1 – Identify the Commission or the FCA’s jurisdiction
The acquisition of a distressed business, provided it is a concentration – i.e. it entails a lasting change in the nature of the control exercised over the business in financial difficulty – must obtain prior merger control clearance either from the Commission or the FCA, provided the applicable jurisdictional turnover thresholds are met.
As a reminder, a concentration falls outside the Commission’s jurisdiction where the buyer and the distressed business each achieve more than two thirds of their aggregate turnovers in the European Union within one and the same Member State. Should it not be the case, the concentration must be notified before the Commission where the cumulative thresholds are met[1].
If none of the above-mentioned EU thresholds are met, the concentration must be notified in France if the two cumulative FCA’s thresholds are met[2], it being specified that specific thresholds exist for the retail sector[3].
It is up to the purchaser to notify the acquisition of a distressed business; the receiver has no legal or regulatory obligation to refer to the Commission or the FCA if the acquisition qualifies as a notifiable concentration.
Buyers involved in a transaction where the target is financially distressed should therefore make sure, as a first step, of the relevant competition authorities’ jurisdiction with respect to merger control.
2 – Where appropriate, anticipate the merger control procedural and substantive consequences as soon as the takeover bid is made
In a second step, it is crucial for buyers of distressed businesses to anticipate their obligations in relation to merger control as early as possible, starting from the preparation of the takeover bid, since:
- On the one hand, the standstill obligation applies under the EU and French merger control rules, i.e. the acquisition of the whole or part of a distressed business cannot be completed (which means that the effective control on the target cannot be exercised by the buyer) as long as the relevant competition authority has not cleared the transaction. Accordingly, in the absence of any derogation from the standstill obligation granted by the relevant competition authority (cf. Section 2.1), the buyer may be compelled to maintain a conditional takeover offer and its offer may eventually be declared non-responsive; and
- On the other hand, the relevant competition authority may identify anti-competitive effects arising from the recovery plan, making it necessary for the buyer to divest eventually some of the target’s assets. Where the transaction appears to give rise to competition concerns (in particular transactions between competitors in highly or fairly concentrated markets), the failing firm defence concept (cf. Section 2.2), which enables the buyer to obtain unconditional merger clearance, may be worth exploring, especially in the wake of the current COVID-19 crisis.
2.1 Procedural aspect : seeking a derogation from the standstill obligation
Derogations from the standstill obligation, which are provided both by the EU and French merger control rules, are frequently granted by the Commission and the FCA in the context of transactions involving the acquisition of distressed businesses.
Where a derogation from the standstill obligation is granted, the buyer can complete the transaction with a full or partial integration of the target, without waiting for the competition authority’s prior merger clearance.
When to seek a derogation?
Obtaining a derogation from the standstill obligation is exceptional. However, the buyer may consider seeking a derogation from the Commission or the FCA, and such derogation is generally granted in the following specific cases:
- Acquisition of a distressed business in the context of a collective insolvency proceeding before the Commercial Court: the acquisition of a distressed business, when it takes place in the context of an insolvency proceeding and qualifies as a concentration subject to prior filing before a competition authority (i.e. the Commission, the FCA or any other relevant authority), may put the buyer in a situation whereby it would automatically infringe merger control rules (as a result of the Commercial Court’s ruling that would immediately grant the buyer control over the target before any merger clearance from the relevant competition authorities).Conversely, compliance with the standstill obligation where a merger filing is required may jeopardize the buyer’s offer acceptability as any takeover offer disclosed in the framework of a receivership must be definitive and unconditional the day where the Commercial Court examines the offers (failing which it may be inadmissible). Under such circumstances, a derogation from the standstill obligation hence appears necessary.
- Other exceptional circumstances: other exceptional circumstances may justify seeking a derogation from the standstill obligation, such as the risk of going out of business of the target, the necessity to implement some agreements allowing the buyer to exercise de facto control over the target (such as management lease contracts) in order to ensure the target’s viability, or the necessity for the buyer to provide guarantees or to get financing for the target’s viability. However, in practice, derogations from the standstill obligation in those types of cases are relatively rare.In such exceptional circumstances and for transactions that do not cause any substantive competition concerns (e.g. where there is no overlap or any vertical or related links between the parties), a filing under the classical and simplified procedure, if possible, may be a better option, provided it is anticipated sufficiently in advance. Indeed, the simplified procedure allows the buyer to prepare and submit the notification more quickly, to provide less information, and obtain a merger clearance decision within a shorter timeframe (in any case in less than 25 working days).
How to seek a derogation?
To obtain a derogation from the standstill obligation regime, the buyer must submit to the relevant competition authority a reasoned submission, including the reasons for such derogation as well as a preliminary and simplified competitive assessment of the impact of the proposed transaction. The request for derogation may cover the whole or part of the contemplated transaction.
It is advisable to make early contact with the relevant competition authority, it being specified that according to the FCA, the derogation must be submitted five (5) working days before the Commercial Court’s ruling at the latest.
The Commission and the FCA may grant derogation at a relatively short notice (approx. ten (10) days in previous cases).
Under which conditions a derogation may be granted?
A derogation is a waiver from the requirement to wait for merger control clearance before completing the transaction, it is however not a waiver from the requirement to obtain substantive competition clearance for the deal. In other words, the buyer still needs to make a complete filing as soon as possible and go through the normal EU or French merger control process.
The derogation granted by the Commission or the FCA may be declared void if the filing is not complete in a given timeframe after the transaction is completed. The French merger control rules provide a fix timeframe (three (3) months), whereas the Commission has already imposed shorter periods ranging from one (1) month to six (6) weeks.
In addition, a derogation is without prejudice to the final decision that will eventually be taken by the relevant competition authority regarding the impact of the contemplated transaction on competition. As such, the Commission and the FCA may, if deemed necessary, impose remedies or even block the deal if, as a result of their review, they conclude that the merger is anti-competitive.
The buyer must therefore make sure that prior to the Commission’s or the FCA’s final decision, it does not take any action or implement any measure that would change the structure of the transaction such as, for example, the divestment of the target’s assets, completing irrevocably the transaction, or executing an agreement that would hinder the purchase of whole or part of the target’s assets by a third party (either jointly or separately). In this respect, the EU and French competition authorities may grant the derogation with conditions attached, such as the appointment of an independent trustee that must monitor the buyer’s actions and measures up until the competition authority’s final decision.
Early informal discussions with the Commission or the FCA are therefore highly advisable, since they may allow the buyer to anticipate potential competitive concerns that could result from the transaction and adjust the scope of its takeover offer accordingly.
2.2 Substantive aspect : considering the failing firm defence concept
The failing firm defence is an argument enabling the notifying party to avoid any competitive assessment of the contemplated transaction by the Commission or the FCA.
In other words, a concentration may be unconditionally cleared by the Commission or the FCA, even though it is likely to have significant anti-competitive effects, provided that the three cumulative conditions below are met:
- The target would, in the near future, be forced out of the market because of financial difficulties, if not taken over by the buyer. This first criterion requires to demonstrate that in the absence of the takeover, the target would not be able to maintain its activity in the short run;
- There must be no less anti-competitive alternative purchase (covering either the whole or a substantial part of the target) than the proposed transaction. This second criterion aims at assessing the market operators’ reactions in the event of business failure of the target, in order to make sure that the takeover by the notifying party (for the whole or part of the target’s assets) is the less harmful scenario, should the target close down; and
- The exit of the distressed business would not be a less harmful outcome for the consumers than the contemplated transaction. This last criterion consists in comparing the competitive effects of the proposed transaction with those of the different scenarios that would have occurred in the absence of the transaction.
The Commission has also enshrined the “failing division” concept, in order to approve the buyer’s takeover of some assets of the target, provided the three above mentioned conditions are met.
These three conditions are strictly interpreted by both the Commission and the FCA, and there are very few cases where the failing firm defence argument has been accepted in the past.
However, in light of the significant impact of the COVID-19 crisis and its uncertain duration, it can be expected that some of the most severely affected sectors will go through a consolidation phase in the short-midterm which may lead to a resurgence of the failing firm defense concept. It should nevertheless be noted that at this stage, the Commission is not considering a relaxation of the analysis of these three criteria in the context of the COVID-19 crisis. Indeed, on 24 April 2020, the Competition Commissioner Margrethe Vestager has publicly declared that there is no need to relax the DG COMP’s traditional approach towards the failing firm defence concept, even in these uncertain times related to the COVID-19 crisis. To date, the FCA has made no public statement with respect to its future approach concerning the failing firm defence concept in relation to COVID-19.
[1] (i) the combined worldwide pre-tax turnover of all the undertakings concerned (i.e., the buyer and the distressed business) exceeds EUR 5 billion and (ii) the aggregate EU pre-tax turnover of each of at least two of the undertakings exceeds EUR 250 million. A concentration that does not meet the above-mentioned thresholds still needs to be notified to the Commission when (i) the combined aggregate worldwide pre-tax turnover of all the undertakings concerned exceeds EUR 2,5 billion; (ii) in each of at least three Member States, the combined aggregate pre-tax turnover of all the undertakings concerned exceeds EUR 100 million; (iii) in each of at least 3 Member States mentioned in (ii), the aggregate pre-tax turnover by at least two of the undertakings concerned exceeds EUR 25 million and (iv) the aggregate EU pre-tax turnover of at least two of the undertakings concerned exceeds EUR 100 million.
[2] (i) the total worldwide pre-tax turnover of all the undertakings concerned exceeds EUR 150 million and (ii) the total turnover achieved in France by each of at least two of the undertakings concerned exceeds EUR 50 million.
[3] When at least two of the undertakings concerned operate one or several retail shops, the concentration must be notified if (i) the total worldwide pre-tax turnover of all the undertakings concerned exceeds EUR 75 million and (ii) the total pre-tax turnover achieved in France in the retail sector by each of at least two of the undertakings concerned exceeds EUR 15 million.
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