Antitrust in focus - July 2023

European Commission’s record gun-jumping fine on Illumina serves as warning to merging parties

The European Commission (EC) has imposed a fine of around EUR432 million on genomics company Illumina for closing its acquisition of blood-based cancer test developer GRAIL before the conclusion of the EC’s merger control investigation into the transaction. GRAIL was fined EUR1,000.

Illumina’s fine is the highest ever imposed by the EC for breach of procedural rules under the EU Merger Regulation (EUMR). It is almost four times higher than the EUR124.5m gun-jumping fine imposed on Altice in 2018.

But it was not unexpected.

Illumina disputed that the EC had jurisdiction to assess its planned acquisition of GRAIL. It challenged the EC’s revised policy on Article 22 referrals, which allows member state antitrust authorities to refer to it for review transactions that do not meet EU or national merger control thresholds (see our commentary on this aspect of the case).

In August 2021, while the EC’s in-depth investigation into the transaction was ongoing, Illumina publicly announced that it had completed the deal. Unsurprisingly, the EC launched an investigation into whether Illumina breached the EUMR’s “standstill” obligation, which prevents merging parties from implementing their transaction prior to receiving EC approval.

Shortly after, the EC adopted interim measures aimed at preventing harm to competition pending the outcome of the EC’s merger review. The measures required GRAIL to be kept separate from Illumina (with Illumina providing funds for GRAIL’s operation and development), prohibited the sharing of confidential information and obliged the parties to deal with each other on arm’s length terms. This was the first time the EC had adopted interim measures in a gun-jumping scenario. The parties have appealed.

The EC has now concluded its gun-jumping probe. It found that Illumina and GRAIL “knowingly and intentionally” breached the standstill obligation. This was, said the EC, an “unprecedented and very serious infringement undermining the effective functioning of the EU merger control system”. In particular, the authority took issue with the fact that Illumina had strategically weighed up the risk of a gun-jumping fine against the risk of having to pay a high break-up fee (USD300m) in the event that the deal failed.

The case is unusual on its facts. It is the first (and only) time that merging parties have intentionally completed a transaction during an ongoing EC merger review. We don’t expect to see many other cases with the same fact pattern.

However, for merging parties, the fine is still a clear warning of the risks of breaching procedural merger control rules. It shows the EC’s willingness to use the full extent of its powers. In its press release the EC suggests that it initially set a higher fine, but was ultimately subject to the statutory limit of 10% of Illumina’s global turnover and so had to impose an amount of around EUR432m.

The EUR1,000 fine on GRAIL is also important. The EC notes it was only symbolic given that this is the first time it has imposed a gun-jumping fine on a target company. But the authority made clear its findings that GRAIL played an active role in the infringement. In future, target companies knowingly involved in any breach may well face much higher penalties.

The saga of this case continues. In September 2022 the EC blocked the transaction, concluding it would harm competition, stifle innovation and reduce choice in the emerging market for blood-based early cancer detection tests. This in itself was a landmark decision, marking the EC’s first prohibition based solely on vertical concerns and the first time the EC has blocked a below-threshold merger.

The parties’ appeal of the prohibition decision is pending, as is their appeal of the interim measures decision and the European Court of Justice’s ruling on the EC’s revised Article 22 policy. Even the gun-jumping aspects of the case are not over – Illumina has announced it will appeal the fine.

In the meantime, the parties await a final EC decision on how the deal should be unwound. We will keep you updated as developments unfold.

EU Foreign Subsidies Regulation takes effect with procedural rules clarified

Most of the provisions of the EU Foreign Subsidies Regulation (FSR) took effect this month. The European Commission (EC) also adopted its long-awaited implementing regulation (IR) – containing the notification forms and important procedural rules – as well as an updated Q&A document.

As a reminder, the regime enables the EC to tackle foreign subsidies that it concludes will distort competition in the EU internal market. It introduces new suspensory notification requirements (applying from 12 October 2023) for companies participating in certain M&A transactions, joint ventures and public/utilities tenders. The FSR also enables the EC (from 12 July 2023) to investigate potentially distortive foreign subsidies on its own initiative.

If the EC finds a distortive foreign subsidy following either a review of a transaction/public procurement procedure or an own-initiative investigation, the EC has wide powers to impose redressive measures, including blocking deals or tender awards. For more on how the regime will work, see our previous alert.

Our latest commentary considers the newly finalised IR.

We explain how the final version of the IR limits some of the information disclosures required by the notification forms, as compared to the far-reaching requirements of the original draft. In particular, we discuss when investment funds and private equity firms will be able to take advantage of a carve-out from certain disclosure obligations.

We also consider the processes for (i) requesting waivers from information requirements, and (ii) pre-notification discussions with the EC, which will in principle be available from September 2023.

Finally, our alert suggests steps that businesses should be taking now to ensure compliance with the new regime. Read it here.

New U.S. merger guidelines rewrite framework for reviewing M&A transactions

After many months of anticipation, the Federal Trade Commission and Department of Justice Antitrust Division have finally issued revised draft merger guidelines.

The guidelines are ground-breaking. While the agencies claim that they “build upon, expand and clarify” previous versions, in fact the revisions effectively amount to a rewrite of how the agencies will review transactions under the U.S. merger control rules and what they will demand of notifying parties. However, this does not change the legal standards applied by courts. The agencies will need to continue to prove a substantial lessening of competition in line with existing judicial precedent.

Key points include:

• A presumption of illegality for mergers creating or involving a firm with a market share of over 30%.
• Merging guidance on vertical and horizontal mergers, putting non-horizontal deals on the same level as transactions between rivals.
• A focus on a merger’s effects on labour markets, as well as a spotlight on serial acquisitions and minority stake deals.

The draft guidelines now face a 60-day public comment period, after which they will be finalised.

Read more about the new guidelines in our alert.

This is the second major U.S. merger control reform proposal in a month.

In our last edition of Antitrust in focus, we discussed the planned overhaul of the U.S. merger control notification form, announced by the U.S. antitrust agencies in June. The proposed changes – the most significant to the U.S. merger review process in four decades – will dramatically expand the scope of information that merging parties will need to submit. You can read our more detailed briefing on the proposals and their implications here.

UK government publishes second annual report on the National Security and Investment Act

The UK government’s latest annual report on activity under the National Security and Investment Act (NSIA) – the UK’s investment screening mechanism – is the first to cover a full calendar year. It relates to the period 1 April 2022 to 31 March 2023 and sets out key statistics relating to the cases reviewed under the regime.

Key takeaways are as follows:

• 866 notifications were received during the period, fewer than the government’s initial prediction. Unsurprisingly, the vast majority (77%) were mandatory filings.
• 65 deals were called-in for an in-depth review – including ten that were not notified – again, lower than government estimations.
• 15 of those 65 ended in government intervention – five were prohibited (including some where the acquirer was forced to sell off the entire target business) and ten were cleared subject to conditions.
• On timing, 93% of deals notified were cleared within 30 working days, with in-depth assessments resulting in clearance taking a further 25 working days on average, or 81 working days where conditions were imposed.
• Chinese investments attracted the most scrutiny and the highest levels of intervention – 42% of called-in deals were related to China.
• Mandatory notifications were focused on the defence sector (47%), but the government intervened in deals across a range of sectors, including military and dual use, communications, defence, energy, computing hardware and advanced materials.
• No penalties were issued during the period, and no criminal prosecutions were concluded.

Overall, the government believes the regime is working well. It describes it as “light touch” and “proportionate”. But the government wants to keep an open dialogue with businesses to look at how the system can be improved – something to be welcomed given that, in our experience, there are a number of underlying issues with its operation.

For more on the data (and our views on what it means), see our alert.

Significant reforms to German antitrust law include new power for FCO to impose remedies following sector inquiries

Likely in late September 2023, substantial amendments to the German Act Against Restraints of Competition will come into effect. The reforms introduce three key changes:

1. Following completion of a sector inquiry, a new competition tool empowers the Federal Cartel Office (FCO) to impose remedies, including (as a last resort) divestitures, to address “significant and continuous disruptions of competition”. This tool will be available irrespective of the addressee’s compliance with antitrust law. In addition, the threshold for the FCO to be able to require individual undertakings to notify future mergers may be substantially lowered and therefore bring M&A in small and regional markets under the FCO’s scrutiny.
2. In relation to the EU’s Digital Markets Act (DMA), provisions empower the FCO to conduct investigations and support the European Commission’s own enforcement of the rules. The amendments also establish the procedural and substantive rules for private enforcement of the DMA in Germany.
3. The FCO’s ability to seek public disgorgement is improved through a new rebuttable presumption that anti-competitive profits amount to 1% of an undertaking’s sales of goods or services affected by the infringement.

Our alert takes you through each of the reforms in more detail and discusses how they could impact public and/or private enforcement. It is worth noting that a 12th amendment to the antitrust law is already underway, which will reportedly address ESG and private enforcement aspects (although no draft has so far become public).

China’s SAMR consults on draft standard essential patent antitrust guideline

At the end of last month, China’s State Administration for Market Regulation (SAMR) published a draft antitrust guideline for standard essential patents (SEPs).

The draft guideline covers a number of antitrust issues relating to SEPs. It follows the principles underlying China’s Anti-Monopoly Law and previous SAMR and court precedents.

The key highlights include:

1. information disclosure requirements in the standard setting process
2. the licensing framework based on fair, reasonable, and non-discriminatory (FRAND) terms, in particular the steps to follow for good-faith negotiation
3. guidance for assessing abuse of dominant position concerning SEPs including licensing SEPs at unfairly high prices and imposing unreasonable trading conditions
4. guidelines on monopoly agreements, including patent pools and information exchange
5. factors SAMR should consider when reviewing mergers involving SEPs

The guideline reflects SAMR’s increased focus on the potential abuse of SEPs. Future SEP-related antitrust enforcement activity may centre on the information communication technology sector as well as emerging sectors such as the automotive industry (although the draft guideline does not address certain controversial SEP licensing issues in that industry).

The draft also fits into the wider global focus on SEPs. In April this year, for example, the European Commission published a proposal for a regulation on SEPs. It has also addressed some antitrust issues relating to SEPs in its recently adopted guidelines on horizontal cooperation agreements.

The draft guideline is open for public comment until 29 July. Read more about it in our alert. 

Australian tribunal upholds prohibition of Telstra/TPG network sharing deal

The Australian Competition Tribunal has confirmed the decision of the Australian Competition and Consumer Commission (ACCC) to block a network sharing agreement between rivals Telstra and TPG Telecom.

Early in 2022, the telecoms companies reached three separate agreements to share mobile infrastructure and spectrum in certain regional areas (the Regional Coverage Zone) for a ten-year period.

Under a spectrum authorisation agreement, TPG would allow Telstra to operate radio communication devices and use its 4G and 5G spectrum licences in the Regional Coverage Zone (and beyond) for the purposes of its radio access network. TPG also committed in a second agreement to transferring 169 of its mobile sites in the Regional Coverage Zone to Telstra and decommissioning the rest. In return, under a third agreement, Telstra would use its radio access network to supply TPG with 4G and 5G services.

The ACCC refused to authorise the deal. The authority recognised that the arrangements would give rise to some benefits by improving TPG’s network coverage and lead to cost savings for the companies. However, on balance it concluded that the arrangements would likely result in less competition in the longer term, leaving Australian consumers worse off in terms of price and regional coverage, and negatively impacting incentives to innovate and improve networks. The ACCC also found that the deal would entrench Telstra’s dominant position as the strongest mobile network operator in Australia. It rejected the remedies offered by the parties.

The Tribunal has now upheld the prohibition decision on appeal, setting out its findings in a summary of reasons.

The Tribunal found that the spectrum authorisation agreement would provide Telstra with commercial and competitive benefits that would entrench its position in both the retail and wholesale segments of the market. This would undermine the incentives of the parties’ main rival Optus to invest in 5G technology. Over time, it would weaken the competitive constraints on Telstra, leading to a gap in quality and increased prices and margins.

The ACCC has welcomed the Tribunal’s reasoning. The case marks the first review by the Tribunal of a merger authorisation under revised Australian merger control rules which took effect in 2017. The ACCC notes that the clarification of approach will be helpful in future applications for authorisation.

For telecoms companies wishing to enter into network sharing agreements, the outcome of the case may at first sight give cause for concern. However, the Tribunal is clear that its “determination should not be understood as suggesting that network sharing arrangements…would always have the effect of substantially lessening competition or give rise to net public detriments”.

In fact, the Tribunal goes even further, stating that there are “strong commercial and economic incentives” for the mobile network operators to share network infrastructure in regional areas, and where “appropriately structured”, such arrangements can deliver efficiency benefits without harming competition. It will be interesting to see if the Tribunal’s full decision adds any more guidance to these statements.

Network sharing agreements have received plenty of attention from antitrust authorities over the years, which have sought to strike a balance between the efficiencies that network sharing can generate and the impact it may have on competition in infrastructure investment and in wholesale and/or retail markets.

Recently, in the EU, the European Commission (EC) has published specific