A new decision from a federal court in Delaware reinforces the high burden that parties face in insulating an otherwise anticompetitive merger based on the so-called "failing firm" defense. The Justice Department ("DOJ") sought an injunction to block the combination of nuclear waste disposal companies, Energy Solutions Inc. and Waste Control Specialists LLC ("WCS"). The DOJ alleged that the deal would result in a monopoly for the disposal of certain types of radioactive waste. The Defendants challenged the DOJ's market definition but also argued that without the deal, WCS, which had never made an operating profit, would go out of business.
The failing firm defense requires proof that a company (1) is in danger of imminent business failure, (2) cannot reorganize successfully in bankruptcy, and (3) made unsuccessful good faith efforts to find alternative purchasers. The court addressed just the third element, holding that the defendants failed to show that Energy Solutions was the only purchaser. The court found that WCS courted another bidder before terminating those discussions and signing an agreement with Energy Solutions. Moreover, the parties' agreement contained "no-shop" and "no-talk" provisions that prevented WCS from informing itself of other offers.
This case is in contrast to the recently consummated merger of CentraCare Health and St. Cloud Medical Group ("SCMG"), a matter handled by Jones Day. CentraCare and SCMG were the two largest physician practices in St. Cloud, Minnesota but SCMG was failing financially. The FTC permitted the transaction based on the failing firm defense, in part because SCMG led an unsuccessful multiyear search for alternative buyers to CentraCare.
Both matters demonstrate that the failing firm defense is a high bar to meet. In addition to the financial standards, a company will have to show that it conducted an exhaustive search for alternative buyers that proves none exist. Moreover, provisions in a transaction agreement that limit the ability of the failing firm seek or consider competing offers may be harmful to failing firm arguments.