The spread of COVID-19 has already taken a significant toll on the health of individuals and economies across the globe. While governments are using fiscal and monetary policy tools in an effort to limit the impact on businesses affected by the ongoing crisis, there is still much uncertainty surrounding the scope of harm that the pandemic will ultimately inflict. It seems certain, however, that acquisitions and investments involving distressed companies are likely to increase as firms try to find a path forward through the crisis and as investors seek to inject additional capital into companies in need.
It is important to remember that in these extraordinary times, investments, and acquisitions – including those involving financially distressed companies – will often still trigger antitrust reporting obligations in the United States under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act). U.S. antitrust laws include unique rules for bankruptcy transactions and exemptions from normal notification requirements to account for the special circumstances of transactions involving distressed companies. In this alert, we (1) provide a brief overview of filing requirements under the HSR Act, (2) summarize special rules relating to transactions involving bankrupt or financially distressed firms, and (3) review the “failing firm” defense, which may permit an otherwise anticompetitive transaction to proceed in limited circumstances.
As companies face the new normal and try to keep pace with rapid developments and fast‑moving transactions, they should be mindful of these rules and engage antitrust counsel early to help navigate the merger review process.
Under the HSR Act, parties to transactions that meet the following thresholds are required to report the transaction to the U.S. antitrust agencies (the Department of Justice Antitrust Division and the Federal Trade Commission), unless an exemption applies:
Subject to certain exceptions – including some bankruptcy transactions – submission of an HSR filing triggers a 30-day waiting period during which the parties may not close the transaction. Upon either filing party’s request, the agencies may grant early termination of the waiting period. Early termination was recently suspended when the agencies instituted a new e-filing program as a result of COVID-19. It has since been reinstated, albeit on a more limited basis, with grants issued more slowly and in fewer cases than usual.
If early termination is not granted, upon expiration of the 30-day waiting period, the agencies may allow the transaction to proceed. Alternatively, the reviewing agency may issue a Request for Additional Information and Documentary Materials (Second Request), initiating a more in‑depth investigation, usually due to concerns about a transaction’s competitive impact. Subject to timing agreements that parties often negotiate with the agencies, parties are prohibited from closing until 30 days after substantial compliance with a Second Request.
Transactions that are subject to Section 363(b) of the Bankruptcy Code are governed by a special set of HSR rules. In order for these special rules to apply, the transaction must be subject to Section 363(b), and bankruptcy proceedings must have been formally initiated.
For acquisitions connected to a bankruptcy, parties can file HSR using the bankruptcy order, rather than an executed agreement, as is typically required. In the case of a bankruptcy auction, multiple bidders can make HSR filings to be ready to close in case they ultimately win the auction. This will require the trustee or DIP to submit multiple filings corresponding to each potential buyer. Obtaining antitrust clearance early can increase the attractiveness of a particular bid in a bankruptcy auction.
In addition to the special rules for some bankruptcy transactions, certain HSR filing exemptions may apply to transactions involving companies in financial distress.
Regardless of whether a transaction involving a financially distressed firm implicates the special HSR rules or exemptions discussed above, U.S. antitrust agencies and courts recognize a “failing firm” defense for certain transactions that might otherwise lessen competition. This defense allows an otherwise anticompetitive transaction, such as a merger between close competitors, to proceed if the parties can show that the distressed firm (1) will be unable to meet its financial obligations in the near future, (2) would not be able to reorganize successfully under Chapter 11 of the Bankruptcy Act, and (3) has made unsuccessful good-faith efforts to elicit reasonable alternative offers from alternative buyers who would pose less of an antitrust risk.
Under normal circumstances, it is very difficult to satisfy each of these elements. However, this could change as the economic conditions worsen as a result of COVID-19, and a growing number of companies find themselves in existential distress. More generally, parties undertaking transactions in distressed situations may be able to argue that deals will not harm competition (or are indeed procompetitive) in the extraordinary circumstances presented by COVID-19.
Over 100 jurisdictions around the world have active merger control regimes. Transactions involving companies with operations outside the United States may trigger merger control filings and/or antitrust scrutiny in other jurisdictions. Countries with newer antitrust regimes might not yet have had cause to determine whether or how to streamline filings in the event of a pandemic or in cases involving firms in economic distress. Transactions that qualify for an exemption for distressed situations in one country might require a filing in another. Finally, several antitrust authorities have announced changes to their operations due to COVID-19, including office closures and the suspension of ongoing reviews (without terminating any mandatory waiting periods that prohibit closing).
Parties considering transactions should monitor developments carefully and consult with experienced antirust counsel to navigate the heterogeneous global enforcement landscape.
U.S. antitrust laws acknowledge in many ways that extraordinary times may call for extraordinary measures. However, this added complexity makes it all the more important to involve antitrust counsel early to ensure that antitrust obligations are properly identified and that companies can avail of any special rules or exemptions that may apply.
 These thresholds are adjusted annually based on changes in gross national product.