Member Article

The COVID-19 pandemic is indisputably the most serious public health emergency of our times, and at the same time, a shock to the global economy. Being a field of law largely influenced by economics, it would seem inevitable that the application of competition law would not be affected by the current economic realities brought about by the coronavirus pandemic.

Competition authorities stress that in times of economic downturn, it is critical to preserve competition in the markets and that competition law and application thereof should not be suspended.

At the same time, it is becoming apparent that it will be necessary for competition authorities worldwide to factor in non-competition elements in their antitrust assessment of transactions as justification for certain restraints of competition.

In any event, it is more important than ever that undertakings and consumers receive protection under competition law in these challenging times and it would not be an exaggeration to say that antitrust regimes also have an important role to play in the protection of public health and welfare during this crisis.

We set out below the main developments in the fields of antitrust, merger control and state aid in light of COVID-19 and the role that the enforcement of competition law plays in this context.

Antitrust

The current exceptional circumstances may trigger the need for businesses that normally compete to cooperate with each other in order to overcome the crisis to the ultimate benefit of consumers.

Examples include cooperation among food retailers or pharmaceutical companies in order to ensure the supply and fair distribution of essential scarce products and services to all consumers.

Such need has been recognised in a Joint statement issued on 23 March 2020 by the European Commission (EC), the European Competition Network (ECN), comprising all National Competition Authorities of Member States and the EFTA Surveillance Authority on the application of antitrust rules during the coronavirus crisis.

In essence, the ECN states that it will not actively intervene against necessary and temporary measures put in place in order to avoid a shortage of supply. Such measures are unlikely to be problematic, since they would either not amount to a restriction of competition under Article 101 TFEU and equivalent national law provisions or would generate efficiencies that would most likely outweigh any such restriction.

Businesses should of course be cautious to ensure that any legitimate collaboration does not go beyond what is necessary to serve the intended public health and consumers welfare objectives. For example, unlimited exchanges of competitively sensitive information should not impact how parties will compete after the crisis or in other areas of their businesses.

It is also stressed that it is of utmost importance to ensure that products considered essential to protect the health of consumers in the current situation (e.g. face masks and sanitising gel) remain available at competitive prices. The ECN will therefore not hesitate to take action against companies taking advantage of the current situation by cartelising or abusing their dominant position.

In this context, the EC published a Communication on 8 April 2020 on a Temporary Framework for assessing antitrust issues related to business cooperation in response to situations of urgency stemming from the current COVID-19 outbreak. The Communication covers possible forms of cooperation between undertakings in order to ensure the supply and adequate distribution of essential scarce products and services during the COVID-19 outbreak – notably in the health sector and in view of the risk of shortages of critical hospital medicines used to treat COVID-19 patients resulting first and foremost from the rapid and exponential growth of demand.

The Communication explains:

(i) the main criteria that it will follow in assessing these possible cooperation projects and in setting its enforcement priorities during this crisis; and

(ii) a temporary process that it has exceptionally set up to provide, where appropriate, ad hoc written comfort to undertakings in relation to specific and well-defined cooperation projects in this context.

While no equivalent announcement has been made on its part, it is expected, that the Commission for the Protection of Competition (CPC) in Cyprus, being an ECN member and applying EU competition law, will follow the rationale and guidance of the Communication in its application of antitrust rules.

Notwithstanding the above, companies should readily address any competition risks before collaborating and appropriate safeguards need to be put into place to ensure that any such arrangement is proportional to the pursued aim.

Considering that there is a fine line between entering into a legitimate cooperation arrangement under the circumstances and an arrangement which constitutes anticompetitive conduct, businesses in doubt about the compatibility of any such cooperation initiative with Cyprus and EU competition law, should seek appropriate legal counsel and if necessary reach out to the CPC for guidance.

Merger control

Merger control regimes remain in operation, albeit delays are expected.

At the EU level, DG COMP encourages parties to discuss the timing of notifications of transactions with the relevant case team and to use electronic means to notify their transactions. It is also expected that in these difficult times, antitrust authorities may face difficulties in collecting information from the parties and the market (e.g. customers, competitors and suppliers).

DG COMP has nonetheless stated that it stands ready to deal with cases where firms can show very compelling reasons to proceed with a merger notification without delay.

At local level, the CPC is so far accepting notifications normally, both in hard copy and in electronic form. Deadlines in phase 1 proceedings have, to our knowledge, not been suspended.

It is anticipated that in the coming months, M&A activity will be on the rise as a result of necessary restructurings and buy-outs of distressed assets across a range of industries and lower share prices. In this respect, merger control and quick antitrust clearances will be key and buyers and sellers might need to agree to longer dates for the fulfilment of conditions precedent of a regulatory nature resulting in likely delays in closing M&A transactions.

An interesting consideration in the context of transactions involving distressed assets and where the acquirer has significant overlapping businesses with those of the target (and therefore a speedy clearance will not be possible) is the so-called “failing firm defence”.

The Failing Firm Defence (FFD) is invoked when a concentration has anti-competitive effects but the target of the transaction is in such a grave financial position that it is in effect “failing” and would be forced to exit the market in the absence of the envisaged transaction.

Competition authorities accept such arguments only when they assess that the merger is more favourable than the exit of the failing company and its assets from the market. That could be the case if the affected markets, absent the merger, would in any event experience an increase in concentration and a significant lessening of competition.

There are generally strict conditions for the application of the FFD. In particular, the following cumulative conditions must be satisfied:

• the failing firm would, in the near future, be forced out of the market because of financial difficulties, if not taken over by another undertaking;
• there must be no less anti-competitive alternative purchase than the proposed transaction;
• and in the absence of the proposed transaction, the assets of the failing firm would inevitably exit the market.

It cannot be anticipated whether competition authorities, in the current pandemic crisis, will be applying a more relaxed approach to the FFD to approve transactions that would otherwise raise competition concerns.

For the time being, the EC does not appear to be keen to lower the threshold that the parties must fulfil to avail themselves of the FFD.

The Aegean/Olympic II case in 2013 remains the last case where a party successfully argued a FFD before the EC and is an important precedent in these circumstances as it was also decided against the backdrop of a global financial crisis.

State aid

State aid measures are very topical in the context of the Covid-19 outbreak and in helping businesses in financial distress survive. This undoubtedly poses an unprecedented challenge for the application of EU state aid rules, aimed at preventing any aid from distorting markets by giving recipients an unfair economic advantage. Under EU law, member states are generally prohibited from providing state aid unless such aid is exempted or approved by the EC.

In response to this challenge, the EC adopted on 19 March 2020 a Temporary Framework to enable Member States to use the full flexibility foreseen under State aid rules to support the economy in the context of the COVID-19 outbreak. Together with many other support measures that can be used by Member States under the existing State aid rules, the Temporary Framework enables Member States to ensure that sufficient liquidity remains available to businesses of all types and to preserve the continuity of economic activity during and after the COVID-19 outbreak.

The Framework is based on Article 107(3)(b) TFEU and provides what aid measures Member States can take to remedy a serious disturbance in their economies. The Framework clarifies what measures may be taken without requiring prior approval of the Commission (e.g. measures applicable to all undertakings regarding wage subsidies, suspension of payments of corporate and value added taxes or social welfare contributions, or financial support directly to consumers for cancelled services or tickets not reimbursed by the concerned operators) and how the Commission will assess measures that do need to be notified.

The Temporary Framework provides detailed guidance on the compatibility conditions the Commission will apply to any aid granted by a Member State to remedy a serious disturbance in its economy. It specifically addresses the following five types of aid:

(i) Direct grants, selective tax advantages and advance payments: Member States will be able to set up schemes to grant up to €800,000 to a company to address its urgent liquidity needs.

(ii) State guarantees for loans taken by companies from banks: Member States will be able to provide State guarantees to ensure banks keep providing loans to the customers who need them.

(iii) Subsidised public loans to companies: Member States will be able to grant loans with favourable interest rates to companies. These loans can help businesses cover immediate working capital and investment needs.

(iv) Safeguards for banks that channel State aid to the real economy: Some Member States plan to build on banks’ existing lending capacities and use them as a channel for support to businesses – in particular to small and medium-sized companies. The Framework makes clear that such aid is considered as direct aid to the banks’ customers, not to the banks themselves, and gives guidance on how to ensure minimal distortion of competition between banks.

(v) Short-term export credit insurance: The Framework introduces additional flexibility on how to demonstrate that certain countries are not-marketable risks, thereby enabling short-term export credit insurance to be provided by the State where needed.

On 3 April 2020, the European Commission adopted an amendment extending the scope of the Temporary Framework of 19 March to enable Member States to accelerate the research, testing and production of coronavirus relevant products, to protect jobs and to further support the economy in the context of the coronavirus outbreak.

The amendment provides in essence for five additional types of aid measures, namely support for coronavirus related R&D, support for the construction and upscaling of testing facilities, support for the production of products relevant to tackle the coronavirus outbreak, targeted support in the form of deferral of tax payments and/or suspensions of social security contributions and targeted support in the form of wage subsidies for employees.

The amendment Temporary Framework will be in place until the end of December 2020 but may be extended if deemed necessary by the EC in consultation with the member states.

It is noted that the Office of the Commissioner for State Aid Control in Cyprus has published two relevant announcements on its website on 26 March 2020 and 24 April respectively, addressed to all involved government bodies and actors, and informing them about the Temporary Framework of the EC, as well as the amendment thereto. The Commissioner stressed in particular that any envisaged state aid measures on the basis of the relevant framework should, in accordance with the relevant Cyprus Law on the Control of State Aids, be notified to the same for an opinion before they are notified to the EC for approval.

Key takeaways

• Competition law will continue to apply during the COVID-19 crisis and companies must ensure compliance.
  National competition authorities will not actively intervene against certain forms of cooperation necessary to ensure supply continuity of necessary goods.
• Competition authorities are particularly vigilant in times of financial crisis with exploitative practices, such as excessive price increases, and will closely scrutinize behaviour with respect to the supply of goods in high demand due to COVID-19.
• Companies should ensure that long-stop dates for M&A deals are sufficient and factor in that merger control approvals may take longer than expected during the crisis.
• It is expected that there will be a rise in M&A activity in the coming months as a result of necessary restructurings and buy-outs of distressed assets.
• An increase in the invocation of the Failing Firm Defence is anticipated in merger control notifications. It remains to be seen if the high standard set by the European Commission in relation to the FFD will be relaxed or will remain intact.
• The EC has adjusted its State aid rules to allow member states unprecedented flexibility to support their economies and to ensure liquidity of individual businesses during the coronavirus crisis.
• Businesses should carefully consider whether state aid relief is available in their respective sectors under newly established aid schemes and closely scrutinize potential notification requirements and compliance of the aid with Cyprus and EU law so as to avoid being forced to return any unlawful aid.

[This article was prepared by Senior Associate Ioanna Sapidou, from our firm’s Competition law practice]

The above is intended for general information purposes only as at 6 May 2020 and does not constitute legal advice. For legal issues that arise, please contact our competition law team.