Six key takeaways for COVID-19 Restructurings and Antitrust

The COVID-19 crisis has led, and will continue to lead, to enterprise-threatening financial difficulties for many firms in many industries. In a worst-case scenario, firms might ultimately leave the market, which could result in a long-term loss of competition. It is therefore important to restructure financially distressed firms and to avoid their market exit. This can require contributions from a number of stakeholders (including shareholders, suppliers, creditors, and customers), and the allocation can be difficult. To allow for a fair and objectively balanced allocation of contributions, discussions need to go into considerable detail, which can, in turn, implicate antitrust issues since creditors, suppliers or customers, are typically competitors (within their stakeholder group). These groups therefore require guidance on what details they are allowed to exchange in their common goal to restructure a financially distressed firm.

On 9 June 2020, the head of the German Federal Cartel Office’s (FCO) 4th decision division — responsible for the automotive industry — sent a comfort letter to the German Association of the Automotive Industry (VDA).

The comfort letter responds to measures the VDA presented to the FCO, with a view to overcoming certain challenges caused by the COVID-19 pandemic in the automotive industry. Following a review of the suggested measures and discussions with the VDA and the European Commission, the FCO decided to refrain from further scrutiny. (Read the press release here.)

The measures now endorsed by the comfort letter include (a) a model process for individual restructurings and (b) conditions for coordinated production restarts. (Further information on the FCO’s Comfort Letter and its guidelines can be found here.)

Six key takeaways

1. The FCO deserves a lot of recognition for its pragmatic and helpful dialogue with many companies during the COVID-19 crisis. The FCO’s openness to discuss companies’ concerns and also provide guidance to them benefits all of the parties involved; the FCO can develop a better understanding of industry specific issues.
2. The FCO’s comfort letter on COVID-19 related restructurings is not only helpful for the automotive industry. While the automotive industry has many suppliers that can be considered systemically relevant, the comfort letter’s guidance is not limited to systemically relevant companies and its logic can be applied to other industries.
3. While the comfort letter is expressly limited to financially distressed companies in Germany, there is no reason why its logic should not be applied in other EU member states. Indeed, the FCO has discussed the adoption of the comfort letter with the European Commission. Moreover, in the context of the reform of its horizontal guidelines, the European Commission also considers information exchange issues in restructuring processes. Now that the FCO has provided a first milestone in the form of a comfort letter for Germany, it would be both important and beneficial if the European Commission provided guidance on the topic as well. Such guidance should be general and not limited to the COVID-19 crisis.
4. The FCO’s guidance on information exchanges during restructurings essentially targets two elements:
   1. Control over who is involved. The FCO’s guidance that expressly allows representatives of the involved stakeholders to be members of the clean team is positive, as is the (necessary) reporting by these clean team members within their company’s hierarchy. However, the one-year exclusion from sourcing negotiations with the restructured company seems too broad, both in terms of duration and product scope. The “Chinese Walls” provision and the requirement not to use the information with regard to other suppliers make sense.
   2. Control over what is exchanged. The FCO relies on standard measures to prevent a restriction of competition, especially the “need” requirement and the aggregation of competitively sensitive information. By expressly mentioning parts prices and supply volumes towards customer stakeholders and interest rates, and factoring costs towards creditor stakeholders, the FCO clearly considers these types of information to be particularly sensitive.
5. For more general guidance, it appears possible to generally work with more flexible concepts. In addition, the more restrictive the “who is involved” element is handled in a concrete case, the more flexible the “what is exchanged” element can be handled. Furthermore, while the VDA members likely focused on customer stakeholders in their discussions with the FCO, more general guidance will likely also have to focus on the supplier and creditor stakeholder. Specific needs of these stakeholder groups should be reflected in more general guidance, too.
6. Ultimately, the comfort letter provides good comfort to all stakeholders that their restructuring discussions, if conducted along the lines of the comfort letter, will not expose them to significant risks under antitrust law in Germany.