Crisis cartels and state aid as a solution to the corona pandemic

The corona pandemic that causes the COVID-19 illness has the entire world in its grip. Numerous sectors are already struggling with the financial adversity resulting from the mandatory corona measures. Clear call have been made for lenient application of the competition rules. Fortunately, competition law already allows cooperation among competitors during a crisis. There is also scope for accelerated state aid to failing companies. We will explain how companies can (i) form crisis cartels; and (ii) request and receive state aid.

Crisis cartels: a solution in the interest of businesses and consumers?

Every crisis has its own characteristics. What makes the corona crisis special is the worldwide and often acute collapse of consumer demand in certain sectors, which may continue for a long time. It is therefore a given that the corona pandemic in particular is leading to foreseeable overcapacity, specific examples of which already abound. Business owners in a wide range of sectors are confronted with the question of what to do, how to proceed, and how long this situation will last. One means for businesses of coping with recurring expenses is to limit the supply in consultation with competitors or to otherwise work together with them. But ACM and the European Commission (the “Commission”) surely prohibit agreements with competitors? Or are they permitted during a crisis? Crisis cartels are temporary agreements or contracts between businesses aimed at, for instance, reducing overcapacity caused by exogenous factors.

Competition during an explosive and acute crisis, such as that caused by the corona pandemic, may mean that only companies with the deepest pockets survive. They are not necessarily also the most innovative or efficient companies on the market. Be that as it may, it is often not beneficial to competition in the medium to long term if suddenly much fewer market parties remain due to competition during a crisis. Consumers may then be faced with higher prices or less freedom of choice, or with a reduction in the supply or in the quality of products or services. ACM considers that an undesirable situation both during and after the crisis. Temporary crisis cartels can prevent that undesirable scenario and may therefore in fact be beneficial to the competition among companies and to consumers and consumer prosperity in the medium to long term. Crisis cartels may, for instance, allow smaller, innovative market parties with no or fewer financial reserves to keep their head above water until the crisis abates. In sum, it is conceivable that temporary crisis cartels may help healthy companies in ailing sectors to survive a crisis. Those companies may thereby save jobs and fully resume their competition after the crisis, because a sufficient number of competitors will then have remained active on the market thanks to the crisis cartel.

How to form a crisis cartel without penalties being imposed by competition authorities

There have been positive examples of crisis cartels in the past. On several occasions ACM and the Commission have expressed their awareness of the fact that temporary crisis cartels may be a lawful means of helping ailing sectors; see here and here. But ACM and the Commission have also been known to take a critical view of crisis cartels in the past (e.g. in the case of seasonal or cyclical overcapacity); see for instance here and here. When planning a crisis cartel, companies must therefore move fast and be well-prepared. Despite being restrictions by object, agreements among competitors to temporarily limit the supply are not prohibited by definition, because competition law provides for an exception from the cartel prohibition. If, briefly stated, the advantages of a temporary crisis cartel outweigh the disadvantages, there are grounds for an exemption from the cartel prohibition. Answering the question whether all the conditions for exemption from the cartel prohibition are actually met in a proposed crisis cartel requires a legal and economic analysis of the agreements that the parties in question wish to make. In the event of doubt, it may be advisable to consult with ACM or the Commission before such agreements are made.

It is a positive development that Martijn Snoep, chairman of the board at ACM, has already announced that ACM will apply the competition rules in a more lenient manner during the corona crisis. Supermarkets, for instance, are allowed to inform each other about their stocks (exchange of sensitive competitive information, which is usually prohibited outside a crisis). Medicine wholesalers may also keep each other informed of the number of products that they sell. ACM has not yet been very explicit about the possibilities of forming crisis cartels, but Martijn Snoep has already rightly noted: “Also in the long term, it is by no means beneficial to competition if a large number of companies now suddenly go bankrupt”. That is precisely what a temporary crisis cartel can prevent. The Norwegian government already spoke in favour of a crisis cartel in the seriously afflicted aviation sector shortly after the outbreak of the corona pandemic. We expect that more examples will follow. It is important that companies rapidly identify how the proposed crisis cartel may offer a solution to overcapacity in a specific situation, since crisis cartels are permitted only on certain conditions. The mere existence of a crisis situation does not suffice as a justification. It is advisable to consult a specialised lawyer or to contact ACM or the Commission before forming a crisis cartel. In light of the exceptional circumstances, the competition authorities are likely to lend a willing ear and will be willing to give their opinion.

Relaxation of Commission’s state aid rules

Massive appeals are currently being made to governments to provide financial or other support to hard-pressed companies. And national governments, including that of the Netherlands, are complying with those requests. The Commission has also announced that it will offer support and will accommodate measures taken by national governments wherever possible, also by flexibly applying the state aid rules.

The Commission’s measures that are relevant from a state aid perspective are set out in the temporary framework. The Commission introduced a similar temporary legal framework for state aid at the time of the economic crisis in 2008. By means of the current measures, the Commission wishes to provide Member States with specific tools under Article 107(3)(b) of the TFEU to deal with serious economic disruptions. Those measures supplement rather than replace the current possibilities to provide state aid. The Commission is offering Member States the following possibilities:

  1. Introducing schemes to award a company €800,000 to meet urgent liquidity requirements. That may be done in the form of a direct subsidy, advance payment or tax break.
  2. Offering guarantees to banks regarding loans taken out by companies, to ensure that banks continue to grant loans to companies that need them.
  3. Offering subsidised interest rates for loans, thereby allowing companies to take out favourable loans to cover their operating capital and investment needs.
  4. The Commission regards temporary state aid for the bank sector as direct aid to the actual economy rather than as aid to the banks themselves.
  5. Offering short-term export credit insurance to exporting companies.

It is also good to see the Commission act with great expedition with regard to the reporting regime that applies to state aid. It approved, for instance, a €12 million selective compensation scheme to Danish event organisations within 24 hours after it was reported. It usually takes the Commission two months to do so. The Commission has also promised to address other reports of state aid within a very short period during the corona pandemic.

Update 23 March: The ECN has announced in a joint statement that it will take the effects of the coronavirus into account in the application of competition law. The ECN is a cooperation in which the competition authorities of the Member States and the European Commission are participating. For the joint statement, see here.

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