Out-Law News 4 min. read
23 Apr 2020, 5:31 pm
The potential for delays was highlighted by the authority in specific guidance relating to how it intends to approach merger assessments during the period of pandemic.
Although the normal framework and procedures for such assessments will continue to apply, the guidance sets out various practical concessions to the difficulties posed by the current crisis, including case-by-case adjustments.
For example, cases may spend longer in the pre-notification process and, where companies are able the demonstrate that they are experiencing Covid-19-related issues in responding to requests for information, the CMA is not likely to impose penalties and may well choose to 'stop the clock' where merging parties are struggling to provide information by the specified deadlines. Meetings and oral hearings will be conducted remotely via videoconferencing or telephone.
Partner, Head of Competition, EU & Trade
Both during and after the pandemic crisis, with likely increased consolidation across many sectors, including opportunistic acquisitions of distressed businesses and assets, the 'failing firm' defence will form an important part of any arguments for clearance
Robert Eriksson, who specialises in merger control at Pinsent Masons, the law firm behind Out-Law, said: "The CMA has confirmed that the current crisis means the pre-notification process may take longer than normal because of difficulties in obtaining information from the merging parties and third parties. Whilst it is natural for businesses in times of crisis to put potential acquisitions on hold, this likely delay to the CMA process will be important to bear in mind for businesses, particularly where the timing for completion is important."
"On a related point, if a large number of transactions that are now on hold were to hit the CMA in parallel at the end of the Covid-19 crisis, that could also result in a bottleneck effect at the CMA," he said.
In a statement issued alongside its new guidance, the authority said it is "conscious of the challenges that coronavirus brings for businesses involved in CMA investigations and will seek to take these into account where it can". It said that "all merger investigations follow established processes and are subject to legally binding deadlines, however, and these timescales have not changed as a result of coronavirus".
The CMA said its "overall approach to assessing the circumstances in which a merger causes competition concerns remains unchanged". It said it will "continue to assess deals and will take the appropriate action where necessary to protect UK consumers". However, the authority said it would "carefully consider the available evidence in relation to the possible impacts of Coronavirus on competition in each case".
Unlike some other competition authorities, the CMA is not currently asking merging parties to delay merger notifications, because it does not "see this working well with the UK’s voluntary system of merger control".
The CMA also recognises that it may receive a greater volume of submissions asserting that businesses, at risk of failure due to Covid-19 disruption, are likely to exit the market but for the merger in question. In response, the CMA has prepared a summary of the principles that govern how it will assess such 'failing firm' claims.
Competition law expert Alan Davis of Pinsent Masons said: "Both during and after the pandemic crisis, with likely increased consolidation across many sectors, including opportunistic acquisitions of distressed businesses and assets, the 'failing firm' defence will form an important part of any arguments for clearance."
This may raise evidentiary challenges in some mergers because "the medium and long-term impact of the pandemic on market structures and competitive dynamics in various industry sectors is unclear," he said.
When assessing ‘failing firm’ claims, where firms involved in mergers are failing financially and would have exited the market absent the merger in question, the CMA applies a three-limb test. It considers 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; and what the impact of exit would be on competition compared to the competitive outcome that would arise from the acquisition.
Reflecting on the CMA's decision last week to provisionally clear the Amazon/Deliveroo deal, ostensibly on 'failing firm' grounds, despite its earlier competition concerns that led to an in-depth merger investigation, Davis cautioned that the CMA's decision in the case was "very fact-specific". However, he said "it does demonstrate that in certain cases the CMA may be prepared to apply its 'failing firm' test less 'mechanically', which is reflected in its latest guidance".
In the case of the Amazon/Deliveroo merger, the CMA provisionally found that Deliveroo would likely exit the UK market unless it received Amazon's substantial financial investment as a minority shareholder. The authority identified this scenario in light of the impact the Covid-19 lockdown has had on Deliveroo's financial situation. No prospective investments in Deliveroo, apart from Amazon's, would have put Deliveroo in a viable position to survive the coronavirus disruption, the CMA found. The adverse competitive impact of Deliveroo's market exit outweighed the potential competitive risks arising from Amazon's minority stake acquisition, it said.
Eriksson said the CMA is trying to send a message of ‘business as usual’ when it comes to merger control, including the so-called ‘failing firm defence’. However, he said: "It is interesting that the CMA has chosen this time to acknowledge that, in practice, it has applied part of the test less mechanistically than suggested in its merger assessment guidelines, which perhaps indicates that there may be more flexibility than has otherwise been thought."
The new guidance does not mention the CMA's substantive approach to merger remedies, which Davis said would presumably remain unchanged. The authority said it could make further changes to its practice in light of the impact of coronavirus.
M&A activity during the Covid-19 crisis entails risks for both buyers and sellers, as well as opportunities. In addition to merger control, parties should be mindful of increased European vigilance in foreign direct investment screening, particularly in sensitive industry sectors such as healthcare.
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