Beyond COVID-19: Crisis response or road to recovery?
Crisis response or road to recovery?
A recent decision by the Australian Competition and Consumer Commission ("ACCC") to oppose a proposed sale by voluntary administrators of a group of companies producing chilled ready/takeaway meals is a reminder to insolvency practitioners (e.g., administrators and receivers) as well as creditors and other stakeholders of the limitations imposed by the Australian competition regime in connection with the sale of shares and/or assets of a distressed entity. Indeed, the restraints and hurdles imposed by the competition regime sit awkwardly with an insolvency practitioner's duties and obligations under Australia's insolvency regime. This potential to dampen insolvency sales is not limited to Australian insolvency proceedings since similar antitrust positions are reflected in many jurisdictions around the world.
While the 'failing firm' doctrine is recognised in Australia and a number of international jurisdictions, whether as part of the counterfactual analysis, a defence or an exception to the prohibition on transactions that substantially lessen competition, the stringent requirements imposed by the ACCC have the effect of rendering this doctrine illusory in all but the rarest of cases. Indeed, the evidentiary burden that is required to be satisfied ensures that it only becomes available when enterprise value has materially deteriorated.
Jewel Fine Foods Pty Ltd (In Administration) ("Jewel") is a manufacturer of chilled pre-cooked ready meals that require little preparation by consumers and are sold across Australia through supermarkets, petrol stations, convenience stores and other outlets. Jewel had been placed into voluntary administration in April 2019 due to financial difficulties.
The preferred bidder identified through the voluntary administrators' sale process, Beak & Johnson City Kitchen Pty Ltd ("B&J City"), is a food processing business that sells fresh cut and value added meat products, fresh soups, sauces and prepared meals.
Following an informal review process that commenced in late July 2019, the ACCC announced in September 2019 its opposition to the proposed acquisition of the business of Jewel by B&J City. Following the ACCC's determination, the voluntary administrators remarketed the business for sale, with their sale process ongoing.
While insolvency proceedings foster sales that allow businesses to continue as going-concerns and generate the highest and best return for creditors, the antitrust and competition laws nonetheless continue to apply and may put pressure in the opposite direction.
The Competition and Consumer Act 2010 (Cth) ("Competition Act") governs competition matters in Australia and provides that the objective of the regime is to "enhance the welfare of Australians through the promotion of competition and fair trading and provision for consumer protection".
Section 50 of the Competition Act provides that a person must not acquire the shares or assets of another if that acquisition would have the effect, or likely effect, of substantially lessening competition in any market for goods and services in Australia. The ACCC considers the effects of the transaction by comparing the likely future state of competition if the transaction proceeds to the likely future state of competition if the transaction does not proceed. This is more commonly known as the 'with or without test'. This substantially lessening competition formulation is mirrored in other jurisdictions including the United States, the United Kingdom, the European Union, Hong Kong and Singapore.
Notwithstanding that competition clearance in Australia is not mandatory, there is a material risk that, if clearance is not sought and the ACCC considers that the transaction will substantially lessen competition, the ACCC will seek to block the transaction from proceeding or seek to unwind it post-closing. Further, substantial penalties and fines may be imposed on the corporation and its officers. This potential liability could, in certain circumstances, apply to the insolvency practitioner managing the sale of the business and/or assets where it is operating in the capacity of an officer of the corporation.
Accordingly, the purchase of assets from a company that has been placed into voluntary administration, liquidation or receivership may require ACCC clearance. Either authorisation or an informal process can be utilised. Unlike other jurisdictions, the Australian regime does not contain mandatory reporting of proposed acquisitions if the relevant threshold is met and as such it is a matter of discretion. However, the ACCC may unilaterally commence its own review of a proposed acquisition where it is not notified.
The authorisation process, if successful, provides the applicant with finality and statutory protection from legal action arising from breach of the Competition Act pursuant to any share or business acquisition. This is a statutory 90 day process (which may be extended by agreement with the ACCC). This gives a greater level of certainty over the timeframe for a decision and is a transparent public process.
The informal clearance process does not provide statutory protection, but it does provide comfort to the parties that the ACCC will not take action to seek the transaction from completing. The length of the process is driven by the level of enquiries that the ACCC is required to make in order to vet the transaction. For acquisitions where the ACCC needs to make enquiries of, and seek submissions from, competitors and other market participants, the review process can take three to six months (or longer in particularly complex cases). Accordingly, requiring competition clearance may prevent an insolvency practitioner from achieving a quick sale of a company's assets.
Both the informal and authorisation processes necessarily involve a delay in concluding the proposed transaction. Further, any review of the ACCC's determination requires either proceedings in the Federal Court, or in the case of authorisation review by the Tribunal which will make its own findings of fact and reach its own conclusions, or by judicial review of the decision by the Federal Court on a question of law, that will similarly involve further delay. This is contrary to the truncated timetable provided by the voluntary administration regime and hampers an insolvency practitioner's attempts to both preserve a going-concern business and realise value for creditors through a sale.
The ACCC recognises the 'failing firm' doctrine in its consideration of whether a transaction will substantially lessen competition. Unfortunately, in Australia this doctrine provides extremely limited comfort given the stringent criteria that is applied and effectively ensures that it is only available in the rarest of occasions and in circumstances where attempts to restructure and preserve enterprise value have failed.
The 'failing firm' doctrine is not a statutory defence but rather only a factor to be taken into consideration when conducting the 'with or without test'. It is necessary to show that: (i) the relevant target firm is in imminent danger of failure and is unlikely to be successfully restructured without the merger; (ii) in the absence of the merger, the assets associated with the target firm will leave the industry; and (iii) the likely state of competition with the merger would not be substantially less than the likely state of competition after the target has exited and the target's customers have moved their business to alternative sources of supply.
The current position of the 'failing firm' doctrine in the Australian market is highlighted by the fact that it is not referenced in the Merger Guidelines (notwithstanding that it had appeared in earlier versions). It is applicable in only extremely limited circumstances and the evidentiary burden to satisfy the threshold is incredibly high. Indeed, the ACCC would need to conclude (mere speculation is insufficient) that the insolvent target's business would exit the market absent the transaction and that the target's assets would not otherwise be used productively by competitors other than the acquirer. The high evidentiary threshold to be satisfied, coupled with the delay and cost of obtaining clearance, may result in unnecessary value destruction to all stakeholders – e.g., secured creditors, unsecured creditors, vendors, and employees.
The ACCC opposed the proposed sale of the Jewel business to B&J City on the basis that it would substantially lessen competition in respect of the supply of chilled ready meals with the potential for consumers to face increased prices.
Importantly, the ACCC held that chilled ready meals ought to be separated from other convenience meals such as frozen ready meals and other prepared takeaway food (e.g. pizzas, soups and quiches). While the ACCC acknowledged there are a large number of competitors in ready meals, it determined that Jewel and B&J City operate in a niche market and the transaction would combine the two major players, thereby concentrating manufacturing capacity in one business. The ACCC also determined that "if the proposed acquisition does not proceed, an alternative purchaser is likely to buy Jewel and compete strongly with B&J City Kitchen".
The position adopted by the ACCC in this case is consistent with the approach they have taken historically. There are, however, a limited number of cases where the ACCC has determined not to oppose an acquisition notwithstanding that it was likely to substantially lessen competition on the basis of the 'failing firm' doctrine.
In 2015, the ACCC determined not to oppose a transaction between VIP Steel Packaging Pty Ltd ("VIP") and National Can Industries Pty Ltd ("NCI"), both of which supplied plastic and steel packaging products, stating that "in this case there was clear evidence that the relevant assets would leave the market if VIP Steel's proposed acquisition does not go ahead. In these circumstances, the opportunities for competition in the supply of new steel drums would be the same with or without the proposed acquisition". In so doing, the ACCC appointed their own forensic accountant to examine the financial documentation and confirm the company's imminent demise.
Similarly, in February 2009, the ACCC confirmed they would not oppose the proposed acquisition of Hans Continental Smallgoods by P&M Quality Smallgoods. The ACCC concluded: "unless acquired by Primo, Hans would be likely to cease trading imminently and would be liquidated by the administrator". Hans had been placed into voluntary administration in late 2008 and no alternative bids had been received for the business or the company's assets that "were capable of being finalised prior to the administrator being required to take steps to close the business". The ACCC went on to note that "the ACCC will assess any failing firm argument rigorously and will require clear information to show both that the target is likely to fail without the acquisition, and that this is not a better outcome for competition than an acquisition by a competitor".
The narrow operation of the 'failing firm' doctrine advanced by the ACCC, which mirrors the stance taken by equivalent regulators in certain other jurisdictions, sits awkwardly with the duties and obligations imposed on insolvency practitioners pursuant to the Corporations Act 2001 (Cth) ("Corporations Act") and may inhibit attempts to restructure and preserve enterprise value.
The voluntary administration regime is intended to provide for the business of an insolvent company to be administered for the purposes of maximising the chances of the company, or as much as possible of the business, continuing in existence and thus provide what is usually expected to be a better return for creditors than would have been achieved in an immediate liquidation. Accordingly, voluntary administrators are obliged to maximise the chances of the company, or as much as possible of its business, continuing in existence. In the absence of some other form of capital restructure, a sale of the business on a going-concern basis is often the best avenue to ensure that the business continues for the benefit of all stakeholders, including secured and unsecured creditors and employees.
Further, the voluntary administration regime is intended to be conducted on a truncated timetable so that the future of the company can be determined expeditiously before the loss of enterprise value that may occur as a result of both lengthy and uncertain restructuring proceedings and a liquidation scenario. While extensions can be granted by the Court, and not infrequently are, the potential for delay while the ACCC investigates a proposed acquisition risks the dissipation of value during this holding period. It is this potential for loss of enterprise value that the voluntary administration regime is intended to avoid.
In the Jewel decision, the critical factor relied on by the ACCC to oppose the sale was the fact that other alternative purchasers, albeit at a lower price, had been identified in the sale process. The ACCC proceeded on the assumption that these other parties remained viable alternative purchasers in a further sale process notwithstanding the passage of time while the review was undertaken. In such a scenario, however, there is a real possibility that the previously identified purchasers may not be willing to participate in a further sale process. Further, assuming buyers are still interested, it is possible that the renewed sale process will result in a loss of value and/or discount. Stakeholders, including employees and creditors, may be significantly worse off in such a scenario. For example, any number of sale terms may be negotiated downward (including pricing at significantly lower levels), retention of jobs for the insolvent target's employees may be downgraded, and, of course, an alternative acquisition may not close at all, thereby causing the company to fall into liquidation. This is to be contrasted with the material efficiency gains and social benefits to be achieved by proceeding with the original acquisition. For example, continuity of employment and the redeployment of capital in the economy.
In the context of a receivership, section 420A of the Corporations Act provides that receivers are obliged to either sell the assets at not less than market value or the best price that is reasonably obtainable. It is readily apparent that this obligation is contradicted by the obligations under the Competition Act. Accordingly, receivers are required to balance two potentially competing statutory obligations under the threat of personal liability for breach of either.
Further, receivers, liquidators and voluntary administrators, as officers of a company, will be required to act in the best interests of the company, which in an insolvency context will focus on the interests of creditors but will also include employees of the entity. This duty is also supportive of an obligation to obtain the best possible price for the sale and the continuation of the business as a going-concern.
While it is hoped that the divergences between the two regimes will be examined by the legislature in the future, reform in this area is unlikely in the short term and the Jewel decision indicates that insolvency practitioners should consider the likely competitive implication of a sale early in the process to ensure that any competition clearance process does not inhibit a timely completion. When conducting a sale process a practitioner is obliged to act in the best interests of the company, in particular its creditors in an insolvency context. The competition regime has the potential to temper this where it is not given appropriate weight in determining the most appropriate purchaser, potentially adversely impacting creditors, employees and/or the chances of the business continuing in existence.
Key takeaways are:
On May 4, the decree amending the Mexican Hydrocarbons Law was published in the Federal Official Gazette.
© Norton Rose Fulbright LLP 2020