Recent trends in the Commission's approach to mergers

Torrin Crowther, Partner | Tuesday 24 February 2009

Recent developments have affected how the Commerce Commission will assess clearance applications for mergers and acquisitions. In this update, we summarise recent trends and look at the impacts for businesses seeking Commission clearance.

The "Failing Firm" argument

In certain circumstances, the Commission will clear a merger on the basis the target business is a "failing firm" – even where very high market shares (or sometimes even a monopoly) will result. Historically, the failing firm test has been extremely difficult to meet, given the Commission needs to be "satisfied" the business will fail, there are no alternative buyers and the target's assets will not otherwise constrain the applicant.

While there have only been a handful of successful failing firm applications since the 1990s, the current economic climate suggests that we may see more in the short term. A recent example was the Commission's clearance for Fletcher Building to acquire certain masonry assets from Stevenson Group, on the basis there was no real prospect of a third party acquiring the business as a going concern, or acquiring the assets on closure and using them to compete in the relevant markets. (Bell Gully acted for Stevenson in successfully advancing that failing firm argument.)

Inevitably, such failing firm arguments are led by the target, not the applicant. Firms contemplating a failing firm argument should be prepared to provide the Commission with:

• evidence of previous attempts to restructure;

• details of the sales process undertaken and the nature of the bids received; and

• the firm's assessment of those bids and its liquidation benefits,

as well as associated management reports, board papers and board minutes.

While the failing firm hurdle is relatively high, it is important to realise that it is not necessary to show that there are no alternative bids for the business or assets, but rather that there are no alternative bidders that will pay more than the close-down/liquidation benefits to the firm. Such benefits typically accrue from scrapping the assets, putting the assets to alternative use or selling the assets off-shore.

Commission's approach to testing the parties' arguments

The Commission is increasingly demanding hard, factual evidence before it accepts assertions from the parties. As we've signalled in the past, the Commission is putting increasing weight on internal company documents (such as board papers, management reports, etc.) as part of its assessment of clearance applications, and will almost always request such internal documents during the clearance process. Likewise, such documents can often be presented by the applicant (or the target) in support of their own arguments for clearance.

It's therefore essential that the language used in these internal documents is clear and unambiguous. (Click here to read Bell Gully's Language in Documents guidelines.) An important point in the merger context is to make sure that management papers/presentations do not exaggerate a merger's potential to lead to price or margin increases, where such increases are unlikely.

Revised merger process

The Commission's recent Mergers and Acquisitions Clearance Process Guidelines provide greater transparency by formalising the Commission's approach to assessing clearance applications. The guidelines include a reference to pre-notification discussions and a statement of preliminary issues.

Pre-notification discussions give a potential applicant the opportunity to engage with the Commission on a more informal level before an application is actually filed. While the guidelines formalise this initial step in the clearance process (and are therefore welcomed), at a practical level there is little change because there has always been the scope for such discussions.

The Commission aims to publish a Statement of Preliminary Issues within 15 working days of the application's registration, outlining the potential competition issues raised by the application. The Commission has said the statement's purpose is to improve the transparency of the clearance process and to enable interested parties to make submissions on issues identified by the Commission. While this may be valuable to third parties, we see only very limited benefit to the merging parties themselves. They will already be aware of those issues, and in fact the process of preparing the statement risks diverting the Commission's resources away from the actual investigation.

 

For further information, please contact your usual Bell Gully adviser or:

Phil Taylor
Partner

Torrin Crowther
Partner

Jenny Stevens
Partner

David Blacktop
Senior Associate