Accelerated M&A transactions and merger control issues during COVID-19

A summary of accelerated M&A merger control and regulatory issues during COVID-19, including the failing firm defence and foreign investment rules

17 June 2020

As the COVID-19 crisis continues, many companies will unfortunately be at risk of failure whilst others, including competitors or foreign investors, will see opportunities from a distressed market. It is therefore likely that we will see consolidation in certain markets, and merging parties may cite the so-called “failing firm defence” in order to gain merger control clearance where one of the parties is financially distressed. In addition, some M&A transactions may give rise to foreign investment concerns where the buyer is a foreign investor. We set out below a summary of the UK merger control regime and some recent developments on the failing firm defence, and foreign investment rules in the UK.

UK merger control

The UK merger control regime is a voluntary regime and there is no requirement to notify transactions to the UK Competition and Markets Authority (“CMA”). However, the CMA has the jurisdiction to review or “call in” transactions that are not notified where (i) the target’s UK turnover is more than £70 million; or (ii) the transaction results in the creation or enhancement of at least a 25% share of supply of goods or services in the UK, known as the “share of supply test”. The CMA has the power to review completed transactions 4 months from the later of completion of a transaction or material facts about the transaction being made public.

The CMA’s review period should always be factored into deal timing and this is particularly relevant in the case of a financially distressed business where limited funding and directors’ duties means that an M&A transaction needs to be carried out on an accelerated basis. The Phase 1 review period can last up to 40 working days and the CMA’s pre-notification period can last around 4 – 8 weeks (or longer) which means that the overall process may take 3 to 4 months or longer (in addition to the time required to prepare the merger notice). The CMA has recently published guidance on the application of UK merger control rules during the crisis. The guidance confirms that the timescales under which the CMA is required to operate have not been altered. However, it notes that the pre-notification process in some cases will take longer than usual because of difficulties in obtaining information from the merging parties and third parties. In addition, the CMA may not be able to start the 40-working day clock where third parties are unable to meaningfully engage with the CMA’s investigation.

As an alternative to a full merger notice, parties may consider submitting a short briefing paper to the CMA, explaining why the parties do not propose to submit a formal notification and why the transaction does not give rise to substantive competition concerns. Following receipt of the paper, the CMA may request further information from the parties, confirm that it has no further questions, or alternatively it may open a Phase 1 investigation where is considers that there may be competition concerns. Confirmation from the CMA that it has no further questions does not preclude the CMA from opening an investigation at a later stage. However, parties undergoing accelerated/distressed sales may consider this option given that the CMA usually responds within several weeks. Our recent, post COVID-19 experience, has shown that this process can sometimes be a useful tool in distressed situations, depending on the specific transaction.

The failing firm defence

The failing firm defence is an argument that can be used when parties are seeking UK merger control clearance where one of the parties is failing financially. The defence is subject to three strict criteria, which have been satisfied in relatively few cases. The CMA’s recent guidance includes a 'refresher' guide on how it will approach failing firm claims during the pandemic and broadly mirrors the guidance set out in its general merger assessment guidelines. The CMA confirms that in order to establish that the ‘failing firm’ scenario, the CMA requires ‘compelling evidence’ to demonstrate that the criteria below is met:

  • Would the firm have exited the market absent the transaction? – The parties must show that the failing firm would have exited due to financial reasons. The CMA will consider whether the firm is unable to meet its financial obligations in the near future and whether it is unable to restructure itself successfully.
  • Would there have been no less anti-competitive alternative purchaser for the firm or its assets? – The CMA will consider available evidence supporting any claims that there was genuinely only one possible purchaser. It advises that businesses should carefully consider the implications of choosing to try to sell to a close competitor and, in particular, merger control risks should be carefully considered in conjunction with other commercial considerations.
  • What would the impact of exit be on competition compared to the competitive outcome that would arise from the acquisition? - The CMA is likely to consider the impact that the exit of the failing firm would have on competition within the markets at issue (looking at the overall market structure and the relevant parameters of competition) compared to the competitive outcome that would arise from the acquisition. The defence is only likely to succeed if the firm’s exit from the market is worse for competition and consumers, than if the acquisition took place.

The CMA guidance states that it needs to ensure its decisions are based on evidence and not speculation, and will carefully consider the available evidence in relation to the possible impacts of the COVID-19 pandemic on competition on a case by case basis.

Is COVID-19 a free pass for the failing firm defence?

On 17 April 2020, the CMA provisionally cleared Amazon’s minority investment in Deliveroo based on the failing firm defence. This is the first time that the CMA has cleared a transaction under the defence during the COVID-19 pandemic. The ongoing ‘lockdown’ in the UK has resulted in the closure of a large number of the key restaurants available through Deliveroo, and a significant decline in Deliveroo’s revenues. The CMA therefore provisionally cleared the transaction on the basis that Deliveroo’s exit from the market would be inevitable without access to significant additional funding, which only Amazon would be willing and able to provide at this time. The CMA considered that the imminent exit of Deliveroo would be worse for competition than allowing Amazon’s investment to proceed.

However, does this mean that COVID-19 is a free pass for the failing firm defence? The CMA’s guidance confirms that the COVID-19 pandemic has not brought about any relaxation of the standards by which mergers are assessed or the CMA’s investigational standards. It also confirms that the statutory timescales under which the CMA is required to operate have not been altered. Therefore, whilst the current pandemic may bring urgent financial and time pressures for some merging parties, it is clear that the evidential burden on parties has not lessened. The CMA’s guidance was issued shortly after the Amazon/Deliveroo decision, which may be a signal from the CMA that the decision should not be taken as an indication that the failing firm test has been relaxed in any way. As such, it is unlikely that the COVID-19 crisis offers parties a free pass for the failing firm defence.

Foreign investment

On 25 March 2020, the European Commission issued guidance to EU member states to make use of their foreign direct investment screening tools during the COVID-19 pandemic given the increased risk of attempts to acquire healthcare capacities (e.g. for the production of medical or protective equipment) or related industries such as research establishments. The President of the European Commission also recently advised EU member states to use all options to protect critical European companies from foreign takeovers or influence that could undermine security and public order during the COVID-19 pandemic.

It is therefore likely that foreign investment concerns will be live across the EU and some member states will be adopting specific protectionist measures and closely scrutinising foreign investments during this time. A series of foreign investment reforms have already been introduced in the UK to protect the country’s key industries. In June 2018, the UK revised its merger control thresholds for national security transactions where the target is active in one of the following areas (we reported on these changes here):

  • The development or production of items for military or military and civilian use.
  • The design and maintenance of aspects of computing hardware.
  • The development and production of quantum technology.

The revised thresholds were designed to increase the UK government’s powers to investigate mergers that give rise to national security concerns. Some high profile transactions have recently been reviewed on national security grounds, including Advent International’s acquisition of Cobham plc and the acquisition of Inmarsat plc by Connect Bidco (a consortium including Apax Partners, Warburg Pincus, and two Canadian pension firms). These transactions concerned the defence and satellite sectors respectively.

In December 2019, the UK government proposed new national security and investment legislation to increase its powers further to review transactions on national security grounds. The legislation includes a notification system whereby businesses will be required to flag transactions with potential security concerns to the government for quick, efficient screening. The legislation is currently going through Parliament and the date for the second reading of the legislation has not yet been set. In addition, in April 2020, the Foreign Affairs Committee launched an inquiry into the Foreign & Commonwealth Office's (“FCO”) role in blocking foreign asset stripping of UK companies, especially where there may be national security risks. The inquiry will examine how the FCO assesses whether a potentially hostile party is seeking to secure significant influence or control over a UK company and in what circumstances the FCO should intervene.

How can we help?

Burges Salmon is tracking COVID-19 developments and advises on all aspects of EU and UK merger control and insolvency proceedings. If you have any questions in relation to the issues raised in this article, please contact Andrew Eaton (corporate restructuring and insolvency matters), Rupert Weston (M&A matters) and Chris Worrall (merger control matters).

Written by Sandra Mapara.

Key contact

Chris Worrall

Chris Worrall Partner

  • Head of Competition
  • Mergers and Acquisitions
  • Financial Services

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