On March 16, 2023, the Court of the European Union issued an epoch-making decision in the field of economic concentration (case Towercast)[1] which fundamentally changes the structure of analysis of M&A transactions in the European Union. This decision follows another surprising approach by the European Commission regarding the ability of a Member State to notify the Commission of a transaction which is not notifiable at national level but which may have a significant effect on competition. Reflecting the much more active role that the European Commission wants to play in this area in the context of the debate in recent years, these developments will significantly affect the confidence of parties in M&A transactions.

Reason Towercast and the impact on M&A operations – the sword of Damocles?

The first aspect discussed in any merger and acquisition agreement is the need to notify the Competition Council/European Commission or other national authorities of the transaction related, among other things, to the turnover of the acquired entity and the acquiring entity. After it is established that the turnover of the relevant economic entities is lower than the threshold values ​​provided by the law, the agreement can be implemented without problems from a competitive point of view, without the need to involve the competent authorities.

Reason Towercast fundamentally changes this perspective and allows for the first time[2] national authorities – in our case the Competition Council – to investigate a non-notifiable transaction from the point of view of a violation of competition: abuse of a dominant position. In other words, even if the parties establish that the transaction does not meet the notification thresholds, but the buyer is in a dominant position in the relevant market, the Competition Council can open an abuse of dominance investigation even after completion of the agreement. Fines in this area can be up to 10% of global turnover, so the transaction can not only be canceled, but probably a large fine. In addition, once an abuse of a dominant position has been established, third parties who consider themselves injured may seek compensation in national courts.

How is dominance defined? Analysis deals with the definition of the relevant market, an economic concept used to identify the competitive constraints faced by companies. On a case-by-case basis, depending on objective criteria such as substitutability of products/services, the market may be defined to contain 3 or 30 companies – otherwise the rule is that the market must be defined according to the circumstances applicable to moment of agreement/breach. More precisely, the fact that a company believes through the prism of market research that it has 30 competitors and a small market share in the broad sense does not automatically exclude the existence of dominance.

However, the Court noted that not every acquisition made by a dominant company would be considered abusive, but only those that significantly distort market competition. For example, in a case Towercast, the dominant company acquired its only competitor in the relevant market, which significantly affected the downstream and upstream markets, where the company still had significant market power. In a competitively healthy market, competition manifests itself through mutual constraints between competitors – price, quality, production method, distribution network, etc. From this point of view, the Court clarifies that a relevant distortion of competition from the point of view of abuse of a dominant position will exist if, in fact, as a result of the acquisition, only participants remain on the market dependent the behavior of the dominant company. Accordingly, an abuse only occurs if the dominant company can behave completely independently of the rest of the companies in the market, which are no longer able to increase the competitive constraints (as would be normal in a healthy market).[3]

The consequences of this decision were immediately visible – on March 21, 2023, the Belgian antimonopoly authority opened an investigation into possible abuse of a dominant position (the acquisition of Edpnet by the telecommunications giant Proximus).

Mergers and acquisitions will undoubtedly suffer in terms of legal certainty, as parties will have to consider this risk from the outset of any acquisition discussions, no matter how small the acquired company, and for a long time after the deal is completed. At the same time, it is not clear whether a national authority of another Member State can open an investigation into the abuse of a dominant position, even if the Competition Council has approved it in accordance with national rules, which would further increase the degree of uncertainty in the market. .

Article 22 and reason Illumina/Grail[4]

The decision has come Towercast takes place after a paradigm shift in the analysis of economic concentration announced in 2021 by the European Commission,[5] in the context of growing concern about the so-called killer acquisitions due to which the company eliminates its (potential) competitors by acquiring them.

In the new approach, Article 22 of the European Regulation on economic concentrations[6] allows the Commission to review transactions that do not meet a Member State’s national notification thresholds if they (1) affect trade between Member States; and (2) threatens to significantly affect competition within the territory of the Member State. The new approach also allows the analysis of transactions that pose other types of risks to intra-EU trade that do not meet the national notification thresholds.

Similar to the dominant position analysis, Article 22 allows for review ex post operation, therefore after its completion. It has already been applied in the case Illumina/Grail regarding a purchase between two American companies. Following notification by several Member States, the Commission opened an investigation jumping from a cannon – carrying out the operation before obtaining consent. Although this decision was appealed, the General Court confirmed the Commission’s authority to review the transaction. Read the full article and comment on contributors.ro