Competition Law in Times of Corona – Rescue Mergers

In times of an economic crisis like the one we are experiencing now, one solution to create efficiencies might be an acquisition of another company in the same field of business. Nevertheless, usually it is quite difficult or even impossible to acquire a competitor with high combined market shares due to merger control restrictions. Therefore, it is important to know that a rarely used exception for rescue mergers (the so called “failing company defence”) could sometimes be argued in such times.

 When Does the Exemption Apply?

The failing company defence would apply in case of (i) an imminent market exit of a competitor (target company), (ii) that thereby its market shares would accrue to the potential acquirer in any case and (iii) that no other company would have been prepared to acquire such company. These circumstances need to be evidenced to the competition authorities. The above might also apply to the market withdrawal of a subsidiary or a company division (failing divison defence). This only in case of sufficient economic and organisational separability of such division.

Often the difficult part in such scenarios is to prove that the preconditions of the defence are met:

Whilst proof of the market withdrawal could, eg, be provided by showing that bankruptcy proceedings have started or shall be applied for soon, it is usually difficult to evidence that no other, potentially less anti-competitive scenarios are possible. Inter alia, the acquirer needs to show that, (i) the market shares would accrue to it anyway (at least to the biggest part) and (ii) notwithstanding adequate efforts no alternative purchaser of the business could be found. The first aspect implies that an alternative scenario - ie the market structure in absence of the merger - is examined as to whether the market shares would accrue to the acquirer in any case or if the relevant assets (eg, means of production) of the target business would exit the market. In the latter case, the likelihood of deterioration of market conditions due to possible supply shortages and price increases must also be taken into account with the assessment. The second aspect is somewhat qualified by the fact that also such alternative acquirer would need to fulfil certain conditions, eg, (i) provide a set-up sufficient to ensure the continuation of the business and (ii) that the alternative acquisition could be implemented at sufficiently short notice to actually preserve the target business.

Current Situation

In normal circumstances the failing company defence seldomly applies. In times of the lockdown due to the spread of the corona virus it could gain a more significant role. The proof of the prerequisite criteria could be less burdensome if certain facts can already be derived from the general economic situation or the generally known problems in a particular sector thereof. In addition, in certain circumstances there might be need of imminent action to prevent the market exit of the respective company in financial difficulties.  

However, competition authorities could also reject the failing company defence if there are other less far-reaching alternatives of joining forces with another company. This might, eg, be the case if a temporary cooperation with such other company in regard to supply, production or logistics were also possible and such would suffice to keep the respective business viable. Nevertheless, certain efficiency gains might only be possible with a full-scale merger. Therefore, the appropriate solution would need to be decided upon on a case by case basis.

Please note: This newsletter merely provides general information and does not constitute legal advice of any kind from Binder Grösswang Rechtsanwälte GmbH. The newsletter cannot replace individual legal consultation. Binder Grösswang Rechtsanwälte GmbH assumes no liability whatsoever for the content and correctness of the newsletter.