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The first wave of discussion about the impact of COVID-19 on EU merger control was very much on the practical and procedural. What, impact if any, will the response to this crisis have on the substantive assessment of mergers going forward?
State aid can distort competition; the bigger the aid, the greater the effect on competition there is likely to be. Its impact must therefore be taken into account when assessing a merger. Question 3.4 of Form CO requires a description of any financial or other support received from public authorities by any of the parties. Historically ignored, the European Commission has more recently been looking into this issue during reviews as the debate over how state subsidies should be taken into account when assessing the competitive threat from Chinese companies in particular.
How to factor subsidy into merger review will now return to being a European issue; governments have made massive pledges of financial support to businesses facing difficulties brought about during the current crisis. Examples include EUR 300 billion for companies in France, EUR 3 billion for tourism, restaurants and manufacturing companies in Portugal and EUR 300 million to liberal professions and companies in Luxembourg. More details can be found in our recent COVID-19: State aid Support to Businesses.
In the event that the merging parties were the recipients of the aid, it seems unlikely that this would result in the financial strengthening of the company sufficient to significantly impede effective competition. First, aid being granted in the context of COVID-19 is to enable recipients to overcome the serious economic disturbance, i.e. of a compensatory nature rather than promotional. Second, the majority of the aid comes in the form of government-back loans and guarantees rather than access to cash to invest or affect market pricing. Third, the aid is so widely available that it is unlikely the merging parties will have benefitted disproportionately versus their competitors.
The harder case could be where markets are EEA-wide or global and where the parties (or their competitors) in other Member States or outside the EU have received much larger amounts.
When granted to competitors, aid could be presented by merging parties as evidence that their historic market share over-represents the competitive force the company brings to the market. Alternatively, the market investigation may reveal complaints from market participants that aid to the parties means the Commission should assume greater strength going forward. In both circumstances, the state aid will just be one indicator that the Commission takes into account in its assessment and will need to be seen in context of other relevant factors.
The EU Merger Regulation allows for a “failing firm defense.” If the parties to a merger can prove that the alternative to the deal is the assets of the target leaving the market, the Commission may allow the merger to proceed, despite the potential for anti-competitive effects.
Notifying parties frequently allude to the ill health of the target in their submissions but infrequently go all out with this defense. There are two main reasons for this. First, because of the high burden of proof on the parties, and second because it effectively means conceding the point that the consolidation risks having anti-competitive effects.
In the coming weeks and months, there will be plenty of opportunities to pick up distressed assets across a range of industries. Some will be in fragmented industries such as tourism and restaurants but others such as airlines and manufacturing will be on the Commission’s list of priority cases. The Commission will not be keen to lower the evidentiary burden on the parties to allow a failing firm defense—especially when a less anti-competitive alternative was available.
Competition law ultimately assumes that consumer welfare is maximized in conditions of perfect competition. Once both demand and supply are shocked simultaneously across all sectors, the usual market mechanisms to achieve good outcomes for consumer welfare are basically broken. Efficient firms are at risk of leaving the market, causing permanent damage to productivity and future competitiveness of markets.
In order to manage the sudden and massive over-capacity in multiple industries and the severe capacity constraints in others, antitrust authorities have sensibly relaxed the normal competition law rules to meet a variety of desirable objectives, examples including the Norwegian airline industry, the British and German supermarkets and the Portuguese tourism industry. More details can be found in COVID-19 and Antitrust: Crisis and Change.
Through this cooperation, businesses will gain insight into the inner workings of their competitors, relationships between the individuals in those businesses will be strengthened and focal points will be established around which business can most effectively coordinate. It is unclear how the Commission will take these factors into account when assessing consolidation between these coordinating players going forward.
A key limb of many coordinated effects theories is whether there is a history of coordination in the industry. It seems unreasonable for the Commission to look back at any permitted cooperation during this time and use that as evidence of an industry being prone to coordination, however it is the reality that the Commission may claim that businesses may find it easier to coordinate in the future once the current turmoil reduces.
It is imperative therefore that even while coordination during this period may not only be permitted but encouraged, companies take measures to effectively ring-fence this coordination to defend themselves against such allegations in the future.
The answer, we suspect, will be a nuanced no. The Commission will be keen to stress that transactions that could result in consumer harm are as bad for Europe now as they ever were. Moreover, precedent is important to DG Competition in all aspects of merger control, from market definition to remedies procedure, and they will be keen not to start a practice that they will have to live with when a crisis strikes specific industries in the future. It will also be important to the Commission not to backtrack on their strong public statements against amending the rules to allow for the creation of European Champions, which we may see a trend towards as we come out of the crisis.
That said, there will be borderline cases where parties might get away with a lighter review or indeed avoid an in-depth review. With limited resources, DG Comp and the Commissioner will have to prioritize the difficult cases over those which it fancies might be interesting. There are no headlines to be grabbed on a sexy merger investigation at the moment. There will also be a keenness to demonstrate the system is still working efficiently, which, under the current working conditions, may mean parties manage to avoid certain rabbit holes that case teams may otherwise have been allowed to fall down.