The current difficult trading conditions caused by COVID-19 restrictions will inevitably lead to insolvencies and the forced sale of assets. This is unfortunate for the business affected but also creates opportunities for competitors to acquire distressed assets.
Section 50 of the Competition and Consumer Act 2010 (Cth) makes it unlawful for a person to acquire shares or assets where that acquisition is likely to cause a substantial lessening of competition in an Australian market.
In determining the competitive impact of a merger, it is necessary to compare the likely future state of competition in the relevant market if the merger proceeds against that future state if the merger does not proceed, in each case looking ahead one to two years. Where a merger leads to greater concentration in the market or the removal of a vigorous competitor, the "with and without" comparison may show a substantial lessening of competition. However, where, due to insolvency, the target company or the owner of the assets is likely to exit the market in the foreseeable future (a so-called "failing firm"), the likely level of competition if the merger does not proceed may be less than it is at the date of the merger, which may make an anti-competitive impact less likely.
In order to rely on the so-called "failing company argument", it usually must be shown that the relevant firm is in imminent danger of failure and is unlikely to be successfully restructured without the merger and/or that the relevant assets are likely to leave the industry without the merger.
Ultimately, the likelihood of market exit due to insolvency is only one factor in undertaking section 50 analysis, but in the current environment it may create opportunities for acquisitions which would otherwise be too risky because of potential anti-competitive impact.
Our team is actively monitoring and considering the implications of legal and regulatory developments in response to the COVID-19 pandemic. You can find our COVID-19 collection here.
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