The European Commission plans to change the use of the referral system in merger control. This should allow the Commission to assess small but, in its view, important transactions, even if the turnover of the companies concerned is below the national notification thresholds. Margrethe Vestager revealed this during her speech at the competition conference held on 8 September 2020.
The Commission will in the future call on national competition authorities to refer such transactions to it more often. This gives new life to the so-called Dutch clause: Article 22 of the European Merger Regulation. This change is expected to have major implications for merger control practice and, as a result, merger and acquisition processes.
Article 22 – the Dutch clause
Article 22 allows Member States to request the Commission to assess potentially problematic transactions, even if they do not have a European dimension. This is subject to the condition that the transaction could affect trade between Member States and threaten to have significant effects on competition in the Member State concerned. Such a request is also possible in respect of transactions which do not meet the national turnover thresholds.
Article 22 was originally introduced at the request of the Netherlands and is consequently referred to as the Dutch clause. The purpose of the provision was to ensure that transactions in Member States without a merger control regime could still be reviewed, even if the turnover of the parties involved was below the European notification thresholds. Over time all Member States, with the exception of Luxembourg, have implemented merger control rules at a national level. Article 22 was practically redundant. The Commission took the stance that it would rather not assess transactions that did not meet the (lower) national thresholds.
Fear of killer acquisitions
In recent years, however, the Commission has had concerns about takeovers of 'promising' small companies by already dominant parties. There are fears that these so called killer acquisitions will hinder potential competition in the future. The relevant transactions include the acquisition by large technological or pharmaceutical companies of innovative start-ups. Due to the low turnover of these small companies, these transactions remain below the European and national notification thresholds and are therefore not subject to merger control. The question, however, remains whether these transactions constitute a significant impediment to (future) competition. From the Commission's point of view, small innovative companies could potentially compete with the dominant parties in the future.
For this reason, the Commission encourages the use of the referral option for Member States under Article 22. The Commission encourages Member States to refer to it small but important transactions. This would enable the Commission to assess this type of transaction in the future. It is still unclear how the Commission will implement this in practice. The Commission is expected to provide more clarity in the course of next year.
Consequences for M&A practice
This change of course by the Commission will probably have a number of (major) consequences for mergers and acquisitions and will lead to a degree of uncertainty for companies involved in such tranactions.
One of these uncertainties resides in the fact that while merging firms are not required to disclose a transaction if the turnover thresholds are not met, they can no longer fully rely on the fact that the transaction will not be assessed from a competition perspective. The transaction can still be referred to and investigated by the Commission. If that happens this has consequences for the parties ability to complete the transaction. It also has consequences if a transaction has been completed before the Commission has informed the companies of its investigation.
Merging parties are required to suspend a transaction as soon as they are informed that a referral request has been made by a Member State. Violation of this suspension obligation can lead to a fine of up to 10% of worldwide turnover. Transactions which have already been implemented may be held to be invalid.
The Commission's change of course therefore has a significant impact on the timing of transactions. Member States may refer non-reportable transactions to the Commission within 15 working days of their publication. The qualification of a publication is important for the commencement of this 15-day period. Pursuant to the Commission Notice Case Referral in respect of concentrations, a notice must contain sufficient information to enable a preliminary assessment to be made before submitting a referral request. This means that the disclosure must show whether the transaction is likely to affect trade between Member States and have a significant effect on competition within the Member State. A regular press release about the transaction therefore does not seem sufficient.
Preliminary points for attention
Based on these developments, merging companies – especially those operating in innovative sectors – will need to consider the following factors:
- Completion of a transaction may have to be suspended if the Commission initiates an investigation prior to such completion;
- The parties should consider the inclusion in the purchase agreement of a clause regulating rights and obligations of the parties in the case of a referral of the transaction to the Commission, even if the turnover of (one of the) parties involved is small. In addition, the parties could provide for a waiting period before completion of the transaction, in order to mitigate the risks of unnecessary costs on the basis of a possible investigation by the Commission;
- Proper disclosure of transactions is an important in view of the 15 day period within which a referral has to be made. If the transaction has not been properly disclosed, the relevant period may not yet start running, as a consequence of which a referral to and investigation by the Commission cannot be excluded even after the 15 days.
- Finally, the parties should be aware that potential competitors could use the Article 22 procedure to frustrate the transaction by calling on Member States to submit the transaction to the Commission.
Our European and Competition Law team closely monitors these developments. If you would like to know more about this or have other questions in the field of European and Competition law, please do not hesitate to contact us.