Gun-jumping: regulators setting their sights on deal-making in Europe and in Ireland

In our note of July 2022 we considered European developments regarding the $8b acquisition of GRAIL Inc. (Grail) by Illumina Inc (Illumina), both US headquartered businesses, and possible impacts of the decision on competition law in Ireland.

On 12 July 2023, the Commission announced that it has fined Illumina and Grail approximately €432 million and €1,000 respectively, for implementing their proposed merger before approval by the Commission. This is in breach of EU merger control rules which impose a standstill obligation - so-called ‘gun-jumping’. These fines are noteworthy both for being: (i) the highest ever imposed by the Commission set at the maximum statutory level available of 10% of turnover (Illumina); and (ii) the first time the Commission has ever fined a target for gun-jumping (Grail).

Background

Article 22 of the EU Merger Regulations (EUMR) allows for Member States to request the Commission to examine any acquisition that does not have an EU dimension but: (i) affects trade between Member States and (ii) threatens to significantly affect competition within the territory of the Member State (or Member States) making the request.

Following a referral request from six Member States  the Commission opened an in-depth investigation into the Illumina/Grail transaction on 22 July 2021. On 6 September 2022, the Commission blocked the transaction over concerns that it would have significant anticompetitive effects, stifling innovation and reducing choice in the emerging market for blood-based early cancer detection tests, regardless of the fact that neither party had significant activities in the EU.

In August 2021 while the Commission's review was still ongoing, Illumina publicly announced that it had completed its acquisition of Grail. On this date, the parties executed all documents needed to complete the transaction and Grail merged with two wholly-owned subsidiaries of Illumina.

Article 7 of the EUMR requires merging companies not to implement mergers which are under investigation until approved by the Commission (a so-called "standstill obligation"). This obligation is seen as a cornerstone of the European merger control system, enabling the Commission to carry-out its supervisory role before structural changes irreparably modify the competitive landscape. Under the EUMR the Commission can impose fines of up to 10% of aggregated turnover of companies, which intentionally or negligently breach the standstill obligation.

Record fines

In setting the amount of the fines, the Commission considered the gravity of the infringement as well as the existence of mitigating or aggravating circumstances. Fines should also ensure a sufficiently dissuasive and deterrent effect. In fining Illumina and Grail, the Commission found that:

  • Illumina strategically weighed up the risk of a gun-jumping fine against the risk of having to pay a high break-up fee in the event the deal was ultimately prohibited factoring in the potential profits it could obtain by jumping the gun, even if it were ultimately forced to divest Grail. It then intentionally decided to proceed and to close the deal while the Commission was still investigating the transaction that was ultimately prohibited
  • Illumina’s conduct amounted to “a very serious infringement” which required the imposition of “a proportionate fine, with the aim of deterring such conduct”
  • a fine was subject to a statutory limit of 10% of Illumina's turnover (approximately €432 million). Citing Illumina’s “deliberate strategy”, the Commission chose to impose this maximum available amount
  • it took due account of the (limited) hold separate measures adopted by the parties as a mitigating circumstance but did not find that this should lessen the amount of the fine
  • Grail, despite being aware that the Commission’s investigation was on-going “played an active role in the infringement” by taking legal steps to enable the completion of the transaction. This led the Commission to impose a symbolic fine on Grail, the first time it imposed a fine for gun-jumping on a target company

With its imposition of this record fine the Commission confirmed its view that Illumina and Grail intentionally breached the standstill obligation, and its willingness to assert its authority to enforce its powers in respect of deal-making activity.

Competition regulatory landscape in Ireland

The Competition (Amendment) Act 2022 (Act) (signed into law in June 2022 and awaiting commencement) empowers the Irish Competition and Consumer Protection Commission, the CCPC, to "require" parties to a below threshold deal to notify the CCPC if it thinks that the deal "may... have an effect on competition" in Ireland. This requirement to notify the CCPC can apply whether or not the deal has already been put into effect.

The similarities between this provision and the Commission’s approach to Article 22 EUMR represents a degree of alignment between Dublin and Brussels in terms of merger policy, and a stricter regime for businesses both at a national and an EU level.

Further, the Act increases the CCPC’s powers. It allows the CCPC to impose interim measures in respect of a transaction that has been notified or “called in” for review where it considers such measures are appropriate due to the risk that the transaction may have an effect on markets for goods or services in Ireland. Measures include requiring that parties refrain from taking steps towards carrying out the transaction such as exchanging confidential information. The offence of gun-jumping under the Competition Act 2002 (as amended) has been updated so that parties which have either implemented a notifiable transaction without making a notification to the CCPC or implemented a notified transaction before CCPC clearance will be guilty of a criminal offence of gun-jumping. Parties guilty of this offence can receive a headline fine of up to €250,000 and an additional daily fine of €25,000 for each day the offence continues.

It remains to be seen how the Commission's Article 22 powers and the CCPC's new powers to require notification of sub-threshold deals will work in practice, but recent events suggest that regulators’ willingness to intercede in transactions is expanding, both in Europe and at home.

We will review the decision when available and continue to monitor developments in this area.

For more information in relation to this topic, please contact Michelle McLoughlin, Knowledge Consultant, Liam Murphy, Senior Knowledge Lawyer,  Anne O’Neill, Senior Knowledge Executive or any other member of ALG’s Corporate and M&A team.

Date published: 20 July 2023