COVID-19 and Irish Merger Control – The "Failing Firm" Defence
COVID-19 and Irish Merger Control – The “Failing Firm” Defence
With COVID-19 and its effect on the Irish (and wider global) economy, firms are experiencing significant economic challenges. As a result, stronger firms may become well-positioned to acquire ailing firms. Merger control involves regulators assessing whether the acquisition of one firm by another (often competitors) would be anti-competitive. When notifying acquisitions to those regulators, a feature of the competition analysis can involve assessing whether the target (or the division of the target) being acquired by the buyer would have gone out of business if the acquisition had not taken place.
When might the failing firm defence be raised?
The acquisition, in particular, of one competitor by another competitor, can raise difficulties in obtaining Irish merger control approval (i.e. from the Competition and Consumer Protection Commission (CCPC)). This is where the effect of such an acquisition would be likely to substantially lessen competition (SLC) in Ireland.
Where the acquisition would be likely to SLC in Ireland, merging parties can raise a defence that the target is a "failing firm" and therefore the CCPC should allow the acquisition to proceed. This would be on the basis that, without merger control approval, the target would have gone out of business. The CCPC looks at both the position of the target and the buyer in considering such a failing firm defence.
The position is similar with other regulators such as the European Commission (Commission) under EU merger control and the Competition and Markets Authority (CMA) under UK merger control (also the "exiting firm" defence).
When will the CCPC consider a failing firm defence?
The failing firm defence requires that both the target (and its productive assets) would exit from the relevant market unless the acquisition is put into effect.
The CCPC's failing firm defence test has four elements — all of which must be met.
The target must be unable to meet its financial obligations in the near future
There must be no viable prospect of reorganising the target through receivership, examinership or otherwise
The assets of the target would exit the relevant market in the absence of the acquisition
There is no credible less anti-competitive alternative outcome than the acquisition
Evidence in support of the target's financial distress includes documents, prepared by the parties and/or third parties, such as the following:
Audited financial statements
Projected cash flows
Does the CCPC also look at the position of the buyer in applying the failing firm defence?
Yes. The pending exit of the target from a market does not necessarily justify the proposed buyer of the target. It may also be that an acquisition with an alternative buyer may be better (i.e. more pro-competitive) for the CCPC. Therefore, the merging parties need to show good-faith efforts have been made to find alternative acquirers that would not lead to as significant a reduction in competition in comparison to the acquisition involving the merging parties.
Evidence that there is no credible less anti-competitive alternative outcome than the acquisition of the target in question involves either: (i) the acquisition being less anti-competitive compared to other viable acquisition with other buyers, or (ii) there being no other viable buyers. Such evidence would include;
Details of the sales process
The number of alternative bids
Internal documents prepared by staff including briefing materials for the Board and/or senior management
Documents prepared by third parties for the Board and/or senior management
Evidence of the likely distribution of sales of the failing firm
These criteria are designed to show that the acquisition would not leave consumers worse off than if the target had just left the relevant market.
Is there also a "failing division" defence under Irish merger control?
Yes. The failing division argument (i.e., where the productive assets of part of a firm would exit the market but for the acquisition) is similar to the failing firm argument. A high level of CCPC scrutiny takes place given the potential unavailability of division-specific information (though it was successfully used in the 2015 CCPC decision in Baxter Healthcare/Fannin Compounding)
Does the CCPC consider a failing acquirer(s) and failing target(s) argument?
Yes – the parties have to demonstrate no adverse effect on competition as well as the failing firm criteria.
Has the CCPC applied the failing firm defence in practice?
Yes, though rarely since 2003 when the current Irish merger control system began.
In its Baxter Healthcare/Fannin Compounding decision (2015), the CCPC took the view that Fannin Compounding (i.e. the target), based on all the available evidence, satisfied each condition of the CCPC's failing division test. As a result, the most likely outcome in the absence of the acquisition was that Fannin Compounding and its assets would exit the relevant market. The CCPC also considered that there were credible reasons to believe that the competitive structure in the commercial supply of compounded chemotherapy medicines in Ireland (the subject-matter of the acquisition) was likely to deteriorate to an even greater extent in the absence of the acquisition. The CCPC also concluded that in the absence of the acquisition, there would be a relatively significant reduction in supply capacity in Ireland for compounded medicines, which would have been likely to lead to an increase in prices. In addition, Baxter was found, in effect, to be the only credible purchaser of Fannin Compounding. As a result, the acquisition was approved by the CCPC (in Phase 2 of its assessment process).
In some cases, the CCPC has cleared an acquisition on competition grounds without having to consider whether the claimed failing firm defence applied (e.g. the CCPC decision in Club Travel/Budget Travel (2010)).
Also, the CCPC has rejected the failing firm defence (e.g. the CCPC decision in Musgrave/Superquinn (2011) because it was not certain that all the target assets would have exited the market in the absence of the acquisition).
While the failing firm defence was not used in the CCPC decision in HMV Ireland/Zavvi (2010), the CCPC shortened the time period for 3rd party comments on the notification because it wanted to reach its decision quickly given that if the assets were not sold as quickly as possible, it was likely that the target retail stores would be closed (with the consequent loss of at least 100 jobs).
Use of the failing firm defence during the COVID-19 crisis
While there have been no COVID-19 based CCPC merger control decisions so far, the CMA provisionally concluded in April 2020 that the Amazon/Deliveroo acquisition in the UK would not SLC in the UK. The CMA provisionally found that, due to COVID-19, Deliveroo was likely to exit the market unless it received the additional funding available through the acquisition by Amazon. Also, the CMA provisionally found that no less anti-competitive investor was available and the loss of Deliveroo as a competitor would be more detrimental to competition and to consumers than allowing the Amazon investment to proceed. It is also worth noting that the failing firm defence will continue to be applied by the CMA under UK merger control rules post-Brexit. The Commission has on occasion allowed the failing firm defence. One notable case in which the failing firm defence was accepted by the Commission was in 2013 in its Aegean/Olympic II decision (COMP/M.6796).
The failing firm (and division) defence is a possibility in the context of an otherwise anti-competitive acquisition under Irish merger control. The economic impact of COVID-19 might create the conditions for such a defence. However, the defence is a challenging one to raise successfully (and it wasn't used often in acquisitions following the global financial crisis in 2008). The key for the merging parties in using this defence is to ensure that they have sufficient evidence to provide to the CCPC to demonstrate the target's ailing position and also the appropriateness from a merger control perspective of the buyer in seeking to acquire the target.