The global COVID-19 pandemic has changed how merger enforcement regimes around the world are currently reviewing proposed transactions. Two weeks into the new environment, we now have a body of experience from which to assess how merger reviews are proceeding (and may continue to evolve) under these unprecedented circumstances. Here is what we have experienced and what it means for your deal.
Deals with No Competitive Implications
- U.S. – Antitrust agencies are actively processing and reviewing HSR filings. Parties to transactions with no competitive implications should expect the HSR waiting period to expire in the standard 30 days.
- EU – The statutory timetable is unaffected and filings for “simplified cases” – transactions with little or no competitive overlaps – are being accepted and decided. The European Commission, however, did ask companies to delay their filing of notifications “where possible.” Even in simplified cases, parties should expect some expansion of the recommended two-week consultation period prior to filing.
Deals for Which Some Scrutiny is Expected
- U.S. – Parties will face challenges in resolving concerns in the initial 30 day waiting period, and should expect a higher risk that a pull-and-refile strategy will be necessary, adding an additional 30 days to the process. Proactively working to anticipate antitrust agency questions and prepare evidence needed for responses can improve the odds of avoiding a delay.
- EU – Transactions that require full-form notifications (as opposed to simplified cases), will involve either longer pre-notification talks with the case team or the notification may need to be postponed indefinitely.
Deals for Which Substantial Scrutiny is Expected
- U.S. – Parties to transactions expected to receive Second Requests should plan for the timeline to be expanded by at least 60 days (the pre-COVID timeline averages 12 months) for Significant Investigations according to the most recent data available through DAMITT.
- EU – Parties anticipating a Phase II process should expect delays. Although the statutory timeline is unchanged, the European Commission may simply choose not to accept filings in high-scrutiny cases. For ongoing reviews, we may witness the regulator increasingly resort to procedural tools to suspend the review period. The parties, however, can continue to advocate for clearance and discuss remedies during such delays.
Over the past two weeks, the U.S. federal government has taken drastic steps to reduce the spread of the COVID-19 virus, including by requiring most federal employees to work remotely, including attorneys and economists at the Antitrust Division of the Department of Justice (DOJ) and the Federal Trade Commission (FTC). Remote working has also been implemented at the European Commission (Commission) and in most Member State national competition authorities, with all non-essential staff, including case handlers, working from home.
Merging parties at any stage of a transaction – bidding, negotiating, making competition filings, and complying with antitrust/competition law investigations – need to understand the implications of how these new ways of operating will affect the timing of their deals, and how the parties can take steps proactively to minimize delays.
The good news is that these new teleworking conditions should have very little impact on the great majority of transactions. In deals with competitive implications, however, the challenges of conducting merger clearances through remote means are real, and they affect how parties approach their preparations for responding to investigations and how they draft their merger agreements.
1. Deals with No Competitive Implications
What has changed?
The agencies initially announced that they would not grant early terminations of the HSR waiting period while applying the COVID-19 procedures.2 But, after two weeks of experience, the FTC announced that the agencies would resume processing early termination requests on March 30, 2020, as time and resources allow.3 We expect that early termination, which was never guaranteed on a particular timeframe, could take longer and be granted in fewer transactions than under normal circumstances. Parties to transactions without competitive issues should nonetheless expect the HSR waiting period to expire in 30 days or fewer, as before.
Preparation of HSR filings by the parties, however, may take longer. The collection of potentially responsive documents, especially hard copy documents in offices that remain closed, presents a new challenge in preparing HSR filings. Therefore, businesses may want to build in more time between signing the merger agreement and filing HSR, or start preparing the HSR filing in advance of signing, to allow for difficulties in collecting HSR documents or accessing employees needed for data required for the HSR form.
The European Commission’s statement anticipated difficulties in collecting information from third parties to conduct market testing, and in accessing the merging parties’ information and databases. Transactions that give rise to minimal or no competitive overlaps, however, are assessed under a simplified procedure that entails limited or no market testing and does not require much information gathering. In 2019, almost 75 percent of the cases resolved by the Commission were assessed under the simplified procedure. Thus far, the Commission’s review of these cases has been relatively unaffected. Since March 16, the Commission has accepted 11 notifications and adopted 12 clearance decisions under the simplified procedure, despite its request for companies to delay notifications. Although early signs are encouraging, there may be a slowing of activity in the coming weeks as the proportion of new cases – those where pre-notification discussions were not commenced prior to March 16 – increases.
With respect to the filing process, while merger-related documents were previously required to be hand-delivered, the Commission is now temporarily accepting and encouraging parties to make electronic submissions.
Parties to such transactions reviewed in the United Sates should expect a much higher risk that a pull-and-refile strategy will be necessary, which will add another 30 days to the initial 30 day HSR waiting period.
After considering the evidence, the staff and their management need to make a decision on whether to launch a Second Request investigation. This collaborative decision-making process can be slowed by the difficulty of getting the right people together to build consensus and reach a decision in a telework environment.
Companies with deals in this category can improve their odds of avoiding the need for a pull and refile by working proactively with antitrust counsel to anticipate questions and gather the evidence needed to respond.
What has NOT changed?
There will be neither a weakening of enforcement vigor nor a relaxation of the standard of review, despite the strain on the Commission’s resources and the likely difficulties it will experience obtaining market feedback. The Commission still needs to adopt decisions that will withstand judicial scrutiny and will not want to risk an increase in appeals.
In contrast to U.S. practice, pull-and-refile is not a familiar device, and parties instead should expect to engage in a longer period of pre-notification discussions, which are likely to progress at a slower pace as the case team works off the administrative clock to conduct their investigation.
Such transactions are likely to receive Second Requests in the United States, which can take about nine months from the HSR filing to complete in the best case scenarios and are currently taking about one year on average for “Significant Antitrust Investigations.” (See discussion in Dechert’s Antitrust Investigation Timing Tracker “DAMITT” annual report here). Merging parties should expect the COVID-19 telework environment to add another 60-90 days to this timeline.
In the EU, such transactions are likely to proceed to Phase II. These investigations involve extensive market testing by the case team, and require parties to respond to highly detailed information requests.
Parties to such transactions that have not yet been formally notified should expect that a filing will not be accepted by the European Commission in these circumstances. This will force the parties to pursue advocacy off the clock, and we recommend that parties do so aggressively to avoid further delays once formal filings are accepted.
What has changed?
Complying with a Second Request requires extensive work and access to company documents and employees. Companies will experience increased difficulty preparing responses to a Second Request in a telework environment (e.g., collecting data and documents, including paper documents located in closed offices, managing document reviews, and interviewing employees to prepare narrative responses to interrogatories). This will naturally slow down the ability of companies to certify that they have substantially complied with the Second Request.
The telework environment can also be expected to slow down agency investigations. For example, the agencies often send subpoena-like Civil Investigative Demands (CIDs) to third parties, such as competitors and customers. These non-parties may also face challenges responding in a timely fashion.
The FTC and DOJ may also face difficulties receiving large volumes of electronically-stored documents or databases for review. The agencies typically require production of electronically-stored information on physical media, including hard drives, thumb drives, and/or DVD disks. With both agency staff and the private bar working remotely, the submission of productions by physical media is more complicated and may delay how quickly the agencies can review documents and analyze data. We understand that the agencies are actively considering alternative methods for receiving electronic productions securely without the use of physical media to address these concerns.
Second Request investigations typically include investigational hearings or depositions, which are ordinarily held in-person. Attorneys representing the merging parties typically conduct in-person preparation sessions for such hearings. The telework environment makes conducting and preparing for these hearings more challenging. In addition, if divestitures or other remedies are required, the process of vetting and approving divestiture buyers in the telework environment could add further delays.
The realities of such challenges are reflected in statements by U.S. enforcers. Assistant Attorney General Makan Delrahim of the DOJ’s Antitrust Division recently announced that an additional 30 days will be required on all timing agreements, and that the DOJ may reconsider and request even more time depending on further developments with the pandemic.6 Similarly, Ian Conner, Director of the Bureau of Competition at the FTC, stated on March 16, 2020:
[W]e are conducting a matter-by-matter review of our investigations and litigations to consider appropriate modifications of statutory or agreed-to timing. Parties and their counsel should expect that we will be in touch to discuss proposed modifications; they should also feel free to reach out to staff proactively to begin those discussions themselves. We understand that some proposed modifications may be inconvenient and that parties may be reluctant to agree to them, but we trust that parties will value a flexible and reasonable approach. Companies and their counsel should appreciate that, as always, we will take affirmative action to protect consumers when necessary, including when an unmodified time period does not allow us to address competitive concerns.7
What has NOT Changed?
As the above demonstrates, the antitrust enforcement agencies will review deals with the same scrutiny and thoroughness as before the COVID-19 crisis. Parties should not expect a less exhaustive investigation.
Second Request compliance could require 2-3 months more than in the pre-COVID-19 environment. Our DAMITT data indicate that, even before COVID-19, the average time from public announcement of a deal to significant agency action was 11.9 months. Parties to deals can expect an increase of about 60-90 days and possibly longer depending on how long the telework environment is needed and the severity of the pandemic.
Parties negotiating a deal should account for this longer investigation time when setting the outside or long-stop date in the merger agreement and in building in any extension provisions. Failure to do so may result in the parties running out of time. For parties who have already negotiated a deal, this longer timing means taking extra care to ensure that timing built into the merger agreement does not give the other party an opportunity to walk away, especially if views on the deal valuation have changed given the new expectations of a recession following the COVID-19 pandemic.
What has changed?
At present, the European Commission is highly unlikely to accept notifications for potentially problematic deals since it will be difficult to conduct any meaningful market testing. Merger reviews where remedies negotiations require on-site visits or in-depth discussions with business people may also need to be interrupted. Nevertheless, case teams are being allocated to new cases and the Commission continues to engage in pre-notification discussions. It follows that merging parties should take the opportunity to advance pre-notification discussions so as to get case teams familiarized with the transaction, and if necessary, engage in informal remedies discussions.
The review of deals that were notified before March 16, 2020 will continue. Although the statutory time limits remain in place, case teams will be hard pressed to keep reviews on track in complex transactions that require extensive input from the parties and, in particular, market participants. We will thus likely see the Commission make increased use of procedural tools to suspend the administrative clock in Phase II investigations.
First, the EU Merger Regulation permits “voluntary” extensions of time up to a maximum of 20 working days. These extensions may be at the behest of the parties (for example to create space for a remedy discussion), but they are often conceded at the instigation of staff. According to our DAMITT statistics, all Phase II investigations that were resolved in 2019 involved voluntary extensions of time, adding the statutory maximum 20 working days to the investigation period in all but one case. The frequent use of voluntary extensions will certainly continue under the COVID-19 telework conditions.
Second, the Commission has the power to stop-the-clock. In practice, these orders are primarily attributable to parties’ failure to provide information requested within a specified time limit.9 The proportion of cases that were hit with such orders reached 78 percent in 2019 (the highest level over the 2011-2019 time period tracked by DAMITT), adding an average of 0.9 months to each affected investigation. Parties should expect increased use of this power in response to the pandemic.
Delays in Phase II investigations are to be expected. Parties that have not yet made a formal filing should expect that the filing will not be accepted and that they will need to work informally during the prolonged pre-notification period to pursue advocacy for clearance. We would strongly advise companies planning transactions that are likely to attract significant antitrust scrutiny to treat these pre-notification periods as equivalent to a formal investigation. They should dedicate resources to gathering evidence, fine-tuning case strategy, and, if remedies are likely to be required, parties should also consider devising strong proposals that may be presented to the case team informally at the first opportunity.
Companies that anticipate a protracted EU merger review should take into account the potential delays in the deal documentation (as with transactions where a Second Request is expected), including in particular the long-stop date. We expect that disruptions due to COVID-19 will expand the Phase II investigation timeline, which according to DAMITT statistics already averaged 15.6 months for cases resolved in 2019. A formal communication is expected from the Commission in the coming weeks which may give a clearer picture of the anticipated delays.