EU Merger Control Landscape: Four Key Aspects Adding Complexity and Unpredictability

Dealmakers need to navigate an increasingly complex and unpredictable merger control environment in the European Union (“EU”). Emboldened by recent rulings of the EU courts, the European Commission (“EC”) is keen to review transactions that it suspects may harm competition even if these fall below the turnover thresholds of the EU Merger Regulation. The EC also takes an overall tougher approach to merger control review, for example, by increasingly applying novel theories of harm, in particular, with respect to vertical and conglomerate mergers.

Adding to the overall complexity is the new EU Foreign Subsidies Regulation, which came into force on 12 July 2023, and which creates an additional notification regime in the EU (in addition to merger control and foreign direct investment (“FDI”) control) that dealmakers need to take into account when planning transactions.

We set out below an overview of four key trends in the EU that add complexity and unpredictability for dealmaking.

1. Risk of review of transactions that are not reportable under the EU turnover thresholds:

• In March 2021, in a move intended to address a perceived enforcement gap in the review of so-called “killer acquisitions”, the EC published a guidance paper encouraging national competition authorities to refer certain transactions for review, even if they fall below the classic thresholds.
  
• Under Article 22 of the EU Merger Regulation, member states may ask the EC to review a transaction that affects trade or could significantly threaten competition, with innovation being one of the critical points in this regard.  The notion is that today's turnover may not reflect a company's future competitive potential. Therefore, acquisitions of promising startups and other fledgling competitors, particularly in high-innovation industries such as pharmaceuticals and technology, are now being scrutinised.
• Just before the EC issued the guidance paper on its new approach to Article 22 referrals, the EC called in for review Illumina’s acquisition of Grail, an early cancer detection test company, and a supplier to Illumina. The transaction did not meet the review thresholds of the EU Merger Regulation nor any national merger control rules since Grail had no sales in the EU. Nonetheless, it was reviewed and eventually prohibited in September 2022, after the EU’s General Court endorsed the EC’s referral policy under Article 22.
• Although Illumina has appealed the General Court’s judgment, in the meantime the ruling has encouraged the EC to call in for review two additional transactions (Qualcomm/Autotalks and EEX/Nasdaq Power) that were not reportable at EU or Member State level. On 21 March 2024, the Advocate General Nicholas Emiliou issued his opinion challenging the EC’s approach to calling-in below-threshold deals. The final judgment will be delivered by the European Court of Justice’s (“ECJ”) “Grand Chamber” on 3 September 2024. In the meantime, while the EC will be holding its breath, merging parties should continue to take a conservative approach when negotiating a deal in case the opinion is not followed.                                                             
• Therefore, merging parties need to factor the possibility of an Article 22 referral into transaction timetables, closing conditions and risk allocation provisions in the deal documents even for non-reportable transactions. Not taking such considerations into account can lead to significant consequences for companies, including fines, as happened with Illumina, when it closed the transaction while the EC’s review was ongoing and was fined EUR 432 million (a record-breaking fine that reached the statutory maximum of 10% of Illumina’s worldwide turnover, which Illumina is currently appealing).
• Moreover, under the Article 14 of the Digital Markets Act, which entered into force in November 2022, national regulators are able to use information received by digital platforms that are designated as “gatekeepers” about their intended acquisitions to request that the EC examine a transaction under the Article 22 referral mechanism. This may trigger several additional referrals in the digital sector, albeit that the EC is at pains to assure the antitrust community that it will call in only a few select deals and exercise self-restraint.
• In addition to Article 22 that, according to the EC, intends to fill the enforcement gap of non-reportable transactions with an ex-ante review, in March 2023, the ECJ’s judgment in Towercast confirmed that national competition authorities (and national courts) can apply abuse of dominance rules to challenge transactions that do not trigger EU or national merger control thresholds, and have not been referred to the EC under Article 22. The day after the judgment, the Belgian authority opened an investigation into the completed acquisition by Proximus of near-bankrupt broadband communications service provider EDPnet, explicitly citing the Towercast case law (the investigation closed after divestment of EDPNet by Proximus). More recently. The French Competition Authority (“FCA”) applied and extended the Towercast judgment when analysing whether non-reportable mergers in meat-cutting sector were likely on their own to constitute an anti-competitive agreement contrary to Article 101 TFEU (concerning market allocation). The FCA considered that the conclusion of the ECJ that article 102 TFEU is a “provision [of primary law] having direct effect”, whose applicability could not be ruled out by a piece of secondary legislation, could be extended to Article 101 TFEU.

2. Wide discretion to challenge transactions in concentrated markets:

• In July 2023, the ECJ handed down the long-awaited judgment in CK Telecoms. The ECJ overruled the EU General Court judgment and held that the EC to block a merger or require remedies, it needs to show based on “a cogent and consistent body of evidence” that a transaction “more likely than not” will result in a significant impediment to effective competition. 
• The ECJ dismissed the higher standard of “strong probability” suggested by the EU General Court. It also disagreed with the General Court that a significant impediment to competition in ‘below the dominance threshold’ cases (so called “gap cases”) can only be established if the EC demonstrates that two conditions (namely, (i) elimination of an important competitive constraint that the merging parties had exerted upon each other; and (ii) reduction of competitive pressure on the remaining competitors), are cumulatively satisfied. This opened the door for a far broader application.  The judgment provides the EC with renewed confidence to challenge mergers, particularly in oligopolistic markets, it is seen by the EC as a major win and, potentially, an endorsement of the more interventionist approach to merger control that started during EU Commissioner Margrethe Vestager’s second term.

3. Increasing application of novel theories of harm by the EC and focus on AI partnerships and acqui-hires:

• Competition regulators across the world have traditionally focused on horizontal mergers and perceived non-horizontal mergers as less likely to be problematic because there is substantive scope for efficiencies. The EC has recently expressed concerns with transactions based on non-traditional and novel theories of harm.
• In September 2022, the EC prohibited Illumina/Grail, which is the first EC prohibition based exclusively on vertical concerns. The prohibition is based on the so-called killer acquisition theory of harm.
• In September 2023, the EC prohibited the Booking.com/Etraveli conglomerate merger. This is the first prohibition based purely on an ecosystem theory of harm.  The theory of harm argues that expanding a dominant company’s reach to a neighbouring market could strengthen its too-powerful position on its core market. Booking.com is regarded as the leading global online travel agency for reserving accommodation. Etraveli is a Swedish based global provider of search, booking and fulfilment services for flights. The EC was concerned that the merger would strengthen Booking.com’s dominant position on the hotel online travel agency market and that the transaction would expand Booking’s ecosystem of travel services, making its market position in the hotel online travel agency market more difficult to contest. As a result, the transaction would allegedly lead to higher costs for hotels and possibly for consumers. The behavioral remedies offered by Booking.com (once a customer books a flight, the system would show accommodation options offered by Booking and alternative reservation platforms) were dismissed by the EC as insufficient. Booking appealed the EC’s decision in December 2023. Booking argues that the EC has departed from the settled law and precedent when prohibiting the deal on ecosystem concerns alone. In particular, Booking claims that the EC had departed without justification from its 2008 Non-Horizontal Merger Guidelines. The judgment will be closely watched as it will provide an important precedent for analyzing mergers in the digital sector.
• Amazon/iRobot is another non-horizontal digital transaction that was subject to the EC’s heavy scrutiny, following the EC’s indication of foreclosure concerns as well as a concern over Amazon strengthening its position as a leading online marketplace.  The parties abandoned the transaction in January 2024 citing “undue and disproportionate regulatory hurdles”.
• Following Microsoft’s latest investment into OpenAI leading to Microsoft having an observer seat in the AI developer in November 2023, the EC opened an investigation into the relationship between the companies under EU merger control rules. The key question was whether Microsoft had acquired control on a lasting basis over OpenAI. The EC concluded that the partnership does not qualify as a merger. The Competition Commissioner Margrethe Vestager has made recently repeatedly clear that the EC will continue closely monitoring partnerships between big tech companies and small AI developers.
• The EC is also keeping a close eye on the so-called acqui-hire practices to make sure that they do not circumvent EU merger control rules if they lead to a concentration. Microsoft’s hiring of the co-founders and most of the employees of Inflection AI led the EC to closely monitor such practices. The EC concluded that the situation did not constitute a notifiable merger.

4. The EU Foreign Subsidies Regulation – an additional layer of complexity to an already challenging landscape of dealmaking:

• The EU’s new Foreign Subsidies Regulation (“FSR”) took effect in July 2023 with notification obligations that started on 12 October 2023. It gives the EC far-reaching powers to tackle any subsidies provided by non-EU countries that distort the EU’s internal market. The EC also has powers to launch ex officio investigations. The FSR is a unique new EU regulation based on aspects of trade, state aid, merger control and public procurement law.
  
• Multinational companies are now subject to new notification and approval requirements for major M&A transactions and public tenders in the EU, in which they will be asked to disclose relevant financial contributions from non-EU countries (so-called FFCs).
• With regard to M&A, the EC requires an FSR filing to the EC prior to the implementation of M&A transactions if the EU turnover of the target, one of the merging parties, or the JV itself, is at least €500 million in the prior financial year, and the combined foreign financial contributions of the parties involved are at least €50 million in the three years prior to signing of the transaction.
• When an FSR notification is required, a transaction cannot close before the EC grants the FSR clearance.  As in EU merger control, failure to notify or closing before an FSR clearance may lead to fines of up to 10% of the parties’ aggregate turnover in the prior financial year.
• On 10 June 2024, the EC opened its first Phase II foreign subsidies investigation into the acquisition of parts of PPF, a European telecommunication operator, by Emirates Telecommunications Group Company PJSC, a State-controlled telecommunication operator based in the United Arab Emirates. A decision is expected by 15 October 2024.
• Together with the FDI and merger control rules, this new regulatory regime may significantly affect the regulatory timetable and creates a burdensome requirement for companies required to collect all relevant information about foreign financial contributions in order to be ready to make the relevant disclosures in the filing to the EC.

This concludes the article’s overview.