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The failing firm defence and caveat emptor

On 27 May 2022, the CMA published the full text of its clearance decision in which it accepted that the so-called “failing firm defence” applied to the merger between Nijjar/Medina. The detailed text of the CMA’s decision suggests that this had many of the ingredients of a being a horror story for the parties, and highlights that the words “caveat emptor” very much apply in the context of cases involving firms facing financial difficulties. The CMA’s decision is entirely in line with its revised Merger Assessment Guidelines, and indeed previous decisions involving allegedly failing firms – as set out in the article I have recently co-authored.

By way of background, the merger had been contemplated since May 2019, and the parties had entered into various cooperation agreements, including rationalising its distribution network through depot closures and entering into associated distribution arrangements with Freshways, outsourcing processing and packaging of milk to Freshways (enabling the closure of Watson’s Dairy), and entering into joint purchasing arrangements for bread and other dairy and grocery products (the joint arrangements). Further, in January 2021, Freshways agreed to provide Medina with funding totalling £8 million. There was then a separate merger agreement dated 20 July 2021, which was conditional on CMA clearance.

However, before the proposed merger was notified to the CMA, it was identified by the CMA’s Mergers Intelligence Unit and an initial enforcement order (IEO) was imposed – despite the merger not having completed, but no doubt mindful of the joint arrangements and the loans that had already been provided. IEOs are intrusive, particularly for failing business, and the CMA also required the appointment of a monitoring trustee to ensure, amongst other things, that the appropriate steps were taken to maintain each of the parties’ businesses as a going concern. The further unwelcome developments were that several customers indicated to the CMA that the merger was likely to lead to price increases – such that it would appear that the failing firm arguments would be key to any clearance decision.

The background to the case also created further evidential hurdles for the parties, namely whether the joint arrangements and loans contributed to the absence of alternative purchasers, and particularly in circumstances where Medina did not market itself or its assets to potential purchasers other than Freshways and did not undertake a formal sales process prior or in parallel to entering into negotiations with Freshways in relation to a merger in early 2019. The CMA’s decision provides the further wealth warning: “In circumstances where exiting businesses fail to run a meaningful sale process, the CMA would typically be unlikely to be able to reach the conclusion that there was no realistic prospect of a less anti-competitive purchaser, particularly within the context of a Phase 1 investigation.”

The clearance decision is then carefully justified by the CMA by referencing in detail the scale of the difficulties faced by Medina, that the joint agreements and loans did not compromise the Medina business or the existence of alternative purchasers, and the CMA conducting its own market test of alternative possible purchasers (as it also did in East Coast Buses/First Scotland East (2017) and Aer Lingus/CityJet (2018)).

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