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The Failing Firm Defence in EU Merger Control and the Effects of the Economic Crisis on its Development

Ranta, Pontus

Opinnäytetyöt , Gradut ja muut tutkielmat
Alkuperäinen julkaisupäivä: 29.11.2017


In the fall of 2013 the European Commission cleared two mergers, Nynas/Shell/Harburg Refinery and Aegean/Olympic II, on the basis of the failing firm defence. Since the European Commission had only twice before accepted a concentration on the basis of this defence these clearances raised the question whether the Commission’s interpretation of the failing firm defence had become more lenient. Such a change of practice would have been welcomed both by those who believed that the Commission’s failing firm doctrine was too demanding for merging parties to live up to and by European companies that were experiencing financial difficulties in the midst of the economic crisis. However, the European Commission has repeatedly stated that it cannot relax its application of EU merger control rules and that social concerns such as employment should be tackled by instruments designed specifically for them.

This thesis assesses the development of the failing firm doctrine of the European Commission. The aim is to clarify how the Commission has reviewed failing firm arguments invoked by the merging parties and whether the decisions adopted during the recent economic crisis have affected this assessment. The thesis has a doctrinal standpoint as it attempts to explain how the European Commission has been and now is applying the failing firm defence.

The failing firm defence is invoked when a concentration has anti-competitive effects but one of the parties to the transaction is in financial ruins and would be forced to exit the market without the merger. Competition authorities accept such arguments only when they assess that the merger is more favourable than the exit of the failing company and its assets from the market. It is argued here, that the European Commission has been fairly consistent with its application of the failing firm defence. Ever since clearing a concentration for the first time on the basis of the defence in Kali and Salz the Commission has insisted that the defence can be accepted only if the concentration in question is not causing the deterioration of the competitive structure. The purpose of the failing firm criteria it has established is to assist in the assessment of this causality. However, the 2013 clearance decisions seem to have changed the way in which the failing division defence, where only a business branch or a subsidiary of a financially healthy parent company is failing, is assessed in EU merger control. According to the Commission’s initial approach such a transaction could not take place only due to unfulfilled expectations of the parent company. However, both in Nynas/Shell/Harburg Refinery and Aegean/Olympic II the Commission assessed the strategic interests of the parent companies to continue funding their subsidiaries, which it had not done in its previous decisions.

The thesis also has a theoretical aspect to it. Competition law has an inherent law and economics approach which is followed here as a series of economic theories concerning merger control is introduced. These theories serve a purpose in educating the reader about the basic concepts relating to the appraisal of failing firm arguments. However, they are also used here for assessing how the European Commission’s failing firm doctrine has developed. It is argued here that the acceptance of the defence in Kali and Salz and in BASF/Eurodiol/Pantochim is compatible with the theory of contestable markets as the clearances were followed by de facto monopoly market structures. Similarly in the 2013 clearance decisions the Commission seems to have taken due notice of the theory as the parent companies were allowed to exit unprofitable markets. However, the Commission has not relied on such reasoning every time it has faced failing firm arguments as its initial approach towards failing division arguments illustrates. Instead it can be argued that both the Commission’s failing firm doctrine as well as EU merger control on a more general level have been and still are influenced by a variety of partly contradicting economic theories.


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