25 Jul 2022 |
Since announcing the $8 billion acquisition in September 2020, Illumina, Inc. (hereafter “Illumina”) and Grail, LLC (hereafter “Grail”) have been put through the wringer by the European Commission (hereafter “Commission”). The former is an American healthcare company which developed next-generation sequencing technology to determine the order of the basic building blocks in entire genomes or targeted regions of DNA or RNA, and the latter is also an American company; famously backed by Jeff Bezos and Bill Gates, which develops multi-cancer early detection tests. In 2016, Grail was founded by Illumina and it holds 14.5% of Grail’s shares.
Background In A Nutshell
A handful of National Competition Authorities (hereafter “NCAs”) of Member States referred the concentration to the Commission. Whilst the Commission’s in-depth investigation into the effects of the proposed concentration of Illumina and Grail was ongoing, Illumina announced in August 2021 that it completed its acquisition of Grail. In response, the Commission sent a Statement of Objections in September 2021, and it adopted interim measures due to their breach of the standstill obligation (also known as “gun jumping”) under the EU Merger Regulation (hereafter “EUMR”).
Bit More Background
The NCAs of France, Belgium, Greece, Iceland, the Netherlands and Norway initiated the referral mechanism set out in Article 22 of the EUMR, thus requesting the Commission to examine, for those Member States, this concentration that does not have EU dimension but affects trade between Member States and threatens to significantly affect competition within the territory of the Member States making the request. Therefore, Article 22 is applicable to all concentrations, not only those that meet the respective jurisdictional criteria of the referring Member States.
It is worth noting, this was the first time Article 22 was triggered by an NCA and subsequently the Commission issued guidance on the application of the referral mechanism set out in Article 22 of the EUMR (hereafter “the Guidance”). The Commission acknowledged the departure from the up until recently status quo by elaborating on the practice that was developed of discouraging referral requests under Article 22 from Member States that did not have original jurisdiction over the transaction at stake, and that was due to the progressive implementation of national regimes for merger control in almost all Member States. This practice was notably based on the experience that such transactions were not generally likely to have a significant impact on the internal market. The Commission recalibrated its approach after reviewing the recent market developments that have resulted in a gradual increase of concentrations involving firms that play or may develop into playing a significant competitive role on the markets at stake despite generating little or no turnover in the EU at the moment of the concentration. The Commission’s rationale is that especially in the pharmaceutical sector; where a vital trait of the sector is innovation and conducting research & development projects with strong competitive potential, competition must be fostered. This change in approach will allow Member States and the Commission to ensure that additional transactions that merit review under the EUMR are examined by the Commission, without imposing a notification obligation on transactions that would not warrant such review.
The Commission justified its power to review the acquisition under Article 22, even though neither Illumina nor Grail are active in the EU, and they have no turnover within any Member State.
It is worth mentioning that Illumina argued that there was a legitimate expectation that since Article 22 was never utilised in such manner, that it would not be used in a merger control case. The Commission issued the Guidance after the NCAs triggered the referral process.
This was the first time the Commission adopted interim measures in a vertical merger following an unprecedented early implementation of a concentration. In effect, the Commission was (i) ordering Grail to be kept separate from Illumina; (ii) prohibiting the sharing of confidential business information between the undertakings; (iii) conferring an obligation on Illumina to finance additional funds necessary for the operation and development of Grail; (iv) ordering the undertakings to conduct business interactions at arm’s length, hence without unduly favouring Grail to the detriment of its competitors; and (v) ordering Grail to actively work on alternative options to the transaction to prepare for the possible scenario in which the deal would have to be undone in case the Commission were to declare the transaction incompatible with the internal market.
The main objective of the Commission was to prevent the potential irreparable detrimental impact of the transaction on competition as well as possible irreversible integration of the merging parties, pending the outcome of the Commission’s merger investigation.
The EU’s General Court (hereafter “GC”) decided to suspend the procedure as to whether the Commission was right to impose interim measures until they first determine whether the referral was legitimate.
Statements From The Parties
Ilumina appealed the Interim order and issued a statement saying that “the Commission has asserted jurisdiction over the transaction between two American companies with no foreseeable impact on competition in Europe and, in doing so, is threatening to deny Europe faster access to this life-saving technology”. Moreover, Illumina stated the benefits that will arise from the acquisition will reach the EU and that "Illumina will accelerate the adoption of GRAIL's test in Europe years faster than GRAIL could on its own, saving tens of thousands of lives in the EEA (European Economic Area) and billions of euros in healthcare costs."
CEO of Illumina said “Venture capitalists know to invest in that model, expecting liquidity through an acquisition. And if you take that away, I think it could impact investment into the space”.
The Commission's rationale is that this acquisition could make it more difficult for other developers of cancer tests to access Illumina’s technology, and that it is important to preserve competition and innovation in the sector, Commissioner Vestager stated “in designing the interim measures, we made sure Grail and other companies can continue developing their innovative cancer detection technology so that it can reach patients as quickly as possible, thus saving many lives”.
In America, the U.S. Federal Trade Commission also filed a lawsuit against the acquisition and abandoned another urgent procedure to block the deal pending the suit – as it believed the European Commission review would not allow the parties to close the transaction anyway.
GC Sees Eye to Eye With the Commission
Illumina in January this year sought to address the Commission’s concerns with its offer of remedies such as the proposed offer to cut prices and allow rivals continued access to its technologies. The Commission was not convinced by the proposed remedies for the $8 billion cash-and-stock bid for Grail. Illumina may have to sweeten its package of proposed remedies if it wants to win the Commission’s approval for the acquisition of the cancer detection test maker. Illumina said it was working constructively with the Commission.
The case coincides with the European Commission seeking to expand its power to examine big companies' acquisitions of start-ups aimed at shutting down nascent rivals, with the focus on tech and pharma deals.
On 13 July 2022, the GC confirmed the Commission’s jurisdiction to review the proposed acquisition of Grail by Illumina following the decision of the Commission to accept referral requests from NCAs. As per the principle of the protection of legitimate expectations and legal certainty, the GC held that it is not possible for Illumina to rely on the principle as it is on the party to establish that they received precise, unconditional and consistent assurances, originating from authorised, reliable sources, such as to lead them to entertain well-founded expectations. Illumina failed to demonstrate the above circumstances.
Illumina has already announced it will appeal the GC’s ruling.
Implications Of The Ruling For The EU and Especially Cyprus
The GC ruling will have far-reaching implications that are still remained to be seen. This ruling will likely encourage the Commission to utilise its newly recalibrated Article 22 referral mechanism more frequently to review certain transactions that fall outside the traditional thresholds of the EUMR by arguing that the transaction affects trade between Member States and threatens to significantly affect competition. Thus, the Commission has this trump card up its sleeve where it can utilise without necessarily providing evidence at an initial stage.
The industry will have to readjust to the status quo, merging parties will have to factor in carefully and at the outset the possibility of an Article 22 referral, closing conditions and risk allocation provisions in the acquisition documents.
In order to avoid a floodgates phenomenon and regulatory uncertainty, it is anticipated that Article 22 will only be utilised for specific cases and under very specific conditions.
It is entirely possible for the Commission for the Protection of Competition (hereafter “CPC”) of Cyprus to trigger in the future an Article 22 referral mechanism, but as it happened in this case it will most certainly be along with other NCAs. Triggering such mechanism requires great cooperation between the NCAs and constant vigilance.
In the national landscape, there is a great interest from overseas players wanting to acquire national businesses active in the pharmaceutical and ancillary sectors. Just this current year alone, acquisition value in those markets reached €170 million.