Illumina’s challenge to the European Commission
The EU Competition Commissioner, Ms. Margrethe Vestager is on fire since it learned that Illumina, an US based producer of innovative screeners and markers for early detection of cancer announced that ”it completed” the acquisition of Grail, a smaller cancer test maker, before receiving a decision on the proposed merger from the European Commission, expected until the end of 2021.
According to Ms. Vestager the announced completion could amount to a breach of the standstill obligation provided by article 7 of Merger Regulation (139/2004), so that an investigation has been opened in this regard. The situation is for sure a first for the European Commission, given that D.G. Competition was already in a phase 2 investigation into the effects of the proposed take over of Grail.
At first sight, the announcement made by Illumina looks as a very daring move, exposing this company with a fine of up to 10% of its aggregate turnover, which would mean some 320 million USD. In principle, the European Commission has an apparently easy task in identifying when a transaction is implemented. So what determined the management of Illumina to take such a route? Is there any reason to make the management confront the European Commission – and the Federal Trade Commission in US, which challenged the merger and the hearings are set for August 24, 2021! – and, consequently, take such a huge risk? The risk is even larger, if we consider that at the end of its phase 2 analysis, the Commission might decide to block the merger or to submitted to cumbersome conditions, so that Illumina would need to roll back the deal or amend it significantly.
I think the decision to complete the acquisition, although risky, is not a gambling bet from Illumina. Looking into the details of this merger and in the history of Illumina and Grail, we see a picture which makes the EU bureaucrats look a little embarrassing.
First, Grail is not a direct competitor of Ilumina. Moreover, it has been spun off from Illumina a couple of years ago, apparently with the intention to attract funding for the line of business operated by Grail, something which happens quite often in the pharma industry and something which eventually happened, with several big names, such as Bill Gate and Jeff Bezos pouring money into the endeavour followed by Grail, that of finding an effective and cheap way to detect cancer in an early phase. For this reason, Illumina speaks of ”re-unification” when referring to the take over of Grail. Before the acquisition, Illumina was also the largest shareholder of Grail, thus having some weight in its business decisions.
Against this background, the idea of a gun-jumping does not look as straight-forward as the European Commission puts it. Illumina could argue that it had some control over Grail before the acquisition, which was rather meant to pay-out the generous investors, such as Bill Gates and Jeff Bezos.
In addition, Illumina disputes that the European Commission has jurisdiction over this acquisition because the thresholds provided by the Merger Regulation are not met in this case. The merger got on the European Commission table following a referral from France, supported by several other Member States, based on article 22 of the Merger Regulation. It is, thus, one of the very few mergers which get before the lenses of the EU competition enforcer forcefully, against the will of the parties. In doing so, the referring Member States and the European Commission applied the new approach regarding such situations, as expressed in the Communication from the Commission Guidance on the application of the referral mechanism set out in Article 22 of the Merger Regulation to certain categories of cases 2021/C 113/01, which was intended to cover mainly the so-called ”killer acquisitions”, especially in the digital area, which could be under the radar of the national competition authorities and of the European Commission.
However, it may be that the European Commission made a wrong choice of flexing its muscles, given, first, the common history and the nature of the relationships between Illumina and Grail and second, the sensitive nature of this business, with Illumina claiming that the bureaucrats at the European Commission delay the launch of some products very valuable for the consumers and which can potentially save lives.
Moreover, the concept of ”implementation” is not defined in the primary legislation and it is not about a formal obligation, but a substantial one, related to the exercise of control and on real market effects. Consequently, as long as there are no market effects and no exercise of control, there is no implementation. Not even article 7 of Regulation (EC) 139/2004 provides what ”implementation” stands for, so that a wide interpretation might not withstand in court. There are legal precedents in this regard but as far as I could check none which would resemble the Illumina-Grail case.
So, this is a most interesting case to follow but I would not bet against Illumina in this matter. It could be a harsh lesson for Ms. Vestager that competition enforcement is sound when details are properly considered and that having power always requires to exercise it wisely.