The EU Court of Justice (ECJ) recently ruled that the European Commission (EC) overstepped its authority by applying Article 22 of the EU Merger Regulation (EUMR) to review and ultimately block Illumina Inc.’s acquisition of Grail LLC, a transaction which would otherwise have escaped merger control review by the EC or individual EU Member States because it did not meet the relevant jurisdictional thresholds.
The Illumina/Grail case raises questions about the future of enforcement against “killer acquisitions.” This LawFlash dives into the developments and future implications for below-threshold mergers and acquisitions (M&A) in Europe.
Antitrust authorities around the world have increasingly sought to review so-called “killer acquisitions.” These are acquisitions by firms with market power (generally in the technology or life sciences sectors) of startup or early-stage companies, allegedly with the intention of eliminating potential future competition. The policy decision to aggressively enforce against killer acquisitions has been controversial as it has raised concerns that this may have a chilling effect on innovation, e.g., limiting the ability of startups to exit.
The EC has been one of the most aggressive enforcers in this area, but it has faced a particular problem reviewing such deals because, under the EUMR, it does not have jurisdiction to review acquisitions without a “Community Dimension” (meaning the parties have high enough revenue across the EU and across EU Member States). In “killer acquisition” situations, the target may often have no revenue in the EU, which, in principle, means the EC lacks jurisdiction to review these transactions under the EUMR. This is equally true of the EU Member States: most (but not all) require the target to meet local revenue thresholds. In recent years, other EU Member States, such as Austria and Germany, have introduced changes to their national laws to extend jurisdiction to deals with a high enough transaction value.
The EC’s solution to this problem was to reinterpret Article 22 of the EUMR, which allows an EU Member State to refer a transaction that does not have a Community Dimension (i.e., does not meet the requisite revenue thresholds) to the EC for review. Article 22’s original purpose (when it was first introduced in 1989) had been to allow national Member States without a competition authority to refer deals to the EC to assess.
Since at least 2020, the EC has used Article 22 to plug what it perceived to be a “killer acquisition” enforcement gap. It has actively encouraged EU Member State authorities to refer any below-threshold transactions to it, not just those that could be reviewed under national merger control laws. Subsequently, the EC issued guidance encouraging merging parties to seek guidance from it on whether specific deals may be referred. This was a controversial policy, notably being rejected by the German competition authority, which stated that it could not refer a transaction to the EC over which it could not take jurisdiction under German merger control law.
On September 21, 2020, Illumina, a US company specializing in genetic analysis solutions, announced its proposal to acquire Grail, a US company that develops blood tests for the early detection of cancer. As Grail had no revenues in the EU, the transaction was not notified to the EC nor to any EU Member State.
The EC received a complaint about the deal and encouraged several EU Member States to refer the transaction to it for review under Article 22 of the EUMR. Once they had done so, the EC investigated and ultimately blocked the transaction on the grounds that it could lessen potential future competition in cancer diagnostic testing in Europe. It fined Illumina more than €400 million for closing the transaction without approval in the meantime, and later ordered Illumina to unwind the acquisition. Both Illumina and Grail appealed the EC’s decision on jurisdictional grounds and lost at first instance before the EU General Court. This judgment was then appealed before the EU’s highest court, the ECJ.
On September 3, the ECJ definitively ruled in favor of Illumina and Grail. It held that Article 22 cannot be used as a “corrective mechanism” to review transactions which would otherwise have escaped merger control review by the EC or individual EU Member States because they did not meet the relevant jurisdictional thresholds.
In doing so, the ECJ noted that “the thresholds set for determining whether or not a transaction must be notified are an important guarantee of foreseeability and legal certainty for the undertakings concerned. Those undertakings must be able easily to determine whether their proposed transaction must be the subject of a preliminary examination and, if so, by which authority and subject to what procedural requirements.”
However, the judgment clearly allows the EC to encourage and accept a referral in circumstances where an individual Member State has jurisdiction to review a deal under its own laws.
Unsurprisingly, given the nature of the question being appealed, the ECJ refrains from giving guidance either way on the merits of enforcement against “killer acquisitions.”
The EC will likely undertake a comprehensive reassessment of its enforcement policy against killer acquisitions and may consider the following options:
The risk of referral of a below-threshold transaction to the EC may appear lower in the immediate aftermath of the Illumina/Grail judgment (and the withdrawal of an ongoing Article 22 referral request by seven EU Member States after the judgment is evident of this), but companies would be wise to continue to be vigilant and consult competition counsel to avoid surprises.
The EC has an established team that is proactively engaged, whether on the basis of its own monitoring activities or in response to complaints, on trying to detect potential killer acquisitions, and it can be expected that they will continue to do so, independent of referrals from EU Member States.
In addition, there are a number of factors which indicate that future enforcement in this area will continue to be a priority in Europe:
It remains as important as ever for merging parties to engage with outside competition counsel at an early stage in planning strategic transactions. This engagement is essential to assess the necessity of pre-closing filings and to determine whether, in the absence of binary thresholds, a deal could nonetheless be called in for review. Investigations can have a real effect on a deal’s timing, particularly in more complex cases where reviews can take up to two years and deals may be preemptively blocked or unwound post-completion. The need to properly allocate for risk, even in smaller transactions, should therefore not be underestimated.