The fact that a merger might be anticompetitive is not a reason to prohibit a transaction if all of the elements of the “failing firm defense” are met, as described below. In fact, the antitrust agencies have long recognized that the failing firm defense will allow some anticompetitive transactions to proceed, noting, in an earlier version of the Merger Guidelines:
The “failing firm defense” is a long-established, but ambiguous, doctrine under which an anticompetitive merger may be allowed because one of the merging firms is “failing.” Because the defense can immunize significantly anticompetitive mergers, the Department will construe its element[s] strictly.
1984 Merger Guidelines § 5.1.
As noted, the agencies carefully scrutinize companies invoking the failing firm defense. To successfully invoke the failing firm defense, a company must satisfy three requirements:
First, the proponent of the acquisition must show that the company to be acquired is in imminent danger of failure. Second, the failing company must have no realistic prospect for a successful reorganization. Third, the proponent must demonstrate that there is no other viable alternative purchaser.
DOJ and FTC, Horizontal Merger Guidelines, § 11 (August 19, 2010).
There are two main justifications that courts and commentators give for the failing firm defense: the social impact of letting a firm fail and the economic impact. The social impact rationale focuses on the impact that letting the firm fail will have on stockholders, creditors, and workers, while the economic rationale focuses on the fact that if the failing firm’s capacity and other assets are allowed to exit the market, this can ultimately lead to higher prices and lower output.
Although economists and commentators have long debated the merits of both the social and economic rationales for the doctrine, it is widely recognized that the failing firm defense is an “absolute defense” to an otherwise anticompetitive merger. The agencies and the courts continue to recognize that the defense represents a policy determination that certain mergers should be allowed to proceed even if it is possible that they will result in anticompetitive effects.