25 August 2020
The Commerce Commission has put out an article that targets practitioners involved in distressed mergers and acquisitions (M&A). The Commerce Commission has put out an article that targets practitioners involved in distressed mergers and acquisitions (M&A). They are attempting to get out ahead of a potential increase in M&A involving so-called 'failing firms' once the COVID-19 wage subsidy is discontinued. The following article is written by Katie Rusbatch, Head of Competition, Commerce Commission and has been shared with RITANZ for the benefit of our members. Mergers and Acquisitions involving distressed firms The COVID-19 pandemic has had a significant impact on businesses, and its effects are expected to be felt for years to come. As businesses continue to navigate through these challenging times, acquisitions of firms[1] in financial difficulty may become more common. These acquisitions involving so-called 'failing firms' can be beneficial in terms of saving businesses and jobs. However, in certain circumstances such acquisitions can give rise to competition issues, even where the current viability of one or both merger parties is compromised. In this article, we set out the Commission's approach to assessing acquisitions involving firms in financial or other forms of distress. Those administering or advising businesses under financial stress should be alive to the possibility that these types of acquisitions can still give rise to competition issues in certain circumstances under section 47 of the Commerce Act.[2] Such issues can arise if a purchaser is a significant competitor or potential competitor, customer or supplier to the business being sold. Administrators and advisers should also be alert to the possibility that a competitor, customer or supplier may be willing to pay a higher price than other potential purchasers to obtain, or enhance, market power. Whether a transaction is likely to substantially lessen competition under section 47 involves a comparison between the future state of competition 'with' the transaction (the 'factual') and the future state of competition 'without' the transaction (the 'counterfactual'). Often the appropriate counterfactual scenario in an acquisition will be the status quo; that is, a world where competition would continue to play out in the same way without the merger. However, where one or both merger parties are in financial distress, the likely state of competition without a transaction may look very different from the status quo. For example, if a transaction does not proceed, it is possible that a firm and its assets will exit a market altogether. In such circumstances, the Commission may grant clearance to an otherwise anticompetitive acquisition on the basis that it involves a 'failing firm', because there is unlikely to be a material difference in competition in a market with and without the merger. However, if it is likely a firm or its assets would be acquired by an alternative purchaser, or it could recover (possibly after a period under administration), then the merger will be assessed against a future involving an alternative acquisition, or the status quo. How the Commission approaches failing firm arguments When assessing a failing firm argument, the Commission will consider two key questions:
Has the firm ceased operations or will it likely cease operations in the near future?
What is likely to happen to the assets of the firm without the acquisition? Is it likely the assets will exit the market or is there an alternative buyer?
evidence that the firm has been liquidated or placed into administration;
financial statements, management accounts, budgets, and forecasts;
internal documents relating to the viability of the firm or assets;
any plans to restructure or improve performance;
independent appraisals or valuations;
evidence of genuine efforts to sell the firm or assets; and
any other offers for the firm or assets, including the identity of other likely purchasers and the timeframe under which an alternative transaction would likely take place.