The European Commission wants to be able to block or conditionally approve transactions, mainly in the digital economy and in the pharmaceutical sector, even when the thresholds for notification are not met. In publishing its new Article 22 Guidance, the Commission has significantly expanded its ability to review transactions. Parties to a transaction, especially in the digital economy and in the pharma sector, should bear this in mind when strategising on deal timing and any potential remedies. They will also have to take into account the possibility that the transaction will be blocked. For third parties, this opens another possibility to stop a transaction, to extract remedies from the notifying parties or to even roll back an implemented transaction.

IN DEPTH

What Happened

• Article 22 of the EU Merger Regulation (EUMR) allows for one or more Member States to request the Commission to examine any merger that does not have an EU dimension but meets the following cumulative conditions: it affects trade between Member States, and it threatens to significantly affect competition within the territory of the Member State or States making the request (Article 22 Conditions). Fulfilment of the Article 22 Conditions ensures that a merger has a sufficient nexus with the European Union and the referring Member State(s).

• Traditionally, the Commission has discouraged the use of Article 22 EUMR in merger cases that were not notifiable under the laws of the referring Member State(s). This is principally because the Commission considered such transactions unlikely to have a significant impact on the internal market.

• Recently, however, there has been an increase in the number of mergers involving companies that play, or may develop into playing, a significant competitive role on the market, despite generating little or no turnover at the time of the merger. This development has been found to be particularly significant in the digital economy, where services regularly launch with the aim of building up a significant user base and/or commercially valuable data inventories, before the business is monetised, and in the pharma sector, where transactions have involved innovative companies conducting R&D with strong competitive potential, even if such companies have not yet finalised, let alone exploited commercially, the results of their R&D activities. Because of the absence of, or low, turnover of one the parties to such transactions, they invariably escape assessment under national merger control rules.

• With a view ensuring that non-notifiable yet potentially problematic mergers do not fly under the radar of merger control review, on 26 March 2021 the Commission issued practical guidance (Article 22 Guidance) on when it might be appropriate for a Member State to refer such mergers to the Commission for merger control review.

What This Means

• The Commission encourages, and is more amenable to (discretionally) accepting, referrals in cases where the referring Member State does not have initial jurisdiction over a case, but where the Article 22 Conditions are met, particularly in, although not necessarily limited to, cases involving a transaction where one party:
  – Is a start-up or recent entrant with significant competitive potential that has yet to develop or implement a business model generating significant revenues (or is still in the initial phase of implementing such business model)
  – Is an important innovator or is conducting potentially important research
  – Is an actual or potential important competitive force
  – Has access to competitively significant assets (such as raw materials, infrastructure, data or intellectual property rights)
  – Provides products or services that are key inputs/components for other industries.

In exercising its discretion whether to encourage or accept a referral, the Commission may also take into account whether the value of the transaction is particularly high compared to the current turn-over of the target.

What to Bear in Mind

Transactions involving nascent competitors in particular—especially in (though not strictly limited to) the digital economy and pharma sectors—are likely to increasingly be in the Commission’s crosshairs. Mergers that until recently were unlikely to face antitrust scrutiny because of the absence of, or low, turnover of the target now may be referred upwards to the Commission for merger control review. Henceforth, this risk will have to be factored into any deal timeline.

With this risk on the horizon, and with a view to avoiding (potentially significant) business disruption, increased prudence is called for. Merging parties may wish to pre-emptively approach the Commission regarding their intended transaction to solicit an early indication of whether the transaction constitutes a candidate for referral under Article 22 EUMR. If the Commission does become aware of a transaction that, in its view, meets the Article 22 Conditions, it may inform the relevant Member State(s) thereof, and invite the State(s) to make a (discretionary) referral request. If the Commission subsequently picks up the referral, implementation of the transaction will have to be put on hold until the Commission gives the green light. Moreover, the fact that a transaction has already been closed does not preclude a Member State from requesting a referral to the Commission — although the Commission is unlikely to look into a transaction where more than six months has passed since its implementation.

The Article 22 Guidance also gives rise to new opportunities for third parties that have misgivings about a transaction which, up until now, would not have been reviewed and which, absent review, may have a negative impact on their business. It may be, for example, that an aggrieved third party sees that a transaction, which is not prima facie subject to review, will lead to higher prices or risks foreclosing it from the market, in which case it is encouraged to inform the Commission or the competent Member State authority. This may allow a third party pick up any “low-hanging fruit” by positioning itself as a potential purchaser for any remedies that are offered. Even behind the scenes, the mechanism enshrined in the Article 22 Guidance may open doors for third parties to secure strategic concessions from parties to an intended transaction to the extent the parties have not notified the Commission thereof.