See the news release that corresponds to this position statement.
GATINEAU, QC, April 29, 2020 — Following a three-month inquiry, on February 24, 2020, the Competition Bureau decided to take no further action regarding the acquisition of Total Metal Recovery (TMR) Inc. by American Iron & Metal Company Inc. (AIM). The Bureau found that TMR was a failing firm whose assets were likely to have exited the market in the absence of the merger.
Pre-merger, AIM and TMR were the two largest scrap metal processors in Quebec. Their operations overlapped with respect to the purchase and sale of unprocessed and processed scrap metal.
The following statement summarizes the approach taken by the Bureau in its investigation of this non-notifiable transaction, and the information sought from the merged parties and third parties, both voluntarily and through formal powers under the Competition Act (Act). Given that failing firm claims are not common, the focus of this statement is on the Bureau’s failing firm analysis. It provides general guidance on the types of information that are most relevant for a timely and efficient analysis of a failing firm.Footnote 1
On this page:
- Failing firm analysis – General principles and relevant information as applied to TMR
In the scrap metal business, shredders are used to process car bodies, household appliances and other primarily ferrous metals gathered by scrap yards and peddlers from various sources. Once shredded, the ferrous scrap material is sold to steel mills and foundries for the production of steel products.
AIM operates scrap metal processing facilities in Eastern Canada, including shredding facilities in the Province of Quebec. Since 2017, TMR had operated a single shredding facility in Laval, Quebec, located adjacent to one of AIM’s shredding facilities. Prior to the transaction, both facilities produced shredded scrap for customers in Quebec and Ontario, as well as in international markets.
In conducting its inquiry, the Bureau considered the evaluative criteria set out in section 93 of the Act. Prior to closing the transaction, the merging parties submitted that TMR had suffered financial losses and was in financial distress. As a result, a significant aspect of the Bureau’s investigation focussed on whether TMR was a failing firm in the context of paragraph 93(b) of the Act and Part 13 of the Bureau’s Merger Enforcement Guidelines (MEGs), which is discussed below. To assist with its analysis, the Bureau retained a financial expert and received submissions from a financial expert retained by AIM.
While the merging parties initially submitted pre-merger notification filings in early November 2019, the filings were subsequently withdrawn after they determined the transaction was not notifiable. As AIM and TMR were the two largest scrap metal processors in Quebec, the Bureau initiated a formal inquiry into the transaction on December 5, 2019, shortly after becoming aware that AIM was proposing to acquire TMR. On December 17, 2019, AIM entered into a Consent Preservation Agreement with the Bureau pursuant to sections 100 and 105 of the Act. Under the terms of this agreement, AIM was required to preserve and maintain the assets of TMR for a period of 60 days following the closing of the transaction. The transaction closed on December 20, 2019.
In the course of its inquiry, the Bureau conducted telephone and in-person interviews and collected documents and data, either voluntarily or pursuant to court orders. This information was collected from the merging parties and numerous industry stakeholders, including suppliers, customers, competitors and other interested parties, to determine whether the transaction would likely result in a substantial lessening or prevention of competition.
In January 2020, the Bureau expeditiously sought and obtained orders pursuant to section 11 of the Act to compel certain information from the merged parties as well as from Giampaolo Group Inc. (GGI), a third party who had expressed interest in purchasing TMR. The recipients of the section 11 orders were required to produce responsive information to the Bureau under relatively tight timeframes as, under the terms of Consent Preservation Order, AIM was only required to preserve and maintain the assets of TMR for a 60 day period expiring February 18, 2020. Specifically, an application for an order under paragraphs 11(1)(b) and 11(1)(c) was filed against AIM and TMR on January 2, 2020. The Federal Court issued the order on January 3, 2020, requiring AIM and TMR to produce data and records on January 20 and January 27, 2020. Shortly thereafter, an application for an order under paragraph 11(1)(b) requiring GGI to produce records was filed on January 24, 2020. The Federal Court issued the order on January 31, 2020, requiring GGI to produce records on February 14 and 21, 2020. The Bureau conducted a thorough review of the data and records produced under each order.
Failing firm analysis – General principles and relevant information as applied to TMR
The opening clause of section 93 of the Act makes it clear what information is to be considered “in determining, for the purpose of section 92, whether or not a merger or proposed merger prevents or lessens, or is likely to prevent or lessen, competition substantially.” Paragraph 93(b) lists “whether the business, or a part of the business, of a party to the merger or proposed merger has failed or is likely to fail.”
Probable business failure does not provide a defence for a merger that is likely to prevent or lessen competition substantially. Rather, the loss of the actual or future competitive influence of a failing firm is not attributed to the merger if imminent failure is probable and, in the absence of a merger, the assets of the firm are likely to exit the relevant market because no competitive alternatives exist. Merging parties intending to invoke the failing firm rationale are encouraged to make their submissions in this regard as early as possible. This includes detailed information about the financial status of the failing firm as well as any and all steps taken to survive in a retrenched form or in the hands of a different owner that would be considered competitively preferable compared to the merger at issue.
Insolvency or imminent bankruptcy
As set out in Part 13.3 of the MEGs, a firm is considered to be failing or likely to fail if:
- it is insolvent or is likely to become insolvent;
- it has initiated or is likely to initiate voluntary bankruptcy proceedings; or
- it has been, or is likely to be, petitioned into bankruptcy or receivership.
Assessing whether a firm is failing or is likely to fail requires a careful analysis of that firm’s financial information such as audited financial statements, liquidity reports and forecasts, business plans, correspondence to and from creditors, as well as documents related to plans to initiate bankruptcy proceedings or seek creditor protection under the Company Creditors Arrangement Act.Footnote 2 Insolvency occurs when liabilities exceed the realizable value of assets, or when a firm is unable to pay its liabilities as they come due. Therefore, to determine a firm’s solvency, financial information is typically assessed using various methodologies through the lenses of balance sheet solvency and the ability to pay debts as they become due. Balance sheet solvency tests examine variables that relate to the transaction price, discounted cash flows of the firm, or earnings multiples of similar firms, whereas the ability to pay solvency tests examine liquidity forecasts, any calls of debt by creditors and whether the firm is likely to have access to replacement funding. With respect to the likelihood of voluntary or involuntary bankruptcy, financial statement metrics and other data are applied to various statistical bankruptcy prediction models that have been established in the accounting industry. The results of these models provide useful indicators of whether a firm is likely to enter into receivership or file for bankruptcy in the near term, including in the event that a transaction to purchase that firm does not take place. With the assistance of a financial expert, the Bureau concluded TMR was a failing firm within the context of paragraph 93(b) because it was insolvent and had a high likelihood of a bankruptcy filing in the immediate future.
As described in the MEGs, a determination of whether a firm is failing or likely to fail is not dispositive of the review. The Bureau also examines the likelihood of various counterfactual scenarios to a merger and the expected levels of competition in the market under such scenarios. This is a necessary step in determining whether a merger involving a failing firm is likely to result in a substantial lessening or prevention of competition. These counterfactual scenarios include the restructuring or retrenchment of the failing firm, the sale of the firm to a competitively preferable purchaser, and liquidation of the failing firm’s assets.
i. Restructuring and retrenchment
Retrenchment or restructuring of a failing firm could prevent its failure or enable it to survive as a meaningful competitor. Therefore, documents and information showing attempts to restructure the firm by narrowing the scope of its operations, employing cost-cutting measures, or searching for strategic partners to solidify operations instead of selling the whole business will assist the Bureau in determining whether this is likely to be a viable alternative to a merger.
Following a review of TMR’s information, the Bureau determined that further attempts at the retrenchment or restructuring of TMR would not have prevented its failure nor enabled it to survive as a meaningful competitor.
ii. Competitively preferable purchaser
The Bureau considered whether TMR’s business could continue in the hands of a competitively preferable purchaser. The first step in determining whether such a purchaser exists is an assessment of whether a thorough search for a purchaser has been carried out. As indicated in the MEGs, when no such shop has been conducted, the Bureau may require that an independent third party be engaged to carry out a search for alternative buyers before the failing firm rationale is accepted. When parties claim that a thorough search for alternate buyers has been conducted, the Bureau will require documents and information showing such bona fide attempts have taken place. This includes a complete list of potential buyers that were approached, together with contact information for those potential buyers, information related to the distribution of a Confidential Information Memorandum or similar document describing the operations of the target company to other firms, as well as responses to requests for expressions of interest.
Furthermore, to the extent that one or more alternative buyers expressed interest in buying the failing firm, documents and information must be provided to demonstrate the steps taken by the failing firm and the interested buyer in relation to negotiations and attempts to finalize a deal. This includes all correspondence between the relevant parties, all draft and/or signed letters of intent as well as any draft purchase agreements, due diligence reports, internal correspondence related to a proposed transaction, as well as recommendations and decisions by senior management or shareholders of the relevant parties. Importantly, the Bureau may also seek information and documents from an interested purchaser in order to obtain a complete picture of the negotiation process as well as to determine, with the assistance of business plans, how effective or competitive that interested party would be if they were successful in purchasing the failing firm. Information gathered from the failing firm and third parties will assist the Bureau in establishing a timeline of events to determine whether a potential purchaser was or would be able to finalize an agreement with the failing firm in a timely way, especially given the financial circumstances of the failing firm. Even when an alternative purchaser would likely be competitively preferable, its ability to finalize a transaction in a timely way is important in determining whether it would be a viable alternative to the potentially anti-competitive merger under review. If the Bureau determines that a competitively preferable purchaser exists, the Bureau will focus on completing its competitive effects analysis to determine whether the merger under review is otherwise likely to result in a substantial lessening or prevention of competition.
Following a detailed review of information gathered from various sources in its inquiry, the Bureau determined that a thorough search for potential alternative purchasers of TMR had been conducted, but that no competitively preferable purchaser to AIM existed.
When the Bureau determines that a failing firm is not likely to continue operating in a retrenched form or in the hands of an alternate purchaser, it also considers whether liquidation of the failing firm’s assets would nonetheless be a materially better competitive alternative to a merger that may raise competition issues. Because liquidation is disruptive to all parties involved and may not result in an efficient allocation of resources, there are very limited circumstances under which the Bureau may determine that liquidation is the preferable outcome. For example, when a failing firm has certain valuable assets that are otherwise difficult to obtain, releasing those assets in a liquidation scenario may facilitate entry by firms who are willing to compete for those assets, even though they may not have been prepared to purchase the failing firm. As such, the Bureau will assess these assets in the context of its analysis of barriers to entry. Information and documents from the parties relating to potential alternate uses for the assets as well as the ease by which those assets can otherwise be obtained by other firms will be helpful to the Bureau’s assessment of whether liquidation may be a preferable alternative to the merger at issue.
In this case, the Bureau determined that liquidation of TMR’s individual assets would not have been a determining factor in facilitating entry of a competing shredder operation within the Quebec marketplace and was not likely to result in a materially higher level of competition than if the merger did not proceed.
Following a detailed review of information gathered over a short period, the Bureau concluded that TMR was a failing firm and its assets were likely to have exited the market in the absence of the merger.
Merging parties intending to make failing firm claims are encouraged to provide complete information to the Bureau as early as possible in the review. While the circumstances of a case may vary, compressed timelines will not negate the need for the Bureau to complete its review. The Bureau will continue to use all of the tools at its disposal to ensure it obtains the information required to evaluate whether a proposed or completed transaction is likely to substantially prevent or lessen competition.
This publication is not a legal document. The Bureau’s findings, as reflected in this Position Statement, are not findings of fact or law that have been tested before a tribunal or court. Further, the contents of this Position Statement do not indicate findings of unlawful conduct by any party.
However, in an effort to further enhance its communication and transparency with stakeholders, the Bureau may publicly communicate the results of certain investigations, inquiries and merger reviews by way of a Position Statement. In the case of a merger review, Position Statements briefly describe the Bureau's analysis of a particular proposed transaction and summarize its main findings. The Bureau also publishes Position Statements summarizing the results of certain investigations, inquiries and reviews conducted under the Competition Act. Readers should exercise caution in interpreting the Bureau’s assessment. Enforcement decisions are made on a case‑by‑case basis and the conclusions discussed in the Position Statement are specific to the present matter and are not binding on the Commissioner of Competition.