Merger remedies: From diamonds to Covid-19 dust? Not quite
During the lockdown month of May 2020, the European Commission released not one – but two – firms from divestiture commitments that each firm had given to secure merger clearances. Such commitments are – much like diamonds – thought to be forever. So, did the COVID-19 pandemic turn these two diamonds into dust? Do these decisions signal a change in policy direction? Not likely: Other “exceptional circumstances” were at play, but an economy-wide, deep, and protracted crisis may well necessitate more remedy flexibility. Here’s how and why.
Merger remedies are designed to remove specific competition concerns resulting from a deal. In EU merger control, the concerns are removed by commitments that the merging parties make to the European Commission, and which the Commission gives binding force via a conditional (i.e. subject to the parties’ delivering on their commitments) clearance decision. The conditions are integral to the decision that permits the deal to take place: so not intended to be changed in any way. Forever, like diamonds.
But, in the immortal words of Ian Fleming...
“Nothing is forever, only death is permanent”
Remedies must be proportional to the ills they aim to cure, and if the disease goes away so must the remedy. The EU’s General Court made this clear in Lufthansa v. Commission: “[t]he purpose of commitments is in fact to remedy the competition problems identified in the decision authorising the concentration… the commitments might have to be amended, or the need for them might disappear, depending on how the market situation develops.”
Remedies may be released or varied by means of a specific “release valve”. The Commission sets the scene in its Remedies Notice: “the Commission may grant waivers or accept modifications or substitutions of the commitments only in exceptional circumstances”. The release valve is built in to the review clause of the Commission’s Model Divestiture commitments, the blueprint for most undertakings given over past decades: “The Commission may further, in response to a reasoned request from the Notifying Parties showing good cause waive, modify or substitute, in exceptional circumstances, one or more of the undertakings in these Commitments.”
Clearly, the release valve is for rare situations and its use must be justified. The merging parties must request a review and show good cause for the Commission to make a change. Not unexpectedly, that is a tall order. The parties must show exceptional circumstances, namely:
- “significant and permanent” market changes that occurred after the Commission’s merger review;
- those changes could not have been foreseen when the Commission adopted its conditional clearance decision; and
- the commitments are no longer required to address the competition concerns identified in the clearance decision. Effectively the market circumstances must mean that the remedies have become obsolete.
“I'll take the full odds on the ten, two hundred on the hard way, the limit on all the numbers, two hundred and fifty on the eleven.”
The release valve has, as a result, been used very rarely. Over the past 30 years, the Commission has reviewed more than 7,700 M&A deals, 459 of which were cleared on the basis that the parties would implement the remedies in question. The published record on changes to these is sparse: around a dozen remedy commitments (around 3% of remedies cases) appear to have been changed in some way. The changes have been triggered by extraordinary circumstances, such as an acquirer losing control of a target after the clearance, the divestment business becoming insolvent or entering financial distress, commitments being superseded by orders made in other investigations or by other competition authorities, or industry regulation fundamentally changing the competitive landscape. Most of these changes concerned modifications to commitments concerning business conduct, and were motivated after the commitments had been in place over a long period of time. A smaller number of varied merger remedies involved divestiture commitments. There may be several reasons for this, but, generally, such assets must be disposed of within a few months’ time, and the likelihood of ”extraordinary” circumstances intervening is naturally low.
Well I’m afraid you’ve caught me with more than my hands up
After an in-depth Phase II review, the Commission cleared Nidec’s acquisition of its rival compressor maker Embraco. But Nidec was required to divest a compressor business, with production assets in Austria, China and Slovakia. Nidec’s commitment included a standard clause, under which it agreed to not re-acquire any part of the divestment business. But Nidec had also committed to (i) not close the Embraco deal before the Commission had approved the buyer of the divestment business, and (ii) pay that buyer a substantial amount of money, to fund future investment in the Austria and Slovak plants (to ensure viability of the plants and to secure jobs).
The Commission vetted several buyers, and eventually approved a buyer backed by a private equity firm. The Nidec-Embraco deal closed. The divestment deal closed. This might have been the end of the story.
A few months later, the buyer of the divestment business announced it would close down parts of the European business that it had just acquired. Nidec stated publicly that this was a surprise. The Commission will have been equally surprised. As part of the buyer approval, it would have confirmed that the buyer satisfied all purchaser criteria, including the standard requirement that the buyer shall have the incentives to “maintain and develop the Divestment Business as a viable and active competitive force”. Nidec requested a partial waiver.
In any event, explaining that “the structure of the relevant markets for variable speed and fixed speed refrigeration compressors for household applications has changed” the Commission waived Nidec’s re-acquisition prohibition, in respect of some of the Austrian assets. Nidec can retain the production line and save jobs.
To secure Commission clearance of its Shire acquisition, Takeda had committed to divest one of Shire’s pipeline development compounds. A future potential overlap had been identified between that compound and one of Takeda’s on-market gastrointestinal drugs. During a period of 14 months, attempts were made to divest the pipeline asset. Takeda tried. An independent investment bank, acting as Divestment Trustee, tried – even at “no minimum price”. Neither was successful. Takeda requested a full waiver from its commitments.
Three “permanent, significant and unforeseeable” developments took place during the divestiture process and, the Commission concluded, justified a full waiver. First, new promising drugs had emerged, which were expected to increase competition. Second, some clinical studies showed negative results for the divestment pipeline asset. Third, there had been unforeseeable difficulties in recruiting patients for the divestment pipeline assets Phase III trials. Owing to these accepted unforeseen developments, the divestment was considered obsolete. Separately, Takeda explained that, although ongoing trials for the pipeline drug will cease, data from those trials will be available to scientists via a scientific foundation and responding patients will have continued access to the drug in a post-access trial.
So Diamonds aren’t forever?
Not all diamonds are forever, but two waiver decisions in two weeks seems more of a coincidence for the reasons given above, than a shift in policy.
So the question which arises is whether fallout related to the COVID-19 pandemic will constitute “exceptional circumstances”. There are likely to be two categories of case in which COVID-19 impacts are cited. First, cases in which a remedy has been given “BC” (before COVID-19 lockdowns hit); and second, future cases not yet notified, or currently in review, for which remedies will be required. In the first category of cases, COVID impacts were unforeseen when commitments were given and so unforeseen circumstances may be easier to identify. But that does not mean that intervening circumstances remove or reduce competition concerns. And agencies are, however, likely to reach for other flexibilities (e.g. extension of the initial divestment period, where we have already seen very substantial extensions granted in the UK for example), modifications to divestment forms or substitution of assets, and, in the case of behavioural remedies, some temporary modifications (see Austrian case ProSiebenSat.1Puls 4/ATV).
In cases which are not yet resolved, or are yet to be notified (assuming crisis impacts over the medium term, as many commentators expect), COVID-19 fallout may be relevant both to the question whether a competition problem arises and, if so, how to design a remedy to remove the problem. The crisis’ impacts thus far have been felt very differently by different sectors (e.g. grocery chains vs airlines). Where remedies are necessary, and clearly involve implementation risks, agencies could turn to design tools such as: upfront buyer requirements (though the Nidec-case shows this does not guarantee an effective remedy), more rarely: “crown-jewel” divestments (sell one of two businesses, one of which is certain to find a buyer), or much more rarely, but still possible: an immediate Divestiture Trustee requirement (by-passing the usual ability of a buyer to attempt to sell the business first itself; although it is hard to see how this addresses the concern when M&A markets are subdued overall). Such steps would also increase the risk, cost and burdens on merging parties at an already difficult time where many face a cash crisis.
As we head into unchartered territory in relation to the duration and scale of COVID impacts, we may well experience more remedy failures – even if designed with belts as well as braces. This is particularly the case where more novel (online platform envelopment) or speculative (pipeline competition) theories of harm are pursued. The key to succeeding on a variation request will be showing that market structures have changed as a result of COVID fallout in ways not foreseen at the time of the commitment (given COVID impacts themselves were not unforeseen). The success of such arguments will obviously depend on the market in question given how unevenly COVID impacts to date have been spread.