The UK antitrust authority, the Office of Fair Trading (OFT), published on 18 December 2008 a restatement of its position on the "failing firm" defence in merger reviews. In current economic conditions, this is timely confirmation of the relevant principles and practice. It is also a reminder that mergers that would probably have been blocked in better economic conditions may now be cleared.
The defence allows a claim by the parties to a proposed merger that, because one of the firms is failing, there is no causal link between the merger – and the exit of one of the players and concentration of share and assets in a single player – and the competitive harm that might result.
The failing firm defence is recognised and has been applied by many (but not all) antitrust authorities, including the European Commission, those in many EU Member States, and the U.S. enforcement agencies. To date, the "failing firm" defence has been successfully invoked before the UK authorities in only four cases. However, although in the broad context of merger reviews the defence is of fairly limited application, in fact the UK authorities have accepted the defence more often than most.
Recourse to the defence is bound to increase if current economic conditions persist. Indeed, the OFT’s restatement was published just two months after the UK government (exercising statutory powers granted to the Secretary of State) withdrew jurisdiction from the antitrust authorities to review a banking merger: the Lloyds TSB Group plc acquisition of struggling banking group HBOS plc. In that case the OFT reported "a realistic prospect that the anticipated merger will result in a substantial lessening of competition in personal current accounts, banking services for small and medium sized enterprises and mortgages." However, despite these concerns, the Secretary of State used his statutory powers (s42 Enterprise Act 2002) to prioritise the public interest of financial stability and allow the transaction to proceed without reference by the OFT to the Competition Commission.
The OFT’s Statement (PDF). The new publication of the defence by the OFT is designed to be consistent with past practice and to merely amount to a codification of existing guidance and decision making practice. According to the OFT’s statement, the OFT will only clear a transaction on the basis of a "failing firm" defence where it has "sufficient compelling evidence" that all of the following conditions are satisfied:
- it is inevitable that the failing business will exit the market absent the merger in the near future;
- there is no serious prospect of the failing business being reorganised – such options being demonstrably explored; and
- there is no realistic and substantially less anti-competitive alternative, including:
- no other realistic purchasers whose acquisition would produce a substantially better outcome for competition – even if such a purchaser may not offer as high a purchase price or otherwise benefit the target business – the OFT will take account of any realistic prospect of alternative offers above liquidation value; or
- no scenario where it may be better for competition that the failing business fails and the remaining players compete for its market share and assets rather than being transferred entirely to a single purchaser.
The current economic climate increases the likelihood of circumstances arising that will support claim regarding the first two conditions – that there will be "inevitable exit" and the absence of an "alternative purchaser." Nevertheless, the OFT has signaled that it will not relax its requirement of sufficient compelling evidence. The OFT’s stance is that a "failing firm" defence is not a free pass, but a counterfactual submission against which a merger must be judged. Time will tell.
In Practice. As a matter of practice the "failing firm" defence can be raised in relation to the target or the purchaser. Furthermore, in line with its usual practice, the OFT will not treat completed acquisitions (there is no formal obligation to notify transactions in the UK) more favourably than anticipated transactions when assessing any "failing firm" submissions.
Crucially, the OFT indicates that, in line with recent practice, the OFT is willing to provide informal guidance on whether the "failing firm" defence might be invoked in any given case prior to completion of a deal and prior to notification. Of course, the OFT underlines that the usual conditions for informal guidance will apply, which include an assessment by the parties’ advisers that the case is a credible candidate for reference to the Competition Commission. (But as with all Informal Guidance, any indications from the OFT are non-binding and its quality is strictly subject to the data supplied by the parties. As a result the case for Informal Guidance should be carefully considered before making an approach.)
Read more on the restatement at the OFT’s web site.