Commission guidance on expanded merger referral by Member States

The Commission Guidance on the application of Art 22 referral mechanism: more legal uncertainty for parties to a transaction

Last week, the Commission published its 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), which complements the Commission Notice on Case Referral in respect of concentrations. The Commission's initiative comes in response to concerns that certain problematic transactions escape scrutiny because the target does not yet generate much turnover, but is expected to have significant market presence. While some jurisdictions have altered their merger control thresholds in response (eg Germany and Austria), the Commission decided not to amend the EU thresholds but to change its referral practice, in particular regarding Article 22 of the Merger Regulation.

The Commission had actually amended its practice already before the publication of this Article 22 Guidance, as publicly announced and implemented with the Illumina/Grail transaction. In this case, the Commission asked the French Competition Authority on 19 February 2021 to request a referral of the Illumina/Grail transaction which the French Competition Authority did on 9 March 2021 (an appeal to this referral request at national level was considered inadmissible).

Expansion of the Article 22 Merger Regulation practice

Article 22 Merger Regulation, known as the 'Dutch clause', allows one or more Member States to refer to the Commission a concentration that does not meet the EU thresholds but which presents a risk of negative effect on competition between Member States.

Until recently, the Commission refused to accept referrals in cases where no national competition authority of a Member State had competence under national law to review the transaction even if such national competence is not required by law. The Article 22 Guidance confirms the change of practice by which the Commission will accept referrals by Member States if the concentration threatens to:

(i) affect trade between Member States (based on location of actual or potential customers, the availability and offering of the products concerned, etc.); and

(ii) significantly affect competition within the territory of the Member State(s) making the request -- this implies a prima facie substantive merger control analysis (where the actual substantive merger control analysis will happen post-referral).

Member States are, in particular, requested to refer transactions where the turnover of at least one of the parties does not reflect its actual or future competitive potential as it may be the case with start-ups having significant competitive potential, but having not yet developed or implemented a business model generating significant revenues.

Impact on the deal process in practice

Before the Article 22 Guidance, if the jurisdictional analysis indicated that neither the Commission nor any Member State had competence, parties to a transaction could proceed with its implementation without worrying about its actual or potential anticompetitive effects in the EEA.

Now, a Member State can decide to refer a transaction to the Commission at its own initiative, on the request of a third party or even on the request of the Commission itself. As a result, parties to a transaction no longer benefit from legal certainty and are required to self-assess the risk of referral.

The risk of referral must now be taken into account in the deal planning, as parties are expected to suspend the implementation of the transaction (if not already implemented) as soon as they are notified of a referral request having been made:

• a referral request should be made within 15 working days of the date on which the concentration is made known to the Member State concerned. A transaction is considered to be made known to a Member State if the information concerned allows them to make a preliminary assessment as to the existence of the criteria relevant for the assessment of the referral.

• Once a referral request has been made, the Commission will inform the authorities of the Member States concerned as well as the parties without delay, allowing other Member States to join the referral request within 15 working days. Within 10 working days after this 15 working day deadline, the Commission will decide whether to accept the referral request or not. If a decision is not made within this deadline, the Commission will be considered to have accepted the referral request.

• In case the referral request is accepted, the normal merger control procedure under the Merger Regulation will start (ie pre-notification, phase I and, possibly, phase II).

In addition, parties should consider the risk of a referral request being made after implementation of the transaction. The Article 22 Guidance indicates in this respect that the Commission will in certain circumstances accept a later referral (in general no later than six months after implementation but this is not a fixed deadline).  

To prevent this uncertainty, parties to a transaction may voluntarily come forward with information about their intended transaction, to receive an early indication from the Commission on the risk of a referral request being successful.   

Conclusion

Parties to a transaction that does not meet any of the merger control thresholds in the EU (at EU-level or national level) should carefully consider the risk that the transaction may be referred to the Commission. Parties involved in high-value transactions in the digital- and pharmaceutical sectors should be particularly careful.

Should you need assistance, have any further questions regarding this article or competition law generally, please do not hesitate to contact any of the individuals listed or your usual Simmons & Simmons contact.