New guidance from the UK Competition and Markets Authority warns that it will not relax its substantive or evidentiary standards for merger investigations during the coronavirus (COVID-19) pandemic. Statutory deadlines will not be altered, although aspects of investigations may be subject to delay, and the authority will continue to impose interim measures. The authority also set out its position on mergers involving “failing firms,” indicating some flexibility in its interpretation of the counterfactual test.
The COVID-19 pandemic is causing competition authorities around the globe to evaluate their standards, protocols, and approaches toward businesses. This includes guidance on foreign investment, competitor collaborations, and state aid, and investment guidance amid planning for the economy’s inevitable rebound. Merger investigations have been impacted both procedurally and substantively, and merging parties should be cognizant of where competition authorities will—and will not—show flexibility during the crisis.
On April 22, the UK Competition and Markets Authority (CMA) published further details on its approach to merger investigations during the COVID-19 pandemic, comprising guidance on merger assessments and a summary on the CMA’s position on mergers involving “failing firms.”
These further details followed the CMA’s statements of March 18 regarding its working arrangements during the COVID-19 pandemic and March 25 on business cooperation during the pandemic.
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The CMA states that substantiated claims that a business is facing difficulties brought about by COVID-19 will generally constitute a reasonable excuse for not providing certain information by a specified deadline in response to a statutory information request.
The CMA is therefore unlikely to impose penalties where businesses are unable to comply with statutory requests for information by the specified deadline in such circumstances. In keeping with its usual practice, the CMA confirms that it may “stop the clock” where merging parties are unable to provide information by a specified deadline in a statutory information request.
Timing of Investigations
The CMA confirms that the statutory deadlines that apply to CMA merger reviews remain unchanged. However, the CMA acknowledges that the COVID-19 pandemic is likely to raise some challenges to the expedient running of investigations, in particular because of difficulties that may arise in obtaining the information that the CMA requires carry out its statutory duties.
As a result,
- prenotification processes may take longer;
- the CMA may not be able to start the 40-working-day clock where third parties are unable to meaningfully engage with the CMA’s investigation; and
- the CMA recommends that the timing of individual cases be discussed with the relevant case team.
- The CMA notes that while it is not currently asking merging parties to delay merger notifications, it is encouraging merging parties to consider whether some filings could be postponed. For example, postponement could be appropriate where a merger is not particularly well advanced and may not ultimately proceed.
MEETINGS AND HEARINGS
The CMA advises that all meetings are being conducted remotely via videoconferencing or telephone, including meetings and hearings that make up part of the formal investigation process (e.g., issues meetings, main party hearings, and remedies hearings).
“Site visits” that typically occur during the early weeks of a Phase 2 investigation will not take place, and will not be rearranged at a later stage of a Phase 2 investigation in the event that the restrictions on in-person meetings brought about by COVID-19 are relaxed. Instead, the CMA will arrange an alternative opportunity to gain a greater understanding of the parties’ businesses and remotely meet key operational staff during the early stages of the Phase 2 investigation.
The CMA confirms that it has received a high volume of requests from merging parties for changes to interim measures in completed mergers, in order to address operational challenges brought about by COVID-19.
The CMA states that it will assess each request on a case-by-case basis. If the CMA decides to investigate a merger, it will continue to impose interim measures in line with its policy pre-COVID-19, and it is unlikely to lift interim measures that are already in place during the course of its review.
Derogations can be, and have been, granted rapidly where merging parties demonstrate that such steps are necessary to ensure the viability of their businesses, and appropriate safeguards are put in place to protect the CMA’s ability to take appropriate action during its review. In this respect, the CMA encourages merging parties to engage with the relevant case team as early as possible after they conclude that such derogations may be necessary.
The CMA notes that it will not relax the standards under which it will assess mergers as a result of COVID-19, although it will take into account the impact of COVID-19 where appropriate.
In the short term, there will be a substantial impact across the United Kingdom as a result of changes in market conditions, and there remains considerable uncertainty about the extent and duration of this impact. However, the CMA states that even significant short-term, industrywide 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.
COVID-19 is expected to increase the number of bankruptcies of UK businesses. Under UK competition rules, the CMA may clear a transaction on the basis that the target is a “failing firm” that would have otherwise exited the market.
In anticipation of further failing firm claims, the CMA also published on April 22 a summary of its framework for assessing such claims as part of merger investigations.
The Framework for Assessing a Failing Firm Claim
The CMA’s framework for assessing a failing firm claim considers three limbs:
- Whether the firm would have exited (through failure or otherwise) absent the transaction.
- Whether there would have been an alternative purchaser for the firm or its assets.
- What the impact of its exit would be on competition compared to the competitive outcome that would arise from the acquisition.
In its summary, the CMA reiterates the following principles for assessing failing firm claims:
- the counterfactual incorporates only those elements of scenarios that are foreseeable.
- Events that occur during the CMA’s review of a transaction (such as the business impact of COVID-19) but are not a result of the merger can be incorporated into the counterfactual.
- Where future events or circumstances are not certain or foreseeable enough to include in the counterfactual, the analysis of such events can take place in the CMA’s assessment of competitive effects.
- Where a business’s financial difficulties do not meet the conditions of the exiting firm counterfactual, the implications of those financial difficulties (where appropriately evidenced) could also be considered within the CMA’s competitive assessment.
- The CMA will not, for the purposes of substantive assessment, treat completed acquisitions any differently from anticipated transactions.
- Despite COVID-19, merging parties can continue to expect the CMA to thoroughly test any failing firm claims. The CMA is unlikely to accept unsubstantiated claims. The CMA notes in this regard that sellers seeking to minimize execution risk may therefore prefer to pursue a sale to a purchaser that raises no competition issues, if such a purchaser exists, even if the price that purchaser offers is lower than that offered by a close competitor.
In this regard, the CMA urges sellers to note that establishing that a failing firm scenario exists will require a significant amount of information to be provided to the CMA to establish financial failure and the absence of any realistic and substantially less anticompetitive alternative purchaser.
However, the CMA does appear to signal some flexibility in its interpretation of limb 3 of the test (counterfactual analysis) where it notes that “in practice, the CMA has applied this test less mechanistically than is suggested in the wording of the Merger Assessment Guidelines (given the undue emphasis that this wording places on the redistribution of sales for the purposes of competitive assessment).”
The CMA goes on to state that, depending on the nature of the markets at issue, it will not only consider what might happen to the sales of the merging party, but will also consider the impact that the merger is likely to have on competition more broadly. More specifically, the CMA is likely to consider the impact that the exit of the failing firm would have on competition within the markets at issue (looking at the overall market structure and taking all relevant parameters of competition into account) compared to the competitive outcome that would arise from the acquisition.
The CMA recommends early engagement with the case team to discuss what information is likely to be required to inform the CMA’s assessment of a failing firm claim.
The CMA also notes that it may be willing to give informal advice in relation to whether one of the merging businesses can be regarded as a failing firm, but that such advice is only available for good-faith confidential transactions and where there is a “genuine issue.” Crucially, informal advice is not available as a substitute for external legal advice or as a tool to seek endorsement of external legal advice.
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