In a Landmark Judgment, Top European Court Curbs European Commission’s Ability to Review “Killer Acquisitions”

On 3 September 2024, the European Court of Justice (ECJ) ruled that the European Commission (Commission) cannot encourage or accept referrals for below-threshold deals from national competition authorities if those authorities lack the power to review the merger under their own laws. This ruling, which overturns the General Court’s judgment and annuls the Commission’s decision Ito review the merger under Article 22 of the EU Merger Regulation (EUMR), marks a significant development in EU merger control enforcement.

Unpacking the Legal Issues

The case centred on the interpretation and application of Article 22 of the EUMR. Illumina’s €5.9 billion acquisition of Grail, a biotech firm specializing in early cancer detection, did not meet the EU’s traditional merger control thresholds due to Grail’s lack of revenue. However, in April 2021, the Commission, at the request of the French Competition Authority, decided to open a merger review under Article 22 of the EUMR, despite no national Member State merger thresholds being met. This unprecedented and controversial move was based on concerns that Illumina’s control of next-generation sequencing systems could harm competition in the early cancer detection market. Notably, just before launching its merger review, the Commission in March 2021 had announced a policy shift, signalling that it would now encourage and accept more referrals from Member States for deals that fell below national merger control thresholds.

The Commission eventually blocked the merger and fined Illumina €432 million for violating the standstill obligation (so-called, ‘gun jumping’ fine), while Grail received a token €1,000 fine. In 2022, the General Court upheld the Commission’s use of Article 22 as a “corrective mechanism” to review deals that bypass traditional turnover-based thresholds, naturally raising concerns for businesses that the EC’s jurisdictional reach had in practice expanded. Illumina later divested Grail and appealed both the Commission’s jurisdiction and the fines.

The ECJ ruled this week that the General Court’s interpretation undermined legal certainty and predictability and that the Commission had exceeded its authority.¹ Article 22, the ECJ held, does not allow the Commission to review transactions that do not  meet national thresholds, and expanding this power requires legislative action, not agency overreach: “… even if the effectiveness of the [EUMR financial] thresholds … were to prove insufficient to scrutinise some transactions capable of significantly affecting competition, it is for the EU legislature alone to review those thresholds or to provide for a safeguard mechanism enabling the Commission to scrutinise such a transaction”.²

This ruling significantly curtails the Commission’s ability to review so-called “killer acquisitions”: transactions in which a larger firm acquires a nascent competitor with significant future potential but little or no current market presence.

Key Takeaways

The ECJ’s ruling is a heavy defeat for the Commission and welcome news for companies engaging in deal activity, particularly involving pre-revenue, innovation companies. Since the Commission’s 2021 Communication to “encourage and accept” referrals from Member States lacking jurisdiction,³ deal execution in digital or life science industries has become increasingly uncertain. Risk-shifting mechanisms, such as “springing” conditions precedent, have become a feature of certain deals.

Parties have also faced procedural challenges when seeking to pre-emptively manage Article 22 risk. For example, the Commission has been accepting Article 22 briefing papers from parties wishing to proactively engage with the agency, but the process is vague and complex.

The ECJ affirmed that the Commission’s approach “undermines the effectiveness, predictability and legal certainty” that transacting parties require.⁴ However, whether the ECJ’s judgment is as much of a win for legal certainty as it first appears is less clear. Dealmakers will continue to have to consider the risk of call-in from national competition agencies with residual jurisdiction to review deals that fall below their national merger thresholds, as well as potential investigations pursuant to the other powers in the Commission’s traditional antitrust toolkit.

Enforcement vs. Certainty: Striking the Right Balance

The ECJ’s ruling leaves a gap in the Commission’s ability to scrutinize certain transactions that could potentially harm competition but fall below existing EUMR thresholds. This is particularly relevant for mergers in the life science and digital sectors that are actively under the Commission’s microscope. Time will tell whether the Commission and national competition authorities seek to deploy alternative routes to address this potential enforcement gap.

EU and Member States could adjust merger control thresholds. The Commission or Member States could start the process of amending (and broadening) their thresholds to capture acquisitions of small, innovative or pre-revenue targets. In its Judgment, the ECJ even hinted that Member States may wish to “revise downwards their own thresholds based on turnover” (emphasis added).

Below-threshold mergers: The rise of call-ins. Some Member States are considering or have already adopted powers to “call in” mergers for review, even if they fall below mandatory notification thresholds. This approach is gaining traction in Member States such as Italy, Ireland, Sweden, Denmark, Slovenia, Latvia, Hungary, and Lithuania. It remains unclear whether the Commission can review such deals under Article 22 when they fall below national thresholds but are still called in for review at the national level. A key challenge is whether these transactions must have local effects on competition or a local revenue nexus, which could exclude cases such as Illumina-Grail, in which Grail had no revenues.

Beyond merger control: Other antitrust tools at the Commission’s disposal. In a judgment of 16 March 2023, the ECJ confirmed that concentrations below merger control thresholds can be subject to ex-post review under Article 102 abuse of dominance rules (the Towercast Judgment). Such rules apply only to companies deemed to hold a “dominant” position in a relevant market and therefore would not cover deals entered into by non-dominant acquirers. Nevertheless, agencies may feel emboldened by the Towercast Judgment to assess under these alternative antitrust rules any transactions that would have escaped scrutiny pre-closing, adding a new layer of uncertainty for mergers and necessitating parties and their advisers consider this as part of overall antitrust risk assessment. How exactly contracting parties will seek to mitigate this risk will likely become the subject of negotiation.

Conclusion

The ECJ’s decision in the Illumina-Grail case represents a significant development in EU competition law enforcement. It curtails the Commission’s recent efforts to extend its merger control powers, emphasizing the importance of clear legislative limits and underscoring the ongoing tension between regulatory ambitions for broader jurisdictional authority and the need for legal certainty within the EU’s competition framework. However, the likely shift towards greater reliance on alternative enforcement tools by antitrust agencies could introduce new uncertainties that businesses will need to navigate carefully.

 

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^[1] The ECJ held that the General Court’s interpretation is “liable to upset the balance between the various objectives” and “undermines the effectiveness, predictability and legal certainty that must be guaranteed” to merging parties (Judgment of the Court in Joined Cases C-611/22 P and C-625/22 P (Judgment), 3 September 2024.
^[2] Judgment, paragraph 216.
^[3] Communication 2021/C 113/01.
^[4] Judgment, paragraph 206.

 

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