Antitrust Aspects of Acquisitions of Financially Distressed Businesses

With increasing frequency, financial restructurings are being implemented via a variety of distressed M&A transactions: Section 363 asset sales, Chapter 11 plans, acquisitions in connection with cross-border insolvency proceedings or out-of-court transactions. This Commentary discusses some of regulatory issues relevant to a distressed investment transaction from a competition and antitrust perspective.
Time-sensitive Implications for [Hart-Scott-Rodino (HSR)] Act-Covered Transactions. The HSR Act requires parties to observe the applicable waiting period prior to consummating the transaction, unless terminated early or extended by the issuance of a Request for Additional Information and Documentary Material, known as a “Second Request.” For most transactions, the initial waiting period is 30 days; for transactions involving targets in bankruptcy or cash tender offers, a shorter 15 day waiting period applies. Upon issuance of a Second Request, the waiting period is suspended for 30 days (or in the case of a cash tender offer or bankrupt target, 10 days) after the parties substantially comply with the request. In order to maximize the value of a business in distress, authorities are cognizant of the fact that a failing firm target may be more time-sensitive than a profitable target.
While there is no express waiting period exemption, in the case of a target in bankruptcy (or a cash tender offer target), the waiting periods are triggered with the submissions of the acquiring person only; in all other transactions, the waiting periods begin only when all notifying parties comply. In an auction of assets requiring approval of a bankruptcy court, the antitrust agencies will accept HSR notifications prior to a sale agreement and from multiple bidders for the same assets.34 These expedited HSR waiting periods acknowledge the concern that the value of entities or assets under bankruptcy may decline quickly due to lack of capital and serious disruptions to the business.
Analyzing Competitive Effects of Acquisitions of Distressed Businesses. Regardless of whether an HSR filing is required, the antitrust agencies may challenge an acquisition of a distressed business under Section 7 of the Clayton Act (Section 7) if the “effect of [the transaction] may be substantially to lessen competition, or to tend to create a monopoly.” The agencies and courts consider relevant to their analysis of the transaction the financial condition of the parties to the extent that such condition impacts the future competitive significance of the parties absent the acquisition. The following discussion addresses how the agencies will factor into their analysis the financial condition of the target.