On April 29, 2020, the Competition Bureau (Bureau) released a statement outlining its approach to analyzing mergers that involve a “failing firm.” The statement was issued following the Bureau’s investigation into scrap metal processor American Iron & Metal Company Inc.’s (AIM) acquisition of Total Metal Recovery Inc. (TMR)
- The Bureau’s statement is a timely roadmap for companies looking to rely on the failing firm defence to complete mergers that the Bureau may conclude would lessen or prevent competition
- Parties will be required to provide extensive information to substantiate a failing firm rationale and the Bureau may even obtain orders under section 11 of the Competition Act to compel parties to produce various records
- To assist with its analysis, the Bureau may retain sophisticated financial experts to review the documentation and data received from parties
- The Bureau initiated an inquiry after AIM and TMR, the two largest scrap metal processors in Quebec, initially notified the Bureau of their proposed deal believing it to be notifiable; the parties made representations that TMR was a failing firm. The Bureau concluded that TMR was a failing firm, whose assets were likely to have exited the market absent the merger.
HOW WILL THE BUREAU ANALYZE ACQUISITIONS OF DISTRESSED FIRMS?
1. Is the firm being acquired actually failing?
The Bureau will use sophisticated and expert analysis to determine if a firm is or is likely to become insolvent, initiate bankruptcy or be petitioned into bankruptcy.
Solvency: To be assessed based on financial information and balance sheet solvency tests
Likelihood of Voluntary or Involuntary Bankruptcy: Financial statement metrics to be applied to statistical bankruptcy prediction models
2. Are there any competitively preferable alternatives to the proposed merger?
The Bureau will assess three factors to determine whether alternatives to the proposed merger exist that are likely to result in a materially greater level of competition.
- Whether the failing firm could survive as a meaningful competitor by retrenching or restructuring
- The Bureau will seek documents demonstrating attempts to restructure the firm to enable it to survive as a meaningful competitor
- Whether the failing firm could continue in the hands of a competitively preferable purchaser
- The Bureau may obtain orders pursuant to section 11 to compel information from merging parties, as well as third parties that expressed interest in purchasing the failing firm
- Whether the liquidation of the failing firm is competitively preferable to the proposed merger
- Due to its disruptive nature, there are very limited circumstances in which the Bureau may determine that liquidation is the preferable outcome
WHAT DO COMPANIES NEED TO DO?
Companies intending to rely on a failing firm rationale will be required to provide extensive documentation and information to the Bureau. Firms should be prepared to provide the Bureau with:
Detailed financial performance indicators, including, among other things, audited financial statements, correspondence with creditors and documents pertaining to plans to initiate bankruptcy proceedings or to seek creditor protection
- Evidence of attempts to narrow the scope of operations, implement cost cutting measures and/or find a strategic partner
- Records demonstrating that a thorough search was conducted for a purchaser, including, names of potential purchasers that were approached, documents prepared to solicit interest and responses to requests for expressions of interest
- Information relating to potential alternate uses for the firm’s assets, and the ability of other firms seeking to compete to obtain such assets
If you have any questions, please do not hesitate to contact your usual Blakes contact or any member of the Blakes Competition, Antitrust & Foreign Investment group.
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