Competition Law

05 Jun 2009

Fletcher and Simpson Grierson obtain Commerce Commission Clearance based on "failing firm" argument

Simpson Grierson recently assisted Fletcher Building Limited with its application to the Commerce Commission seeking clearance to acquire Stevenson Group's masonry businesses. On 13 February 2009 the Commission granted clearance to Fletcher, permitting the acquisition of the Stevenson businesses. Written reasons were issued after substantial delay on 3 April 2009.

This Competition Law FYI seeks to provide some insight into the process, the submissions and how the Commission is likely to approach clearance applications in the future where the target is said to be a "failing firm". This is of particular interest in the current economic climate.   

The Commission granted clearance based solely on a "failing firm" argument; that is, there was only one relevant counterfactual - imminent closure of the masonry businesses and, to the extent relevant assets had competitive significance, their exit from the market. In these circumstances, the Commission found there would be no difference in the level of competition in the market whether the sale to Fletcher proceeded or not.

Advancing a case for clearance based on a "failing firm" argument is not entirely novel. As with much of our competition law, the concept originated in the United States. The "defence" as it is called there immunises mergers that otherwise would appear to be problematic having regard to concentration ratios and other standard analysis.

We did not seek clearance on any other basis. However, this was not an admission that there were no other grounds upon which to seek clearance if the failing firm argument did not succeed. It simply reflected the need for a focussed and urgent review by the Commission and our confidence in the submission.

To determine that there were no other more pro-competitive counterfactuals the Commission had to be satisfied that:

1. Stevenson would close the businesses if they could not be sold;
2. no other person would acquire the  businesses at a price and within a time frame at which it would be rational for Stevenson to sell; and
3. the assets of the closed businesses would exit the market or were not of competitive significance.

This application profiled for us a number of subtleties around these necessary conclusions. For example:

• It would not have been enough for the Commission to determine that any of these outcomes was "probable". They had to establish that there was no real and substantial prospect of any other outcomes.
• It is possible that some other potential purchasers could be seen as adding nothing to the competitive dynamics of the markets but, in the context of a 2 to 1 merger, the Commission would have been extremely unlikely to have discounted any potential purchaser. It is almost without doubt that in a 2 to 1 merger context, the Commission would likely conclude that any duopoly market has to be better than a monopoly, however weak the second participant may be.
• Stevenson was not obliged to continue to run the businesses regardless of losses, just to maintain a degree of competition in the market. It was entitled at any time simply to close down the businesses. Nor was it required to give its businesses away or to pay someone to take them. Rationally, Stevenson was entitled to assess the financial benefits available to it from closure  and to decline to sell for a lesser sum.
• The Commission was clearly interested in the integrity of Stevenson's sales process: had Stevenson taken all reasonably steps to flush out all interested persons and to optimise its prospects of sale?  Interestingly, it is not clear that this is a legal necessity. In all probability the Commission must accept a seller's sales efforts as they are. For better or for worse those efforts are simply part of the counter-factual. By all means, Stevenson could not ignore approaches, but it was under no obligation to run an exemplary sales process.

Many parties came to the Commission's attention as potential purchasers. Some of these came to light because they had approached Stevenson. Others were "uncovered" by the Commission and, in this respect, it would be fair to say that the Commission was critical of the manner in which Stevenson had sought to test the market. However, in the final analysis, the Commission was satisfied that there was no sufficiently serious prospect that any potential purchaser would meet Stevenson's legitimate price expectations.

A Practical Caution

As noted, the Commission was critical of the manner in which Stevenson had tested the market. As a competing bidder for the assets, Fletcher was unable to assist in this respect. Although Fletcher was the applicant, uniquely, it had to accept that its application stood to fail if the Commission could not become satisfied as to the absence of serious buyers and that it had no control over this. Most other applicants for clearance in a failing firm context could find themselves in a similar position.

Some publicity was given to Stevenson's conduct around the time of the application. For example:

• Stevenson made it very clear through the press that, if clearance was denied, 60 additional jobs would be lost. Stevenson publicly stated that there were only two options; closure or sale to Fletcher.
• Stevenson had reduced manufacturing in Drury with a view to manufacturing no more stock than was needed. Stevenson had also stopped ordering replacement stock for resold products at its trade yards.
• Stevenson had taken irreversible steps to close yards and showrooms that were not proposed to be sold to Fletcher and had announced those steps.

Such actions may be seen to have removed any potential for any third party to acquire the totality of Stevenson's masonry business and the publicity certainly placed the Commission's decision in the political spotlight. However, the actions were perfectly lawful and, indeed, understandable. Stevenson had long since determined that it had only two options and it was perfectly entitled to act on that basis, even though the Commerce Commission might have determined that there was a third available outcome. The closures and wind downs simply had to be factored into the factual analysis and, as a matter of law, the Commission had to give little (in fact, no) weight to employment considerations. Any application that sought to rely upon such considerations would need to be an application for authorisation (which permits public benefits to be taken into account).

In the current economic climate, it is said to be likely that the Commission will see more applications based on "failing firm" arguments. We do not dismiss this possibility but suspect that the rigours of the Commission's processes and the length of the process timetable will dissuade many from this course.

Authors

Anne Callinan

Partner - Dispute Resolution

DDI: +64 9 977 5031

Mobile: +64 21 403 592

Email:

View Profile

Shelley Cave

Partner - Corporate & Commercial

DDI: +64 9 977 5260

Mobile: +64 21 660 090

Email:

View Profile

James Craig

Partner - Dispute Resolution

DDI: +64 9 977 5125

Mobile: +64 21 497 713

Email:

View Profile

Peter Hinton

Partner - Corporate & Commercial

DDI: +64 9 977 5056

Mobile: +64 21 446 866

Email:

View Profile

Elisabeth Welson

Partner - Corporate & Commercial

DDI: +64 4 924 3400

Mobile: +64 29 924 3400

Email:

View Profile