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July 1, 2020 |
U.S. Department of Justice and Federal Trade Commission Finalize Vertical Merger Guidelines

Click for PDF On June 30, 2020, the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice released new Vertical Merger Guidelines, which replace the Non-Horizontal Merger Guidelines published in 1984. The FTC’s vote to issue the Guidelines was 3-2, with Commissioners Rebecca Kelly Slaughter and Rohit Chopra dissenting. The new Vertical Merger Guidelines are effective immediately. Vertical mergers are M&A transactions that combine firms or assets operating at different stages of the supply chain. Examples of vertical mergers include a car manufacturer acquiring the company that supplies it with auto parts, or a grocery store acquiring a milk processor. The Vertical Merger Guidelines aim to describe the agencies’ current approach to vertical mergers and provide greater transparency about how they evaluate such deals. The finalized Guidelines include substantial revisions to previously released draft guidelines in response to more than 70 public comments. The Vertical Merger Guidelines acknowledge certain procompetitive benefits of vertical mergers, noting that vertical deals “often benefit consumers” by increasing incentives to lower prices and tend to raise fewer competitive concerns than horizontal mergers between competitors. But the final Vertical Merger Guidelines also remove from the initial draft what some observers viewed as a “safe harbor” and describe several additional ways in which vertical mergers could harm competition. And they leave several questions unresolved, including about remedies for vertical mergers. Significant Changes from the Draft Guidelines

  • Market Share: One notable change to the final Vertical Merger Guidelines compared with the draft guidelines is the removal of a “safe harbor” for certain transaction based on market shares. The agencies previously said they were unlikely to challenge a vertical merger where the parties to the merger have less than a 20 per cent share in the relevant market and the “related product” (a product or service supplied to firms in the relevant market by the merged firm) is used in less than 20 per cent of the relevant market. The agencies removed this provision following widespread criticism. Now, the Guidelines state that, though levels of concentration may be relevant to assessing a deal’s competitive effects, the agencies will not rely exclusively on market shares or concentration statistics as screens for competitive harm.
  • Elimination of Double Marginalization: The draft guidelines explained that when two vertically related firms merge, the merged firm can often profitably reduce its downstream prices by combining its upstream and downstream margins. The final Vertical Merger Guidelines continue to stress the consumer benefits from this effect, called elimination of double marginalization (“EDM”), but elaborate on the agencies’ approach to EDM in three ways. First, they explain that the agencies will consider EDM earlier in the analytical process, in assessing whether the merged firm would have an incentive to raise or lower prices as a result of the merger. Second, they suggest that parties will be expected to substantiate claims that their merger will produce EDM. And third, they explain that the agencies will address whether EDM is merger-specific by looking at the merged firms’ cost of self-supply and its existing contracting practices.
  • Foreclosure and Raising Rivals’ Costs: Like the draft version, the final Guidelines emphasize that vertical mergers may harm competition by increasing the merged firm’s incentive and ability to foreclose rivals from, or raise rivals’ costs to access, related products such as necessary inputs or distribution channels. The Guidelines clarify, however, that mergers will “rarely warrant close scrutiny” on such grounds when rivals could readily switch to alternative providers of the related product, or supply themselves. And as already noted, the Guidelines now explain that the agencies will consider whether the merged firm’s incentive to set lower downstream prices as a result of EDM offsets potential price increases from foreclosing rivals or raising their costs.
  • Complement and “diagonal” mergers: The Guidelines now describe the agencies’ approach to two types of mergers that, while not strictly vertical, bear similarities to vertical mergers. First, they explain that mergers between makers of complements, such as necessary components of the same product, can raise competitive concerns. Because the price of one complement in certain cases might affect demand for the other, a merged firm may harm rivals by raising the price of one input to customers that do not buy the other. However, the Guidelines acknowledge that mergers involving complementary products and services can also lead to lower prices and other consumer benefits. Second, the Guidelines describe possible competitive concerns that might arise in “diagonal” mergers—mergers between firms at different stages of competing supply chains. In certain cases, such mergers might raise competitive concerns by giving the merged firm control over inputs that facilitate competition between the different supply chains.
  • Entry: The final Vertical Merger Guidelines also revive the “two-level entry” theory of harm, which also appears in the 1984 Guidelines. First, the agencies suggest that vertical mergers may harm competition by creating a need for “two-level entry.” A vertically integrated company (according to the Guidelines) may have little incentive to encourage the entry of new upstream or downstream competitors, which may mean a new entrant has to self-supply, making entry more costly. Second, the Guidelines state that the agencies will consider whether a vertical merger harms competition by forestalling the potential entry of one merging party into the other firm’s market.
Analysis and Implications Changes to the final Guidelines attempt to address comments from multiple directions and perspectives. Merging parties will welcome the Guidelines’ greater emphasis on and recognition of the procompetitive benefits of many vertical mergers—EDM foremost among them. The Guidelines now also helpfully describe situations in which vertical mergers will rarely raise concerns about foreclosure or raising rivals’ costs. At the same time, advocates for more active antitrust enforcement will be pleased that the final Guidelines lack a safe harbor and describe additional ways in which a vertical merger could potentially harm competition, including by discouraging potential entry and through “diagonal” and other relationships. Still, several areas of uncertainty remain from the draft guidelines, and present potential ambiguities for merging parties. For instance, the Guidelines resurrect the “two-level entry” theory of harm, asserting that vertical mergers can raise barriers to entry by effectively requiring new rivals to simultaneously enter both the upstream and downstream markets. Although the 1984 Guidelines also explored this theory, it is unclear whether “two-level entry” has ever provided a standalone basis for challenging a merger, and the agencies’ draft guidelines would have eliminated it. The elimination of the safe harbor also creates uncertainty about how market shares and concentration will factor into the agencies’ approach to vertical mergers. The draft Guidelines contained language suggesting that enforcement action was unlikely for mergers below certain market share thresholds, while holding out the possibility that mergers with shares below the thresholds could still give rise to competitive concerns. But with the safe harbor gone, parties now have little insight into how the agencies will factor the merged firms’ market shares and concentration into their analysis, other than knowing that “high” concentration may sometimes cause concerns. How the agencies will approach EDM in practice also remains unclear from the final Guidelines. The Guidelines at times appear to suggest that merging parties have the burden of showing that EDM is verifiable and merger specific, as with efficiencies under the Horizontal Merger Guidelines. But elsewhere, the Guidelines suggest that the agencies may “independently attempt to quantify” EDM based on available evidence, including the evidence agencies develop themselves to assess other price effects. Lastly, the Guidelines remain silent about how the agencies will address remedies in vertical mergers. Recent policy statements and the retraction of DOJ’s 2011 Policy Guide for Merger Remedies have created considerable uncertainty about the agencies’ approach. For example, it is unclear whether either or both agencies will seek structural remedies in the form of divestitures, or will continue to accept conduct or “behavioral” remedies as they have in the past. It remains to be seen whether or how the new Guidelines will impact agency policy concerning remedies. Companies considering vertical mergers should carefully consider whether their transactions will receive increased scrutiny under the new Vertical Merger Guidelines. Gibson Dunn successfully defended the only vertical merger challenge litigated to trial by the DOJ in the last forty years (involving AT&T’s acquisition of Time Warner), and attorneys in our Antitrust and Competition Law practice stand ready to assist clients in analyzing and securing approval of vertical transactions.
The following Gibson Dunn lawyers prepared this client alert: Kristen Limarzi, Adam Di Vincenzo, Richard Parker, Chris Wilson and Harry Phillips. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please feel free to contact the Gibson Dunn attorney with whom you usually work, the authors, or any member of the firm’s Antitrust and Competition Practice Group: Antitrust and Competition Group: Washington, D.C. D. Jarrett Arp (+1 202-955-8678, jarp@gibsondunn.com) Adam Di Vincenzo (+1 202-887-3704, adivincenzo@gibsondunn.com) Scott D. Hammond (+1 202-887-3684, shammond@gibsondunn.com) Kristen C. Limarzi (+1 202-887-3518, klimarzi@gibsondunn.com) Joshua Lipton (+1 202-955-8226, jlipton@gibsondunn.com) Richard G. Parker (+1 202-955-8503, rparker@gibsondunn.com) Cynthia Richman (+1 202-955-8234, crichman@gibsondunn.com) Jeremy Robison (+1 202-955-8518, wrobison@gibsondunn.com) Andrew Cline (+1 202-887-3698, acline@gibsondunn.com) Chris Wilson (+1 202-955-8520, cwilson@gibsondunn.com) Harry R. S. Phillips (+1 202-887-3706, hphillips2@gibsondunn.com) New York Eric J. Stock (+1 212-351-2301, estock@gibsondunn.com) Lawrence J. Zweifach (+1 212-351-2625, lzweifach@gibsondunn.com) Los Angeles Daniel G. Swanson (+1 213-229-7430, dswanson@gibsondunn.com) Samuel G. Liversidge (+1 213-229-7420, sliversidge@gibsondunn.com) Jay P. Srinivasan (+1 213-229-7296, jsrinivasan@gibsondunn.com) Rod J. Stone (+1 213-229-7256, rstone@gibsondunn.com) San Francisco Rachel S. Brass (+1 415-393-8293, rbrass@gibsondunn.com) Dallas Veronica S. Lewis (+1 214-698-3320, vlewis@gibsondunn.com) Mike Raiff (+1 214-698-3350, mraiff@gibsondunn.com) Brian Robison (+1 214-698-3370, brobison@gibsondunn.com) Robert C. Walters (+1 214-698-3114, rwalters@gibsondunn.com) Brussels Peter Alexiadis (+32 2 554 7200, palexiadis@gibsondunn.com) Attila Borsos (+32 2 554 72 11, aborsos@gibsondunn.com) Jens-Olrik Murach (+32 2 554 7240, jmurach@gibsondunn.com) Christian Riis-Madsen (+32 2 554 72 05, criis@gibsondunn.com) Lena Sandberg (+32 2 554 72 60, lsandberg@gibsondunn.com) David Wood (+32 2 554 7210, dwood@gibsondunn.com) Munich Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com) London Patrick Doris (+44 20 7071 4276, pdoris@gibsondunn.com) Charles Falconer (+44 20 7071 4270, cfalconer@gibsondunn.com) Ali Nikpay (+44 20 7071 4273, anikpay@gibsondunn.com) Philip Rocher (+44 20 7071 4202, procher@gibsondunn.com) Deirdre Taylor (+44 20 7071 4274, dtaylor2@gibsondunn.com) Hong Kong Kelly Austin (+852 2214 3788, kaustin@gibsondunn.com) Sébastien Evrard (+852 2214 3798, sevrard@gibsondunn.com) © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 30, 2020 |
European Commission Publishes Third Amendment to the Temporary Framework: Start-Ups (and Private Equity) to Get a Piece of the State Aid Pie

Click for PDF On June 29, 2020, the European Commission (the Commission) published a Third Amendment to the Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak (the Temporary Framework).[1] As described in Gibson Dunn’s client alert of 27 March 2020, on 19 March 2020 the Commission adopted the Temporary Framework aimed at enabling Member States to use State aid rules to support the economy in the context of the on-going pandemic, namely by allowing Member States to ensure that sufficient liquidity remains available to businesses and to preserve the continuity of economic activity during and after the COVID-19 outbreak. Since its adoption, the Temporary Framework has already been subject to several amendments by the Commission. Firstly, it was amended on 3 April 2020, to include aid to accelerate the research, testing and the production of COVID-19 relevant products, to protect jobs and to further support the economy during the current crisis (the First Amendment).[2] Secondly, it was amended on 8 May 2020, to further ease access to capital and liquidity for undertakings affected by the crisis (the Second Amendment).[3] With the Thrid Amendment the Commission further extended the scope of the Temporary Framework, in order to enable Member States to provide public support to micro and small companies, even in cases where the companies were already in financial difficulty on 31 December 2019, with the exception of companies undergoing insolvency proceedings and of companies which have received rescue aid that has not been repaid, or are subject to a restructuring plan under State aid rules. In addition, the Commission also took this opportunity to introduce certain clarifications to the application of the Temporary Framework, drawing from its experience in applying the relevant rules during the previous months.

The First and Second Amendments

On 3 April 2020, the Commission adopted the First Amendment to the Temporary Framework, so that Member States would be able to accelerate the research, testing and production of relevant products in the COVID-19 context, protect jobs and further support the economy in light of the pandemic. The Commission recognized that beyond ensuring access to liquidity and finance, it was also important to foster research and development, as well as to protect employment across the European Union. Therefore, the amendment introduced five additional types of aid measures: (i) support for research and development related to COVID-19, in the form of direct grants, repayable advances or tax advantages; (ii) support for the construction and upscaling of testing facilities, in the form of direct grants, tax advantages, repayable advances and no-loss guarantees; (iii) support for the production of products deemed relevant to tackle the pandemic outbreak in the form of direct grants, tax advantages, repayable advances and no-loss guarantees; (iv) targeted support in the form of deferral of tax payments and/or suspensions of social security contributions, in order to reduce liquidity constraints on companies; and (v) targeted support in the form of wage subsidies for employees, to limit the impact of the outbreak on workers. Moreover, to encourage cooperation and support between Member States, in the first three types of aid listed above the Commission introduced the possibility of increasing the aid intensity in projects involving cross-border cooperation between Member States. On 8 May 2020, the Commission adopted the Second Amendment to the Temporary Framework. The amendment expanded the Temporary Framework in order to enable Member States to provide recapitalizations and subordinated debt to companies in distress. The Commission recognized that well-targeted public interventions providing equity and/or hybrid capital instruments to companies could reduce the risk of a serious economic downturn impacting the whole EU economy, ensure the continuity of economic activity during the outbreak and foster subsequent economic recovery. Therefore, the amendment further allows Member States to design measures in line with additional policy objectives, setting conditions in order to avoid undue distortions of competition, namely (i) conditions on the necessity, appropriateness and size of the intervention; (ii) conditions on the State’s entry in the capital of companies and remuneration; (iii) conditions regarding the exit of the state from the capital of the companies concerned; (iv) conditions regarding governance; as well as (v) a prohibition of cross-subsidization and an acquisition ban. The Commission also emphasizes the importance of green and digital transformation, encouraging Member States to take these into consideration when designing national support measures. In addition, the Commission also adjusted the rules for loans, in particular with regard to subordinated debt. According to the amendment, Member States can provide subordinated loans subject to the Member States receiving a higher remuneration and a further limitation as to the amount when compared to senior debt.

The Third Amendment

The Third Amendment aims at: (i) extending the scope of the current framework in order to allow access to liquidity support also to micro and small companies as well as start-ups; (ii) providing incentives for private investors to participate in coronavirus-related recapitalization aid measures; (iii) eliminating the dependency of aid on the relocation of a production activity from another country within the European Economic Area (EEA) to the territory of the Member State granting the aid; and (iv) introducing procedural adjustments and improvements on the basis of the acquired experience over the past four months.

i. Micro and small companies and start-ups

Micro and small companies. The Commission has now further extended the Temporary Framework to micro and small companies (i.e., undertakings with less than 50 employees and less than EUR 10 million of annual turnover and/or annual balance sheet), as these companies have been particularly affected by the liquidity shortage caused by the pandemic. Further to the Third Amendment, State aid can be granted to micro and small enterprises even if they were in financial difficulty on 31 December 2019.[4] The Commission’s rationale is premised on the fact that due to their limited size and involvement in cross-border transactions, this type of aid will be less likely to distort competition in the Internal Market than State aid provided to larger companies. However, the amendment is not applicable to companies subject to collective insolvency procedures under national law and to companies which have received either rescue aid that has not been repaid or restructuring aid and are operating under a restructuring plan. Start-ups. The amendment is also intended to increase the possibility to provide support to innovative start-up companies, which are in their high-growth phase and may be considered crucial for the economic recovery of the European Union. Although there is no EU-wide definition for start-ups, it appears that the vast majority would fall within the micro and small companies cluster of the definition of small and medium enterprises (SMEs) in Annex I of the General Block Exemption Regulation (the GBER).[5] It should be recalled that even prior to this amendment, all SMEs that were in existence for less than three years on 31 December 2019 already benefitted from the possibility of receiving State aid provided under the Temporary Framework, since they could not qualify as undertakings in difficult under the GBER. In addition, the current framework provides the possibility to Member States to modify existing schemes already approved by the Commission under the Temporary Framework in order to include as beneficiaries within their scope micro and small companies that were already in difficulty on 31 December 2019.

ii. Incentives for private investors to participate in COVID-19-related recapitalization aid measures

The Commission has also adapted the conditions for recapitalization measures under the Temporary Framework for those cases where private investors contribute to the capital increase of companies together with the State. These changes will encourage capital injections with significant private participation in companies, limiting the need for State aid and the risk of competition distortions. In particular, if the State decides to grant recapitalization aid, but private investors contribute to the capital increase in a significant manner (in principle at least 30% of the new equity injected) at the same conditions as the State, the acquisition ban and the cap on the remuneration of the management are limited to three years. Furthermore, the dividend ban is lifted for the holders of the new shares as well as for existing shares, provided that the holders of those existing shares are altogether diluted to below 10% in the company. Furthermore, in line with the principle of neutrality towards public and private ownership, this amendment will also enable companies with an existing State shareholding to raise capital from their shareholders similar to private companies. In instances where the conditions above as regards the participation of private investors in the capital increase are met and the State was a shareholder already before the granting of recapitalization aid, if the State invests pro rata, the Commission will not to impose specific conditions as regards the State’s exit.

iii. Relocation of a production activity

The amendment also clarified that the aid should not be conditioned on the relocation of the production activity or of another activity of the beneficiary from another country within the EEA to the territory of the Member State granting the aid. According to the Commission, such a condition would be particularly detrimental to the internal market.

iv. Clarifications ameliorations to the current framework

Building on the experience of the application of the Temporary Framework in the previous months, the Commission also seized this opportunity to introduce some clarifications to the Temporary Framework. In particular, the Commission clarified the method for analyzing the compatibility of the measures and the factors taken into account for the balancing test applied in the context of this analysis. In addition, the Commission also specified the methods for applying recapitalisation measures, as well as measures intended to reduce companies’ wage costs.

Conclusion

The Third Amendment constitutes a welcomed development in the Commission’s State aid policy-making in view of the pandemic, which will remedy the paradox of having the “undertakings in difficulty” rules preventing government support for lossmaking companies. The application of these rules has so far been an obstacle for many high-growth equity backed businesses in essential sectors, such as pharmaceuticals and technology, from accessing crucial State funds. The lifting of this impediment is expected to allow governmental bodies to finally be able to direct funds to viable innovation-driven companies of significant importance to the post-pandemic economy. At the same time, the Third Amendment will also allow private equity-backed companies which often use specific tax-structures in order to hold stakes that can leave their balance sheets in the negative to be entitled to State aid. This means that otherwise viable companies will be able to eventually take part in government loan schemes aimed at helping businesses that have suffered from the pandemic. ______________________ [1] Communication from the Commission of 19 March 2020, C(2020)1863, OJ C 091I of 20.03.2020, available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.CI.2020.091.01.0001.01.ENG [2] Communication from the Commission of 3 April 2020, C(2020) 2215, OJ C 112I of 04.04.2020, available here. [3] Communication from the Commission of 8 May 2020, C(2020) 3156, OJ C 164, 13.05.2020, available here. [4] Companies that were already in difficulty before 31 December 2019 are not eligible for aid under the Temporary Framework, but may benefit from aid under existing State aid rules, in particular the Rescue and Restructuring Guidelines. These Guidelines set clear conditions according to which such companies must define sound restructuring plans that will allow them to achieve long-term viability. [5] Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty Text with EEA relevance, OJ L 187, 26.6.2014, p. 1–78
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments. For additional information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the Antitrust and Competition practice group or the following authors in Brussels: Attila Borsos (+32 2 554 72 11, aborsos@gibsondunn.com) Lena Sandberg (+32 2 554 72 60, lsandberg@gibsondunn.com) Maria Francisca Couto (+32 2 554 72 31, fcouto@gibsondunn.com) Vasiliki Dolka (+32 2 554 72 01, vdolka@gibsondunn.com) Antitrust and Competition Group in Europe: Brussels Peter Alexiadis (+32 2 554 7200, palexiadis@gibsondunn.com) Attila Borsos (+32 2 554 72 11, aborsos@gibsondunn.com) Jens-Olrik Murach (+32 2 554 7240, jmurach@gibsondunn.com) Christian Riis-Madsen (+32 2 554 72 05, criis@gibsondunn.com) Lena Sandberg (+32 2 554 72 60, lsandberg@gibsondunn.com) David Wood (+32 2 554 7210, dwood@gibsondunn.com) Munich Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com) London Patrick Doris (+44 20 7071 4276, pdoris@gibsondunn.com) Charles Falconer (+44 20 7071 4270, cfalconer@gibsondunn.com) Ali Nikpay (+44 20 7071 4273, anikpay@gibsondunn.com) Philip Rocher (+44 20 7071 4202, procher@gibsondunn.com) Deirdre Taylor (+44 20 7071 4274, dtaylor2@gibsondunn.com) © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 26, 2020 |
Best Lawyers in Germany 2021 Recognizes 19 Gibson Dunn Attorneys

Best Lawyers in Germany 2021 has recognized 19 Gibson Dunn attorneys as leading lawyers in their respective practice areas. Frankfurt attorneys recognized include: Alexander Klein – Banking and Finance Law; Jens-Olrik Murach – Competition/Antitrust Law, and Litigation; Dirk Oberbracht – Corporate Law, Mergers and Acquisitions Law, and Private Equity Law; Wilhelm Reinhardt – Corporate Law, and Mergers and Acquisitions Law; Sebastian Schoon – Banking and Finance Law; and Finn Zeidler – Arbitration and Mediation, Criminal Defense, and Litigation. Munich attorneys recognized include: Silke Beiter – Corporate Governance and Compliance Practice; Peter Decker – Banking & Finance, Private Equity Law, and Real Estate Law; Lutz Englisch – Corporate Governance and Compliance Practice, Corporate Law, Mergers and Acquisitions Law, and Private Equity Law; Ralf van Ermingen-Marbach – Criminal Tax Practice; Birgit Friedl – Restructuring and Insolvency Law; Ferdinand Fromholzer – Corporate Law, Mergers and Acquisitions Law, and Private Equity Law; Kai Gesing – Litigation; Markus Nauheim – Arbitration and Mediation, Corporate Law, Litigation, and Mergers and Acquisitions Law; Markus Rieder – Arbitration and Mediation, Corporate Governance and Compliance Practice, International Arbitration, and Litigation; Hans Martin Schmid – Real Estate Law; Benno Schwarz – Corporate Governance and Compliance Practice, Corporate Law, Criminal Defense, and Mergers and Acquisitions Law; Michael Walther – Competition/Antitrust Law; and Mark Zimmer – Corporate Governance and Compliance Practice, Criminal Defense, Labor and Employment, and Litigation. The list was published on June 26, 2020.

June 24, 2020 |
Expiration of Federal Law Limiting Antitrust Civil Exposure Creates Uncertainty for Cartel Self-Reporting

Click for PDF The Antitrust Criminal Penalty Enhancement & Reform Act (“ACPERA”) is an essential complement to the Corporate Leniency Policy, which the Department of Justice, Antitrust Division has described as its “most important prosecutorial tool.”[1] In essence, ACPERA releases a leniency recipient from the treble damages and joint-and-several liability that would otherwise apply in private civil claims related to its self-reported cartel conduct. But this limitation on private damages was lost when ACPERA expired on June 22, 2020 following a legislative impasse between the DOJ and a member of the Senate Judiciary Committee regarding an unrelated oversight concern. Until a political solution is found, potential leniency applicants face significant uncertainty about the civil damages exposure they may eventually confront. ACPERA was originally passed in 2004, after lobbying by the Antitrust Division, to “creat[e] greater incentives for corporations to self-report illegal conduct to the Department’s Antitrust Division.”[2] The Division recognized that the onerous burdens of private civil litigation were discouraging potential leniency applicants.[3] ACPERA was an effort to craft a policy solution that eliminated punitive treble damages for leniency applicants, while continuing to hold them accountable for “actual damages” caused by their own misconduct and to require their cooperation with the plaintiffs against their co-conspirators. Among the legislative compromises reflected in the final ACPERA bill was a “sunset” provision that required reauthorization in five years. Following a brief one-year extension in 2009, Congress reauthorized ACPERA for ten years in 2010 after studying its effectiveness.[4] As the 2020 horizon for reauthorization approached, the DOJ again supported reauthorization and this time lobbied for a bill to permanently extend ACPERA,[5] which Sen. Lindsey Graham introduced earlier this year.[6] While there have been active debates about ACPERA’s effectiveness and ways in which it could be improved,[7] the DOJ, plaintiffs’ bar, and defense bar all seemed to agree that ACPERA should be reauthorized in some form.[8] Despite the apparent broad support for ACPERA’s reauthorization in the criminal antitrust community, it has encountered difficulties in Congress. On June 9, 2020, Sen. Whitehouse sent a letter to Makan Delrahim, the Assistant Attorney General for the Antitrust Division, explaining that he would “withhold [his] consent to any request to expedite consideration of [Sen. Graham’s] bill” until he had received “satisfactory answers” to questions relating to a prior Antitrust Division investigation.[9] In particular, Sen. Whitehouse expressed concern with “the Antitrust Division’s investigation of agreements four automakers made with the State of California to follow vehicle greenhouse gas emissions standards set by the state.”[10] Sen. Whitehouse similarly raised “concerns of political interference and improper use of the Department’s legal authority to intimidate businesses that made decisions contrary to the interests of the President” when AAG Delrahim appeared before the Senate Judiciary Committee on September 17, 2019.[11] The Department of Justice has responded to Sen. Whitehouse, but has not yet satisfied his concerns. In a response to Sen. Whitehouse on June 19, 2020—three days before ACPERA was scheduled to expire—the DOJ explained that the Antitrust Division’s investigation into the automakers’ agreement with California was “entirely reasonable.”[12] However, this assertion was challenged when AAG Delrahim’s former acting chief of staff testified on June 23, 2020 at an oversight hearing before the House Committee on the Judiciary that explored “Political Interference and Threats to Prosecutorial Independence.”[13] While the broader issues between the Department of Justice and Congress may take time to resolve, ACPERA’s June 22, 2020 expiration date has now come and gone, changing the cartel enforcement landscape. The immediate effect of ACPERA’s expiration will be uncertainty for potential leniency applicants. At least in the near term, leniency applicants must weigh the risk of increased civil liability against the benefits of immunity from criminal prosecution. Congress had the foresight to ensure that recipients of a marker or conditional leniency letter prior to ACPERA’s expiration would continue to be protected.[14] However, it remains to be seen whether Congress will reauthorize ACPERA. Anyone applying for leniency during this interim period must account for this risk. The long-term repercussions of ACPERA’s expiration may be more profound. While Congress may soon reauthorize the legislation, the uncertainty it injects into the Antitrust Division’s leniency program will not quickly subside. The Antitrust Division has previously explained that a leniency program can only excel if there is “transparency and predictability to the greatest extent possible throughout a jurisdiction’s cartel enforcement program, so that companies can predict with a high degree of certainty how they will be treated if they seek leniency and what the consequences will be if they do not.”[15] The expiration of ACPERA thus undermines the confidence that the Antitrust Division recognizes is a necessary predicate for its leniency program to succeed and may negatively affect its future criminal enforcement efforts if not quickly remedied. ___________________________    [1]   Richard A. Powers, Deputy Assistant Attorney General, Dep’t of Justice, A Matter of Trust: Enduring Leniency Lessons for the Future of Cartel Enforcement (Feb. 19, 2020), available at https://www.justice.gov/opa/speech/deputy-assistant-attorney-general-richard-powers-delivers-remarks-13th-international.    [2]   Dep’t of Justice, ACPERA Roundtable Executive Summary, available at https://www.justice.gov/atr/page/file/1184396/download.    [3]   United States, Organisation for Economic Co-operation and Development, Relationship Between Public and Private Antitrust Enforcement (June 9, 2015), available at https://www.justice.gov/atr/file/823166/download (“ACPERA protects a successful leniency applicant from the burden of treble damages and joint and several liability in private litigation . . . .”).    [4]   Gibson Dunn, U.S. Congress Renews Civil Leniency for Companies That Self-Report Sherman Act Criminal Violations (June 4, 2010), available at https://www.gibsondunn.com/u-s-congress-renews-civil-leniency-for-companies-that-self-report-sherman-act-criminal-violations/; Gov’t Accountability Office, Criminal Cartel Enforcement: Stakeholder Views on Impact of 2004 Antitrust Reform Are Mixed, but Support Whistleblower Protection (July 2011), available at https://www.gao.gov/new.items/d11619.pdf.    [5]   Richard A. Powers, Deputy Assistant Attorney General, Antitrust Division, Dep’t of Justice, A Matter of Trust: Enduring Leniency Lessons for the Future of Cartel Enforcement (Feb. 19, 2020), available at https://www.justice.gov/opa/speech/deputy-assistant-attorney-general-richard-powers-delivers-remarks-13th-international (“The division supports reauthorization and the elimination of the sunset provision.”).    [6]   Antitrust Criminal Penalty Enhancement and Reform Permanent Extension Act, S. 3377, 116th Cong. (2020).    [7]   Dep’t of Justice, ACPERA Roundtable Executive Summary, available at https://www.justice.gov/atr/page/file/1184396/download.    [8]   Scott Hammond, Global Competition Review, Takeaways from the DOJ’s ACPERA Roundtable and Proposed Next Steps (April 17, 2020), available at https://globalcompetitionreview.com/article/1225312/takeaways-from-the-doj%E2%80%99s-acpera-roundtable-and-proposed-next-steps.    [9]   Letter from Sen. Sheldon Whitehouse to Makan Delrahim, Assistant Attorney General, Antitrust Division, Dep’t of Justice (June 9, 2020), available at https://www.whitehouse.senate.gov/imo/media/doc/200609_Follow-up%20letter%20to%20Makan%20Delrahim_Final.pdf. [10]   Id. [11]   Id. [12]   Kelsey Tamborrino, Politico, A New Era of WOTUS (June 22, 2020 10:00 AM EST), available at https://www.politico.com/newsletters/morning-energy/2020/06/22/a-new-era-of-wotus-788682. [13]   House Committee on the Judiciary, Oversight of the Department of Justice: Political Interference and Threats to Prosecutorial Independence (June 17, 2020 12:05 PM), available at https://judiciary.house.gov/calendar/eventsingle.aspx?EventID=3034; Kelsey Tamborrino, Politico, A new era of WOTUS (June 22, 2020 10:00 AM EST), available at https://www.politico.com/newsletters/morning-energy/2020/06/22/a-new-era-of-wotus-788682; U.S. House Committee on the Judiciary, Testimony of John W. Elias (June 24, 2020), available at https://judiciary.house.gov/uploadedfiles/elias_written_testimony_hjc.pdf?utm_campaign=4024-519. [14]   Act to amend the Antitrust Criminal Penalty Enhancement and Reform Act of 2004, Pub. L. No. 111-190, § 1, 124 Stat. 1275, 1275 (2010). [15]   Scott Hammond, Director of Criminal Enforcement, Antitrust Division, Dep’t of Justice, Cornerstones of an Effective Leniency Program (Nov. 22, 2004), available at https://www.justice.gov/atr/speech/cornerstones-effective-leniency-program.


The following Gibson Dunn lawyers prepared this client alert: Scott Hammond, Jeremy Robison, Kristen Limarzi, Rachel Brass, Jarrett Arp, Cynthia Richman, Dan Swanson, and Joshua Wade. Gibson, Dunn & Crutcher’s Antitrust and Competition Practice Group includes several former DOJ officials with extensive experience with the implementation and oversight of the Antitrust Division’s Corporate Leniency Program. No law firm has a more distinguished record of success than Gibson Dunn in handling high-stakes criminal antitrust investigations and follow-on civil antitrust litigation. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please feel free to contact the Gibson Dunn attorney with whom you usually work or the authors. Antitrust and Competition Group: Washington, D.C. D. Jarrett Arp (+1 202-955-8678, jarp@gibsondunn.com) Adam Di Vincenzo (+1 202-887-3704, adivincenzo@gibsondunn.com) Scott D. Hammond (+1 202-887-3684, shammond@gibsondunn.com) Kristen C. Limarzi (+1 202-887-3518, klimarzi@gibsondunn.com) Joshua Lipton (+1 202-955-8226, jlipton@gibsondunn.com) Richard G. Parker (+1 202-955-8503, rparker@gibsondunn.com) Cynthia Richman (+1 202-955-8234, crichman@gibsondunn.com) Jeremy Robison (+1 202-955-8518, wrobison@gibsondunn.com) Andrew Cline (+1 202-887-3698, acline@gibsondunn.com) Chris Wilson (+1 202-955-8520, cwilson@gibsondunn.com) New York Eric J. Stock (+1 212-351-2301, estock@gibsondunn.com) Lawrence J. Zweifach (+1 212-351-2625, lzweifach@gibsondunn.com) Los Angeles Daniel G. Swanson (+1 213-229-7430, dswanson@gibsondunn.com) Samuel G. Liversidge (+1 213-229-7420, sliversidge@gibsondunn.com) Jay P. Srinivasan (+1 213-229-7296, jsrinivasan@gibsondunn.com) Rod J. Stone (+1 213-229-7256, rstone@gibsondunn.com) San Francisco Rachel S. Brass (+1 415-393-8293, rbrass@gibsondunn.com) Dallas Veronica S. Lewis (+1 214-698-3320, vlewis@gibsondunn.com) Mike Raiff (+1 214-698-3350, mraiff@gibsondunn.com) Brian Robison (+1 214-698-3370, brobison@gibsondunn.com) Robert C. Walters (+1 214-698-3114, rwalters@gibsondunn.com) Brussels Peter Alexiadis (+32 2 554 7200, palexiadis@gibsondunn.com) Attila Borsos (+32 2 554 72 11, aborsos@gibsondunn.com) Jens-Olrik Murach (+32 2 554 7240, jmurach@gibsondunn.com) Christian Riis-Madsen (+32 2 554 72 05, criis@gibsondunn.com) Lena Sandberg (+32 2 554 72 60, lsandberg@gibsondunn.com) David Wood (+32 2 554 7210, dwood@gibsondunn.com) Munich Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com) London Patrick Doris (+44 20 7071 4276, pdoris@gibsondunn.com) Charles Falconer (+44 20 7071 4270, cfalconer@gibsondunn.com) Ali Nikpay (+44 20 7071 4273, anikpay@gibsondunn.com) Philip Rocher (+44 20 7071 4202, procher@gibsondunn.com) Deirdre Taylor (+44 20 7071 4274, dtaylor2@gibsondunn.com) Hong Kong Kelly Austin (+852 2214 3788, kaustin@gibsondunn.com) Sébastien Evrard (+852 2214 3798, sevrard@gibsondunn.com) © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 24, 2020 |
Rachel Brass and Dan Swanson Named Among California’s Top Antitrust Lawyers 2020

San Francisco partner Rachel Brass and Los Angeles partner Dan Swanson were named to the Daily Journal’s Top Antitrust Lawyers 2020 list, which features California’s top antitrust lawyers. The list was published on June 24, 2020. Rachel Brass is co-chair of Gibson Dunn’s Antitrust and Competition Practice Group.  Her extensive antitrust and competition experience includes international cartel matters, mergers and acquisitions, grand jury investigations, and other antitrust investigations by the Federal Trade Commission, United States Department of Justice, European Commission, Canadian Competition Bureau, Korean Fair Trade Commission, Japan Fair Trade Commission and Australian Competition and Consumer Commission, as well as litigation in trial and appellate courts.  She has represented clients in a number of industries, including semiconductors, disk drives, communications, display panels, and other high technology, auto parts, package delivery, transportation, agriculture, and retail, among others. Dan Swanson also co-chairs the firm’s Antitrust and Competition Practice Group.  His practice focuses on antitrust and competition law, including trial and appellate litigation, class actions, grand jury and civil investigations, merger review, regulatory and competition policy matters, and antitrust counseling.  He currently serves as Co-Chair of the International Bar Association’s Antitrust Section, which is the world’s largest organization of international antitrust practitioners.

June 18, 2020 |
The European Commission Publishes White Paper on Foreign Subsidies – Political Power Meets Legal Ambiguity

Click for PDF On June 17, 2020, the European Commission (the Commission) issued a White Paper asking for views on its plans for tackling foreign State subsidies that affect EU markets. If adopted, the reform will have far-reaching consequences on how non-EU owned businesses are run in the EU and how foreign entities can invest in Europe. The White Paper is premised on the idea that subsidies provided by non-EU States are liable to distort competition within the EU, either through foreign States’ financing of acquisitions of EU targets or through their subsidization of companies that are already active in the EU, thereby providing them with an unfair competitive advantage against their peers. The new tools are designed to address a regulatory gap and will complement existing legal instruments, such as merger control, foreign investment control in strategic sectors and anti-subsidy investigations. The White Paper also reflects a move to shield EU merger control from a potential reform that would include public interest considerations being taken into account in the merger review process. Those calls have come from a number of Member States which have expressed their preference for the creation of “European champions” that would be better equipped to compete with their foreign rivals, and have called for the possibility that in the EU merger review process public interest considerations would outweigh competition concerns. The Commission has proposed three new legal instruments: Module I, aims to address the distortions caused by foreign subsidies provided to an economic operator active in the EU market. Module II, is designed to address the issues around foreign State-subsidised acquisitions of EU target companies, as well as the potentially distortive effect of foreign subsidies in the context of acquisitions of EU targets. Module III envisages the introduction of a compulsory notification system for foreign subsidies in the context of individual public tender procedures. Module I – Sweeping ex post foreign subsidy control This instrument is the basis upon which the negative effects of foreign subsidies that are provided by non-EU states to companies established or active in the EU can be captured. As such, Module I is meant to close an existing regulatory gap, given that EU State aid control only covers subsidies provided by EU Member States, while the WTO anti-subsidy instrument only covers the import of subsidised goods to the EU and neither covers services nor production within the EU that has been subsidized by non-EU States. In addition, Module I would provide for the Commission (or the relevant authorities of the EU Member States) to review ex post acquisitions of EU targets that have been facilitated by foreign subsidies. The review under Module I would likely take place once the acquisition has been completed.

  • The White Paper proposes a broad definition of foreign subsidies that could be covered under Module I. Specifically, there would be two large categories of subsidies covered:
    • Foreign subsidies that are presumed to cause per se a distortion in the internal market (a presumption that in principle cannot be rebutted), such as subsidies in the form of export financing (unless the export financing is provided in line with the OECD Arrangement on officially supported export credits), government guarantees of debts or liabilities of certain undertakings without any limitation as to the amount or duration, subsidies (such as debt forgiveness) to ailing undertakings, subsidies directly facilitating the acquisition of an EU target, and operating subsidies in the form of tax reliefs.
    • Any other foreign subsidy that does not fall under the category of inherently distortive foreign subsidies could still be found to cause distortions in the internal market of the EU. For this category of subsidies, the Commission would carry out a case by case assessment based on the following indicators in order to determine their precise impact:
      • the relative size of the subsidy in question;
      • the situation of the beneficiary (e.g., the larger a beneficiary, the more likely that the subsidy would be distortive);
      • the situation on the market concerned (e.g., subsidies to beneficiaries active in markets with structural excess capacity are more likely to be distortive);
      • the market conduct in question (e.g., outbidding efficient bidders in acquisitions); and
      • the level of activity of the beneficiary in the internal market (e.g., subsidies granted to undertakings with limited activity in the internal market are less likely to be distortive).
  • Foreign subsidies below a certain mandatory threshold would be deemed not to generate distortive effects. The Commission proposes to set this threshold at EUR 200,000 over a period of three consecutive years, in line with the de minimis threshold that applies to subsidies (State aid) granted by EU Member States.[1]
  • Ultimately, both categories of subsidies would be assessed on the basis of an EU interest test, whereby the distortion would be weighed up against its possible positive impact. When determining whether or not there is a positive impact in the EU, public policy objectives such as job creation, achieving climate neutrality and protecting the environment, digital transformation, or public safety, would be taken into account.
  • Under Module I, the competent supervisory authorities (the Commission and the relevant Member State authorities) would be able to act ex officio upon any information concerning the grant of a foreign subsidy to a beneficiary active in the EU. The Commission and the Member States authorities will have vast investigation powers similar to what we know from State Aid or other competition investigations.
    • Similar to a situation in a State aid investigation, any investigation of foreign subsidies would consist of a preliminary review, followed by an in-depth investigation.
    • If it is confirmed by an in-depth investigation that the internal market has been distorted through a foreign subsidy, the Commission or the competent authorities of the Member States can decide (at their discretion) to impose measures to redress those distortions, such as the elimination of the financial benefit of a foreign subsidy through payments to the third country in order to restore the level playing field. The competent supervisory authority may be given the power to impose a variety of alternative redressive measures, ranging from structural remedies over behavioral measures to redressive payments to the EU and the Member States (e.g., divestment of assets, prohibition of certain investments, third party access, licensing on FRAND terms, etc.). The undertaking concerned may offer commitments to mitigate the distortion.
Module II – Prior notification of acquisition of EU targets Module II has a somewhat narrower scope than Module I, as it is intended to specifically address distortions caused by foreign subsidies which facilitate the acquisition of EU targets,[2] either: (1) directly, by explicitly linking a subsidy to a given acquisition or (2) indirectly, by de facto increasing the financial strength of the acquirer, which would in turn facilitate the acquisition. The competent supervisory authority (in all likelihood the Commission) would ex ante review acquisitions involving possible foreign subsidies under a compulsory notification mechanism. The Commission would also have the right to conduct an ex officio review of the acquisition which should have been notified by the acquirer, including after it has been completed. The review could ultimately result in the prohibition of the acquisition or, if it has been already completed, in its unwinding.
  • The scope of notifiable acquisitions will be wider than under EU merger control. In addition to the acquisition of control, it will also include the acquisition of at least a certain percentage of shares or voting rights (which, in an earlier version of the White Paper, was set at 35%) or the acquisition of material influence over the target company.
  • Potentially subsidised acquisitions would be defined as acquisitions of an EU target where a party has received a financial contribution by any third country government in the past three years or expects such contribution in the coming year.
  • The framework described above might include thresholds to better target the potentially problematic cases of subsidised acquisitions. The actual value of such thresholds will likely depend on the options chosen regarding the notion of “EU target”, the trigger for notification and the appropriate competent supervisory authorities.
    • An “EU target” triggering a filing requirement could be defined by reference to various thresholds to ensure that all acquisitions of interest are caught. In particular, the White Paper suggests a qualitative threshold referring to all assets likely to generate a significant EU turnover in the future and a quantitative threshold. A quantitative threshold based on turnover could be set at, for example, EUR 100 million, but other values, thresholds or alternative approaches could also be envisaged.
    • The trigger of potentially subsidised acquisitions could be limited to acquisitions facilitated by a certain volume of financial contributions from third country authorities. This could, for instance, be the case where the total amount of financial contribution received by the acquiring undertaking in the three calendar years prior to the notification is in excess of a certain amount or a given percentage of the acquisition price.
    • The value of each of these thresholds will most likely also depend on the supervisory authority entrusted with the implementation of Module II (whether the Commission or authorities at the national level).
  • The notification would entail a stand-still obligation throughout the Commission’s review. If, after having reviewed the notification, it is not concluded that there is sufficient indication that the acquirer benefitted from foreign subsidies facilitating the acquisition, the Commission may decide to open an in-depth investigation, upon which, the Commission may decide not to oppose the acquisition, to clear the acquisition subject to certain conditions or to prohibit the acquisition.
  • In order to block a subsidised acquisition, the Commission will need to demonstrate that the acquisition was facilitated by a foreign subsidy and that it would result in a distortion of the internal market, based on the following proposed non-exhaustive indicators, namely:
    • the size of the subsidy in question (e.g., the greater the subsidy in relative terms, the more likely it is to have a negative impact on the internal market);
    • the situation of the beneficiary (e.g., the larger the EU target or the acquirer, the more likely that the subsidised acquisition is distortive);
    • the situation on the relevant markets (e.g., subsidised acquisitions where the EU target is active in markets with structural excess capacity are more likely to cause distortions than others); and
    • the level of activity in the internal market of the parties concerned (e.g., subsidised acquisitions where the parties, notably the target company, have limited activities in the internal market in comparison with their global activities are less likely to distort the internal market).
Module III – Review mechanisms to monitor foreign subsidies in the context of public tenders in the EU Under Module III, economic operators participating in public procurement procedures would be obliged to notify to the contracting authority when submitting their bid whether they (or any of their consortium members or subcontractors and suppliers) have received a financial contribution within the past three years preceding the participation in the procedure, and whether such a financial contribution is expected to be received during the period of execution of the contract. In order to focus the instrument on the most relevant cases, the White Paper envisages that notification could be subject to certain conditions, for example if the financial contribution is above a certain value and the value of the tendered contract exceeds the threshold of the EU Public Procurement Directives. In those cases of subsidised bidding in public procurement procedures that falls outside the scope of Module III, the possibility remains that this conduct can be addressed under Module I. Similar to Module II, this procedure also requires a degree of self-assessment by tender participants.
  • The effect of any foreign subsidy would be assessed in relation to the specific procurement procedure that is applied. Following the notification, a relevant foreign subsidy would be referred to the relevant competent authority, which may start an investigation.
  • This investigation would also consist of two steps. In the preliminary review, the competent national authority may either conclude that there is no foreign subsidy and close the investigation, or proceed to conduct an in-depth investigation. The White Paper envisages the adoption of strict time limits, which could be extended in certain circumstances (e.g., 15 working days for the preliminary review and no more than three months for an in-depth review).
  • Within the context of cooperation and coordination, the national supervisory authority in question is obliged to inform the Commission, the contracting authority and all the competent supervisory authorities of the Member States of these decisions and communicate its prior draft conclusions to the Commission. During the investigation, the relevant contracting authority is prevented from awarding the contract to the economic operator that is under investigation.
  • Following an investigation of the effects of the subsidy, the participant could, in certain circumstances under which the foreign subsidy is found to be distortive, be excluded from the tender as well as future tenders (for a period of maximum three years) or have any existing contracts terminated.
Finally, in an attempt to potentially further broaden the scope of Module III, the White Paper considers that the measures put in place to address foreign subsidies under the generally applicable public procurement rules should apply equally to prevent EU funding that has been deployed through procurement from contributing to distortions of the internal market. Preliminary Observations Module I is a far reaching instrument which bestows upon the EU and the Member States a wide arsenal of investigative and remedial powers. However, although it sets very concrete goals in terms of the results it wishes to achieve, the details of the concrete legislative proposal remain to be seen, as there is a number of questions that the White Paper leaves unanswered. First, while it provides examples of the types of foreign subsidies that it intends to address, the White Paper lacks a concrete definition as to what will constitute a foreign subsidy that might warrant the Commission’s attention. Given the sweeping powers that the Commission and the relevant Member States authorities will have to investigate and address any distortions of the internal market caused by foreign subsidies, it will be crucial to ensure at least some level of legal certainty by adopting a precise definition of ‘foreign subsidy’. The reference made in the White Paper to the notion of “aid” under State aid rules and to the notion of “subsidy” under the WTO SCM Agreement on subsidies are particularly unhelpful, as the two instruments are very distinct in terms of their respective scope. Second, similarly to the notion of foreign subsidy, the notion of “distortion of the internal market” will also need to be defined. It is unlikely that the notion of “distortion of competition” could be directly transposed from State aid control rules, as that would result in virtually each and every foreign subsidy qualifying as being distortive and therefore can be redressed. Third, the Commission’s proposals rely on the assumption that third countries will accept the extraterritorial application of the proposed law in much the same way as they do the EU merger rules. However, this ignores the fact that almost all countries with competition law regimes operate merger rules that apply to foreign entities. That is not the case as regards foreign subsidies; the proposed new tools are unprecedented and there are no similar instruments in the legislative arsenal of the EU’s major economic partners. More generally, the concept of controlling State subsidies, other than in the rather limited context of the WTO SCM Agreement, is unknown outside the EU (other than those who are engaged in bilateral agreements with the EU), which makes it even less likely that third countries would simply accept the EU’s new instruments and cooperate with a foreign subsidy investigation. Fourth, the White Paper seems to grant an unusually wide margin of discretion to the Commission in its deliberations. Not only has the Commission (or the competent authorities of the Member States) absolute discretion into which cases it will conduct a preliminary review or open an in-depth investigation, but it can also simply decide to close an in-depth investigation on the grounds that it is no longer a priority. According to the White Paper, an investigation by the Commission’s or by the competent authorities of the Member States’ investigation will rely on stakeholders’ contributions. It remains to be seen, and will to a large extent depend on how the Commission will use its new powers, whether stakeholders will indeed make the effort and commit resources to support such investigations if they can be terminated at the Commission’s sole discretion and without any obligation on the Commission to state the reasons for such a termination in proceedings (other than the investigation no longer being a priority). The possibility that the Commission might terminate an in-depth investigation on the ground that it is no longer a priority in effect insulates any desire to terminate proceedings from any effective judicial oversight, similar to the power enjoyed by the Commission under Article 106 TFEU.[3] In the same vein, it is noticeable that investigations would only be initiated ex officio with the White Paper not providing for the possibility of complaints being submitted. Stakeholders will then be likely to have even more limited rights within the framework for foreign subsidy investigations that complainants currently do in relation to State aid investigations. The unusually wide margin of discretion accorded to the Commission in foreign subsidy investigations, coupled with the lack of any legal standing for stakeholders, may render the new regime prone to being used as a political tool in the service of the political priorities of a particular Commissioner at a given point in time, thereby undermining the credibility of the new instruments. The White Paper proposes to level the playing field by closing the regulatory gap that is not covered by EU State aid controls and trade defense instruments. However, Module II goes well beyond the closing of that gap, and has the potential to lead to discrimination against direct foreign investment in the EU. This might have far reaching consequences for Europe’s economy. First, EU State aid control is neutral as regards State or private ownership. State ownership and the participation of the State as an actor in the economy is not in and of itself an element that the Commission could or would regulate or over which it would require oversight powers. Nothing prevents Member States or publicly owned companies from investing in the economy, by, for example, acquiring undertakings established in the EU. As long as the publicly owned acquirer has paid the market price for the target company, the acquisition escapes EU State aid control. A typical, and according to the Commission’s own guidelines, also the most desirable, way to determine whether the price paid for a certain asset represents the market price is to conduct a competitive bidding process. However, it is exactly this type of bidding process that the White Paper considers might lead to an undesirable outcome where one of the bidders is backed by a foreign State subsidy, thereby allowing it to pay a higher price for the target company. This is in stark contrast with the situation where a bidder is backed by an EU Member State and can therefore outbid other potential acquirers. Whereas the latter situation falls outside the scope of the notion of “State aid” and thus escapes scrutiny, the former situation may be considered to cause distortion in the internal market. If adopted, not only will Module II introduce a notification requirement for foreign State investments in the EU, but it may also end up treating such investments more strictly, ultimately discouraging foreign direct investments. Second, while its exact details still need to be resolved, it may be a challenge to define the notion of “foreign subsidy” in such a way that is both practicable and does not undermine the principle of legal certainty. If the Commission decides to attach the notification obligation to acquisitions that have been directly subsidised by foreign States, it might not be overly burdensome for acquirers to circumvent the filing obligation by making arrangements to receive the subsidy via a different channel. The Commission’s new powers to investigate such a circumvention of the rules would quickly reach their limits when the Commission would need to investigate, assess and opine upon whether a foreign State has deliberately structured its financial support to a company in such a way as to avoid the filing obligation. As mentioned in relation to Module I, it appears to be overly optimistic to expect any third country to willingly cooperate with the Commission in the context of these new types of instruments, not to mention that third countries, unlike EU Member States have no obligation of loyal cooperation with the Commission. By contrast, adopting a broad definition of the concept of “foreign subsidies” that is liable to trigger a notification obligation could render the operation of the new regulatory regime impracticable and, may discourage direct foreign investment in the EU. Under a broad definition, any subsidy that the acquirer received in the past three years could lead to a notification obligation and, eventually, to an in-depth investigation. For example, an acquirer established in the United States that benefitted from subsidies to revamp its production facilities domestically and which would then go on to acquire an EU target could be considered to have been “subsidised” for the purposes of its acquisition in the EU, since the subsidies it received for its US facility freed up its financial resources for the acquisition. The proposed regulatory framework presented in the present White Paper constitutes an undeniably ambitious project for the stronger regulatory oversight of the role that foreign subsidies play in the EU’s economy. The details of both the substantive scope and the procedural rules of the proposed new instruments will ultimately determine how important and how effective these tools will be in the Commission’s regulatory arsenal. The reaction of the EU’s major economic partners will also be likely to influence how far the Commission will be seeking to push the boundaries of this new regulatory regime and how effectively it can implement it in practice. While introducing new tools to level the playing field in the internal market may indeed be necessary and a welcome development, it will be important for the Commission and the Member States to not lose sight of the existence of established instruments and perhaps to rely more boldly on trade defense measures and other existing tools to achieve the same objectives. ______________________       [1]    Commission Regulation (EU) No 1407/2013 of 18 December 2013 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid, OJ L 352, 24.12.2013, p. 1.       [2]    There is still no concrete and definitive proposal for the definition of “EU Targetunder Module II but the White Paper proposed the following: “any undertaking established in the EU and meeting a certain turnover threshold in the EU”, without excluding the consideration of other criteria.       [3]    Article 106 TFEU prohibits Member States, with respect to public undertakings or (private) undertakings endowed with special rights, from enacting or maintaining in force any measure contrary to the rules contained in the Treaties, and in particular, Articles 101 and 102 TFEU.
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments. For additional information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Antitrust and Competition or International Trade practice groups, or the following authors: Attila Borsos - Brussels (+32 2 554 72 11, aborsos@gibsondunn.com) Peter Alexiadis - Brussels (+32 2 554 7200, palexiadis@gibsondunn.com) Ali Nikpay - London (+44 20 7071 4273, anikpay@gibsondunn.com) Jens-Olrik Murach - Brussels (+32 2 554 7240, jmurach@gibsondunn.com) Vasiliki Dolka - Brussels (+32 2 554 72 01, vdolka@gibsondunn.com) © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 15, 2020 |
WirtschaftsWoche Ranks Gibson Dunn as a 2020 Top Law Firm in M&A and Antitrust

In its list of the most renowned law firms and lawyers in M&A and Antitrust, German publication WirtschaftsWoche has recognized Gibson Dunn as a Top Law Firm in both practices. Munich partner Lutz Englisch and Frankfurt partner Dirk Oberbracht were recognized as Top Lawyers in M&A, and Munich partner Michael Walther was named a Top Lawyer in Antitrust.  The list was published on June 12, 2020. Lutz Englisch focuses on M&A (private and public) and corporate law. He advises many blue chips, (listed) German and foreign companies and PE Funds on domestic and cross-border public and private take-overs including multi-billion (carve-out) deals, as well as on corporate law and corporate governance matters. His stock corporation law practice focuses on executive and supervisory board matters, stockholders meetings and compliance-related matters. Dirk Oberbracht is a leading private equity and M&A lawyer. He advises private equity investors, corporate clients, families and management teams. He has extensive expertise in cross-border and domestic deals, including carve-outs, joint ventures, minority investments, corporate restructurings and management equity programs. Michael Walther practices in the areas of antitrust and competition, data protection and cybersecurity, as well as white collar defense and investigations. He successfully advises German and international clients many of which are active in technology-driven industries, such as automotive, high technology, IT, semi-conductor, pharma and medical devices on antitrust and competition law.

June 11, 2020 |
“Killer Acquisitions,” Big Tech, and Section 2: A Solution in Search of a Problem

Washington, D.C. partner Kristen Limarzi and associate Harry Phillips are the authors of "'Killer Acquisitions,' Big Tech, and Section 2: A Solution in Search of a Problem," [PDF] published by the Competition Policy International Antitrust Chronicle in May 2020.

May 28, 2020 |
General Court Dismantles European Commission’s Tough Approach to Mobile Mergers

Click for PDF General Court Judgment of 28 May 2020 - Case T-399/16, Case CK Telecoms UK Investments Ltd. v. Commission The General Court earlier today called into serious question the tough approach taken by the European Commission (the ‘Commission’) in its review of mergers in the mobile communications sector. In doing so, the General Court has subjected the Commission’s analysis to an unprecedented level of scrutiny on a range of important substantive issues, rather than seeking to catch out the Commission on more procedural technicalities. As noted by the General Court itself, this was the first time it had been called upon to rule on the conditions for the application of the EU Merger Regulation to a merger in an oligopolistic market which did not involve the creation or strengthening of an individual or collective dominant position, but giving rise to so-called “non-coordinated effects”.[1] Since its initial 2006 Decision in T-Mobile Austria/Tele-ring,[2] the Commission has focused on a series of “gap” cases[3] in mobile communications markets, rather than on traditional theories of harm based on unilateral effects. The overturning of a Commission merger veto Decision is rare,[4] and it is even more rare for a General Court Ruling to annul a Commission Decision in such a comprehensive manner. The Decision The appeal arose in relation to the Commission’s 2016 Decision[5] to block the proposed acquisition by UK mobile network operator (‘MNO’) Three of O2, thereby limiting the number of MNOs on the UK market from 4 to 3. The acquisition would have created the UK’s largest MNO, with a market share of 40%. In the eyes of the Commission, the loss of a fourth MNO in the circumstances was incompatible with the Common Market. It was generally understood at the time that the Commission’s Decision was fully endorsed by the UK authorities, which had earlier requested that the merger be reviewed by them under the ‘referral’ powers available under the EU Merger Regulation.[6] The key findings of the Commission's Decision were that the proposed transaction would result in the following:

  1. A lessening of competition due to the removal of an important competitor, leaving only two other MNOs (namely, Vodafone and Everything Everywhere, or ‘EE’) to compete against the merged entity. This would have lowered existing incentives on the merged entity to compete, in turn leading to higher prices and reduced quality and choice for consumers.
  2. The hampering of mobile network infrastructure investment in the UK, primarily because the merged entity would have been participating with two other sets of infrastructure sharing agreements with the other MNOs on the market. The level of market transparency gained by participation in such agreements was likely to lead to less competition in the roll-out of next generation (5G) technology.
  3. A reduction in the number of MNOs that would be willing to host mobile virtual network operators (“MVNOs”) through wholesale access relationships, thereby weakening the negotiating position of MVNOs to obtain favourable access terms from MNOs.
With a view to overcoming the Commission’s competition concerns reflected in its three theories of harm, the notifying parties submitted a series of proposed behavioural commitments to the Commission concerning the grant of MVNO access and access to its network sharing relationships. These commitments were rejected by the Commission because they were too complex to implement and to monitor effectively, and because they would have been commercially unattractive to MVNOs. Grounds of the Appeal The appeal before the General Court was based on a number of grounds, including the Commission’s alleged errors of assessment when concluding that the merging parties were “close competitors” and when concluding that Three was an “important competitive force” in the mobile wholesale access market. In addition, it was argued that the Commission had misunderstood important aspects of Three’s network capacity capabilities relative to its competitors. It was also argued that the Commission had misunderstood the workings of the UK mobile market when concluding that the MNOs were likely to align their market behaviour post-merger. Finally, it was alleged that the Commission had erred in concluding that the commitments offered by the notifying parties were not capable of sustaining effective competitors in the marketplace. The Judgment In what might be seen to be a landmark Judgment, the General Court annulled the Commission’s Decision in its entirety, concluding that the Commission had failed to substantiate its three separate theories of harm laid out in its Decision. According to the General Court, the Commission had failed to satisfy the requisite legal standard regarding the negative effects of the proposed merger on prices and quality, the competitive impediments raised by the network sharing agreements, and the concerns about wholesale access bargaining. More specifically, the Court subjected each of the Commission’s theories of harm to forensic analysis. Thus, in connection with the first theory of harm, the Court was not convinced that a relatively low degree of product differentiation was likely to eliminate competitive constraints being exercised in the mobile retail market. Moreover, the Commission’s quantitative analysis had little probative value, as it fell far short of proving how “significant” the upward pressure on retail prices would be. To add insult to injury, the Court felt that the Commission had wrongly conflated the ideas of “significant impediment to effective competition”, “elimination of an important competitive constraint” and “elimination of an important competitive force”. In doing so, it rendered its decision-making on the first theory of harm fatally flawed. As regards the second theory of harm, the Court expressed its surprise at the “novelty” of that theory, insofar as the Court found it difficult to comprehend how the Commission could draw a causal link between potential increases in fixed and incremental costs with a tendency of MNOs to engage in fewer network investments, deteriorate quality or lower competitive pressure. Moreover, in asserting that new levels of transparency between operators would induce aligned behaviour, the Commission had failed to conduct a sufficiently dynamic analysis of current and emerging competitive conditions. Most importantly, the Commission had failed to give due weight to the fact that, at some time post-merger, the merging parties would be operating only one network, which would by definition weaken any tendency towards greater transparency in the market. Finally, the Court also dismissed the Commission’s third theory of harm. According to the Court, the Commission had over-emphasised the extent to which the competitive dynamic might change as a result of 4 access options being diminished to 3. Moreover, the Commission had over-estimated the relative importance of Three in the wholesale market, where it accounted for only a relatively small market share. As such, its disappearance as a wholesale access option was unlikely to change the competing environment in any significant way post-merger. The views of the General Court will no doubt make unpleasant reading for the Commission, yet it is difficult to find fault with the approach adopted by the Court. Given the number of methodological errors made by the Commission, it would be wrong to conclude that the General Court has gone beyond its review mandate and superimposed its views for those of the Commission on matters of complex economic assessment. There now seems to be a clear current of thinking in the General Court that the Commission is under a significant responsibility to explain it’s sometimes complex economic analyses. This is most obvious when it comes to likely competitive effects, but has also recently been seen in relation to other issues like fine calculations. Likely Aftermath It is undeniable that the Commission has suffered a significant blow to its tough policy on “gap” mergers in the mobile communications sector. The mobile industry will no doubt be heartened that the General Court has dealt a blow to that policy, as the industry continues to explore the possibilities of consolidation in the face of tough margins and competition from “over the top” providers of communications services. The mobile industry will be particularly pleased by the fact that the General Court has, on a number of occasions in its Judgment, pointed out that there is no competitive magic associated with the existence of 4 mobile operators in any given national market. Despite numerous denials to the contrary by Commission spokespeople,[7] the overwhelming feeling has been for some time that the Commission has operated under the mantra that the existence of 4 mobile operators in each Member State is the preferred market structure that will deliver optimal competitive outcomes. The industry will also be well disposed to the views expressed by the Court about the motivations on the industry to invest as an outcome of consolidation, rather than using consolidation to engage in less ambitious expansion plans. In this sense, it must also provide a spur to the industry that its members now have the prospect of achieving scale at a pan-European level on the cusp of next generation 5G investments being made that will provide the bedrock for Europe’s digital transformation in the age of the “Internet of Things”.[8] Having said all that, a 4-to-3 mobile deal will still pose great challenges for the notifying parties. With one notable exception,[9] the Court has focused fundamentally on the faulty methodology relied upon by the Commission, rather than on the analytical basis of the theories of harm adopted by it.[10] Moreover, the Court has not needed to take a view on the Commission’s tough line on remedies, as this question was rendered moot in the circumstances. Armed with the ability to extract comprehensive commitments from the notifying parties to a merger, it is arguable that the Ruling of the Court has merely clipped the Commission’s wings, rather than having dealt it a bodyblow. The next merger in the mobile sector may therefore be a tough test case in the wake of the Court’s Ruling, as the Commission re-assesses its position and the depths of its fact-finding. Finally, the net beneficiaries of this Judgment are likely to be the parties negotiating the proposed Virgin Media/O2 deal, which will be facing merger review bodies across the Channel bearing deep scar tissue from their recent mauling before the General Court in the Three/O2 Case.[11] _________________________ [1] Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings, OJ C 31, 5.2.2004, pp. 5-18, paragraphs 24-38. [2] Case No. COMP/M.3916. [3] In complex oligopoly situations, theories of harm are developed to address theories of harm in the analytical “gap” that exists between unilateral effects and coordinated effects theories. [4] Since the adoption of the EU Merger Regulation in January 2004, the Commission has blocked only twelve mergers following a “Phase II” investigation on the basis of Article 8(3) of the Regulation. Among these, eight appeals were brought before the General Court, and three are still pending. [5] Case No. COMP/M.7612. [6] Council Regulation (EC) No. 139/2004 of 20 January 2004 on the control of concentration between undertakings, OJ L 24, 29.1.2004, pp. 1-22, Article 9(2)(a). [7] See, for example, most recently, Olivier Guersent’s statement according to which Telecoms mergers that leave just three players do not face a pre-cooked veto from Brussels (April 2020), available at: https://www.mlex.com/GlobalAntitrust/DetailView.aspx?cid=1182698&siteid=190&rdir=1. [8] The Internet of things (“IoT”) is a system of interrelated computing devices that are provided with unique identifiers and the ability to transfer data over a network without requiring human-to-human or human-to-computer interaction. [9] Namely, the Commission’s conclusion that low levels of investments would be the necessary by-product of network sharing agreements. [10] Even as regards the application of the third theory of harm, there is nothing to suggest that the Commission’s views about the likely negative impact on bargaining power for mobile network access agreements would not have been upheld had Three enjoyed a more significant wholesale market share. [11] https://www.theguardian.com/business/2020/may/07/virgin-media-and-o2-owners-confirm-31bn-mega-merger-in-uk.
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments. For additional information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Antitrust and Competition Practice Group, or the following authors in Brussels: Peter Alexiadis (+32 2 554 7200, palexiadis@gibsondunn.com) David Wood (+32 2 554 7210, dwood@gibsondunn.com) Iseult Derème (+32 2 554 72 29, idereme@gibsondunn.com) © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 15, 2020 |
Gibson Dunn named among top commercial law firms in Germany

The German monthly brand eins recognized Gibson Dunn's Frankfurt and Munich offices in its special issue „Commercial Law Firms“. The firm is recommended as „Beste Wirtschaftskanzlei 2020“ (top commercial law firm) in the Compliance and Mergers & Acquisitions categories. The feature was published on May 15, 2020.

May 12, 2020 |
Attila Borsos Named to GCR’s 40 Under 40 List

Global Competition Review has named Brussels partner Attila Borsos to its 2020 40 under 40 list, which profiles the top young antitrust lawyers in the world. The feature was published on May 12, 2020. Attila Borsos advises on a broad range of complex competition and antitrust issues, including global merger control and cartel enforcement. He represents clients before the European Commission, national competition authorities in Europe, as well as regulatory authorities worldwide. His experience spans many industry sectors, including consumer goods, chemicals, energy, airline, media and entertainment, insurance, and financial services. In addition, he advises clients on EU State aid, anti-dumping and anti-subsidy investigations and on EU sanctions.

May 6, 2020 |
Webcast: Pharma, Medical Device, and Biotech Antitrust Update: New Developments and What They Mean

Antitrust authorities in the U.S. and Europe have increasingly emphasized the importance of policing competition in innovation-driven health care markets, including pharmaceuticals, biologics, medical devices, and biotech. During and after the COVID-19 crisis, companies can expect greater demands on industry participants to collaborate, as governments and companies all work to develop innovative treatments and products. In addition, in recent years antitrust enforcers have been reviewing mergers and conduct throughout the industry through new analytical frameworks, and have issued new guidelines, which may have both short-term and long-term ramifications for business practices and transactions. We also can expect continued enforcement attention to perceived high drug costs. M&A transactions, litigation, and government enforcement are impacted and will continue to be impacted by these trends. Drawing on their experiences in recent cases and their enforcement backgrounds, Gibson Dunn lawyers will discuss how to navigate these new and evolving approaches to antitrust enforcement and litigation. The panel also will discuss how pharmaceutical, medical device, biologic and biotech companies can engage effectively with enforcers, while practically managing antitrust risk in this challenging environment. View Slides (PDF)



PANELISTS: Adam J. Di Vincenzo is a partner in the Washington, D.C. office of Gibson Dunn. Mr. Di Vincenzo’s practice encompasses a wide range of antitrust litigation and merger investigations. He has represented numerous clients before antitrust enforcement authorities in the United States (including the DOJ and FTC), European Union, and other jurisdictions in connection with mergers, acquisitions, joint ventures, conduct, and intellectual property issues. His recent matters include merger-related FTC investigations involving the pharmaceuticals, biotech, and medical device industries, including his representation of Spark Therapeutics in its $4.3 billion acquisition by Roche. He has been recognized as a leading antitrust and competition lawyer by Who’s Who Legal: Competition, Legal 500, Global Competition Review, and Law360. Richard Parker is a partner in the Washington, D.C. office of Gibson Dunn and a member of the firm’s Antitrust and Competition Practice Group. Mr. Parker is a leading antitrust lawyer who has successfully represented clients before both enforcement agencies and the courts. As an experienced antitrust trial and regulatory lawyer, Mr. Parker has been involved in many major antitrust representations, including merger clearance cases, cartel matters, class actions, and government civil investigations. He has extensive experience representing clients in matters before the Federal Trade Commission (FTC) and the U.S. Department of Justice Antitrust Division. His experience in high-profile merger trials has earned him high honors, including being recognized by Chambers USA as a first-tier ranked “Leading Lawyer” in Antitrust, and included on Benchmark Litigation’s “Top 100 Trial Lawyers in America” list. From 1998 to 2001, Mr. Parker served as the Senior Deputy Director and then as Director of the Bureau of Competition of the U.S. Federal Trade Commission. Eric J. Stock is a partner in the New York office of Gibson Dunn where his practice focuses on antitrust litigation and investigations, especially for clients in the pharmaceutical, health care, and financial services industries. He has particular experience advising pharmaceutical companies accused of monopolization or anticompetitive transactions, especially in matters that involve the intersection of the antitrust and intellectual property laws. Mr. Stock currently is defending several pharmaceutical companies in matters involving alleged “reverse payment” patent settlements, alleged “sham” citizen petitions or patent lawsuits, or the use of bundled discounts. In these matters, Mr. Stock frequently is responsible for coordinating the client’s response to these legal issues across multiple proceedings and jurisdictions, including state and/or federal investigations, class actions, and other customer or competitor lawsuits. From 2013-2016, Mr. Stock was the Chief of the Antitrust Bureau at the New York Attorney General’s Office. Deirdre Taylor is a partner and English qualified solicitor in the London office of Gibson Dunn. Ms. Taylor’s practice encompasses the full range of antitrust issues, including cartel investigations, merger control, and abuse of dominance. Ms. Taylor has provided antitrust advice to clients across a number of industries, including telecommunications, aviation, financial services, oil and gas, engineering, retail, pharmaceutical, and manufacturing. Her recent merger experience in the pharmaceuticals, biotech, and medical device industries includes representation of Spark Therapeutics before the UK competition authority in relation to its acquisition by Roche. Ms. Taylor is assistant editor of “Faull & Nikpay: The EC Law of Competition,” one of the leading practitioner texts in the antitrust and competition law field.
MCLE INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement.  This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Victoria Chan (Attorney Training Manager) at vchan@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.

May 4, 2020 |
Hong Kong Competition Tribunal Provides Guidance on Cartel Fines

Click for PDF The Hong Kong Competition Tribunal (“Tribunal”) has issued its first decision on cartel fines in Competition Commission v W. Hing Construction Company Limited and Others (“Competition Commission v W. Hing”).[1] This decision is important because it sets out the methodology that the Tribunal will follow when imposing fines on undertakings in breach of the prohibition on cartel conduct. The Tribunal has, by and large, followed the approach recommended by the Hong Kong Competition Commission (“Commission”). However, the facts of the case did not require the Tribunal to fully address all of the relevant factors for the calculation of a fine in the cartel context. Also, it is unclear how the framework adopted by the Tribunal would apply in case of fines on individuals. Further guidance from the Commission would therefore be welcome. In addition, the facts did not require the Tribunal to assess a Commission recommendation on fine reductions under the Commission’s Cooperation and Settlement Policy. However, the Tribunal recognized the strong public interest in facilitating the kind of cooperation envisaged in the Commission’s leniency programme and it is therefore likely that the Tribunal will follow the Commission’s recommended reductions for cooperation.

1.   Background

The Hong Kong Competition Ordinance (“Ordinance”) prohibits cartel conduct under its “First Conduct Rule.” The Commission can commence proceedings for violations of the First Conduct Rule before the Tribunal, which can impose pecuniary penalties of up to 10% of an undertaking’s total gross revenues generated in Hong Kong for the duration of the contravention (capped at three years). The Commission has recently brought major changes to its leniency programme (see https://www.gibsondunn.com/hong-kong-competition-commission-brings-major-changes-to-leniency-program/). The Commission has initiated proceedings before the Tribunal for several cartel cases. The Competition Commission v W. Hing case concerned market sharing practices among decoration contractors in relation to a housing estate. The Tribunal decided on 17 May 2019 that the practices amounted to an infringement of the First Conduct Rule. In a subsequent decision on 29 April 2020, the Tribunal issued its decision on the amount of the fines to be imposed on the cartel participants.

2.   Methodology for Fine Calculation

The Tribunal has adopted a methodology that is similar to the approaches taken by the UK and the EU. In particular, the Tribunal set out a four-step approach in calculating the fine: (1) determining the base amount; (2) making adjustments for aggravating, mitigating and other factors; (3) applying the statutory cap; and (4) applying any fine reductions based on cooperation or an inability to pay.

2.1   Step One: Determining the Base Amount

The base amount reflects the nature and extent of the conduct constituting the contravention, which is one of the mandatory considerations that the Tribunal must take into account in determining the amount of fine. The starting point is the “value of sales,” namely the undertaking’s sales directly or indirectly related to the contravention in the relevant geographic area within Hong Kong in the financial year in question. This is a different concept from the turnover of the undertaking, as the value of sales refers not to the revenues from all of the undertaking’s activities, but only from the affected commerce. In this case, the value of sales was calculated based on each defendant’s work orders and invoices issued for renovation works on the housing estate in question. The next step is to identify the “gravity percentage,” which reflects the gravity and blameworthiness of the conduct. The Tribunal agreed with the Commission’s suggestion that the range of 15% to 30% would be appropriate for serious anti-competitive conduct and applied a percentage of 24%. Finally, the amount is multiplied by the number of years of the undertaking’s participation in the contravention to reflect the temporal extent of the conduct in question. The Tribunal applied a multiplier of 1 although the cartel only lasted for 5 months.

2.2   Step Two: Making Adjustments for Aggravating, Mitigating and Other Factors

As provided by the Ordinance, the Tribunal must also take into account (1) aggravating circumstances; (2) mitigating circumstances; and (3) whether the person in question has previously been found to have contravened the Ordinance. The Tribunal did not discuss the aggravating circumstances in detail as they were not relevant in the present case. Some of the aggravating circumstances suggested by the Commission include where the undertaking acted as a leader in the contravention, or where the anti-competitive practice is reflective of widespread industry practice such that there is a need for general deterrence. On the other hand, the Commission suggested that mitigating circumstances may include where there was a genuine uncertainty as to the lawfulness of the conduct in question, where an undertaking had limited participation in the contravention, or where an undertaking has taken steps to ensure genuine compliance with the Ordinance, although there is no indication in the judgment as to whether this is a reference to pre-investigation/contravention steps or post-investigation remedial measures, or both. Where there is a previous contravention, the Tribunal indicated that an increase in the amount of penalty would be imposed, having regard to the number of previous contraventions, the time lag between the previous and current contraventions, whether any of the individuals involved in the previous contravention are connected with the current contravention and the nature of the previous contravention. However, these factors were not relevant in the Competition Commission v W. Hing case. The Tribunal added that proportionality is relevant throughout the process of assessment, in particular to give “an overall sense check” to ensure that the amount would be a just and proportionate penalty for the contravention by the undertaking in the circumstances.

2.3   Step Three: Applying the Statutory Cap

Section 93(3) of the Ordinance imposes a ceiling which a penalty may not exceed, namely 10% of the undertaking’s turnover for each year in which the contravention occurred, or where the contravention occurred in more than three years, 10% of the turnover of the undertaking for the three years in which the contravention occurred that saw the highest, second highest and third highest turnover. The Tribunal rejected the argument that the statutory cap should be viewed as the “maximum sentence” to be reserved for a case that is the worst case of its kind that can be realistically envisaged. In finding that the statutory cap is more akin to a jurisdictional limit than provisions stipulating the maximum amount of fine, the Tribunal explained that the limit is applied only towards the end of the process of assessment so as to ensure that the maximum is not exceeded, and not treated as part of the general considerations in arriving at the amount of the penalty in the first place.

2.4   Step Four: Applying Cooperation Reduction and Considering Plea of Inability to Pay

Step Four involves the application of fine reductions to reflect cooperation with the Commission and, in exceptional cases, the undertaking’s inability to pay the penalty. Under the Commission’s Leniency Policy, the first undertaking to report its participation in a cartel will obtain full immunity from possible fines. Other cartel participants can still obtain a reduction of the possible fine under the Commission’s Cooperation and Settlement Policy. In exchange for their cooperation, the Commission will agree to apply a discount to the pecuniary penalty that it would recommend to the Tribunal. Where an undertaking indicates its willingness to cooperate with the Commission before the commencement of any Tribunal proceedings against it, it may receive a discount of up to 50% depending on the order in which undertakings express their interest to cooperate. In particular, the Commission may recommend a discount between 35% and 50% in favour of the first undertaking after the immunity applicant to express its interest to cooperate (see https://www.gibsondunn.com/cartel-leniency-in-hong-kong/). While the Tribunal did not fully consider the weight to be placed on the Commission’s recommendation of a reduction of penalty as none of the defendants in the case claimed a cooperation reduction, the Tribunal indicated that it would give due consideration to any such recommendations if raised by the Commission. In particular, the Tribunal acknowledged that there is strong public interest in facilitating the kind of cooperation and settlement envisaged in the Commission’s leniency and cooperation policies. Such arrangements enable the Commission to carry out its investigations more efficiently, conserve resources and give early redress to any harmful conduct. Finally, the Tribunal held that the cooperation reduction should be dealt with after applying the statutory cap to ensure that there would still be a real benefit for someone to offer cooperation even if the pecuniary penalty would already be limited by the statutory cap. With regard to an undertaking’s inability to pay, the Tribunal stated that a reduction of penalty on account of inability to pay should be an exceptional measure, having regard to the effect on the undertaking’s viability and supported by clear and compelling evidence. ______________________    [1]   Competition Commission v W. Hing Construction Company Limited and Others [2020] HKCT 1. A copy of the judgment is available at: https://legalref.judiciary.hk/lrs/common/ju/ju_frame.jsp?DIS=127610&currpage=T.

The following Gibson Dunn lawyers assisted in the preparation of this client update: Sébastien Evrard and Bonnie Tong.

Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these issues.  Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm's Antitrust and Competition Practice Group, or the following lawyers in the firm’s Hong Kong office:

Sébastien Evrard (+852 2214 3798, sevrard@gibsondunn.com) Kelly Austin (+852 2214 3788, kaustin@gibsondunn.com) Emily Seo (+852 2214 3725, eseo@gibsondunn.com) Bonnie Tong (+852 2214 3762, btong@gibsondunn.com) © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 30, 2020 |
Gibson Dunn Ranked in Legal 500 EMEA 2020

The Legal 500 EMEA 2020 has recommended Gibson Dunn in 19 categories in Belgium, France, Germany and UAE.  The firm was recognized in Competition – EU and Global in Belgium; Administrative and Public Law, Data Protection, Dispute Resolution – Commercial Litigation, Industry Focus – IT and the Internet, Insolvency, International Arbitration, Mergers and Acquisitions, Private Equity and Tax in France; Antitrust, Compliance, Corporate, Corporate – M&A Large Deals (€500m+), Corporate – M&A Mid-Size Deals (-€500m), Internal Investigations, and Private Equity in Germany; and Corporate and M&A and Investment Funds in UAE. Dubai partner Chézard Ameer, Paris partners Ahmed Baladi and Jean-Pierre Farges, and Munich partner Benno Schwarz were all recognized as Leading Individuals. Frankfurt partner Dirk Oberbracht and Dubai partner Chézard Ameer were also recognized in The Legal 500’s Hall of Fame. Paris of counsel Vera Lukic was listed as a Rising Star. The publication also recommended 37 Gibson Dunn attorneys in their respective practice areas, with some listed in more than one category.

April 30, 2020 |
EU Merger Control and the Acquisition of Distressed Businesses in the Wake of COVID-19

Click for PDF As a result of the current pandemic and the work-from-home restrictions throughout much of the world, the European Commission has adjusted how it deals with merger reviews. The Commission continues to process already filed merger notifications (notwithstanding difficulties in getting feedback from third parties for the purpose of market testing). By contrast, for mergers that have yet to be filed, the Commission encourages parties to “delay [new] notifications, where possible”. Nevertheless, the Commission has confirmed that it stands ready to deal with cases where the parties can show “very compelling reasons” to proceed with a merger notification without delay. One type of case where “very compelling reasons” are likely to be present is the acquisition of financially distressed assets for which the injection of resources and strategic control by new owners is urgent. In such cases, the Commission is likely to accept notifications, particularly if the competition analysis is both straightforward and clearly explained. There are two other issues that potential acquirors may also need to consider in such cases: (i) the suspension of the ‘standstill’ obligation; and (ii) the possible use of “failing firm” arguments. The legal grounds for both of these issues are explained in this Alert. It is also worth noting comments from Margrethe Vestager, Vice President of the European Commission in charge of Competition Law, who recently warned an online panel at the American Bar Association Antitrust Virtual Spring Meeting that: "[t]his crisis certainly shouldn't be a shield to allow mergers that would hurt consumers and hold back the recovery". While she acknowledged that the Commission has rarely accepted arguments about “failing firms”, she said that her staff would take such arguments into consideration, but that the long-standing test would remain the same. She added that: “The failing firm defence is a very well-known concept. It is also important that some things are stable in these very uncertain times”.

1) Derogation from the suspensory requirement

Despite the impact of the COVID-19 crisis on timelines and procedures, companies are still bound by the notification and standstill obligations laid down in the EU Merger Regulation (“EUMR”). Under these rules, and in the absence of a specific derogation from the Commission, firms cannot implement notifiable transactions prior to receiving clearance. However, Article 7(3) EUMR provides that it is possible to obtain a derogation from the standstill obligation in exceptional cases where the negative effects of the suspension outweigh the threat to competition posed by the transaction. For this to happen, two conditions must be satisfied: (i) the suspension of the transaction must give rise to a risk of serious damage to the parties or third parties; and (ii) the transaction must not raise prima facie competition concerns. As regards the first condition, the financial distress of the target company is the most commonly cited reason for seeking a derogation. During the 2008 financial crisis, the Commission granted derogations for the acquisition by Santander of Bradford & Bingley and the acquisition of Fortis by BNP Paribas. The Commission’s reasoning in these cases suggests that systemic risk threatening financial stability as a whole was a decisive factor in the assessment of the risks related to the suspension of the transaction (see Case No COMP/M.5384 – BNP Paribas/Fortis, Decision of 27.10.2018; Case No COMP/M.5363 Santander/ Bradford & Bingley Assets, Decision of 28.09.2008). The second condition limits the application of the derogation to those transactions that do not pose a threat to competition, such as cases where there is a minimal overlap of the parties’ activities. Where these conditions are satisfied, the Commission may allow the parties to proceed with the transaction before authorisation is received, potentially subject to conditions and obligations. Generally speaking the derogation will only allow the transfer of the minimum amount of control that is required to avoid the risk of serious economic damage (such as the transfer of funds and limited management control).

2) The failing firm/division defence

In the context of transactions involving distressed targets, the failing firm defence (“FFD”) is often raised but is rarely successful in practice. The Horizontal Merger Guidelines (at paragraph 89) explain that an otherwise problematic merger may nevertheless be authorised if one of the merging parties is a failing firm. The reasoning behind this important principle is that the deterioration of the competitive structure of the market that follows the merger is not caused by the transaction, but by the prevailing economic conditions affecting the target. In other words, the competitive structure of the market would deteriorate at least to the same extent in the absence of the merger. There are three criteria which are relevant in the assessment of whether an FFD is likely to succeed: (i) the failing firm would in the near future be forced to exit the market due to financial difficulties if it is not taken over by another firm; (ii) there is no less anti-competitive alternative than the proposed merger; and (iii) in the absence of the proposed merger, the assets of the failing firm would inevitably exit the market. (See Joined Cases C-68/94 and C-30/95, Kali and Salz. See also Commission Decision 2002/365/EC in Case COMP/M.2314 - BASF/Pantochim/Eurodiol, at points 157-160). These conditions are cumulative. The first condition requires sufficient evidence of the failing firm’s financial difficulties. While it is not required that the target is subject to a formal bankruptcy procedure, the notifying parties must demonstrate that the target would be forced to exit the market within a short period of time. The argument must be supported with data and evidence, particularly on various counterfactual scenarios. Internal documentation showing denied access to finance or failed attempts at restructuring constitutes particularly relevant evidence. In 2013, the Commission cleared Aegean Airlines’ acquisition of Olympic Air, both Greek air carriers, after having previously blocked the same proposed transaction in 2011. The failing firm defence was invoked in both cases. In Aegean/Olympic II, the changed market conditions (prompted by the on-going economic crisis in Greece), the rapid decline in the target’s competitiveness and financial situation, and the parent company’s lack of ability and incentive to support Olympic, led the Commission to conclude that Olympic would soon exit the market in the absence of the transaction. The second condition is fulfilled where it can be demonstrated that there are no credible alternative buyers for the target company, which would otherwise result in a more competitive outcome. In this regard, the Commission requires evidence of serious and credible efforts to seek alternative options. In Aegean/Olympic II, the Commission relied on past tender processes for the sale of Olympic and internal documents demonstrating the absence of alternative buyers. The third condition requires the parties to demonstrate that, should the target company fail, its assets would inevitably exit the market absent the merger. In Aegean/Olympic II, the Commission’s market investigation showed that there were no operators interested in acquiring Olympic’s assets in the event the firm would leave the market. Moreover, Olympic’s market shares on the relevant air routes would, in any event, accrue to Aegean since the parties were already in a quasi-duopoly situation, and entry by a third operator was considered to be unlikely in the foreseeable future. The standard of proof that the parties must meet for a successful FFD is thus very high and the Commission’s economic analysis is necessarily complex. In fact, an FFD has only been accepted in three cases, namely: Cases C-68/94 and C-30/95, Kali and Salz; Case COMP/M.2314 - BASF/Pantochim/Eurodiol; and COMP/M.6796 – Aegean/Olympic II. Furthermore, the Commission has made it clear both in the context of the 2008 crisis and that of the present that it would continue to apply strict merger control standards in times of crisis. Thus, it is very unlikely that the Commission will lower its formal legal standards for the FFD in the context of the current pandemic. However, even where an FFD argument is likely to fail, the decisional practice of the Commission suggests that clearance may nevertheless be available where the alternative counterfactual scenario clearly demonstrates that the exit of the target’s assets from the market would be more harmful to competition than allowing the transaction to go ahead. This might occur, for example, where only part of a firm is threatened with closure. Thus, in BASF/Pantochim/Eurodiol, the Commission did not require that the market share of the failing firm must in any event accrue to the other merging party. Instead, the Commission applied an overall economic assessment and compared the effects the clearance would have on the market structure compared with the effects of a prohibition. The Commission concluded that a clearance in such circumstances would have fewer anti-competitive effects than a prohibition, particularly because the exit of the assets from the market would have led to capacity bottlenecks, thereby increasing prices even more and therefore operating more strongly against customer interests. In Nynas/Shell/Harburg Refinery, the Commission allowed Nynas to acquire Shell’s refinery assets in Harburg, Germany, on the basis of the failing firm criteria despite the fact that the remainder of the firm was not financially challenged. It concluded that Shell would close the Harburg refinery, absent divestiture, and that the assets would in the near future be forced out of the market if not taken over by another undertaking, because of their poor financial performance and because of Shell's strategic focus on other activities. (Case No COMP/M.6360 - Nynas/ Shell/ Harburg Refinery, Decision of 02.09.2013). The application by the Commission in its Decision of reasoning which facilitated the purchase of a single refinery without an explicit reference to the reasoning underpinning the FFD suggests that the case would not have met the formal FFD standards, especially regarding the satisfaction of the first condition. In fact, Shell’s decision to close the refinery was strategic in nature, because it could have chosen to maintain the business. By contrast, in Aegean/Olympic II, the parent company had neither the incentive nor the ability to continue to support Olympic. In NewsCorp/Telepiù, the FFD was not accepted because the first and second criteria were not fulfilled. Notably, as regards the first condition, the Commission noted that the exit of the target from the market in the absence of the transaction was seen as a “management decision to abandon a business activity whose development has not lived up to the expectations of the firm's managing board”. Even so, the Commission proceeded to employ a counterfactual analysis and concluded that the authorisation of the merger would be more beneficial than the disruption caused by a potential exit of the target from the market. (See Case No COMP/M.2876, NewsCorp/Telepiù, Decision of 02.04.2003). Finally, in the T-Mobile/Tele2 NL and KLM/Martinair Decisions, the Commission cleared the mergers on the grounds that, in the absence of the mergers, the targets’ future competitive positions would inevitably deteriorate, which would be more detrimental to effective competition overall. (See Case M.8792 T-Mobile NL/Tele2 NL, 27.11.2018; Case No COMP/M.5141 KLM/ Martinair, 17.12.2008). Hence, the precedents suggest that the Commission can be persuaded through an appropriate counterfactual analysis to take into consideration the financial difficulties of a target firm, whether by applying a formal FDD analysis or a more relaxed version of the FFD. The economic difficulties raised by the COVID-19 pandemic suggest that the time may be ripe for the more flexible use of that doctrine.
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak. For additional information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Coronavirus (COVID-19) Response Team or its Antitrust and Competition Practice Group, or the following authors in Brussels: Peter Alexiadis (+32 2 554 7200, palexiadis@gibsondunn.com) Attila Borsos (+32 2 554 72 11, aborsos@gibsondunn.com) Jens-Olrik Murach (+32 2 554 7240, jmurach@gibsondunn.com) Christian Riis-Madsen (+32 2 554 72 05, criis@gibsondunn.com) David Wood (+32 2 554 7210, dwood@gibsondunn.com) © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 24, 2020 |
Gibson Dunn Earns 84 Top-Tier Rankings in Chambers USA 2020

In its 2020 edition, Chambers USA: America’s Leading Lawyers for Business awarded Gibson Dunn 84 first-tier rankings, of which 31 were firm practice group rankings and 53 were individual lawyer rankings. Overall, the firm earned 302 rankings – 84 firm practice group rankings and 218 individual lawyer rankings. Gibson Dunn earned top-tier rankings in the following practice group categories: National – Antitrust National – Antitrust: Cartel National – Appellate Law National – Corporate Crime & Investigations National – FCPA National – Outsourcing National – Product Liability: Consumer Class Actions National – Real Estate National – Retail: Corporate & Transactional National – Securities: Regulation CA – Antitrust CA – IT & Outsourcing CA – Litigation: Appellate CA – Litigation: General Commercial CA – Litigation: Securities CA – Litigation: White-Collar Crime & Government Investigations CA – Real Estate: Zoning/Land Use CA (Los Angeles & Surrounds) – Employee Benefits & Executive Compensation CA – Real Estate: Northern California CA – Real Estate: Southern California CO – Litigation: White-Collar Crime & Government Investigations CO – Natural Resources & Energy DC – Corporate/M&A & Private Equity DC – Labor & Employment DC – Litigation: General Commercial DC – Litigation: White-Collar Crime & Government Investigations NY – Litigation: General Commercial: The Elite NY – Real Estate: Mainly Corporate & Finance NY – Technology & Outsourcing TX – Antitrust This year, 156 Gibson Dunn attorneys were identified as leading lawyers in their respective practice areas, with some ranked in more than one category. The following lawyers achieved top-tier rankings:  D. Jarrett Arp, Michael Bopp, Theodore Boutrous, Jessica Brown, Jeffrey Chapman, Linda Curtis, Michael P. Darden, Patrick Dennis, Mark Director, Thomas Dupree, Scott Edelman, Miguel Estrada, Stephen Fackler, Sean Feller, Eric Feuerstein, Amy Forbes, Stephen Glover, Richard Grime, Peter Hanlon, Hillary Holmes, Daniel Kolkey, Brian Lane, Jonathan Layne, Ray Ludwiszewski, Karen Manos, Randy Mastro, Cromwell Montgomery, Stephen Nordahl, Theodore Olson, Richard Parker, William Peters, Tomer Pinkusiewicz, Jesse Sharf, Orin Snyder, George Stamas, Beau Stark, Charles Stevens, Daniel Swanson, Steven Talley, Helgi Walker, Robert Walters, F. Joseph Warin, Debra Wong Yang, and Meryl Young.

April 22, 2020 |
COVID-19: Update on UK Financial Support Measures

Click for PDF In our client alert of 27 March 2020, we provided an overview of the financial support made available by the UK Government to: (i) investment grade businesses through the Covid Corporate Finance Facility (the “CCFF”); and (ii) small and medium sized enterprises (“SMEs”) through the Coronavirus Business Interruption Loan Scheme (the “CBILS”).  In our client alert of 6 April 2020, we gave a brief overview of the measures that have been taken in the UK to support businesses and highlighted in that alert that the CBILS was being extended to larger business with an annual revenue of between £45 million and £500 million. In this client alert we summarise: (i) the announcement of details on the Coronavirus Large Business Interruption Loan Scheme (the “CLBILS”); and (ii) the announcement of a new funding scheme for innovative companies that are facing financing difficulties due to the COVID-19 pandemic (the “Innovation and Development Scheme”). See also the Gibson Dunn Coronavirus (COVID-19) Resource Centre for more resources on the response to COVID-19. Background to the CLBILS Design Flaws with the CBILS and Pressure from Industry Whilst the UK Government announced a package of measures worth approximately £330 billion in mid-March 2020, in recent days, the UK Government has come under pressure to ensure that all UK businesses are able to access the financial and liquidity support measures that have been made available. As at close of business on 13 April 2020, UK Finance (the industry body for the banking and finance sector in the UK) reported that of 28,461 applications made to lenders to access the CBILS, only 6,016 loans had been approved with total lending reaching £1.1 billion. Further, it has become clear that the CCFF would only be available to a select number of investment grade companies in the UK that already had a commercial paper issuance programme or those that would otherwise meet the criteria for such a programme. Criticism of the CBILS have been growing since its launch. Industry bodies, including the British Private Equity and Venture Capital Association (the “BVCA”) have been reporting a number of structural issues with the scheme that meant large business and portfolio companies of private equity firms were not able to access much needed financial support. This is supported by the views of our private equity clients, whose portfolio companies have encountered difficulties in accessing the scheme. Some of the issues identified have been:

  • Process and Timing: Difficulties with access to the scheme and the process for approving applications has had a significant impact on the liquidity position of a number of companies.
  • Eligibility Criteria:
    • Companies and industry bodies have been reporting that banks are only lending to those companies that are credit-worthy with a strong balance sheet (i.e. those companies with retained profits/equity capital and low leverage). This is because lenders retain a 20% exposure to loans advanced under the CBILS. This has prevented many venture capital backed companies and innovative tech and healthcare companies that are not typically profitable from accessing much-needed financial support.
    • Importantly for our clients, guidance from the British Business Bank to lenders also provided that companies that are majority-owned by a private equity firm would not be eligible to participate in the CBILS in circumstances where additional equity funding is available to be provided by the private equity firm.
    • Lenders have also been aggregating the annual revenues of private equity firm’s majority-owned portfolio companies to determine whether a single portfolio company is eligible for a CBILS loan, which had the effect of excluding the large majority of portfolio companies backed by mid to large-cap private equity firms (estimated by the BVCA to be 750+ companies).
  • Level of Funding: When the CLBILS was initially announced on 3 April 2020, it was suggested that the scheme would provide £25 million of funding to businesses with an annual revenue of between £45 million and £500 million. For larger companies with an annual revenue of £500 million, a loan of £25 million would represent just over half of a business’ revenue for a month. The concern expressed is that if the current low levels of economic activity prevail for a significant period into the summer months, the loans available would not provide a sufficient liquidity buffer, even with the other support measures available, to prevent many companies from going out of business.
In the context of the growing criticism of the design flaws with the CBILS and the lack of access to the CCFF, the UK Government was forced to act by launching: (i) the CLBILS to provide genuine support to the majority of medium to large-sized UK businesses, and (ii) the Innovation and Development Scheme to support innovative development and research companies, including those backed by venture capital firms. Regulatory Pressure On 15 April 2020, the Financial Conduct Authority (FCA) published a “Dear CEO” letter setting out its expectations of banks, in relation to lending to SMEs. In the letter to banks, the FCA reminded them that the priority is ensuring that the benefit of the package of measures introduced by the Government, including the CBILS, is passed through to businesses as soon as possible. The FCA also highlighted that responsibility for these specific lending activities should be allocated to one or more Senior Managers. In the letter, the FCA also stated that a new small business unit has been established. This will, amongst other things, gather intelligence about the treatment of SMEs during the crisis. There is, therefore, a clear prospect of future enforcement action being taken by the FCA against banks where it does not consider that its expectations have been met. The pressure on commercial lending institutions to deliver the UK Government’s schemes and provide access to liquidity has, therefore, been increasing. The Coronavirus Large Business Interruption Loan Scheme On 3 April 2020, the UK Chancellor of the Exchequer, Rishi Sunak MP, announced that support would be provided to larger businesses in the UK (i.e. those with an annual revenue of in excess of £45 million) through the CLBILS. There followed an announcement on 16 April 2020, which set out the scope of the CLBILS, a scope broader than that initially announced on 3 April 2020. The UK Government has sought to design the CLBILS to support those businesses that hitherto had been unable to access funding through the CBILS or that had been ineligible to obtain funding through the CCFF. The CLBILS launched on Monday, 20 April 2020, and the key details of the scheme are as follows:
  • Businesses with UK-based business activity and annual revenue of more than £45 million are eligible.
  • Businesses with an annual revenue of between £45 million and £250 million will be able to access to up to £25 million of loans and businesses with an annual revenue of more than £250 million will have access to up to £50 million of loans.
  • The UK Government will guarantee 80% of each loan but unlike the CBILS, the UK Government will not cover the first twelve months of interest.
  • The business needs to have a borrowing proposal which the lender would consider viable, that will enable the business to trade out of any short-term to medium-term difficulty caused by the COVID-19 pandemic.
  • The business should be able to self-certify that it has been adversely impacted by the COVID-19 pandemic.
  • The business should not have received a facility under the CCFF.
  • Majority-owned portfolio companies of private equity firms will now be able to access the scheme following updated guidance to lenders, as such companies’ annual revenues will be assessed on a standalone basis (i.e. there will be no grouping of all of a private equity firm’s portfolio companies’ annual revenues).
  • Personal guarantees will not be permitted for loans of up to £250,000.
  • The scheme will be available through a series of accredited lenders, that will be listed on the British Business Bank website.
  • Credit institutions, insurers, reinsurers, building societies, public sector bodies, grant-funded further education establishments and state-funded schools are not eligible to participate in the scheme.
As a result of pressure from UK-businesses, the CLBILS appears to address some of the key issues relating to eligibility and levels of funding that had been identified with the CBILS. Large businesses now have access to up to £50 million of funding (depending on annual revenues) and companies that are not eligible to access the CCFF may still able to access the loans under the CLBILS. Importantly for the private equity industry, it also appears as though revenue-grouping for portfolio companies has been abolished together with the exclusion from the schemes of companies that are majority-owned by private equity firms. However, one key point to note is that it appears as though businesses will need to still be credit-worthy with a viable business plan to access finance under the CLBILS. The decision on credit-worthiness remains in the hands of a business’ lenders and so businesses which maintain a high leverage levels may continue to be excluded. The Innovation and Development Scheme On 20 April 2020, the Chancellor of the Exchequer announced the establishment of a new Future Fund to support the UK’s innovative businesses currently affected by the Covid-19 pandemic, together with other measures to support businesses driving innovation in the UK. In total, the package announced represents £1.25 billion of additional funding through: (i) a £500 million investment fund for high-growth companies impacted by the Covid-19 pandemic, delivered in partnership between UK Government and the private-sector (the “Future Fund”); and (ii) £750 million of grants and loans to SMEs focussing on research and development. The Future Fund In an unprecedented step, the Future Fund will make convertible loans of between £125,000 and £5 million available to high-growth innovative businesses in the UK. The Fund will be delivered by the British Business Bank and will provide UK-based companies with funding from the UK Government. Private investors will be obliged to match the UK Government funding amount for companies to participate. These loans will automatically convert into equity on the company’s next qualifying funding round, or at the end of the loan if they are not repaid, meaning the UK Government will become a shareholder in these companies. To be eligible, a business must be an unlisted UK registered company that has previously raised at least £250,000 in equity investment from third party investors in the last five years. The UK Government has also published a term sheet which sets out the terms of the convertible loans provided under the Future Fund here. The UK Government’s initial commitment to the Future Fund will be £250 million, with the Future Fund due to open for applications in May 2020 and run until September 2020. The UK Government has announced that it will keep the scale of its investment in the Future Fund under review. Grants and Loans for Research and Development £750 million of targeted support will be made available for research and development intensive SMEs. The grants and loans will be provided through existing schemes of the UK’s national innovation agency, Innovate UK. Innovate UK, will accelerate up to £200 million of grant and loan payments for its 2,500 existing Innovate UK customers on an opt-in basis. An extra £550 million will also be made available to increase support for existing customers and £175,000 of support will be offered to around 1,200 firms not currently in receipt of Innovate UK funding. It has been announced that the first payments will be made by mid-May. Conclusions We are in unprecedented times in the United Kingdom, as is the case for many leading economies globally. The UK State (and accordingly, the UK taxpayer) is being asked to underwrite British business for it to survive during the COVID-19 pandemic. The UK Government is having to make policy announcements an almost daily basis in a very fluid situation and then rush to provide guidance and infrastructure for policy to be delivered. This has led to much criticism but the new measures appear to be designed to plug the design flaws in the initial schemes that were adopted in the early days of the developing COVID-19 crisis. However, it remains to be seen whether the new schemes and updated guidance will enable lenders to speed up processes for approving loans and funding businesses at a time when the liquidity squeeze is being keenly felt. Central to the loan approval processes is the issue that the UK Government is guaranteeing only 80% of the exposure for lenders under the schemes with 20% of the residual risk carried by commercial lenders. In the current economic environment and prevailing macro-economic uncertainty, some lenders are discouraged from approving the loans under the schemes where they carry such residual risk. It is considered likely that further measures may need to be enacted, including having the UK Government or the Bank of England step in to guarantee 100% of the loans issued under the schemes to enable lenders to have the confidence in lending to British business. In these unprecedented times, it will remain to be seen whether further unprecedented measures are needed or whether the UK Government’s latest schemes will provide sufficient funding and liquidity for UK Business to survive what is fast-turning into a global economic crisis.
This client update was prepared by Tom Budd, Greg Campbell, Michelle Kirschner, Mark Sperotto, Attila Borsos, Amar Madhani and Martin Coombes. Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak.  For additional information, please contact your usual contacts or any member of the Firm’s Coronavirus (COVID-19) Response Team. In the UK, the contact details of the authors and other key practice group lawyers are as follows: The Authors: Thomas M. Budd – London, Finance (+44 (0)20 7071 4234, tbudd@gibsondunn.com) Gregory A. Campbell – London, Restructuring and Finance (+44 (0)20 7071 4236, gcampbell@gibsondunn.com) Michelle M. Kirschner – London, Financial Institutions (+44 (0)20 7071 4212, mkirschner@gibsondunn.com) Mark Sperotto – London, Private Equity (+44 (0)20 7071 4291, msperotto@gibsondunn.com) Attila Borsos – Brussels, Antitrust (+32 2 554 72 11, aborsos@gibsondunn.com) Amar Madhani – London, Private Equity and Real Estate (+44 (0)20 7071 4229, amadhani@gibsondunn.com) Martin Coombes – London, Financial Institutions (+44 (0)20 7071 4258, mcoombes@gibsondunn.com) London Key Contacts: Sandy Bhogal – London, Tax (+44 (0)20 7071 4266, sbhogal@gibsondunn.com) Thomas M. Budd – London, Finance (+44 (0)20 7071 4234, tbudd@gibsondunn.com) James A. Cox – London, Employment (+44 (0)20 7071 4250, jcox@gibsondunn.com) Patrick Doris – London, Litigation & Data Protection (+44 (0)20 7071 4276, pdoris@gibsondunn.com) Ben Fryer – London, Tax (+44 (0)20 7071 4232, bfryer@gibsondunn.com) Christopher Haynes – London, Corporate (+44 (0)20 7071 4238, chaynes@gibsondunn.com) James R. Howe – London, Private Equity (+44 (0)20 7071 4214, jhowe@gibsondunn.com) Anna Howell – London, Energy, Oil & Gas (+44 (0)20 7070 9241, ahowell@gibsondunn.com) Charles Falconer, QC – London, Litigation (+44 (0)20 7071 4270, cfalconer@gibsondunn.com) Jeremy Kenley – London, M&A, Private Equity & Real Estate (+44 (0)20 7071 4255, jkenley@gibsondunn.com) Penny Madden, QC – London, Arbitration (+44 (0)20 7071 4226, pamadden@gibsondunn.com) Ali Nikpay – London, Antitrust (+44 (0)20 7071 4273, anikpay@gibsondunn.com) Philip Rocher – London, Litigation (+44 (0)20 7071 4202, procher@gibsondunn.com) Selina S. Sagayam – London, Corporate (+44 (0)20 7071 4264, ssagayam@gibsondunn.com) Alan A. Samson - London, Real Estate & Real Estate Finance (+44 (0)20 7071 4222, asamson@gibsondunn.com) Jeffrey M. Trinklein – London, Tax (+44 (0)20 7071 4264, jtrinklein@gibsondunn.com) © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 20, 2020 |
Hong Kong Competition Commission Brings Major Changes to Leniency Program

Click for PDF The Hong Kong Competition Commission (“Commission”) has brought significant changes to its leniency program. In particular, (1) leniency will now be available to individuals; and (2) corporate leniency applicants will, under certain circumstances, receive additional protection from follow-on damage claims.

Background

The Hong Kong Competition Ordinance (“Ordinance”) prohibits cartel conduct under its “First Conduct Rule.” The Commission can commence proceedings for violations of the First Conduct Rule before the Competition Tribunal (“Tribunal”), which can impose pecuniary penalties of up to 10% of an undertaking’s total gross revenues generated in Hong Kong for the duration of the contravention (capped at three years). The Ordinance does not distinguish between individuals and undertakings with respect to the maximum pecuniary penalty that can be imposed by the Tribunal, and there is not yet any precedent on this issue. The Tribunal also has jurisdiction to adjudicate follow-on damage claims. The Commission’s previous leniency framework for cartel conduct was governed by two policies: the “Leniency Policy for Undertakings Engaged in Cartel Conduct” (the “Leniency Policy,” published in November 2015), and the “Cooperation and Settlement Policy for Undertakings Engaged in Cartel Conduct” (the “Cooperation Policy,” published in April 2019) (see our previous articles here and here for further discussion of these policies). The Commission’s new policies (available here and here) expand upon the pre-existing framework for leniency applicants who report or provide substantial assistance to the Commission in connection with its investigations into cartel conduct, incentivizing early reporting by both undertakings and individuals. Leniency for Individuals The Commission has demonstrated a willingness to prosecute individuals under the Ordinance; the four most recent cartel cases brought (and currently pending) before the Tribunal all include individuals. However, under the previous version of the Leniency Policy, only undertakings were eligible to apply for leniency (undertakings are defined as “any entity (including natural persons), regardless of its legal status or the way in which it is financed, which is engaged in an economic activity”). This meant that employees or directors who may have, of their own accord, wished to “blow the whistle on a company” would not be able to benefit from the Leniency Policy. In a dramatic shift, the new Leniency Policy for Individuals makes leniency available to the first individual involved in cartel conduct who reports the cartel to the Commission. In exchange for the reporting individual’s full cooperation, the Commission will not take any proceedings against the leniency applicant in relation to the reported conduct. Notably, leniency is only available to individuals who report before the Commission has granted a leniency marker to an undertaking under the Leniency Policy for Undertakings (by contrast, the Commission may still grant an additional marker to the first undertaking to apply for leniency even in instances in which the Commission has already granted leniency to an individual involved in the same cartel). The new policy addresses a gap in the Commission’s leniency program and will have significant implications, incentivizing directors and employees to blow the whistle on an employer that refuses to come forward. Enhanced Protection Against Damage Claims Under the previous version of the Leniency Policy, the Competition Commission could initiate proceedings before the Tribunal against the leniency applicant for an order that an offense had been committed (but not for the imposition of pecuniary penalties). This created a disincentive to report, as a successful leniency applicant could, by reporting cartel conduct, also expose itself to follow-on damages claims based on the Tribunal’s order. In order to address this issue, Commission will now distinguish between “Type 1” and “Type 2” applicants in the revised policy. Type 1 applicants refer to undertakings that report cartel conduct before the Commission has opened an initial assessment or commenced an investigation. Type 2 applicants are undertakings that report after the Commission has opened an assessment or commenced an investigation. Under the revised policy, the Commission will agree to not commence proceedings before the Tribunal against both Type 1 and Type 2 successful applicants, which will include not bringing proceedings for an order declaring that the applicant has contravened the Ordinance. However, for Type 2 applicants, the Commission may still issue an infringement notice requiring the applicant to admit to contravention of the First Conduct Rule, in order to permit a follow-on action for damages against the undertaking. The Commission will not issue such a notice unless victims have initiated follow-on action against other undertakings found to have contravened the First Conduct Rule by participation in the cartel conduct covered by the leniency agreement.

Conclusion

The revised Leniency Policy for Undertakings and the new Leniency Policy for Individuals substantially alter the incentive scheme for reporting cartel conduct in Hong Kong. The Leniency Policy for Individuals will encourage employees and directors to report behavior that they previously had little incentive to disclose. The distinction between Type 1 and Type 2 applicants provides a further incentive for undertakings to disclose any cartel conduct as soon as possible.
Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these issues.  Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm's Antitrust and Competition Practice Group, or the following lawyers in the firm's Hong Kong office: Sébastien Evrard (+852 2214 3798, sevrard@gibsondunn.com) Virginia S. Newman (+852 2214 3729, vnewman@gibsondunn.com) © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 14, 2020 |
Corporate/M&A in Times of the Corona Crisis – Current Legal Developments for German Business

Click for PDF (English) Click for PDF (German) On March 28, 2020, the German Federal legislature’s response to the Corona crisis entered into force, introducing a varied array of far-reaching legislative measures to stabilize and support the German economy. In the sphere of corporate law, such statutory implementation measures are, in particular, contained in the Act on the Mitigation of the Consequences of the COVID-19 Pandemic in Civil, Insolvency and Criminal Procedural Law (Gesetz zur Abmilderung der Folgen der COVID-19-Pandemie im Zivil-, Insolvenz- und Strafverfahrensrecht hereinafter theCOVID-19 Pandemic Mitigation Act) and the so-called Act on the Introduction of an Economic Stabilization Fund (Wirtschaftsstabilisierungsfondsgesetz - WStFG). A selective overview of some of these implementation measures adopted in the corporate law domain is given in Section 1.1 (Corporate Caw “Light” in the Context of State Measures under the WStFG) and 1.2 (Other Corporate Law Modifications pursuant to the COVID-19 Pandemic Mitigation Act). The Corona crisis also triggers intricate issues related to current and future financial statements: The German Institute of Auditors (Institut der Wirtschaftsprüfer - IDW) has dealt with these questions via three separate official communications in March and April 2020 (both in terms of accounting issues under the German HGB-accounting standards and IFRS). A legal overview is given below in Section 2 (Dealing with the Corona Crisis in the Annual Financial Statements for the Business Years 2019 and 2020). The well-documented concerns regarding increased foreign acquisition activities in sensitive industry sectors during the Corona crisis has seen the EU Commission react a couple of days ago by publishing a Communication providing additional guidance on the foreign investment control mechanisms of the Member States. On April 8, 2020, the German government has resolved a draft of the „Erstes Gesetz zur Änderung des Außenwirtschaftsgesetzes” (First Statute on the Amendment of the Foreign Trade and Payments Act). We provide a brief summary of the current German legal situation and the prospective changes under Section 3 (Closing Gaps – COVID-19 and the Modifications of the National Investment Control Regimes). Last but not least, several anti-trust authorities have issued statements either specifically with regard to merger control issues or, more generally, regarding the application of the competition rules in the current crisis situation, including, inter alia, the EU Commission and the German Federal Cartel Office (Bundeskartellamt - BKartA). We briefly analyze these latest developments below in Section 4 (Anti-Trust and Merger Control in Times of COVID-19). TABLE OF CONTENTS

1.1      Corporate Law “Light” in the Context of State Measures under the WStFG 1.2     Other Corporate Law Modifications pursuant to the COVID-19 Pandemic Mitigation Act 2.       Dealing with the Corona Crisis in the Annual Financial Statements for the Business Years 2019 and 2020 3.       Closing Gaps – COVID-19 and the Modifications of the National Investment Control Regimes 4.       Anti-Trust and Merger Control in Times of COVID-19

1.1  Corporate Law “Light” in the Context of State Measures under the WStFG

The Act on the Introduction of an Economic Stabilization Fund (Gesetz zur Errichtung eines Wirtschaftsstabilisierungsfonds - WStFG), which entered into force on March 28, 2020, provides the statutory framework for the German Federal state‘s measures aimed at stabilizing the national economy and securing jobs. The measures provided for in this new Act flank the stabilization measures at the Federal level via the support programmes of the Kreditanstalt für Wiederaufbau (KfW) as well as the additional measures taken at the level of the regional German states (Bundesländer).[1] The decision on the stabilization measures provided for in the WStFG rests with the Federal Finance Ministry (Bundesministerium für Finanzen) which decides based on the due exercise of its discretion and after consultation with the Federal Ministry for the Economy and Energy (Bundesministerium für Wirtschaft und Energie) following an application of the respective enterprise. Relevant criteria for this discretionary decision are the importance of the applicant enterprise for the German economy, the urgency involved, the potential effects on the job market and on competition, as well as the principles of the most cost-efficient, prudent, economic use of the financial means of the Economic Stabilization Funds (Wirtschaftsstabilisierungsfonds - WSF). The applicant enterprises of real economy must, furthermore, meet at least two of the following requirements (i) balance sheet sum of more than € 43 million, (ii) more than € 50 million sales revenues, and (iii) more than 249 employees on average. Any legal entitlement to receive funds under the WStFG is expressly excluded. In addition to providing guarantees, the WSF may also participate in recapitalization measures. The measures at its disposal include the acquisition of subordinated debt instruments, profit-sharing rights (Genussrechte), silent partnerships or convertible bonds and the acquisition of shares. The measures are in principle time-limited until December 31, 2021, but can be extended in the individual case, in particular, if such extension is required to safeguard such a stabilization measure. In order to implement these measures, a number of corporate law provisions applicable to the respective corporate format are temporarily superimposed by the WStFG with a view to facilitating the involvement of the WSF. This concerns, in particular:
  • Benefitting companies, as a rule, will have to issue a self-commitment declaration (with the approval of the supervisory board), which contains rules on the due use of funding, the entry into of future liabilities, the remuneration of the company bodies, the dividend policies and other measures and which is also effective vis-à-vis the respective company and its shareholders. Such a self-commitment does not clash with the principle of the management board’s independent management capacities and responsibilities even in a stock corporation.
  • The exclusion of the subscription rights of existing shareholders for the benefit of the WSF in the context of capital measures has been facilitated.
  • New shares can be issued to the WSF with a profit or liquidation preference.
  • Irrespective of any contrasting provisions in the articles of association, a capital increase against contribution can be resolved with the majority of the votes cast. The necessary majority to resolve an exclusion of subscription rights is at least 2/3 of the votes cast or of the represented registered share capital (Grundkapital); if at least 50% of the registered share capital are represented, the simple majority is also sufficient in such case.
  • Prepayments by the WSF on its contribution obligation have discharging effect.
  • Further measures were introduced to simplify and accelerate capital decreases, as well as to facilitate the creation of conditional and/or authorized capital (bedingtes und/oder genehmigtes Kapital).
  • Resolutions regarding capital measures are effective already prior to their registration in the commercial register, provided they are published on the internet webpage of the company.
  • The rules on affiliated companies regarding stock corporations are not applicable until December 31, 2021 for the benefit of the WSF, as well as the German Federal Republic and its public corporations and bodies (öffentlicher Körperschaften). The rules on the representation of employees in the supervisory board of a company controlled by the WSF are, however, exempt from this exclusion and remain applicable.
  • Shareholders who delay or frustrate required recapitalization measures inter alia by their voting behavior or legal remedies may end up being liable to the company for damages.
  • Corresponding simplifications for capital measures also apply for benefitting companies in the legal format of partnerships limited by shares (KGaA) and European stock corporations (SE). In limited liability companies (GmbH) capital increases only require a simple majority of votes present; shareholders can be excluded from the company against compensation with a majority of ¾ of the votes present, if this is necessary for the stabilization measure to be successful. The WSF may be accepted as new limited partner of limited partnerships with a limited liability company as general partner (GmbH & Co. KG) or other limited partnerships by partner resolution taken by the partners present with simple majority.
  • Information duties vis-à-vis the economic committee (Wirtschaftsausschuss) or the works council (Betriebsrat) are excluded for participation of the WSF.
  • Furthermore, for stock corporations the notification duties arising under capital market rules (wertpapierhandelsrechtliche Mitteilungspflichten) do not apply, and the obligation to submit a mandatory offer to acquire shares pursuant to the Securities Acquisition and Takeover Act (Wertpapiererwerbs- und Übernahmegesetz) is derogated from even if the thresholds are exceeded by the WSF. In tandem, the threshold for the squeeze-out of minority shareholders is lowered to 90% for the benefit of the WSF.
  • Further-reaching rules in favor of the WSF concern the large-scale exclusion of the rules on hidden contributions in kind (verdeckten Sacheinlagen) and of contestation rights of stabilization measures as well as the subordination of shareholder loans pursuant to the Insolvency Code (InsolvenzordnungInsO). Contractual provisions, which otherwise would give contracting partners a right to terminate the contract on account of a change of control because the WSF joins or exits a business, are deemed to be invalid. The same applies to compensation or severance payments in favor of company organs in the case of a change of control.
  • By contract, self-commitment or administrative act, mitigating measures to avoid any distortions of competition can be placed on the beneficiary businesses. The limited applicability of the German Law against Restraints on Competition (Gesetz gegen Wettbewerbsbeschränkungen - GWB) to the WSF itself is clarified for completeness sake, notably that only part 4 (Procurement law) and part 5 (Applicability of the GWB to public enterprises) are applicable.

1.2  Other Corporate Law Modifications pursuant to the COVID-19 Pandemic Mitigation Act

The main focus on the corporate law changes was initially put on the relaxation of the requirements for staging general meetings of German stock corporations (AktiengesellschaftAG), allowing them to proceed in an entirely electronic manner, as well as the possibility of delaying the ordinary general meeting (ordentliche Hauptversammlung) beyond the hitherto applicable eight month deadline.[2] But there is a number of other, temporary provisions of company law which can be relevant for the management of corporate entities:
  • Shareholder resolutions of German limited liability companies (GmbH) may be adopted in text form or by written vote in the year 2020 even if there is no express enabling clause to do so in the relevant articles of association. It is not necessary that all shareholders consent to such procedure. Text form will not require a personal signature by hand. It is sufficient that the declaration is legible and the name of the person making the declaration is given and that the declaration is embodied on a lasting data medium (e.g. a hard drive, USB stick, but also an e-mail). Such derogation from the holding of presence meetings even without consent of all shareholders, however, does not remove the other formalities for the adoption of resolutions. In particular, whenever resolutions on potentially contentious matters are proposed, the deadline accorded for the submission of written votes should match the regular convocation or resolution announcement periods (Fristen für die Beschlussankündigung). Such a waiver of holding a presence meeting also does not derogate any other form requirements applicable to the adoption of shareholder resolutions, which means that changes to the articles of association or measures under the German Conversion Act (Umwandlungsgesetz - UmwG) continue to require notarial recordings.
  • If proposed measures under the Conversion Act (UmwG) require the submission of closing balance sheets (Schlussbilanz) as an attachment of the mandatory commercial register filings (for instance the balance sheet of the transferring entity in the case of mergers), under the current law, the balance sheet reference date (Bilanzstichtag) used in such filings could not be older than eight months by the time the register filing was submitted to the registry court. This time period has now been extended to twelve months for register filings made in 2020. For example, the register filing of a merger, which is proposed to be submitted on June 1, 2020, would now be permitted to make use of the annual financial statements with reference date as of June 30, 2019 rather than having to prepare an interim balance sheet of a more recent date.
  • The management bodies of companies, who benefit from the conditional derogation of the duty to file for insolvency due to COVID-19 for an interim period until, at present, September 30, 2020 despite being in a state of over-indebtedness or illiquidity,[3] may make continued payments in the ordinary course of business during such period despite the existence of over-indebtedness or illiquidity without incurring the personal liability they would otherwise incur. Such payments in a COVID-19-caused technical state of insolvency are deemed by law to be in line with the standards of care of a prudent business person and manager. The reform law lists, by way of examples, payments aimed at maintaining or restarting business operations or designed to implement an operational restructuring concept. However, this new rule places a significant standard of care on the management of companies in financial distress. The necessary assessment notwithstanding whether any measures proposed to be taken is part of the ordinary course of business operations, management will furthermore have to ensure in advance that the company can indeed avail itself of this interim insolvency filing derogation by falling within the scope of the rule. In particular, the state of financial distress must be on account of COVID-19 and there has to be a (reasonable) expectation that such financial distress can be overcome. Management can, however, rely on an (albeit rebuttable) legal presumption that both these requirements apply to the company if the state of over-indebtedness/illiquidity did not already exist as of December 31, 2019.

2.  Dealing with the Corona Crisis in the Annual Financial Statements for the Business Years 2019 and 2020

Since the first COVID-19 cases had already been publicized in December 2019 but the cataclysmic consequences for public health and the economy in Germany and Europe only started to be felt in earnest from the end of February 2020, the question whether and if so, how the Corona crisis might also have to be taken into account in the financial statements for the completed fiscal year 2019 quickly became a topic of discussion. Two separate official communications published by the German Institute of German Auditors (Institut der Wirtschaftsprüfer - IDW) dated March 4, 2020[4] and dated March 25, 2020[5] provided crucial guidelines. On April 8, 2020, the IDW has published a third communication that specifically deals with specific questions asked in response to the two earlier guidelines.[6] In summary, it can be said that the IDW does not view the Corona crisis as a point in time event and, thus, as a value-enhancing event (wertaufhellend) under the German HGB-accounting standards or an adjusting event under IFRS but rather as an ongoing process of a certain duration, which therefore is deemed to be value-justifying (wertbegründend) under the HGB-rules or a non-adjusting event under IFRS. The crisis is, thus, of particular relevance for the reporting in the current fiscal year 2020 and potentially future fiscal years beyond. Based on this assessment of the crisis as an, in principle, value-justifying event, the developments surrounding the corona virus, nevertheless, are to be reflected in the (consolidated) notes to the HGB financial statements 2019 in the individual case if they qualify as a “matter of particular importance” according to § 285 No. 33 or § 314 para. 1 No. 25 HGB. According to the IDW that is the case if the effects of COVID-19 are likely to influence the picture conveyed by the financial statements 2019 and, without subsequent supplemental reporting, the developments after the balance sheet date would be judged significantly differently by the addressees of the financial statements. The IDW reaches similar conclusions also for the assessment to be made under IFRS. Further, it should be noted that developments surrounding the coronavirus will in many cases be reflected in the (Group) management reports for the completed fiscal year 2019, at least, in the risk and forecast reporting. According to the IDW such an inclusion in the risk report is warranted in principle if the possible further developments lead to negative deviations from the forecasts and goals of the business, such circumstances are a material individual risk and the financial statements would otherwise not provide an accurate picture of the risk position of the group. It is also possible that the current dramatic changes of the economic parameters result in a situation where management has to revise its expectations of the forecast performance indicators in such a way that an appropriate reflection in or revision of the forecast report in the financial statements 2019 is required. In the ongoing auditing season for the fiscal year 2019 special focus should, thus, be placed on subsequent, critical developments and close coordination with external advisors is particularly well advised. The European Securities and Market Authority (ESMA) has, in this context, appealed to issuers to create transparency with regard to the actual and potential consequences of COVID-19 and include corresponding clarifying assessments in the financial statements for the fiscal year 2019 to the extent they are not yet finalized and established.[7] This is even more critical in cases where the crisis affects a business in such an impactful way that makes it apparent at this stage that it can no longer be assumed that the company will be able to continue its business operations (§ 252 para. 1 No. 2 HGB). It is possible that under certain circumstances the going concern assumption must be retroactively abandoned also for the fiscal year 2019. The IDW states in its communication that in those concrete individual cases where the Corona pandemic no longer allows the company to justify the continuation of its business activities based on a going concern assumption, „the financial statements must be prepared in accordance with the provisions of IDW RS HFA 17 (e.g. valuation from a liquidation perspective), and the going concern assumption must be abandoned” which applies “even if the reason for the departure did not occur until after the balance sheet date.”[8]

3.  Closing Gaps – COVID-19 and the Modifications of the National Investment Control Regimes

As a reaction not least to concerns that weakened enterprises might be acquired by investors from abroad, a global trend to tighten the controls on foreign investment in local business is noticeable. For instance, Australia has recently announced that all foreign investments will now be subject to control.[9] The USA had tightened their investment control rules already in February (the so-called 2018 Foreign Investment Risk Review and Modernization Act (FIRRMA)) and extended the competencies of the U.S. Committee on Foreign Investment in the United States (CFIUS). Now certain investments into the life sciences sector below the regular control thresholds are nevertheless subject to the CFIUS filing requirement.[10] The EU Commission has also published a communication on March 26, 2020,[11] in which it urged the member states to introduce mechanisms to comprehensively control foreign investment or make full use of such already existing[12] control mechanisms in order to jointly protect strategically important industries against acquisition by foreign investors during the times of crisis. The communication expressly is not limited to the health industry only, but puts special focus on this industry. Already in its earlier communication of March 13, 2020,[13] the Commission had asked the Member states to protect critical installations and technologies. Such communications are not binding, but provide important guidelines for the shaping of the national investment control regimes by the member states – and, thus, relevant clues as to what investors can expect in future. While Spain, for instance, has already reacted to the Commission’s communication with a provisional obligation to obtain an ex ante clearance for foreign direct investments into strategic sectors,[14] it otherwise remains to be seen how the other EU member states will position themselves. Certain EU member states had already tightened their investment control regimes before the COVID-19 pandemic struck.[15] But even if it turns out that there might not be a full-scale across the board adaptation of national legislation, a more stringent practical implementation can certainly be expected. The drive to attempt to harmonize the investment control regimes in the member states pre-dates the COVID-19 crisis: On October 11, 2020 the Regulation establishing a framework for the screening of foreign direct investments into the Union (EU-Screening-Regulation)[16] will enter into force. It provides, inter alia, for a consultation procedure between the Commission and/or member states, on the one hand, and the competent member state, on the other hand, in the context of which the Commission and the member states can suggest mitigation measures or prohibitions for investments which go beyond the initial decision of the competent member state. With the aim of adapting German law to this EU Regulation, and consequently not purely in direct response to the COVID-19 pandemic and its consequences, the Federal government cabinet on April 8, 2020 launched a draft bill called the First Statute on the Amendment of the Foreign Trade and Payments Act and other Laws (Erstes Gesetz zur Änderung des Außenwirtschaftsgesetzes (AWG) und anderer Gesetze),[17], which is based on a ministerial draft bill dated January 30, 2020.[18] The pre-existing fundamental differentiation in the German foreign direct investment control rules between the so-called cross-sectoral control (§§ 55-59 of the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung - AWV)) and the so-called sector-specific control (§§ 60-62 AWV) is maintained in principle: The cross-sectoral control, in principle, covers all acquisition transactions which give an acquirer from outside the Union direct or indirect control over at least 25 per cent of the voting rights in a national enterprise. If the national enterprise conducts its business in a particularly security-relevant sector, as conclusively listed in § 55 para. 1 S. 2 AWV, the control threshold is set at 10 per cent of the voting rights. Acquisitions within the Union are only covered in so far as they are deemed to be a circumvention of the investment control rules. A prohibition of the acquisition currently may only be issued if the public order and security of the Federal Republic of Germany is endangered.[19] The acquirer, furthermore, has the option – e.g. whenever there are uncertainties regarding the applicability and scope of §§ 55 et seq. of the AWV and/or to ensure deal security – of applying for a certificate of non-objection. The sector-specific control, in contrast, exclusively covers acquisition transactions pursuant to which a foreigner (including foreigners from other EU member states) acquires, directly or indirectly, at least 10 per cent of the voting rights in a national enterprise which produces or develops one of the goods listed conclusively in § 60 AWV. Pursuant to the government draft bill, in the future, not only the production and development of such goods would qualify for a sector-specific control, but also expressly the modification or use of such goods. A prohibition of the acquisition may only be issued if material security interests of the Federal Republic of Germany are endangered.[20] In addition, the draft bill, in particular, provides for two further key changes: On the one hand, the current concept of endangering in the AWG (“… if the public order or security of the Federal Republic of Germany is endangered by the acquisition“, § 5 para. 2 AWG, current version) stands to be adapted to the concept of endangering in the EU-Screening-Regulation (“…if the public order or security of the Federal Republic of Germany or another member state of the European Union … are likely endangered by the acquisition“, § 5 para. 2 AWG in the version in the draft of April 8, 2020). Via the cross-reference to § 4 para. 1 No. 4 AWG (as amended) this would apply accordingly to the public security and order regarding projects and programmes of Union interest within the meaning of Article 8 of the EU-Screening-Regulation. This will consequently result in more future transactions being within the remit of the German foreign direct investment control regime. On the other hand, it is stipulated that the underlying contractual (schuldrechtliche) acquisition transactions shall be subject in future to a dissolving condition of a prohibition both within the scope of the cross-sectoral and the sector-specific investment control procedures until such time when the control procedure is completed. The duty to notify the underlying contractual transaction continues to arise from § 55 para. 4 AWV. The implementation of transactions subject to a notification requirement shall in future in all cases only become valid upon completion of the control proceedings. This aims at reducing the risk that irreversible facts are created in the time window until the control procedure is completed by, for instance, implementing the acquisition transaction de facto in practice or the irreversible loss of information and technologies. This legal change is flanked by adding specific prohibition scenarios to § 15 para. 4 AWG, like the exercise of voting rights by the acquirer, accepting instructions how to vote, profit payments or the submission of enterprise-specific, investment control relevant information to the acquirer. The relevant Foreign Trade and Payments Ordinance shall be amended accordingly.

4.  Anti-Trust and Merger Control in Times of COVID-19

There are several varying consequences of the pandemic on the timelines for merger control proceedings. Some anti-trust authorities have communicated that delays to the customary timeframes are likely,[21] while others have engaged in reviving „fast-track“ programs.[22] The European Commission has published on its website that - due to the present situation - it is currently facing difficulties to collect the necessary information from the notifying parties and other third parties like, for example, their customers, competitors and suppliers.[23] In view of the existing procedural deadlines, it will therefore be forced to make generous use of „stop-the-clock“ provisions. However, the Commission expressly remains willing and capable of accepting new merger filing applications and processing them to the best of its abilities if the notifying parties can provide very compelling reasons that militate for a speedy implementation of merger control proceedings in the individual case. The German Federal Cartel Office (BKartA) has merely issued a reminder that any currently proposed new merger control notifications should be “re-considered”,[24] but remains in full working mode and has opened additional communication channels to facilitate “remote” work and the submission of documentation. Any parties currently considering mergers and acquisitions which may be subject to filing requirements under one or several merger control regimes would, thus, be well advised under the current circumstances to re-assess the anticipated timeframes and take into account potential time delays and other procedural hurdles in obtaining merger control clearance.[25] Even in times of crisis, the applicable anti-trust and merger control laws allow for flexible cooperation mechanisms. In a joint statement by the European Competition Network on the COVID-19 crisis,[26] it was already established that the European competition authorities will not actively intervene against cooperation forms which are aimed at securing the access for all consumers to otherwise scarce goods. Further, on April 8, 2020, the European Commission published a “Temporary Framework for assessing antitrust issues related to business cooperation in response to situations of urgency stemming from the current COVID-19 outbreak”.[27] The Commission’s communication is meant to provide antitrust guidance to companies cooperating in response to urgent situations related to the current coronavirus outbreak which includes, in particular, medicines and medical equipment that are used to treat coronavirus patients but also applies to similar supply emergencies resulting from the coronavirus outbreak for essential goods and services outside the health sector. On the other hand, the competition authorities have left no doubt that they will stringently quash any attempts to profiteer from the current emergency situation by way of concerted efforts or the abuse of market power. They have therefore clearly highlighted that the rules on anti-competitive behaviors, and prime amongst them the prohibition of cartels in Art. 101 TFEU/§ 1 German Competition Act (Gesetz gegen WettbewerbsbeschränkungenGWB), also apply as the guiding principle in these unprecedented times of crisis. Ultimately, this means that it remains incumbent on the enterprises and their legal advisors to assess the admissibility under competition law of any proposed measures in each individual case. Recognizant of the fact that such assessments are difficult enough in “normal times”, let alone in times of a global health pandemic, the European Commission has been engaging with companies and trade associations to help them in assessing the legality of their cooperation plans and putting in place adequate safeguards against longer-term anticompetitive effects, and collected and published additional information and guidelines on its website regarding “Antitrust rules and coronavirus”.[28] The key feature among this information is a specially designated email address which can be used by businesses to obtain informal advice on specific company initiatives. The German BKartA has expressly declared its support for this initiative and serves as national point of contact to discuss national concerns and matters in this regard.[29] In addition, the European Commission exceptionally declared its willingness to issue so-called ‘comfort letters’ in cases where there may still be uncertainty about whether such initiatives are compatible with EU competition laws.[30] Special provisions apply to cooperation among businesses during the coronavirus outbreak to avoid supply shortages of critical hospital medicines and other medical products and services. For this purpose, and in addition to the Temporary Framework outlined above, the European Commission has published “Guidelines on the optimal and rational supply of medicines to avoid shortages during the COVID-19 outbreak” on April 8, 2020. These communications outline the main criteria that will be applied when assessing these possible cooperation projects.[31] In particular, antitrust guidance is provided to companies willing to temporarily cooperate and coordinate their activities in order to increase production in the most effective way and, specifically, to optimize the supply of urgently needed hospital medicines, e.g. by coordinating production, stock management, distribution and logistics. Furthermore, the European Commission has already issued a comfort letter as described above for a cooperation project among pharmaceutical producers that targets the risk of shortage of critical hospital medicines for the treatment of coronavirus patients.  
  [1]  Also see in this context: https://www.gibsondunn.com/european-and-german-programs-counteracting-liquidity-shortfalls-and-relaxations-in-german-insolvency-law/. [2]   See in this context also: https://www.gibsondunn.com/whatever-it-takes-german-parliament-passes-far-reaching-legal-measures-in-response-to-the-covid-19-pandemic/, Section III.   [3]   In this context, also see: https://www.gibsondunn.com/whatever-it-takes-german-parliament-passes-far-reaching-legal-measures-in-response-to-the-covid-19-pandemic/, section II.2.   [4]   In German available under: https://www.idw.de/idw/im-fokus/coronavirus/auswirkungen-der-ausbreitung-des-coronavirus-auf-rechnungslegung-und-pruefung--teil-1--fachlicher-hinweis-des-idw-/122498.   [5]   In German available under: https://www.idw.de/idw/im-fokus/coronavirus/auswirkungen-der-ausbreitung-des-coronavirus-auf-rechnungslegung-und-pruefung--teil-2--fachlicher-hinweis-des-idw-/122878. A combined English language version of the two German communications can be found under the address: https://www.idw.de/idw/im-fokus/coronavirus/effects-of-the-spread-of-the-corona-virus-on-the-financial-statements-as-of-31-12-2019-and-their-audit/122914.   [6]  In German available under: https://www.idw.de/idw/im-fokus/coronavirus/auswirkungen-der-ausbreitung-des-coronavirus-auf-rechnungslegung-und-pruefung--teil-3--fachlicher-hinweis-des-idw-/123092 and again as an English translation: https://www.idw.de/idw/im-fokus/coronavirus/questions-concerning-the-impact-of-the-spread-of-coronavirus-on-the-financial-statements-and-their-audit--part-3-/123132.   [7]   https://www.esma.europa.eu/about-esma/covid-19.   [8]   Guidelines of the IDW dated March 27, 2020, Page 10/37, https://www.idw.de/blob/122914/8b4b3722606c025e741eb7ac59988ded/down-corona-englische-fassung-teil-1-und-2-data.pdf.   [9]   Press release dated March 29, 2020, available under: https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/changes-foreign-investment-framework [10]   Further information on the CFIUS reform see Client Alert „CFIUS Reform: Top Ten Takeaways from the Final FIRRMA Rules“ dated February 19, 2020: https://www.gibsondunn.com/cfius-reform-top-ten-takeaways-from-the-final-firrma-rules/. [11]   Communication from the Commission dated March 25, 2020, Guidance to the Member States concerning foreign direct investment and free movement of capital from third countries, and the protection of Europe’s strategic assets, ahead of the application of Regulation (EU) 2019/452 (FDI Screening Regulation), C(2020) 1981, available under: https://data.consilium.europa.eu/doc/document/ST-7028-2020-INIT/de/pdf (German, without annexes) or https://trade.ec.europa.eu/doclib/docs/2020/march/tradoc_158676.pdf (English, full text). [12]   So far the following 14 member states have established control mechanisms: Austria, Denmark, Finland, France, Germany, Hungary, Italy, Latvia, Lithuania, Netherlands, Poland, Portugal, Rumania, Spain; in addition, corresponding rules also exist in Great Britain. [13]   Communication from the Commission to the European Parliament, the European Council, the Council, the European Central Bank, the European Investment Bank and the Eurogroup: Coordinated economic response to the COVID-19 Outbreak; available under https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52020DC0112. [14]   Real Decreto 8/2020 dated March 18, 2020, available under: https://www.boe.es/boe/dias/2020/03/18/pdfs/BOE-A-2020-3824.pdf (in Spanish). [15]   Germany and others notwithstanding, France had already tightened its foreign investment control legislation at the beginning of last year and extended the list of sectors subject to control, see press release of January 3, 2019, available under: https://www.gouvernement.fr/en/strengthening-control-of-foreign-investments-in-sensitive-companies. [16]   Regulation (EU) 2019/452 of the European Parliament and of the Council of March 19, 2019 establishing a framework for the screening of foreign direct investments into the Union, available under: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019R0452&from=EN. [17]   The draft law’s text can be found under https://www.juris.de/jportal/portal/page/homerl.psml?nid=jnachr-JUNA200401047&cmsuri=%2Fjuris%2Fde%2Fnachrichten%2Fzeigenachricht.jsp. [18]   Referentenentwurf Bundesministerium für Wirtschaft und Energie, Erstes Gesetz zur Änderung des Außenwirtschaftsgesetzes dated January 30, 2020, available under https://www.bmwi.de/Redaktion/DE/Downloads/E/erstes-gesetz-zur-aenderung-des-aussenwirtschaftsgesetzes.pdf?__blob=publicationFile&v=6. [19]   It can be expected that the concept of endangering in the AWV will be modified in accordance with the First Statute on the Amendment of the Foreign Trade and Payments Act and other Laws to match the concept of endangering in the EU-Screening Regulation. [20]   It can be expected that the concept of endangering in the AWV will be modified in accordance with the First Statute on the Amendment of the Foreign Trade and Payments Act and other Laws to match the concept of endangering in the EU-Screening Regulation. [21]   France: Autorité de la concurrence, „Adaptation of the time limits and procedures of the Autorité de la concurrence in times of health emergency“, press release of March 27, 2020, available in English under https://www.autoritedelaconcurrence.fr/en/press-release/adaptation-time-limits-and-procedures-autorite-de-la-concurrence-times-health; Denmark: Konkurrence- og Forbrugerstyrelsen, „Time limits for merger control are suspended for 14 days“, press release of March 18, 2020, available in English under https://www.en.kfst.dk/nyheder/kfst/english/news/2020/20200318-time-limits-for-merger-control-are-suspended-for-14-days/. [22]   U.S. Federal Trade Commission, „Resuming early termination of HSR reviews“, blog post of March 27, 2020, available in English under https://www.ftc.gov/news-events/blogs/competition-matters/2020/03/resuming-early-termination-hsr-reviews. [23]  Notice of the EU Commission dated March 7, 2020, „Special Measures due to Coronavirus / COVID-19: Update of 7th April 2020“, available in English under https://ec.europa.eu/competition/mergers/covid_19.html. [24]   Bundeskartellamt, „Kommunikation mit dem Bundeskartellamt (Corona–Maßnahmen)“, Notice of March 17, 2020, available under https://www.bundeskartellamt.de/SharedDocs/Meldung/DE/AktuelleMeldungen/2020/17_03_2020_Kommunikation_Bundeskartellamt.html. [25]   In this regard also refer to our Client Alert, „U.S. Federal Trade Commission and DG COMP Implement Changes to U.S. and EU Merger Filing Procedures in Response to COVID-19“, March 16, 2020, available in English under https://www.gibsondunn.com/us-ftc-and-dg-comp-implement-changes-to-us-and-eu-merger-filing-procedures-in-response-to-covid-19/. [26]   European Competition Network, „Antitrust: Joint statement by the European Competition Network (ECN) on application of competition law during the Corona crisis“, Statement of March 23, 2020, available in English under https://ec.europa.eu/competition/ecn/202003_joint-statement_ecn_corona-crisis.pdf [27]  Communication from the Commission dated April 8, 2020, “Temporary Framework for assessing antitrust issues related to business cooperation in response to situations of urgency stemming from the current COVID-19 outbreak”, C(2020) 3200, available in English under: https://ec.europa.eu/info/sites/info/files/framework_communication_antitrust_issues_related_to_cooperation_between_competitors_in_covid-19.pdf. [28]   https://ec.europa.eu/competition/antitrust/coronavirus.html. [29]   Bundeskartellamt „EU-Kommission informiert zu Wettbewerbsregeln in der Coronavirus-Krise“, Notice dated March 31, 2020, available in English under https://www.bundeskartellamt.de/SharedDocs/Meldung/EN/AktuelleMeldungen/2020/01_04_2020_EU_Commission_competition_rules_coronavirus.html?nn=4136442. [30]  See Communication from the Commission dated April 8, 2020, “Temporary Framework for assessing antitrust issues related to business cooperation in response to situations of urgency stemming from the current COVID-19 outbreak”, C(2020) 3200, available in English under: https://ec.europa.eu/info/sites/info/files/framework_communication_antitrust_issues_related_to_cooperation_between_competitors_in_covid-19.pdf. [31]  Communication from the Commission dated April 8, 2020, “Guidelines on the optimal and rational supply of medicines to avoid shortages during the COVID-19 outbreak”, C(2020) 2272, available in English under: https://ec.europa.eu/info/sites/info/files/communication-commission-guidelines-optimal-rational-supply-medicines-avoid.pdf.
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