The failing firm defence in the age of COVID-19

As COVID-19 continues to cause economic upheaval, undermine established business models, and jeopardise the long-term viability of important sectors of the economy, an increasing number of transactions may involve firms in severe financial difficulty. This may in turn increase the number of cases in which antitrust agencies are asked to apply the failing firm “defence” and approve acquisitions of companies facing financial ruin where, in the absence of the merger, competition would in any event be significantly reduced. In such cases, agencies accept that the notified concentration is not the cause of the reduction in competition. This article considers the history and application of the failing firm defence by the European Commission in light of the practice of the US federal agencies. Although colloquially referred to as a “defence,” this article explains why the failing firm conditions are more accurately understood as being an extreme case of reasoning about the state of the world absent the proposed concentration, or “counterfactual.” This in turn explains why the defence has been accepted only rarely and why agencies are unlikely to expand the circumstances in which the defence may be available in the aftermath of the pandemic. This article predicts that antitrust agencies will nonetheless continue to take account of companies’ deteriorated or deteriorating financial circumstances in assessing the relevant counterfactual to reportable concentrations.

I. Introduction 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 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 (“Commission”) Temporary Framework. [3] But other struggling firms may look to M&A for survival. This may, in turn, lead to an increasing number of cases where agencies come under pressure to approve acquisitions that would ensure the survival of those firms. 2. Merger control is a predictive exercise. Competition authorities endeavour to assess the impact of a given

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