Competition law newsletter – Merger control “revolution” for transactions which do not meet turnover thresholds

Article 22 of the Merger Regulation allows a national competition authority (“NCA“) to refer to the Commission a concentration which does not have a European dimension but which;

(i) affects trade between Member States; and
(ii) threatens to significantly affect competition within the territory of the Member State or States making the request.

Until 2020, the Commission had indicated that it would only accept a referral under this article if the transaction exceeded the notification thresholds at the national level of at least one Member State, thus recommending that Member States should not request a referral under Article 22 if the national thresholds were not met.

At a conference held on 11 September 2020, the Commission announced, through Commissioner Vestager, that it would henceforth agree to examine referral requests submitted by NCAs on the basis of Article 22, even when the mergers in question do not exceed the national notification thresholds of any Member State, provided that the conditions set out in Article 22 are met. The new modalities for the application of the Article 22 referral have since been discussed with the NCAs and the Guidance is the result of these discussions.

The Communication, in line with what Mr Olivier Guersent had said during the webinar of 23 March, stresses that the Merger Regulation does not need to be amended. Article 22 expressly allows for a referral, despite the absence of NCA’s competence. In the past, the Commission has strongly discouraged the use of referrals; it now abandons this recommendation and clearly encourages NCAs to use referrals for certain categories of cases.

The transactions targeted in priority are those that usually escape the control of the Commission and the NCAs that may affect competition, notably those concerning “high-potential start-ups“, “rating agencies“, the digital and pharmaceutical sectors.

However, the Guidance clarifies that this new application of Article 22 will not be limited to a particular sector.

Both conditions of Article 22 must be fulfilled, i.e. the concentration must:

(i) affects trade between Member States; and
(ii) threatens to significantly affect competition within the territory of the Member State or States making the request.

These conditions refer to rather classical criteria, on which the Guidance however provides some clarifications.

The first criterion, i.e. the effect on trade between Member States, is to be considered fulfilled if the proposed concentration has some discernible influence on the pattern of trade between Member States.

The second criterion, relating to the effect on competition in the territory of the requesting Member State(s), requires the Member State to demonstrate that, based on a preliminary analysis, there is a real risk that the transaction may have a significant adverse impact on competition, and thus deserve close scrutiny. This analysis may include the following considerations:

• the creation or strengthening of a dominant position of one of the undertakings concerned;
• the elimination of an important competitive force, including the elimination of a recent or future entrant or the merger between two important innovators;
• the reduction of competitors’ ability and/or incentive to compete, including by making their entry or expansion more difficult or by hampering their access to supplies or markets;
• the ability and incentive to leverage a strong market position from one market to another by means of tying or bundling or other exclusionary practices.

The Guidance emphasizes that, in considering these two criteria, the Commission will take particular account of the prospective nature of merger control assessment.

However, the main contribution of the Guidance is to specify the other factors that should be taken into account by the Commission and the Member States in assessing whether a referral is appropriate.

Beyond the conditions set out in the existing 2005 Communication on referrals, the Commission indicates the cases that should “normally” be appropriate for a referral under Article 22. These are cases in which the merger is not notifiable in the referring Member State(s) consisting in transactions where the turnover of at least one of the undertakings concerned does not reflect its actual or future competitive potential.

Without being limited to a particular sector, cases warranting referral include, for example, those in which the target company:

1. 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);
2. is an important innovator or is conducting potentially important research;
3. is an actual or potential important competitive force;
4. has access to competitively significant assets (such as for instance raw materials, infrastructure, data or intellectual property rights);
5. provides products or services that are key inputs/components for other industries.

The Guidance stresses that the Commission may also take into account whether or not the value of the consideration received by the seller is particularly high as compared to the current turnover of the target.

In addition, the Guidance states that a transaction which has already been closed does not preclude a Member State from requesting a referral.

Although assessments are carried out on a case-by-case basis, the Commission should however not consider a referral appropriate where more than six months have passed after the implementation of the concentration. If the implementation of the concentration was not in the public domain, this period of six months would run from the moment when material facts about the concentration have been made public in the EU. In exceptional situations, the Guidance states that a later referral may also be appropriate, based, for example, on the magnitude of the potential competition concerns and of the potential detrimental effect on consumers.

Finally, if the transaction has already been notified in one or more Member States, and no request for referral has been made, the Guidance reminds that this may be a factor against accepting the referral.

III. Procedural aspects

The Commission indicates that it will cooperate closely with NCAs with a view to identifying mergers that may constitute potential candidates for a referral under Article 22, although they do not meet the jurisdictional criteria relevant under the respective national laws.

On procedural aspects, the Guidance states, in particular, the following:

• The Commission will accept a form of “informal pre-notification“. In practice, the parties will be able to voluntarily provide information on their intended transactions. Where appropriate, the Commission may give the parties an early indication that it does not consider their concentration to be a “good candidate” for a referral under Article 22, if sufficient information to make this preliminary assessment has been submitted.
• Third parties to a concentration may contact the NCAs or the Commission if they consider that a concentration may be a candidate for a referral under Article 22. Third parties will have to provide sufficient information on the transaction allowing a preliminary assessment of the justification for such a referral. However, the Guidance stresses that Article 22 of the Merger Regulation does not impose any obligation on Member States to take any action following a contact by a third party.
• If a referral request is being considered, the Commission will inform the parties thereof as soon as possible. The parties are not obliged to cease any implementation of the transaction, but may, according to the Guidance, choose to delay implementation until the referral has been decided or not.
• Regarding deadlines, a referral request must be made by the NCA within 15 working days of the date on which the concentration is made known to the Member State concerned. The Guidance clarifies that the concept of “made known” implies that sufficient information has been provided to the Member State to make a preliminary assessment on the basis of this information. The Guidance then confirms the deadlines set out in Article 22: once a Member State has requested a referral, the Commission informs the Member States “without delay”; the latter then have 15 working days to join the initial referral request. Once this period has expired, the Commission decides whether or not to proceed with the examination of the referred transaction within 10 working days. If no decision has been taken within this period, the Commission shall be deemed to have adopted a decision to examine the transaction in accordance with the request.
• The prohibition to implement the transaction under Article 7 of the Merger Regulation only applies if the concentration has not been implemented by the date the Commission informs the undertakings that a referral request has been made. In the event that the parties have decided to suspend any transaction, the obligation to suspend only ceases if the Commission decides not to examine the concentration under Article 22.

Despite the publication of the Communication, significant areas of uncertainty remain in the application of the Article 22 referral. This is further confirmed by the Communication, which states that the document may be revised at any time “in the light of experience“.

The Commission’s announcement of the possibility to examine transactions that have already been completed six months after the closing (which is already a very long time), or even beyond this six-month period in the absence of any communication on the transaction or if the Commission considers that it is an exceptional case that justifies it, thus raises serious questions in terms of legal security.

This reform will therefore have to be considered in the agreements concluded by the companies in the context of a merger: clauses relating to conditions precedent and the determination of the deadline for the completion of the transaction will have to be examined with particular attention.

The team remains at your disposal for any questions regarding the application of this reform.