Considering that only around 1-2% of cases notified to competition authorities require closer scrutiny, merger control is typically not considered very intriguing (despite being a nuisance for M&A timetables). Yet, EU merger control proves to be an exception. Recently, Illumina, a US-based global genomics company, decided to (at least partially) close its acquisition of Grail, another US company developing blood-based cancer tests, without waiting for the approval of the European Commission (“EC”) and despite the EC’s on-going in-depth investigation of the deal. Immediately after Illumina made its closing actions public, in what many have labeled as aggressive and brutal policy application, the EC opened an investigation against Illumina for suspected gun-jumping despite the deal’s presumptively lacking effects in the EU and thus questionable jurisdiction of the EC. Could this case teach us anything when it comes to the West Balkans/SEE merger control practice?
What is the background?
Because of increasing concerns that some important transactions were flying under the EC’s radar, the EC had been reviewing its merger control policy in search of the best way to also catch such transactions. Concerns related to transactions typically involving companies with significant competitive potential that generate little or no turnover, thus escaping the turnover-based merger filing thresholds. This primarily includes the so-called “killer acquisitions” – transactions where large players acquire nascent and innovative companies with the intention to subsequently close their operations.
As a result, after rejecting the possibility of introducing transaction value-based thresholds similar to those introduced in Austria and Germany, the EC opted for the approach of “widening” the scope of the existing rules through policy change. On 26 March 2021, the EC issued guidance (EC’s Guidance on the application of the referral mechanism set out in Article 22 of the Merger Regulation to certain categories of cases), according to which it will accept to review certain transactions referred to it from the EU member states also in cases where member states have no jurisdiction over the case in the first place because national turnover based merger filing thresholds are not exceeded (“Guidance”).
The categories of transactions the EC would find appropriate to review under the Guidance are transactions where the turnover of at least one of the undertakings concerned does not reflect its actual or future competitive potential. This includes, for example, cases where the undertaking: (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); and/or (5) provides products or services that are key inputs/components for other industries.
This policy shift was deemed by many as unprecedented because it creates significant legal uncertainty: (1) in terms of jurisdictional assessment of a contemplated merger ie, whether a transaction not otherwise fulfilling the EU merger filing thresholds may still end up being scrutinized by the EC; (2) in terms of transaction timetable planning; (3) in terms of potential standstill obligations that would be imposed by the EC, for example in case where the undertakings concerned already implemented or commenced with the implementation of the transaction.
What happened in Illumina/Grail?
Illumina is a leading supplier of next generation sequencing (“NGS”) systems for genetic and genomic analysis. Grail was Illumina’s customer which develops cancer detection tests relying on NGS systems. Both companies are based in the US and, as it seems, Grail has no business in Europe.
In September 2020, Illumina announced it has signed a definitive agreement for the acquisition of Grail. On 19 April 2021, the EC accepted a referral request, based on the Guidance, from France, Belgium, Greece, Iceland, the Netherlands and Norway, to assess the proposed acquisition of Grail by Illumina. On 29 April 2021, Illumina confirmed it filed an action before the EU General Court asking for an annulment of the EC’s decision asserting jurisdiction.
On 22 July 2021, the EC opened an in-depth investigation against Illumina due to concerns the transaction could impede effective competition. Namely, the EC had concerns that, given its leading position in the NGS systems, Illumina would have incentive to foreclose Grail’s rivals from access to this crucial input for the development and commercialization of NGS-based cancer detection tests.
On 18 August 2021, Illumina announced it had closed the acquisition of Grail, but that it will hold Grail separate to account for the EC’s pending review.
What is so courageous in Illumina/Grail?
The Illumina/Grail deal does not meet the EU merger filing thresholds. It also fails to meet the merger filing thresholds of any EU member state. According to Illumina, Grail has no business in Europe. Therefore, based on the applicable merger filing thresholds, this transaction did not need to be notified to and cleared by the EC or any national competition authority (“NCA”) of any of the EU member states as a condition to closing. Against this background following seems very courageous.
- The EC started its review of this transaction following referral requests from EU member states that had no jurisdiction over the transaction in the first place, but relied on the Guidance issued several weeks before. This was the first time the EC implemented its harshly criticized new policy, in a what seems to be a rather difficult case.
- The Guidance was only issued in March 2021 – six months after the Illumina/Grail deal was announced, and the EC’s decision to review the deal a month later. The new policy established in the Guidance was hence applied retroactively, seven months after the Illumina/Grail deal was announced. This undoubtedly poses a legitimate question of legal certainty and predictability – if, when and why the parties to a transaction that otherwise does not meet the EU turnover-based merger filing thresholds may expect the EC to intervene and potentially block already implemented transactions.
- As turnover based merger filing thresholds exist to catch all transactions with the potential of affecting competition, the fact that in this case the EU’s and EU member states’ merger filing thresholds were not fulfilled should have created a presumption the deal had no relevant effects in the EU. Yet, despite presumptively lacking effects, the EC opened an in-depth investigation that implies not only the existence of effects in the EU but rather considerable competition concerns. The EC has therefore a very heavy burden of proof in this case to show the existence and likelihood of any effects and potential competition concerns.
- Despite the on-going in-dept investigation and the structural and behavioural remedies Illumina offered to alleviate any concerns identified by the EC, Illumina decided to close the deal. This would seem to be in line with Illumina’s firm stance that the EC has no jurisdiction in this case but is in contradiction with Illumina’s readiness to offer remedies in the first place.
- In consideration of all the circumstances apparently, Illumina announced it will hold Grail separate until the final EC’s decision. Yet, recent case law (most notably in Toshiba) shows the EC has low tolerance for mechanisms intended to enable a partial implementation of a deal as means of circumventing the standstill obligation in jurisdictions where the deal is still under review.
- Despite all the question marks, the EC brutally demonstrated its power by opening a separate investigation against Illumina for a suspected gun-jumping. This took place only two days after Illumina announced it had closed the deal (with a hold-separate arrangement in place).
Without going into purely substantive issues, there is hardly any other merger control case that has caused that many bold decisions. All the intricacies linked to this case aside, two facts remain: rarely have market players so blatantly opposed the EC as Illumina has with its decision to close the Grail deal despite the ongoing proceedings and preliminary concerns expressed by the EC, and the EC has hardly ever been that aggressive in both the framing of its merger control policy and its enforcement.
Takeaways for Serbia and the West Balkans
When looking at the quite courageous moves of both Illumina and the EC, the merger control practice of companies and competition authorities in Serbia and many other West Balkans countries does not seem that courageous.
Local competition authorities remain firm in their position that they have jurisdiction whenever local merger filing thresholds are met and they accept and decide on notifications of transactions where no effects in this region can be reasonably conceived or predicted. And many companies are along for the ride by notifying locally their purely foreign-to-foreign transactions occurring in entirely opposite parts of the world.
It is hence very curious to see how the EC’s case against Illumina will resolve. The results will be relevant for the practice in the West Balkans countries too as the same principles underlie merger control regimes in the EU and the West Balkans:
- While there is a fair amount of guidance in the case law already, Illumina/Grail will potentially allow one to see in more detail what sorts of local effects and the level of their likelihood is necessary for a competition authority to assert its jurisdiction over a foreign-to-foreign transaction.
- The legality of the arrangement between the merging parties to hold separate their operations in countries where merger control reviews are pending, as a mechanism to avoid gun-jumping in those countries while allowing the deal to move forward in others, will also be put to test. Together with standards set most recently in Toshiba and Altice, this will provide further clarity that may turn out to be relevant for transactions involving merger filings in countries with very long review periods (eg, Montenegro where the statutory deadline for an unconditional clearance amounts to 105 business days).
- The EC’s jurisdiction in Illumina/Grail could, if proven, be relevant for some (local) companies operating in the region. Considering lower turnovers, transactions in the Balkan region are rarely capable of triggering an EU merger filing. The new referral policy could change that and local innovative companies especially should keep an eye on how these referral rules develop and are enforced in the future.