'Failing firm' guidelines
The Commerce Commission has released guidelines on how applications for mergers and acquisitions involving the ‘failing firm’ argument will be treated.
The guidelines explain how the commission will assess claims that the target firm (or division of a firm) is failing, as well as outlining the types of supporting evidence that may be required.
These guidelines supplement the commission’s Mergers and Acquisitions Guidelines.
The rationale for accepting failing firm claims is that any harm to competition would result even without the acquisition, because the target firm would be forced to cease operating in the near future and its assets would leave the market. The circumstances of claims that a firm is failing vary and each case is assessed on its facts.
"When presented with an application that uses the failing firm argument, the commission will first examine whether the facts support the claim that the target firm is failing," Commerce Commission Chair Dr Mark Berry said. "The commission will then examine the possibility that a credible third party could acquire the firm or its assets without this resulting in a substantial lessening of competition.
"In some situations which involve a claimed failing firm, the need for a clearance decision is urgent," he said. "The commission can only act quickly if the parties provide the necessary information promptly. Publishing these guidelines will provide clarity about the information the commission requires."
Draft guidelines were released for public consultation in July and some suggestions made as a result of the consultation process are reflected in the final guidelines.
The guidelines are available on the commission’s website www.comcom.govt.nz under Business Competition/Mergers and Acquisitions.
Background
Section 47 of the Commerce Act 1986 prohibits the acquisition of a business or shares if this would, or would be likely to, substantially lessen competition in a market. Applications may be made under s66 of the Commerce Act for clearance of proposed acquisitions. The commission will grant clearance if it is satisfied that the acquisition will not have, or would not be likely to have, the effect of substantially lessening competition.
Since the Commerce Act came into effect, the commission has considered a number of clearance applications where a failing firm claim was made. In some of these cases, the commission found that the claim was supported by the facts and clearance was given. In some other cases, the claim was not found to be valid.
The commission has not previously issued failing firm guidelines, although the commission’s Mergers and Acquisitions Guidelines issued in January 2004 contain a short section on failing firms. The Failing Firms Guidelines do not introduce any change in the commission’s existing approach to analysing these claims.
LawTalk 742, 30 November 2009