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Time to Bid Farewell to the Failing Firm Defense? Some Thoughts in the Wake of Nynas/Shell and Olympic/Aegean

Kyriakos Fountoukakos and Lisa Geary, CPI Europe Column, December 20, 2013.

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Our last edition of the CPI Europe Column for 2013 is dedicated to the “failing firm defense.” Kyriakos Fountoukakos and Lisa Geary (Herbert Smith Freehills) guide us through the recent developments in this area of EU merger control. The failing firm defense doctrine has been firmly in the spotlight in recent years, in view of the persistent difficult economic times in Europe with speculation that the Commission could increasingly accept failing firm defenses. This did not materialize until very recently when the Commission issued two consecutive clearance decisions (Nynas/Shell and Olympic/Aegean) in the short space of a few months. The Commission’s statements in those cases and its overall decisional practice, however, suggest that there is no real relaxation in the Commission’s approach and that the failing firm defense still applies rarely and narrowly and will only succeed in the presence of strong factual evidence. However, the authors argue that the approach in the two cases and the Commission’s approach in past cases involving counterfactual analyses in situations similar to a failing firm scenario involving diminution of a business for reasons unrelated to the merger, show that the Commission can and will employ a broad counterfactual analysis of which a failing firm scenario is just one example. The authors argue that, in this light, the strictly applied failing firm test with its formalistic limitations may no longer serve a purpose and can indeed be seen as a concrete example of a wider counterfactual analysis. In this latter instance, the negative effects on competition and the causality link between them and the proposed merger will necessarily be considered and may well justify a clearance decision where the competitive conditions in the market absent the merger would not be more favorable. Strong evidence to prove the counterfactual will, however, always be essential. Companies should continue to be cautious before raising such issues before the Commission and should continue to expect that such failing firm style counterfactuals will continue to be accepted only exceptionally.

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