Author: Michaela Jančišinová, Master’s program in Law at University of P.J.Šafárik, Košice, Slovak Republic, 2010-2016, e-mail: [email protected]
Legal Editor: Tofig Shahniyarov, MPA at ADA University, 2020-2022, Doctor of Philosophy – Ph.D. at Middlesex University, e-mail: [email protected]
Abstract
This article is dedicated to the analysis of how effective merger control regimes are in protecting competition within the acquisition of start-ups or ‘nascent’ companies, by dominant incumbents. Economists have identified some of those acquisitions as an anti-competitive practice “killer acquisition”. The very meaning of the anti-competitiveness lies in the fact that an acquirer with an early-stage overlapping project may be attempting to bury the competition without competing on the merits. Killer acquisitions have been a much-discussed competition topic as a traditional merger control regulation has not been equipped in dealing with the antitrust implications of the innovation potential of a start-up. However, policy changes in merger and acquisition control through the guidance of the European Commission, moreover sanctified by the European Court of Justice’s decision are now considered to be tools for assessing a transaction.
Introduction
Article 22 of the European Community Merger Regulation (ECMR), as the European Union’s merger regulation, or so-called “Dutch clause” finds its origin in challenging legal loopholes by the Netherlands. No national legislation on merger control existed back then and respective mergers were subject to any regulation at all. Even though most member states have already legislated their own national merger regulation laws it was crucial to legislatively control transactions exceeding the national framework. Therefore, ECMR aimed to balance the interests of the member states when a concentration with a community dimension threatened significantly to affect competition within the market of the specific member state, presenting all the characteristics of a distinct market. However, now, according to the extensive meaning of article 22, European Union’s member states are allowed to request the European Commission (EC) to examine even those concentrations not having the necessary community dimension but affecting trade between member states and competition only within the territory of the applicant. The adoption of the ECMR may be considered the most interesting reformation of the European Union (EU) merger control system. This article peruses the criteria that are used to evaluate a transaction with reference to the EC’s policy shift on referrals under article 22 of the ECMR.
Legal Status
There are two levels of merger control relating to the Member States of the EU. For those transactions meeting the EU merger regulation criteria but qualify for investigation under the national laws of individual Member States there is a national merger control. In contrast, certain transactions with a “Community dimension” fall within the EU merger control, i.e., the jurisdiction of the European Commission under Council Regulation No. 139/2004. The ECMR specifically sets forth that “One or more Member States may request the Commission to examine any concentration as defined in Article 3 that does not have a Community dimension within the meaning of Article 1 but affects trade between Member States and threatens to significantly affect competition within the territory of the Member State or States making the request”.[1] The ECMR granted the EC jurisdiction to review concentrations with an EU dimension, falling under the combined turnover-based thresholds. It means that the transactions whose impact on the market is deemed to be at the EU level i.e., are beyond the national borders of any member state, delineate such thresholds.
However, on 26 March 2021, EC referring to article 22 of the ECMR issued a Commission Guidance on the application of the referral mechanism set out in Article 22 of the Merger Regulation to certain categories of cases (Guidance)[2]. It is imposed on the EU’s national competition authorities to refer to the EC transactions not meeting national or EU merger control thresholds that would therefore possibly escape EU merger control. The Guidance declares that “the Commission intends, in certain circumstances, to encourage and accept referrals in cases where the referring member state does not have initial jurisdiction over the case (but where the criteria of Article 22 are met).”.[3]
Guidance’ impact on the Killer Acquisitions
The Guidance is interpreted as an evidently fundamental EC policy shift as it is pushing for a broader interpretation of Article 22, with the intention of supporting the European competition authority in addressing smaller mergers that have significant competitive implications. In other words, ECMR, in accordance with the Guidance, covers transactions having concentrations with a significant impact on competition but not falling under turnover thresholds, national and EU. The Guidance specifically mentions the effectiveness of the turnover-based jurisdictional thresholds of the ECMR with reference to the involving firms such as start-ups or ‘nascent’ companies, particularly in the digital and pharma sectors.[4]
For the time being, acquisitions circumscribed as “transactions where the turnover of at least one of the undertakings concerned does not reflect its actual or future competitive potential” emerged, especially in these sectors. This anti-competitive practice, also known as the “Killer Acquisition” arises when an acquirer decides to acquire another company with the sole purpose of eliminating potential or current competition. [5] In such case, a start-up happens to be an innovative target and by acquiring the company by the incumbent company may be terminated the development of its innovations to preempt future competition.[6] To prevent above mentioned the EC considered that a reappraisal of the ECMR’s Article 22 application can contribute to addressing this issue.
Moreover, EC’s extended powers in merger and acquisition reviews are lately confirmed by a landmark decision of the European Court of Justice announced on September 6, 2022 (“Decision”), by which the EC prohibited the acquisition by Illumina, a U.S. company specializing in genomic sequencing, of GRAIL, a U.S. based start-up developing early cancer-detection tests[7]. The Decision allows a broad interpretation of the EU Merger Regulation empowering national competition authorities to refer to the EC concentration cases below the national thresholds
Conclusion
Two aspects may refer to the above-mentioned reformation of the EU merger control system. Conforming to this the policy change can be seen as the EC powers’ extension through Guidance to assess transactions and, what is more imperative, as the potential key to prevent the “killer acquisitions”. So far, it has not resulted in statistical changes. The majority of notified mergers do not pose competition problems and are cleared within 25 working days of their notification, after a routine review by the EC. Presumptions imply that in-depth investigation will remain rather rare.
Another, likely negative view may be seen in this policy change. Foremost, the EC change in approach basically means extending the merit review under the ECMR but leaving aside a modification of the relevant provisions of the merger regulation itself. Not excluding over-enforcement of control may sometimes appear harmful. Generally, the impact of every merger and acquisition needs to be contemplated. With this in mind, the potential 40 working day referral process and the potential for EC investigation needs to be taken into account in the transaction documents and planning process. Moreover, since regulators can be very difficult to spot a “killer acquisition” before it happens, high disruption for transactions may appear and result in potentially arbitrary requests for referral. This means an unnecessary fight of the transaction parties against the imposed merger control procedure, including the standstill obligation.
The next few years will show whether arbitrary requests and the transactions allegedly considered as the “killer acquisition” show up; or whether allowing Article 22 to block an acquisition by a dominant acquirer will prevent injecting capital into the start-ups or outcome in freezing the innovation and preclude new products from reaching the market.
List of References
Commission Guidance on the application of the referral mechanism set out in Article 22 of the Merger Regulation to certain categories of cases, https://ec.europa.eu/competition/consultations/2021_merger_control/guidance_article_22_referrals.pdf
Communication from the Commission of 26 March 2021 – C(2021) 1959 final, https://ec.europa.eu/competition/consultations/2021_merger_control/guidance_article_22_referrals.pdf
Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentration between undertakings, https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2004:024:0001:0022:en:PDF
Cunningham, C., Ederer, F., & Ma, S. (2018). Killer Acquisitions. https://doi.org/http://dx.doi.org/10.2139/ssrn.3241707
Mergers: Commission prohibits acquisition of GRAIL by Illumina, Press release 6 September 2022, Brussels, https://ec.europa.eu/commission/presscorner/detail/en/ip_22_5364
[1] Article 22(1) first paragraph of the ECMR
[2] Communication from the Commission of 26 March 2021 – C(2021) 1959 final, https://ec.europa.eu/competition/consultations/2021_merger_control/guidance_article_22_referrals.pdf
[3] Recital 11 of the Guidance
[4] Communication from the Commission of 26 March 2021 – C(2021) 1959 final, https://ec.europa.eu/competition/consultations/2021_merger_control/guidance_article_22_referrals.pdf
[5] Cunningham, C., Ederer, F., & Ma, S. (2018). Killer Acquisitions. https://doi.org/http://dx.doi.org/10.2139/ssrn.3241707
[6] Cunningham, C., Ederer, F., & Ma, S. (2018). Killer Acquisitions. https://doi.org/http://dx.doi.org/10.2139/ssrn.3241707
[7] Mergers: Commission prohibits acquisition of GRAIL by Illumina, Press release 6 September 2022, Brussels, https://ec.europa.eu/commission/presscorner/detail/en/ip_22_5364
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