Does COVID-19 affect the assessment of mergers?
COVID-19 has severely affected the economy in Iceland as well as other countries. Needless to say, many companies are suffering in the current economy, and their future is uncertain. In such scenarios, it is not unusal for companies to look into the potential benefits of a merger, or the buying of assets, in order to acquire synergies or ensure that assets remain on the market, for example. In such a situation, it is important to take note of the merger rules of the Competition Act no. 44/2005.
When companies are on the brink of bankruptcy, the Competition Authority is able to sanction the merger of companies certain conditions being fulfilled, despite the merger having prima facie negative effects on competition should the effects be unavoidable due to market conditions and the financial situation of the acquired company. This rule is called ‘the failing firm defence.’ One argument in favour of the rule is, among others, that it is for the long-term benefit of the consumer that assets maintain in operation despite there being fewer competitors on the market as a result of the merger.
There are three cumulative conditions for sanctioning mergers on the basis of the failing firm defence. In practice, it necessary for all three conditions to be fulfilled in order for the defence to apply, although the distinctive characteristics of each market should always be considered.
Firstly, it should be demonstrated that the acquired company is due to exit the market in the near future. In order to fulfill this condition, it is generally sufficient to demonstrate that the company is headed for bankruptcy and is therefore forced to exit the market.
Secondly, it should be demonstrated that there are no alternative options available that would lead to a less anti-competitive result, i.e. a merger with another company. A fulfillment of this condition can be difficult to demonstrate indisputably, as there is often limited time available to acquire failing firms. In principle, it is sufficient to demonstrate that there are no other potential buyers, or that other options will not lead to less anti-competitive results. Generally, it helps to demonstrate that a genuine attempt has been made to seek alternative solutions, such as if the company has been up for sale for some time and acquired the assistance of experts to find potential buyers without result.
Thirdly, it should be demonstrated that the acquired company’s assets will exit the market in absence of the merger. In practice, this condition is considered fulfilled when it is demonstrated that the market share of the failing firm will go to the acquiring company with or without a merger. This condition can also be considered fulfilled when the alternative option is to sell the acquired company’s assets offshore.
This rule is an exception and is therefore narrowly interpreted by the Competition Authority. It can therefore be difficult to prove that all conditions are fulfilled, the second condition in particular, as the acquisition of a failing firm, or the purchase of its assets, needs to happen quickly and without hiccups, and often there is no time to test whether there are any other potential buyers.
The Competition Authority has published a special informative website dedicated to the application of competition law and competition supervision as a result of the economic effects of COVID-19. There can be found clues to the Authority’s emphasis in the coming months. It can be interpreted as such that the Competition Authority recognizes the current situation and will, as far as they are able, evaluate whether the acquired company is a failing firm based on the submissions of the merging parties.
In such situations, the merging parties will need to rely on a quick and flexible approach on behalf of the Competition Authority, whereby the merging parties simply will not be able to enjoy lengthy proceedings for a decision regarding whether the acquired company is due to exit the market in absence of the merger due to its financial difficulties. This requires companies to be ready to demonstrate with appropriate documentation that a merger will not be anti-competitive, or that the narrow conditions of the failing firm defence are fulfilled. Preparation and execution of the transaction is therefore of utmost importance.