The European Commission broadens its Member State referral system – increased uncertainty for businesses undertaking M&A?

The European Commission (EC) has recently announced a change in policy to its referral system to bolster the circumstances in which it will accept referral requests from Member States under Article 22 of the EU Merger Regulation (EUMR). In particular, the EC is encouraging national competition authorities to use the referral mechanism even where transactions do not meet the national merger control thresholds of the referring Member States. The EC is planning to publish further guidance to support this change in policy in mid-2021.

Despite the EC’s announcement being largely directed at addressing the EC’s increasing drive to review so-called “killer acquisitions” (including in the tech space), it will make it more difficult for all businesses to assess whether their transactions may ultimately be subject to an EC merger investigation.

Increased uncertainty for businesses undertaking M&A

The EC’s announcement now raises at least the following points of uncertainty for all businesses:

• Vague jurisdictional criteria: where a transaction does not meet either the EC’s revenue-based thresholds or Member States’ national merger control thresholds, businesses will need to assess the risk that the transaction could trigger the interest of one or more competition authorities in the Member States and ultimately be subject to an EC merger investigation due to an Article 22 referral.
• Uncertainties for transaction timetables: where transactions do not require notification to national competition authorities, it is unclear when a transaction will be considered to have been “made known” to Member States in order to trigger the initial 15 working day period under Article 22. There are no clear guidelines on what is required for a transaction to be “made known”, including the media on which transactions need to be announced and what level of detail is required in any announcement.
• Impact on closing and post-closing integration: businesses will need to consider whether to close a transaction and commence with integration if there is a risk of the transaction being reviewed by the EC following an Article 22 referral request. This is because the suspensory effect of an EC merger investigation only kicks in under Article 22 once the EC has informed the merging parties of a Member State’s referral request. If a transaction has not closed at this point, the parties are no longer permitted to close the transaction until the EC has cleared the transaction.
• Parallel EC and Member State review: in cases where national jurisdictional thresholds are met in some Member States, the EC’s change in practice may increase the likelihood of a transaction being reviewed simultaneously by the EC and certain Member States. These parallel reviews impose a significant additional administrative burden on businesses.

Interplay with the UK’s merger control regime

The UK Competition and Markets Authority (CMA) has the power to call in for review non-notified transactions where they trigger its jurisdictional thresholds, namely where (i) the UK turnover of the target business exceeds £70 million or (ii) the combined businesses have a “share of supply” that exceeds 25%. As of late, the CMA has been taking an increasingly expansive approach in its interpretation of the “share of supply” test, as illustrated by the recent Roche / Spark and Sabre / Farelogix decisions.

Following the end of the Brexit transition period on 31 December 2020, the UK will no longer fall within the scope of the EC’s ‘one-stop shop’ regime. The EC’s policy change for Article 22 referrals combined with the CMA’s expansive interpretation of its jurisdictional thresholds mean businesses will face an increased risk of having to secure approvals from both the EC and CMA in circumstances where their transactions do not require mandatory notification to the EC, any EU Member State or the UK.

Practical steps to reduce uncertainty and mitigate risk

Depending on the transaction in question, there are practical steps that businesses can take to reduce the uncertainty caused by the EC’s change in policy under Article 22 EUMR.

• Tailoring the risk assessment of whether an EC filing is required: in order to assess the risk of an Article 22 referral, businesses will need to look beyond the EC’s revenue-based thresholds and Member States’ merger control thresholds. There are various factors that may influence whether a transaction may be susceptible to an Article 22 referral, including the transaction value, the existence of likely complainants, whether the transaction could raise concerns around a loss of (potential) competition, and whether the transaction is notifiable in jurisdictions outside of the EU (including the UK) under merger control or foreign investment regimes.
• Deal publicity: where a transaction does not meet a Member State’s jurisdictional thresholds, the Member State still retains the ability to request a referral to the EC within 15 days of the transaction being “made known” to the Member State. Businesses will therefore need to: (i) weigh up the advantages and disadvantages of publicising a transaction (which may trigger interest from national competition authorities) or remaining silent (which may result in a lengthy, and perhaps permanent, state of uncertainty); and (ii) if the former, how to publicise the transaction and what information to provide.
• Accounting for and allocating the risk in transaction documents: depending on the transaction in question, the risk of an Article 22 referral may need to be reflected in transaction documents, such as the formulation of conditions precedent and other risk allocation provisions (e.g. break fees and deferred payment mechanisms). As an Article 22 referral is likely to lengthen the process of obtaining merger control approvals, this may need to be reflected in the long-stop dates of transactions.
• Timing of closing and integration planning: businesses will need to consider when to close a transaction and integrate the target business if there is a possibility of the transaction being referred to the EC under Article 22 EUMR, particularly in circumstances where the EC may threaten to unwind an acquisition if it finds competition concerns.

For more information on this topic, please see our full briefing here.