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 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. 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?
In seeking to answer these questions, we look to supporting evidence, including:
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.
The Commission will not accept a failing firm argument without close scrutiny. That said, we recognise that COVID-19 may impact the ability of some firms to produce the level of supporting evidence that might otherwise have been possible. We will consider each acquisition on a case-by-case basis and we encourage parties to engage with the Commission as early as possible when considering a potential acquisition.
In assessing failing firm arguments and acquisitions in general, we will take into account the impact of COVID-19 on the financial positions of companies. In doing this, however, we will have regard as to whether the relevant COVID-19 effects are transient, or more permanent in nature.
Guidance for advisors involved in distressed M&A
New Zealand has a voluntary clearance regime for anticipated, but not completed, acquisitions. If the Commission grants clearance to an acquisition, this gives the parties legal immunity for the transaction, so long as it is completed within 12 months. Where clearance is not sought, and the Commission considers an acquisition would be likely to breach section 47, the Commission can apply to the court for an injunction, or divestiture and/or penalties of up to $5 million for a body corporate and $500,000 for an individual.
If you are involved in a potential acquisition and are unsure about how it might affect competition, you should seek advice from a lawyer experienced in competition law. The Commission can give guidance in such circumstances, but it does not give legal advice.
More information about the Commission’s role in relation to business acquisitions, including our approach to assessing failing firm arguments, is available in our Mergers and Acquisitions Guidelines, which are available on our website.
If there is sufficient interest in this issue, the Commission is open to conducting a seminar or webinar discussing its process in relation to failing firms. Please contact the Commission on firstname.lastname@example.org if you would find this useful.
This article does not constitute legal advice and should not be relied upon as such.
 Unless otherwise specified, references to ‘firms’ in this article include parts of firms such as business units, divisions and assets.
2 Section 47 of the Commerce Act prohibits acquisitions of shares or assets of a business that result, or are likely to result, in a substantial lessening of competition in a New Zealand market. It covers mergers where they involve such acquisitions by one or both of the merger parties (as virtually all mergers do).
Authored by Katie Rusbatch, Head of Competition, Commerce Commission