Hit hard by the crunch, the Irish Government is fighting back, implementing new competition laws and support for companies in crisis. Alan McCarthy reports

It has hardly escaped the attention of the world's media that Ireland is one of the countries hit hardest by the recent economic downturn. Once boasting the envious label as the 'Celtic Tiger' economy, Ireland has now taken on the reputation of somewhat of a pariah, whose banking system and general economic stability are under threat. Indeed, as a result of the current financial crisis, last month saw the implementation a €750m (£682m) recapitalisation scheme for Ireland's biggest banks after the European Commission confirmed that the scheme is consistent with European Union (EU) state aid.

Competition law measures

With the global financial markets in turmoil, and in an attempt to reinvigorate struggling financial institutions, the Irish Government was one of the first to resort to exceptional fiscal measures, such as a state-sponsored scheme to guarantee all deposits in, and liabilities of, Irish credit institutions. In addition, legislative and policy changes over the past few months have paved the way for striking changes to the application of merger control rules vis-a-vis the financial sector.

In the context of the global credit crisis and its effect on the Irish financial system, the Government implemented measures to support the financial system through the passage of the Credit Institutions (Financial Support) Act. The Act essentially provides financial support to protect the borrowings, liabilities and obligations of specified credit institutions in the form of a scheme that will run until 29 September, 2010. The European Commission approved Ireland's bank guarantee scheme under the EU state aid rules. The Commission found that the scheme constituted an adequate means to restore confidence in the financial markets and overcome a market failure for wholesale funding that affects even healthy banks. The Commission also found that the scheme addressed issues that had been raised by the Commission relating to maintaining the integrity of the single market in financial services and compliance with EU state aid principles.

In addition to the introduction of the bank guarantee scheme, the merger provisions of the Competition Act 2002 were amended by the Act. Mergers involving a credit institution are now to be brought to the attention of the Minister for Finance and not to the Competition Authority if the stability of the Irish financial system is at stake. Specifically, the minister is now empowered to approve mergers involving a credit institution and its subsidiaries where it is believed that the merger is necessary to protect the stability of the financial system in Ireland.

There are no merger procedural timelines under the Act, other than obliging the minister to make a decision in relation to a credit institution merger as soon as reasonably practicable after receipt of the notification. The minister will publish the notification and third parties are entitled to make submissions on a credit institution merger. The minister will consult with the Minister for Enterprise, Trade and Employment, the Central Bank and the Competition Authority. In terms of assessment, the minister will consider whether the credit institution merger would "substantially lessen competition" in the Republic of Ireland. However, the minister can still approve a credit institution merger, even if it substantially lessens competition in Ireland, in circumstances where: (i) the stability of the state's financial system is at risk; (ii) there is a need to avoid a serious threat to the stability of credit institutions; and/or (iii) there is a need to remedy a serious disturbance in the Irish economy.

In imposing any conditions in relation to a credit institution merger, the minister will consider: (i) the effect of the credit institutions' merger on the markets in the state; (ii) the maintenance of the stability of the financial system in the state; (iii) the need to avoid any serious stress in the stability of credit institutions; and (iv) the need to remedy a serious disturbance in the economy of the state. The minister may, in particular, impose conditions on the merger to facilitate competition in the market.

Notwithstanding the altered landscape, mergers involving credit institutions remain subject to the application of the EU Merger Regulation. For example, the minister cannot exercise jurisdiction over a credit institution merger which is notifiable to the Commission under the EU merger rules. The Irish Government could, however, request the Commission to refer a credit institution merger back to Ireland for analysis under the Act if it is otherwise notifiable to the Commission. The Government can also take measures to protect legitimate interests, including in respect of prudential rules, even if a credit institution merger is otherwise notifiable to the Commission.

The Act is yet to be tested in any credit institution merger (and the recent Lloyds/TSB merger was notified to and cleared by the Competition Authority in December 2008 under the normal Competition Act merger rules).

However, one interesting distinction prevails between the law in Ireland and the UK. Under Section 45 (6) of the Enterprise Act 2002, the Secretary of State concluded that ensuring the stability of the financial system in the UK justified the anti-competitive outcome of Lloyds TSB/HBOS, which the Office of Fair Trading had earlier identified, and that the public interest would best be served by approving the merger. Prior to the Irish legislative changes, mergers involving Irish credit institutions would have been subject to review by the Competition Authority to ascertain whether they would substantially lessen competition. Now, however, the Irish Minister for Finance can give speedy and unilateral approval to the merging of credit institutions under legislation that allows the Minister to bypass the Competition Authority entirely. This key difference between Irish and UK legislation enables a quicker response in Ireland to the current financial crisis in terms of credit institutions merger control, but will likely lead to a far less rigorous analysis of the real competitive effects of such mergers.

In the Competition Authority's 2009 decision in HMV/Zavvi, the approval identified the distressed circumstances surrounding the acquisition. While the HMV/Zavvi merger was cleared on competition law grounds, the economic circumstances outlined in the approval determination suggest that the Competition Authority took them carefully into account (at least in terms of the time it took from notification to approval – just seven days). This case may not have been based on a "failing firm defence", but there is the suggestion of at least some flexibility and pragmatism in the Competition Authority's approach to mergers in the current economic crisis.

The Irish Competition Authority stance

The Competition Authority maintains a positive stance on the relevance of the application of competition law in the current economic environment. In its 2008 annual report, the Competition Authority states that "opening up the sheltered sectors of our economy to greater competition will drive down the cost of doing business in Ireland, making us more competitive and more attractive to foreign investment".

A cautionary note expressed by the Competition Authority is that there may be a tendency during difficult economic times for businesses to form cartels to maintain prices above a competitive level, which would inevitably harm consumers. The Competition Authority is mindful of the fact that operators may make requests to the Government to introduce measures cushioning them from the negative effects of slower economic growth, including exemptions from the scope of competition law. In recognition of this, the Competition Authority reminds policymakers that support for effective competition is of paramount importance, so as to ensure that consumers are not unduly harmed during the difficult economic circumstances. This message is also designed to protect consumers in the future, by ensuring that productive and competitive firms are in a position to thrive in Ireland. Fostering efficient and innovative enterprises through pro-competitive market structures will, says the Competition Authority, "better enable Ireland to weather the current economic storm and enhance future growth and employment prospects".

To this end, the Competition Authority has cited a number of key priorities in its recent strategy statement for the period 2009-11. It is therefore likely that it will underscore efforts during the economic downturn to find and seek punishment for cartels (through the courts), other anti-competitive agreements and abuses of dominance. The Competition Authority has stated that it will give highest priority to those practices that damage Irish consumers.

Evidence of this approach is the initiation by the Competition Authority of High Court proceedings against the Licensed Vintners' Association and Vintners' Federation of Ireland, alleging that a price freeze jointly announced by the two publican's organisations on 1 December, 2008 infringes competition law. The Competition Authority is concerned that a price freeze is likely to result, especially during a recession, in substantial consumer harm, although both organisations have restated their position that they believe their actions to be competition law-compliant.

The Competition Authority has stated its determination to maintain an interventionist and effective competition policy during the financial crisis (especially in relation to cartels). However, with the general public sector cutbacks affecting resources at the Competition Authority and state focus primarily on issues other than competition (for example, with the rescue of the banking sector and the provision of substantial state aid), it remains to be seen if the Competition Authority will really be able to hold this line.

Alan McCarthy is a partner in A&L Goodbody's EU & competition law group.