Distressed M&A on the horizon: Merger control considerations to adapt to a new transactional environment

By now, however, it has become obvious that transaction deal value and volume contracted rapidly. This is consistent with previous crises. But crises often bring opportunities for strategic acquisitions of distressed assets.

The consensus view is that as the economic impact of the pandemic continues and government support tapers off, acquisitions of distressed assets and companies will pick up. Acquisitive companies should not make the mistake, however, of expecting competition authorities to wave through consolidation in distressed situations, even if the acquisition will help the target avoid insolvency and safeguard jobs. Successfully completing distressed transactions requires careful planning and implementation within constrained timetables. Two aspects merit special mention: the failing firm defence and review timelines. There are significant differences in the approach to and experience with both aspects by competition authorities in CEE.

On top of these merger control considerations, new foreign investment control tools can significantly impact transactional deadlines. While these tools are outside the scope of this article, details on the respective mechanisms can be found in our dedicated FDI info corner.

Failing firm defence in CEE

The substantive test for merger control review applied in most jurisdictions is whether the transaction will contribute to a significant impediment to effective competition, particularly by creating or strengthening market dominance. However, the current economic crisis will likely lead to situations where the markets affected by the transaction, absent the merger, would in any event see companies exiting and consequently an increase in concentration and a significant lessening of competition.

In such a situation, the failing firm defence (FFD) comes into the equation. Relying on the FFD means that regardless of potential competitive issues, the argument is made that the only alternative would be the bankruptcy of the target business and that this would be more harmful to competition than the proposed acquisition. In other words, the acquisition is presented as a "rescue merger" and sold as the least adverse outcome when compared to the alternative.

Some competition authorities explicitly acknowledge the FFD. Those that do rely mainly on three criteria to assess whether an FFD is likely to succeed. These criteria are also enshrined in the EU 2004 Horizontal Merger Guidelines3 and are based on decisions in Kali + Salz4 and BASF5:

1. the failing firm would soon be forced to exit the market due to financial difficulties if it is not taken over by another company;
   
   
2. here is no less anticompetitive alternative than the proposed merger; and
   
   
3. in the absence of the proposed merger, the assets of the failing firm would inevitably exit the market.

On the following page we list whether CEE authorities have already accepted the FFD in practice:

Early clearance and derogation in distressed situations

Although CEE jurisdictions require transactions involving parties meeting relevant thresholds to be notified and approved before closing, in exceptional circumstances closing can occur before clearance is obtained.

For example, the EU Merger Regulation provides that the European Commission may, on reasoned request, grant a derogation from the obligation to obtain prior clearance. Such a derogation may be made subject to conditions and obligations in order to ensure conditions of effective competition. For example, the businesses may be required to be held separate pending clearance. A derogation may be applied for and granted at any time ("EUMR Derogation").

In addition, almost all jurisdictions have followed the EU example and exempt the following acquisitions from the obligation to obtain clearance: (i) a credit or financial institution that acquires shares on a temporary basis (less than one year) with the intention to re-sell the shares, and provided the acquirer does not exercise any voting rights attached to the shares; (ii) a liquidator, trustee in bankruptcy, or similar, under the relevant national legislation; or (iii) a financial holding company. We will disregard these exemptions for the purpose of this article ("EUMR Exemptions").

Only a few CEE jurisdictions have enshrined a concept similar to the EUMR Derogation. Without such a derogation, eventual acquirers that need to close early are left to discuss with competition authorities either their readiness to provide exceptionally quick clearance or at least to signal their willingness not to pursue a fine if a transaction is closed before clearance. The latter would expose the transaction to the risk of challenges by third parties that oppose the transaction.

More importantly, only a few jurisdictions even provide for the possibility of early clearance before the standard review period has elapsed. We have summarised the details in the following table.

¹The author would like to thank the eu & competition department's CEE team heads and co-heads of Georgiana Bădescu (ROM), Claudia Bock (CZE/SVK), András Nagy (HUN), Galina Petkova (BUL), Srđana Petronijević (CRO/BIH/SRB), Pawel Kulak (POL) and Eva Škufca (SLO) for their input.
²See here for a comprehensive summary of the actions taken by CEE competition authorities
³Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings ("Horizontal Merger Guidelines"),
OJ [2004] C 31/5, para. 90.
⁴Commission Decision of 9 July 1998 in Case M.308 Kali+Salz/MdK/Treuhand.
⁵Commission Decision of 11 July 2001 in Case M.2314 BASF/Eurodiol/Pantochim.
⁵The position paper looks into mergers caused by COVID-19 ("shutdown mergers"), offers companies a checklist for the assessment of shutdown mergers, explains the criteria applied to assess financially distressed companies, gives an overview of the impact of market power and its macroeconomic effects, and lists possible alternatives to shutdown

author: Christoph Haid¹