Despite significant Government supports to industry in the aftermath of COVID-19, it seems that there will be numerous company reorganisations, mergers and takeovers as a consequence of the economic crisis.
Many transactions will involve distressed businesses and assets being acquired by other companies.
As with all such transactions, it will be essential to consider whether any proposed acquisitions are notifiable to the Competition and Consumer Protection Commission (“CCPC”) or the European Commission. The consequences of a failure to notify a notifiable transaction are severe. The European Commission can impose fines of up to 10% of the aggregate turnover of the undertakings concerned. Under Irish law, such a transaction is void and merging parties can be subject to fines of up to €3,000 (on summary conviction) and €250,000 (on conviction on indictment) in addition to possible daily fines for each subsequent day the transaction is not notified.
While the fact that the target business or assets are in distress will not be sufficient grounds for clearance of a proposed transaction that would otherwise be anti-competitive, a ground for clearance may exist if the parties can show that the target firm and its assets would exit the market and that that would be worse for competition than allowing the transaction to proceed. This is known as the “failing firm defence”.
The failing firm defence was recently raised in the UK in the ongoing merger inquiry by the Competition and Markets Authority (“CMA”) into Amazon’s investment in Deliveroo. To date, the failing firm defence has only once been successfully raised in a merger review in Ireland. However, given the current economic crisis, it is likely to be raised by parties in future merger reviews relating to sales of distressed businesses and assets in Ireland.
The CMA’s Merger Inquiry in Amazon/Deliveroo
After Phase 1 of its merger inquiry, the CMA had concerns that the deal could damage competition by:
- discouraging Amazon from re-entering the online restaurant food market (i.e. Amazon had operated an online food platform in the UK in competition with Deliveroo until Amazon exited the market in November 2018); and
- Amazon further developing its presence within the online convenience grocery delivery market in the UK (i.e. the CMA believed that the merger would result in the combination of two of the largest and best established suppliers of online convenience groceries).
However, in recent weeks, it was established that COVID-19 was having a significant negative impact on Deliveroo’s business. The ongoing ‘lockdown’ had resulted in the closure of a large number of the key restaurants available through Deliveroo, and a significant decline in revenues. While Deliveroo had sought to expand its supply of convenience groceries during the crisis, these sales were limited and had not made up for losses in its restaurants business.
As a result, Deliveroo informed the CMA that the impact of COVID-19 on its business meant that it would fail financially and exit the market without the Amazon investment. The CMA agreed and found that the imminent exit of Deliveroo would be worse for competition than allowing the Amazon investment to proceed and therefore provisionally found that the deal should be cleared.
The ‘Failing Firm Defence’ in Irish Merger Control
In Ireland, Guidelines for Merger Analysis published by the Irish Competition and Consumer Protection Commission (“CCPC”) set out the following four cumulative criteria that the merging parties must demonstrate in order to successfully raise the failing firm defence to a merger that would otherwise be anti-competitive:
(a) The firm must be unable to meet its financial obligations in the near future;
(b) There must be no viable prospect of reorganising the business through the process of receivership, examinership or otherwise;
(c) The assets of the failing firm would exit the relevant market in the absence of a merger transaction, and
(d) There is no credible less anti-competitive alternative outcome than the merger in question.
The CCPC’s 2015 ‘Phase 2’ Determination in M/15/026 – Baxter Healthcare / Fannin Compounding was the first merger clearance in Ireland on the basis of the failing firm defence. In that case, the CCPC’s merger review identified certain concerns relating to an expected substantial lessening in competition for the commercial supply of compounded chemotherapy medicines to hospitals in the State following the proposed acquisition.
However, the parties submitted evidence to the CCPC to support their view that Fannin Compounding was a “failing division” and that its assets would exit the market if the transaction was prohibited by the CCPC. The CCPC undertook an in-depth review of the parties’ failing division argument and concluded that Fannin Compounding satisfied each of the four criteria of the failing firm test. In the CCPC’s view, the competitive structure of the relevant market would deteriorate to at least the same extent (and, possibly, to an even greater extent) in the absence of the proposed acquisition, and therefore found that there was no basis for prohibiting the proposed transaction.
Given the adverse market shock caused by COVID-19, the failing firm defence may be raised in further merger reviews in respect of the sale of distressed businesses or assets both abroad and in Ireland.
However, it may be challenging for notifying parties to successfully raise, because it requires demonstrating to the CCPC the likely impact on the market of the firm’s failure, absent the merger. In that regard the CCPC will need to consider:
- whether the firm’s exit from the market would lead to a loss of overall capacity in the market, or
- whether the firm’s assets would likely be sold on and remain in use.If the CCPC considers that the firm’s assets would likely be sold on and remain in use, the next question the CCPC will need to consider is which firms in the market would be strengthened by this? If the assets and customers of the failed firm would likely go to smaller rivals this may mean that the CCPC’s approval of the merger based on the failing firm defence would be more anti-competitive than if the assets and customers would likely go to larger competitors, or the other merging party anyway.