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Previously, if a deal were below the filing thresholds in the EC Merger Regulation and not subject to review by any Member State, the Commission would refuse a request to review the deal. This policy has now changed. This means that almost all deals are subject to potential review by the European Commission. A filing may come into play long after closing. This newsletter takes a closer look at this change in policy and what you can do to achieve greater deal certainty.
M&A parties prefer deal certainty. This includes knowing whether a deal will be subject to prolonged merger control proceedings or any proceedings at all. Most jurisdictions have some sort of threshold for catching transactions that require prior approval. This includes the European Commission where the filing thresholds are very high. If you are above, you need to file. If you are below, you are good to go, unless the jurisdiction retains some power to vet the transaction anyhow. The European Commission has had such a possibility since 1990 – similar to the USA, Norway, and several other jurisdictions.
The European Commission has always had the power to look into a transaction below the filing thresholds, if a Member State requested a referral. This is Article 22 of the EC Merger Regulation. It was a requirement that the deal affected trade between Member States and threatened to significantly affect competition within the territory of the Member State or Member States making the request. Previous guidance from the European Commission said a referral might be appropriate in situations where:
and in both cases assuming the main economic impact of the deal was on these markets.
Such referrals were a transactional nightmare since the request could come at any time – even after closing. There was a 15 working day deadline, but that did not start before the Member State had all the information necessary to preliminarily decide whether to request a referral. This led to some unfortunate situations:
The referral mechanism was originally for member states that did not have their own merger control rules. The European Commission therefore appropriately applied the policy that if a member state had merger control rules (which today are all but Liechtenstein and Luxembourg), it discouraged referrals if the transaction was below the national filing thresholds.
This policy gave some deal certainty since parties would run their merger control analysis and know which Member States were potentially in play. Furthermore, referrals were very rare: 38 times since 1990, usually in situations where the deal was clearly problematic, and most often by Germany followed by Spain, France, UK, and Austria.
This has now changed. On 26 March 2021, the European Commission issued Commission Guidance on the application of the referral mechanism set out in Article 22 of the Merger Regulation to certain categories of cases. This communication abandons the European Commission’s prior policy. The European Commission will now allow Member States to request a referral to the European Commission even if the transaction is not subject to merger control in the Member State in question. The European Commission also quite actively encourages Member States to request referrals in case the European Commission wants to review a transaction.
It is still a requirement that the deal affects trade between Member States and threatens to significantly affect competition within the territory of the Member State or Member States making the request.
The European Commission has however expanded the list of referral candidates to include situations where:
The European Commission declares that it may take into account whether the value of the consideration received by the seller is particularly high compared to the current turnover of the target business.
These are all very broad concepts. The Danish Competition Council e.g. found that Danish insurance provider Alka was a Maverick because Alka advertised heavily focusing on prices.
If a Member State makes a referral request and the European Commission accepts it, it is necessary to file the deal with the European Commission. The European Commission will then review the deal within its formal deadlines (which in practice can be very long) and decide whether it will approve or prohibit the deal. In the latter case, the parties can offer remedies. At the time the European Commission informs the parties of the receipt of a referral request, the standstill obligation kicks in. This means the parties must stop the implementation of the transaction until clearance.
All this leaves a great amount of deal uncertainty. Buyers are at risk of having their deal vetted by the European Commission long after closing. Provisions in the deal agreement saying the buyer should only accept reasonable remedies are effectively without value when the deal has already closed. The above guidance from the European Commission is broad, vague, of a purely illustrative purpose, not in any way comprehensive, and not limited to any specific economic sectors (although the European Commission does expressly mention the digital and pharma sectors), meaning it seems extremely difficult for parties to foresee what would be a referral candidate.
The European Commission itself suggests that parties can voluntarily come forward with information about their intended transaction. Where appropriate, the European Commission may give an early indication that it does not consider a referral appropriate. The European Commission makes the reservation that it needs to have all the necessary information at its disposal to make the assessment. In addition, the European Commission does not give any guidance when a case is appropriate. Back in the days when it was possible to notify agreements to the European Commission, it also swamped the Commission meaning it took ages to get a response. We believe it would be in the minority of cases that such an approach would be the best way going forward. This calls for a self-assessment in most cases.
In every merger control screening Gorrissen Federspiel already considered the risk of a referral to the European Commission. After the change in policy, it is necessary to consider this in even more detail. As always, we recommend that parties as early as possible have Gorrissen Federspiel assess potential merger control filing obligations and if there are any such whether the deal is likely to secure clearance with or without remedies. In addition, we recommend parties now devote the necessary time and resources to assess the increased risk of a referral to the European Commission. This will require a bit more information than previously. It may also be necessary to reach out to national competition authorities – similar to the risk of a Member State requiring a referral from the European Commission today.