The failing firm defence in the age of COVID-19
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Concurrences REVUE DES DROITS DE LA CONCURRENCE | COMPETITION LAW REVIEW The failing firm defence in the age of COVID-19 Legal practices l Concurrences N° 4-2020 www.concurrences.com Nicholas Levy nlevy@cgsh.com Partner Cleary Gottlieb Steen & Hamilton, London Daniel Culley dculley@cgsh.com Partner Cleary Gottlieb Steen & Hamilton, Brussels/Washington, D.C. Richard Pepper rpepper@cgsh.com Counsel Cleary Gottlieb Steen & Hamilton, Brussels Alexis Lazda alazda@cgsh.com Associate Cleary Gottlieb Steen & Hamilton, Washington, D.C. Edward Dean edean@cgsh.com Associate Cleary Gottlieb Steen & Hamilton, Brussels
Legal practices
Nicholas Levy*
The failing firm
constitutes a violation of the publisher's rights and may be punished by up to 3 years imprisonment and up to a € 300 000 fine (Art. L. 335-2 Code de la Propriété Intellectuelle). Personal use of this document is authorised within the limits of Art. L 122-5 Code de la Propriété Intellectuelle and DRM protection.
nlevy@cgsh.com
Ce document est protégé au titre du droit d'auteur par les conventions internationales en vigueur et le Code de la propriété intellectuelle du 1er juillet 1992. Toute utilisation non autorisée constitue une contrefaçon, délit pénalement sanctionné jusqu'à 3 ans d'emprisonnement et 300 000 € d'amende (art.
L. 335-2 CPI). L’utilisation personnelle est strictement autorisée dans les limites de l’article L. 122 5 CPI et des mesures techniques de protection pouvant accompagner ce document. This document is protected by copyright laws and international copyright treaties. Non-authorised use of this document
Partner Cleary Gottlieb Steen
defence in the age
& Hamilton, London
Daniel Culley
dculley@cgsh.com
Partner Cleary Gottlieb Steen
of COVID-19
& Hamilton, Brussels/Washington, D.C.
Richard Pepper
rpepper@cgsh.com
Counsel Cleary Gottlieb Steen
& Hamilton, Brussels
Alexis Lazda
alazda@cgsh.com
Associate Cleary Gottlieb Steen
& Hamilton, Washington, D.C.
Edward Dean
edean@cgsh.com
Associate Cleary Gottlieb Steen
I. Introduction
& Hamilton, Brussels
1. Although the economic consequences of the COVID-19 pandemic have not
fully crystallised, early indications suggest they will be severe. The European
economy is forecast to shrink by 8.3% in 2020,1 and the Federal Reserve forecasts
ABSTRACT a contraction of 6.5% in the United States.2 Some potential insolvencies will be
averted by the extensive State aid authorised under the European Commission’s
As COVID-19 continues to cause economic
upheaval, undermine established business
(“Commission”) Temporary Framework.3 But other struggling firms may look
models, and jeopardise the long-term viability to M&A for survival. This may, in turn, lead to an increasing number of cases
of important sectors of the economy, where agencies come under pressure to approve acquisitions that would ensure
an increasing number of transactions may the survival of those firms.
involve firms in severe financial difficulty.
This may in turn increase the number of cases
in which antitrust agencies are asked to apply 2. Merger control is a predictive exercise. Competition authorities endeavour
the failing firm “defence” and approve to assess the impact of a given transaction by comparing what would happen
acquisitions of companies facing financial ruin
where, in the absence of the merger,
if it occurs with what would happen if it does not—the “counterfactual.” This
competition would in any event be concept is codified in guidelines issued by the Commission, which refer to a
significantly reduced. In such cases, agencies comparison between “the competitive conditions that would result from the notified
accept that the notified concentration
merger with the conditions that would have prevailed without the merger,”4 and by
is not the cause of the reduction in
competition. This article considers the history the US Department of Justice (“DOJ”) and Federal Trade Commission (“FTC”),
and application of the failing firm defence which state that “merger analysis is necessarily predictive, requiring an assessment
by the European Commission in light of what will likely happen if a merger proceeds as compared to what will likely
of the practice of the US federal agencies.
happen if it does not.”5
Alors que la COVID-19 continue de provoquer
des bouleversements économiques, de saper
les modèles commerciaux établis et de mettre 3. In many cases, the relevant counterfactual may simply be the status quo; absent
en péril la viabilité à long terme de secteurs the transaction, the parties would go on competing just as they have in the recent
importants de l’économie, un nombre past.6 But future competitive conditions may often depart from those of the recent
croissant de transactions peut impliquer
des entreprises en proie à de graves difficultés
past. This can work either for or against the interests of the merging parties,
financières. Cela peut augmenter le nombre relative to the status quo. For example, a transaction might need to be assessed
de cas dans lesquels les autorités in light of imminent increases in competition from other rivals (e.g., competitor
de concurrence sont invitées à appliquer entry/expansion, technological advances by rivals, or regulatory developments)
la «défense» de l’entreprise défaillante
et à approuver l’acquisition de sociétés or a permanent impairment to the competitiveness of the merging parties; in
confrontées à la ruine financière, alors qu’en those circumstances, the transaction may affect competition less than the status
l’absence de fusion, la concurrence serait quo might suggest. Conversely, a transaction might need to be assessed in light
de toute façon considérablement réduite.
Dans de tels cas, les autorités acceptent
que la concentration notifiée ne soit pas
la cause de la réduction de la concurrence.
Cet article examine l’historique et l’application 1 Commission, European Economic Growth Forecast: Summer 2020 (Interim) (Institutional Paper 132, July 2020), https://ec.europa.
de la défense de l’entreprise défaillante par eu/info/sites/info/files/economy-finance/ip132_en.pdf, Table 1.
la Commission européenne à la lumière de 2 Federal Reserve, Federal Open Market Committee Projections (June 10, 2020), https://www.federalreserve.gov/monetarypolicy/
la pratique des agences fédérales américaines. fomcprojtabl20200610.htm.
3 Commission, Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak
(Communication) [2020] OJ C 91I/01.
*The opinions expressed in this article are 4 Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between
the authors’ own and are not attributable undertakings [2004] OJ C 31/5 (“Horizontal Merger Guidelines”), para. 9.
to their firm or clients, in particular those
clients mentioned in this article that the firm 5 FTC and DOJ, 2010 Horizontal Merger Guidelines, https://www.justice.gov/atr/horizontal-merger-guidelines-08192010, § 1.
has represented and advised. The authors
would like to thank Elise Lane for her invaluable 6 Horizontal Merger Guidelines, para. 9 (“In most cases the competitive conditions existing at the time of the merger constitute the
assistance in preparing this article. relevant comparison for evaluating the effects of a merger”).
Concurrences N° 4-2020 I Legal practices I Nicholas Levy, Daniel Culley, Richard Pepper, Alexis Lazda, Edward Dean I The failing firm defence in the age of COVID-19 1of a deterioration of competition from rivals; in these 6. As of the date of writing, the authors can find no
constitutes a violation of the publisher's rights and may be punished by up to 3 years imprisonment and up to a € 300 000 fine (Art. L. 335-2 Code de la Propriété Intellectuelle). Personal use of this document is authorised within the limits of Art. L 122-5 Code de la Propriété Intellectuelle and DRM protection.
circumstances, the transaction’s impact on competition transaction during the COVID-19 pandemic that has
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L. 335-2 CPI). L’utilisation personnelle est strictement autorisée dans les limites de l’article L. 122 5 CPI et des mesures techniques de protection pouvant accompagner ce document. This document is protected by copyright laws and international copyright treaties. Non-authorised use of this document
may be worse than the status quo would have suggested.7 been approved by the Commission, the US agencies, or
a national competition agency in Europe on the basis
4. The COVID-19 pandemic will likely lead merging of the failing firm defence. The CMA came closest
parties to contend more frequently that the target during the early stages of the pandemic, in its review
company will be less competitive in future than the of Amazon’s acquisition of a 16% interest in Deliveroo,
recent past might otherwise suggest. Merging parties an online food delivery company, although the relevant
have long made these arguments to the Commission conditions were subsequently found no longer to exist
and US agencies, resulting in what has become known after the underlying facts had changed. In provisional
as the “failing firm defence.” The defence maintains findings issued in April 2020, the CMA determined
that the failure of one of the merging firms would cause that the failing firm defence might be available due the
competition to deteriorate at least to the same extent as deterioration in Deliveroo’s financial situation.13 But as
the transaction. In such circumstances, the transaction Deliveroo’s position improved, the CMA reversed its
would not be responsible for any significant impediment position on the defence in June 2020 and approved the
to effective competition (the EU test) or substantial transaction on other grounds in August 2020.14
lessening of competition (the US test).8
5. Antitrust agencies have attached stringent conditions
to the failing firm defence in the past. Early on, the
II. History
pandemic led to speculation that they might relax those
conditions. They have not.9 During the early months of the failing firm
of the pandemic, the director of the FTC’s Bureau of
Competition said that the “antitrust laws are flexible
enough to account for changing market conditions, even
defence
during uncertain times,”10 while Commissioner Vestager
has warned that the crisis “shouldn’t be a shield to allow 1. Origins in US merger control
mergers that would hurt consumers and hold back the
recovery.”11 These sentiments have been shared by several 7. The failing firm defence was first raised in US merger
other agencies, including the UK Competition and litigation in 1930,15 when the International Shoe
Markets Authority (“CMA”), which reissued guidance in Company sought to acquire the McElwain Company, a
April countenancing no relaxation of the defence.12 rival supplier of men’s dress shoes.16 The Supreme Court
rejected a challenge by the FTC under Section 7 of the
Clayton Act,17 explaining that McElwain found itself
in “failing circumstances” and was “selling its capital
to the only available purchaser in order to avoid what its
officers fairly concluded was a more disastrous fate.”18 In
light of McElwain’s dire condition (and the lack of close
7 See, e.g., DOJ and FTC, Commentary on the Horizontal Merger Guidelines (2010), https://
www.justice.gov/atr/commentary-horizontal-merger-guidelines (citing Aspen Technology, competition between the merging parties), the court held
Inc. and Hyprotech, Ltd. (2004), 69 Fed. Reg. 45,063 (July 28, 2004)). In Aspen Technology, that there was no violation of Section 7.19 The court’s
Inc., the FTC required divestitures for the proposed acquisition of the first and second largest
vendors of process engineering simulation software, finding the combination particularly
reasoning in that case is instructive and quite different
problematic because the third firm in the market was declining. from how the defence would later develop; for example,
8 Council Regulation (EC) No. 139/2004 of 20 January 2004 on the control of concentrations
the court refused to second guess whether the company’s
between undertakings (“Merger Regulation”), Art. 2(2)–(3); Clayton Act § 7, 15 U.S.C. management might have taken on additional debt or
§ 18. reorganised itself in bankruptcy as a going concern.20
9 OECD, Roundtable on Failing Firm Defence – Note by the Delegation of the European
Commission (DAF/COMP/WD(2009) 100) (September 22, 2009), https://ec.europa.eu/
competition/international/multilateral/failingfirmdefence.pdf, paras. 18–19 and 23.
13 CMA, Anticipated acquisition by Amazon of a minority shareholding and certain rights in
10 I. Conner (director, FTC Bureau of Competition), Antitrust review at the FTC: staying
Deliveroo: Provisional findings report (April 16, 2020).
the course during uncertain times (April 6, 2020), https://www.ftc.gov/news-events/blogs/
competition-matters/2020/04/antitrust-review-ftc-staying-course-during-uncertain. 14 Namely, that Amazon’s minority investment would not materially change its incentives to re-
enter and compete in the online food delivery sector. CMA, Anticipated acquisition by Amazon
11 N. Hirst, Crisis no “shield” for anticompetitive mergers, Vestager says, MLex (April 24,
of a minority shareholding and certain rights in Deliveroo: Final report (August 4, 2020).
2020); and L. Crofts, Failing firms won’t get more EU leeway to plead for mergers, Vestager
says, MLex (April 24, 2020). See also P. Csiszár, DG COMP director, Concurrences Webinar: 15 Int’l Shoe Co. v. FTC, 280 U.S. 291, 302–03 (1930). See also Citizen Publ’g Co. v. United
The Future of the Failing-Firm Defence (May 6, 2020), https://globalcompetitionreview. States, 394 U.S. 131, 136 (1969) (describing the defence as a “judicially created doctrine”).
com/article/1226557/eu-official-relaxing-competition-rules-would-slow-economic-
recovery (“Easing competition rules during the coronavirus pandemic is a short-term trade- 16 Int’l Shoe Co. v. FTC, supra, 295–96.
off that would cause a slower economic recovery. It is tempting to relax competition rules—
especially failing-firm defence standards—for social and political reasons during a crisis like
17 Ibid., at 293.
the coronavirus pandemic. But this would cause lasting anticompetitive structural changes in 18 Ibid., at 301.
markets and a slower economic recovery”); and M. Motta, former DG COMP chief economist,
Royal Economic Society Webinar: Competition Policy and the Covid-19 Crisis, June 4, 2020 19 Ibid., at 302–03 (finding no violation of the Clayton Act where the target’s“resources [were]
(“Historically, competition authorities have enforced the failing firm defence very strictly, and I so depleted and the prospect of rehabilitation so remote that it faced the grave probability of a
believe they should not change their standards now”). business failure”).
12 CMA, Annex A: Summary of CMA’s position on mergers involving ‘failing firms’ (April 20 Ibid., at 301–02 (“It was suggested (…) that instead of an outright sale, any one of several
22, 2020), https://www.gov.uk/government/publications/merger-assessments-during-the- alternatives might have been adopted which would have saved the property and preserved
coronavirus-covid-19-pandemic/annex-a-summary-of-cmas-position-on-mergers-involving- competition; (…) There is no reason to doubt that in so doing they exercised a judgment which
failing-firms. was both honest and well informed”).
2 Concurrences N° 4-2020 I Legal practices I Nicholas Levy, Daniel Culley, Richard Pepper, Alexis Lazda, Edward Dean I The failing firm defence in the age of COVID-198. In later years, the test was rarely invoked and The 2010 Guidelines characterise the failing firm defense
constitutes a violation of the publisher's rights and may be punished by up to 3 years imprisonment and up to a € 300 000 fine (Art. L. 335-2 Code de la Propriété Intellectuelle). Personal use of this document is authorised within the limits of Art. L 122-5 Code de la Propriété Intellectuelle and DRM protection.
progressively became more stringent, although it remains as “an extreme instance of the more general circumstance”
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L. 335-2 CPI). L’utilisation personnelle est strictement autorisée dans les limites de l’article L. 122 5 CPI et des mesures techniques de protection pouvant accompagner ce document. This document is protected by copyright laws and international copyright treaties. Non-authorised use of this document
well established that a firm that is deemed to be “failing” of a decline in a firm’s competitive significance’. .
is not subject to liability under Section 7 of the Clayton
Act. In its first appearance in the 1930 International
Shoe decision, there was no suggestion that the failing 2. Transposition into
firm argument was a “defence” in the formal sense of
the word; the Supreme Court simply took account of EU merger control
what was likely to occur absent the transaction. Not until 11. Building on the US framework, the failing firm
more than thirty years later, and in passing in a footnote, defence entered European merger control shortly after
did the court refer to it as the “so-called failing company the introduction of the original EU Merger Regulation.
defen[c]e.”21 In the years that followed, the newly created It was first raised in 1991, when two French and Italian
defence gained momentum during an era of aggressive aerospace manufacturers, Aérospatiale and Alenia,
enforcement and formalisation of antitrust law. In sought to acquire Boeing’s struggling de Havilland
1963, for example, the Supreme Court in United States division. In blocking the transaction, the Commission
v. Philadelphia National Bank created a presumption of dismissed their argument that de Havilland would have
illegality for “undue concentration. ”22 The court also been eliminated as a competitor with or without the
added a number of practices to the per se illegal category merger, finding “no likelihood that de Havilland, in the
under Section 1, a trend that would reverse in the modern absence of the proposed concentration, would in any case
era.23 be phased out.”26
9. The approach taken by US courts with regard to 12. The defence was first successful two years later in 1993,
antitrust generally has since become more holistic and when the Commission approved a merger to monopoly.27
less formulaic. But, as antitrust appeals used to go The merging parties, Kali+Salz and MdK, were the only
straight to the Supreme Court rather than intermediate producers of potash fertiliser in the relevant geographic
circuits, there is a body of established Supreme Court market. However, the Commission accepted that MdK
antitrust law that is frozen in time. As a result, it can be was failing and that Kali+Salz would inevitably acquire
difficult to sustain a transaction through multiple levels all of MdK’s market share, whether MdK failed or the
of appeal when confronted with some of the more rigid, merger took place. The Commission thus accepted the
older precedent. These practical difficulties have kept the argument and set out a tripartite test for future cases:
failing firm defence relatively static as a formal matter. (i) the acquired undertaking would have been forced
The test was ultimately refined to two elements: (i) the out of the market in the near future if not taken over
target firm faces “the grave probability of a business by another undertaking; (ii) the acquiring undertaking
failure”; 24 and (ii) there is no other prospective purchaser would have completely taken over the market share of
that poses less risk of anticompetitive effects.25 the acquired undertaking had the acquired undertaking
been forced out of the market; and (iii) there must be
10. The DOJ and FTC articulated the failing firm test no less anticompetitive alternative purchase.28 In doing
and its reasoning in the first edition of their 1968 Merger so, the Commission observed that the argument could
Guidelines; every edition since has included it as a be sustained only exceptionally and stated that “the
defence. While framed somewhat differently than the case burden of proof for a missing link of causality lies with
law, the elements and reasoning are the same. Notably, the merging undertakings.”29 Subsequent EU case law
each iteration of the Merger Guidelines has maintained has made clear that the Commission bears the burden of
its particularly high standard. In 1968, the DOJ noted proof,30 so this may be understood as requiring merging
that it would “apply this standard only in the clearest of parties to adduce evidence on matters in their possession
circumstances,” explaining the difficulty in assessing relevant to the determination of whether the conditions
arbitrary accounting practices and the possibility of of the failing firm defence have been met.
rehabilitation. In 1982, the DOJ stated that “[b]ecause
the defen[c]e can immunize significantly anticompetitive
mergers, the Department will construe its elements strictly.”
21 See United States v. Philadelphia Nat. Bank, 374 U.S. 321, 372 n. 46 (1963).
22 Ibid., at 364–67. 26 Commission decision of October 2, 1991, Case IV/M.053 – Aérospatiale-Alenia/de
Havilland, para. 31.
23 See, e.g., State Oil Co. v. Khan, 522 U.S. 3 (1997) (overruling the Supreme Court’s decision
in Albrecht v. Herald Co., 390 U.S. 145 (1968) to hold that vertical maximum price fixing 27 Commission decision of December 14, 1993, Case IV/M.308 – Kali+Salz/MdK/Treuhand.
is no longer a per se violation of Section 1 of the Sherman Act, and should instead be
evaluated under the rule of reason). 28 Ibid., para. 71.
24 United States v. Greater Buffalo Press, Inc., 402 U.S. 549, 555 (1971) (quoting Int’l Shoe Co. 29 Ibid., para. 72.
v. FTC, 280 U.S., 302).
30 In Energias de Portugal v. Commission, Case T-87/05, EU:T:2005:333, para. 61, the
25 See Citizen Publ’g Co., 394 U.S., 137 (“The failing company doctrine plainly cannot be applied General Court held that “[i]t is for the Commission to demonstrate that a concentration
in a merger or in any other case unless it is established that the company that acquires the failing cannot be declared compatible with the common market.”In Bertelsmann and Sony v. Impala,
company or brings it under dominion is the only available purchaser. For if another person or Case C-413/06 P, EU:C:2008:392, para. 52, the Court of Justice confirmed that this
group could be interested, a unit in the competitive system would be preserved and not lost to principle also applies to clearance decisions: “[T]he Commission is, in principle, required
monopoly power”). to adopt a position, either in the sense of approving or of prohibiting the concentration.”
Concurrences N° 4-2020 I Legal practices I Nicholas Levy, Daniel Culley, Richard Pepper, Alexis Lazda, Edward Dean I The failing firm defence in the age of COVID-19 313. The French government appealed the Commission’s
3. A comparison of EU
constitutes a violation of the publisher's rights and may be punished by up to 3 years imprisonment and up to a € 300 000 fine (Art. L. 335-2 Code de la Propriété Intellectuelle). Personal use of this document is authorised within the limits of Art. L 122-5 Code de la Propriété Intellectuelle and DRM protection.
three-limb test to the Court of Justice.31 That appeal
and US tests
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L. 335-2 CPI). L’utilisation personnelle est strictement autorisée dans les limites de l’article L. 122 5 CPI et des mesures techniques de protection pouvant accompagner ce document. This document is protected by copyright laws and international copyright treaties. Non-authorised use of this document
contended that the second limb of the test—requiring the
absorption of the target’s market share by the acquirer—
was not part of the test developed and applied in the 15. Table 1 compares the EU test (as set out in the
United States and had been introduced arbitrarily by the Commission’s Horizontal Merger Guidelines38) with that
Commission. The court rejected the appeal, as well as the applied by the US agencies (as set out in the Horizontal
suggestion that the EU and US failing firm conditions Merger Guidelines published by the DOJ and FTC39).
should be consistent. In doing so, the court explained
the basis for the market share criterion, holding that it Table 1.
endeavoured to ensure that “the competitive structure Concept EU Test US Test
resulting from the concentration would deteriorate in
The firm would in the The firm would not be
similar fashion even if the concentration did not proceed.”32 near future be forced able to meet its financial
Failing firm
out of the market obligations in the near future
facing terminal
14. The Commission took account of this judgment in a 2001 financial
because of financial and would not be able to
decision, BASF/Eurodiol/Pantochim, the second successful difficulties if not taken reorganise successfully
difficulties.
over by another under Chapter 11 of the
invocation of the defence. BASF proposed acquiring two
undertaking.* Bankruptcy Act.
chemical producers (Eurodiol and Pantochim) that had
been placed under a Belgian pre-bankruptcy regime. The Transaction There is no less
The firm has unsuccessfully
combination of BASF and Eurodiol resulted in a monopoly is the best anticompetitive
sought reasonable
available alternative purchase
in the merchant supply of N-methylpyrrolidon and gamma- option. than the notified merger.
alternative offers that
butyrolacton, and brought together two out of three would keep its assets
in the relevant market while
merchant suppliers of tetrahydrofuran. Notwithstanding Assets would In the absence of a
presenting less danger
these concentration levels, the Commission was ready to exit the market merger, the assets of
to competition than does
absent the the firm would inevitably
accept that Eurodiol would exit the market absent a takeover transaction. exit the market.
the proposed merger.**
and that no other acquirer was available. The Commission
did not accept that all of Eurodiol’s market share would
have accrued to BASF (the transaction did not result in 16. Although structured slightly differently, the EU
a monopoly in tetrahydrofuran, and other non-merchant and US tests are substantively similar: (i) both require
suppliers were active in the other areas).33 However, it a failing firm that is facing financial difficulties that
conceded that market share absorption was specific to the jeopardise its future; (ii) both require evidence that there
circumstances of Kali+Salz,34 and noted that the court are no less anticompetitive purchasers; and (iii) both
had broadened the relevant framework.35 The Commission require a showing that the assets of the failing firm would
concluded that the competitive structure would deteriorate exit the market absent the transaction. Agencies in both
absent the transaction, as “the assets to be acquired would jurisdictions consider that the burden of substantiating
inevitably exit the market if not taken over by another the defence is borne by the merging parties. For the DOJ
undertaking.” In doing so, the Commission sought to and FTC, this reflects the procedural reality of merger
distinguish between: (i) cases where a legal entity would litigation, where at a minimum if the agencies have
become insolvent but the productivity of the underlying proven their prima facie case and obtained a presumption
assets would survive, albeit in the hands of a different of illegality, the burden of producing evidence shifts to
owner;36 and (ii) cases where the underlying assets would the merging parties.40 In the EU, the Commission’s view
not survive insolvency, resulting in a long-term decline that the burden rests on merging parties to “provide in due
in capacity—in which case the defence is available.37 time all the relevant information necessary to demonstrate
The Commission therefore substituted the market share that the deterioration of the competitive structure that
test applied in Kali+Salz for a test that identifies whether follows the merger is not caused by the merger”41 reflects a
a failing firm’s assets will “inevitably” exit the market.
* This test is narrower than the test advanced in Kali+Salz and BASF/Eurodiol/Pantochim,
which countenanced exit other than through financial difficulties. This does not appear to be
31 France and Société commerciale des potasses et de l’azote and Entreprise minière et chimique v. based on a Commission decision but may reflect an attempt to exclude the defence where
Commission, Joined Cases C-68/94 and C-30/95, EU:C:1998:148 (“Kali+Salz/MdK”). market exit is a commercial decision independent of financial performance.
32 Ibid., para. 115. ** The Horizontal Merger Guidelines note that “[a]ny offer to purchase the assets of the
failing firm for a price above the liquidation value of those assets will be regarded as
33 Ibid., para. 151. a reasonable alternative offer. Liquidation value is the highest value the assets could
command for use outside the relevant market.” DOJ and FTC, 2010 Horizontal Merger
34 Commission decision of July 11, 2001, Case COMP/M.2314 – BASF/Eurodiol/Pantochim, Guidelines, https://www.justice.gov/atr/horizontal-merger-guidelines-08192010#foot16,
para. 150. § 11, fn. 16.
35 Ibid., para. 139. 38 Horizontal Merger Guidelines, para. 90.
36 See, e.g., Commission decision of March 30, 2012, Case COMP/M.6447 – IAG/bmi, 39 DOJ and FTC, 2010 Horizontal Merger Guidelines, https://www.justice.gov/atr/
paras. 617–19 (the Commission concluded that bmi’s slots at Heathrow Airport would not horizontal-merger-guidelines-08192010#11, § 11.
“inevitably”leave the market if it failed, but would be reallocated to other airlines).
40 See Joseph Ciccone & Sons, Inc. v. Eastern Inds., Inc., 537 F. Supp. 623, 628 (E.D. Pa. 1982).
37 BASF/Eurodiol/Pantochim, supra, para. 141 (“If such assets were taken over by competitors in See also United States v. M.P.M., Inc., 397 F. Supp. 78, 95 (D. Colo. 1975); and Citizen Publ’g
the course of bankruptcy proceedings, the economic effects would be similar to a take-over of the Co., 394 U.S., 139 (“The burden of proving that the conditions of the failing company doctrine
failing firms themselves by an alternative purchaser. Thus it needs to be established in addition to have been satisfied is on those who seek refuge under it”).
the first two criteria, that the assets to be purchased would inevitably disappear from the market
in the absence of the merger”). 41 Horizontal Merger Guidelines, para. 91.
4 Concurrences N° 4-2020 I Legal practices I Nicholas Levy, Daniel Culley, Richard Pepper, Alexis Lazda, Edward Dean I The failing firm defence in the age of COVID-19practical reality that, as in the case of evidence relevant Bertelsmann/Kirch/Premiere;50 NewsCorp/Telepiù;51 JCI/
constitutes a violation of the publisher's rights and may be punished by up to 3 years imprisonment and up to a € 300 000 fine (Art. L. 335-2 Code de la Propriété Intellectuelle). Personal use of this document is authorised within the limits of Art. L 122-5 Code de la Propriété Intellectuelle and DRM protection.
to efficiencies, the merging parties may be expected to FIAMM;52 IAG/bmi;53 and ArcelorMittal/Ilva.54
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have access to the relevant evidence.
19. The US agencies have also been reluctant to accept
the “failing division defence,” which concerns failing
III. Application divisions of companies that are not themselves at
immediate risk of collapse. The US Horizontal Merger
of the failing firm
Guidelines require the satisfaction of two conditions to
conclude that the relevant assets would exit the relevant
market: “(1) applying cost allocation rules that reflect
defence true economic costs, the division has a persistently negative
cash flow on an operating basis, and such negative cash
17. Since its introduction to US merger control in the flow is not economically justified for the firm by benefits
1930s, courts have accepted the failing firm defence such as added sales in complementary markets or enhanced
in only a handful of cases, including Reilly v. Hearst customer goodwill; and (2) the owner of the failing
Corp,42 United States v. Culbro Corp.,43 and United division has made unsuccessful good-faith efforts to elicit
States v. M.P.M., Inc.44 The US agencies accept the reasonable alternative offers that would keep its tangible
defence just as infrequently; although it is difficult to and intangible assets in the relevant market and pose a
quantify how often it is rejected by the agencies prior to less severe danger to competition than does the proposed
trial, the defence is generally viewed by practitioners as acquisition.”55
“rarely invoked in court or before the Agencies” and, when
invoked, is “rarely successful.”45 20. The Commission has also set a high bar for companies
seeking to avail themselves of the failing division
18. Likewise, the Commission has accepted the failing defence. In Bertelsmann/Kirch/Premiere, for example,
firm defence only rarely (in Kali+Salz/MdK/Treuhand, the Commission rejected the defence on the ground that
BASF/Eurodiol/Pantochim, and Aegean/Olympic (II),46 “Kirch’s abandonment of the pay-TV market is simply a
which followed a prohibition of the same combination management decision to give up an area of its business
two years previously).47 In other cases where the defence which has not lived up to the management’s expectations.”
has been advanced, the Commission has generally The most notable exception is Nynas/Shell/Harburg
rejected its application, including in Saint-Gobain/ Refinery,56 discussed below, where the Commission
Wacker-Chemie/NOM;48 Blokker/Toys “R” Us (II);49 effectively accepted a failing division defence.
50 Commission decision of May 27, 1998, Case IV/M.993 – Bertelsmann/Kirch/Premiere. The
Commission found that Kirch was unlikely to withdraw from the pay-TV sector; that, even
if it did, its market share would not automatically be absorbed by Premiere (in line with
Kali+Salz); and that an acquisition by less anticompetitive purchasers had not been excluded.
51 Commission decision of April 2, 2003, Case COMP/M.2876 – NewsCorp/Telepiù, paras.
206–20. The Commission found that NewsCorp had failed to show that its Stream pay-TV
42 107 F. Supp. 2d 1192 (N.D. Cal. 2000). business would exit the market and had made no attempt to identify alternative purchasers.
43 504 F. Supp. 661 (S.D.N.Y. 1981). 52 Commission decision of May 10, 2007, Case COMP/M.4381 – JCI/FIAMM, paras. 689–
750. The Commission found that the target division’s failure would have jeopardised the
44 397 F. Supp. 78 (D. Colo. 1975). survival of the broader group. It therefore treated the failing division as an instance of
a failing firm. The defence failed, however, as the target would likely have been sold to
45 See OECD, Roundtable on Failing Firm Defence – Contribution by the United States
competitors in the context of bankruptcy proceedings, so would not have exited the market.
(DAF/COMP/WD(2009)99) (October 6, 2009), https://www.justice.gov/sites/default/
files/atr/legacy/2011/05/05/270422.pdf, para. 2. 53 IAG/bmi, supra, paras. 608–33. The Commission rejected the defence having determined that,
if bmi failed, its slots at Heathrow Airport would be reallocated to other airlines, possibly for
46 Commission decision of October 9, 2013, Case COMP/M.6796 – Aegean/Olympic (II).
use on routes previously served by bmi. IAG had therefore failed to show that bmi’s insolvency
47 Commission decision of January 26, 2011, Case COMP/M.5830 – Olympic/Aegean Airlines would lead inevitably to the withdrawal of its routes. In fact, the Commission considered
(I). In its 2011 review of this transaction, the Commission concluded that Olympic Air would that bmi’s insolvency could be preferable to its acquisition by IAG, as it would likely“result in
not exit the market, but would instead maintain domestic flights and scale back international a more balanced distribution of market shares (and frequencies of service).”
flights. Two years later, after Olympic Air had been further ravaged by the Greek sovereign
54 Commission decision of May 7, 2018, Case COMP/M.8444 – ArcelorMittal/Ilva, paras. 404–
debt crisis, the Commission reversed its position, recognising that Olympic Air had never
32. The Commission rejected the defence in part because Ilva’s assets “were awarded as a result
been profitable since its 2009 privatisation; had only survived through successive capital
of a competitive procedure where two bidders submitted bids. Absent the Transaction, the most
injections; and would no longer be supported. The Commission accepted that the relevant
likely counterfactual scenario at the time of the merger would thus have been that another buyer
conditions were satisfied and approved the merger unconditionally.
would have been awarded Ilva as a going concern.”In other words, the relevant counterfactual
48 Commission decision of December 4, 1996, Case IV/M.774 – Saint-Gobain/Wacker-Chemie/ was the competitive situation existing at the time of the merger, and in this counterfactual,
NOM, paras. 247–59. No limb of the defence was proven: the parties had not shown that a less anti-competitive purchaser (i.e., the second failing firm condition) was plausible. As
the target would exit the market; Saint-Gobain would not acquire all of its market share if regards the inevitably of Ilva’s assets exiting the market, ArcelorMittal had “not provided any
it failed (the case was decided prior to BASF/Eurodiol/Pantochim); and the target included evidence that the market share of the failing firm would in any event accrue to the other merging
productive assets that could continue to compete under less anti-competitive ownership. The party”(para. 431), an unexpected return to the Kali+Salz market share criterion.
Commission concluded: “it is clear from an examination of the three criteria that a prohibition
of the merger would be the less anti-competitive decision.” 55 Fed. Trade Comm. and Dep’t of Just., 2010 Horizontal Merger Guidelines, § 11. See, e.g.,
FTC v. Great Lakes Chem. Corp., 528 F. Supp. 84, 96 (N.D. Ill. 1981).
49 Commission decision of June 26, 1997, Case IV/M.890 – Blokker/Toys “R” Us (II), paras.
109–13. The Commission accepted that Toys “R” Us would exit the Dutch market, but 56 Commission decision of September 2, 2013, Case COMP/M.6360 – Nynas/Shell/Harburg
rejected the claim that Blokker would acquire all of Toys “R”Us’market share if it failed. Refinery.
Concurrences N° 4-2020 I Legal practices I Nicholas Levy, Daniel Culley, Richard Pepper, Alexis Lazda, Edward Dean I The failing firm defence in the age of COVID-19 5IV. The was not a defence for the merging parties to assert, but
constitutes a violation of the publisher's rights and may be punished by up to 3 years imprisonment and up to a € 300 000 fine (Art. L. 335-2 Code de la Propriété Intellectuelle). Personal use of this document is authorised within the limits of Art. L 122-5 Code de la Propriété Intellectuelle and DRM protection.
rather a piece of what the DOJ should have taken into
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L. 335-2 CPI). L’utilisation personnelle est strictement autorisée dans les limites de l’article L. 122 5 CPI et des mesures techniques de protection pouvant accompagner ce document. This document is protected by copyright laws and international copyright treaties. Non-authorised use of this document
consideration in making its prima facie case.
counterfactual 23. The US agencies’ use of counterfactual evidence has
approach or “flailing also been evident in cases outside the context of merger
litigation. In 1997, for example, the FTC approved the
firm defence” combination of Boeing, the world’s largest producer
of commercial aircraft with a 60% market share, and
McDonnell Douglas, which had a share of nearly 5%.63
21. Despite the strict application of the failing firm The market was highly concentrated—Airbus was
defence in the EU and United States, the Commission the only other significant player, and the FTC found
and US federal agencies have over time become more that entry barriers were especially high in commercial
willing to take account of a company’s deteriorating aircraft manufacturing. Although the FTC found that
financial condition in their substantive assessment of McDonnell Douglas was not a failing firm, it concluded
the counterfactual. In some cases, this approach has that McDonnell Douglas’ significance as an independent
led to unconditional clearance.57 More commonly, supplier of commercial aircraft had deteriorated to
evidence of this kind has helped to mitigate potential the point that it no longer constrained Boeing’s and
concerns, leading to a conditional approval subject to Airbus’ prices for large commercial aircraft. The FTC
less burdensome remedies than might otherwise have found that McDonnell Douglas’ decline resulted from
been required. its failure to invest in new technology and identified no
evidence that the decline could or would be reversed
absent the transaction. Accordingly, the FTC closed the
1. The US agencies’ and courts’ investigation without taking any action.
approach 24. Most recently, in 2020, a judge in the United States
22. As with the failing firm defence, the origins of District Court for the Southern District of New York
this approach are in the United States, where some denied an injunction sought by over a dozen state
have referred to it as the “flailing firm” argument. The attorneys general seeking to block T-Mobile US, Inc.’s
Supreme Court credited such an argument in United proposed acquisition of Sprint Corporation.64 Although
States v. General Dynamics Corp.58 There, as a result the merging parties represented two of only four players
of General Dynamics’ acquisition of Material Service in the wireless carrier market, the court found in favour
Corp., which had itself acquired stock of United Electric of T-Mobile, citing Sprint’s position as a “weakened
Coal, “General Dynamics became the Nation’s fifth largest competitor” that cannot “compete effectively in the future”
commercial coal producer.”59 The DOJ challenged the as an important factor in finding that the merger was
merger under Section 7 of the Clayton Act,60 arguing in unlikely to have anticompetitive effects.
part that the District Court’s reliance on evidence of the
“[changing] patterns and structure of the coal industry,” 25. Despite appearing to offer a more party-friendly
and United Electrics’ depleted coal resources—such that pathway, analysis of the counterfactual or flailing firm
it was unable to compete effectively for future contracts— argument is still rigorous. The Sixth Circuit has referred
was essentially a failing firm defence and failed to meet its to it—somewhat overdramatically—as the “Hail-Mary
“strict limits.”61 The court rejected that framing. Instead, pass of presumptively doomed mergers.”65 Indeed, in 2011,
it found that United Electric’s lack of reserves meant it a US administrative law judge rejected the argument in
was no longer strong enough to compete and those facts ProMedica’s proposed acquisition of St. Luke’s hospital
“went to the heart of the Government’s statistical prima and supported the FTC’s opposition to the transaction.66
facie case” as to the merger’s effect on competition.62 Despite evidence that St. Luke’s has been consistently
Thus, evidence of United Electric’s failing position operating at a loss since 2007, which led to deferring capital
investments and a downgrade of St. Luke’s bond rating
(described by the court as “close to ‘junk bond status”)
and the conclusion that St. Luke’s “future viability beyond
57 In two related cases, the Commission applied the failing firm defence in all but name.
Deloitte & Touche/Andersen (UK) and Ernst & Young France/Andersen France both
concerned the collapse of accountancy firm Arthur Andersen after the 2001 Enron scandal.
The Commission considered that Arthur Andersen’s failure and the subsequent reduction
of major accountancy firms from five to four was “inevitable” in the wake of the scandal.
63 R. Pitofsky, Former FTC Chairman, R. B. Starek, III, Former FTC Comm’r & C. A.
It approved Deloitte’s and Ernst & Young’s takeover of the British and French arms of
Varney, Former FTC Comm’r, Statement of Chairman Robert Pitofsky and Comm’rs
Arthur Andersen (leading to a similar reduction of firms from five to four) unconditionally.
Janet D. Steiger, Roscoe B. Starek III and Christine A. Varney in the Matter of The Boeing
See Commission decision of July 1, 2002, Case COMP/M.2810 – Deloitte & Touche/Andersen
Company/McDonnell Douglas Corporation (July 1, 1997), https://www.ftc.gov/public-
(UK), paras. 44–61; and Commission decision of September 5, 2002, Case COMP/M.2816
statements/1997/07/statement-chairman-robert-pitofsky-commissioners-janet-d-steiger-
– Ernst & Young France/Andersen France, paras. 75–90.
roscoe-b; and DOJ and FTC, Commentary on the Horizontal Merger Guidelines (2010),
58 United States v. General Dynamics Corp., 415 U.S. 486 (1974). https://www.justice.gov/atr/commentary-horizontal-merger-guidelines (citing Boeing
and McDonnell Douglas (FTC 1997)).
59 Ibid., at 488–89.
64 Decision and Order, State of New York v. Deutsche Telekom AG, No. 1:19-cv-05434 (S.D.N.Y.
60 Ibid., at 488. 2020).
61 Ibid., at 506–10. 65 ProMedica Health Sys., Inc. v. FTC, 749 F.3d 559 (6th Cir. 2014).
62 Ibid., at 508. 66 ProMedica Health Sys., Inc., 152 F.T.C. 708 (2011) (Initial Decision).
6 Concurrences N° 4-2020 I Legal practices I Nicholas Levy, Daniel Culley, Richard Pepper, Alexis Lazda, Edward Dean I The failing firm defence in the age of COVID-19the next several years is uncertain,” the judge ultimately acknowledged that this evidence could be considered
constitutes a violation of the publisher's rights and may be punished by up to 3 years imprisonment and up to a € 300 000 fine (Art. L. 335-2 Code de la Propriété Intellectuelle). Personal use of this document is authorised within the limits of Art. L 122-5 Code de la Propriété Intellectuelle and DRM protection.
rejected these arguments due to insufficient evidence of a within the confines of the failing firm defence or as part of
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L. 335-2 CPI). L’utilisation personnelle est strictement autorisée dans les limites de l’article L. 122 5 CPI et des mesures techniques de protection pouvant accompagner ce document. This document is protected by copyright laws and international copyright treaties. Non-authorised use of this document
sharp decline in future market share.67 a broader substantive assessment, where the Commission
would “assess how the deterioration of competition absent
the merger would compare to long-term structural effects
2. The Commission’s approach of the merger on the market.”74 In other words, the
Commission will treat evidence submitted as part of the
26. In common with the US agencies and courts, the failing firm defence similarly to evidence relating to other
Commission has been willing to accept similar arguments aspects of the counterfactual.75 On the facts of the case,
in the EU. The leading case is probably Nynas/Shell/ however, the Commission concluded that Alstom would
Harburg Refinery. Although the Commission did continue to be an effective competitor even if the merger
not characterise this as a failing firm (or division), it did not proceed.76
systematically applied the three conditions, concluding
that they had been met and that the relevant 29. Similar arguments were made in Hutchison 3G Italy/
counterfactual was one where Shell would have closed WIND/JV, where both partners argued that they would
a refinery in Harburg in the absence of its acquisition compete less effectively absent the transaction because
by Nynas.68 Similarly, in T-Mobile NL/Tele2 NL, the they lacked the ability to invest in 4G and would fall behind
Commission unconditionally approved a transaction on rivals (Hutchison 3G Italy because it was constrained by
the ground that Tele2 NL was already stagnating prior its small size and WIND because it was saddled with
to the merger, suffering from both limited growth and a debt). The Commission reviewed both parties’ historical
decline in network quality, and was expected to continue performance, financial data, and internal documents and
to deteriorate absent the transaction.69 concluded that both parties had competed—and would
continue to compete—aggressively and effectively. The
27. In NewsCorp/Telepiù70 and JCI/FIAMM,71 the appropriate counterfactual was therefore one where
Commission attached importance to evidence that Hutchison 3G Italy and WIND remained important
the targets in question were “flailing” in conditionally competitive forces.77
approving the transactions.72 The Commission’s
assessment of ArcelorMittal/Ilva was also influenced
by similar considerations. In that case, the Commission
rejected the failing firm defence (including because of
doubts over whether Ilva’s assets would exit the market
V. Conclusion
absent the transaction). Because, however, Ilva had 30. The Commission and US federal agencies have
been forced by environmental restrictions to operate established strict conditions for the application of the
below optimal capacity, the Commission accepted (in failing firm defence. This rigour is likely to be maintained
what it characterised as a “conservative approach”) that in the aftermath of the COVID-19 pandemic. Decision
Ilva would not be restored to full capacity absent the makers have emphasised that they will not relax these
transaction.73 standards, consistent with their approach in previous
economic downturns.
28. The Commission is rigorous in examining flailing
firm arguments. In General Electric/Alstom, for example, 31. The history of the defence’s application partly reflects
the merging parties argued that the Commission should how difficult it is to satisfy. Even where it is clear that
take account of financial and structural constraints a target firm is at risk of imminent insolvency, EU and
on Alstom’s future competitiveness. The Commission US agencies require compelling evidence that: (i) no less
anticompetitive purchaser is available; and (ii) the target’s
assets will exit the market absent the transaction. These
two points (which have been at issue in recent cases in
67 ProMedica Health Sys., Inc., 152 F.T.C. 708, 950, 953 (2011) (Initial Decision); ProMedica
Health Sys., Inc., 153 F.T.C. 473, 513 (2012) (Op. of the Comm’n).
the United States and Europe78) are partly interrelated.
Accordingly, merging parties looking to rely on the
68 Nynas/Shell/Harburg Refinery, supra, paras. 307–62.
69 Commission decision of November 27, 2018, Case COMP/M.8792 – T-Mobile NL/Tele2 NL,
paras. 431–565.
70 NewsCorp/Telepiù, supra, paras. 206–20. NewsCorp had failed to show that its Stream 74 Commission decision of September 8, 2015, Case M.7278 – General Electric/Alstom
pay-TV business would exit the market and had made no attempt to identify alternative (Thermal Power, Renewable Power and Grid Business), paras. 1150–52.
purchasers.
75 Ibid., para. 1152 (“Even where the criteria for the application of the ‘failing firm defence’
71 JCI/FIAMM, supra, paras. 689–750. The Commission found—unlike in NewsCorp/ are not met, the development of competitive conditions could lead to the conclusion that the
Telepiù—that the target division’s failure would have jeopardised the survival of the broader deterioration of competition in the market is not a consequence of the merger. In such situations,
group. It therefore treated the failing division as an instance of a failing firm. The defence the Commission can undertake a general causation test in applying Article 2(3) of the Merger
ultimately failed, however, as the target would likely have been sold to competitors in the Regulation and paragraph 9 of the Horizontal Merger Guidelines”). See also JCI/FIAMM,
context of bankruptcy proceedings, and would not therefore have exited the market. supra, para. 751.
72 NewsCorp/Telepiù, supra, paras. 205–21 (Although the Commission rejected the formal 76 General Electric/Alstom (Thermal Power, Renewable Power and Grid Business), supra, paras.
application of the failing firm defence, it still concluded that “the risk of Stream exiting 1157–228.
the market, if it were to materialise, would be a factor to take into account when assessing the
present merger. The Commission further considers that an authorisation of the merger subject 77 Commission decision of September 1, 2016, Case M.7758 – Hutchison 3G Italy/WIND/JV,
to appropriate conditions will be more beneficial to consumers than a disruption caused by a paras. 570–771.
potential closure of Stream”); and JCI/FIAMM, supra, paras. 751–815.
78 United States v. Energy Solutions, Inc., Civ. No. 16-1056-SLR (D. Del. July 13, 2017), [49]–
73 ArcelorMittal/Ilva, supra, paras. 434–36 [52]; ArcelorMittal/Ilva, supra, paras. 418–24.
Concurrences N° 4-2020 I Legal practices I Nicholas Levy, Daniel Culley, Richard Pepper, Alexis Lazda, Edward Dean I The failing firm defence in the age of COVID-19 7You can also read
