Calming the storm after the SVB collapse: Prudential policy the key to stability
The collapse of Silicon Valley Bank, Signature Bank and Silvergate Bank in the last week has caused turmoil in global financial market.
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Global | Publication | May 2020
In response to the COVID-19 crisis, European Union (EU) President Ursula von der Leyen has formed a team led by eight Commissioners to coordinate the EU response. This team of Commissioners is advised by a new advisory panel of epidemiologists and virologists. The European Commission (EC) is also coordinating daily contacts with European Health Ministers and Ministers of the Interior. New developments are posted on a dedicated EC webpage in this rapidly evolving situation.
Following the EU’s initial package of COVID-19 measures on March 13, 2020, the EC’s Directorate-General for Competition (DG COMP) moved quickly to update its EU competition policy enforcement, including issuing a communication on the antitrust assessment of cooperative arrangements responding to the crisis, creating a dedicated webpage and email for companies seeking guidance on proposed cooperation agreements and implementing a speedy approval process for COVID-19-related State aid.
On May 8, the EC announced the second amendment to its temporary framework for assessing State aid, addressing the controversial topic of State aid involving recapitalizations and subordinated loans, and announced that it had so far approved an estimated €1.9 trillion in State aid to the EU economy.
On April 8, DG COMP published a Communication on a temporary framework for assessing antitrust issues related to business cooperation stemming from the COVID-19 crisis (the Cooperation Framework). The EC has also created a dedicated COVID-19 webpage discussing the application of EU antitrust rules in the crisis. The webpage references the ECN joint statement discussed below and notes that DG COMP has created a dedicated mailbox, COMP-COVID-ANTITRUST@ec.europa.eu, for companies seeking informal guidance on specific initiatives to respond to the crisis.
The Cooperation Framework. The Cooperation Framework acknowledges the potential need for companies to cooperate to overcome or mitigate the effects of the crisis, especially but not only with respect to medicines and medical equipment used to test and treat COVID-19 patients or to mitigate and possibly overcome the outbreak. The Cooperation Framework covers both arrangements involving companies already active in the relevant sector and those active in other sectors (e.g. companies converting part of their production lines to start producing scarce products). The Cooperation Framework explains DG COMP’s main criteria for assessing cooperation projects and setting its enforcement priorities.
The Cooperation Framework acknowledges that companies may be able to address shortages of essential products and services during the COVID-19 outbreak more efficiently by cooperating, but they may need guidance on proposed cooperation initiatives and/or ad hoc feedback or comfort to implement these initiatives rapidly. Based on requests from companies and trade associations, notably in the health sector, the Cooperation Framework recognizes that companies might need to rapidly increase production for some products, while reducing production of others, and to reallocate stocks. These steps could require companies to share information on sales and stocks and to coordinate the use of production lines. For example, output could be increased more efficiently if only one medicine was produced at a particular site (as opposed to switching production between different products, which requires time-consuming cleaning of machinery, etc.), balancing economies of scale with the need to avoid excessive reliance on any particular production site.
The Cooperation Framework notes that some forms of cooperation in the health sector would not be considered to raise any antitrust issues if implemented in accordance with standard EC guidelines on horizontal cooperation, including entrusting a trade association (or an independent advisor, independent service provider, or public body) to e.g.:
The Cooperation Framework acknowledges that other forms of cooperation to overcome critical supply shortages in the health sector might go beyond the types of cooperation permitted under existing guidance. These could include coordinating production, such as which sites produce which medicines, stock management and, potentially, distribution with a view to increasing and optimising output so that not all firms focus on one or a few medicines, while other medicines remain in under-production. This coordination could also require exchanges of commercially sensitive information.
In the current exceptional circumstances, the Cooperation Framework notes that such measures would not be problematic under EU competition law or at least not give rise to an enforcement priority, to the extent that such measures would be:
Companies seeking to rely on this framework should document all exchanges and agreements between them and make them available to DG COMP on request.
The Cooperation Framework notes that cooperation undertaken in response to an “imperative request” from public authorities (e.g. to organize production and delivery to meet an urgent need to keep up the functioning of healthcare for COVID-19 patients) is allowed, while cooperation encouraged and/or coordinated by a public authority will be considered a “relevant factor” in concluding that such cooperation would not be problematic or an enforcement priority.
The Informal Guidance Procedure. Companies seeking informal guidance under the new procedure are asked to provide as much detail as possible, including: (i) the firm(s), product(s) or service(s) concerned; (ii) the scope and set-up of the cooperation; (iii) the aspects that may raise concerns under EU antitrust law; and (iv) the benefits that the cooperation seeks to achieve, and an explanation of why the cooperation is necessary and proportionate to achieve those benefits in the current circumstances. The informal guidance procedure is noteworthy, since the previous procedure for seeking such guidance was eliminated almost 20 years ago, with the adoption of the so-called “self-assessment” system in Regulation 1/2003. The EC had previously signalled, however, that creation of a new informal guidance procedure was one of a number of antitrust reforms under consideration prior to the crisis.
DG COMP also announced the issuance of the first comfort letter under its new procedure to Medicines for Europe (MfE, formerly the European Generics Medicines Association) in relation to a cooperation pursuant to which pharmaceutical manufacturers producing certain COVID-19 medicines would cooperate to model demand; identify production capacity and existing stocks; adapt or reallocate production and stocks; possibly cooperate on distribution; coordinate available production capacity and identify resource optimizations, for example through the cross-supply of active pharmaceutical ingredients; and jointly identify where to best switch production and/or to increase capacity, so that not all firms focus on one or a few medicines, whilst others remain in under-production. Where medicines are being under- or over-supplied, participants could also rebalance and adapt their capacity utilisation, production and supply (including possibly distribution), on an ongoing basis.
Based on the current circumstances and the EC’s steering role, DG COMP found that the proposed cooperation did not raise issues under Article 101(1) TFEU, but set out a number of conditions:
This comfort letter provides helpful legal certainty to participants and was issued in only two days after MfE’s request (though they had probably coordinated with DG COMP in advance). Given the extraordinary circumstances and the safeguards required, however, the conclusion that the cooperation does not violate EU antitrust rules does not seem difficult to reach. Moreover, the monitoring and otherwise close involvement of the EC suggests that this model cannot be adopted for a large number of cooperative arrangements. Indeed, so far DG COMP has not announced the issuance of any similar comfort letters.
Enhanced enforcement against “crisis cartels” and abuses. On the other hand, the Cooperation Framework underlines that it is more important than ever in the current crisis that competition law protect companies and consumers and warns particularly against companies engaging in anti-competitive agreements or abusing their dominant positions (including dominant positions resulting from the crisis) by exploiting customers and consumers (e.g. by charging prices above normal competitive levels) or limiting production to the ultimate prejudice of consumers (e.g. by obstructing attempts to scale up production to face shortages of supply).
International initiatives. The Cooperation Framework is in line with the March 23 joint statement of the European Competition Network (the ECN), which acknowledged that the current situation may require companies to cooperate to ensure the supply and fair distribution of scarce products and stating that the ECN will not actively intervene against necessary and temporary measures put in place to avoid supply shortages. The International Competition Network (ICN) Steering Group subsequently released a similar statement. The ECN joint statement noted that such measures would likely not to be problematic in any case, since they would either not restrict competition or generate efficiencies outweighing any such restriction. Like the Cooperation Framework, the ECN joint statement also stressed that ECN members will not hesitate to take action against companies taking advantage of the current situation by cartelising or abusing dominant positions.
Comments on the cooperation framework and informal guidance procedure. It is perhaps regrettable that the Cooperation Framework does not provide specific examples of how its existing guidance would apply in the current extraordinary circumstances or explain the crisis’ effect on DG COMP’s application of existing guidance to specific types of cooperation. The Cooperation Framework describes ways in which a trade association could facilitate the collection of competitively sensitive information and its aggregation and use to improve the production of medicines and medical equipment consistent with existing guidance, but this description would likely apply at any time.
he Cooperation Framework does not even reference existing guidance on other types of cooperation, such as so-called “specialization agreements” by which companies decide to specialize in complementary activities, which may already benefit from an exemption from EU antitrust rules (assuming they do not involve fixing prices, limiting output or sales or allocating customers), joint purchasing or sector-specific rules, for example in the agricultural and transport sectors, much less provide details on how its application may be affected by the current crisis. The Cooperation Framework also does not go as far as some other authorities in providing formal relief or guidance, especially in sectors other than healthcare (e.g. the UK (relating to cooperation among supermarkets) and Norway (exempting certain cooperation in the transport sector)).
On the other hand, several new elements that do emerge from the Cooperation Framework include (i) confirmation of the possibility that current circumstances may justify otherwise problematic cooperation in areas such as production, stock management and even distribution, at least in relation to the production and distribution of urgently needed medicines and medical supplies, (ii) the position that cooperation in response to an “imperative request” from public authorities is allowed, while official “encouragement” will also be considered as a favorable factor in any future investigation, and (iii) a potentially new approach to abuses of dominant positions, in which DG COMP may find abuses of temporary dominant positions created by the crisis itself.
DG COMP’s issuance of an individual comfort letter to Medicines for Europe is a welcome confirmation that DG COMP will follow through on its promise to provide speedy comfort to companies and trade associations responding to the crisis. Other such comfort letters are no doubt under way, and additional announcements can be expected in the coming days and weeks. Based on DG COMP’s press release regarding the Medicines for Europe comfort letter, however, DG COMP may not provide details on the arrangements covered by such letters and they may thus be of limited use to other companies as guidance on DG COMP’s approach.
Interestingly, though the Cooperation Framework stresses the need for vigilant enforcement to prevent companies from taking advantage of the crisis for anti-competitive agreements and/or abuses of dominant positions such as excessive pricing, DG COMP did not indicate that it is investigating any such conduct. This is a marked contrast to the situation in many Member States that have disclosed the existence of numerous complaints and opened a number of investigations.
Unlike financial assistance granted directly by the EU, financial assistance granted by EU Member States is subject to the EU State aid rules under Article 107 of the Treaty on the Functioning of the EU (the TFEU). Article 107 TFEU generally prohibits “State aid,” which is interpreted broadly to include many types of financial assistance, unless the aid is covered by a general approval under EU rules or specifically approved by the EC.
The EC adopted a temporary framework (the State Aid Framework) for the assessment of State aid based on Article 107(3)(b) TFEU, which covers aid measures adopted to address “serious disturbances” in Member State economies, on March 19, 2020. The State Aid Framework applies to aid granted to remedy liquidity shortages and to ensure that the disruptions caused by the COVID-19 outbreak do not undermine the viability of companies, especially small- and medium-sized enterprises (SMEs). The State Aid Framework was amended for the first time on April 3, 2020 notably to enable Member States to accelerate the research, testing and production of coronavirus relevant products, and will likely soon be amended further to cover Member State participation in recapitalizations. As mentioned, the State Aid Framework was amended again on May 8, 2020 to cover aid in the form of recapitalization and subordinated loans.
Member States must still notify their proposed aid measures to the EC and show that they are necessary, appropriate and proportionate and that all the conditions of the State Aid Framework are respected. Nonetheless, the State Aid Framework allows the EC to approve State aid notifications very quickly. The State Aid Framework originally set out conditions for three distinct types of aid:
The April 3 amendment extended the State Aid Framework by providing for an additional five types of aid measures:
The May 8 amendment extended the State Aid Framework again, this time to cover recapitalizations and subordinated loans. The conditions to recapitalization aid include:
Aid in the form of subordinated debt cannot be converted into equity while the beneficiary is a going concern and should include higher remuneration and be subject to the amount limitations for senior debt. Subordinated debt exceeding the senior debt threshold should be subject to the conditions for recapitalization measures.
Member States may also design national measures to promote additional policy objectives, such as further enabling the green and digital transformation of their economies or preventing fraud, tax evasion or aggressive tax avoidance. Member States can notify recapitalization schemes or individual aid measures. When approving a scheme, the Commission will request the separate notification of aid to a company above the threshold of €250 million for individual assessment.
Under the State Aid Framework, aid can be granted to companies that were not in difficulty as of December 31, 2019 but have entered into difficulty as a result of the COVID-19 crisis. The State Aid Framework will be in place until December 31, 2020 unless it is amended, terminated or extended. Member States granting aid under the State Aid Framework are subject to various monitoring and reporting requirements including, publication of information on individual aids within 12 months and providing annual reports and a list of measures based on the State Aid Framework to the EC.
The State Aid Framework does not supersede the normally available frameworks for permitted State aid. These include:
The EC can be expected to continue approving aid measures under the State Aid Framework very rapidly to avoid standing in the way of national efforts to mitigate the crisis’ effects. The short turnaround makes it difficult for the EC to scrutinize measures closely. The State Aid Framework also provides no guidance on how Member States should allocate aid under approved measures, leaving considerable uncertainty as to how Member States will assess the incentive effect and proportionality of aid requests from individual applicants. The new process will also limit the ability of third parties, such as competitors, to participate and comment on aid requests, at least at the EU level.
Each company’s situation is different and must be assessed on a case-by-case basis. As the COVID-19 crisis evolves, however, many companies will need to take advantage of a combination of EU and national financial assistance. The EC rapidly adopted a special framework for assessing State aid measures responding to the crisis and is continuing to amend and expand this framework. DG COMP can be expected to continue adapting the State Aid Framework and approving new aid measures expeditiously. However, national authorities face significant challenges in deciding who will get assistance, and how much. In particular, national authorities will need to confirm that aid is limited to damages caused by the crisis and make difficult judgments about how to allocate limited resources. As the EU emerges from the crisis, it seems likely that DG COMP will be called upon to examine many individual grants of aid to ensure that the State Aid Framework conditions are adhered to.
Companies will also be exploring a wide variety of cooperation arrangements, mergers and joint ventures in response to the crisis. Except in the case of hardcore violations, DG COMP will likely be receptive to arguments that short- and medium-term cooperation arrangements to ensure continuity of supply are compatible with EU law. DG COMP’s publication of the Cooperation Framework and issuance of the first comfort letter under its new procedure for this purpose are welcome. So far, however, DG COMP has not gone as far as other European and global authorities in granting sector-specific guidance and relief, especially in sectors outside the health sector. Also unlike many authorities, moreover, DG COMP has not reported investigations of crisis-related anti-competitive agreements or abuses of dominant positions.
The longer term effects of the COVID-19 crisis on EU antitrust reform remain to be seen. The crisis has already accelerated the EC’s promise to provide more guidance on cooperation arrangements. DG COMP has reaffirmed the timeline for most other workstreams, but some may be pushed back. Hopefully, DG COMP’s antitrust reforms will benefit from its experience in responding to the COVID-19 outbreak, for instance in the assessment of horizontal and vertical cooperation arrangements.
The collapse of Silicon Valley Bank, Signature Bank and Silvergate Bank in the last week has caused turmoil in global financial market.
The European Union’s Foreign Subsidies Regulation (the FSR) entered into force on 12 January 2023 and creates a new regime aimed at combating distortions of competition on the EU internal market caused by foreign subsidies. It imposes mandatory notification and approval requirements for acquisitions of significant EU businesses and large EU public tenders, and gives the European Commission (EC) extensive powers to launch ex officio investigations. The notification requirements go live on 12 October 2023.
© Norton Rose Fulbright LLP 2023