Vision

Competitor and buyer can now arm themselves against ‘killer acquisitions’

What to do when a dominant competitor takes over a promising start-up

Until recently, competitors and customers were left empty-handed in the case of a so-called ‘killer acquisition’. These are takeovers where a large, established company takes over a smaller, innovative and start-up competitor with the aim or effect of stifling innovation and/or eliminating potential competition. The reason for this was that many of these acquisitions do not have to be notified to a competition authority because the turnover thresholds are not met. Killer acquisitions could therefore not be assessed by the national competition authority or the European Commission. This has now changed.

On 26 March 2021, the Commission published new guidance on the application of the referral mechanism of Article 22 of the European Merger Regulation (“EU Regulation”). In addition to concentrations which are subject to notification to the national authorities, Article 22 of the EU Regulation also allows concentrations which are not subject to notification to be referred to the Commission for assessment.

The Commission is particularly interested in referrals of concentrations where the turnover of the parties does not accurately reflect their current or future potential. In practice, this will especially concern mergers involving new competitors and innovative companies. This will occur, inter alia, in digital, pharmaceutical, biotechnology and certain industrial sectors. The new policy is expected to have less impact on acquisitions in more traditional markets.

Background

On 26 March 2021, the Commission announced a major reform of the EU regulation. One of these major changes is a new policy on the application of Article 22 of the EU Regulation.

Old and new policy Article 22 EU Regulation

Article 22 of the EU Regulation allows one or more national competition authorities to refer a concentration to the Commission for examination when it may significantly affect competition in the internal market. The article dates back to 1989 when many Member States did not yet have a national merger control regime and therefore still had the possibility to have potentially anti-competitive concentrations examined by the Commission. Article 22 is also called the ‘Dutch clause‘ because it was introduced at the request of the Netherlands, which did not have merger control at that time. The article explicitly refers to concentrations that do not require notification. However, after almost all Member States had introduced a merger control regime, the importance of Article 22 significantly declined. It was even the Commission’s policy to discourage referrals of non-notifiable concentrations on the grounds that the concentrations would generally not significantly affect competition in the internal market.

The Commission’s new policy constitutes a major shift in the application of Article 22 of the EU regulation. The Commission now encourages Member States to refer certain concentrations to the Commission, even in cases where the referring Member State does not have jurisdiction to assess the concentration under the turnover thresholds. The Commission is free to decide whether to accept a referral request.

The new policy did not just come out of thin air. There had been a desire for some time by competition authorities to be able to assess killer acquisitions. The discussion was sparked in 2014 by Facebook’s acquisition of Whatsapp. The acquisition was not subject to notification in many member states because of Whatsapp’s low turnover. However, the acquisition was ultimately assessed by the European Commission because the acquisition was notifiable in three member states and was therefore qualified for a referral under Article 4(5) of the EU Regulation. The Commission approved the merger. This case was one of the reasons for Germany and Austria to adopt new laws introducing an additional notification threshold based on the value of the transaction. The Dutch Consumer and Market Authority (“ACM”), the Luxembourg Conseil de la Conucurrence and the Belgian Competition Authority (“BMA”) wrote a Benelux memorandum on the supervision of competition in the digital sector. This memorandum argued for a change in the notification thresholds, for example by introducing an additional threshold based on market power and/or the value of the transaction.

Test case: Illumina-Grail

Shortly after the Commission’s communication on the reforms of the EU merger control regime, it became known that the acquisition of Grail by Illumina was a test case for the application of the Commission’s new policy. For the first time since 1999, an Article 22 request was made without any of the expanding Member States having jurisdiction to assess the merger.

Illumina is one of the largest players in the world in the field of gene sequencing. Grail is a young company developing a blood test to detect about 50 types of cancer at an early stage by DNA sequencing. The company has no turnover in the EU, which means that, in principle, the concentration does not need to be notified to the Commission or the national authorities of the EU Member States. However, the acquisition had to be notified to the US Federal Trade Commission and is under attack there.

In February, the Commission expressed concerns about the potentially anti-competitive effects of the proposed merger in the field of cancer tests and encouraged national competition authorities to file a referral request in line with the new policy. The French Autorité de la concurrence has responded to the call and the ACM, BMA, and Greece Competition Commission supported the request. The acquisition was not subject to notification in any of those Member States. The Commission has accepted the request and will assess the proposed acquisition.

The referral request has caused quite a stir. Illumina brought lawsuits against the request in the Netherlands and France, but lost both cases. The case will undoubtedly be contested before the Court of Justice of the European Union. The new policy leads to much legal uncertainty in mergers and acquisitions in which a dominant competitor takes over a promising start-up. It is therefore important to take this into account during the (contract)negotiations of the acquisition. For example, when drafting the suspensive conditions in the contract, one should take into account the possibility of a referral to the Commission, even if the competition authorities in the Member States concerned do not have the power to assess the concentration themselves. On the other hand, the new policy also provides more opportunities for third-party stakeholders, such as competitors and purchasers, to complain.

What to do in case of a killer acquisition

Is a dominant competitor or supplier of yours taking over a promising start-up? Then take the following actions.

  1. Consider whether the turnover of the start-up gives an accurate view of its current or future potential. It may be that a start-up has little or no turnover yet, but is of great importance to the competition in the market or will become so in the near future. This can, among others, occur in the following situations:
    • the target is an important innovator or conducts potentially important research
    • the target is an important (potential) competitor
    • the target has access to important assets (such as raw materials, infrastructure, data or intellectual property rights)
  1. Contact as soon as possible the ACM and/or other Member States where the dominant competitor is active. The competition authority has a period of 15 working days to refer a concentration to the European Commission after the transaction has been ‘made known to the Member State concerned’. The period only begins to run when sufficient information is provided tot he Member State to make a preliminary assessment as to whether the criteria of Article 22 of the EU Regulation are met. Member States seem to have a fairly wide discretion in determining when the deadline starts running.
  1. Explain why the concentration affects trade between Member States. This is, for instance, the case if the dominant competitor is active in several Member States and/or (potential) customers are located in different Member States.
  1. Explain also why there is a real risk that the concentration will significantly impede competition within the territory of the Member State(s) concerned. A real risk exists where, as a result of the acquisition:
    • an important (potential) competitor is eliminated;
    • there is a merger between two important innovative companies;
    • competitors have fewer incentives or opportunities to compete because, among other things, market entry or expansion becomes difficult or even impossible;
    • there is an incentive or possibility for a strong market position in one market to be leveraged into another market through tying, bundling or other exclusionary practices.
  1. Contact the Commission. The Commission may encourage Member States to refer the acquisition.

Bas Braeken, Lara Elzas and Jade Versteeg

Vision

Competition law in vertical relationships: killjoy or life preserver?

In almost every supply chain, agreements are concluded between suppliers and buyers to make the cooperation more efficient. Although vertical agreements are in many cases exempted by the Vertical Block Exemption Regulation (“VBER”) from the cartel prohibition under Article 101 of the Treaty on the Functioning of the European Union (“TFEU”) and Article 6 of the Dutch Competition Act (“Mw”), not every restriction is permitted. After all, the VBER does not apply to a number of hardcore restrictions of competition, or where market shares exceed 30%. The distinction between permitted and prohibited restrictions is not always clear to companies. This is evident, for example, from a survey conducted by the Benelux Secretariat in which at least 89% of the companies questioned indicated that they had been confronted with prohibited territorial restrictions. This blog provides an overview of enforcement and case law from 2019 and 2020, and discusses the most recent developments.

Enforcement by ACM

In September 2020, the Authority for Consumers and Markets (“ACM”) announced that it had completed its investigation into drug manufacturer AbbVie. From the end of 2018, AbbVie offered significant discounts to hospitals for the rheumatology drug Humira. The patent on the active substance in Humira expired in October 2018, allowing other manufacturers to market a generic product. To prevent its market position from declining as a result thereof, Abbvie gave discounts to hospitals if they purchased Humira for all their patients. ACM considered that AbbVie thereby factually imposed an exclusive purchasing obligation on hospitals which limited competition for new products. AbbVie agreed not to include exclusive purchasing clauses in its agreements with hospitals anymore.

Case law on vertical agreements

In March 2019, the Court of Appeal of Arnhem-Leeuwarden ruled on the legality of an exit scheme of Avebe. The articles of association of Avebe, a cooperative of farmers, stipulated that if members wished to transfer the shares to Avebe upon termination of their membership, they had to pay an amount of €681 per share to the cooperative. Six arable farmers did not agree with this withdrawal arrangement. The Court of Appeal agreed with the lower court and ruled that although the exit scheme was a restriction of competition, the scheme did not divide the market or impose price restrictions or other hardcore restrictions and was therefore allowed.

At the end of 2019, the Amsterdam Court of Appeal ruled in an (as yet unpublished) interlocutory judgment in the case between Prijsvrij and Corendon that the termination of an agreement can be an instrument to achieve resale price maintenance. Customers could book trips of Corendon through Prijsvrij, which used discounts on its website on trips of Corendon. The tour operator did not want Prijsvrij to apply such discounts and eventually terminated the agency agreement. Prijsvrij held that this termination should be regarded as a form of prohibited resale price maintenance. The Court of Appeal agreed and considered it proven (for the moment) that the termination of the agreement with Prijsvrij was particularly caused by the discounts offered by Prijsvrij to consumers.*

On 12 June 2020, Advocate General Drijber concluded – with reference to the appeal in cassation against a judgment of the Court of Appeal of The Hague – that a settlement agreement regarding a patent did not violate competition law. Jet Set and Brielle Industrie Services (“BIS“) in this case, both active in the field of cleaning techniques for oil tanks, had reached a settlement which, according to BIS, included a non-compete and non-challenge clause. BIS considered this to be a licence agreement with hardcore restrictions within the meaning of the Technology Transfer Block Exemption Regulation (“TTBER“). However, Advocate General Drijber concluded that it was neither a licence agreement nor a non-compete clause. A prohibition to use Jet Set’s technology follows directly from the patent on that technology. There was therefore no need to review the TTBER or Article 6(3) Mw. Although a non-challenge clause does not generally fall under the TTBER, there was no such clause in this case either. BIS had in fact (successfully) contested the patent. The Supreme Court did not reach a substantive judgment.

A case that did involve vertical licensing agreements concerned a dispute between Dromenjager, the company behind the well-known Woezel & Pip children’s figures, and toy manufacturer International Bon Ton Toys (“IBTT“). IBTT produces and sells toys for which it is allowed to use the Woezel & Pip (figurative) trademark. The licence agreement included a provision requiring approval from Dromenjager for sales by the licensees to a certain number of retailers, including Kruidvat. IBTT wanted to sell its remaining stock of Woezel & Pip products to Kruidvat and complained that the required approval was contrary to competition law. The President of the court reached the provisional conclusion that the approval provision in the licence agreement is a hardcore restriction of competition law. The judgment in summary proceedings has been appealed.**

Vertical agreements also often play an important role in the pharmaceutical market. In its judgment of 8 June 2020, the district court of Midden-Nederland ruled that health insurer Zilveren Kruis was allowed to use a ‘discount policy’ to encourage hospitals to purchase medicines from a manufacturer that was cheaper for Zilveren Kruis. Together with other health insurers, Zilveren Kruis entered into an agreement with Janssen-Cilag, the producer of a medicine for leukaemia (named Imbruvica). On the basis of this agreement, Janssen-Cilag supplied Imbruvica to the hospitals, after which the health insurers received discounts (based on subsequent calculation). Zilveren Kruis applied a mark-up of 49% if hospitals purchased Imbruvica from suppliers other than Janssen-Cilag. Eureco-Pharma, a competitor of Janssen-Cilag, argued that Zilveren Kruis was channelling the Imbruvica offer to Janssen-Cilag through its discount policy. The judge, however, concluded that Zilveren Kruis’ policy is aimed at always paying the lowest price. A competitive company is able to pursue this aim. Moreover, Eureco-Pharma was able to conclude a similar agreement with Zilveren Kruis. Therefore, there was no prohibited vertical restraint.

Finally, at the end of 2020, the Amsterdam District Court ruled that Trek Benelux – supplier of fast, lightweight bicycles – had to continue an agreement with its distributor. Trek Benelux terminated the agreement when the distributor applied a discount on top of the recommended retail price. According to Trek Benelux, such discounts harmed its brand image. The agreement also included an obligation to deliver assembled bicycles to customers. The distributor argued that the recommended retail price is in fact a minimum price and that the obligation to deliver assembled bicycles limits its passive (online) sales. The judge in preliminary relief proceedings ruled in line with the VBER that forcing distributors to adhere to the recommended retail price constitutes a hardcore restriction of competition law. Moreover, no justification had been put forward by Trek Benelux. Therefore, the agreement had to be continued. Trek Benelux was, however, able to demonstrate that the obligation to deliver assembled bicycles was necessary to protect the quality of the bicycles, which requires accurate assembly and adjustment. This provision was not contrary to competition law.

Evaluation of the VBER

The current Regulation, which has been in force since 2010, expires on 31 May 2022. The European Commission (“Commission“) intends to amend the Regulation. In this context, the Commission conducted a review, the findings of which were published on 8 September 2020.

The review shows that the VBER, albeit still relevant, is no longer adequate for application to online sales. After all, the retail sector has changed tremendously in recent years, particularly as a result of digitalisation and the subsequent increase in e-commerce (e-tailing). Entirely new types of restrictions on online sales have been imposed on buyers the past few years, such as a ban on the use of Google AdWords by Guess or the (re)sale of products on online marketplaces by Coty. The Commission has also imposed fines on, amongst others, Asus, Philips and Pioneer for imposing resale price maintenance on their online retailers. The interpretation of the rules on online sales restrictions varies widely in Europe. The new VBER will have to provide clarification. According to the Commission, there is still too much uncertainty about the use and lawfulness of ‘across-platforms parity agreements‘ (APPAs) as well. For the background and recent developments regarding APPAs, please read our earlier blog.

In addition, the collection and use of data has become crucial to the business operations of (online) companies in recent years. In this context, the Commission has also launched an investigation into Amazon. The American company is said to use data of sellers on Amazon – which it obtained in its capacity as a platform – to benefit its sales channel on the same platform. For this ‘self-preferencing’, the Commission previously imposed a fine of more than €2.4 billion on Google, which put its own services above those of competitors in Google’s search results.

Conclusion

Vertical agreements can often benefit from the exemption from the cartel prohibition, but not every restriction can be imposed. Dutch and European case law over the past two years confirms this. It is therefore essential to know what may and may not be included in a vertical relationship. It is, in this regard, of great importance what the new VBER will entail, especially with regard to online sales. However, the clarifications that the Commission seems to have in mind will only apply after May 2022. In any case, both civil and administrative enforcement of competition law in respect of vertical relationships has increased dramatically in recent years. It is likely that this trend will continue in the coming years.

* Bas Braeken and Jade Versteeg assist Prijsvrij in these proceedings.

** Bas Braeken and Timo Hieselaar have (first) become involved on appeal as Dromenjager’s lawyers.

 

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