Impact of Covid-19 on merger reviews

The surge in M&A in Q3 2020 shows that despite the Covid crisis, there is room for significant M&A activity. While antitrust regulators have handled the crisis well overall, dealmakers should pay particular attention to long stop dates, antitrust risk allocation and pre-closing covenants, to make sure that Covid-related delays do not derail their deals.

Merger enforcement has remained strict. At the onset of the Covid-19 crisis, there was speculation that merger enforcement would be softened through the “failing / flailing firm” defence, or a greater use of the EC derogation mechanism that removes the standstill obligation. However, the competition agencies were quick to emphasise that the crisis is not an opportunity for anticompetitive mergers. There have been no decisions based on the “failing firm” defence so far (the CMA considered it in Amazon/Deliveroo but eventually rejected it), and there have only been two derogation decisions involving two separate bidders for French steelmaker Ascoval, that was already in bankruptcy and liquidation proceedings. In fact, the current economic uncertainty will make it more likely that the EC and other agencies will insist on upfront buyer divestiture remedies. 

Deal reviews will continue to take longer for complex transactions in Europe, particularly in Covid-hit sectors. The Covid-19 crisis did not have a material impact on merger reviews in the US or China, but it has resulted in extra delays to the already very lengthy merger reviews in Europe. The difficulty of market testing in Covid-hit sectors has led the EC to make greater use of “stop the clocks” that suspend the review period in complex cases. This has led to some high-profile casualties, with Boeing/Embraer being the most noticeable, falling apart after a record six “stop the clocks”. LVMH/Tiffany was also a near-casualty, surviving a very lengthy EC review only after Tiffany agreed to a lower purchase price.

Deal reviews for no-issues cases not materially affected. After a short adaptation period, the EC and other major competition authorities (including in the US and China) have managed to deal with no-issues filings – particularly those that do not require extensive market testing – with relative ease, without any material timing impact. 

Against this background, dealmakers should take into account the following in selecting acquisition targets:

  • Long stop dates. sufficient time and flexibility should be factored in to allow for unforeseen delays in merger control reviews. While a few years ago 6-9 months was viewed as a reasonable period for a complex EC review, in the current environment a reasonable long stop date would be almost the double of that. Delays are likely to be much greater in the sectors that are most affected by Covid (e.g. retail, transport and hospitality).
  • Antitrust risk allocation. Dealmakers should carefully negotiate the “efforts” that the buyer must take to get the deal through, reverse break-up fees, as well as the potential “outs” a buyer might use (e.g. the definition of “material adverse change”). Longer review periods can create buyer remorse, particularly in the current economic environment.
  • Pre-closing covenants. Pre-closing “ordinary course of business” covenants should be given even greater attention than before. There is a fine line to be drawn between ensuring that the target will not engage in actions that would devalue its business in the interim sign-to-close period, and gun jumping. These pre-closing covenants can be a cause for dispute as we have seen in Luxotica/GrandVision, which led to litigation before the Dutch courts.

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