Failing Company Defense

A merger or acquisition that has the potential to lessen competition significantly may violate Section 7 of the Clayton Act, 15 U.S.C.S. § 18. However, a “failing company” defense has emerged from case law and legislative history of an amendment to Section 7 that allows an acquisition or merger to proceed if the company being acquired is subject to imminent bankruptcy or liquidation, and the acquiring company is the only prospective purchaser of the failing company.

Factors to consider in applying the failing company defense are, in order of significance:

  • The company truly is failing and has deteriorated financially beyond business reverses to probability of total failure;
  • No other prospective purchaser of the failing company is available despite serious efforts at finding an alternative purchaser whose acquisition of the failing company would have less anti-competitive effect;
  • Reorganization of the failing company following bankruptcy is unlikely to result in a viable competitor;
  • Market impact of the merger is relatively insignificant;
  • Potential harm to individuals is significant enough to allow the merger as a matter of public interest; and
  • The merger is not being undertaken with an anticompetitive purpose.

The first two factors are paramount in case law and in consideration by the Department of Justice and the Federal Trade Commission of premerger notifications in which a failing company defense is raised. The remaining factors have been referred to in case law but have not been determinative of the outcome of the case in the absence of the first two factors.

Congressional recognition of the failing company defense has resulted in special legislation for the banking and newspaper industries to implement the defense. For the banking industry, the Bank Merger Act of 1966 provides that bank mergers may not be challenged under the antitrust laws if the mergers have been approved by a banking regulator due to imminent failure of one of the involved banks. For the newspaper industry, the Newspaper Preservation Act provides an antitrust exemption for joint operating arrangements between newspapers in a locality that combine production but not reporting or editorial departments. Such immunized joint operating arrangements must be approved by the Attorney General on the basis that failure of one of the papers is likely to occur if the arrangement is not allowed.

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