COVID-19 has disrupted global economies and thrown businesses into an unfamiliar and unstable environment. The economic effects of the pandemic are already significant, with large corporations around the world filing for bankruptcy. As individual firms look for a path forward, some are considering transactions to either save their own business or to acquire assets that are more affordable due to the economic pressure applied by the pandemic.
In our latest episode of Essential Antitrust, partners Alastair Chapman, Mary Lehner and Tone Oeyen join host Jenn Mellott to discuss antitrust considerations in transactions involving a distressed business and how COVID-19 has impacted agency enforcement.
The pandemic has caused financial distress across the global economy in virtually every industry, but large transactions are subject to scrutiny by antitrust enforcement agencies regardless of market conditions. Firms in distress in the United States, UK and Europe can raise the so-called failing firm defense to prevent enforcement agencies from blocking their transaction. While the factors differ slightly between jurisdictions, the defense generally requires a firm to prove that it would be unable to continue in the market without the transaction, it is unable to find an alternative purchaser, and that exiting the market completely would more negatively impact competition than the proposed transaction.
During COVID-19, antitrust enforcement agencies in the UK, Europe, and the United States have stressed that the criteria for the failing firm defense will not be relaxed. Further, the agencies have made clear that the level of scrutiny of transactions involving distressed firms will be unaffected by the economic crisis caused by the pandemic. In practice, however, the agencies have begun to show sympathy for struggling businesses due to economic pressure caused by COVID-19. The agencies’ view of transactions is at least influenced by the current economic climate faced by firms in distress.
Finally, in response to the economic hardship caused by COVID-19, policy responses to foreign investment are increasing. Most notably, in June the UK announced new measures to ensure that UK businesses that are critical to combatting public health emergencies are protected from hostile takeovers by those outside the country. Similarly, the EU has encouraged its member states to use all available mechanisms to protect critical assets and technology from foreign hostile takeover. In the United States, political proposals aimed at preventing foreign investment, or halting merger and acquisitions completely, during the pandemic have been introduced but are unlikely to pass and take effect.
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