The failing company defense is accepted in the analysis of economic concentrations

1.      The new decision

By Resolutions No 340/2003 and No 32/2003, the National Commission for the Defense of Competition and the Secretary for the Defense of Competition, Deregulation and Defense of Consumer (together hereinafter the “Antitrust Tribunal”) rejected a transaction where one of the cable TV suppliers of the city of Venado Tuerto, Santa Fe, was acquiring the assets of the other two cable TV suppliers from their bankruptcy proceedings.

Although the resolution rejected the transaction under approval, it introduced the world-wide recognized “failing company defense” as a valid defense that may be requested to obtain the approval of certain acquisitions in the event that the target company has the risk of failing if the acquisition does not take place. The use of this defense is worth bearing in mind since it may be used and applied in future transactions where the target company may disappear if the transaction fails.

2.      The transaction

The city of Venado Tuerto, Province of Santa Fe, had three suppliers of cable TV. For reasons not mentioned in the Antitrust Tribunal’s decision, two of them were declared bankrupt and, pursuant to the terms of the Bankruptcy Law, their trustee started to dispose of the assets of the bankrupt companies in order to settle all credits. In this specific case, the third cable TV supplier of the city of Venado Tuerto offered the best bidding offer to acquire the assets under the terms of the public bidding called by the trustee.

Both the acquiring company and the trustee of the sellers’ bankruptcy proceedings requested the approval of the transaction to the Antitrust Tribunal. Sections 6 and 8 of the Antitrust Law No 25,156 (the “Antitrust Law”) state that this type of acquisitions must be previously cleared with the Antitrust Tribunal if the volume of business of the acquiring company and the assets being acquired are higher than 200 million Argentine Pesos. The trustee of the bankruptcy proceedings has the obligation to obtain prior clearance from the Antitrust Tribunal if, in order to dispose of the bankrupt companies’ assets, it has to execute a transaction covered under the terms of the Antitrust Law.

3.      Competitive effects on the relevant market

The Antitrust Tribunal made an analysis of the transaction according to the terms of the Guidelines for the Control of Economic Concentrations, published by Resolution No 164/2001 of the Secretary for the Defense of Competition, Deregulation and Defense of Consumer. According to these Guidelines, the Antitrust Tribunal must evaluate: (i) the relevant market by assessing the relevant product and the substitute product; (ii) the share market participation; (iii) the level of market concentration; (iv) the barriers of entry to the relevant market and (v) the efficiency gains of the transaction. Once the relevant market has been defined, the share market participation and the calculation of the Herfindahl-Hirschmann Index will show the level of market participation. If the level of concentration is low, the Antitrust Tribunal will approve the transaction. If the market participation is high and shows an important market concentration, the Antitrust Tribunal will request the parties that they demonstrate the efficiency gains of the transaction.

In the case under analysis, the Antitrust Tribunal decided that the relevant market of the transaction analyzed was the cable TV suppliers market in the city of Venado Tuerto and its surroundings. As to the market concentration, the acquiring company would be obtaining 100% of the relevant market due to the disappearance of the other two competitors. The calculation of the HHI index showed, in the Antitrust Tribunal’s opinion, that the acquiring company would be obtaining a position of monopoly in the relevant market.

As to barriers of entry to the relevant market, the Antitrust Tribunal concluded that any competitors that would like to enter the relevant market would end up having complicated barriers of entry due to legal and commercial restrictions. Obtaining a license to supply cable TV services may take up to a year and the provision of cable TV services implies contracting wiring services or optical fiber services that may also take a long time. There is also a barrier of entry due to the vertical and horizontal relations that the transaction contains: the indirect controller of the acquiring company is the controlling shareholder of other companies that commercialize various TV channels, including the company that commercializes the channel that has the right to broadcast the Argentine soccer championship. Lastly, the Antitrust Tribunal pointed out that the indirect controlling shareholder of the acquiring company also indirectly controls one of the two most important cable TV companies in Argentina.

Finally, the Antitrust Tribunal pointed out that the parties were not able to demonstrate the efficiency gains that the transaction would produce, rather, the cable TV market structure for the city of Venado Tuerto was an asset (a “competitive capital” according to the CNDC) that required many years to develop. As a consequence of the transaction, such “competitive capital” would be eliminated.

Based on the high market concentration, the existence of horizontal and vertical relations, the existence of barriers of entry and lack of efficiency gains, the Antitrust Tribunal further assessed that the transaction could provoke a harm to the general economic interest and was therefore prohibited under the terms of the Antitrust Law. The Antitrust Tribunal prohibited the transaction and pointed out that the trustee of the bankruptcy proceedings must continue with another public bidding in order to find possible new candidates for the assets of the bankrupt companies.

4.      Failing company defense

Since the transaction had arisen from bankruptcy proceedings, in its decision the Antitrust Tribunal mentioned the failing company defense argument and further detailed why it was not applicable to this transaction. It is worth mentioning that the parties did not request the application of this defense and it was only raised and analyzed by the Antitrust Tribunal. This is the first time the Antitrust Tribunal mentions the possible application of this defense to a transaction that is under its review.

According to the Antitrust Tribunal the failing company defense may be used when the business, or part of the business, has failed or is likely to fail if the transaction is not approved. In other words, the failing company defense may be used by any company in making an acquisition of another company that would disappear if the transaction did not take place.

In order to see whether the failing company defense is applied, the Antitrust Tribunal will analyze whether (i) a sale to a third party will not occur if the transaction is not approved; (ii) the firm proposing to exit would not be likely to remain in the market in its actual state or in a restructured process; and (iii) liquidation would be likely to occur and competition may decrease as a consequence of the liquidation. If this parameters are met, the Antitrust Tribunal would approve the transaction with no further competition analysis.

In this specific case, the Antitrust Tribunal mentioned that according to the evidence filed by the parties, it was not demonstrated that other persons or entities might be interested in acquiring the bankrupt assets. The parties failed to evidence that the acquiring company was the only interested company. Moreover, the Antitrust Tribunal received information that there were other entities interested in acquiring the assets of the bankrupt companies. Based on these facts, the Antitrust Tribunal concluded that the failing company defense could not be applied to the transaction.

5.      Final comment

It is very important to point out that the Antitrust Tribunal, by mentioning the “failing company defense”, is accepting the use of this world-wide recognized defense, as it is used in other jurisdictions. The application of this defense has to be considered an improvement in the Antitrust Tribunal’s analysis of economic concentrations. The commented resolution represents a very important element in the analysis of future economic concentrations where the target company may fail if the transaction is not approved by the Antitrust Tribunal.

However, this decision raises serious doubts on the efficiency of Antitrust Tribunal in the control of economic concentrations derived from bankruptcy proceedings. The Antitrust Tribunal took a total of nine months to issue its rejection and from such moment, the trustee of the bankruptcy proceedings had to start looking for new buyers of the bankrupt assets.