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09 April 2020
Like other countries across the globe, Israel is dealing with the COVID-19 pandemic, which is, among other things, creating unprecedented and constantly evolving business-related challenges. The Israeli Competition Authority (ICA) has published several clarifications regarding the application of the Economic Competition Law 5748-1988 in light of the pandemic.
It is a core principle of competition law that a state of emergency or business distress does not necessarily exempt a cooperation arrangement between competitors. However, the current state of emergency may affect the way the law is applied. The ICA recognises that consumers are also currently facing challenges and that this is by no means a time to harm or exploit consumers. Therefore, while it adopts a somewhat pragmatic approach due to the challenges faced by businesses, the ICA warns that it will not hesitate to take enforcement measures against exploitative cooperation arrangements and unilateral practices, which may harm competition. Indeed, the ICA has made public statements that it is closely monitoring the food and toiletries industries to prevent players from abusing the consumer high dependency on frequent supply. It was also published that the ICA warned retailers that their joint organisations regarding their commercial arrangements with retail landlords may be deemed a restrictive arrangement.
The ICA's clarifications refer to three main issues:
The ICA clarifies that collaborations between competitors that would allow businesses to keep their activities ongoing during this time may be beneficial to ensure the existence of effective competition in the long run. The main legal instrument that enables collaborations between competitors is the Antitrust Rules (Block Exemption for Joint Ventures) 5766-2006, which is a self-assessment-based block exemption. Subject to certain circumstances, this block exemption permits collaboration between competitors in the manufacturing, purchasing and marketing of goods. One such condition is that the main purpose of the arrangement is not "to decrease or prevent competition" and its restrictions are "necessary for the fulfillment of its purpose" (ie, that the agreement is not 'naked'). Another requirement is that the arrangement neither limits nor substantially harms competition in a substantial part of a market.
The COVID-19 crisis may influence legal analysis both with respect to the legitimacy of cooperation and the effect on competition assessment. The competition commissioner has clarified that if an arrangement is necessary for maintaining business activity during this challenging period, it would not be considered naked. This may be the case, for instance, when a competitor whose activity is disrupted by crisis-related circumstances seeks backup, or would like to source equipment or input from competitors.
Parties must also always examine the potential effect of an arrangement on competition in accordance with regular methodologies. If cooperation is vital to allow both competitors to keep their ongoing businesses running, an arrangement which under ordinary circumstances may have been deemed to harm competition may now be viewed as pro-competitive.
Under Israeli competition law, it is generally strictly prohibited to execute a merger, in whole or in part, while awaiting the competition commissioner's clearance thereof. In special circumstances, such as one of the merging parties suffering irreversible harm during the waiting period, the ICA has been known to find interim solutions and expedite reviews. Occasionally, this has happened when the acquired company was under bankruptcy proceedings. The ICA clarified that a similar policy will be adopted in relevant cases and invites parties to approach it if they face such threats.
Owing to the exceptional state of the economy, the ICA will endeavour to find interim solutions to difficulties that arise during merger clearances until the competition commissioner has reached a decision on said mergers. Presumably, such measures may include expediting the review procedure and allowing certain actions that would normally be viewed as gun-jumping, including (for example) the transfer of funds to the seller and allowing the acquirer to participate in certain discussions at the acquired business, pertaining to the steps taken to respond to the current crisis, which may have implications in future.
However, importantly, this does not mean that the parties to a merger may cut corners. The ICA has no intention of clearing merger transactions that could harm competition. This special treatment is reserved for cases where regulation may cause an impediment, which will be decisive to mergers in light of the COVID-19 situation. It is estimated that the ICA will apply the more lenient approach mainly if the following accumulative conditions are met:
The Promotion of Competition in the Food Sector Law 5774-2014 (the Food Law) and the Regulations of Promotion of Competition in the Food Sector Law (Reports of Major Suppliers and Major Retailers) 5774-2014 stipulate that "major suppliers" and "major retailers", as defined in the Food Law, must submit an annual report to the competition commissioner. The 2020 annual report was due to be submitted by 31 March 2020; however, the ICA has extended the deadline to submit annual reports to 30 April 2020.
As the economic situation becomes more and more challenging, new examples of creative solutions being implemented daily. Some solutions are carried out independently by the parties to an arrangement based on self-assessment, while others are carried out with the ICA's engagement. For example, to accelerate the review process, the ICA recently cleared a merger within one day of the parties informing it of their difficulties maintaining the gun-jumping rules due to the COVID-19 crisis.
In light of the COVID-19 situation, the government is allowing employers to offer their employees temporary unpaid leave in order for said employees to receive unemployment payments from the state. Employers wanting to do so must declare that they intend to rehire these employees after the end of the current economic instability. However, in a merger transaction, the employees would eventually be transferred to the buyer, thus the current employer (ie, the seller) cannot declare that they will rehire them.
The current regulation regarding unemployment payments during unpaid leave did not address such a merger situation. To safeguard employees' ability to receive unemployment payments, the ICA has decided to quickly finalise its review, so as to facilitate the immediate transfer of employees to acquirers. In doing so, the ICA has enabled parties to safeguard their employees' ability to enjoy state benefits.
In these challenging times, it is important that regulators are demonstrating flexibility to minimise any economic damage to businesses. At the same time, it is vital not to subject customers to the perils of anti-competitive behaviour. The ICA's guidance is a step in the right direction, but more concrete and comprehensive guidance is needed. The ICA's clarifications provide only a glimpse into the application of local competition rules during the COVID-19 pandemic, but parties should carefully self-assess whether an intended action or contemplated transaction are indeed permissible. It is advisable for parties foreseeing that they may need to collaborate with competitors, or otherwise engage in arrangements which may be deemed to be restrictive, to prepare the legal contingencies beforehand.
For further information on this topic please contact Ayal HaCohen or Roi Krause at Tadmor Levy & Co by telephone (+972 3 684 6000) or email (firstname.lastname@example.org or email@example.com). The Tadmor Levy & Co website can be accessed at www.tadmor.com.
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