Coronavirus could lead to many bankruptcies. 

COVID-19 has brought much of the European economy to a halt. Despite the deployment of various EU measures to mitigate the economic effects of COVID-19, bankruptcy for many companies may be imminent.

Significant consolidation in various industries is therefore likely. Facilitating such consolidation seems warranted: not to do so risks a colossal exit from the market of assets that are core to the European economy (e.g. in the tourism, aviation, technology and retail industries), and an attendant increase in unemployment.

It is submitted that loosening the rigour with which the EU Merger Regulation (EUMR) is applied, and the failing firm defense (FFD) in particular, represents a further opportunity to ease the devastating economic impact of COVID-19.

Pursuant to the EU Horizontal Merger Guidelines 2004, an otherwise problematic concentration is compatible with the internal market if a party to the concentration is a "failing firm". A three-pronged cumulative test is currently employed by the European Commission to establish whether a firm is "failing": 

• The allegedly failing firm would in the near future be forced out of the market because of financial difficulties, if not taken over by another firm;
• There is no less anti-competitive alternative purchase than the merger in question; and
• In the absence of the merger, the assets of the failing firm would inevitably exit the market (para 90) (together known as the FFD Criteria). 

However, in only a handful of cases has the Commission cleared an otherwise problematic transaction on the basis that the FFD Criteria were met.

Following the seminal Kali + Salz/MdK/Treuhand (1993) case, the FFD has been accepted only in (i) BASF/Eurodiol/Pantochim (2001), (ii) Nynas/Shell/Harburg Refinery (2013) and (iii) Aegean/Olympic II (2013).

In each of these cases, the Commission carried out a Phase II investigation involving the adduction of extensive (economic) evidence by the parties, and copious requests for evidence and comments by third parties, including alternative purchasers. The dearth of successful FFD cases thus bears testimony to the formidable challenges faced when seeking to meet its highly exacting standards. In practice, therefore, the FFD is often only advanced in cases where prohibition or a requirement to offer far-reaching remedies are on the horizon. 

It has become increasingly foreseeable, however, that COVID-19 will spur an uptick in companies filing for bankruptcy. The FFD therefore takes on an increased level of relevance. This is because of a likely proliferation of transactions involving financially healthy companies, on the one hand, and financially distressed companies, on the other. With respect to the latter, they are likely subject to very rapid deterioration and in (or on the brink of being in) receivership. Time is therefore very much of the essence.

The introduction of a truncated and simpler administrative procedure/test with respect to the application of the FFD during COVID-19, and its (immediate) aftermath, may thus be warranted. Noting that there would be no need to amend the EUMR, the following points could be taken into consideration by the EC: 

• Requiring the adduction of significantly less internal documentation/(economic) evidence showing that the economic viability of the firm in question is irretrievably compromised. A simple statement to this effect by a bankruptcy court or an auditing firm of reputable standing should suffice. 

• Reducing the lengths to which the allegedly failing firm and/or its advisors have to go to demonstrate that there is no less anti-competitive alternative purchaser. Simple reliance on a good faith refusal by alternative purchasers to acquire the failing firm should suffice. 

• A good faith statement from the receiver in bankruptcy or its equivalent that the assets in question would "inevitably" leave the market as is usually the case when a company is liquidated. 

• Information requests by the Commission to notifying parties and potential purchasers and requests for comment by third parties, such as customers and competitors, should be initiated at the pre-notification stage to ensure that the EC issues a decision within Phase I. 

While recognising that FFD candidate cases are, by their nature, normally likely to go into Phase II, a drawn-out Phase II must be avoided. This is because, most of the time, national bankruptcy proceedings cannot wait for a "normal" Phase II decision to be rendered  ̶  liquidation of the assets in question would occur before the Commission has issued its decision. Front-loading the FFD review to Phase I is, therefore, imperative.  

Jacques Buhart and David Henry are lawyers in the Paris and Brussels offices of McDermott Will & Emery.