The Failing Firm Defence: Are the Failing Firm Defence Criteria Formal Conditions or a Tool to Help Assess Overall Effects of a Merger?

Abstract: The failing firm defence is an exception to the underlying philosophy of merger control. When the failing firm defence is applied successfully mergers that have anti-competitive effects are approved, due to the fact that the competitive structure would deteriorate in a similar fashion in the absence of the merger. This thesis examines the Commission´s approach in appraising such mergers under the Merger Regulations. The failing firm defence was first accepted in the case of Kali und Salz where the Commission established the criteria for the assessment of the defence. The criteria were later reformulated in the BASF/Eurodial/Pantochim decision. This thesis argues that the Commission has moved from a formalistic approach in applying the failing firm defence criteria, which was similar to the approach that is used in the United States, towards a more effect-based approach where an overall counterfactual analysis plays a larger role than it did before. In some cases, a so-called failing division defence has been invoked. This happens when the entire firm is not failing but only a division of it is not profitable so the firm might have a strategic incentive to close the division. The Commission required a higher standard of proof in its earlier cases so that it not be a mere management decision to close down the division in question. The defence was first successfully invoked in 2013 in the Nynas/Shell merger. This thesis argues that the Commission has not relaxed the evidentiary standards for the acceptance failing division defence but rather applies the defence in a more flexible manner, where strategic incentives of the firms in question and the overall effects have been given more weight in the Commissions assessment.