Below threshold mergers: update following the ECJ Illumina/Grail judgment

On 3 September 2024, the Court of Justice of the European Union (ECJ), handed down its judgment in the Illumina/Grail appeal. The ECJ rejected the European Commission’s (Commission) expansive approach to asserting jurisdiction under Article 22 of the EU Merger Regulation (EUMR), finding that the Commission had no jurisdiction to review Illumina’s acquisition of Grail, where the merger fell below the thresholds for review by the Commission and the national competition authorities.

The ECJ judgment is a welcome correction to the Commission’s approach, which had increased uncertainty and risk for those planning M&A activities. However, many national competition authorities have already developed or will shortly be introducing new powers to call in and review mergers falling below national turnover thresholds, primarily in light of concerns about so-called “killer acquisitions”. This means that the possibility of review by the relevant authorities should continue to be considered in all cases, in order to manage risks and understand possible impacts on the deal timetable.

Background to the Community merger control regime

The prime mechanism for the competition authorities to examine mergers is the application of turnover thresholds. The very largest mergers – those having a “Community dimension” because they meet the turnover thresholds set out the EUMR - are reviewed by the Commission to the exclusion of any national competition authorities in EU Member States. This is known as the “one stop shop” principle. 

Article 22 of the EUMR allows one or more Member States of the EU to request that the Commission examines a merger that does not have a Community dimension, but which affects trade between Member States and threatens to significantly affect competition within the territory of the Member State or States making the request. The original purpose of Article 22 was to allow Member States without their own merger control regimes to request that the Commission review deals that could affect competition within those Member States.

Prior to the Illumina/Grail case, the Commission had discouraged referrals from EU Member States under Article 22, and it was used only very rarely by Member States. However, shortly before the Illumina/Grail deal was announced, the Commission shared a change in policy, encouraging national competition authorities of Member States to refer mergers to the Commission that “were considered worth reviewing at EU level – whether or not those authorities had the power to review the case themselves”. The purpose of the change in policy was to address a perceived deficiency that the European merger control regime did not catch so called “killer acquisitions,” where the acquiring party has a large turnover, but the target is a small, nascent company with minimal or non-existent turnover. For companies such as these, typically in sectors such as pharmaceuticals, bio tech and digital, the concern was that their revenues may not reflect their competitive significance. Acquisitions of these potentially important nascent competitors by larger, established players could stifle innovation and change the development of the market. 

Illumina / Grail  

Both Illumina and Grail are US biotech companies. Neither of their turnovers exceeded the thresholds in the EUMR and the proposed acquisition did not trigger merger control thresholds anywhere in the EEA. In fact, Grail had no turnover, whether in the EU or elsewhere. On this basis, the parties did not notify the acquisition to the Commission, or to any Member State.

However, in February 2021 and after receiving a complaint from a third party, the Commission informed all Member States that it believed the Illumina/Grail merger met the Article 22 criteria, and it invited them to submit a referral request to the Commission so it could examine the proposed acquisition. France, followed by Iceland, Norway, Belgium, the Netherlands and Greece submitted referral requests. The Commission ultimately blocked the transaction in September 2022.

Illumina appealed against the Commission’s decision to accept the referrals from the EU Member States. 

The appeals

On first appeal, the General Court agreed with the Commission’s interpretation, deciding that the Member States could ask the Commission to:

• examine a concentration even though it did not have a Community dimension.
• examine any concentration over which the Member States themselves did not have jurisdiction as long as the conditions in Article 22 were satisfied.

The General Court viewed Article 22 as a "corrective mechanism" for the effective control of all concentrations with significant effects on EU competition, bringing needed flexibility to a system based on turnover thresholds which are of themselves static in nature. 

On appeal, the ECJ ruled in favour of Illumina and Grail, setting aside the General Court’s judgment and annulling the Commission’s decisions. The ECJ disagreed with the General Court’s approach to Article 22. It examined the literal, historical, contextual and teleological/purposeful interpretation of the Article and ruled that Article 22 had two key aims:

• to allow the Commission to scrutinise concentrations that could distort competition locally, where the Member State in question did not have national merger control rules.
• to extend the ‘one-stop shop’ principle and enable the Commission to examine a concentration that is notified/ notifiable in several Member States, thereby avoiding multiple notifications at national level and enhancing legal certainty for businesses. 

Article 22 was not therefore a corrective mechanism for the effective control of all concentrations, irrespective of whether that concentration falls within the national merger control system of the Member State making the request. 

The ECJ’s reasoning

The ECJ said that businesses involved in a merger should be easily able to determine:

• whether a proposed transaction will be the subject of a preliminary examination
• which authority will carry out the preliminary examination
• when a decision may be expected following the preliminary examination

The ECJ recognised that determining the competence of national competition authorities by reference to turnover criteria guarantees foreseeability and legal certainty, whereas the General Court’s wide interpretation of Article 22 would disrupt these objectives. As noted in Advocate General Nicholas Emiliou’s opinion, endorsing the General Court’s approach would mean that merging parties would have to inform thirty national authorities of a non-notifiable merger in order to have legal certainty that the merger would not be called in at some future (and unknown) point. 

Implications of this case

The ECJ’s emphasis on legal certainty will be a relief to merging parties and give them some comfort that acquisitions which do not meet the turnover thresholds will not be subject to scrutiny by the Commission. However, in practice, this comfort is tempered by the recent trend for national competition authorities to be given increased “call in” powers to review mergers falling outside the applicable jurisdictional turnover thresholds. This trend means that applying the jurisdictional thresholds as a quick and reliable “first screening” tool for an assessment of where a deal may need to be notified is no longer reliable.

Here in the UK, the Digital Markets, Competition and Consumer Act 2024 introduces a new hybrid jurisdictional test (discussed here), which is currently expected to come into effect in December 2024 or January 2025. The hybrid test will enable the Competition and Markets Authority (CMA) to review a wide range of mergers, including vertical acquisitions, killer acquisitions and conglomerate mergers (where the parties are involved in adjacent sectors, but their activities do not overlap). 

The expansion of the CMA’s powers, and similar rules in other EU jurisdictions, mean that companies considering a transaction need to make sure they have considered merger control rules at the earliest stage in deal planning in order to properly assess whether any notifications may need to be made and understand any impacts on the deal timetable.  

Our competition team has extensive experience advising on transactions and are well versed in providing strategic advice on deal structure, the assessment of risk and options for navigating the regulatory process.