CN09 - FCO departs from EC guidance on Article 22 referrals in Facebook-Kustomer

On 23 July 2021 the German competition authority ("FCO") announced that it shall examine whether Facebook's acquisition of Kustomer falls under the German merger control regime. The deal is currently being assessed by the European Commission upon referral requests by inter alia the Austrian competition authority. The FCO did not join such a referral because the FCO's policy is to refer cases if they would be notifiable under national competition law – which in this case still needs to be clarified. The case raises interesting practice points as the FCO has apparently chosen not to apply the European Commission's guidance on the application of the referral mechanism from March 2021. 

Key takeaways

• The German FCO is currently examining ex officio whether Facebook's acquisition of Kustomer falls under the EUR 400 million transaction value threshold – a threshold introduced to capture transactions where a large buyer acquires a target with no/little German turnover but with significant activities and thus has competitive potential in Germany.
• The FCO did not join the request to refer the case to the European Commission pursuant to Article 22 EUMR as submitted by other competition authorities (such as Austria) arguing that it can only do so if the national notification thresholds are met – which still needs to be clarified in the present case.
• However, under the European Commission's revised Guidance on Article 22 EUMR, a transaction which (i) affects trade between Member States and (ii) threatens to significantly affect competition within the territory of a Member State or States may be referred for review to the European Commission even if the transaction falls below national merger thresholds.
• It remains to be seen whether and how the German FCO's alternative approach may have an impact on the referral practise of other competition authorities in the EU.
• The referral issue is already proving controversial. Illumina filed an action against the European Commission before the General Court claiming that the referral of the Illumina/Grail case to the European Commission was illegal and thus the European Commission has no competence to review the deal (which the European Commission is reviewing in an in-depth Phase II investigation).

The FCO is investigating ex officio whether Facebook's acquisition of Kustomer, a provider of a cloud-based customer management platform for business customers, is subject to German merger control. In particular, the FCO is assessing whether the acquisition falls under the EUR 400 million transaction value threshold intended to capture acquisitions by large companies of smaller companies with no or little German turnover but with significant activities and thus a competitive potential in Germany. 

In parallel, the transaction is already being examined by the European Commission in Phase II after being referred to it by the Austrian competition authority under Article 22 EU Merger Regulation ("EUMR"). Nine other EU Member States also joined the referral. As a consequence the referring Member States will not apply their own national merger control regimes to the transaction.

The case highlights significant differences in the application of the Article 22 EUMR referral mechanism. 

Germany did not join the referral because under the FCO's general practice a referral "requires a transaction to be notifiable under national competition law", and that point on notifiability is still being clarified in this case. The FCO's approach contrasts with the revised Guidance on Article 22 EUMR issued by the European Commission in March 2021 (the "Guidelines"). Those new Guidelines invite national competition authorities to refer deals to the Commission when they could impact competition in the single market "even if they do not meet national notification thresholds". 

That aspect of the European Commission's approach to Article 22 EUMR referrals under the revised Guidelines had sought to ensure that transactions with a significant impact on competition in the EU internal market do not escape a merger control review – in particular in the digital and pharma sectors, where often targets do not meet the relevant national filing thresholds. 

It is already proving controversial. 

In the Illumina/Grail case, the first merger referred to the European Commission following adoption of the revised Guidelines (see our May 2021 Newsletter), Illumina has asked the General Court to annul the European Commission's decision to investigate the deal. Illumina argues inter alia that the European Commission failed to recognise that Article 22 EUMR referrals should be exceptional and construed narrowly and that the change of policy of the European Commission is contrary to Illumina's legitimate expectations and legal certainty given that Commissioner Vestager in September 2020 announced that there would be a change only after the issuance of the new Guidelines. Yet the invitation letter by which the European Commission invited national competition authorities in Member States to refer the Illumina/Grail transaction to it was sent in February 2021 (i.e. prior to the publication of the new Guidelines). On this basis, Illumina holds that the European Commission does not have competence to review the case since the referring states had no jurisdiction under national merger control rules. Since in August 2021, Illumina publicly announced that it had decided to complete its acquisition of Grail, while the European Commission's (in-depth Phase II) review of the deal is still pending, the European Commission opened a proceeding against Illumina for a possible breach of the stand-still obligation.

It remains to be seen how the General Court will decide on the legality of the Commission's approach in the Illumina/Grail case and whether and how Germany's alternative approach may have an impact on the practise of other competition agencies in the EU. The president of the FCO, Dr Mundt, announced that should it turn out that the Facebook/Kustomer deal is subject to a notification under German merger control, the FCO would request Facebook to submit the respective documents for examination immediately (i.e. in parallel to the investigation at EU level).

With thanks to Lukas Oldach (intern in the Munich office) of Ashurst for his contribution.