Correct as of 5pm on 23 April 2020. This article is being maintained.
As Europe responds to the COVID-19 emergency, fast-moving events are leading to changes of approach by competition regulators and potential delays in merger control timetables, just at a time when transactions taking place in distressed circumstances are likely to need faster approvals than usual.
This is partly due to staff of competition regulators moving to a less efficient ‘work from home’ model, as is the case for most organisations. However, regulators are also facing difficulties obtaining views on proposed transactions from customers and competitors who are understandably focussed on the day-to-day challenges of keeping their businesses afloat.
This alert looks at how we might expect the UK’s Competition and Markets Authority (CMA) and the European Commission to address merger cases over the coming weeks and months. We also consider the challenges that may bring for transaction parties, and what steps they can take to mitigate those challenges.
What types of transactions may require merger control clearance over the next few months?
It appears relatively likely that there will be a dip in the number of standard, discretionary M&A transactions that are notified in both Brussels and London, given an anticipated slow-down in deal-making during a time of economic uncertainty and the need for businesses to preserve cash. However, that is expected to be countered at least in part by a rise in the number of buy-outs of distressed businesses, restructurings or other emergency investments.
These transactions may need to take place very quickly. However, operators will need to be alert not to inadvertently trigger merger control notifications, which can delay completion by at least 2-3 months even in circumstances where a deal triggers no substantive competition law concerns. Some common scenarios which might tip into the realm of merger control during times of economic distress include:
- One party buying out their co-shareholders i.e. if a purchaser moves from jointly controlling to solely controlling a business.
- A specialist fund taking sole or joint control over a business, even where third party investors own the majority of the shares.
- A debt-for-equity swap, if the acquisition of shares brings control rights over the businesses’ strategy and operation.
- In the UK, the acquisition of mere ‘material influence’ can trigger CMA merger control jurisdiction. The threshold for material influence is low and can be found at shareholdings below 20% and in the absence of any specific rights over the decision-making or strategy of the target.
Neither the European Commission nor the UK’s CMA have put in place any provisions for special ‘fast track’ or simplified reviews of mergers in distressed circumstances. This stands in stark contrast to the Commission’s temporary framework for State aid approvals, for example, which is currently being used to clear applications for the approval of aid schemes in as little as 24-48 hours. In fact, it is likely that merger control reviews will take even longer than usual over the next few weeks.
EU merger control
Transactions in the UK remain subject to EU merger control rules until the end of the EU membership transition period, currently scheduled for 31 December 2020. There has been speculation that the transition period will be extended, given the difficulties of conducting intense trade negotiations during a period of restricted travel and social distancing. In any event, however, the system continues to work for now as if the UK is a continuing EU Member State.
A transaction must continue to be notified and must receive pre-completion clearance from the European Commission if it meets specific turnover-based thresholds designed to capture the largest transactions irrespective of whether those transactions cause any substantive competition issues. There have so far been no COVID-19 exceptions or relaxations to the jurisdictional thresholds.
Where a target business is likely to become bankrupt in the absence of a transaction, but that transaction is unlikely to be cleared by the European Commission due to substantive competition issues, the parties may wish to use the so-called “failing firm defence” to request that the transaction should be cleared in any event. To claim this defence the transaction must meet a three-part test under the Commission’s guidelines:
- the allegedly failing firm would, in the near future, be forced out of the market because of financial difficulties if not taken over by another firm;
- there is no less anti-competitive alternative purchase than the notified merger; and
- in the absence of a merger, the assets of the failing firm would inevitably exit the market.
In practice, a very high evidential burden must be met. Parties can, for example, struggle to prove that no alternative buyer could be found if the assets or target were sold at a substantially lower price. COVID-19 is unlikely to change the way the defence is applied by the Commission in practice and any party wishing to use this rationale is advised to carefully assimilate all relevant evidence including economic analysis of the market and run a competitive auction process.
What may, however, change over the coming weeks is the time taken to complete a merger control review. The European Commission says that it has put in place various internal measures to ensure business continuity in the enforcement of the EU Merger Regulation. However, they have nevertheless cautioned that due to the complexities and disruptions caused by the Coronavirus, they encourage companies to delay planned merger control notifications “until further notice, where possible”.
The Commission’s announcement explains that this is because it anticipates difficulties in collecting information from third parties, such as customers, competitors and suppliers at this time; and further because of difficulties in Commission staff accessing the information and databases that they need to do their jobs from home, which will slow down reviews. A further reason, not stated publicly, is likely to be that some Commission resources are inevitably being diverted from approving mergers to approving applications for COVID-19-related State aid schemes.
At this stage, the Commission has not gone so far as to say that they will be unable to meet deadlines, but there nevertheless appears to be some risk of this happening, for example by the Commission more frequently ‘stopping the clock’ where parties are unable to provide information in response to tight Commission time limits. It also appears likely that the Commission will use pre-notification procedures more extensively than usual, and will be particularly strict in its decisions on whether to declare merger notifications as ‘complete’ such as to start the clock on a statutory timetable (25 working days in Phase 1). Despite this expected slowdown, evidence so far suggests the Commission is continuing to accept simplified notifications on a daily basis and is capable of progressing merger control investigations remotely.
However, given these constraints, it becomes more important than ever for notifying parties to cooperate with the Commission in good faith, and to approach the Commission as early as possible with respect to a proposed transaction, so as to allow it to complete in time even if the Commission does throw up more hurdles than usual to secure a clearance. One positive time-saving step is that exceptionally at the moment the Commission is prepared to accept merger control filings by email or secure file transfer only, rather than insisting on multiple hard copies.
UK merger control
If a transaction does not meet the EU thresholds, it is necessary to consider whether it meets the UK’s jurisdictional thresholds. A voluntary merger control notification may be advisable if either of the following thresholds are met:
- the target derived turnover in the UK of £70m or more in the last financial year; or
- the transaction would lead to the creation of, or increase to, a share of 25% or more of the supply of goods or services of a particular description in the UK, or a substantial part of it.
“Share of supply” is not the same as “market share”. While market shares are calculated by reference to defined economic markets, for shares of supply the CMA has very wide discretion to calculate these on the basis of “any reasonable description of goods or services” (e.g. share of value, cost, price, quantity, or even number of workers) and/or local geographic area. This means that if the CMA is interested in a transaction, it can usually find a way to take jurisdiction over it. There have so far been no COVID-19 exceptions or relaxations to the jurisdictional thresholds.
The CMA has published guidance on Merger assessments during the Coronavirus (COVID-19) pandemic highlighting that its approach to the substantive assessment of mergers and its investigational standards remain unchanged, whilst acknowledging that the pressures of COVID-19 could have a material impact on its work. The guidance notes that:
- The CMA will consider COVID-19 as a reasonable excuse for a party not responding to a statutory information request by the specified deadline where those claims can be substantiated. In such circumstances the CMA is unlikely to impose penalties, but in keeping with its usual practice, may ‘stop the clock’.
- The statutory deadlines that apply to the CMA’s work have not been altered, but it is possible that the pre-notification process will take longer than it would otherwise because of difficulties in obtaining information from merging parties and third parties. Parties are encouraged to discuss timings with their case team, provide as much information as possible upfront and be realistic about the timing of their case.
- The CMA is not currently asking merging parties to delay merger notifications but is encouraging parties to consider postponing filings where a merger is not particularly advanced and ultimately may not ultimately proceed.
- All visits and meetings will be undertaken remotely, with the “site visits” that typically occur in the early weeks of a Phase 2 investigation taking place through other means of engagement with key operational staff.
- The CMA will continue to impose interim measures where necessary and will assess any changes to measures requested by parties in response to operational challenges brought about by COVID-19 on a case-by-case basis. The CMA says that they have received a higher number of requests for changes to interim measures, given difficulties caused by COVID-19, and that these requests have been ‘granted rapidly’ where it can demonstrated that they are necessary to safeguard the viability of a business.
As at the EU level, parties can run a ‘ failing firm ’ defence. This possibility has received more attention during the current crisis, given the difficulties being experienced by a wide range of businesses. However, the Annex to the CMA’s guidance on merger assessments during the Coronavirus (COVID-19) pandemic reiterates that the CMA’s existing guidance on ‘failing firms’ still applies during COVID-19 and that there will be no relaxation in its investigational standards or the way it assesses mergers.
The approach taken by the CMA is similar (but not identical) to that of the Commission and a high evidential burden is placed on the parties. The CMA considers:
- whether the target firm would have left the market (through failure or otherwise);
- whether there would have been an alternative purchaser for the firm or its assets to the acquirer under investigation, and
- what would have happened to the firm’s sales in the event of its exit from the market.
In terms of what is happening in practice, we understand that at least early during the pandemic, the CMA had asked parties in pre-notification discussions to delay the formal notification of their transactions, wherever possible, to avoid the CMA’s statutory clock (40 working days in Phase 1) starting to run, thus extending informal ‘pre-notification’ discussions. At the same time, we understand that the CMA has been reluctant to grant extensions to deadlines within statutory merger control review periods that are already running, and has been issuing questionnaires with short deadlines to try to keep its timings on track.
For deals which need to happen very quickly in the current environment, the voluntary nature of UK merger control makes it possible to complete without notifying and receiving CMA clearance. However, once the CMA discovers the transaction, it could order the acquired business to be ‘held separate’ i.e. it should continue to be run as a standalone business pending CMA review, under the CMA’s system of Initial Enforcement Orders (IEOs).
Given that neither the European Commission nor the CMA currently have flexibility to extend their statutory deadlines, they are understandably resorting to asking businesses to voluntarily reduce their demands on merger clearance services. While that may be a viable strategy for typical M&A under normal conditions, these are clearly not normal times, and regulators face increased demands to review emergency or accelerated transactions at a time when their capacity to assess the merger control consequences of those transactions is stretched.
It is difficult to ask regulators to complete reviews more quickly than their statutory timetable permits. Parties are therefore likely to need to focus any efforts to accelerate timetables on the parts of the process that they can control:
- Engage with a regulator as early as possible to commence the pre-notification process and be well-prepared when doing so.
- Be clear and direct if there is urgency to get a business-critical deal cleared quickly, to e.g. prevent a business from collapse. Despite the official position, there is likely to be an increased willingness from regulators to be flexible at this time.
- If a transaction is not confidential, consider asking the regulator to undertake informal market testing in parallel with the pre-notification discussions, in order to protect the later integrity of the statutory timetable.
- Anticipate regulators seeking to make use of ‘stop the clock’ during the merger procedure (i.e. where the formal timetable is paused due to an outstanding information request). The alternative may be a need to withdraw a notification and re-file (at EU level) or face a Phase 2 investigation (at UK level).
- Anticipate regulators maximising all routes available to them under statute to extend formal deadlines. Plan for the longest possible timetable and think in advance about what objections you would raise to any attempt to use extensions.
- Equally, be able to respond promptly if the CMA and/or Commission are in fact able to work more quickly on a segment of the review, to make up time.
For further information on these issues please contact any of the authors, or your usual contact in the CMS UK Competition & Trade team.