As the pandemic persists, we will likely see more M&A activity involving financially struggling companies. Part of the goal of getting approval from antitrust law enforcement agencies – or courts if necessary – is to show that a business is indeed “failing.”
Even when such transactions involve horizontal mergers in concentrated industries, firms may still be able to gain approval if they can establish three key elements: (1) that the target firm faces the serious likelihood of ” impending default, (2) that the target business cannot reorganize under Chapter 11 of the United States Bankruptcy Code, and (3) that despite conducting good faith shopping, the target does not cannot find an alternative buyer who presents a lesser competitive threat than the proposed buyer.
The theory behind this “failed firm” defense is that in some cases exiting a target from the market would be more detrimental to consumers than allowing a transaction that lessens competition. However, the target must be able to prove that their ability to compete effectively in the future is in serious doubt.
If the target is sitting on valuable assets, antitrust law enforcement agencies would likely be skeptical about the defense if the company could take steps to improve its management or access more capital. But a business that can’t generate new revenue, secure more capital, pay its bills, or honor its debts has a decent chance of establishing the first element of defense, especially when its ability to continue to operate has been discounted. in question. by an independent auditor.
Good Faith Purchases for an Alternative Buyer
In addition to establishing that a Chapter 11 reorganization would not be feasible, the target must also show that they have been running a good faith shop for an alternative buyer.
To assess whether a store was in good faith, enforcement agencies and courts look at whether the target hired an investment banker to conduct a full store and provided potential buyers with sufficient time and information to assess a potential acquisition.
Since the defaulting firm’s defense is essentially a pass for a transaction that would otherwise be viewed as anti-competitive, the target must be willing to accept an offer for less than fair market value, up to value. liquidation of its assets.
A target that enters into an exclusivity agreement with its competitor, or refuses to consider alternative offers above the liquidation value of its asset, is unlikely to establish that it has not been able to find a solution. alternative purchaser.
The last time the defaulter’s defense was argued in federal district court, in the 2017 case United States v EnergySolutions, the target’s failure to run a store in good faith was central to the court’s decision to dismiss the defense and block the merger of two nuclear waste disposal companies.
There, the Target had not only fired its investment banker and failed to provide an alternative potential buyer with access to a data room, but also turned down several offers above the liquidation value. Additionally, when Target finally agreed to accept a much higher offer from their biggest rival, they agreed not to solicit alternative offers from any other party.
A “Flailing Firm” argument could work
Recently, companies have had more success with a related but different argument called the weak competitor argument, or “struggling business”.
The crux of this argument is that the target’s existing market shares overestimate their ability to compete with the buyer in the future. This means that the merger would probably have a smaller impact on competition than the market share statistics would suggest.
Antitrust law enforcement agencies and courts tend to be more persuaded by this argument when other mitigating factors are also present, such as efficiency gains from mergers, remedies offered by parties to merger or other competitors about to enter the market.
Prepare for a thorough exam
Companies seeking to rely on the failing firm defense or the failing firm argument in their merger advocacy should be prepared for scrutiny.
The target should consider hiring outside counselors to tidy up their home. These experts can help the business assess its financial health, assess possible restructuring options, and conduct the auction process if the business decides to sell.
The target should also keep in mind that marketing materials, statements to investors or lenders, and confidential briefings containing overly optimistic statements about the target’s financial health, growth or market position will be difficult to overcome if antitrust law enforcement agencies decide to challenge the transaction.
While defending business defense has become a hot topic, it is neither a panacea for struggling businesses nor a pass for strategic investments in businesses that would previously have been “off limits” to some buyers.
Parties to a deal with potential antitrust issues should critically assess whether they can reach the high bar for establishing these defenses and undertake the necessary preparation before relying on these arguments in their advocacy with law enforcement agencies. antitrust.
This column does not necessarily reflect the opinion of the Bureau of National Affairs, Inc. or its owners.
Julie elmer is a Washington, DC-based partner in Freshfields’ antitrust, competition and business practice, focusing on US antitrust litigation against government and private plaintiffs; cartel investigations and civil lawsuits; and merger and civil conduct investigations before the DOJ, the Federal Trade Commission, and state attorneys general. Previously, she worked in the Technology and Financial Services Section of the Antitrust Division of the Department of Justice, where she was one of the principal litigators for the Department of Justice.
Meredith moms is a senior associate in Antitrust, Competition and Business Practices at Freshfields, based in Washington, DC. foreign investment review by the Committee on Foreign Investment in the United States and Consumer Protection.