The European Commission (EC) has published guidance on its new policy to encourage and accept referral requests from Member States under Article 22 of the EU Merger Regulation (EUMR) even where transactions do not meet the national merger control thresholds of the referring Member States (see here for our previous blog post when the EC announced this change in policy).
The EC considers that this change of approach is needed in light of the gradual increase of transactions involving low-turnover firms that play (or may develop into playing) a significant competitive role.
Despite a strong focus on the digital and pharma sectors, the EC’s change in practice will impact businesses doing M&A across many sectors. Indeed, the guidance notes that Article 22 EUMR has allowed the EC to review “a significant number of transactions in a wide array of economic sectors”, including industrial and manufacturing sectors.
The guidance aims to “increase transparency, predictability and legal certainty as regards a wider application of Article 22”, for example by describing illustrative categories of cases that would be suitable candidates for Article 22 referrals. However, we consider that the likely practical effect of the guidance is a significant increase in unpredictability and a lack of legal certainty for deals.
While some clarity is provided in the guidance, the EC’s considerable discretion to accept referrals (including post-closing) means significant uncertainty will remain for businesses undertaking M&A in Europe. This marks an important shift in practice, given the EC’s merger regime has previously been characterised by a “bright line” revenue-based test to assessing whether a transaction is notifiable for review. Through this change in policy, the EC is in effect empowering itself to review transactions that fall below the EUMR’s revenue-based thresholds on the basis of subjective criteria.
There are clear parallels with the approach of the UK Competition and Markets Authority (CMA). The CMA has been taking an increasingly flexible approach to establishing jurisdiction and this lack of jurisdictional certainty is perhaps the most controversial aspect of the UK merger control regime (which has been contrasted with the more certain jurisdictional thresholds (formally) in the EU). With this change in approach to Article 22 EUMR, the EC is in effect “importing” the UK’s approach to jurisdictional uncertainty but without any of the countervailing mechanisms present in the UK regime, such as the statutory (4-month) deadline for the CMA to intervene post-closing and the ability for parties to close their deals prior to obtaining CMA approval. As set out below, the EC’s guidance is unclear on what triggers the time period within which Member States can request a referral under Article 22 EUMR and the practicalities of dealing with completed transactions following a referral.
Key aspects of the Article 22 EUMR guidance
The guidance sheds some light on the EC’s intended approach and provides additional detail on the following key areas:
- Monitoring mechanisms: the guidance suggests that the EC is actively monitoring deal activity to identify any transactions that may constitute potential candidates for an Article 22 referral. Where the EC becomes aware of a transaction that it considers meets the criteria for an Article 22 referral, it may proactively inform the relevant Member State(s) and encourage a referral request. In addition, third parties are encouraged to contact the EC (or national competition authorities) to inform them of any suitable candidates.
- Suitable candidates for an Article 22 referral: the guidance sets out the overarching principle that Article 22 referrals will normally be appropriate where the turnover of at least one of the parties “does not reflect its actual or future competitive potential”. The guidance goes on to provide categories of cases where this would be the case, in particular where one of the parties:
- is a start-up or recent entrant with significant competitive potential;
- is an important innovator or is conducting potentially important research;
- is an actual or potential important competitive force;
- has access to competitively significant assets (e.g. raw materials, infrastructure, data or intellectual property rights); and/or
- provides products or services that are key inputs/components for other industries.
These categories indicate that the EC is seeking to expand its review of transactions that raise concerns relating to a loss of potential competition, a loss of innovation and/or access to key infrastructure. There are parallels with the approach being taken by the CMA in dynamic and innovation-led sectors – for example, the CMA’s recent update to its merger assessment guidelines adopts a broader approach to assessing whether a transaction leads to a loss of future or dynamic competition. However, the EC’s guidance notes that these categories are “provided for purely illustrative purposes […] not limited to any specific economic sector […] and cannot be deemed in any way comprehensive”. The EC therefore seeks to retain significant discretion in relation to the transactions for which it may accept Article 22 referrals going forward.
- Post-closing referrals: the guidance highlights that the closing of a transaction does not preclude it from being subject to an EC merger investigation following an Article 22 referral. While the guidance notes that the EC would generally not consider a referral appropriate where more than six months has passed after closing (or, if later, where material facts about the transaction have been made public), referrals can still be appropriate in such circumstances “in exceptional situations” (e.g. due to the magnitude of potential competition concerns).
Remaining uncertainty for businesses undertaking M&A
Whilst the guidance provides some additional detail, the EC’s change in approach continues to raise key areas of uncertainty. In particular:
- Vague and subjective jurisdictional criteria: in deciding whether to accept an Article 22 referral, the EC will primarily consider whether the transaction “threatens to significantly affect competition” in the referring Member States. The relevant considerations underpinning this assessment are broad and the guidance notes that the EC retains “a considerable margin of discretion”. As such, there is an inevitable degree of uncertainty around whether the EC will ultimately review a transaction that does not meet the EUMR’s revenue-based thresholds or the merger control thresholds of any Member State. Given the CMA is also taking an increasingly flexible approach to establishing jurisdiction, businesses will need to undertake a more tailored risk assessment around whether their transactions will be reviewed by the EC and the CMA in cases where their respective merger control thresholds are not clearly met.
- Material uncertainties for transaction timetables: it remains 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 (i.e. the “start date”) under Article 22 EUMR. The guidance merely repeats the vague language in the EC’s existing Notice on Case Referral that “the notion of ‘made known’ should be interpreted as implying sufficient information to make a preliminary assessment as to the existence of the criteria relevant for the assessment of the referral”. Further guidance should be provided by the EC on what information is required to be given (or made available) to national competition authorities for a transaction to have been “made known” to Member States.
- Dealing with completing transactions: the guidance provides very little information on the practicalities of dealing with completed mergers following a post-closing referral (e.g. the acquirer may already have fully or materially integrated the target business). Further guidance is required from the EC on this issue, including how it would exercise its remedial powers in a proportionate manner where it identifies competition concerns in relation to a completed transaction.
Practical steps to reduce uncertainty and mitigate risk
There are a range of practical steps that businesses can take to reduce the uncertainty caused by the EC’s change in approach under Article 22 EUMR, including: (i) tailoring the risk assessment of whether an EC filing is required; (ii) considering the degree of deal publicity; (iii) accounting for and allocating the risk in transaction documents; and (iv) considering the timing of closing and integration planning. Further details on these practical steps are available in our previous blog post.
In addition, the EC’s guidance notes that parties may voluntarily provide information to the EC about their transaction and the EC may provide an early indication on whether the transaction would constitute a good candidate for an Article 22 referral (which would presumably, at least for certain transactions, involve the EC liaising with Member States). This mechanism appears to be very similar to the CMA’s briefing paper process whereby parties can submit a short briefing paper to the CMA explaining why they consider their transaction should not be formally investigated by the CMA. In the post-Brexit era where the EC and the CMA can conduct parallel reviews, there may be transactions where parallel informal consultations to the EC and the CMA are a preferable strategic option to obtain sufficient commercial comfort that transactions will not be formally investigated by these authorities post-closing.
The EC’s guidance is likely to create unpredictability and uncertainty, and businesses impacted by this may seek ways to challenge this change in policy. It seems quite likely that many of the uncertainties created by this change in policy for Article 22 EUMR will end up keeping the EU Courts in Luxembourg busy.