Life sciences A to Z - J is for jumping the gun

On 12 July 2023, the European Commission ("Commission") announced it had imposed the highest fine ever for gun-jumping of €432 million on Illumina for its pre-emptive completion of its acquisition of GRAIL without Commission approval. This figure represented 10% of Illumina's worldwide turnover – the maximum fine the Commission could charge under the EU Merger Regulation ("EUMR"). Never before had the Commission imposed a fine at this level – its previous fines, including the previous record fine amount, often only amounted to roughly 1% of the parties' aggregated turnover. Even more surprisingly, the Commission even imposed a fine on GRAIL – albeit a symbolic one – in what was the first time a target company had been punished financially for a gun-jumping offence.

Beyond the fine amount, which will undoubtedly grab the headlines, more significant still was the manner in which the Commission conducted its gun-jumping investigation and ultimately reached its decision. In what proved to be a deal of many 'firsts', the transaction also marked the first time the Commission had used its significantly widened jurisdictional powers of review under Article 22 to review a transaction where the target had no EU turnover.¹ As a result, with the Commission clearly not afraid to take a tough stance on gun-jumping, and with the merger activities of large pharmaceutical companies increasingly susceptible to falling under the Commission's microscope, the decision in Illumina/Grail could have significant consequences both for the life sciences sector and deal makers more broadly.

Background

In September 2020, Illumina Inc. ("Illumina"), a US-based world leading biotech company specialising in the development of next generation sequencing ("NGS")², announced it had agreed to acquire GRAIL Inc ("GRAIL") – a US-based oncology firm originally founded by Illumina in 2016 before being spun off in 2017 to obtain external investment – for $7.1 billion. GRAIL had no sales in the EU at all, meaning the deal did not meet any review thresholds under the EUMR or any national merger control rules. The Commission nonetheless accepted a referral request of the deal under the then recently formalised Article 22 procedure by France on 19 April 2021, bringing the transaction under the Commission's microscope and resulting in the opening of an in-depth investigation on 22 July 2021. This automatically triggered Article 7 of the EUMR, imposing a mandatory standstill on the deal and prohibiting the parties from completing the transaction without clearance. Thus, faced with a choice between completing the deal in the face of a standstill obligation, or risking its collapse, Illumina opted to: i) challenge the Commission's jurisdiction over the transaction; and ii) complete the acquisition while offering undertakings to keep the two businesses separate. These undertakings were rejected however, and the Commission started a parallel 'gun-jumping' investigation against the parties for breaching the standstill obligation.

Decision

On 12 July 2023, after a review lasting almost twice as long as the one-year drop dead date in the Illumina/GRAIL Share Purchase Agreement³, the Commission upheld its preliminary views that both parties had intentionally breached this standstill obligation. Illumina was found to have strategically assessed the risk of a gun-jumping fine against the risk of paying a break-up fee if it failed to acquire GRAIL, and to have exerted the decisive influence it held over GRAIL in closing the transaction. Such behaviour was considered to directly undermine the effective functioning of the EU merger control system and carried a fine of up to 10% of the aggregated turnover of the parties.⁴

The Commission's press release explained that any fine for gun-jumping had to be sufficiently dissuasive and carry a deterrent effect. As a reflection of the severity of the infringement, the Commission decided to impose a fine of approximately €432 million on Illumina, which represented the maximum amount permitted and comfortably exceeded the previous record of €124.5 million imposed in 2018 against Altice in relation to its acquisition of PT Portugal⁵. In a second unexpected development, the Commission also opted to impose a symbolic fine of €1,000 on GRAIL for taking legal steps to complete the transaction. Although this was the first instance the Commission had imposed a fine for gun-jumping on a target company, it may prove to be a practice seen more frequently moving forward.

Impact on the life sciences sector?

As mentioned previously in our Q2 2021 Competition Newsletter,⁶ the Illumina/GRAIL deal is the first case accepted by the Commission after the issuance of its Article 22 Guidance.⁷ After the Commission widened the purpose of Article 22 in March 2021, to be captured a merger now simply has to affect trade between Member States and threaten to affect competition within the territory of the Member State or States making the request.

It is clear from the Commission's wide-reaching application of the new Article 22 regime to the Illumina/GRAIL deal, in addition to its other decision-making practices vis-à-vis the transaction – namely, the decision to impose interim measures requiring GRAIL to be kept separate from Illumina and run by an independent hold separate manager⁸, and the ultimate decision to prohibit the merger⁹ - that the life sciences sector can expect increased scrutiny of future merger activity by competition authorities moving forward. Indeed, the Commission's official guidance on the application of Article 22 singles out the pharmaceutical sector as a key area of focus for use of these broad review powers.¹⁰

More importantly, this increased scrutiny of the life sciences sector by competition authorities could call into question the investment model frequently adopted to acquire innovative pharmaceutical start-ups. It is often the case that large pharmaceutical companies look to 'spin off' a start-up subsidiary to obtain external financing, only to then later re-acquire that more developed start-up entity – as was seen in the case of Illumina/GRAIL. Commenting on the Commission's approach to the transaction, the former Chief Executive of Illumina, Francis de Souza made this exact observation, stating that “Venture capitalists know to invest in that model, expecting liquidity through an acquisition. And if you take that away, I think it could impact investment into the space.” Stakeholders in the pharmaceutical sector may therefore need to re-think how they go about growing their innovative start-ups if selling and subsequently re-acquiring is no longer viewed so favourably by the competition authorities.

Practical implications for dealmakers

Illumina has announced it will appeal the Commission's gun-jumping decision and the associated fine it carried. However, it is likely the Commission will continue to use its new Article 22 referral policy to review transactions. Therefore, even where a transaction does not meet a Member States' merger control thresholds, the transaction parties will need to assess the risk of a referral request when contemplating a transaction. This is even more important in a sensitive sector such as the pharma sector, if there is any nexus to the European Union.

Dealmakers should pay particular attention to the negotiation of any SPA involving the acquisition of an innovative start-up by an established market player. Clauses should be included in the transaction documents which make Commission clearance a condition precedent to the transaction in the event an Article 22 referral is made. These clauses will avoid parties being contractually obligated to close a deal if an Article 22 referral is made. The transaction parties should also consider the risk of a referral to the Commission under Article 22 in the transaction timetable by adjusting long-stop dates for those transactions. Even before the document drafting stage, parties should consider the impact that the jurisdictional and substantive risks of an Article 22 referral can have on the valuation of a transaction and ultimately the feasibility of completing the transaction at all.