Recent years have seen an increasing focus, from the Commission and national competition authorities alike, on also catching and examining mergers that are not automatically notifiable because they do not meet the turnover thresholds. One of the tools available to the authorities for capturing such mergers is an increased use of Member States' powers for referring mergers that would not otherwise be notifiable, neither to the Commission nor nationally, and the Commission has recently published a set of Frequently Asked Questions and Answers (Q&A) to help clarify the significant change of practice. Moreover, and somewhat surprisingly, the Advocate General has opined, in the Towercast case, that even below-threshold mergers may in certain cases be assessed under the abuse-of-dominance rules, thus challenging a longstanding practice to the contrary (see link to previous newsletter at the end of this article).
1. Merger control thresholds
Transactions must be notified to the competition authorities if meeting certain statutory thresholds. In most cases, these thresholds mean that transactions must be of a certain volume to be notifiable. The Danish thresholds require, among other conditions, that at least two of the merging entities have an annual turnover in Denmark of at least DKK 100 million, and that the combined annual turnover of the merging entities is at least DKK 900 million in Denmark. For a transaction to be notifiable to the European Commission, the economic thresholds are significantly higher.
Article 22 of the Merger Regulation, however, introduced a sort of emergency mechanism, in the form of a call-in access, allowing for one or more Member States to refer a transaction to the Commission even though it does not meet the EU thresholds. For a national competition authority to refer a transaction to the Commission, that transaction must be capable of affecting trade between Member States and must also pose a considerable risk that competition within the referring Member State(s) will be significantly affected.
2. The commission changed its practice
The Article 22 referral mechanism was originally intended to provide a sort of emergency access for those Member States that did not have merger control regimes of their own. As more and more Member States have implemented national rules, Article 22 has come to serve (to a limited degree) as a supplementary mechanism in its own right – also in Member States with merger control regimes of their own. Until March 2021, the referral access had been used only about 30 times, e.g. in 2020 when MasterCard Inc. acquired NETS A/S. Common to all cases, however, is that the transactions were notifiable in at least one Member State.
Wanting to do away with this restrictive practice, the Commission, in March 2021, published a guide on the application of the referral mechanism (the "Article 22 Guidance"). In it, the Commission emphasised that the mechanism can also be used even though the Member States themselves are not competent to examine the cases, especially on transactions in the tech and pharmaceutical industries. These are industries well-known for acquisitions of undertakings whose turnover may be negligible, but which nonetheless hold great future competitive potential not yet reflected in their turnover. On these markets, therefore, transactions will often be made before the financial thresholds have been met. The objective may be to take over a competitor's business (its data, algorithm, customers or know-how) or to eliminate undertakings before they become serious competitors (so-called 'killer acquisitions').
In transactions where turnover does not reflect competitive potential, Member States must also consider, inter alia, whether the company is a major innovator, has access to assets of particular competitive importance, provides products or services that are important to other industries, and whether the value of the transaction is disproportionately high compared to the company's turnover.
Also, the Commission underlined in the Article 22 Guidance that
the fact that a transaction may have been implemented and closed
already does not preclude its referral, although generally the
Commission will not allow a referral where more than six months has
passed after the transaction was implemented and made public. In
exceptional situations, however, a later referral may be allowed
if, for example,
the potential competition concerns and detrimental effects on
consumers are especially significant, and if the transaction has
not already been notified in any of the Member States.
Since the change in practice, the Commission has allowed referrals in Illumina's acquisition of GRAIL, Metas' acquisition of Kustomer, Viasat's acquisition of Imarsat, and Cochlear's acquisition of Danish hearing aid manufacturer Oticon Medical.
3. Q&A in December 2022
In December 2022, the Commission published the latest Q&A providing guidance on some of the uncertainties and concerns raised by the referral mechanism. Notably, the Q&A lists five examples of scenarios where referral would be especially relevant.
These are:
- a multi-national social media company proposes to acquire a new social media company whose number of active users is not considerable, but is growing rapidly compared to other players in the market
- a multi-national pharmaceuticals company proposes to acquire an R&D company which has yet launched no products, but which has an advanced pipeline project for a new pharmaceutical which could compete with the buyer's bestselling product
- a supplier of DNA sequencing systems proposes to acquire a competitor whose system used to be inferior to that of the buyer but has recently undergone significant improvements, which could make customers consider migrating
- a market-leading provider of music streaming proposes to
acquire a popular music recognition
app which collects user data which could be relevant for the buyer's business model - a multi-national market leader in the concentrated market for high-precision microscopes proposes to acquire one of the only providers of cameras and filters, which are key inputs for the microscopes
These examples serve to illustrate the situations in which an acquisition may greatly impact the market despite low turnover of the target. It is worth noting that the examples are mainly taken from the tech and pharmaceuticals industries and primarily concern the acquisition of undertakings that are expected to grow considerably or can afford the buyer a considerable competitive advantage by offering substantial influence on the downstream or upstream market.
The Commission generally recommends a proactive approach, advising the parties to contact the Commission about any transactions that could potentially be caught by Article 22, asking for the Commission's opinion on whether the transaction should be referred. In practice, this would be done by the parties to the transaction requesting the allocation of a case team with the Commission and providing a description of the transaction.
If the parties to a transaction are unsure as to whether their case is suitable for referral under Article 22, we recommend that the parties seek legal advice to clarify if there is any real risk that the matter will be referred to the Commission – and that a concrete assessment is made of the advisability of contacting the Commission (or the Member States) before implementing the transaction.
Lastly, please note that the possibility that a transaction may be referred to the Commission under Article 22 does not prevent the parties from implementing it. However, should the Commission elect to examine the transaction before the parties have implemented it, the ordinary standstill obligation will kick in. Please see our previous newsletter on the Illumina/GRAIL merger, in which just such a situation arose.
4. Call-in at national level
It is not only the Commission which has exhibited an increased focus on below-threshold transactions. Similar call-in rules have been introduced in several countries, Sweden and Norway among them, allowing national competition authorities to examine transactions even if they do not meet the national thresholds.
Denmark has no such national call-in possibility: Originally, the starting point was that the Danish authorities did not consider themselves competent to refer cases to the Commission under Article 22 if the transaction fell short of the Danish thresholds. In the case of Microsoft's non-notifiable acquisition of Navision, however, the Danish Competition and Consumer Authority did find itself competent to do so, but ultimately found no basis for referral. The Danish Competition and Consumer Authority has not used the possibility since.
Still, a national call-in possibility was included as part of the former Danish government's legislative agenda for 2022-2023, aiming to make it possible for the Danish competition authorities to examine below-threshold transactions. Also the current, new government is expected to present a bill to that effect.
Read the Commission's Guidance.
Read our newsletter on Illumina/GRAIL.
Read our newsletter on the Towercast case.
Originally published by 09 February, 2023
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
