Revival of the European Commission's previously dormant superpower in Merger Control
On March 26th 2021, the European Commission ("Commission") published guidance on the application of the referral system set under Article 22 of the EU Merger Regulation ("EUMR"). The aim is the future examination by the Commission of mergers which, due to the low turnover of at least one of the companies involved, have (i) so far not been subject to merger control - i.e. neither by the Commission nor by a competition authority of a Member State, however, (ii) could restrict competition in the future due to high competitive potential of a participating company in the domestic market.
In its guidelines, the Commission mentions such "referral candidates" of transactions with start-ups or market participants with significant competitive potential, which, however, have not yet developed a business model for this purpose that generates significant revenue. Such companies, include those that conduct potentially important research, have an actual or potentially important competitive force at their disposal, have access to competitively important assets (such as raw materials, infrastructure, data, or intellectual property rights), or supply products or services that are considered important inputs/components in other industries. So far, these have mainly been new competitors in the digital, pharmaceutical and biotechnology sectors.
The Commission now encourages National Competition Authorities ("NCAs") to make referral requests to them under Article 22 EUMR, even if the referring NCA does not have jurisdiction to examine the transaction at all.
The problem is that referrals to the Commission are also permitted from transactions that have already been closed. While the Commission indicates that it would not accept a referral if more than six months had elapsed since closing, provided, however, that the execution of the transaction was a matter of public record. Otherwise, the six-month period runs from the date on which the material facts of the transaction were disclosed. In any case, this period is only a guideline. The Commission expressly reserves the right to accept referral requests for the review of transactions under the Article 22 EUMR procedure even after the expiry of this period.
As a result, any merger can be reviewed by the Commission in the event of a potential harm to competition, irrespective of the transaction value and target turnover. Thus, in the future, companies will need to assess the likelihood or risks of such a review by the Commission. A referral to the Commission or even a voluntary consultation with the national competition authorities and/or the Commission in advance is, in any case, associated with a time expenditure of several months until the transaction is approved. This significantly complicates the planning and execution of transactions.
Alternatively, the possibility of a transaction "staying under the radar", due to lack of media coverage and no third party informing the competition authorities of the merger, must be considered. This risk assessment must consider the legal risks that may arise in the event of a potential reversal of an already completed transaction.
The top premise to be mentioned is the ex tunc reversal. In matters of company law - at least in Austria - a notarial deed must be concluded in order for an assignment to become effective.
With regard to this "interim" situation, internal company law processes must also be observed, such as the payment of balance sheet profits and the question that emerges as to who is entitled to them.
It would also remain unclear on how to deal with resolutions passed in a general meeting: The question remains whether these are reversible - after all, the existing shareholder was actually a shareholder in the "interim period" - and which consequences a retention or reversal would have.
Finally, the question could also turn to tax group contracts concluded on the assumption of an effective merger, as well as the tax treatment of the "interim" group and its dissolution (box privilege etc.). If necessary, such an obligation to reverse the transaction would have to be contractually provided for in the first place.
In essence, transactions in the sectors primarily affected by this will in future require a competition analysis as early as the initiation phase in order to determine whether the transaction is one that would be subject to review by the Commission.
Autor: Christina Hummer
Autor: Thomas Ruhm
Autor: Claus Wintersteller