The failing firm defence (FFD) is applicable in combination regulation when the target firm is a loss-making entity, such that an otherwise anticompetitive combination is approved, to prevent exit of the target firm from the market.[i] The importance of this argument has re-emerged, given the economic climate posed by COVID-19. With the progress of the pandemic, the economic implications on markets vary with the changing restrictions imposed and relaxations. Thus, it becomes important to understand the evidentiary standard acceptable for the application of FFD while establishing whether a firm is merely going through an economic trough or facing potential exit from the market.
Competition Market Authority’s Approach
The merger assessment guidelines[ii] of United Kingdom’s Competition and Market Authority (CMA) has outlined the parameters for establishing the failing firm defence: i) whether the firm would have exited, ii) whether alternate purchaser for the firm or its assets was present and iii) whether the exit would substantially lessen competition as compared to the merger being approved. For the above to be proved, the CMA has set the standard for ‘compelling evidence’ to be required.[iii]
At the onset of the pandemic, CMA also issued the summary of its position on mergers involving ‘failing firm’.[iv] It reflected the compelling evidence standard by stating that only the claims supported by material body of probative evidence would be accepted, thereby not allowing for a relaxation in light of the economic situation caused due to the pandemic. The CMA would consider whether the firm will exit the market if the combination is not approved based on evidence ranging from board meetings and other internal documentation to analysis provided by external legal, financial and insolvency advisers.
In the recent Phase I review[v] of the acquisition of 16% stake in Deliveroo by Amazon, which has been largely discussed to understand FFD during the course of the pandemic, the CMA also took into consideration Amazon’s interest in re-entering the online restaurant market to evaluate the raising of the FFD defence basis the evidence presented, which included Amazon’s internal documents and interviews with senior management.
Competition Commission of India’s Approach
Section 20(4)(k), The Competition Act, 2002 states that the possibility of a failing business can be taken as a consideration for determining whether the combination is likely to cause an adverse appreciable effect on competition. However, unlike the CMA, the Competition Commission of India (CCI) has not outlined the evidentiary requirements to be put forth for FFD and may have to rely on allied laws to establish the argument.
The CCI has previously accepted the parameters for determining sickness of a firm laid down in the Sick Industrial Companies Act, 1985[vi] and may refer to sick industries under Section 253 of the Companies Act, 2013 (yet to be notified).
Further, with the suspension of certain provisions of the Insolvency and Bankruptcy Code, 2016 (IBC)[vii], the use of the green channel route for self-assessment of combinations and in cases of firms undergoing proceedings under IBC where resolution involves combination, greater onus falls on the CCI to evaluate and develop a standard for availing the FFD defence.
Considering the ongoing economic crisis coupled with the suspension of certain IBC provisions, the CCI may find it necessary to issue a separate advisory outlining how merger control would be evaluated post COVID-19 and provide better understanding on the evidence required to be presented by parties to qualify for the application of the failing firm defence.
Evidentiary considerations during the pandemic
While the erstwhile Monopolies Restrictive and Trade Practices (MRTP) Act focused on restricting monopolies, the shift to the Competition Act, 2002 has compelled CCI to review combinations with a view to ensure a competitive space and not necessarily from a lens of preventing monopolies. This has been in line with CCI’s counterparts, which also focus on the dominance is not bad, but its abuse is perspective. Thus, while analysing FFD claim, the evidence referred to has to reflect whether the otherwise anti-competitive combination, would enhance competitiveness of a particular market given the economic conditions.
While the broad guidelines for such consideration has been established in various merger review concerning FFD, regulators have to consider case by case basis with changing market scenarios during the pandemic. Lessons may be learnt from the European Union (EU), Aegean/Olympic[viii] where the EU had initially rejected the transaction and did not accept FFD since parties were not able to provide evidence that the firm would exit the market. However, within two years, in Aegean/Olympic II[ix] with the prolonged impact of the Greek debt crisis, the EU considered the economic situation of Greece and the firm’s deteriorating financial situation.
Thus, CMA and CCI may find it relevant to consider the broader market realities while setting the case to case evidentiary standard for FFD claim and not limit its scope of regulation only to the conditions of a particular firm within the market. For instance, while regulating combinations including aviation firms, regulators have to be mindful of the acute dearth of competitiveness in the aviation sector owing to the pandemic.
Unlike the EU case which included the repercussions of the 2008 financial crisis followed by the Greek debt crisis, in the present scenario, with some countries being declared COVID-19 free, relaxations on economic activities and the possibility of the availability of vaccine in the near future, there is a likelihood of early economic recovery. With the dissipating pandemic fear, consumer demand too has already started to pick up. Some countries are, however, witnessing new waves of infection prompting fresh lockdowns, causing uncertainty. It is to be seen how the economic recovery amid the pandemic pans out. Thus, the compelling evidence standard to determine a failing firm may not be met by firms in light of the pandemic.
Similar stance was taken in the Deliveroo transaction where initially the CMA had considered FFD and provisionally approved the transaction[x], it did not consider the FFD argument in its final report observing that with the relaxation of measures in the British markets, the financial statements filed by Deliveroo reflected that there would be no imminent exit from the market without Amazon’s investment.[xi]
Further, while analysing FFD claims, regulators must view the evidence in light of the government measures being taken to create conducive environment for businesses to weather the economic implications of the pandemic. For instance, in India, the Reserve Bank of India took some measures in the first phase of the lockdown due to pandemic, which was likely to inject liquidity of INR 4.74 lakh crore into the economy.[xii] Considering such public policies to aid affected markets while understanding the evidence presented would allow regulators to differentiate between firms which would eventually have to exit the market as opposed to firms which are facing severe financial burden due to the pandemic but subsequently can overcome with financial and other complementary support.
The goal of competition regulation is not only driven by economic considerations but also by social and consumer welfare considerations. Preventing a firm from exiting the market ensures continuing employment, consumer choices, less sick units in the market and other socio-economic benefits. It may be within business interests to allow incumbent firms the FFD claim in times of the pandemic to prevent small firms and start-ups exiting the market. This is so, since smaller firms in markets which are likely to be affected by the economic situation may not be subject to a large onus by competition regulators as it may be easier for such firms to prove that the concerned combination may not diminish competition, which may especially be the case in competitive sectors.
To conclude, competition authorities must take a pragmatic approach in evaluating the evidentiary standards during the pandemic to establish FFD, meanwhile ensuring that the pandemic cannot be a pretext for entities to claim the failing firm defence.
The author is a former CIRC intern. The views expressed are personal.
[i] The Failing Firm Defence, OECD, available at: http://www.oecd.org/competition/mergers/45810821.pdf
[ii] Merger Assessment Guidelines, Gov.uk, available at: >https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/
[iv] Summary of CMA’s position on mergers involving ‘failing firm’, Gov.uk, available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/
[v] Anticipation acquisition by Amazon of a minority shareholding and certain rights in Deliveroo, Gov.uk, available at: https://assets.publishing.service.gov.uk/media/5defd083ed915d15f052f549/Summary_of_decision_-_web_version_—–_pdf.pdf
[vi] Nirma Limited/Saurashtra Chemicals Limited, C-2012/04/53
[vii] IBC Ordinance 2020, available at: https://ibclaw.in/wp-content/uploads/2019/08/IBC-Ordinance-2020-05.06.2020.pdf
[viii] Olympic/Aegean Airlines, Case M.5830
[ix] Aegean/Olympic II, Case M.6796
[x] Supra 4
[xi] Anticipated acquisition by Amazon of a minority shareholding and certain rights in Deliveroo Final Report, Competition Market Authority, available at: https://assets.publishing.service.gov.uk/media/5f297aa18fa8f57ac287c118/Final_report_pdf_a_version_—–.pdf
[xii] India Government and institution measures in response to COVID-19, KPMG, https://home.kpmg/xx/en/home/insights/2020/04/india-government-and-institution-measures-in-response-to-covid.html