UK UPDATE: The Impact of Covid-19 on Competition Law
*Originally distributed on April 1, 2020
The Covid-19 pandemic and the exceptional containment and lockdown measures adopted around the world to protect public health and suppress the spread of the virus have had a significant impact on the global economy and have created severe constraints for many businesses.
It is clear that collectively many companies are facing unprecedented levels of disruption and significant challenges across their
operations and supply chains.
This article provides a short overview of developments to 31 March 2020 arising from the pandemic in relation to:
- Competition law enforcement
- Merger control considerations
- State aid
- Public procurement
The situation continues to evolve rapidly and we will provide further updates on key developments.
Competition law enforcement
Concerns have been expressed that the risk of competition law enforcement could deter cooperation amongst businesses seeking to respond to the new challenges created by the current crisis. This has prompted competition regulators around the world to provide guidance on permissible cooperation, but at the same time to remind companies that the pandemic should not be used as cover for cartel arrangements or charging unfair prices.
Most recently, on 27 March, the UK Government has adopted a number of statutory instruments (Exclusion Orders) excluding certain categories of agreement from the scope of application of Chapter I of the Act (which prohibits agreements which have the object or effect of restricting competition in the UK)1. These agreements, which will remain excluded from the Chapter I prohibition until the Secretary of State publishes a notice specifying a date on which the exclusion comes to an end, include:2
- Groceries sector – retailers and suppliers: Agreements between retailers and/or their suppliers whose purpose is to prevent or mitigate disruption to the supply of groceries to consumers. The exclusion applies to certain qualifying activities provided the arrangements do not involve the sharing of information related to cost or pricing. The following are qualifying activities for these purposes: (i) coordination to limit consumer purchases of particular groceries; (ii) sharing of staff or facilities; (iii) coordination on the range of groceries being supplied (including agreeing on simplifications to the supply chain and product specifications); (iv) sharing of information on daily stock levels, shortages, and services provided by logistics service providers; (v) coordination to assist particular groups of consumers (e.g. critical workers and clinically vulnerable and/or socially isolated groups); (vi) coordinating on the temporary closure and/or opening hours of stores; and (vii) coordination on supplying groceries to consumers in areas that are particularly vulnerable to shortages.
- Groceries sector – logistic services: Agreements between logistic services providers whose purpose is to prevent or mitigate disruption to the supply of groceries to consumers. The exclusion applies to certain qualifying activities provided the arrangements do not involve the sharing of information related to cost or pricing. The following are qualifying activities: (i) sharing information on labour availability; (ii) sharing of labour or facilities or coordination of the deployment of labour; (iii) sharing information on storage capacity and on storage or warehouse services intended or available for groceries; and (iv) sharing information on delivery vehicle capacity and size, type, or destination of delivery vehicles.
- Health services providers: Agreements between the NHS Commissioning Board (NHS England) and providers who are not part of the NHS, between other NHS bodies and independent providers or between independent providers, intended to assist the NHS in addressing the effects of the coronavirus on the provision of health services to patients in England. Similarly to the exclusions above, this exclusion applies to certain qualifying activities provided that the arrangements do not involve the sharing of information related to cost or pricing between independent providers. Qualifying activities comprise: (i) information sharing in relation to capacity for providing health services of a particular kind; (ii) coordinating the deployment of staff between NHS bodies and independent providers or between independent providers; (iii) sharing or loan of facilities for the provision of health services; (iv) joint purchasing of goods and services for providing health services; and (v) coordination as regards the provision of health services which involves agreements where one or more independent providers or NHS bodies undertake a particular activity or type of activity either generally or within a particular geographical area, including agreement to limit or expand the scale or range of health services being supplied by one or more independent providers or NHS bodies.
To benefit from the Exclusion Orders, details of the party names, a short description of the agreement including the groceries or health services which are covered, and the date of the agreement must be notified to the Secretary of State within fourteen days of an agreement being concluded. A public register of such agreements will be maintained. The Exclusion Orders only exclude the application of UK competition law. Technically, to the extent an agreement may affect trade between Member States, EU competition law would continue to apply (as the UK Government does not have the power to set aside EU law). However, it is difficult to envisage either the Competition & Markets Authority (the CMA) or the European Commission (the Commission) wanting to intervene where there is a genuine need for businesses to come together in order to deal with some of the critical issues arising from the COVID-19 pandemic.
More generally, and quite apart from the situations envisaged in the Exclusion Orders, there are ways in which firms, including competitors, can cooperate without violating competition laws. This is particularly so where such collaboration is undertaken to address specific supply chain or other logistical challenges and/or seeks to respond to other concerns (including health and safety issues) arising as a result of the COVID-19 pandemic, giving rise to clear consumer benefits.
Indeed, prior to the Exclusion Orders being adopted, the CMA published a guidance note on 25 March 2020 to provide reassurance that it will not take action against any coordination between competing businesses where cooperation is undertaken solely to address concerns arising from the current crisis and does not go further or last longer than is necessary.
Similarly, the European Competition Network (the ECN) a cooperation forum between the Commission and the national competition authorities of the EU member states) has taken a similar approach in a short statement published on 23 March 2020. The statement recognises that, even if necessary and temporary measures put in place in order to avoid supply shortages were to restrict competition, they are likely to generate sufficient efficiencies to fall within the scope of existing exemption provisions of the competition rules. Accordingly, the ECN statement indicates that such collaboration measures are unlikely to be problematic but, if companies are in doubt, they can approach the authorities for informal guidance.
The Commission has also established a dedicated page on its website3 and set up a team to assist in providing informal guidance on specific initiatives.
Whilst the above provides some reassurance, the Commission and the CMA (as well as other national competition authorities) have made it clear that businesses have not been given a free pass. Competition authorities will be keen to ensure that products (especially essential goods) remain available at competitive prices. They will not allow businesses to take advantage of the situation and/or exploit the pandemic as a ‘cover’ for non-essential collusion, for example by exchanging information on longer-term pricing or business strategies, where this is not necessary to meet the needs of the current situation.
Accordingly, if cooperation between competitors is necessitated as a result of the pandemic, it is important to ensure that:
- any cooperation is linked to the duration of the pandemic and does not extend significantly beyond the pandemic;
- any cooperation is linked to clear and demonstrable benefits for consumers (not simply to the parties themselves);
- any restrictions arising from the cooperation do not go beyond what is reasonably necessary to achieve such consumer benefits; and
- cost or pricing information is not disclosed to or exchanged with a competitor (or made available via trade associations) unless it is absolutely clear that this is indispensable to achieve the consumer benefits.
Competition regulators have also warned companies about unilateral breaches of competition law and, in particular, acting abusively by exploiting consumers through imposing unfair prices. Whilst some companies would ordinarily take comfort on the basis that they do not believe they are dominant, all companies should take care if they impose significant price increases or materially change terms and conditions. The ability to increase a price significantly suggests in itself an ability to behave independently of customers and competitors (an indicator of dominance). Accordingly, companies increasing prices (even only temporarily) should consider whether any such increase is objectively justified, e.g. because a key input has increased in price or logistics costs have increased. Companies should also be wary of wider consumer protection laws, e.g. preventing suppliers from making misleading claims about product efficacy.
Merger control considerations
Merger control rules continue to apply. The issue of whether a transaction qualifies for notification to a regulator must be assessed in the normal way.
If a transaction meets the EU merger thresholds, it must be notified but there is no strict timetable within which a notification must be made to the Commission. However, a transaction cannot ordinarily be completed until clearance has been obtained. Merging parties typically look to notify within a reasonable period (which may vary depending on the extent of the substantive issues arising from the merger), having engaged in pre-notification discussions with the regulator. Given the current circumstances, it is important to take the following points into account:
- it is possible to obtain a derogation from the prohibition on completion of an EU-qualifying merger. It is not a requirement to have submitted a full notification to obtain a derogation. Derogations are typically quite difficult to obtain, but financial crises and other emergency situations are relevant factors in this regard;
- whilst the Commission continues to deal with mergers, parties should consider carefully whether they should notify at this time. Our experience suggests that the Commission is actively encouraging parties to avoid notifying at the current time unless there are compelling reasons to do so. In any event, the importance of early engagement and discussion with the Commission is heightened in the current circumstances. The reality is that, as for many businesses, the regulators are under significant pressure and are having to use their resources carefully. Whilst mergers that qualify for notification but do not raise substantive issues will be easier for regulators to deal with, cases that potentially raise any substantive issue will typically require market investigation or testing (i.e. contacting customers and competitors of the merging parties) that will be much more difficult to deal with – as it will be more difficult to obtain responses in normal timeframes. Indeed, a number of transactions that the Commission is currently investigating have already been paused – and, in some of those cases, this may have been at the request (or with the agreement) of merging parties who are not able to provide the Commission with information requested in the relevant timeframe; and
- failing firm defences often get discussed at times of major crises. The potential failure of a business is of course a relevant factor, including in the current circumstances. However, regulators typically have quite stringent standards that have to be met to make out this defence. Unless these standards are relaxed, it is likely that in many cases it will not be possible to substantiate a failing firm defence. Instead, the more relevant consideration will be one of a “flailing” or “fading” firm, namely something falling short of a failing firm defence but where financial difficulties are nonetheless a relevant consideration that will go to whether the firm in question can be expected to compete effectively in the future.
If a transaction does not meet the EU merger thresholds, it may meet national merger control thresholds.
UK merger control
In the case of the UK, the merger control notification regime is voluntary. This means that it is not necessary to file or obtain clearance from the CMA prior to completion. However, if the merger parties do complete, the CMA has a period of four months from completion becoming public within which to investigate and decide whether to make a reference.
In cases that could raise substantive issues and attract interest from the CMA, the CMA is likely to require interim undertakings from parties or impose interim measures to cease any steps towards further integration of the merging parties absent explicit consent. In practice, this typically involves the merging businesses continuing to be run independently, absent any derogation or clearance. Whilst, similarly to the Commission, the CMA is still dealing with merger notifications, the CMA will also face challenges when looking to investigate mergers (whether anticipated or completed). This may well result in interim undertakings remaining in force for longer than would otherwise have been the case and may also put pressure on regulators given the statutory timetables they face. Again, this will make it all the more important for the merger parties to consider carefully whether to complete and assume the merger control risk and also, where appropriate, to engage early with the CMA to seek to manage the regulatory process as effectively as possible.
Similar considerations are likely to arise in other jurisdictions, many of which operate merger control regimes where notification is mandatory and where implementation is prohibited prior to clearance being obtained.
Although the future role of state aid4 control remains a controversial issue in the Brexit negotiations, the UK has notified a number of aspects of its COVID-19 financial support package to the Commission reflecting the fact that state aid rules continue to apply during the transition period. Certain measures in that package, such as deferring VAT and corporation tax, are not classed as state aid, as they are available to all businesses. However, the UK has also announced a number of schemes targeted at SMEs and the retail and hospitality sector which, in accordance with the Commission’s recent state aid guidance, should be notified to the Commission for fast track clearance.
The Commission has now cleared two UK schemes which are targeted at SMEs. The clearances run until 30 September 2020 but can potentially be extended until 31 December 2020. The schemes relate to:
- Loan Guarantees: This scheme authorises guarantees that cover 80% of loan facilities for SMEs with a turnover of up to £45m (approximately €49m) to cover their working and investment capital needs. This scheme will be implemented through the British Business Bank, a national promotional bank. The underlying loan amount per company will be linked to the company’s short-medium term liquidity needs for the foreseeable future and is limited to a maximum period of six years. A guarantee premium should be charged in accordance with a prescribed formula.
- Direct Grants: This scheme authorises the provision of direct grants to support SMEs affected by the coronavirus outbreak and which were not in financial difficulty as at 31 December 2019. The overall budget for this scheme is £600m (approximately €654m) but the support per company will not exceed €800,000 (around £734,000), although lower limits apply in respect of the agriculture, fisheries and aquaculture sectors.
The Commission has also announced measures to make public short-term export credit5 insurance more widely available.
The Covid-19 crisis is also requiring changes to the typical approach to procurement. The public procurement regime already makes provision for contracts to be awarded without a tender process where, amongst other things, the contracting authority in question can justify that, due to reasons of extreme urgency as a result of unforeseen circumstances, the normal tendering timescales cannot be complied with. Contracting authorities are also likely to consider whether existing framework agreements (with the ability to run swifter, streamlined call-offs) may also prove useful in the current circumstances.
Importantly, in respect of those contracts which are already in place, the Government has made it clear via a short Procurement Policy Note that all contracting authorities should continue to pay suppliers who may be “at risk” as normal until at least 30 June, even if the service delivery is disrupted.
It may also be necessary to consider whether other amendments to the existing terms may be required, such as adjusting long-stop dates in certain construction and development contracts. Although such changes may, in normal circumstances, often be considered to give rise to a material change that is in breach of the procurement rules, there is already some flexibility in the procurement regime to address changes resulting from unforeseen circumstances, provided certain other conditions are satisfied.
1 The Competition Act 1998 (Groceries) (Coronavirus) (Public Policy Exclusion) Order 2020 and the Competition Act 1998 (Health Services for Patients in England) (Coronavirus) (Public Policy Exclusion) Order 2020
2 Certain agreements between maritime operators providing passenger and freight crossing services to the Isle of Wight have also been excluded from the scope of the Chapter I prohibition.
4 The state aid rules require that any assistance, such as soft loans, grants or tax rebates to particular companies provided by a Member State, be notified to the Commission for approval before being implemented.
5 Export-credits enable foreign buyers of goods and/or services to defer payment. Deferred payment implies credit risk for the seller/exporter, against which they insure themselves, typically with the private insurers (so-called export credit insurance).