In response to the initial outbreak of COVID-19 several countries declared a state of emergency. As an immediate consequence, timelines for reviews of notified transactions were extended or even suspended.
By now, however, it has become obvious that transaction deal
value and volume contracted rapidly. This is consistent with
previous crises. But crises often bring opportunities for strategic
acquisitions of distressed assets.
The consensus view is that as the economic impact of the pandemic
continues and government support tapers off, acquisitions of
distressed assets and companies will pick up. Acquisitive companies
should not make the mistake, however, of expecting competition
authorities to wave through consolidation in distressed situations,
even if the acquisition will help the target avoid insolvency and
safeguard jobs. Successfully completing distressed transactions
requires careful planning and implementation within constrained
timetables. Two aspects merit special mention: the failing firm
defence and review timelines. There are significant differences in
the approach to and experience with both aspects by competition
authorities in CEE.
On top of these merger control considerations, new foreign investment control tools can significantly impact transactional deadlines. While these tools are outside the scope of this article, details on the respective mechanisms can be found in our dedicated FDI info corner.
Failing firm defence in CEE
The substantive test for merger control review applied in most jurisdictions is whether the transaction will contribute to a significant impediment to effective competition, particularly by creating or strengthening market dominance. However, the current economic crisis will likely lead to situations where the markets affected by the transaction, absent the merger, would in any event see companies exiting and consequently an increase in concentration and a significant lessening of competition.
In such a situation, the failing firm defence (FFD) comes into the equation. Relying on the FFD means that regardless of potential competitive issues, the argument is made that the only alternative would be the bankruptcy of the target business and that this would be more harmful to competition than the proposed acquisition. In other words, the acquisition is presented as a "rescue merger" and sold as the least adverse outcome when compared to the alternative.
Some competition authorities explicitly acknowledge the FFD. Those that do rely mainly on three criteria to assess whether an FFD is likely to succeed. These criteria are also enshrined in the EU 2004 Horizontal Merger Guidelines3 and are based on decisions in Kali + Salz4 and BASF5:
- the failing firm would soon be forced to exit the market due to
financial difficulties if it is not taken over by another
company;
- here is no less anticompetitive alternative than the proposed
merger; and
- in the absence of the proposed merger, the assets of the failing firm would inevitably exit the market.
On the following page we list whether CEE authorities have already accepted the FFD in practice:
Austria |
The competition authority published a paper on "Shutdown Mergers" (see here)6 which mentions, inter alia, the FFD and refers to criteria in EU practice. It also mentions that FFD was accepted in several cases, e.g. in BWB/Z-3707, Airbus SE; C Series Aircraft Limited Partnership Cartel Court: |
Bosnia & Herzegovina | No guidance and no case law on FFD according to public records |
Bulgaria | No guidance and no case law on FFD according to public records |
Croatia |
Notice on FFD issued by the Croatian Competition Agency in Guidance paper on horizontal mergers (HR version to be found here) Case law |
Czech Republic | - Notice on FFD issued by the NCA (EN version here:
uohs.cz/en/legislation.html), referring to EU legislation - Case S 128/02 Baring Communications/Vision Networks (FFD accepted). |
Hungary | - Acknowledged in principle (without explicitly mentioning the
criteria) in the NCA's guidance paper on the assessment of
mergers (HU version here) - FFD dismissed in Vj-155/2009 (Bonafarm Zrt. / Herz Zrt.); criteria assessed similar to that under EU FFD |
Poland | No guidance on FFD Cases (all dismissing FFD): - DKK-12/11 (NFI Empik Media & Fashion S.A. / Merlin.pl S.A.); - DKK-1/2011 (PGE Polska Grupa Energetyczna S.A. / Energa S.A.); - DKK-68/09 (Rieber Foods Polska S.A. / FoodCare Sp. z o.o.); - DKK-10/09 (Orzel Bialy S.A. / Baterpol Sp. z o.o.) and - DKK-67/09 (KZN Cogifer Polska Sp. z o.o. / Koltram Sp. z o.o.). |
Romania | No guidance and no case law according to public records |
Serbia | No guidance and no case law according to public records |
Slovakia | No guidance and no case law according to public records |
Slovenia | No guidance and no case law according to public records |
Early clearance and derogation in distressed situations
Although CEE jurisdictions require transactions involving parties meeting relevant thresholds to be notified and approved before closing, in exceptional circumstances closing can occur before clearance is obtained.
For example, the EU Merger Regulation provides that the European Commission may, on reasoned request, grant a derogation from the obligation to obtain prior clearance. Such a derogation may be made subject to conditions and obligations in order to ensure conditions of effective competition. For example, the businesses may be required to be held separate pending clearance. A derogation may be applied for and granted at any time ("EUMR Derogation").
In addition, almost all jurisdictions have followed the EU example and exempt the following acquisitions from the obligation to obtain clearance: (i) a credit or financial institution that acquires shares on a temporary basis (less than one year) with the intention to re-sell the shares, and provided the acquirer does not exercise any voting rights attached to the shares; (ii) a liquidator, trustee in bankruptcy, or similar, under the relevant national legislation; or (iii) a financial holding company. We will disregard these exemptions for the purpose of this article ("EUMR Exemptions").
Only a few CEE jurisdictions have enshrined a concept similar to the EUMR Derogation. Without such a derogation, eventual acquirers that need to close early are left to discuss with competition authorities either their readiness to provide exceptionally quick clearance or at least to signal their willingness not to pursue a fine if a transaction is closed before clearance. The latter would expose the transaction to the risk of challenges by third parties that oppose the transaction.
More importantly, only a few jurisdictions even provide for the possibility of early clearance before the standard review period has elapsed. We have summarised the details in the following table.
Austria |
- No equivalent to EUMR Derogation |
Bosnia & Herzegovina | - No equivalent to EUMR Derogation - No early clearance mechanism |
Bulgaria | - No equivalent to EUMR Derogation - No early clearance mechanism |
Croatia |
- Equivalent to EUMR Derogation |
Czech Republic | - Equivalent to EUMR Derogation; further details provided for
in a notice (EN version can be found here). Reasoned derogation request to be
decided upon within 30 calendar days. It is possible to shorten
this to 10 calendar days based on pre-notification talks. - No early clearance mechanism |
Hungary | - No equivalent to EUMR Derogation. However, transactions
declared by government decree to be of "national
importance" do not require clearance, regardless of turnover
or market effects. - Early clearance mechanism allowing for clearance in eight days if transaction is clearly unproblematic |
Poland | - No EUMR Derogation, but acquisitions in the course of a
bankruptcy procedure are exempted from filing, except where the
acquirer and the target are competitors - No early clearance mechanism |
Romania | - EUMR Derogation equivalent available - No early clearance mechanism, but possible to apply for derogation also after submission of the merger filing |
Serbia | - No EUMR Derogation equivalent available - No early clearance mechanism |
Slovakia | - EUMR Derogation equivalent available. Reasoned request to be
decided upon within 20 business days. - No early clearance mechanism |
Slovenia | - EUMR Derogation equivalent available. Reasoned request to be
decided upon within 15 business days. - No early clearance mechanism |
Footnotes
1The author would like to thank the eu &
competition department's CEE team heads and co-heads of
Georgiana Badescu (ROM), Claudia Bock (CZE/SVK), András Nagy
(HUN), Galina Petkova (BUL), Srdana Petronijevic (CRO/BIH/SRB),
Pawel Kulak (POL) and Eva Skufca (SLO) for their input.
2See here for a comprehensive summary of the actions taken by
CEE competition authorities
3Guidelines on the assessment of horizontal mergers
under the Council Regulation on the control of concentrations
between undertakings ("Horizontal Merger
Guidelines"),
OJ [2004] C 31/5, para. 90.
4Commission Decision of 9 July 1998 in Case M.308
Kali+Salz/MdK/Treuhand.
5Commission Decision of 11 July 2001 in Case M.2314
BASF/Eurodiol/Pantochim.
5The position paper looks into mergers caused by
COVID-19 ("shutdown mergers"), offers companies a
checklist for the assessment of shutdown mergers, explains the
criteria applied to assess financially distressed companies, gives
an overview of the impact of market power and its macroeconomic
effects, and lists possible alternatives to shutdown
author: Christoph Haid1
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.