Takeaways
- As issues related to the coronavirus pandemic continue to disrupt international economies, more companies facing financial difficulties may make failing firm defense arguments to win approval of a merger with a competitor.
- Antitrust authorities in Europe and the United Kingdom, however, are unlikely to relax their standards for determining whether the standards necessary to establish such a defense have been met, according to practitioners.
- While the U.K. Competition and Markets Authority announced on Friday, April 17, that it provisionally cleared Amazon’s investment in Deliveroo - its first application of the failing firm defense during the coronavirus pandemic - practitioners said the decision should not be seen as a game changer for the agency.
Antitrust authorities in Europe and the U.K. are unlikely to ease their standards amid the coronavirus crisis for determining whether companies have established a failing firm defense of their transaction.
As issues related to the coronavirus pandemic continue to disrupt international economies, such failing firm arguments could be made more frequently by companies facing financial difficulties and hoping to win approval of their merger with a competitor. “It is inevitable that there will be those arguments,” an antitrust practitioner in London told Reorg. “But for the moment, there will be no loosening of the criteria” for meeting the failing firm defense. “The [U.K. Competition and Markets Authority, or CMA,] is very keen to limit the application of the failing firm defense to its facts,” the practitioner added.
The three main conditions that must exist before the CMA can accept a failing firm defense are as follows: (1) the alleged failing firm would exit the market absent the merger, (2) there is no substantially less anti-competitive investor or purchaser for the alleged failing firm’s assets, and (3) the firm exiting the market would have a more anti-competitive effect than allowing the merger. The practitioner said the CMA and the European Commission’s Directorate-General for Competition are “basically identical” in their test and application of the criteria.
The practitioner also said that if authorities are not going to relax criteria for meeting the failing firm defense, it would be best if they issued guidance on what information they would like to see from companies, particularly in regard to expert evidence. Doing so could shorten the time frame of agencies’ merger reviews, which will be critical in the current environment where a lengthy analysis could “be contributing to [a company’s] downfall in some ways,” the practitioner said.
A Brussels-based competition law practitioner said that given the current circumstances, authorities may have more cases where the conditions for the failing firm defense exist and that they “will accept [the defense] where standards are met.” But this does not mean that agencies will relax their criteria for determining whether such conditions have been established, the practitioner said.
While the CMA last week announced that it provisionally cleared Amazon’s investment in Deliveroo - its first application of the failing firm defense during the coronavirus pandemic - practitioners said the decision should not be seen as a game changer for the agency.
On Friday, April 17, the CMA said the Deliveroo/Amazon transaction would not be expected to result in a substantial lessening of competition in either the market for online restaurant platforms or the market for online convenience groceries. This conclusion was made “on the basis that, as a result of the Coronavirus (COVID-19) crisis, Deliveroo is likely to exit the market unless it receives the additional funding available through the Transaction,” the authority said in its
summary of provisional findings.
Rod Carlton, a partner at Freshfields in London, told Reorg, “It is encouraging to see the CMA being open to failing firm arguments in the current crisis.” He added, however, that “merging parties in all such cases also need to have compelling evidence that there was no realistic prospect of a less anti-competitive acquirer buying the failing business.”
Juan Rodriguez, a partner at Sullivan & Cromwell in London, said the CMA is still using the same approach for determining whether companies have established a failing firm defense, as evidenced by its provisional findings in the Deliveroo/Amazon case. “The standard is the same,” Rodriguez said. “But now there is a unique cause for failure” because of the coronavirus crisis.
--Alex Wilts