopted by the Commission in its decision ensures the necessary legal certainty, according to the Court.

In addition to criticising the Commission’s interpretation of Article 22, Illumina had also submitted that the French referral request had been made too late. Article 22 requires that the Member State making the request does so within 15 working days of the date on which the transaction was “made known to the Member State concerned”. According to Illumina, since the transaction was known to the public in September 2020, the French referral request was well overdue. However, the Court finds that a transaction’s being “made known” must allow the Member State to carry out a preliminary assessment of the conditions in Article 22. Other provisions in the EUMR are also based on the idea that active transmission of information is necessary before certain formal steps can be taken. It would be “extraneous to the EU merger control system” to rely on the moment when the concentration was made public, according to the Court. Therefore, the invitation letter from the Commission was the right trigger point for the 15-day period to start.

However, the Court did hold that the Commission took too long to send that invitation letter. Although there is no time limit for the Commission to do so, the need to act within a reasonable time is a general principle of EU law incorporated in the Charter of Fundamental Rights. When the Commission receives a complaint enabling it to assess whether a transaction fulfils the conditions in Article 22 (as happened here), it cannot postpone informing the Member States indefinitely. Parties to a transaction like the present one would also suffer a disadvantage compared to those whose transactions meet the EU notification thresholds, where clear deadlines apply. The invitation letter was therefore sent within an unreasonable period of time (47 days). However, since this did not impede the merging parties’ ability to defend themselves, it was not sufficient for the Court to annul the Commission’s decision to accept the referral.

Finally, the Court deals with arguments relating to the Commission’s alleged change in policy and whether this amounted to a breach of Illumina’s legitimate expectations. To prove that the Commission had a policy of not accepting referrals that did not fall within the scope of national merger control rules, Illumina relied on wording in the invitation letter, in the Commission’s decision, in the referral notice, and on remarks by Commission Vice-President Vestager in a 2020 speech. However, the Court considered that none of these documents were sufficient for Illumina to base legitimate expectations on. Moreover, even if there was a policy in which the Commission previously “discouraged” national authorities from referring cases to it which they did not have the power to review themselves (as the Vice-President indicated in her speech), it does not follow that the referral of such transactions was precluded as a matter of principle. Discouragement is not equal to a ban. Indeed, the Vice-President had even emphasised in the same speech that this previous practice was never intended to stop the Commission from dealing with cases that could seriously affect competition in the single market.

Illumina’s appeal was therefore dismissed in its entirety, meaning the Commission has full jurisdiction to proceed with its inquiry, and to block the deal, require remedies, or clear it unconditionally.

Criticisms not very Illuminating, but work to be done for the Commission

I expect that many commentators will criticise the Court’s judgment, indicating that it causes uncertainty for merging parties if the Commission has a broad discretion to call in mergers that do not meet EU or national reporting requirements. The concept of “legal certainty” is here presented as an absolute right that trumps all other legitimate interests.

However, as I have noted previously, the Commission’s approach in its renewed guidance is sound. As I said then, it would be wrong to claim that mergers that do not meet national thresholds can never cause harm to consumers. Within the boundaries of the law, the Commission and national authorities have a duty to prevent that harm from occurring. The merging parties can explain why their merger does not cause a significant impediment to effective competition but if it does, and this is a high threshold for the Commission to meet, it is important that an anti-competitive merger is reviewed and blocked.

That view is endorsed by the General Court, and rightly so in my view. Article 22 contains four clear, unambiguous conditions before the Commission can accept a referral, and the possibility of such a referral being accepted was not an uncertainty. Turnover thresholds are measurable but imperfect. The Commission must protect the Internal Market against any transaction that could cause a significant impediment to effective competition, provided it has a “gateway” to assess the relevant deal.

However, that is not to say that uncertainty is not a legitimate concern going forward. It should not be the case, for example, that merging parties will start feeling obliged to “make known” their non-reportable transactions, as this would create a de facto notification regime for mergers for which notification is not required. For the Commission’s merger control proceedings to remain world-leading, the authority must ensure that its regime not only captures the right transactions, but is also user friendly. With this ringing endorsement from the Court in its pocket, the Commission should now consider ways to improve its processes when it comes to Article 22.

Where next for Illumina/GRAIL?

While the Court was considering Illumina’s appeal against the referral, the Commission’s investigation into the case continued. The deadline for adopting a decision has been suspended since 3 February 2022, as the Commission considers commitments offered by Illumina. We can expect that things will start moving again now that the Court has confirmed that the Commission has jurisdiction. This makes it possible that a final decision is adopted as early as this month, but that depends on how the commitments process has progressed.

Illumina has also appealed the Commission’s decision to adopt interim measures that require it to hold GRAIL separate. It remains to be seen whether Illumina will maintain that appeal in light of the General Court’s judgment. In addition, the Commission is still investigating whether it should impose a penalty on Illumina for gun jumping.

Meanwhile, the US proceedings against the merger continue, meaning there is still significant uncertainty as to whether Illumina’s acquisition of GRAIL will ultimately be cleared.

Stijn Huijts, partner at Geradin Partners. Photo by Carl Campbell on Unsplash.

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