The Office of Fair Trading (OFT) applied the so-called 'failing firm' defence for the first time since issuing a restatement of its position in December 2008 when, last week, it cleared HMV Plc's acquisition of 15 former Zavvi stores.

Antitrust partner Bernardine Adkins says, "With potential buyers scarce and many markets in difficulty, competition authorities are under pressure to speed up processes to review mergers. Failing firm cases are likely to increase in response to current economic conditions. But does this mean the authorities are relaxing standards on failing firms? Definitely not."

Prior to going into administration in December 2008, Zavvi was a leading national retailer of entertainment products and an HMV competitor. So when administrators struck a deal with HMV in February this year, the OFT launched an investigation to determine if it would result in substantial lessening of competition.

In accepting representations that the failing firm defence should apply, the OFT side-stepped having to undertake a detailed market analysis, speeding up the investigation and decision-making process. OFT chief executive John Fingleton felt there was 'overwhelming evidence pointing in favour of a failing firm defence'. Without the merger, the stores would inevitably have exited the market as a result of Zavvi's collapse. There was no other realistic entertainment retail purchaser for the stores.

Bernardine adds, "The OFT has been quick to stress that it's unlikely to bend the rules and will continue to scrutinise claims carefully, including the failing firm defence. Since the Enterprise Act 2002 came into force, the defence has only been successfully applied on five occasions. It will only be willing to accept the defence where it has sufficient and compelling evidence to do so."

This defence essentially entails satisfying the OFT that the complete exit of the target company from the market may be inevitable and demonstrating that there is no realistic and substantially less anti-competitive alternative to the merger.

Bernardine concludes, "While the defence may offer the advantage of a speedier decision-making progress with the OFT, it will not reduce the 'upfront work' that will be needed. The OFT will be sure to test vigorously whether indeed the defence is met. In so doing it is also willing to provide informal advice on the matter where appropriate. This offers a window of opportunity to gauge the OFT's thoughts on whether the conditions of the defence are likely to be met."

"However, the OFT's ability to offer effective advice depends on the amount and quality of information provided by the parties. It should also be noted that the OFT is not bound by any informal advice given."