Procedural Issues with Merger Control Across Europe

In the past few years, there have been significant procedural developments that affect merger review of life sciences transactions. At EU level, the European Commission (EC) has sought to ensure that it may review ‘killer acquisitions’ that do not meet the EC Merger Regulation (EUMR)^[2] turnover-based thresholds. The General Court has upheld the EC’s proposed approach to doing so, and the matter is now before the Court of Justice of the European Union.

In addition, the long-running review of the EUMR simplified procedure was completed in April 2023, with the adoption of the Merger Simplification Package. This package, which entered into force on 1 September 2023, will reduce the burden of notifying concentrations that do not raise substantive concerns.

At Member State level, there have been further cases applying the German and Austrian ‘size-of-transaction’ tests, increasing clarity regarding the circumstances in which notifications are required. In addition, the Italian merger control regime now makes provision for review of transactions where only one party meets the turnover threshold (or the combined global turnover threshold is met) and the transaction is capable of impairing competition. In effect, Italy has become the third Member State to revise its thresholds to facilitate the review of ‘killer’ acquisitions.

In the UK, the Competition and Markets Authority’s (CMA) application of the share of supply jurisdictional test continues to warrant careful consideration, and the Digital Markets, Competition and Consumers Bill was introduced into Parliament in April 2023. The Bill proposes changes to the UK merger control regime, including to the turnover and share of supply tests, and a new threshold intended to facilitate the CMA’s review of ‘killer acquisitions’ and mergers not involving direct competitors.

The EUMR and EU foreign subsidies

EUMR jurisdictional scope and historical referrals

The EUMR provides the regulatory framework for the assessment of concentrations^[3] that have a ‘Community dimension’.^[4]

The ‘one-stop shop’ principle means that transactions that fall within the scope of the EUMR are not subject to parallel merger review in the Member States. Concentrations not covered by the EUMR remain under the jurisdiction of the Member States, subject to the EUMR framework for ‘referrals’ between the EC and Member State authorities in certain circumstances:

• at the request of the parties or a Member State, the EC may refer a case in whole or in part to the competent authorities of a Member State;^[5] and
• the parties may ask the EC to assume jurisdiction where at least three Member States would have jurisdiction,^[6] or Member States may request the EC to examine a concentration not having a Community dimension if it affects trade between Member States and threatens to significantly affect competition within the territory of the requesting Member State.^[7]

In the past 10 years, eight concentrations in the pharma sector have been referred under Article 4(5) of the EUMR (i.e., at the request of the parties). Five were cleared unconditionally following a simplified review.^[8] The other three^[9] were reviewed under the normal procedure and cleared without commitments. In CSL/Novartis Influenza Vaccines Business,^[10] the EC accepted the referral as a result of its experience in human vaccines.

Similarly, in the past 17 years, the EC accepted the referral under Article 4(5) of three medical instruments/devices concentrations. Two were cleared unconditionally following a simplified review,^[11] and the third was reviewed under the normal procedure and cleared unconditionally.^[12]

In contrast, the EC has only referred two pharma concentrations to Member States at the request of the parties (under Article 4(4) of the EUMR). In Boots/Alliance Unichem,^[13] the relevant geographical market was limited to the UK^[14] and the principal impact on competition was on distinct markets in the UK, warranting referral. In Brocacef/Mediq Netherlands,^[15] the EC found that the transaction gave rise to several affected markets for wholesale medical products and the retail sale of pharmaceuticals in the Netherlands, again warranting referral.

The EC has only referred two medical instruments/devices concentrations under Article 4(4). In Helios/Damp,^[16] the EC identified regional or local markets for acute hospitals and national markets for elderly care facilities, concluding that the concentration may have a significant impact on competition in distinct markets in Germany. In Fresenius/Rhön Klinikum,^[17] the EC also found factors indicating regional or local markets for acute hospitals and concluded that the concentration may have had a significant impact on competition in a distinct market in Germany.

The EC has only referred three cases in the pharma sector to a Member State under Article 9 of the EUMR (i.e., at the request of the Member State).^[18] In Ace Pharmaceuticals,^[19] the Belgian Competition Authority sought a referral on the basis that the concentration could significantly impact competition in the manufacturing and distribution of pharmaceuticals in Belgium. The EC agreed that the Belgian Competition Authority was best placed to consider the concentration.

In Alliance Unichem,^[20] the EC found that the relevant market was limited to rapid full-line distributors supplying pharmacies on a frequent basis and with a legal obligation to keep a wide range of pharmaceuticals in stock. The EC concluded that the market was regional because the regulatory regimes applicable to distribution were differentiated across the EU and demand was differentiated regionally. It referred the concentration to the Italian Competition Authority.

Broader application of Article 22

Article 22 of the EUMR, also known as the ‘Dutch clause’,^[21] enables the EC to accept referral of a concentration that does not have a Community dimension where the concentration involves an undertaking supplying cross-border goods or services (such that it is likely to have an actual or potential effect on trade between Member States) and the national competition authority provides evidence of a significant adverse effect on competition in its jurisdiction.

In the 10 years prior to 2021, the EC had only accepted the referral of one concentration in the pharma sector under Article 22. In 2019, the French and German competition authorities referred Johnson & Johnson’s (J&J) proposed acquisition of Tachosil.^[22] The EC accepted jurisdiction on the following bases.

• The EC considered that the concentration could have an appreciable impact on cross-border economic activity involving several Member States, given that the parties had sales of products in almost all Member States.
• The concentration threatened to significantly affect competition, at least in France. On a narrow market limited to haemostatic patches with dual effect, while J&J had no marketed products (having exited the market), the EC found that Tachosil had an 80 to 90 per cent share, and that the transaction would have a negative impact on competition by reducing J&J’s incentives to restart distributing its product (the closest potential competitor of Tachosil) in the EEA.

As a result, the EC concluded that a referral was appropriate because:

• the concentration was notifiable in three Member States, leading to potential legal uncertainty that could arise from conflicting assessments;
• there was a need to examine why J&J decided to exit the EEA in 2017;
• competitors were active throughout the EEA and it would be more efficient to centralise contacts; and
• a coherent handling of the case in relation to potential remedies was desirable.

On 26 March 2021, the EC published new guidance on Article 22 referrals (the Guidance),^[23] addressing the circumstances in which a Member State may request that the EC accepts a referral where the referring Member State does not have jurisdiction. The Guidance reflects the EC’s view that there was an enforcement gap in relation to transactions in certain innovative sectors (e.g., life sciences and the digital economy). In addition, in December 2022, the EC published a ‘question and answer’ document providing practical guidance for Article 22 referrals.^[24] The document includes illustrative examples of scenarios that the EC considers may be suitable for referral, including one in the pharma sector.

Article 22 applies to concentrations where ‘the turnover of at least one of the undertakings concerned does not reflect its actual or future competitive potential’,^[25] such as start-ups or recent entrants with considerable competitive potential that are yet to generate significant revenues, but represent actual or potential important competitive forces. The EC is concerned that these companies could be acquired without scrutiny. In short, the Guidance is intended to enable review of ‘killer acquisitions’.

The new approach reduces predictability and certainty for the parties to concentrations in terms of transaction timelines, conditions precedent to closing (including measures enjoining closing or implementation), appropriate triggers for break-up fees and other important deal parameters.

The EC first applied its expansive interpretation of Article 22 to Illumina’s proposed acquisition of GRAIL, announced on 21 September 2020.^[26] On 19 April 2021, the EC accepted the referral,^[27] finding that the proposed concentration could affect trade within the European single market and threatened to significantly affect competition within France, and that a referral was appropriate as GRAIL’s competitive significance was not reflected in its (lack of) turnover.

Illumina appealed the EC’s assertion of jurisdiction to the General Court. On 13 July 2022, the General Court confirmed the EC’s interpretation of Article 22, noting that the words ‘any concentration’ make it clear that a Member State has the right to refer any concentration to the EC (if it satisfies the cumulative conditions), irrespective of whether the concentration is notifiable under national law.^[28] The General Court characterised it as a ‘corrective mechanism’ to ensure effective review of all concentrations with significant effect on competition in the EU, including those that would otherwise escape review at either EU or national level.

The General Court rejected Illumina’s plea that the referral request was submitted out of time, holding that the expression ‘made known’ should be interpreted as the ‘active transmission of information to the Member State concerned’,^[29] where that information is sufficient to assess whether the conditions for a referral are met. The General Court found that ‘legal certainty’ and ‘good administration’ required the EC to observe reasonable time limits when undertaking administrative procedures, including merger reviews. Nevertheless, even though the EC had not acted within a reasonable time frame, that was not a failure that impacted the ability of Illumina and GRAIL to properly ‘defend themselves’. Illumina appealed the General Court’s judgment to the European Court of Justice on 22 September 2022, and at the time of writing the case is still pending.

In relation to the substantive review of the acquisition, the Phase II review commenced on 22 July 2021.^[30] On 6 September 2022,^[31] the EC blocked the acquisition of GRAIL by Illumina because it considered that Illumina had failed to offer remedies that sufficiently dealt with its concerns. On 17 November 2022, Illumina appealed the prohibition decision to the General Court.^[32],^[33] On 5 December 2022,^[34] the EC formally requested that the acquisition be unwound. The discussions about the appropriate form or divestiture are ongoing.

In parallel with the substantive review of the transaction, on 29 October 2021,^[35] the EC adopted interim measures to ‘restore and maintain the conditions of effective competition following Illumina’s early acquisition of GRAIL’^[36] in breach of the ‘standstill obligation’.^[37] On 1 December 2021, Illumina appealed this interim measures decision to the General Court.^[38] At the time of writing, the judgment of the General Court is pending.

On 28 October 2022,^[39] the EC renewed the interim measures decision to ensure that GRAIL continued to be held separate (given the EC’s prohibition decision). On 10 January 2023, Illumina challenged the decision to renew the interim measures decision to the General Court.^[40] At the time of writing, the judgment of the General Court is also pending.

Finally, as a consequence of Illumina’s breach of the ‘standstill obligation’ (i.e., closing the transaction on 18 August 2021), the EC opened a gun-jumping investigation on 20 August 2021. On 19 July 2022,^[41] the EC sent a statement of objections to Illumina; the EC’s decision regarding this alleged ‘gun jumping’ is still pending.

Since the Illumina/GRAIL referral, the EC has accepted the referral of two transactions that were not notifiable in any Member State.^[42] Neither deal is in the life sciences sector. The first is the proposed acquisition of Autotalks by Qualcomm^[43] (where the referral request was supported by 15 Member States), and the second is the proposed acquisition of Nasdaq Power by EEX^[44] (where the referral request was supported by four Member States).

Reform of the EU simplified procedure rules

On 20 April 2023, the EC adopted the 2023 Merger Simplification Package, which applies from 1 September 2023. The package implements a number of procedural changes.

First, the revised Notice on Simplified Procedure (the Notice) extends the scope of the simplified procedure to three new categories of cases:^[45]

• the individual and combined market shares of the parties are lower than 30 per cent on the upstream and downstream markets;
• the individual and combined market shares are lower than 30 per cent on the upstream market, and parties to the concentration active in the downstream market hold a purchasing share of less than 30 per cent of upstream inputs; and
• the individual or combined upstream and downstream market shares of the parties to the concentration are below 50 per cent on both the upstream and downstream markets, the Herfindahl-Hirschman Index (HHI) delta^[46] is below 150 on both the upstream and downstream markets, and the smaller undertaking (in terms of market share) is the same in the upstream and downstream markets.

The Notice also introduces flexibility that enables the EC to use the simplified procedure to review cases that do not fall within the categories to which that procedure normally applies, namely:

• horizontal mergers or acquisitions where the parties’ combined market share is between 20 per cent and 25 per cent;
• vertical mergers or acquisitions where the parties’ individual or combined upstream or downstream market share is between 30 per cent and 35 per cent;
• vertical mergers or acquisitions where the parties’ individual or combined market shares do not exceed 50 per cent in one market and 10 per cent in the other market; and
• joint ventures with EEA turnover and assets between €100 million and €150 million.

Further, a new ‘super simplified procedure’ allows for notification using a Short Form CO without pre-notification. Finally, the Short Form CO has been amended to include multiple-choice questions and tables, and certain questions regarding the jurisdictional and substantive analysis of cases have been simplified.

However, the Notice also enables the Commission to examine a concentration under the normal procedure, even though it qualifies for simplified treatment.

Second, the revised Implementing Regulation^[47] requires less information to complete the Form CO (reducing the burden of the non-simplified procedure).

Finally, the revised Communication on the transmission of documents specifies that the exchange of documents between the Commission and the parties should be electronic, including for notifications of concentrations.^[48]

EU Foreign Subsidies Regulation

On 12 January 2023, the EU Foreign Subsidies Regulation (FSR) entered into force. The FSR applied from 12 July 2023.^[49] Concentrations must be notified if: (1) the turnover of the target (for acquisitions), the JV (for the creation of a JV) or one of the parties (for mergers) in the EU was at least €500 million in the past financial year; and (2) the undertakings concerned (e.g., the acquirer and the target, the merging entities or the JV and its parents) received from non-EU governments or state-owned entities ‘financial contributions’ of more than €50 million in the three years prior to the notification. The ‘financial contribution’ concept is broadly defined to include direct and indirect funding, such that it catches company- and industry-specific tax benefits and R&D funding from state-owned entities, for example.

Developments in Germany and Austria

German and Austrian value-based threshold

The transaction value threshold introduced in Germany and Austria in 2017 (detailed below) enabled review of pharmaceutical transactions.

In Germany, a transaction is notifiable if the combined aggregate worldwide turnover of all undertakings concerned was more than €500 million in the business year preceding the concentration, the domestic turnover of one undertaking concerned was more than €50 million, the consideration for the acquisition exceeds €400 million and the target has ‘substantial operations in Germany’.

In Austria, a concentration is notifiable if the combined worldwide turnover of the undertakings concerned exceeds €300 million, the combined Austrian turnover exceeds €15 million, the consideration exceeds €200 million and the target undertaking is active in Austria to a significant extent.

As per the German Federal Cartel Office’s (FCO) activity report for 2021–2022, 61 mergers were notified, some of which were precautionary, in that reporting period on the basis of their transaction value.^[50] Information published by the FCO on notifications made based on the transaction value threshold shows that the threshold is most frequently triggered in the digital and pharmaceutical sectors.^[51]

As per the Austrian Federal Competition Authority’s (BWB) 2021 sector inquiry report on ‘health’, it is still unclear whether the value-based thresholds enable the effective review of transactions in the pharmaceutical sector.^[52]

There were eight health sector transactions in 2021 and 2022 that fell within the German merger control regime (because they met the transaction value threshold).^[53] These transactions primarily involved acquisitions of pipeline products (i.e., medicines not yet approved), companies with strong pharmaceutical or medical technology research capabilities^[54] or innovative research-based start-ups. However, in all cases, the risk of anticompetitive effects was ruled out because competitors with strong research activities were active in all the relevant markets.^[55]

Revised Joint Guidance – nexus criteria

The guidance paper on transaction value thresholds (Section 35(1a) GWB and Section 9(4) KartG) published by the FCO and BWB in January 2022 (the Joint Guidance)^[56] provides further guidance for the pharmaceutical sector.

In Austria, there is presumed to be a local nexus if the target has a site in Austria, and has some relevant domestic market orientation. For Germany, location alone is not sufficient. The FCO looks at whether the assets will be used for the German market,^[57] and whether the domestic activity will be more than marginal. For R&D, various criteria are used to determine materiality, including the number of employees involved in R&D, the R&D budget and the number of patents or patent citations.

In both jurisdictions, marketable research activities (usually presumed in Phase III clinical trials) constitute substantial domestic operations, and should be distinguished from basic research activities, which do not amount to substantial domestic operations. In the context of the acquisition of a company whose business activity relates to a newly authorised medicinal product, there is no relevant nexus in either jurisdiction if no sales have been made domestically and market entry has not been prepared.^[58] However, where newly approved drugs are supplied in Germany and generate de minimis turnover (€1 million), this will amount to substantial operations because the turnover does not reflect competitive potential.

Exclusive licences are on all fours with ‘asset acquisitions’

The Joint Guidance also brought new types of transactions within the scope of the German merger control regime, including exclusive licences. Previously, the granting of a licence was not notifiable if it was not associated with current revenue-generating activity. For example, in National Geographic I ^[59] the parties concluded a licence agreement for the initial publication of the magazine National Geographic in German. The Federal Supreme Court confirmed that this licence was not a concentration because the licensors had not yet marketed the magazine in German, so there was no existing market position. The Joint Guidance provides that a transaction may be notifiable under the value thresholds if a future market position is acquired, including where the turnover potential of the target only develops after the licence is granted. To be notifiable, an exclusive licence would ordinarily need to lead to a lasting change in the market structure, thereby excluding short-term licences.

In Austria, an exclusive licence must constitute a concentration to be notifiable.

The value of the transaction or concentration comprises all assets, including payments that are conditional on achieving turnover or profit targets in the future.^[60] In life sciences transactions, payments are often a mixture of upfront and milestone payments and royalties or revenue share. The value of the transaction or concentration includes the net present value of all of these elements.^[61]

Eleventh Amendment of Act against Restraints of Competition

The Eleventh Amendment of the German Act against Restraints of Competition is expected to come into force by October 2023.^[62] It will enable the FCO to require undertakings to notify all future concentrations for a period of (initially) three years where a sector inquiry finds that such future concentrations may significantly impede effective competition, provided that the revenue generated in Germany in the past business year of the acquirer and target exceeded €50 million and €1 million, respectively.^[63]

Germany and Austria foreign direct investment

Life sciences transactions are potentially reviewable under the German Foreign Trade and Payments Ordinance and the Ordinance on the Determination of Critical Infrastructure, both adopted under the Act on the Federal Office for Security and Information Technology.^[64] Transactions are assessed based on whether the deal would have an adverse effect on public policy or public security. In this analysis, the focus is on the origin of the investor and the existence of foreign government influence. In April 2022, the German government prohibited the planned acquisition of the German medical device manufacturer Hayer Medical AG by the Chinese-based Aeonmed Group, to ensure ‘public order or security’.^[65]

Concentrations in the life sciences sector are also caught by the Austrian FDI regime, especially activities concerning R&D regarding medicinal products, vaccines, medical devices and personal protective equipment. These are considered to fall within a sensitive sector at least until 31 December 2023.

Other developments in Member State merger control

In April 2022, the French Competition Authority accepted, for the first time, a ‘failing firm defence’,^[66] and cleared unconditionally the acquisition of Conforama by the Mobilux Group, despite relatively significant competitive risks resulting from the merged entity’s purchasing power.^[67]

In August 2022, the new Italian Competition Law entered into force, and replaced the substantive ‘potentially creating or strengthening of a dominant position’ test with the significant impediment to effective competition (SIEC) test. In addition, the Italian Competition Authority (AGCM) received powers to require the notification of concentrations below the Italian turnover thresholds where:^[68]

• the closing of the transaction took place no more than six months earlier;
• one of the two national cumulative turnover thresholds^[69] is exceeded or the total combined worldwide turnover is exceeded; and
• the transaction is capable of impairing competition in a national market or in a part thereof.

In January 2023, the AGCM published some guidance on the application of this new power,^[70] which includes factors that may be used in the substantive assessment of killer acquisitions, for example it refers to circumstances where the target is a start-up or new entrant whose competitive significance is not reflected in its (lack of) turnover.^[71]

Developments in the UK

Merger review

The UK share of supply test requires the merger to have a sufficient UK nexus as a result of the creation or enhancement of a share of supply of at least 25 per cent in the UK or a ‘substantial part’ of the UK.^[72] The CMA’s guidance regarding its ‘jurisdiction and procedure’ provides further detail as to the CMA’s application of the test.^[73] In several recent cases reviewed by the CMA, it has taken a broad view of the metrics and services that can be used to calculate shares of supply.

One example of the CMA adopting a broad interpretation of the share of supply test in the life sciences sector is Roche/Spark. In this case, the CMA found that Roche and Spark overlapped in the supply of novel non-gene therapy and gene therapy haemophilia A treatments, which included ‘commercialised products and pipeline treatments which are at Phase II (or more advanced) stage of clinical development’, and that the share of supply test was satisfied with reference to the number of employees in the UK who worked on novel non-gene therapy and gene therapy haemophilia A treatments.^[74] Notable points from the CMA’s decision include:

• the CMA found that an entity undertaking R&D activities (specifically at an advanced level) should be considered to be supplying the relevant pharmaceutical treatments in the UK. The CMA specified that this included where there are no actual sales;
• the CMA noted its discretion under the Enterprise Act 2002 to calculate shares of supply, pointing to the ‘number of workers employed’ as a possible measure specified under the Act. It considered data (from Roche and Spark, and third parties) regarding full-time employees, and estimated the parties’ share of supply on this basis; and
• the CMA also applied the share of supply test to the UK patents obtained by the parties relevant for novel non-gene therapy and gene therapy haemophilia A treatments, noting that the CMA viewed obtaining patents as a ‘procurement of goods’.

Other cases such as Google/Looker,^[75] Sabre/Farelogix^[76] and Facebook/GIPHY ^[77] are not related to the life sciences sector, but they are of relevance to the application of the share of supply test to transactions in the sector. In Google/Looker and Facebook/GIPHY, the CMA applied the test to the supply of vertically related services and in Sabre/Farelogix it relied on indirect supply by Farelogix (in that British Airways accessed services supplied by Farelogix to American Airlines).

The Digital Markets, Competition and Consumers Bill

In April 2023, the Digital Markets, Competition and Consumers Bill was introduced into Parliament. The Bill proposes a number of changes to the UK merger control regime.^[78] In relation to the turnover threshold, the Bill proposes increasing the threshold from its current £70 million to £100 million. With respect to the 25 per cent share of supply threshold, the Bill proposes a new ‘safe harbour’ for small transactions, which would preclude the CMA from conducting a review under the share of supply threshold unless at least one relevant party has UK turnover exceeding £10 million. However, the Bill also proposes a new threshold to make it easier for the CMA to take jurisdiction over ‘killer acquisitions’ and other mergers not involving direct competitors. This new threshold would be triggered where one party (intended to be the acquirer) has an existing share of supply of at least 33 per cent in the UK (or a substantial part of the UK) and generates UK turnover of more than £350 million, and the other party (intended to be the target) has a specified connection to the UK.^[79]

The Bill also envisages procedural changes to the merger review regime. It puts the fast-track procedure on a statutory footing (whereas this is currently provided for only in CMA guidance) and proposes a number of changes intended to encourage use of this procedure (where transactions are fast-tracked to a Phase II review when the parties do not expect Phase I clearance). The Bill further provides for the possibility for the statutory timetable for Phase II investigations to be extended by mutual agreement between the CMA and the parties (which may be helpful for early consideration of remedies or to seek alignment with review periods in other jurisdiction where transactions are under review).

National Security and Investment Act

The National Security and Investment Act (the NSI Act) enables the UK government to intervene in acquisitions that could harm the UK’s national security where the relevant tests are met.^[80] The UK government identified 17 sensitive areas of the economy that may require mandatory notifications, including synthetic biology, artificial intelligence and advanced robotics.^[81] The 17 sensitive areas are defined in the National Security and Investment Act 2021 (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021/1264, and there is published guidance on the definitions.^[82] For example, synthetic biology is defined ‘as the process of applying engineering principles to biology to design, redesign or make biological components or systems that do not exist in the natural world’, and the Regulations and guidance elaborate on activities that are or are not caught.^[83]

In addition to the mandatory notification regime, the NSI Act also provides for voluntary notifications for other types of transactions. Transactions within the voluntary notification regime may be called in for review if not notified.

The first full-year annual report since the NSI Act entered into force (covering the period from 1 April 2022 to 31 March 2023) was published in July 2023 and provides insight on how the NSI Act is being applied in practice.^[84] The annual report reveals that 866 notifications were received by the Secretary of State during this period, of which 93 per cent were cleared unconditionally within the initial 30-working-days review period, with the remaining 7 per cent proceeding to a full assessment. Of the transactions that proceeded to a full assessment, only 15 were found to raise national security concerns leading to ‘final orders’ being imposed (five prohibiting the transaction and 10 clearing the transaction with remedies).

The annual report includes data on the proportion of notifications and transactions concerning the synthetic biology sector that proceeded to a full assessment (approximately 5 per cent or less).^[85] None of the 15 transactions that received a final order related to synthetic biology, and from the information available it does not appear that any of the transactions that received a final order during this period related to the broader life sciences sector.

Notes