Merger control: distressed M&A in the time of Covid-19

20 May, 2020

19 May 2020 By: Nicolas Teijeiro / Marcus Vinicius Bitencourt / Bruna B. Rocha / Renata Dalcol de Amorim Ferreira / Carolina Bawlitza / Maria Claudia Martinez Beltran / Isabel Gallástegui / Jorge Benejam / Daniel Flores / Luis Vargas / Rafael Urday Several antitrust issues have taken center stage during the coronavirus disease 2019 (COVID-19) pandemic.  Issues such as price gouging, state aid, and competitor collaborations are top of mind.  But another antitrust issue is likely to share center stage as countries slowly begin to re-open – the failing firm defense.  Most jurisdictions have provisions establishing a failing firm defense in merger control, but the defense often involves a high standard and is rarely triggered.  In the current environment, we are likely to see an increase in the application of the defense. This article provides a brief overview of the main elements of a failing firm defense or exemption focusing on the standards applicable in the United States, Europe, Argentina, Brazil, Chile, Colombia, Mexico and Peru. Failing firms One of the main goals of competition law is to ensure the efficient allocation of resources. In general, struggling companies that cannot keep up with evolving market conditions and consumer trends tend to be replaced by new or better firms. Consumer welfare benefits greatly from companies’ need to be efficient to stay in business and compete, which lowers prices and increases product quality and innovation. However, in certain exceptional cases consumers may benefit more from companies keeping the assets of a failing firm alive than from shutting it down, despite any competition concerns, such as the likelihood of increased consolidation or higher prices. In such cases, the typical antitrust cure (enjoining an anticompetitive merger) may become worse than the disease (allowing a presumably anticompetitive merger go forward), because the assets may exit the market for good. The “failing firm defense” potentially offers some flexibility to companies that wish to merge in the extreme circumstances related to the COVID-19 pandemic.  If the relevant elements are present, financially strained companies (and their buyers) may be able to put forward failing firm arguments to obtain clearance from antitrust agencies around the world. Applicable standards In the United States, the bar set by the failing firm defense is high.  Courts have confirmed that parties face a difficult burden when trying to insulate an otherwise potentially anticompetitive merger based on the failing firm defense.  The failing firm defense not only requires proof that the company is in danger of imminent business failure, but also that it cannot successfully reorganize or be sold to a different buyer.  In practice, each of these factors can be difficult to prove, and establishing all three of them can be close to impossible. Specifically, as stated in Section 11 of the US Horizontal Merger Guidelines of the US Department of Justice and the Federal Trade Comission: “the Agencies do not normally credit claims that the assets of the failing firm would exit the relevant market unless all of the following circumstances are met: the allegedly failing firm would be unable to meet its financial obligations in the near future; it would not […]

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