Expanding the merger control toolkit - Is this the end of non-reportable M&A for firms that are deemed dominant?

The question of how best to capture and test non-reportable acquisitions that are nonetheless deemed as meriting review is one the European Commission (and national competition authorities (NCAs)) have been grappling with for some time. The European Court of Justice’s (ECJ) confirmation earlier this year as to the legality of the Commission’s new policy on Article 22 referrals was a significant boost in this regard, giving regulators the ability to intervene in and review transactions which fall below review thresholds of the EU Merger Regulation (EUMR) or any EU national merger regime.

Now, in a further development aimed at closing the perceived enforcement gap for such acquisitions, particularly in the digital and pharma sectors, Advocate General Juliane Kokott’s Opinion in Towercast, delivered on 13 October, proposes that competition authorities can apply the prohibition on abuse of dominance (under Article 102 TFEU) to transactions which are below national merger control thresholds and have not been referred to the Commission under Article 22.  The French competition authority had dismissed Towercast’s complaint alleging abuse of dominance in relation to an acquisition by TDF Infrastructure of a competing television transmission service operator in France. Towercast appealed the decision to the Paris Court of Appeal, which referred the question on applicability of abuse of dominance up to the ECJ.

It remains to be seen whether the ECJ will follow AG Kokott’s proposal. However, if affirmed, Article 102 would join Article 22 referrals in the expanding enforcement toolkit available to the Commission and NCAs to intervene and review non-reportable transactions. This could introduce yet more uncertainty for deal makers across all sectors (see also our blog on the recent ECJ Illumina/Grail decision upholding the Commission’s use of Article 22 referrals and our blog on the UK proposed merger control reforms).

What did AG Kokott say?

AG Kokott’s Opinion suggests that Article 102 should be applicable to non-reportable mergers, in particular concluding that:

• the EUMR is not the only instrument available to assess the effect of a concentration on competition in the internal market, and Article 102 is directly applicable;
• an acquisition by a dominant company could be an abuse of dominance;
• this addresses a perceived enforcement gap involving acquisitions which may not be caught by an ex ante merger control regime, and should therefore be caught by ex post control under Article 102;
• Article 102 should only apply if the concentration has not already been assessed and approved under merger control regimes and thereby declared as compatible with the internal market (though this would not cover additional conduct outside of the acquisition which could separately constitute an abuse); and
• this sits alongside and complements the Commission’s guidance on Article 22 referrals (which similarly targets below threshold transactions).

Does AG Kokott’s Opinion spell the end of non-reportable M&A activity for dominant firms?  

While AG Kokott’s Opinion suggests that an acquisition by a dominant firm can, in and of itself, amount to an abuse prohibited by Article 102, there is an important qualifier: “provided that the conditions for it are met”. The Opinion therefore does not suggest that every acquisition by a dominant company is abusive, but rather that particular circumstances will be required (as in Tetra Pak Rausing, where the ECJ ruled that an acquisition by a dominant undertaking of an exclusive patent licence for a new industrial process constitutes an abuse where it has the effect of strengthening the undertaking's already very considerable dominance in a market with little competition and of preventing, or at least considerably delaying, the entry of a new competitor into that market).

There is, however, no clear existing guidance regarding the criteria that would be required for an acquisition, in and of itself, to amount to an abuse of dominance (it being generally understood that strengthening of a dominant position in itself is not prohibited under Article 102), nor does AG Kokott go on to specify what these criteria would be, save that it could include acquisitions in highly concentrated markets with the aim of eliminating competitive pressure from an emerging competitor. This would seem to be inconsistent with a recent final ruling by Italian administrative courts in Eventim/TicketOne, which found that an acquisition of a competitor could not amount to an abuse of dominance under Article 102 (even if part of a broader exclusionary strategy, let alone by itself). It is therefore unclear what (if any) “conditions” AG Kokott envisages would be required – whether an abuse could be found on the fact of the acquisition alone, or whether there would need to be some conduct pre- or post-transaction which points to the abusive exclusion of competition (in which case that conduct outside of the acquisition would most likely be sufficient to find an abuse of dominance in any event).

In addition, it is not clear which concentrations would be reviewable ex post under Article 102. In particular, AG Kokott has failed to specify whether: (i) both the Commission’s or any NCA’s approval would exclude an ex post application of Article 102, regardless of which authority is seeking to apply Article 102, or only the Commission’s; and (ii) only mergers which do not hit any merger control thresholds – at the EU or national level – can be reviewed ex post.

It is also unclear whether the temporal scope of the “abuse” would cover only the period pre-closing (i.e. the period during which the “dominant” company is considering and executing the acquisition), upon closing, or whether it is ongoing for as long as the two companies remain integrated. If the latter, this has an important impact on remedying the abuse and potential for future litigation, as set out below.

How does one cease an “abuse” based solely on the fact of an acquisition?

Where a breach of Article 102 is found, the infringing firm will (in cases of ongoing abusive conduct) be required to bring the abuse to an end.

A confusing aspect of AG Kokott’s Opinion is the suggestion that any abuse of dominance founded on an acquisition would not usually result in the threat of subsequent dissolution of the merger, but that a fine would suffice. However, a puzzling implication is that, if the relevant conduct giving rise to the abuse is the acquisition itself (which appears to be what AG Kokott suggests in the Opinion) and the only consequence is a penalty, this leads to the somewhat peculiar outcome that the abusive conduct which infringes Article 102 (the concentration of the two entities) would nevertheless continue and remain unremedied. Even if dissolution (or another structural remedy) could be an appropriate outcome, this does not come without its challenges. Article 102 investigations take time, and by the time the agencies have detected and completed their investigation, the target business may already be so subsumed into the acquirer’s business or so dependent on the acquirer that, even if a divestment were ordered, this may not recreate the competitive constraint that the target could have exercised but for the acquisition.

The limited applicability of Article 102 as a tool of merger control

From an authority’s perspective, an ex post abuse of dominance investigation – in which the authority would need to establish the abuse and its effects – is unlikely to be preferable to preventative merger control tools already used by the Commission and NCAs, given the length and the likely legal and procedural burdens of conducting such investigations and the practical issues of remedying an “abusive” merger set out above.  

The Commission, in particular, would seem unlikely to rely on such an option where it has been confirmed that it can already accept referrals to review transactions which do not meet the thresholds of the EUMR – nor of any national merger regime in the EU – under Article 22 of the EUMR (for example, the vertical combination of Illumina and Grail), which is a far more flexible tool since there is no requirement to demonstrate “dominance” or “abuse” which are the key element of any Article 102 infringement.    

If AG Kokott’s Opinion is affirmed, then it would appear that the most likely use case of Article 102 in this context would be limited to:

1. likely very rare cases where the Commission rejects an Article 22 referral for an under-threshold acquisition, but an NCA still deems it appropriate conduct an assessment;
2. equally rare cases where a transaction went under the radar of the authorities and it is considered inappropriate by the Commission to accept an Article 22 referral post-closing, due to significant time lag since closing;
3. cases where the concentration only has significant effects in a particular member state and therefore the cross-border element required for Article 22 referral is not met; and
4. potential litigation by third party opponents of a concentration (which does not result in an Article 22 referral) in Member States’ courts. Claims by third parties could conceivably come in the form of injunctions – for example, an order to divest or hold separate the target business – and damages. If Article 102 is applied to historic acquisitions by dominant companies, claims would not be time barred in circumstances where an infringement is ongoing for as long as the “abusive” concentration has not been dissolved or remedied.

What does this mean for deal makers?  

AG Kokott’s Opinion is not binding, so it remains to be seen whether the ECJ decides to follow it. If it does, it would bring even more uncertainty and unpredictability for deal makers who already have to contend with competition authorities intervening in cases which fall below filing thresholds via Article 22. Even if deal makers successfully navigate Article 22 referral risk in transactions involving dominant firms, there remains a residual risk that NCAs or active third parties could invoke Article 102 as a means of reviewing (and potentially remedying) a completed transaction. This would likely mean yet more “back to the drawing board” work on deal documentation, if indeed parties could account for this in any reasonable commercial condition precent, warranties or long-stop date at all.