updated on 02 June 2020
QuestionWhat is the Competition and Markets Authority’s (CMA) guidance to businesses on merger assessment during the covid-19 pandemic?
The guidance includes a refresher on “failing firm” defence claims, for which the CMA will maintain a high bar.
On 22 April 2020 the UK’s Competition and Markets Authority (CMA) published guidance on its assessment of mergers during the COVID-19 pandemic. This follows the guidance the CMA issued on 18 March 2020 regarding its working arrangements during the pandemic. It includes a refresher on ‘failing firm’ defence claims, for which the CMA will maintain a high bar.
The new guidance is welcome as a clear statement that it is business as usual in terms of the ability of parties to notify mergers and engage with the CMA, but that the CMA is ready to adapt within the framework of its existing rules to the particularities of the present crisis.
Key takeaways for merging parties include:
Merger control procedure during the pandemic
The UK merger regime, at least for now, is operating slightly differently to a number of merger control regimes around the world which are either encouraging parties to delay notification or introducing statutory extensions to review periods (see Latham’s regularly updated briefing Impact of covid-19 on Global Merger Control Reviews).
The CMA confirms that it remains bound by the same statutory duties and deadlines. This includes a duty to refer for a Phase II investigation any merger meeting the applicable jurisdictional thresholds that the CMA believes has or may be expected to result in a substantial lessening of competition in a UK market. Key statutory deadlines include the four-month period available to the CMA to call a transaction in for review post-closing, and the 40 working day period for the CMA to carry out its Phase I investigation.
The four-month post-completion call-in period is a distinguishing feature of the UK’s voluntary merger control regime. According to the guidance this feature is the reason the CMA is not asking merging parties to delay merger notification. The ability to notify the CMA of a transaction is an important tool for merging parties to obtain the legal certainty that they will not face the disruption of seeing their transaction called in post-completion.
However, the CMA points to elements of its procedure that it may adapt to address difficulties posed by the pandemic:
The CMA’s substantive assessment of mergers during the pandemic and ‘failing firm’ arguments
Unsurprisingly, the CMA confirms that the pandemic has not brought about any relaxation of its investigational standards or the standards by which mergers are assessed (a sentiment echoed by EU antitrust chief Margrethe Vestager in a statement on 24 April 2020). The CMA explains that its merger investigations typically look beyond the short-term to the lasting impact of a merger on markets, and so even significant short-term economic shocks may be insufficient to override these long-term competition concerns. The CMA says its decisions are based on evidence and not speculation, and it will carefully consider the available evidence in relation to the possible impacts of covid-19 on competition in each case.
More specifically, the CMA includes as an annex to its guidance what it calls a “refresher” on submissions that firms involved in mergers are failing financially and would have exited the market absent the merger in question (the so-called failing firm defence). The term ‘refresher’ is accurately deployed as the annex merely restates the CMA’s existing approach, emphasising the stringent nature of the three-limb test that the CMA applies to such arguments and the need for parties to present compelling evidence. The test can be summarised as follows:
The CMA advises merging parties to make clear early on if they will be seeking to present a failing firm argument, and the CMA may be willing to give informal advice.
The timing of the guidance is interesting, in that it comes five days after the CMA announced that it had provisionally cleared an investment by Amazon in Deliveroo, which had been subject to an in-depth Phase II review by the CMA. In a rare move, the CMA has provisionally held that Deliveroo’s exit from the market would be inevitable without access to the investment that the CMA found only Amazon would be willing and able to provide during the pandemic. In this context, the CMA concluded that Deliveroo’s exit would be worse for competition than allowing the Amazon investment to proceed. The subsequent guidance may well be an attempt by the CMA to warn merging parties not to expect a softening in its approach to this test.
Versions of the failing firm defence are established in a number of jurisdictions around the world and merging parties may nevertheless be looking to the CMA’s provisional findings in Amazon/Deliveroo for inspiration to run their own defences. While the CMA may be the first major competition authority to accept such arguments during the present crisis, other regulators are certainly taking into account the impact of the pandemic on market conditions when assessing mergers. For example, a recent European Commission information request relating to a proposed airline merger reportedly asks competitors to comment on the market from two perspectives: the situation absent the pandemic and the situation in which the pandemic is currently resulting in their operations being grounded.
In this context, while global competition authorities may not be relaxing their standard of review of mergers, it is inevitable that the pandemic will have an impact on the outcome of present and future reviews.
John D Colahan is a partner at Latham & Watkins, Stephanie Adams an associate, and Peter Citron is knowledge management counsel at the firm.