CJEU finds EC's recent policy of referrals for deals below the merger thresholds illegal - more certainty for companies doing deals?

On 3 September 2024 the Court of Justice of the EU (CJEU) set aside the General Court's ruling in Illumina and Grail's appeals against the Commission's decision to take jurisdiction to review their transaction under its revised Article 22 referral policy and annulled the Commission's decision accepting the referral request from the French competition authority (link to the judgment here).

Illumina's acquisition of Grail was the first transaction to be referred to the Commission under its revised approach to Article 22 referrals under the EU Merger Regulation (EUMR) under which it encourages referrals from Member States of transactions that also fall below the jurisdictional thresholds of the referring Member States.  The rational for this change in approach by the Commission was to enable it to review so-called 'killer acquisitions' which tend to fall outside the scope of the EUMR and the merger regimes of many Member States as they often involve start-ups with little or no turnover.

The CJEU held that the Commission's interpretation of the Article 22 referral regime under its revised approach was wrong and that the General Court erred in establishing that the EUMR provides for a corrective mechanism for the effective control of all concentrations with significant effects on the structure of competition in the EU. 

In reaching its conclusion the CJEU focused on the importance of predictability and legal certainty for the parties to a concentration, describing clear thresholds for determining whether or not a transaction must be notified "of cardinal importance".

Practical implications

The CJEU's ruling will be a blow for the Commission and Commissioner Vestager has stated that she will "consider the next steps in order to ensure that the Commission is able to review those few cases where a deal would have an impact in Europe but does not otherwise meet the EU notification thresholds".  It does however not mean that the so-called 'killer acquisitions' will escape scrutiny.

The Commission will continue to accept Article 22 referrals by Member States that have jurisdiction over a concentration under their national rules. A number of Member States have laws that catch transactions on the basis of tests other than turnover thresholds such as market share tests (e.g. Spain) and value of deal tests (e.g. Germany and Austria).  It is also worth noting that in recent years a number of Member States have made changes to their merger control regimes under which they can "call in" deals below the thresholds, i.e. request notification of transactions that do not meet the national thresholds but may have a significant impact on competition.  This means that the scope for Article 22 referrals has increased since the Illumina/Grail referral.  Therefore the CJEU's judgment may not in practice mean that the Commission reviews fewer so-called 'killer acquisitions'.

In its Towercast judgment the CJEU also held that national competition authorities can use their antitrust powers to review some transactions.  These powers are narrower than under the Article 22 referral regime.  The transaction must involve a dominant company and the review may take place after the parties have already implemented the transaction, making it is more difficult for an authority to remedy.  Also, it is a power for the national competition authorities, not the Commission, which could lead to inconsistency.

While the CJEU focussed on legal certainty, significant uncertainty remains because of these developments (national systems having wider tests or permitting "call in" of deals plus the Towercast powers). It remains to be seen whether these options do not ultimately result in greater uncertainty, particularly if in practice we see increased ex post use of antitrust powers as an alternative.

Due to the reduced scope of the powers to review transactions under Towercast, the Commission may decide to revisit its previous considerations of whether to propose revising the thresholds under the EUMR.  This would require amending the EUMR which could involve horse trading on other issues and open a much wider debate between the Member States around issues such as industrial policy, global trade and sustainability.

In the meantime, while the judgment is welcome news for companies doing deals as it reduces the number of Member States which may make referrals to the Commission, it is still important to consider national merger controls carefully to make sure a deal is not caught or is unlikely to be called in (either via national merger control plus a referral or via the Towercast judgment route).  It is also important to consider the substance of deals and whether they may result in anticompetitive effects that could attract the interest of national authorities. 

Background to the case

Illumina is a global genomics company that develops next generation sequencing technology (NGS) which are a key input for early detection cancer tests that are able to screen for several cancers in asymptomatic patients.  Grail is a customer of Illumina, using the NGS technology to develop its early detection cancer tests.

Illumina's acquisition of Grail was investigated by the Commission following a referral by the French competition authority under Article 22 of the EUMR and in September 2022 the Commission adopted a decision prohibiting the transaction.  The Commission concluded that the deal would lead to the vertical integration of Illumina, supplier of NGS systems with Grail, a customer of Illumina using NGS systems.  It found that the transaction would enable and incentivise Illumina to foreclose Grail's competitors, who are dependent on Illumina's technology, from access to an essential input needed to develop their own tests, allowing Illumina to gain control of the early cancer-detection market.

The CJEU's ruling is not about the Commission's substantive analysis and its prohibition decision but relates to the Commission's jurisdiction to review the transaction on the basis of its revised Article 22 policy, under which it accepted referrals of transactions that do not meet the jurisdictional thresholds of the merger control regimes of the referring Member States.

The Commission's decision to accept the Article 22 referral

In April 2021 the EU Commission accepted a referral by the French competition authority to review the acquisition by Illumina of Grail under the EUMR, despite the fact that the transaction did not meet the jurisdictional thresholds under the French merger control regime.

This novel approach by the Commission to referrals below the national thresholds was set out in its revised Guidance, published in March 2021, on the Article 22 referral mechanism under which the Commission clarifies expressly that it will now accept referrals from Member States for deals that fall below the domestic jurisdictional thresholds of the referring country, in order to capture more transactions involving nascent competitors and innovative companies. (See our blogposts on the Guidance here and here.)

Illumina appealed the Commission's decision accepting the referral request on the basis that:

• The Commission lacked jurisdiction to accept a referral request under Article 22 EUMR in a case where the referring Member State has no jurisdiction over the transaction under its national merger control regime.
• The French referral request had been made out of time.
• The Commission's approach in this case was in breach of the principles of the protection of legitimate expectations and of legal certainty.

The General Court's ruling

In its judgment of 13 July 2022 the General Court endorsed the Commission's revised approach to Article 22 referrals as set out in its March 2021 Guidance and dismissed Illumina's appeal in its entirety (see our blogpost on the judgment here).

The General Court found that there is nothing in the wording of Article 22 EUMR or in the history of the legislation that stops the Commission from accepting referrals from Member States for a transaction that does not meet their national merger control thresholds.  The wording of the provision does not refer to the scope of the merger control rules of the Member State making the request or whether it should have a merger control system in place.  It may have been the Commission's practice of discouraging national authorities from referring cases they did not have the power to review themselves at the time the referral request was made in this case, but that does not mean the Commission was precluded from doing so as a matter of principle.  Article 22 EUMR is intended to be a corrective mechanism that provides the Commission with the flexibility to review concentrations likely to impact competition in the EU but which would otherwise escape scrutiny.

The General Court also dismissed Illumina's claim that the French referral request had been made out of time.  Article 22 EUMR requires Member States to make a referral request within 15 days of the date of notification of the transaction, or if notification is not required from the date on which the transaction was made known to the Member State.  Illumina publicly announced the transaction in September 2020 and the deal had subsequently attracted wide publicity in France and across Europe. However, the legislation does not explain the concept of 'made known' and the General Court held that it consists of 'the active transmission of relevant information to the Member State concerned'.  The public announcement of the transaction was therefore not sufficient to trigger the 15 working day period.

Finally, the General Court also held that the Commission's change of policy was not in breach of the principles of legitimate expectations and legal certainty.  Illumina relied on a speech made by Commissioner Vestager in September 2020, indicating that the Commission's then policy would continue to apply until it was amended by the publication of the new guidance on 26 March 2021.  However, in order to rely on the principle of legitimate expectations it is necessary for the party concerned to demonstrate that they received precise, unconditional and consistent assurances originating from authorised, reliable sources by the competent authorities.  The speech was about the Commission's general policy and did not refer to the Illumina/Grail transaction.

In September 2022 Illumina and Grail appealed the General Court's ruling before the CJEU.

The Advocate General's opinion

In March 2024 Advocate General Emiliou handed down an opinion in the appeal, inviting the CJEU to set aside the judgment of the General Court and annul the Commission's decision to review the merger under Article 22 EUMR.

The Advocate General considered that the General Court erred in its interpretation of Article 22 when it concluded that the literal, historical, contextual and teleological interpretation supported the view that Member States may request the Commission to examine a concentration that does not have an EU dimension, even where the Member States do not have jurisdiction to review the transaction under their national rules.

He held that to do so would "in one fell swoop" extend the scope of the Commission's powers under the EUMR and allow it to review "almost any concentration, occurring anywhere in the world, regardless of undertakings’ turnover and presence in the European Union and the value of the transaction, and at any moment in time, including well after the completion of the merger".

The Advocate General also noted that it is impossible to overemphasise the importance of predictability and legal certainty for the merging parties.  Undertakings that are potentially subject to notification and suspension obligations need to know, with a relatively high level of confidence, whether their proposed deal will be subject to antitrust scrutiny and by which authorities, and when a definitive answer from those authorities may be expected.  The General Court's broad interpretation of Article 22 creates much uncertainty and would only be remedied by the parties bringing the transaction to the attention of the 30 national authorities (of the EU and EEA Member States) by means of informal notification.

The CJEU's ruling

In its judgment, the CJEU overturned the General Court's ruling and annulled the European Commission's acceptance of referral requests under Article 22 of the EUMR. The CJEU found that the Commission had exceeded its powers in accepting these referrals, as the national competition authorities that made the requests did not have the legal competence to review the transaction under their respective national laws.

Literal Interpretation of Article 22 EUMR

The CJEU underlined the importance of a literal interpretation of Article 22 EUMR. The Court noted that the wording of Article 22 does not explicitly restrict the ability of Member States to refer concentrations to the Commission based on whether they have jurisdiction under their national laws. However, the CJEU determined that this literal interpretation must be balanced with the broader legal context and the objectives of the EUMR.

Historical Interpretation and Legislative Intent

In examining the historical context of Article 22, the CJEU rejected the General Court's reliance on a broad interpretation that extended the scope of the Commission's powers. The CJEU clarified that the original intent behind Article 22 was to allow Member States without national merger control regimes to refer cases to the Commission. The historical records and legislative background do not support an interpretation enabling the Commission to review concentrations that fall outside the jurisdictional thresholds of the EU and the referring Member State's national laws.

The CJEU criticised the General Court for its overreliance on documents postdating the adoption of Regulation No 4064/89, the predecessor to the current EUMR, which the CJEU found did not accurately reflect the legislative intent at the time of the provision's creation. The CJEU stressed that the historical purpose of Article 22 was to serve as a mechanism primarily for Member States without their own merger control rules, ensuring that significant concentrations could still be reviewed to protect competition within the EU.

Contextual Interpretation and the Principle of Subsidiarity

The CJEU also examined the contextual interpretation of Article 22, emphasising the need to consider the principle of subsidiarity and the overall structure of the EUMR. The CJEU held that the General Court erred in allowing a Member State to refer a concentration to the Commission regardless of its national competence. This interpretation, the CJEU found, undermines the balance intended by the EUMR, which is designed to respect the jurisdictional thresholds that determine whether a concentration has a "European dimension."

The CJEU noted that the principle of subsidiarity, as reflected in the EUMR, is intended to ensure that concentrations are primarily reviewed by the authority best placed to do so - usually the national authorities unless the concentration has a significant cross-border impact. By accepting referrals from Member States that lacked jurisdiction under their own laws, the Commission was effectively bypassing these carefully established thresholds, disrupting the intended distribution of competences between the EU and Member States.

Teleological Interpretation and Legal Certainty

The CJEU's ruling also addressed the teleological interpretation of the EUMR, focusing on the need to maintain legal certainty and predictability in merger control. The CJEU found that the General Court's interpretation, which allowed for a broad application of Article 22, introduced unacceptable levels of uncertainty for businesses. The CJEU highlighted that companies must be able to determine with confidence whether their transactions will be subject to review and which authorities will be involved.

The CJEU held that the interpretation endorsed by the General Court, which would allow the Commission to review any concentration referred to it, regardless of the national thresholds, was incompatible with the EUMR's goal of ensuring legal certainty for businesses. The CJEU emphasised that the EUMR was designed to provide clear rules for when and where concentrations would be reviewed, and that the Commission's expansive interpretation of Article 22 undermined this objective.

Other developments relating to the Illumina/Grail transaction

The transaction resulted in a range of Commission decisions related to the parties' conduct during the Commission's investigation. This led to a number of separate appeals before the General Court.  The Commission has made it clear that in light of the CJEU's judgment it will now withdraw the prohibition decision and the other decisions, as they no longer have a legal basis. The appeals thus fall away.  The decisions will however still have some precedential value should similar conduct arise in the context of other transactions and therefore we summarise them below.

• In October 2021 the Commission decided to impose interim measures to restore and maintain the conditions of effective competition, following completion of Illumina's acquisition of Grail in breach of the standstill obligation under the EUMR.  The interim measures were intended to prevent the potentially irreparable damage of the transaction on competition, as well as the possible irreversible integration of the parties, pending the outcome of the Commission's investigation.  Illumina brought an appeal seeking the annulment of the Commission's decision to adopt the interim measures, on the basis that the suspension obligation did not apply and that the provisions imposed under these measures are disproportionate.
• In September 2022 the Commission adopted a decision prohibiting the completed acquisition by Illumina of Grail, under Article 8(3) EUMR.  The Commission concluded that the deal would lead to the vertical integration of Illumina, supplier of NGS systems for genetic and genomic analysis, with Grail, a customer of Illumina using NGS systems to develop cancer detection tests.  The transaction would have enabled and incentivised Illumina to foreclose Grail's competitors, who are dependent on Illumina's technology, from access to an essential input needed to develop their own tests.  In November 2022 Illumina appealed the Commission's decision before the General Court.
• In July 2023 the Commission imposed a penalty of €432 million on Illumina and €1,000 on Grail for implementing their transaction before approval by the Commission.  The level of the fine reflects the fact that Illumina and Grail knowingly and intentionally breached the standstill obligation and was the maximum that the Commission could impose (based on Illumina's turnover).  Illumina strategically weighed up the risk of a gun-jumping fine against the risk of having to pay a high break-up fee if it failed to acquire Grail.  It also considered the potential profits it could obtain by jumping the gun, even if it were ultimately forced to divest Grail.  In September 2023 Illumina brought an appeal against the Commission's decision before the General Court.
• In October 2023 the Commission adopted restorative measures under the EUMR, requiring Illumina it to unwind its completed acquisition of Grail, following the Commission's decision to prohibit the transaction.  In December 2023 Illumina brought an appeal against the Commission's decision to impose these measures claiming that the decision was unlawful as the conditions for adoption of a restorative order under Article 8(4) EUMR were not met.

Illumina has completed its divestment of Grail and it remains to be seen whether it will bring an action for damages against the Commission.  The threshold for bringing such a claim is high, and it will have to demonstrate that the Commission's conduct was unlawful (gave rise to a manifest and grave infringement of the limits imposed on its discretion), damage was suffered and that there was a causal link between the unlawful conduct and the damage suffered.  Previous claims for damages in the context of merger control (Schneider Electric, MyTravel, UPS) have all failed to date.