Gun jumping: More freedom for targets in financial distress?

As some reports indicate, M&A activities in the coming years could involve more targets in financial distress than in the past years. The most prominent example of that unfortunate ‘trend’ might be UBS’ acquisition of Credit Suisse. In that case, the European Commission granted a derogation from the standstill obligation allowing the parties to move forward with their deal even prior to merger control clearance. A blueprint for other deals in the future?

Dealmakers and the parties involved in transactions often (and understandably) wish to close their deals as quickly as possible after signing. Waiting for merger control clearances is not beloved, but usually accepted as a standard part of an M&A process. However, especially in times of crisis, there can be circumstances, e.g. with the target being in financial distress, in which waiting for an official clearance decision could actually do harm – be it to the parties or the financial ecosystem overall (more on competition in times of crisis here and here).

The European legislator has also recognized that, under certain circumstances, the parties need to act quicker than the European Commission’s normal review periods for merger control cases foresee. Therefore, the EU’s merger control regulation allows the Commission to grant derogations from the standstill obligation under certain conditions.

The Commission recently made use of this power by allowing UBS and Credit Suisse to move forward with their deal although it had not even been officially notified to it at that time. Whilst the derogation decision of the Commission in that particular case has not been published yet, the overall economic situation could lead to more companies trying to benefit from this exemption.

The prerequisites – any easy catch?

Starting with the obvious, even if the target is in financial distress, the parties to a transaction are still required to notify their deal and are bound by the standstill obligation. As is well known, the companies are not allowed to implement notifiable transactions prior to receiving clearance.

Art. 7 (3) of the European Merger Control Regulation, however, gives the Commission the power to grant derogations from the standstill obligation under two conditions:

  • waiting for clearance must give rise to a serious risk of damage to the parties or third parties; and
  •  the transaction must not raise prima facie competition concerns.

Even if the conditions are fulfilled, the Commission will usually limit the derogation to those steps of the transactions and to that amount of control which is necessary to mitigate the serious risk of damage as claimed by the parties. In other words, the parties can implement certain steps but not necessarily the overall transaction.

Risk of damage – more than just financial problems

By merely reading the law, one could get the impression that “serious risk of damage” can easily be proven by the parties if the target is in financial distress. Or is it not essential in every transaction to get the acquirer on board rather sooner than later? Two examples of the case law clarify what is expected from the parties:

  • In France Telekom / Global One, the Commission denied the parties’ request for a derogation. The parties argued that decisions regarding the restructuration of the target needed to be taken urgently. The Commission, however, held that the parties “could not show to what extent the situation is different from the situation of any party who has acquired a new business and wants to have control over it as soon as practicable.
  • In BNP Paribas/Fortis, at the height of the financial crisis in 2008, the Commission, on the other hand, granted a derogation. It held that the parties “are in serious financial distress” and also considered that in “context of major financial crisis there are serious risks of further rapid deterioration”. The target was dependent on the acquirer to provide very significant volumes of liquidity on a daily basis. The Commission also took into account that BNP Paribas could consider abandoning the transaction without a derogation which, in turn, could lead to a considerable negative impact.

Clearly, there is a lot more to find in the case law, but these two cases should illustrate that only really exceptional circumstances can justify an exemption from the standstill obligation.

No concerns

Looking at the “no prima facie competition concerns” criteria, there might be more room to argue than one would initially think. The Commission acknowledged in Lufthansa/Certain Air Berlin Assets that the transaction prima facie appears to pose a threat to competition, but was still willing to grant a derogation subject to compliance with certain conditions. And based on the German equivalent of Art. 7 (3), the Bundeskartellamt gave Deutsche Post AG/trans-o-flex the freedom to implement some transaction steps despite prohibiting the deal later.

As a merger of the two biggest Swiss banks does also not seem to be a no-brainer, once the decision is out it will be interesting to see what convinced the Commission in UBS/Credit Suisse. Generally, one can imagine can the political angle and overall economic situation cannot be ignored entirely in high pressure cases.

An easy solution for targets in financial distress?  

Taking all of this together, it is fair to say that only a very few cases will have the chance for a derogation from the suspension obligation. This is also underlined by the Commission’s official statistics. Since 1990, roughly 9,000 cases were notified to the Commission but apparently less than 2% of those involved Art. 7 (3) decisions. Neither during the financial crisis in 2008 nor at the peak of the Covid-19 pandemic numbers for those decisions went up dramatically.   

At the same time, one has to note that where parties applied for a derogation, the Commission has in the past also granted the derogation in most cases. But that might be due to the fact that one usually discusses an application for a derogation with the regulator beforehand, and only submits a formal application if it indeed looks likely to be successful.

Taking the above into account, a steep rise in derogation decisions would be rather surprising. In jurisdictions where regulators can clear deals already before expiry of the statutory review deadline, it is often nonetheless advisable to engage in (formal or informal) discussions with the regulator and explain why a swift decision would be in the interest of everyone involved – even if political circumstances are not as unique as in some of the previous blockbuster deals.

Photo Jametlene Reskp on Unsplash.