Article 22 EUMR Referrals Post-Illumina: Back to the Drawing Board?

On 3 September 2024, the Court of Justice of the European Union (‘the Court’) handed down its highly anticipated judgment in the Illumina case. The Grand Chamber annulled the six decisions of the Commission by which it accepted the referral by six national competition authorities of the Illumina/Grail merger under Article 22 of Regulation 139/2004 (‘EUMR’). It held that a Member State is required to have jurisdiction over a concentration to refer under Article 22 of EUMR.

The Illumina/Grail merger, valued at USD 8 billion, was not subject to notification at the European Union or national level because of Grail’s limited turnover in the EEA. Therefore, none of the referring Member States had jurisdiction over the transaction. In the deal, Illumina, the leading provider of next-generation sequencing (NGS) systems for genomic analysis, acquired Grail, a company focused on developing cancer detection technologies using Illumina’s NGS systems. France referred the merger to the Commission just before the new referral policy was published, with several other Member States joining the request. The Commission blocked the merger, citing concerns that Illumina might be incentivised to foreclose Grail’s competitors, who also rely on Illumina’s NGS systems.

With the judgment, the Court rejects the validity of the Commission’s new policy on referrals under Article 22 of the EU Merger Regulation. While the Court’s critical stance on the Commission’s new referral policy is welcomed for addressing concerns over added legal uncertainty and the increased burden on the merging parties, this post outlines that the Court’s finding is difficult to reconcile with the historical and broader purpose of Article 22 of EUMR. The judgment marks a setback for the Commission’s attempt to bridge the perceived enforcement gap left by mergers below merger control thresholds with competition concerns. It forces the Commission back to the drawing board to revisit its approach to addressing the enforcement gap.

1.     The Commission’s New Referral Policy

In its original purpose, the referral mechanism enabled Member States without merger control laws to refer transactions with significant competition concerns in the referring Member State’s territory and an impact on cross-border trade to the Commission. This mechanism came at the request of the Netherlands, which did not have a national merger control regime until 1998. Therefore, Article 22 EUMR has been nicknamed the ‘Dutch clause’. As nearly all Member States, except Luxembourg, have since implemented merger control laws, the mechanism’s intended use has lost much of its relevance. This, combined with the belief that mergers below the thresholds are unlikely to have cross-border effects, has led to the Commission discouraging referrals of such transactions (see SWD 2021 para 150).

Concerns about the effectiveness of the EUMR’s thresholds emerged after several high-value transactions escaped scrutiny by the Commission as they did not meet the turnover thresholds despite having a significant impact on the market. A prime example is Facebook’s USD 19 billion acquisition of WhatsApp, which did not meet the EUMR’s turnover criteria and was initially not reviewed by the Commission. The Commission could review the merger only after a referral under Article 4(5) EUMR. While the transaction did not meet the EUMR’s turnover thresholds, it was notifiable in at least three Member States, allowing the parties to request a referral to the Commission under Article 4(5) EUMR.

This prompted a review of the jurisdictional aspects of the EUMR, as it became clear that turnover thresholds could not capture mergers with potentially significant effects on competition in the digital and pharmaceutical sectors where traditional metrics like turnover may not reflect an undertaking’s competitive potential. Traditional metrics like turnover often fail to reflect a company’s competitive potential in these sectors. In the digital sector, many acquired companies are start-ups with promising but not yet market-ready technology, or firms possessing valuable datasets built through free offerings. Similarly, in the pharmaceutical industry, companies often develop pipeline products that only generate turnover after gaining regulatory approval.

The Commission chose not to propose an amendment to the thresholds by introducing a transaction-value-based threshold, citing its ineffectiveness in capturing all concentrations with potential competition concerns (SWD 2021, para 112-113). Instead, it opted to rely on the existing Article 22 referral mechanism to address the enforcement gap, aligning with the recommendations from the 2019 advisory report.

Through its new policy, the Commission aimed to address its inability to capture and review so-called ‘killer acquisitions’. Initially, the term ‘killer acquisition’ referred to the idea that undertakings acquire smaller competitors to prevent future potential competition. However, the term is now used more broadly to refer to mergers that raise competition concerns but fall below merger control thresholds, e.g. the acquisition of innovative start-ups with little to no turnover.

The Commission’s reassessment of the referral mechanism was reflected in its updated guidance on Article 22 EUMR referrals. Under the new referral policy, Member States were encouraged to refer mergers to the Commission even if they did not meet national merger thresholds, provided there were prima facie competition concerns and cross-border effects. This was considered a ‘U-turn’ to the Commission’s previous discouragement of referrals for mergers that fell below national merger control thresholds (Guidance Paper, para 8).

The new referral policy was met with immediate criticism and was challenged in an appeal to its first application, the Illumina/Grail merger. Illumina sought to annul the Commission’s decision to accept the referral, arguing that the Commission could not accept a referral request from a Member State with no jurisdiction over the concentration under Article 22 EUMR. In the initial appeal, the General Court sided with the Commission, concluding that a contextual and teleological interpretation of Article 22 supports its function as a corrective mechanism to address the deficiencies of the EUMR’s thresholds. In this corrective mechanism, any concentration would be able to be referred to the Commission, irrespective of being notifiable or not at the Member State level.

Illumina appealed the General Court’s judgment, arguing that the General Court erred in law in its interpretation of Article 22 EUMR and that it did not correctly take into account other objectives sought by the EUMR, namely the principles of legal certainty, proportionality, and subsidiarity (see the present judgment, paras 69-80).

2.     The Court’s Illumina judgment

Contrary to the General Court’s view, the Court concluded that a historical, contextual, and teleological interpretation does not support Article 22 EUMR as a corrective mechanism for threshold deficiencies. Instead, the Court states that the referral mechanism has two objectives. First, its original purpose, allowing Member States without merger control laws to refer cases that significantly impact competition in the referring Member State’s territory and have cross-border effects. Second, with the 1997 amendment of the EUMR, correcting the allocation of cases between the Commission and Member States (para 199).

The Court states that Article 22 EUMR is intended to allow the referral of cases to the Commission when it is better positioned to review them, thereby preventing multiple filings and preserving the ‘one-stop-shop’ principle. In these cases, a Member State transfers its ability to review the concentration to the Commission. Following Advocate General Emiliou’s reasoning that ‘no one can give what they do not have’ (see the Opinion para 65), the Court concluded that a Member State must have jurisdiction over a merger to refer it under Article 22 EUMR (paras 179-180). Therefore, the Commission cannot accept referrals below national merger control thresholds.

Only Member States without merger control laws may refer concentrations outside their jurisdiction to the Commission, reflecting the original intent of the referral mechanism. The Court reaffirmed that Article 22 EUMR allows such Member States to refer concentrations (para 199); today, this only concerns Luxembourg.

The Court emphasises that the EUMR aims to balance several key objectives: the need to assert effective control over concentrations that may harm competition, the clear allocation of cases between the Commission and the Member States, and the establishment of an effective and predictable system. The thresholds set within the Regulation are considered to be of ‘cardinal importance’ in achieving the latter two objectives, as they enable merging parties to determine whether a notification is required and, if so, which authority is responsible for the review (paras 203-204 and 208-209).

The Commission’s new referral policy upsets this balance by requiring informal notifications to each national competition authority (‘NCA’) and introducing ambiguous procedural requirements with which merging parties must comply (paras 205 and 210). Moreover, extending the Commission’s review powers, as facilitated by its new referral policy, to potentially encompass all concentrations challenges the institutional balance (para 215). The Court underscores that it is exclusively within the purview of the EU legislature to expand the Commission’s powers. It emphasises that a corrective mechanism for deficiencies in jurisdictional thresholds exists within the EUMR. Articles 1(4) and 1(5) EUMR grant the Council the ability to amend these thresholds upon a proposal from the Commission if deficiencies in the thresholds appear (paras 183 and 216).

The Court suggests a more prominent role for Member States in addressing the enforcement gap. It highlights that Member States may lower their national merger control thresholds or invoke Article 102 TFEU, as per the Towercast rationale, to address any gaps in the EU merger control framework related to the existence of ‘killer acquisitions’ (paras 214 and 218).

3.     Competent To Refer?

The Commission’s new referral policy has been criticised for increasing the burden on merging parties and adding legal uncertainty to proposed concentrations. Against this backdrop, the Court’s critique of the Commission’s policy is a positive development. However, as I will demonstrate, the requirement for a Member State to be competent in referring a concentration is inconsistent with its historical intent and a broader view of its objective.

The Court’s finding that a Member State must have jurisdiction to refer a concentration is difficult to reconcile with the historical objectives of Article 22 EUMR. As confirmed by the Court in Illumina, a Member State without merger control laws can refer any concentration to the Commission. This would indicate that even without jurisdiction, a Member State could still meet the requirements of Article 22(1) EUMR and be able to refer a merger irrespective of competence. This indeed does not support the Commission’s interpretation of Article 22 EUMR as a corrective mechanism for threshold deficiencies. However, it casts serious doubt on the need for competence over a concentration in the spirit of ‘you cannot give what you do not have’.

In its interpretation of Article 22 EUMR as a corrective mechanism solely for case allocation, thus necessitating competence, the Court appears to disregard its broader objective. Recital 11 of the EUMR and the Commission Notice on Case Referrals clarify that the referral mechanism acts as a corrective mechanism for the principle of subsidiarity provided legal certainty and the ‘one-stop-shop’ principle are safeguarded. It suggests that all concentrations wherein the Commission is better positioned to conduct the review should be referred, with legal certainty and the ‘one-stop-shop’ principle serving as the determining factors in assessing whether to accept a referral in such instances (see: 2009 EUMR Evaluation, para 143 and SWD 2021, para 146b). It would enable Member States to refer cases to the Commission when they believe it is better positioned to assess the concentration after they have been notified or otherwise made known to them. This may be the case in light of potential EEA-wide effects, cross-border issues, or to avoid the need for the merger to be filed in multiple Member States.

In this context, the requirement for competence on the side of the referring Member State appears counterintuitive. A competence requirement precludes referrals from Member States intending to join a referral request of a concentration that has a significant impact on competition in their market. This prevents the Commission from reviewing the wider EEA or the effects of a concentration in all markets it affects, as occurred in the Syngenta/Monsanto merger. Here, the Commission was unable to review the effects of the concentration in all markets it affected as France did not join the referral, despite the Commission noting potential competition concerns in the French market.

Allowing non-competent Member States to join referral requests of concentration that impact competition in their market would benefit the overall system’s efficiency and provide greater legal certainty for merging parties by ensuring a single review at the EU level (see recital 16 EUMR). The latter may seem counterintuitive. However, given the potential for an Article 102 TFEU procedure in non-referring Member States, allowing non-competent Member States to make referrals could benefit the merging parties. It would prevent the application of Article 102 TFEU to the same concentration and grant legal certainty to the merging parties. (see AG Kokott’s Opinion in Towercast, para 62).

The principle of legal certainty would act as a counterbalance in determining the extent to which referrals are permissible. While a referral from a non-competent Member State, outside of the historical ‘Dutch clause’ scenario, would likely conflict with the principle of legal certainty, the involvement of a non-competent Member State in supporting a referral initiated by competent Member States would be less problematic in this view of Article 22 EUMR. It falls to the Commission to balance legal certainty and the ‘one-stop-shop’ principle when deciding whether to accept a referral, as seen in its rejection of the London Stock Exchange Group Plc/LCH Clearnet Group Limited referral. Despite meeting the requirements of Article 22(1) EUMR, the Commission rejected the referral because the United Kingdom (before Brexit), which had jurisdiction, did not join the request. The possibility of a parallel investigation by the United Kingdom, alongside the Commission’s review of the concentration, would undermine the ‘one-stop-shop’ leading to the rejection of the referral.

In conclusion, imposing a competency requirement to initiate or join referrals under Article 22 EUMR appears to contradict its broader purpose. However, this does not imply that referrals initiated solely by non-competent Member States would be automatically accepted. A non-competent Member State may only join or initiate a referral request if the circumstances justifying the referral significantly outweigh the added legal uncertainty. Such instances are likely limited to situations where non-competent Member States are joining referrals already initiated by competent Member States, and the competition concerns are significant in the non-competent Member States.

The Court and commentators rightly point out that the Commission should not gain jurisdiction over all concentrations via Article 22 EUMR, as this would compromise the clarity and predictability of the system that the turnover thresholds ensure. The thresholds are crucial for making the Commission’s jurisdiction clear and foreseeable, which is why the Court emphasises their ‘cardinal importance’ (para 208). The referral mechanism is intended to transfer unique cases to the Commission, where it is better suited for review, keeping in mind the possible EEA-wide effects and cross-border issues of the concentration, or to avoid multiple filings.

4.     Merger Control Post-Illumina

In a statement following the judgment, the Commission hints at an alternative route to address killer acquisitions, emphasising its reliance on the referral mechanism to close the enforcement gap. The Commission aims to leverage Member States’ call-in powers to capture concentrations below merger control thresholds. Currently, eight Member States, including e.g. Italy and Ireland, can assert jurisdiction over such concentrations by requiring notification when competition concerns arise even without meeting any national threshold – this process is known as a ‘call-in’. The post-Illumina route to referrals may thus start with Member States calling in a concentration, asserting jurisdiction, and subsequently referring them to the Commission.

The outcome of the Illumina case could prompt more Member States to introduce call-in mechanisms or adjust their thresholds to bridge the enforcement gap. However, increasing reliance on call-in mechanisms for below-threshold concentrations, enabling referral to the Commission, raises two key issues. First, the multiple-filing requirement conflicts with the one-stop-shop principle, as each NCA with a call-in power must be approached individually for them to assess the appropriateness of calling-in the concentration. Second, the extended timeline for review resulting from the new route to referrals undermines legal certainty.

Under the envisioned procedure post-Illumina, merging parties to a concentration below merger control thresholds, for now, only need to engage with the eight Member States with call-in powers instead of informally notifying each NCA as previously required under the Commission’s new referral policy. While this is an improvement, it still presents a problem: the multiple-filing issue persists, as each NCA with a call-in power must be approached to acquire jurisdiction and initiate or join a referral. This burden will grow if more Member States adopt call-in mechanisms. A potential workaround via Article 4(5) EUMR, which allows merging parties to request for a referral to the Commission if three or more Member States are competent, would still require approaching multiple (at least three) Member States since competence seems to be acquired only after an NCA deems the concentration appropriate for a call-in.

Additionally, the use of call-in mechanisms prolongs the timeline of merger reviews to the detriment of legal certainty. This goes against the Commission’s goal of keeping reviews within a short, reasonable timeframe. The Court’s rationale concerning voluntary merger control systems, which permits Member States to refer cases after becoming aware of a merger and before a notification (Illumina, para 165), implies that Member States with call-in powers can refer a merger as soon as they consider the call-in justified. However, this additional procedural step lengthens an already protracted process in an area where speed is critical for ensuring legal certainty (see Portugal v Commission, paras 51-53). In some cases, such as Italy’s call-in power, a Member State can take up to 60 days to evaluate the appropriateness of a call-in after a voluntary approach by the parties to the concentration. This further extends the review period and adds a potentially disproportionate level of legal uncertainty for merging parties on a potential review of their transaction.

The increasing use of this post-Illumina referral mechanism signals a need to reassess the jurisdictional thresholds. Growing concerns about transactions in sectors where turnover may not reflect an undertaking’s competitive potential could lead to an increased number of concentrations being deemed suitable for referral, even with a competence requirement. This may suggest that reliance on the referral mechanism will continue to grow, potentially straining the system.

The call-in power route to referrals is sub-optimal from the point of view of the one-stop-shop and legal certainty principles. To maintain the integrity of the EU Merger Control framework and ensure legal certainty, the Commission should advocate for reform of the existing thresholds. Amending these thresholds would help balance the need for effective control over concentrations with competition concerns with the necessity of preserving clear jurisdictional boundaries, providing greater predictability for merging parties and a more robust framework for reviewing concentrations with significant competitive impacts.

5.     Conclusion

The Illumina judgment represents a significant setback for the Commission’s approach to Article 22 referrals. The judgment imposes constraints on using the referral mechanism by introducing a competence requirement. The alternative route to referrals hinted at by the Commission may not be the correct way forward, as it generates a multiple filing issue and extends the time to review even further to the detriment of legal certainty. As a result, the Commission must revisit its approach and explore alternative ways to capture mergers with competition concerns that fall below traditional thresholds, whether through amendments to the EUMR’s thresholds or new national thresholds.