ECJ strikes down European Commission’s power to review non-reportable deals in the EU (the Illumina/Grail saga)

Authors: Tobias Caspary, Bernard (Barry) A. Nigro Jr., Neda Moussavi, Paschalis Lois

Summary

In a much anticipated judgment, on September 3, 2024, the European Court of Justice (ECJ) issued its decision in Illumina/Grail[1] (the Illumina judgment), finally putting an end to the European Commission's (EC) assertion that it has the ability to review non-reportable transactions, representing a significant victory for legal certainty. Since March 2021, the EC had claimed it could review transactions that did not trigger either EU or national merger control thresholds, even for deals that had closed, under the so-called "Article 22" referral mechanism. The ECJ unequivocally rejected that Article 22 referrals could be used to review non-reportable deals,[2] finding that to do so would undermine the effectiveness, predictability and legal certainty that are due to transacting parties. The judgment is a victory for parties conducting deals in Europe, but highlights a divergence with US merger control where under the antitrust laws the agencies can open an investigation into transactions even if the transaction is not reportable and has closed.

The Illumina judgement comes as a blow to the EC, who had argued that an "enforcement gap" exists in the EU, particularly in innovative sectors for so-called "killer acquisitions." Against these concerns, it should be noted that several Member States already have national merger control regimes that can review such transactions.[3] Further, EU national competition authorities have powers to review completed transactions under, e.g., EU abuse of dominance rules, even if they fell below the national or EU thresholds (to the extent their own procedural rules allow).[4]

The judgment is final and there is no further possibility of appeal. Going forward, if the EC seeks broader jurisdiction to address a perceived enforcement gap, it should pursue formal legislative amendments. Some residual risk persists that, in an effort to avoid legislating, the EC could seek to continue to use Article 22 through exploiting certain Member States' ex officio "call-in" powers to assert jurisdiction over non-reportable deals, but using this route would come with its own legal hurdles. Overall, the Illumina judgment is a crucial step in restoring the principles of legal certainty and deal predictability in EU transactions, and significantly limits the EC's ability to intervene in transactions that fall outside established notification thresholds.

Context: The Perceived Enforcement Gap

In the last decade, European competition authorities have raised concerns over a perceived "enforcement gap," whereby antitrust agencies cannot review certain potentially problematic (often high value) mergers that fell below the traditional jurisdictional revenue thresholds.

This issue has been seen as particularly prominent in the digital and pharma sectors, being innovative and nascent markets. Concerns centred on "killer acquisitions," where a company acquires and subsequently shuts down an innovative product that could potentially become a significant competitor. Such acquisitions could involve targets with no revenue, but with a significant potential, in emerging and dynamic sectors. Since most Member States use revenue thresholds to determine whether a merger is reportable, the concern was that such transactions could fly under the radar. To address such concerns, Germany and Austria introduced "size of transaction" thresholds, similar to the US antitrust rules, allowing them to review deals where the target had limited/no revenues. Other jurisdictions[5] have empowered their competition authorities to call-in below-threshold transactions that could distort competition. Finally, some jurisdictions already have market share thresholds,[6] which may capture such transactions.

Many expected that the EU might also seek a legislative amendment of thresholds under the EU merger control regulation (EUMR) to include thresholds for such "killer acquisitions." Instead, in 2021 the EC announced new guidance on how it would interpret the provisions of Article 22 of the EUMR which allows Member States to refer transactions for review by the EC under certain circumstances. With the change in guidance, the EC argued that it could review non-reportable transactions that could have some impact on competition in the EU, provided a Member State referred the transaction. The move caused controversy as up until that point, the EC's practice was to accept Article 22 referrals only when the referring Member States already had jurisdiction to review the transaction in question. The effect was that the EC essentially expanded its jurisdiction overnight without having to undergo a lengthy and rigorous legislative reform process.

The first case under the new guidance: Illumina's acquisition of Grail

In September 2020, Illumina, a leading developer of DNA sequencing technology, announced its intention to acquire Grail, a pioneer in early cancer detection. The deal was valued at $8 billion and aimed to integrate Grail's innovative testing technology with Illumina's sequencing platforms. Despite its high valuation, Grail generated no revenues in the EU or any Member State, meaning the transaction was not notifiable at the EU level or any national merger control regimes of any Member State.

Illumina's acquisition of Grail was the first case reviewed under the EC's expanded jurisdiction under Article 22. In the context of Illumina's acquisition, in March 2021, the EC invited Member States to refer the transaction to the EC for review under Article 22, even though Grail generated no revenues in the EU or Member States. Several Member States (despite having no jurisdiction to review the transaction) obliged and referred the transaction to the EC for investigation. In July 2021, the EC opened an in-depth investigation and in September 2022 it concluded the transaction would significantly impede competition in early cancer detection tests, ultimately blocking it.

General Court judgment

Illumina appealed the EC decision arguing, inter alia, that the EC had no jurisdiction to review the transaction under Article 22, as the deal did not meet any national merger control thresholds in the EU. The General Court sided with the EC, relying on, among other grounds, the view that Article 22 applied as a corrective mechanism to ensure that potentially problematic transactions can be reviewed even if they fall below the relevant turnover thresholds of the EUMR or Member States. Therefore, the General Court found that the EC was able to accept Article 22 as a tool to review non-reportable transactions.

ECJ judgment

The ECJ dismissed the General Court's judgment and annulled the EC's decision. The ECJ found that the EC had overreached in its reinterpretation of Article 22 and concluded that it cannot use Article 22 to review transactions that are not reportable under the EUMR or national merger control rules.

The ECJ accepted that one of the EUMR's aims was to establish a control system against transactions that could be harmful to competition. However, this aim was not to be at the expense of legal certainty. Insofar as Article 22 was a corrective mechanism, it was only to the extent that it seeks to uphold the "one-stop shop" principle which aimed at avoiding multiple national notifications within the EU. Further,the EUMR sought to ensure that companies could easily determine whether a transaction is required to comply with notification and standstill obligations in the EU. The EC's interpretation of Article 22 would impose a disproportionate burden on companies, which would, in practice, need to submit informal notification to all Member States to ensure their transaction would not be reviewed under Article 22. Furthermore, the ECJ held that only Member States with jurisdiction can make or join an Article 22 request,[7] thereby limiting the geographic scope of any request to just those countries which could have reviewed the transaction.

The ECJ also seemed to downplay the concern around the perceived enforcement gap. It found that, regardless of Article 22, Member States would still have the ability to review potentially problematic non-reportable transactions. Specifically, the ECJ noted that Member States can still review transactions that do not meet their national merger control thresholds under, e.g., EU abuse of dominance rules, provided their national procedural rules allowed. Additionally, Member States were free to amend their national thresholds to capture "killer acquisitions" that they deem merit ex ante review.

The path ahead: Legal certainty restored?

The judgment is final and there is no further possibility of appeal. In practice this means that if the EC considers non-reportable transactions warrant review, then it should seek to amend its thresholds formally through legislation. There remains, however, a residual risk that the EC might seek alternative methods to obtain jurisdiction short of amended legislation: Namely, some Member States[8] have "ex officio" powers to call-in non-reportable deals, which the outgoing Commissioner Margrethe Vestager suggested could serve as a basis for invoking Article 22 in a press statement immediately following the Illumina judgment. However: (i) use of such call-in powers has been rare. Indeed, Member States are rightly cautious to use them since they go against the legal certainty imposed by their own national thresholds.[9] Even more so, using them as the basis for invoking Article 22 now would come into friction with ECJ's emphasis on upholding legal certainty for reportable transactions; (ii) any attempt to use these powers in such a manner would likely trigger a new wave of legal challenges; and (iii) the current Commissioner's tenure is ending, with a successor to be announced imminently, which could influence the approach to such referrals.

Conclusion

The Illumina judgment curtails the EC's ability to review non-reportable and closed transactions under Article 22, restoring legal certainty and predictability for businesses transacting in the EU. While some residual risks remain, such as the potential for Member States to use their ex officio powers to call in non-reportable deals, these are expected to be limited in practice. Going forward, if the EC seeks broader jurisdiction to address a perceived enforcement gap, it should pursue formal legislative amendments.

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