Australia: Insolvency practitioners take note: The ACCC may oppose the sale of assets in a liquidation

The Australian Competition and Consumer Commission (ACCC) announced, earlier this year, that it will oppose the proposed acquisition by Sonic Healthcare of assets in the Delta Imaging Group, which is in liquidation.

This decision is a reminder to all insolvency practitioners of one of the potential hurdles that may need to be overcome when selling the assets of an insolvent company.

When selling and purchasing shares or assets, insolvency practitioners must consider section 50 of the Competition and Consumer Act 2010, and sufficient time should be allowed for the resulting issues to be assessed and managed appropriately.

This provision applies to all types of corporate insolvencies: receiverships, administrations and liquidations.

Section 50 of the Competition and Consumer Act

Under section 50, a corporation must not directly or indirectly acquire the shares or assets of another, if that acquisition would have the effect, or likely effect, of substantially lessening competition in any market for goods and services in Australia.

The market in which the effect on competition is assessed will depend on factors such as the type of industry and the type of asset involved. Geographically, it will not necessarily be a national market – it may be assessed at a State/Territory, regional or local level (as was the case with the proposed Sonic acquisition).

The legislation provides guidance as to the matters that may be taken into account in determining the effect on competition, such as market concentration, barriers to entry, countervailing market power, the availability of substitutes and whether the acquisition would remove an effective competitor from the market.

This analysis must be undertaken for any material acquisition and, where appropriate, the ACCC undertakes a merger review process.

ACCC merger review process

The ACCC publishes specific Merger Review Guidelines. These are detailed but essentially provide for a process that is driven by the level of enquiries that the ACCC is required to make. A brief review, where no further market enquiries are necessary, can be conducted in as little as two – four weeks. For acquisitions where the ACCC needs to make enquiries of, and seek submissions from, competitors and other market participants, the review process can take up to six months (or longer in particularly complex cases). If an insolvency practitioner wants to achieve a quick sale of a company's assets they need to be aware that the merger review process may prevent that.

The "informal" clearance process, which is the one typically used by applicants, does not provide absolute clearance and a guarantee that the ACCC will not oppose the acquisition, but it does provide comfort to the parties that the ACCC is very unlikely to oppose it. The ACCC can be approached on a confidential basis.

The purchase of assets from a company that has been placed into administration, liquidation or receivership may require ACCC clearance, depending upon the identity of the purchaser, the assets, and the insolvent company. Where clearance is not sought and the acquisition proceeds, there is the risk that the ACCC may seek, from the Federal Court, pecuniary penalties against the parties, a divestiture order winding back the transaction or an injunction blocking the acquisition. Corporate executives may also face disqualification orders.

It is worth noting that Court-imposed fines can be significant, being up to $10 million, or three times the total value of the benefits obtained from that breach, or, where the value of the benefits cannot be determined, 10% of the annual turnover of the company and its related bodies corporate in the 12 months prior to the breach of the Act.

Anyone that aids, abets, counsels, procures or induces a breach of the Act, or that is knowingly concerned in, or party to, such a breach can also be penalised. It is easy to see how this could, in certain circumstances, apply to the insolvency practitioner managing the sale if they were not careful.

Proposed acquisition by Sonic Healthcare

In the matter at hand, the ACCC formed the view that the proposed acquisition would likely have the effect of substantially lessening competition in the market for the supply of MRI services in Newcastle and Maitland, and the market for the supply of general diagnostic imaging services in Maitland. It was noted that:

• the proposed acquisition would remove a significant competitive constraint on Sonic, particularly with pricing
• there were high barriers to entry so new market entrants would be unlikely to constrain Sonic
• the remaining competitors (public hospital providers) were unlikely to impose a sufficient constraint on Sonic.

This decision does not in itself prevent Sonic from proceeding with the acquisition, but it does suggest that the ACCC would challenge the acquisition in the Federal Court if it did proceed.

Takeaway

• Insolvency practitioners must be aware of the potential competition law hurdles that may need to be overcome when selling a company's assets or shares.
• Obtaining ACCC clearance for an acquisition can take months and this timeframe may have a significant impact on any potential asset or share sale. While a quick sale may be preferred, it may not always be possible.
• There are potentially significant penalties for a breach of section 50 of the Act, not just against those directly involved but also those aiding and abetting a breach. This could include insolvency practitioners.
• When assessing the impact on competition in the market of the proposed acquisition, that market may be narrowly defined.
• Advice should be sought for material acquisitions which could potentially impact upon competition and, if in doubt, an informal approach made to the ACCC to at least discuss the issue further.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.