The Peer-Pressure Probe: European Commission to Review Facebook’s Acquisition of Kustomer Following Requests from Member Nations
On May 12, 2021, the European Commission (“the Commission”) announced that it will review Facebook’s proposed acquisition of customer relationship management (“CRM”) startup, Kustomer. While the deal failed to trigger the Commission’s pre-merger notification thresholds, ten member nations used the established Article 22 referral process to request that the Commission review the transaction and address potential competitive concerns. The Commission’s decision follows its April 2, 2021 announcement that it would review Illumina’s proposed acquisition of GRAIL, another transaction that failed to trigger the Commission’s notification requirements. Together, these cases highlight the Commission’s continued focus on targeting purchases of nascent competitors.
The Proposed Acquisition: How Did We Get Here?
On November 20, 2020, Facebook announced that it had reached an agreement to acquire the New York-based CRM firm Kustomer. Kustomer is a startup company that offers software services to help customer service agents manage their communications with customers. According to the announcement, the acquisition would help businesses streamline communications with customers through Facebook-owned messaging platforms, such as Messenger and WhatsApp. While the exact dollar value of the transaction was not disclosed, The Wall Street Journal reported that the acquisition was valued at about $1 billion.
Before closing the deal, Facebook was required to notify Austria’s competition authorities and wait for approval due to triggering national notification thresholds.1 However, the target was not big enough to trigger the Commission’s turnover-based notification thresholds. Using its authority under Article 22 of the EU Merger Regulations,2 Austria’s competition authority referred the transaction to the Commission for review. Nine other countries joined the referral request, including Belgium, Bulgaria, France, Iceland, Italy, Ireland, the Netherlands, Portugal, and Romania.
These referrals prompted the Commission’s statement announcing its review of the deal. Based on the information provided by the referring countries, the Commission concluded “that the transaction might affect competition in the markets for CRM software and online display advertising services.”3
Pressure to Review: Recent Commission Guidance at Play
The Commission’s recent announcements mark a shift away from strict reliance on a company’s combined turnover to determine whether a deal should be reviewed. The Commission’s original jurisdiction to review a deal is based on a set of EC-wide turnover thresholds. When a deal does not meet the Commission’s thresholds, member nations can refer the case to the Commission for review under the Article 22 referral procedure. Until recently, member nations could only refer a case when the country’s individual thresholds (typically based on turnover) were triggered. However, in her September 2020 speech to the International Bar Association, former Commissioner Margrethe Vestager stated that relying on national thresholds alone allowed purchases of nascent competitors, or competitors who would likely become a competitive threat in the future, to fly under the radar. To address this, the Commission announced its plan to accept “referrals from national competition authorities of mergers that are worth reviewing at the EU level – whether or not those authorities had the power to review the case themselves.”4
The Commission started putting its plan into action when it released its updated guidance on Article 22 referrals on March 26, 2021. As promised, the Commission announced that it would begin accepting deal referrals from competition authorities regardless of whether the deal met the country’s national thresholds. To refer a deal under Article 22, the referring member(s) must show that the deal (1) affects trade between EU member nations, and (2) threatens to significantly affect competition in the country or countries making the request. Under the current guidance, any “influence, direct or indirect, actual or potential, on the pattern of trade between Member States”5 is enough to meet the first requirement. Member nations can meet the second requirement through a “preliminary analysis . . . based on prima facie evidence of a possible significant adverse impact on competition.”6
It was under this new guidance that member nations referred both Facebook’s acquisition of Kustomer and Illumina’s acquisition of GRAIL to the Commission. While the Facebook deal did trigger Austria’s threshold requirement, the Illumina deal did not trigger any national-level thresholds. The two cases indicate that member nations are ready and willing to exercise their new Article 22 authority, regardless of whether the deal meets their own notification requirements.
The Commission’s decision to review these cases shows that it is serious about its efforts to target purchases of nascent competitors. The additional probe into these transactions will delay the purchaser’s ability to close the deal until the Commission completes its investigation and decides whether to grant the proper clearances. Companies should keep this in mind and prepare for a potential delay in their ability to complete transactions with startups and other nascent competitors that may have a potential competitive effect in the EU.
1 The set of thresholds that the Facebook/Kustomer deal triggered in Austria are designed to capture acquisitions of nascent competitors in technology industries. See Bundeskartellamt/Bundeswettbewerbsbehörde, Guidance on Transaction Value Thresholds for Mandatory Pre-merger Notification (Section 35(1a) GWB and Section 9(4) KartG) (July 2018), https://www.bundeskartellamt.de/SharedDocs/Publikation/EN/Leitfaden/Leitfaden_Transaktionsschwelle.pdf?__blob=publicationFile&v=2.
2 Council Regulation 4064/89 of 21 December 1989 on the control of concentrations between undertakings, art. 22, 1989 O.J. (L 395/1).
3 Daily News, Eur. Comm’n, Mergers: Commission to Assess Proposed Acquisition of Kustomer by Facebook (May 12, 2021), https://ec.europa.eu/commission/presscorner/detail/en/MEX_21_2464.
4 Margrethe Vestager, Exec. Vice Pres. and Comm’r for Competition, Eur. Comm’n, Keynote Speech at International Bar Association 24th Annual Competition Conference: The future of EU merger control (Sept. 11, 2021).
5 Commission Guidance on the application of the referral mechanism set out in Article 22 of the Merger Regulation to certain categories of cases, COM (2021) 1959 final (Mar. 26, 2021), https://ec.europa.eu/competition/consultations/2021_merger_control/guidance_article_22_referrals.pdf.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.