In pursuit of Grail – recent changes in European merger control

Posted: 08/11/2024

The curtain has fallen on the final act of the long-running drama of the attempted acquisition of Grail by Illumina. To recap: Illumina, the leading player for next-generation DNA sequencing systems with an 80% global market share, had acquired Grail in 2021. Five years previously, Grail had actually been spun out from Illumina as a start-up in the field of cancer screening blood tests. In England, Grail is currently involved in a 140,000 patient trial with the National Health Service for Grail’s Galleri® test for early-stage detection of more than 50 cancers (the trial ends in 2026).

The merger had been scrutinised both in the US (by the Federal Trade Commission (FTC)) and in the EU by the European Commission (Commission). It is notable that most mergers that are prohibited by regulators are ‘horizontal’ deals (ie between competitors), where the aggregation of market power and loss of competition can readily be understood. By contrast, ‘vertical’ mergers (between parties at different levels of a supply chain) are typically viewed as less problematic, but where concerns do arise, they tend to focus on ‘foreclosure’: for example, if the ‘upstream’ merger partner is a supplier of vital inputs to the ‘downstream’ market in which its intended merger partner operates, the upstream partner may be incentivised to reduce or degrade supplies of the vital input to competitors of its downstream partner, thus weakening competition on the downstream market. 

This was, broadly, the view of both regulators, since Grail’s competitors were reliant on Illumina’s sequencing systems, and it was found that Illumina would have both the incentive and the ability to foreclose competition on Grail’s market through the merger.

The FTC’s actions to block the merger ended in December 2023 with an opinion of the Fifth Circuit Court that supported the FTC’s contention that the deal was anti-competitive, following which Illumina announced that it would divest Grail (which it did in June 2024, retaining a 14.5% stake). 

Given this, the Commission’s stance on the merger was not ultimately determinative, but in legal terms it has raised significant issues. Under EU merger control, a merger under review cannot be completed before clearance but notwithstanding that, Illumina had completed the deal, and the Commission imposed a fine of €432 million on Illumina, a record fine in the context of ‘gun-jumping’ – but this was not the key development.

What made the Commission’s involvement so significant? 

EU merger control imposes a mandatory notification requirement where relevant thresholds are met for turnover within the EU, requiring significant turnover levels of both merger parties in a number of EU member states (mergers that meet these thresholds are said to have an ‘EU dimension’). EU member states also have national merger control regimes, under which deals affecting that member state, but without an EU dimension, can be scrutinised. EU merger control acts as a ‘one-stop shop’ under which the competence to review mergers with an EU dimension passes to the Commission, thereby avoiding the need for multiple parallel national merger reviews.

In this case, Grail had no turnover in the EU (nor, indeed, anywhere else): the merger did not have an ‘EU dimension’. How could the Commission exert jurisdiction on a merger that fell beneath the turnover thresholds in the EU merger regulation (EUMR)?

Article 22

Article 22 of the EUMR allows a member state to request the Commission to examine a merger that does not have an EU dimension (ie it falls beneath the high thresholds under which the Commission would automatically review the deal), but where it affects trade between EU member states, ‘and threatens to significantly affect competition within the territory of the Member State or States making the request’. In this case, the Commission had encouraged referrals under Article 22 for this transaction, leading to a referral request from France, joined later by a few other EU and EEA member states.

The basis for Article 22 lies in a period when many EU member states did not have their own national merger regimes, and so it allowed such states to call on the Commission to intervene in mergers that could not otherwise be reviewed (indeed, it was known as the ‘Dutch clause’ because it was added at the request of the Netherlands which, at the time, did not have national merger control rules). 

Now, however, all EU member states (and most of the remaining EEA states) have their own national merger control regimes, typically based on turnover thresholds within the relevant territory. The Commission’s view was that Article 22 permitted a member state to refer a transaction and the Commission to review (and block) it, even where the transaction did not meet either the turnover thresholds of the member state’s own national merger control regime or the higher EU-wide turnover thresholds of an ‘EU dimension’. 

In 2021, the Commission had issued a Communication that had sought to frame Article 22 as a ‘corrective mechanism’ to allow review of all mergers and ‘not only those that meet the respective jurisdictional criteria of the referring Member States’. This was a change of practice from the Commission and was the basis of its decision to accept the referral of the Illumina case and its subsequent decision to block the merger, an approach supported by the first-level European court (the General Court) on Illumina’s appeal in 2022. 

Why this change of approach? 

Merger regimes typically assert jurisdiction on the basis of the turnover of the merger parties in the relevant territory [1], an approach stemming from traditional industries in which the parties’ current turnover could serve as a reasonable proxy for their likely market power following the merger. In more modern, technologically advanced sectors (AI, pharma, biotech) a new phenomenon has emerged, the so-called ‘killer acquisition’, by which a big player acquires an innovative new entrant (which may even be in a pre-commercial development phase); the competition concern is that this may either stifle competition from the entrant against the incumbent purchaser, or – for a vertical merger – that the incumbent could leverage its market power into the entrant’s downstream market. These ‘killer acquisitions’ give rise to an ‘enforcement gap’ – the inability of merger control regimes to intervene even if the acquisition could have serious impacts on a key market.

The writing on the wall for the Commission’s attempt to plug this enforcement gap by its expansive interpretation of Article 22 came in March 2024 with the opinion of the Advocate General (who issued a preliminary non-binding but persuasive opinion to the European court) in Illumina’s appeal against the General Court’s decision. The Advocate General stated that, ‘In one fell swoop, by means of an original interpretation of Article 22 EUMR, the Commission gains the power to review almost any concentration [merger], occurring anywhere in the world, regardless of undertakings’ turnover and presence in the European Union and the value of the transaction, and at any moment in time, including well after the completion of the merger.’ 

Being told that your interpretation of law is ‘original’ is a bit like being told that your new haircut is ‘interesting’.

The Advocate General’s view was confirmed on 3 September 2024 with the ruling of the Court of Justice of the European Union (CJEU). The CJEU considered the interpretation of Article 22 from four perspectives: literal, contextual, historical and teleological (the doctrine that provisions should be interpreted in light of the aims and purposes of EU law), and found that Article 22 did not permit a member state to refer a merger to the Commission (nor permit the Commission to accept the referral) where that merger fell outside the jurisdictional thresholds of the member state’s own domestic merger control regime. To find otherwise, the CJEU said, would undermine the key principles of predictability and legal certainty. This ruling led to the annulment of the fine imposed on Illumina and the withdrawal of the Commission’s related decisions. 

Where next? 

As the CJEU commented, if developments in technology markets mean that competition can be significantly affected by acquisitions of innovative businesses that generate little or no turnover at the time, ‘it is open to the Member States to revise downwards their own thresholds determining competence based on turnover as laid down by national legislation’.

That has already started to happen in some jurisdictions, including through the concept of a ‘transaction value’ threshold in addition to turnover thresholds (for example, the value of the Illumina/Grail transaction was $8 billion at a time that Grail was essentially pre-commercial). A transaction value merger threshold has already been introduced to the regimes in South Korea, Germany and Austria. 

The UK has not implemented a ‘transaction value’ test, but instead (around the end of 2024) will bring in a new ‘acquirer-focused’ threshold for deals where the acquirer has a UK turnover exceeding £350 million and UK market share of 33% or above, and the target has a ‘UK nexus’, being either incorporated in the UK, carrying out at least part of its activities in the UK or supplying goods or services in the UK (but with no turnover or market share thresholds for the target). 

The CMA has indicated (in its draft revisions to its guidance) that it will apply ‘a purposive approach’ to the UK nexus test, which would be satisfied (inter alia) if the target had not begun any UK supply of goods or services but had taken any preparatory step such as obtaining a licence or regulatory approval. While the CMA’s guidance may yet be clarified following consultation, it is clear that the UK nexus requirement will present only a low hurdle to CMA jurisdiction. 

And finally – yes, Grail was apparently so named because of the belief that its blood test might prove to be the ‘Holy Grail’ of cancer detection. The European Commission’s involvement in the Illumina deal lasted more than three years. Wagner’s opera Parsifal (which to non-devotees might seem to last almost as long) also features the Holy Grail, and as Parsifal approaches the Grail, he sings ‘I have barely moved, and yet already I imagine I have travelled far’, an apt comment for this case: despite Illumina’s lengthy journey with the European Commission and through the European courts, its basic position under the transaction barely changed, since the Grail deal was in any case abandoned because of the FTC’s involvement in the US. But European merger control, at any rate, has shifted significantly.

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