Academic journal article William and Mary Law Review

Surviving the Shipwreck: A Proposal to Revive the Failing Division Defense

Academic journal article William and Mary Law Review

Surviving the Shipwreck: A Proposal to Revive the Failing Division Defense

Article excerpt

INTRODUCTION

The Federal Trade Commission (FTC) and the Antitrust Division of the United States Department of Justice (DOJ) evaluate the legality of certain proposed mergers by a set of self-imposed standards known as the Merger Guidelines. (1) The Merger Guidelines outline two absolute defenses to pre-merger enforcement actions brought by the FTC and DOJ (collectively "the agencies") based on the merging parties' financial condition--the failing company defense and the failing division defense. (2) The failing company and failing division defenses permit qualifying merging parties to consummate proposed mergers involving failing assets, even if the transactions are anticompetitive in violation of federal antitrust laws. (3) A successful application of the failing company defense requires that a company (1) is "unable to meet its financial obligations in the near future," (4) (2) is unable "to reorganize successfully under Chapter 11 of the Bankruptcy Act," (5) (3) make unsuccessful good faith efforts to locate less-anticompetitive purchasers, (6) and (4) absent the merger, the assets of the company "would exit the relevant market." (7) The requirements of the failing division defense are similar to those of the failing company defense, but instead of focusing on the financial status of the entire company, the failing division defense only considers the financial status of the specific division. A division of an otherwise successful company can qualify for the failing division defense if (1) the division has negative operating cash flow, (2) the assets of the division would be sold outside the relevant market absent the acquisition, and (3) the merging parties were unable to locate a less-anticompetitive purchaser for the assets. (8)

The DOJ first indicated that a failing division of an otherwise successful company could qualify for a failing division defense in the 1982 version of the Merger Guidelines. (9) In 1982, commentators predicted that the failing division defense would become a staple of antitrust merger enforcement. (10) The enthusiasm with which the failing division defense was originally received quickly faded.

Since the Supreme Court's landmark decision in International Shoe Co. v. FTC in 1930, courts have widely applied the failing company defense to mergers involving failing companies, but have not extended the same protection to mergers involving failing divisions. (11) Despite the enthusiasm with which the defense was introduced in the 1982 Merger Guidelines, no court has ever applied the failing division defense to a merger involving failing divisional assets. (12) If the failing company defense is considered a survivor through seventy years of merger enforcement policy, (13) the failing division defense is analogous to a shipwreck. Instead of applying the failing division defense, courts have addressed mergers involving the sale of divisional assets of an otherwise successful company in the following three ways: (1) considering the merger under the more widely accepted failing company defense, (2) applying the weak competitor analysis proposed in United States v. General Dynamics Corp., (14) or (3) in rare cases, mentioning, but not applying the Merger Guidelines' failing division defense. (15) These three approaches to mergers involving failing divisions harm competition, decrease certainty in an extremely complex merger review process, and do not provide the requisite flexibility to prevent the overriding social harms that may arise from blocking a merger. (16)

Now is the time to reevaluate the failing division defense. In 2001, the District Court for the Northern District of California noted the existence of the failing division defense and suggested its willingness to apply the defense in appropriate cases. (17) Although the court in Sutter Health Systems did not have the opportunity to apply the failing division defense because the merging party was an independent legal entity, the court indicated that it would apply the failing division defense to mergers involving failing divisional assets in appropriate cases. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.