Although many competition authorities are making considerable efforts to ensure “business as usual” during the COVID-19 crisis, the pandemic is inevitably having a material impact on merger control reviews around the globe. In addition to the obvious timing implications, deals are now being, and can be expected for some time to be, reviewed against the backdrop of significant economic distress. The most enduring impact is perhaps that politicisation of merger control is becoming even more prevalent.
It may be too early to tell how the COVID-19 crisis will affect substantive antitrust reviews going forward, but experience from the last financial crisis strongly suggests that it is unlikely to result in a “free pass” for crisis-driven deals that would otherwise give rise to competition concerns. While there may be greater flexibility with some processes, parties will still need to provide compelling evidence to show that the pandemic makes anticompetitive merger effects less likely, for example by invoking “failing firm” or “weakened competitor” defences. Where divestments are required to remedy concerns, merging parties should be prepared to demonstrate that despite the economic downturn potential buyers exist and are financially viable.
Most notably, given the potential for its impact to be felt for years to come, COVID-19 is resulting in the further politicisation of merger control. As countries emerge from the current health crisis, protectionism is likely to accelerate as governments focus on economic recovery aided by strong industries that benefit local consumers. Governments will pay closer attention to foreign investments in their strategic assets – particularly in the health and pharma sectors – and will be more wary of unfair competition from firms that are seen to be benefiting from foreign crisis-related subsidies. For example, in a recent statement to the Financial Times [paywall], Executive Vice-President of the European Commission Margrethe Vestager (who is also responsible for EU competition policy) appeared to call on EU countries to block Chinese takeovers, including by taking defensive stakes in European business that are struggling to survive because of the COVID-19 pandemic and that might be vulnerable to acquisition. With CFIUS already operating as a deterrent to Chinese acquisitions of US businesses, the use of merger control as a tool for geopolitical positioning is becoming ever more pronounced.
Timing implications and accelerated antitrust reviews
As described in our earlier blog post, COVID-19 is impacting merger review timelines around the world, as several agencies enforce or recommend COVID-19 related delays to their processes.
Although far from universal across merger control regimes, these include in some jurisdictions:
- the suspension or extension of (ongoing) merger control proceedings;
- the non-application of accelerated proceedings; and
- recommendations from the merger control authority not to file new matters.
The main reasons being given for these measures include the challenge for an authority to collect sufficient responses from market participants within the tight deadlines of the authority’s usual market investigation processes, as well as challenges posed by staff working remotely. Merger litigation in the US and elsewhere is also being delayed due to the inability of courts to hold in-person hearings.
Against this backdrop, sales and purchase agreements (SPAs) should be drafted to pre-empt these delays, for example by permitting extensions to the long-stop date where COVID-19 impacts the timing of the merger review process.
In deals presenting a particular urgency, the parties may seek to benefit from accelerated antitrust reviews. The European Commission (EC) announced that, amid the current crisis, it “stands ready to deal with cases where firms can show very compelling reasons to proceed with a merger notification without delay.” In exceptional circumstances, the parties may also obtain a derogation from the obligation to suspend concentrations pending antitrust clearance. During the 2008/9 financial crisis the EC granted several derogations where delays would significantly harm the financial interests of the companies involved (see, for example, Santander/Bradford & Bingley Assets (PDF) and BNP Paribas/Fortis (PDF)).
The US Department of Justice (DOJ) and US Federal Trade Commission (FTC) have also resumed early termination of merger reviews, having previously shelved this as a result of COVID-19.
However, during the COVID-19 crisis, early termination will be available on a more limited basis and granted more slowly than has historically been the case. Moreover, the US agencies were keen to emphasise that the “scrutiny of anticompetitive transactions… will not be relaxed.”
Agencies are unlikely to ease the standards of the failing firm defence
We expect the volume of distressed sales to increase, in particular in sectors such as traditional retail, consumer brands, travel (airlines, hotels, (online) travel agencies), smaller oil and gas players, automotive parts and smaller insurers.
In cases where distressed companies seek to merge with a competitor to safeguard their long-term financial stability, they may invoke the failing firm defence if the deal would otherwise raise material competition concerns.
On 17 April 2020, the UK Competition and Markets Authority (CMA) provisionally cleared Amazon’s minority investment in Deliveroo (a UK-based online restaurant delivery company) on the basis of compelling evidence that, as a result of COVID-19, Deliveroo is likely to exit the market unless it received the additional funding provided by Amazon. The CMA concluded that Deliveroo’s exit would prove more harmful to competition in the longer term than permitting Amazon’s investment to proceed.
The CMA’s provisional decision reminds merging parties that the conditions for successfully invoking the failing firm defence are high. This defence is well established in many jurisdictions around the world (eg it was recognised by the US Supreme Court in 1930 in International Shoe) but has only been accepted in exceptional circumstances. As demonstrated in Amazon/Deliveroo, agencies generally require compelling evidence to support the parties’ case that market exit by the failing firm and its assets in the near future is inevitable if not taken over and that there is no less anti-competitive alternative to the deal.
Competition authorities will also assess whether the distressed firm might be kept afloat by alternative funding such as government support. In Lloyds/HBOS (PDF) in 2008, for example, the UK authority assessed the merger on the assumption that HBOS would remain in the market based on state funding as it would unlikely be allowed to fail.
Learnings from previous economic crises and the limited number of cases so far suggest that the current COVID-19 crisis is unlikely to make it materially easier for distressed firms to invoke the failing firm defence. In its guidance on the failing firm defence published on 22 April 2020, the CMA – notwithstanding Amazon/Deliveroo – made explicit that the COVID-19 pandemic “has not brought about any relaxation of the standards by which mergers are assessed or the CMA’s investigational standards.”
In the context of the 2008/9 financial crisis, the EC held in a submission to the OECD (PDF) that “the proposition that a more lenient failing firm test (…) should be applied in times of recession must be rejected.” In a similar vein in the US, former Assistant Attorney General Shapiro stated in a 2009 speech that agencies should not over-react to economic downturn by approving concentrations that harm consumer as “recessions are temporary, but mergers are forever.” As a result, parties will still need to provide detailed evidence to show that an otherwise anticompetitive acquisition should be permitted in order to save a business in financial distress due to COVID-19.
Agencies may nonetheless take account of changed economic circumstances
Where the failing firm standard cannot be met, merging parties can argue that their competitive position is weakened by the crisis or that changed market circumstances (such as an increase in overcapacity) make anticompetitive merger effects less likely.
Merging parties are already pushing agencies to take into account the changed economic backdrop in their assessment of deals. For example, shipyard Fincantieri urged the EC to rethink its concerns related to the acquisition of Chantiers de l'Atlantique due to the devastating impact of the crisis on the cruise ship industry.
Several jurisdictions allow for a “weakened competitor” or “flailing firm” defence. It was recognised by the US Supreme Court in 1974 in General Dynamics and applied recently in T-Mobile/Sprint (PDF), where the District Court held that, absent the merger, the target would continue to operate but would be unlikely to vigorously compete due to important financial constraints.
Similarly, the EC in several cases (eg Newscorp/Telepi (PDF), KLM/Martinair (PDF) and T-Mobile NL/Tele2 NL (PDF)) recognised that merger-specific effects are less likely where market conditions are expected to erode the competitive significance of the merging firms. Those seeking to rely on a weakened competitor defence will need to demonstrate that – absent the merger – the competitiveness of the merging parties would deteriorate due to the COVID-19 crisis.
Alternatively, parties might argue that the merger is necessary to shore up a market as it emerges from the crisis, creating efficiencies that will benefit consumers. Parties will need to present strong pro-consumer deal rationales, as our experience from the 2008/9 financial crisis suggests that agencies will not simply roll over in the case of a deal between financially distressed firms. Indeed, the CMA stated on 22 April 2020 that “even significant short-term industry-wide economic shocks may not be sufficient, in themselves, to override competition concerns that a permanent structural change in the market brought about by a merger could raise.” And as former EU Competition Commissioner Kroes said in 2009 regarding the merger of troubled banks: “two turkeys do not make an eagle.”
Agencies are expected to closely scrutinise potential remedy takers
Where a divestment remedy is required for deals that are currently going through the merger control process, the merging parties should be prepared to demonstrate that despite the current challenging economic circumstances and the absence of deal making a potential remedy taker in fact exists and is financially viable.
To an even greater extent than usual, we expect authorities to require their pre-approval of the purchaser before clearing a transaction or permitting it to close. The FTC warned in a recent press release that it will not, as a consequence of the current pandemic, loosen its “usual rigorous approach to ferreting out anticompetitive harm and seeking appropriate relief, even in the face of uncertainty,” and held that now more than ever it will make sure to vet potential buyers, taking “full account of current financial and economic realities.”
COVID-19 is expected to increase politicisation of merger reviews
Protectionism was growing in merger control even before the current crisis, and governments are already asserting increased concerns flowing from the COVID-19 pandemic about “predatory acquisitions” of strategic assets by foreign powers or unfair competition from companies that are seen to be benefiting from crisis-related subsidies.
In a recent statement to the Financial Times [paywall], EC Executive Vice-President Margrethe Vestager appeared to call on EU countries to block Chinese takeovers, by taking stakes in European business that are struggling to survive. In response to the pandemic, the EU had already issued guidelines urging member states to use foreign investment screening to avoid the loss of critical assets and technology, notably in industries such as health, medical research, and biotechnology. Economy Minister Bruno Le Maire announced that France plans capital injections worth €20bn in strategic industries and tech companies at risk of foreign takeover. Spain suspended plans to liberalise (PDF) its foreign investment regime due to the COVID-19 crisis, Germany introduced stricter foreign investment rules and Australia announced that, for an indefinite period, all foreign bids will be scrutinised by its Foreign Investment Review Board regardless of their size. CFIUS review in the US – which has long been a challenging hurdle for Chinese acquisitions of American semiconductor and financial sector companies – increasingly may present challenges to such investment in the health and pharma sectors.
Beyond formal foreign investment screenings by governments, we expect that competition authorities will come under increasing pressure to take protectionist and industrial policy considerations into account. In the EU, the crisis will give further ammunition to countries who, in the context of the Siemens/Alstom (PDF) deal, called for a reform of EU merger control to allow for industrial policy concerns such as the self-sufficiency of the European economy and the ability of European companies (or “champions”) to compete with foreign-owned firms. In its European Industrial Strategy Package, the EC signalled that it will address the distortive effects caused by foreign subsidies within the single market and safeguard the global level playing field.
With a growing overlay of hostile protectionism, navigating merger control will prove increasingly challenging for global transactions. COVID-19 will pass. But its impact on merger control, with all the implications this could have for the executability of global M&A activity, will persist.
You can also contact your usual Freshfields lawyer or a member of our antitrust team.