European Court of Justice curtails merger control jurisdiction of the European Commission

The European Court of Justice (“ECJ”) delivered its long-awaited ruling in the Illumina/GRAIL merger saga. Contrary to the Commission’s views (and the first instance General Court), the Commission cannot review transactions which were not notifiable under the EU Merger Regulation (“EUMR”) and under EU Member States’ laws, thereby rejecting the Commission’s new interpretation of the case referral mechanism under Article 22 of the EUMR.

The ECJ’s clarification is important first and foremost for M&A dealmaking, which requires a predictable merger control regime and a clear timeline. The judgment is one of principle and clarifies that it is for the legislature alone to review and if necessary change merger control thresholds. Nevertheless, we expect that the Commission will try to find new ways to continue scrutinising potentially critical transactions.

Background

Pursuant to Article 22 EUMR, Member States may request that the Commission examines “any concentration” that does not have an EU dimension but affects trade between Member States and threatens to significantly affect competition within the territory of the Member State making the request.

The clause had been originally introduced to allow Member States with no national merger control regime to bring transactions perceived as problematic to the Commission’s attention. Over time, Article 22 EUMR lost its relevance, as all Member States except Luxembourg had a merger control regime, and the Commission only accepted referrals when a referring Member State was competent under its national law to review the transaction.

Starting in 2021, when the Illumina/GRAIL transaction was signed, the Commission changed its policy and interpreted the rule as allowing the referral of transactions which did not fall under the scope of any national merger control regime and thus would not have been subject to any examination within the EU at all (see our analysis here).

The change in policy was meant to address the (perceived) enforcement gap particularly in the digital, pharma and biotech fields. The takeover of highly innovative companies may not trigger national filing thresholds because the thresholds are often turnover based, and these companies often have limited turnover at first. This means that the elimination of their competitive potential by such a takeover cannot be scrutinised at all. While the law governing large digital platforms (DMA – Digital Markets Act) requires gatekeepers to inform the Commission about relevant transactions, it does not provide for a merger control review. The novel interpretation of Article 22 EUMR – largely based on the open-ended wording of the article – had therefore been a convenient tool for the Commission to scrutinise such transactions without having to go through the legislative process to change the EUMR.

Since 2021, the Commission has “seriously considered” roughly 100 candidate cases but has applied the new policy restrictively in only three cases. Besides Illumina/GRAIL, in the two other cases – Qualcomm/Autotalks and EEX/Nasdaq – the parties abandoned the transaction before the Commission could open an in-depth Phase II investigation, with Qualcomm citing a “lack of regulatory approvals in a timely manner”.

The Illumina/GRAIL saga

The USD 7 billion acquisition of the early cancer detection test maker GRAIL, in which Illumina already held a 14.5% stake, was the first case reviewed by the Commission under the new policy. Illumina has since contested the referral by the French Competition Authority (joined by the Belgian, Greek, Icelandic, Dutch and Norwegian authorities), arguing that Article 22 EUMR was wrongly applied and that the Commission had no competence to review the transaction. GRAIL had not yet generated any turnover at that time and therefore did not fall under the EU merger control and the national merger control thresholds of the referring Member States. Nevertheless, the Commission reviewed and blocked the deal and imposed a record “gun-jumping” fine of EUR 432 million on Illumina and a symbolic fine of EUR 1,000 on GRAIL for closing the transaction without the Commission’s consent. It also ordered Illumina to unwind the GRAIL acquisition.

The ECJ’s findings

The ECJ found that the General Court, which had supported the Commission’s interpretation, had erred in concluding that a literal, historical, contextual and teleological interpretation allowed national competition authorities of the Member States to refer cases that fall outside their competence.

The ECJ considered that (only) the “allegedly clear” wording of the provision leaves room for further interpretation to clarify its exact scope. However, the legislative history of Article 22 EUMR, which had become necessary above all because some Member States did not have a merger control system at that time, contradicted the Commission’s position. According to the ECJ, a broader scope is also not supported by a contextual interpretation (or needed) given that the EUMR provides for the option of a relative fast adjustment of the EUMR thresholds if they are no longer appropriate to capture transactions with potentially harmful effects.

Most importantly, the ECJ assessed the objectives of Article 22 EUMR. The ECJ clarified that the (remaining) relevant objective of the law is to enable the Commission to examine transactions that are notified or notifiable in several Member States, and to avoid multiple notifications at national level, thereby enhancing legal certainty. Article 22 EUMR was, however, never intended to be a “corrective mechanism” to remedy other merger control deficiencies and cannot be interpreted in such a manner. There is also no need for such a broad interpretation since both the EU and the Member States can “revise downwards their own merger control thresholds determining competence based on turnover as laid down by national legislation”. In addition, as the ECJ has recently confirmed in its Towercast judgment, certain transactions which fall below these national thresholds can be scrutinised on the basis of Article 102 TFEU.

Referring to the various objectives of the EUMR, the ECJ made it clear that the EU merger control system is built on the principles of legal certainty, effectiveness, predictability and the timely review of transactions, in order to be compatible with the requirements of the business world. The novel interpretation of Article 22 was considered liable to upset this balance.

Implications

The judgment enhances the legal certainty and predictability for M&A deals, which is a welcome development given the increasing complexity of the global regulatory landscape. At the same time the judgment is one of principle as it makes clear that the legislative process cannot be undermined in the endeavour to scrutinise potentially critical transactions.

In order for the Commission to scrutinise transactions below the EUMR threshold under EU merger control, it would now either have to amend the EUMR test, which is unlikely given the political challenges, or encourage EU Member States with jurisdiction for a transaction under national merger control to make greater use of referrals. The Commission continues to accept referrals by Member States that have jurisdiction over a transaction under their national rules in cases where the national thresholds are met, such as in the cleared acquisition of Kustomer by Meta in 2022.

The Commission may also be particularly keen to rely on national call-in rules, which merging companies will therefore need to pay even more attention to. As Executive Vice-President Magrethe Vestager noted in response to the ECJ’s ruling, some Member States have adapted their national merger control schemes so they can request the notification of transactions that do not meet their national merger control thresholds but could have a significant impact on competition, thus expanding their jurisdiction. Other Member States may follow suit or introduce thresholds relying not solely on turnover but also the transaction value as is already the case in Germany and Austria.

It is questionable whether all of these trends – at least with respect to abstract national call-in rules based on purely qualitative criteria – would increase the options for lawful referrals to the Commission under Article 22 EUMR. As the ECJ made quite clear, “undertakings must be able easily to determine whether their proposed transaction must be the subject of a preliminary examination and, if so, by which authority and subject to what procedural requirements”. In this respect, thresholds set “by reference to criteria relating to turnover” are considered to be of cardinal importance. Given the ECJ’s clear guidance, it is likely that any other approach would lead to further litigation regarding the referral mechanism of Article 22 EUMR.

You can also read our take on the judgment in the media: WirtschaftsWoche, Frankfurter Allgemeine Zeitung, Börsen-Zeitung, Table Briefings and Global Competition Review.