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Competition law and State aid: Opportunities to mitigate the effects of Covid-19

Client Briefing Competition Law - 

The Covid-19 pandemic also has a significant impact in the areas of competition law and State aid. In the current crisis, companies may find it necessary to cooperate or merge with other market participants, to exchange information with competitors (possibly within the framework of associations), to control the resale of products by customers or to take advantage of State aid. This client information provides an overview of possible approaches to mitigate the serious effects on the competitiveness of companies within the current regulatory framework.

The Covid-19 pandemic poses unprecedented challenges to companies of all industries and sizes. Even in times of crisis, the strict rules of competition law and State aid must always be respected. However, politicians and competition authorities are trying to take account of the exceptional needs of companies and to mitigate the economic consequences of the pandemic.

Cooperation between companies

In order to ensure the distribution and purchase of products, but also to create efficiencies and thereby ensure their own economic viability, many companies have the need to cooperate with competitors or to enter into vertical agreements for the purchase or sale of products and services. This can take many forms, ranging from the exchange of competitively sensitive information to the allocation of sales territories or customer groups to agreements on the joint development, production or distribution of products. In this respect, the political discussion currently focuses on the supply of medical products and food to the population. Hence, at national level discussions are underway about relaxing competition law to enable cooperation to secure food supplies, for example between the food industry and retailers. Such relaxations are likely to take effect particularly at the level of the application of competition law by the authorities, leaving the legal framework untouched. In a recent joint communication, the European Commission and the national competition authorities of the EU Member States have expressed the view that the current competition rules are flexible enough to take account of changing market conditions such as the social and economic impact of the crisis.

At the same time, the authorities have indicated that they will intervene strongly against agreements that seek to exploit the current crisis, in particular by raising prices inappropriately. However, the authorities have stated that they will not actively intervene against necessary and temporary measures to prevent supply shortages. In addition, the competition authorities have reiterated that the existing competition rules allow manufactures to set maximum prices for their products.
Even in sectors that are not directly relevant to the system, the rules currently in force provide flexible instruments that allow cooperations even though they may have a restrictive effect on competition. This is true, in particular, if such cooperation is necessary to create efficiencies that are passed on to consumers. For certain scenarios competition law also provides safe harbor rules in the form of so-called block exemption regulations. According to these regulations, certain forms of cooperation are exempted from the ban on cartels if the companies involved do not exceed certain market shares. In the current situation, important fields of application could be in particular research and development cooperations and specialization agreements between competitors. German competition law also contains an exemption for certain forms of cooperation between small and medium-sized enterprises (SMEs), which may become particularly important in the current crisis. Pursuant to this exception, agreements between SMEs, which have as their object the rationalization of economic transactions through inter-company cooperation, are exempted if competition in the market is not significantly affected and the agreement serves to improve the competitiveness of the SMEs involved.

The statements made so far by politicians and competition authorities give reason to hope that the existing scope for enforcement of competition rules will be interpreted generously during the Corona crisis. However, the admissibility of the above-mentioned cooperation projects is, as usual, subject to the self-assessment of the companies. Therefore, companies continue to bear the risk of inadmissibility under competition law with all its legal consequences (e.g. fines, invalidity of contracts, third party claims for damages). In view of this uncertainty, however, the cartel authorities are expressly open to discuss such cooperations, which may considerably reduce the risk in practice. For that purpose, the European Commission has set up a mailbox that can be used to seek informal guidance on specific cooperation initiatives. 
In addition, instruments such as supplies to competitors, purchasing cooperations, joint ventures etc. will continue to be permissible under the known conditions. It must be examined in each individual case whether such forms of cooperation can provide relief to tackle and mitigate the current special situation.

Merger control

The pandemic also has a significant impact on ongoing and upcoming merger control proceedings. Because merger control always requires forecasts regarding the competitive impact of a merger, the crisis may change the substantive assessment criteria. However, it also leads to practical problems in the conduct of merger control proceedings. For example, several proceedings, which were under in-depth investigation by the European Commission, have already been delayed because the companies concerned were unable to respond to requests for information within the set deadlines. 

Of course, the crisis not only has a direct impact on the business activities of companies, but also on the ability of the cartel authorities to work. Although the German Federal Cartel Office has adapted its work procedures and set up specific e-mail addresses to ensure the contact with the competent Decision Divisions, it has requested to delay all notifications that are not urgent. The latter also applies to the European Commission. 
On the other hand, the authorities have introduced facilitations for merger notifications (e.g. in the form of purely electronic notifications). However, as first cases show (e.g. in Austria), it cannot be excluded that delays will nevertheless occur due to the reduced capacities resulting from the exceptional situation. Merging parties should be prepared for such delays in merger control and design the contractual framework and the process flow accordingly.
In general, it can expected that the crisis will entail an increasing number of acquisitions, which may qualify as rescue mergers. A clearance under that concept is possible if the target company would be forced out of the market in the near future, if there is no less anti-competitive purchaser and if the purchaser would gain the market share of the acquired undertaking anyway in case it would be forced out of the market.

Rules for dominant companies

Companies that hold a dominant position in a particular market, or on which SMEs are dependent, also may be faced with difficult decisions in the current crisis, for example when it comes to the distribution of scarce resources and the associated conditions. Even under normal market conditions, such companies have a special responsibility not to allow their behavior to impair (the already weakened) competition, which becomes even more important in crises such as the current one. The national competition authorities monitor the behavior of dominant companies particularly closely, especially in times of crisis and especially with regard to products and services of particular importance to society as a whole. Proceedings are already underway in several countries regarding price increases for products such as protective masks or disinfectants (e.g. against Amazon and eBay in Italy and the United Kingdom). 
However, this does not mean that price increases, deterioration of conditions or selective purchase restrictions by dominant or powerful companies are always prohibited in the current situation. The decisive factor is always whether this behavior constitutes an abuse against customers or suppliers due to the lack of an objective justification. Taking into account existing capacity constraints, restrictive measures may be justified in more cases than under normal circumstances.

State aid

In order to secure liquidity, many companies are currently dependent on State support. Such support, whether in the form of direct grants or loans, guarantees, tax rebates or similar, is subject to State aid control and must in principle be approved by the European Commission before it can be implemented.
The European Commission has recognized that State aid will play a key role in addressing the economic impact of the Covid-19 pandemic. As a first reaction to the current situation, it has therefore announced, e.g., that State aid measures in particularly affected industries such as the aviation sector will be given special priority.
Most importantly, on 19 March 2020, the European Commission adopted a temporary framework, under which the EU Member States can design aid schemes to support companies in difficulty as a result of the Covid-19 outbreak. Aid measures may include direct grants, tax benefits, and subsidized guarantees for bank loans, interest rate subsidies or short-term export credit insurances. Once the relevant national programs have been approved, it is no longer necessary that an individual aid granted within this framework obtains a separate approval.

Based on the temporary framework the European Commission has already approved German aid programs in three cases. First, the European Commission approved two support measures implemented by KfW, a State-owned development bank. The measures will authorize KfW to provide liquidity in the form of subsidized loans to companies affected by the Covid-19 outbreak. However, it is worth noting that applications for the corresponding loans have to be submitted by a commercial bank. Second, the European Commission has approved a German aid scheme called “Small Amounts of Aid 2020”, which allows support via direct grants, repayable advance payments, and various tax and payment advantages. This scheme is a federal framework scheme, allowing aid to be granted at federal, regional and local level. Third, the European Commission approved a measure, which provides aid in the form of guarantees on loans (“Bundesregelung Bürgschaften 2020”). The federal and regional authorities, the development banks of the federal and regional authorities and the guarantee banks are responsible for administering this measure. 

Private enforcement of competition law

Finally, the effects of the Covid-19 pandemy also affect the legal assertion of claims for competition law damages. Many courts have already cancelled or rescheduled oral hearings because they are often only able to maintain emergency operations.  This also leads to the extension of corresponding written pleading deadlines. 
Therefore, a considerable delay in court proceedings is likely. With regard to the impact of the crisis on judicial deadlines, we refer to our separate client information, which can be accessed here

This client information contains only a non-binding overview of recent developments in German competition law and is not meant to replace legal advice. In case of comments or questions, please contact:

Hans-Joachim Hellmann
Silvio Cappellari
Dr. Christina Malz
Dr. Stephanie Birmanns

2020_03_26_Client_Information_Competition_Law_and_State_Aid.pdf 319 KB