The UK Competition and Markets Authority (CMA) has released guidance on its approach to merger assessment during the Covid-19 crisis. The CMA has been keen to stress that there is no substantive shift, though there may be some changes to its processes to take account of the greater difficulty that it faces in getting information from merging parties and third parties.
One area the CMA has emphasised is the “failing firm defence”, on which it has published a separate Annex. This reiterates the three limb test that it has previously employed:
- Would the firm have exited absent the transaction?
- Would there have been an alternative purchaser for the firm or its assets?
- What would the impact of exit be on competition compared to the competitive outcome that would arise from the acquisition?
In normal times, this test would seem to capture well the fundamental issues around the failing firm – essentially whether there is a less anti-competitive solution.
But because of the exceptional circumstances of Covid-19, it will take a brave competition authority to stick to the letter of the failing firm test.
In relation to Limb 2, the test asks whether, at the time the transaction was being contemplated, there was an alternative buyer for a firm’s assets that would lead to greater competition. However, even if that is the case, there may be no such purchaser if the CMA blocks the transaction – at least not immediately. Consider the following timing:
- The UK goes into lockdown in March 2020 with a major effect on the business of Firm A.
- Firm A concludes a deal on an urgent basis with Firm B in April 2020 and notifies the CMA in May 2020, arguing for a failing firm defence.
- The CMA reviews the transaction very quickly and publishes an Issues Letter in July 2020, assessing that the failing firm defence does not hold because an alternative purchaser was or may have been available that would have given rise to a more competitive counterfactual.
Does the CMA refer to Phase 2 in this situation (or block the deal, if this discussion is happening at Phase 2)? On the specific wording of the test, yes: there would have been an alternative, more competitive purchaser. However, in practice this is not a counterfactual that could necessarily be achieved from the point at which the CMA makes the decision. That would require a) a decision to refer; b) a subsequent abandonment of the deal by the parties; c) a further sale process by Firm A; d) identification of the least anti-competitive counterfactual and conclusion of a deal with that party (or one of those parties); and e) a further merger control process. These steps could take several months, at which point Firm A could well have gone under. (If the parties go to Phase 2, and subsequently do not pass the failing firm assessment, there would be further delays.)
In ordinary times, this may not be troubling for the CMA. But in the current situation, it would be a courageous authority that took a view with the benefit of hindsight, rather than from the time at which its decision needs to be made. So the CMA’s desire to stick to the test it sets out in Annex A for its merger guidance may not be credible when faced with real world cases. For instance, in the proposed Amazon/Deliveroo tie-up, the CMA recently cleared the transaction on failing firm grounds, apparently using Deliveroo’s current financial situation rather than thinking about whether an alternative purchaser was available at the point the deal was done. (My colleague Fraser Davison has written an interesting article on Amazon/Deliveroo here.) As Stuart McIntosh, who chaired the inquiry, said in the press release: “Without additional investment, which we currently think is only realistically available from Amazon, it’s clear that Deliveroo would not be able to meet its financial commitments and would have to exit the market... Faced with that stark outcome, we feel the best course of action is to provisionally clear Amazon’s investment in Deliveroo.” (My emphasis.)
Given this, it seems possible that the CMA’s attempt to hold the line on its failing firm test in Annex A may well not be credible (nor would it necessarily be sensible on competition grounds, at least within the context of the Covid-19 crisis). The commentary in Annex A does encourage firms to take the failing firm test into account in their upfront merger decisions: “The CMA notes, in this regard, that businesses wishing to exit the market should carefully consider the implications of choosing to try to sell to a close competitor and, in particular, that execution risks (including those relating to merger control proceedings) should be carefully considered in conjunction with other commercial considerations (including not only what price might be achieved but also how quickly the seller might be able to complete the sales process).” If firms follow this advice, then the CMA may not have to wrestle with the conundrum identified above.
However, whether the CMA in practice would block an Amazon/Deliveroo-type deal because it does not pass the failing firm test is far from clear. Thus far, action and rhetoric do not seem to match.