29 Sep 2011

The Metcash deal: why did the court let it go ahead?

by Michael Corrigan

The latest round of the ACCC's attempt to block the Metcash deal has given useful guidance for future merger disputes.

In the latest chapter of the Metcash / Franklins deal, the Federal Court has refused to grant the ACCC's application for an urgent interlocutory injunction under section 80(2) of the Competition and Consumer Act which would have restrained Metcash and Pick n Pay from completing the share sale agreement pending the ACCC's appeal.

There were two key issues for the Court: Should the injunction be granted? And did the ACCC have to give an undertaking as to damages?

The ACCC's need to give an undertaking as to damages

Section 80(2) gives the Court the power to grant an interim injunction pending determination of an application for a final injunction under section 80(1). Section 80(6) provides that the Court shall not require the ACCC to give an undertaking to damages as a condition of granting an interim injunction.

However, Metcash and Pick n Pay successfully argued that the ACCC could not rely on section 80(2) on an appeal, and hence section 80(6) did not apply. This was because the ACCC failed at trial, so the application is more properly described as one which seeks to preserve the subject matter of the appeal and that the Court’s jurisdiction to do so arises under section 23 of the Federal Court of Australia Act 1976 (Cth).

In the ordinary merger case however, the ACCC is still not required to offer an undertaking as to damages

Why wasn't the injunction granted?

Justice Jacobson said that the Court must weigh up the real consequences to each party, bearing in mind not only the public interest but the private interests involved. There is no presumption that an injunction should be granted or refused, as the matter is one for a judicial exercise of discretion, taking into account all relevant factors.

The relevant factors which led him to dismiss the ACCC's application were:

  • the fact that the ACCC’s case at trial was dismissed by the primary judge, and the ACCC did not point to any glaring error or obvious oversight in the primary judgment – the ACCC appeal points were "debatable";
  • the appeal would not be rendered pointless if the injunction is refused – the ACCC is appealing for two reasons, one being the legal principles of merger analysis which have broader applicability than just this case;
  • in weighing the public vs private interest here, the private ones win in this case because even if interim relief were granted, the status quo is unlikely to be preserved until the determination of the appeal, given the dire condition of the Franklins business and the prospect its operations would be scaled back in some form;
  • although the ACCC believes that a third party will purchase the Franklins’ shares and operate the wholesale assets if the share sale agreement does not proceed, there was no evidence to support this assumption;
  • the difficulties to which the ACCC refers of reversing the arrangements if the deal closes and then if the ACCC wins its appeal which may well ensue if Metcash sells the Franklins’ shares to independent purchasers are relevant, but all parties are aware of the appeal;
  • if injunctive relief were granted, Metcash and Pick n Pay may well extend the deadline for completion – but this is speculation, and Justice Jacobson wasn't about to act on that;
  • Pick n Pay has made it clear that it intends to complete the agreement and cease to carry on business in Australia. This has been its stated intention for some time but it has been delayed by the processes involved in the ACCC’s determination and the trial process; and
  • the sale agreement provides Pick n Pay with the ability to make a certain exit from the business which is of considerable commercial benefit to it. In light of the matters referred to above, Justice Jacobson said he did not see why it should be further delayed in its ability to complete the agreement. Although the matter is under appeal, some weight should be given to the primary judge’s finding that the transaction is pro-competitive.

In summary this case was much affected by Franklins being otherwise likely to be broken up, if not sold to Metcash. As the company is a classic case of a failing company the ruling is of limited application in other cases where a vendor or target business is trading satisfactorily

The hearing of the appeal will expedited, commencing October 24. We will be following this closely.


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