Failing Firm Defence under EU Merger Control: a legal concept or a political feasibility?

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Failing Firm Defence under EU Merger Control: a legal concept or a

political feasibility?

Alexandros Ntallas

Supervisor:

Dr. Kati Cseres

Student Number: 12214744

Date of submission: 26

th

_{July 2019}

LL.M. in European Competition Law and Regulation, Master Thesis

Amsterdam Law School, University of Amsterdam

Amsterdam, Netherlands

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Chapter 1 – Introduction

1.1. Topic and Structure

The topic of this thesis revolves around the odd concept of Failing Firm Defence in EU merger control, as an exception of the general rule of not allowing the anti-competitive effects of a concentration1_{to take place. In general, in order for two or more undertakings to merge they} have to secure and persuade the European Commission that the merger does not significantly impede the effective competition in the internal market.2_{Such an endeavor is not considered} accomplished when only one undertaking will end remaining in the market as a result of the merger. As an exception, the “failing firm” concept may lead an otherwise problematic merger to be compatible with the internal market if one of the merging parties is a “failing firm”3_.

The main question which the paper will address is whether in recent years the European Commission decided to alter its approach over the subject. In particular, until recently, the Commission’s narrow approach was that the merging parties have to prove not only that the merger is not the reason of the deterioration of the competition, but to bring facts and prove the fulfilment of three criteria that the Commission had set. However, the Commission with its two latest decisions appears to adopt a less-narrow,more effect-based interpretation. According to the latter, the Commission will examine whether the deterioration of the competition is a result of the merger, while the fulfilment of the criteria is deemed less important.

Subsequently, the thesis supports the effect-based approach, through which blocking mergers that do not restrict competition in the merits, but simply did not fulfil all of the relevant criteria will be avoided. As a result, decisions with formalistic errors leading to further deterioration of the market will be averted. Subsequently, there is an attempt to understand the non-legal but external sociopolitical and economic factors which may have influenced the Commission to adopt such an approach.

In order to assess the development of the doctrine through the years and the recent evolution of the subject, it is important to understand the circumstances under which the doctrine

1_{Namely a merger, an acquisition or a creation of a joint venture. See Council Regulation (EC) No 139/2004 of 20}

January 2004 on the control of concentrations between undertakings (the EC Merger Regulation) OJ L 24, 29.1.2004, art. 3 (1) and (4).

2_{See Merger Regulation (supra note 1), art. 2(2).}

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was established in the EU and its first criteria. Thus, the thesis analyses the early cases under which the failing firm defence doctrine came into place, namely the Kali & Salz case4_{and the} BASF/Pantochim/Eurodiol case5_{. The chapter concludes explaining the codification of the} established criteria in the 2004 Commission’s merger guidelines.6

Subsequently, in Chapter 3 an effort is made to provide an answer for the question whether or not the European Commission in recent times has developed the failing defence regime by adopting a more lenient, effect-based approach. This attempt to portrait this change in the mindset of the Commission over the interpretation of the doctrine is illustrated in its two most recent decisions, namely the Nynas/Shell/Harburg Refinery7_{and the Aegean/Olympic II cases.}8_The Commission ostensibly responded to these two mergers where the “failing firm defence” was invoked by stating that they fulfill the relevant legal criteria. However, these decisions were cleared guided by a counterfactual analysis and an effect-based justification.

Also, the thesis questions whether the motives of such differentiation can be found in other factors, besides competition law and law in general. As a reminder, the Commission had argued in the past that it would not loose its interpretation of the existing rules and that the current Merger Regulation offers enough flexibility to take into account the evolving market conditions.9_Did actually the European Commission actually stand by its words, or did the internal market factors change so drastically that it had to evolve with them, hence developing the failing firm defence concept as well?

The thesis, in Chapter 4, tries to answer the aforementioned question on the suggestion that EU competition law has an ancillary nature. Under this suggestion, competition law functions as a pillar of the internal market, and together with the four fundamental freedoms, namely the free movement of goods, services, labour and capital, tries to achieve other goals of the European Union. The thesis makes the argument that these objectives were guided by a shift of politics and government from the people back into the control of privileged groups and illustrates that the Commission was influenced by sociopolitical and economic factors, namely the industrial policy

4_{Case No IV/M.308 Kali&Salz/MDK/Treuhaund, Commission Decision of 14 December 1993.} 5_{Case M.2314 BASF/Eurodiol/Pantochim, Commission Decision of 11 July 2001.}

6_{Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations}

between undertakings C 031, 5.2.2004.

7_{Case No COMP/M.6360 Nynas/Shell/Harburg Refinery, Decision of 2 September 2013.} 8_{Case No COMP/M.6796 Aegean/Olympic II, Decision of 9 October 2013.}

9_{European Commission website,}_'_{Tackling the financial crisis}_'

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and the effects of the economic crisis in the European market, to form its decisions. 10_Thus, external factors played a role to the Commission’s adoption of a different approach and assessment of the criteria. However, even though the Commission’s decision was influenced by these external factors it cannot be regarded as solely political. The development of the concept of the failing firm defence, even if it served general EU objectives, was legally justifiable because of its previous unnecessary narrow scope.

1.2. Purpose and methodology

As already mentioned, the main purpose of this thesis is to illustrate the diversion of the mindset of the European Commission in recent times from a narrow to an effect-based approach in relation to the rationale behind the establishment of the “failing firm defence” doctrine in the past. The doctrinal method of research consists of two parts, namely the allocation of the legal provisions in force and subsequently the interpretation and analysis of it. 11

In particular, the doctrinal research method revolves around the analysis and interpretation of the primary sources of the relevant case law and legislation. In this regard, on one hand, the most important primary sources consist of the case law of the European Court of Justice and the decisions of the European Commission. As far as legislation is concerned, both the provisions of the Treaty for the Functioning of the European Union (TFEU), which set out the basic framework of the EU Competition Law, and the Horizontal Merger Guidelines, which codified the “failing firm defence” doctrine, have been taken into consideration for reaching a safe conclusion. On the other hand, the secondary sources primarily consist of competition law handbooks, journal articles dealing with the “failing firm defence” and case commentaries concerning the merger decisions of the European Commission.

This thesis intends to clarify how the latest cases have contributed to the assessment of the failing firm defence in the merger control practiced by the European Commission. The aim is to depict the sociopolitical and economic factors, which apart from the legal criteria, played a major

10_{See Damien Geradin and Ianis Girgenson, 'Industrial Policy and European Merger Control - A Reassessment'}

[2011] TILEC Discussion Paper No. 2011-053, where the Commission many times have based its decisions on industrial policy rather than purely competition criteria. Available at SSRN http://ssrn.com/abstract=1937586.

11_{Hutchinson Terry and Duncan Nigel, 'Defining and Describing What We Do: Doctrinal Legal}

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role on the development of the “failing firm defence” doctrine. This is another reason for choosing the doctrinal research which uses relevant sociopolitical and economic surrounding as legal provisions. Also, another aim of the research is to critically assess whether the influence by those factors steered the European Commission to the right decision protecting the internal market and whether such endeavor was against the purpose of competition law.

Chapter 2 - The establishment of the Failing Firm Defence in EU

Merger Control

2.1. The notion and origins of the failing firm defence

The notion of the failing firm defence plays an important role in competition law, where an otherwise problematic merger between two competitors can be considered compatible with the internal market if one of the parties is a failing firm. In particular, the authorities and courts have to balance between two undesirable outcomes, where on one side, if the merger is blocked, valuable assets from the market will be lost, while on the other, if the merger is cleared, the concentration between companies will increase, hindering competition.12

The birthplace of the doctrine is the U.S. The first case that recognized a legal basis on a failing firm argument was the International Shoe Co. v. FTC13_{were the Supreme Court found that} McElwain Company had a “grave probability of business failure” and that there was no alternative purchaser other than the International Shoe Company. These were the first criteria14_{that led the} Court to conclude that competition was not substantially lessen and to clear the acquisition of McElwain’s capital stock.

The defence was subsequently enhanced from the Congress and the House and Senate Judicial Committees. According to them, the courts are not able to balance the likelihood of failure

12_{See more on Edward O. Correia, 'Re-examining the failing company defence' [1996] 64(3) Antitrust Law Journal,}

p. 683-701.

13_{Case International Shoe Co. v. FTC 280 U.S. 291 (1930).}

14_{Actually, the first official criteria were established later on in Citizen Publishing Co. v. United States 394 U.S. 131}

(1969) case. These criteria, three in number, included the first two that the Court based its decision in the International Shoes case. See more Correia [1996] (supra note 12), p. 685.

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against the likely competitive harm from a merger, but clear the merger if the requirements are fulfilled.15

It is apparent that both the Court and the Committees showcase a very protective policy towards companies by not letting them exit the market and lose their assets. But what is the reason behind such protectionism?

In 1930 the U.S. were amidst the long economic implosion that grew to become the so called “Great Depression”.16_{Hence, the merger, apparently related to the relevant time frame, was} caused by the recession following World War I. 17_{Prior to the depression, the U.S. had developed} a plethora of state-level bills, reinforcing market competition and preclusion of restrains of trade in order for the state to adopt a secondary role as the market was liberalized. 18_{This policy remained} in force in the first years of the repression while president Hoover tried to reverse the downturn. However, his efforts did not flourish and president Roosevelt was elected in 1932 and enforced his own policy, the so-called “New Deal”, according to which the market should not be steered from self-interested behavior, but from interdependent companies who work together.19

Roosevelt’s policy prevailed in 1932 and even if the case in hand took place two years prior to that, it promoted a similar policy and reasoning allowing failing companies to merge and work together to overcome the economic straggle. Thus, it can be argued that in times of need – as during an economical depression – the doctrine has been used to carry out political feasibilities and materialize political objectives. The question that arises which I will try to answer is whether the European Commission by adopting a less narrow approach regarding the failing firm defence doctrine had a similar political objective in mind or the product of its reasoning was strictly legal.

15_{Correia [1996] (supra note 12), p. 685.}

16_{During the depression the unemployment rates reached even 25%, wages shrank and the industrial production fell}

37% from the peak in July 1929 to December 1930. See more Kimberly Amadeo, 'The Great Depression, What Happened, What Caused It, How It Ended' (The Balance, 25th June 2019) < https://www.thebalance.com/the-great-depression-of-1929-3306033> accessed 26 July 2019 and Christina D. Romer, 'The Nation in Depression' [1993] 7(2) The Journal of Economic Perspectives, p. 19-39.

17_{See Richard E. Low, 'The Failing Company Doctrine: An Illusive Economic Defense Under Section 7 of the}

Clayton Act ' [1967] 35(3) Fordham Law Review, p. 427.

18_{Frank R. Dobbin, 'The Social Construction of the Great Depression: Industrial Policy during the 1930 in the}

United States, Britain, and France' [1993] 22(1) Theory and Society, p. 9.

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2.2. Kali & Salz case

2.2.1. Facts of the case

The first successful encounter with the failing firm defence doctrine for the Commission was the Kali & Salz case.20_{Regarding the background of the case, on one hand, Kali & Salz was} a subsidiary of the chemicals group BASF and operated primarily in potash and rock-salt and waste disposal sectors. On the other hand, Mitteldeutsche Kali AG (MdK), also engaged in potash and rock-salt activities, had as its sole shareholder Treuhandanstalt (Treuhand).21

Subsequently, these two companies, Kali & Salz and Treuhand, notified their proposition to create a joint venture which would combine their potash and rock-salt activities, where Kali & Salz would hold 51% and Treuhand 49% of the share capital and voting rights.22_{Such a} concentration was found to raise serious doubts as to its compatibility with the common market according to the European Commission, which led to a Phase II23_proceeding.24

Judging the effects of the aforementioned concentration the Commission held that a de facto dominant position25_{on the German market for potash used for agricultural purposes would} be created with a combined share of 98% of the market.26_{As for the market outside of Germany,} the Commission stated that on the basis of remedies27_{from the parties the concerns regarding the} market would be removed.28_{But, in relation to the magnesium products in this market the offered} remedies were not enough.29

To counterbalance this negative assessment from the Commission, the parties argued that, without the merger, MdK would soon be forced out of the market and that the market shares which would become available would essentially go to Kali & Salz, because other suppliers could not be

20_{Case Kali&Salz (supra note 4).} 21_{Case Kali&Salz (supra note 4), para. 4.} 22_{Ibid, para. 1 and 5.}

23_{In this phase, according to art. 6 (1)(c) of the Merger Regulation (supra note 1) the Commission commences its}

investigation on concentrations which raise serious doubts about their compatibility with the internal market. See more on Richard Whish and David Bailey, Competition Law (9th edn, Oxford 2018), p. 880 et seq.

24_{Case Kali&Salz (see supra note 4), para. 2.}

25_{See more regarding the concept of a dominant position}_{Richard Whish and David Bailey [2018] (supra note 23),}

p. 187-188.

26_{Case Kali&Salz (see supra note 4), paras. 46 and 50 as the conclusion of the assessment in paras. 46-49.} 27_{“commitments by the parties to modify their proposed transaction in order to remedy the competition problems}

identified by the Commission”, see more on Richard Whish and David Bailey [2018] (supra note 23), p. 907.

28_{Case Kali&Salz (see supra note 4), para. 68 as the conclusion of the explanation of the commitments.} 29_{Ibid, para. 69.}

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expected to gain a foothold in the German market to any significant extent.30_{In other words, the} parties argued that the conditions of the “failing firm defence” were satisfied and the Commission should clear the concentration.

2.2.2. The establishment of the doctrine

The Commission could not let such an opportunity to assess the “failing firm” argument go without establishing some robust criteria. The assessment began by illustrating the legal basis of such argument which relates to the causal link between the concentration and the creation or strengthening of a dominant position. A concentration is considered to be anti-competitive in case where it leads to the creation or strengthening of a dominant position for either of the concentrating parts or for both of them in case of a joint venture.31_{It is presumed conversely that if, even in the} event of the merger being prohibited, the acquirer would inevitably establish or strengthen its dominant position the concentration can be regarded as to not restrict competition.

After establishing the legal basis of its assessment, the Commission proceeded with the creation of the relative criteria. Thus, a concentration generally does not create the deterioration of the competitive structure of the market if:

- “the acquired undertaking would be in the near future forced out of the market if not taken over by another undertaking,

- the acquiring undertaking would take over the market share of the acquired undertaking if it were forced out of the market,

- there is no less anticompetitive alternative purchase.”

Although, the Commission left an ambiguous last addition, stating that in case where a merger leads to a de facto monopoly on the market, it is particularly important that the three conditions should be met.32_{That reasoning may lead us to believe that these criteria have been set} out only in situations of de facto monopoly and have less than a robust character in all other cases. Such interpretation shows a possible preexisting will of the Commission to accept other situations under the “failing firm defence” regime even without the fulfillment of the criteria.

30_{Case Kali&Salz (see supra note 4), para. 70 and 49.}

31_{The reasoning is aligned with the today’s reasoning of Merger Regulation (supra note 1), art. 2(2).} 32_{Case Kali&Salz (see supra note 4), para. 71.}

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Subsequently, the Commission continued with the individual assessment of the MdK as a failing firm. First, it declared that MdK had immense losses mainly because of the firm’s operating structure, its crisis in sales and its inefficient distribution system. Also, the undertaking could not continue to operate without the Treuhand which has covered the losses until that point, using state aids, a technique not viable for the future.33_{For the aforementioned reasons the Commission} concluded that the first criterion, namely that MdK will withdraw from the market if it is not taken over by a private undertaking, had been fulfilled.34_{The second criterion was fulfilled because the} German potash market was sealed off against competitors from other countries, due to a number of structural factors, hence the MdK’s share of the market would accrue to Kali & Salz either way.35_{Third, the Commission was of the opinion that there was sufficient evidence to suggest that} an acquisition of all or substantial part of MdK by an undertaking other than Kali and Salz could be ruled out, fulfilling the third criterion. This opinion was led mainly by two factors, first, because possible alternative buyers have been contacted and declared no interest and, second, because “no other undertaking could achieve the same synergies as Kali & Salz would”.36_{Hence, the} Commission concluded that the merger is not the cause of the strengthening of a dominant position on the German market and cleared the concentration.37

The immediate response to the decision was an action against it by the French Government.38_{Based on the reasons of the annulment of the decision pleaded by the French} Government one may argue that national policy was the underlaying cause of action, namely not letting the entirety of the German market to one undertaking. Whichever was the cause, the French Government based its action on four different reasons, one of them being the incorrect assessment of the effect of the concentration on the German market and the acceptance of the failing firm defence.

In particular, the French Government argument was founded upon two elements. On one side, the Commission had to use the criteria of the ‘failing firm defence’ as they were developed in the US litigation and not create its own, by reason that the regime was borrowed from the US

33_{Case Kali&Salz (see supra note 4), para. 75 and 76.} 34_{Ibid, para. 77.}

35_{Ibid, para. 78.} 36_{Ibid, paras. 84 and 85.} 37_{Ibid, para. 95.}

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case law, hence better developed there. On the other hand, in the alternative that the criteria had been set correctly they were not satisfied.39

The Court dissolved those arguments stating that the fact that the conditions set by the Commission do not entirely coincide with the conditions applied in the US ‘failing firm defence’ is not in itself a ground of invalidity. Furthermore, it is clear from the reasoning of the Court that the Commission had satisfied all of the criteria in the case in hand, answering thus the argument of the French Government for alleged misapplication.40

The importance of the Kali & Salz case – both the Commission’s decision and Court’s ruling – cannot be understated. From the perspective of the Commission’s decision, the criteria for the fulfillment of the lack of casualty of the deterioration of competition in the internal market were formulated. Moreover, the Commission did not follow the criteria of the US case law and legal system, but incorporated them based in the European reality hinting that they are aligned with the EU targets and goals.

From the perspective of the case law, the Court confirmed the approach taken by the Commission – criteria to fulfill the lack of causality – creating a legal precedent for the years to come. Moreover, the Court took a wider approach than the Commission in relation to the doctrine.41_{In particular, according to the Court the failing firm defence could be accepted if the} competitive structure resulting from the concentration would deteriorate in a similar fashion as it would in the absence of the transaction42_{. This statement sets out that the results streaming from} the concentration didn’t have to be better than those in its absence in order for the concentration to be cleared. Even results “in a similar fashion” are sufficient. The endeavor to clarify this addition to the concept by the Court was undertaken in the next successful ‘failing firm defence’ case by the Commission.

39_{Joined Cases France and others (supra note 38), para. 90-99, where the French Government for the support of its}

second element invoked three reasons. Firstly, the Commission ignored the possibility that MdK might become viable again following an autonomous restructuring operation carried out with financial assistance from Treuhand. Secondly, the Commission didn’t show that there was no other way of carrying out the acquisition which was less harmful to competition (principle of proportionality). Lastly, the Commission made a manifest error of assessment by the absence of conditions for authorization of the concentration which led to a combined market share of 98%.

40_{Ibid, paras. 112-125.}

41_{Emily F. Clark and Celia E. Foss, 'When the Failing Firm Defence Fails' [2012] 3(4) Journal of European}

Competition Law & Practice, p. 319. Also see Ioannis Kokkoris, 'Failing firm defence in the European Union A panacea for mergers?' [2006] 27(9) European Competition Law Review, page 499 andIoannis Kokkoris and Rodrigo Olivares-Caminal, Antitrust Law Amidst Financial Crises (Cambridge University Press 2010), p. 119.

42_{Joint Cases France and others (supra note 38), paras. 110–116. See also the Commission Decision in BASF case}

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2.3. BASF/Eurodiol/Pantochim case – Completing the doctrine

2.3.1 The reformulation of the criteria

The case which aided the further development of the doctrine was the BASF/Eurodiol/Pantochim case43_{. This case took place in 2001 and was the first clearance of a} concentration based on the failing firm defence since the Kali & Salz case, something that showcases the difficulty of the fulfillment of the criteria in any given case.

The participants were, on one side, BASF and, on the other side, Eurodiol and Pantochim. BASF was a company active worldwide in the production and distribution of chemicals, while Eurodiol and Pantochim were Belgian companies active in the production of chemicals.44_In particular, the case arose as the parties notified the Commission of a proposed acquisition of the whole of the Belgian companies by BASF.45

The Commission examined the relevant markets in the EEA46_{in which the acquisition} would create or strengthen a dominant position. After its assessment, the Commission concluded that the PA (Phthalic Anhydride) and Phthalates markets would not rise competition concerns47_, while the Butanediol (BDO) and BDO-related solvents: GBL, NMP and THF would.48_{As an} answer, BASF invoked the failing firm defence stating that it would gain a comparable position in the absence of the merger and that the assets of the business in question would definitively exit the market.49

Replying to this claim the Commission had the opportunity to further develop the failing firm defence but also confirm the wider approach taken by the Court of Justice in Kali & Salz case50_{. It began stating that two of the three criteria for the establishment of the lack of casualty} between the merger and the deterioration of the market in the Kali & Salz case were relevant. In particular, the first and third criterion, namely the exit of the acquired undertaking from the market in the near future and the no less anti-competitive alternative purchase were still in force, but the

43_{Case BASF (supra note 5).} 44_{Ibid, paras. 3-4.}

45_{Ibid, paras. 1 and 6-7.}

46_{Ibid, para. 58, the relevant geographical market is the EEA.} 47_{Ibid, paras. 63 and 67 respectively.}

48_{Ibid, paras. 78, 100, 118 and 134.} 49_{Ibid, para. 135.}

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second criterion, which demanded the acquiring company to take over the market share of the acquired company, was not.51_{To justify this claim, the Commission said that such a criterion} seemed the most obvious method to prove that the concept of the ‘rescue merger’ could be applied to that case due to the natural duopoly of the market. But, BASF would absorb merely all of Eurodiol’s market share, while all the assets of the failing firm would definitely exit from the market, which would lead to a considerable deterioration of the market conditions.52_{Thus, the} Commission adopted a new criterion, namely that the assets to be purchased would inevitably disappear from the market in the absence of the merger. The new formulation of the criteria is as follows:

- “the acquired undertaking would in the near future be forced out of the market if not taken over by another undertaking,

- there is no less anti-competitive alternative purchase, and

- the assets to be acquired would inevitably exit the market if not taken over by another undertaking.” 53

Lastly, the Commission reaffirmed that the deterioration of the competitive structure through the merger has to be at least no worse than in the absence of the merger.54

2.3.2. The Commission’s assessment

After establishing the theoretical framework of its assessment, the Commission continued with examining the case in hand on the merits. The first criterion was easily fulfilled by reason of the upcoming bankruptcy of the two Belgian companies. The companies were already heavily indebted and under a pre-bankruptcy regime in Belgium, where a restructuring plan due to the lack of liquidity was not even proposed and the danger of bankruptcy was clear-cut. Hence, the companies were to be forced out of the market in the near future.55

The second criterion of no less anti-competitive alternative purchase option for Eurodiol and Pantochim was also fulfilled. Under their pre-bankruptcy regime, a number of competitors were contacted, but apart from BASF, no other company was ready to submit a viable offer for

51_{Case BASF (supra note 5), para. 140.} 52_{Ibid, paras. 150 and 151.}

53_{Ibid, paras. 141 and 142.} 54_{Ibid, para. 143.}

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these companies. Moreover, the Commission itself decided, even though it was not necessary, to further inquire as to the possibility of an acquisition by an alternative purchase, which also didn’t bear any fruits.56

As for the new, third criterion, the Commission declared that the assets of the two companies would definitely exit the market. This conclusion was based on three factors. First, an immediate takeover of the companies, after bankruptcy, by a third party seems to be unlikely. Second, a restart of the plants at a later stage would be relatively expensive in comparison with an immediate takeover. Third, the plants could only be economically operated as a whole making it impossible isolated assets to purchased.57

However, the Commission did not stop its assessment on the fulfillment of the third criterion, which, in conformity with the other two, illustrated the further deterioration of the market even in the absence of the transaction, but applied a counterfactual analysis.58_{This decision raised} questions and was interpreted differently from the critics. On one hand, it was argued that such a counterfactual analysis was a fourth criterion needed to be fulfilled59_{, while, on the other hand, it} was argued that the three criteria were enough to prove the lack of causality.60

Performing its counterfactual analysis, the Commission held that due to the exit of the companies from the market the total capacity of the products in the market will be significantly reduced which will affect the consumers. Also, BASF and its competitors will not be able to satisfy the increasing demand and will not place additional quantities even in case of a 10% price increase. As a result, a “very considerable price increase” will be the immediate consequence of the loss of the companies from the market.61_{In contrast, in a post-merger scenario the capacity will not have} a sharp shortfall and BASF is unlikely to enforce major price increases, both of which will work

56_{Case BASF (supra note 5), paras. 146-148.} 57_{Ibid, paras. 152-156.}

58_{See for the explanation of the counterfactual analysis}_{Laia Marco Perpiñà, 'Rescuing Icarus: the European}

Commission's approach to dealing with failing firms and sectors in distress' [2015] 11(1) European Competition Journal, p. 106, where “the competition authorities identify the proper counterfactual – i.e. the situation that would unfold in the absence of the merger – and then compare this counterfactual with the post-merger scenario”.

59_{George P. Kyprianides, 'Assess the importance of the counterfactual in merger assessment with regards to the}

failing firm defence' [2012] 33(12) European Competition Law Review, p. 580.

60_{Vincenzo Baccaro, 'Failing firm defence and lack of causality: doctrine and practice in Europe of two closely}

related concepts' [2004] 25(1) European Competition Law Review p. 23 and Antitrust Law Amidst Financial Crises (supra note 33), page. 112.

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for the benefit of the consumers. Thus, the Commission concludes the deterioration of the competitive structure will be at least no worse after the merger than in its absence.62

The Commission’s Decision on BASF/Eurodiol/Pantochim case constitutes the second stage of the completion of the ‘failing firm defence’ in EU law. More specifically, its significance can be illustrated in three points. Firstly, it confirmed the wider approach of the Court in Kali & Salz case that the competitive structure of the market does not have to be better after the clearness of the merger than what it would be without it. Secondly, it further developed the ‘failing firm defence’ doctrine introducing a reformed third criterion which does not only deal with cases from duopoly to monopoly but can be applied in a more general context. Lastly, it introduced the counterfactual analysis after the fulfillment of the criteria, which for some63_{added an additional,} fourth criterion, while for others64_{a safeguard. As far as I am concerned, what became clear was} that the Commission gave itself the opportunity to examine the actual results of the merger and, on the basis of it, to be able to oppose it. The criteria however are followed normally and do not lose their importance, since their fulfillment indicate a probable positive outcome for the counterfactual analysis.

2.4. Codification of the criteria in the Horizontal Merger Guidelines

After the two well-known clearances of the Kali & Salz case and the BASF/Eurodiol/Pantochim case based on the ‘failing firm defence’, the European Commission felt the need to include the doctrine into the Horizontal Merger Guidelines65_{, which accompanied the} 2004 Merger Regulation66_{. The importance of the document is two-fold and cannot be understated} given the Commission’s influence on competition law. On one hand, even though it is not legally binding to the companies, it provides a relative safe guide to the Commission’s perception over the assessment of the failing firms. On the other hand, the doctrine wasn’t incorporated into the Merger Regulation leaving the codification of the previous decisions only in the Guidelines.

First of all, the Commission secured that the legal basis which the Court used in Kali & Salz case was mentioned in the Guidelines. The reasoning of the Court is clear: a problematic

62_{Case BASF (supra note 5), paras. 160-162.} 63_{Kyprianides, George P. [2012] (supra note 59)}

64_{Baccaro, (2004) (supra note 60), p. 23 and}_{Antitrust Law Amidst Financial Crises (supra note 41),}_{page. 112.} 65_{Horizontal Merger Guidelines (supra note 6).}

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merger is nevertheless compatible with the common market if one of the merging parties is a failing firm and “the deterioration of the competitive structure that follows the merger cannot be said to be caused by the merger”. The Commission adds also, clearly influenced by both cases, that the deterioration of the competitive structure has to be at least no worse after the merger than in its absence. 67

After establishing the legal basis, the Commission continues with the three relevant criteria for the application of a ‘failing firm defence’68_{. As for the first criterion, influenced by the Kali &} Salz case “the allegedly failing firm would in the near future be forced out of the market because of financial difficulties if not taken over by another undertaking”.

There are several factors needed to be considered in this sentence. First of all, the time period of the ‘near future’ is a shorter period than the typical time horizon for examining the effects of a merger.69_{Secondly, the ‘financial difficulties’ are met when no shareholder or other financial} investor would be willing to provide the necessary capital for the business to remain in the market as a going concern.70_{The Commission in that sense makes a case-by-case assessment and does} not request the bankruptcy proceedings to have been initiated, but the likelihood for the company to enter in the future.71_{Moreover, the tool used for the measurement of financial distress is the} company’s balance sheet in terms of profitability, liquidity and solvency.72_{Lastly, in the} assessment as a whole, the type of industry that the company is part of and the market characteristics will influence the fulfillment or not of the criterion.73

The aforementioned assessment illustrates the technical and formalistic nature of the first criterion, which, based on that can be characterised as the most difficult to be fulfilled, but at the

67_{Horizontal Merger Guidelines (supra note 6), para. 89.} 68_{Ibid, para. 90.}

69_{See more in Alistair Lindsay and Alison Berridge, The EU Merger Regulation: Substantive Issues (4th edn, Sweet}

& Maxwell 2012), p. 570.

70_{OECD (2009): Roundtable on Failing Firm Defence, pages 183-184. Available at}

http://www.oecd.org/competition/mergers/45810821.pdf accessed 26 July 2019.

71_{Ibid, pages 183-184 and Kali&Salz (supra note 4), para. 71. Although this bankruptcy must be imminent, because}

it would be tempting for companies to pretend to be less profitable, see Kokkoris [2006] (supra note 41), p. 494 and 509.

72_{OECD 2009 (supra note 70), pages 183-184. However, Firms on the verge of administration may not meet the}

criterion of exit of the firm in the near future. Firms in liquidation, though, are more likely to satisfy the criterion. Decisions by a parent company which is profitable to shut down its loss-making subsidiaries are not likely to be accepted as a credible failing-firm defence. See more Antitrust Law Amidst Financial Crises [2010] (supra note 41), p. 113.

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same time the most robust of them all.74_{But, an element of this criterion, namely the market} characteristics, may not always have a positive impact on the assessment because in a market which has been hit by an economic crisis the Commission may be quite confused as to whether the company is actually failing or not. This was the case with the merger between Aegean and Olympic as it will be illustrated further below.

The second criterion of the Horizontal Guidelines requires that “there is no less anti-competitive alternative purchase than the notified merger”. The Commission in this stage initiates an assessment to find whether other alternative buyers exist, who in case of acquiring the failing firm would lead the competition structure of the market in a better situation than the notified merger would have. The level of these effects needs also to be measured for the best possible outcome for the competition. In other words, the second criterion is a special, different case of counterfactual where the merger situation of the notified merger is compared with the post-merger situation of a post-merger that would have entailed a different acquirer.75

Not only that, but the parties of the notified concentration will have to demonstrate actual proof and persuade the Commission that they tried in the past to come into an agreement with other parties which would be less harmful acquirers for the competition. In fact, all offers or negotiation efforts above the liquidation threshold need to be considered in the analysis for the Commission to decide whether the second criterion has been established and no-less anticompetitive alternative exists.76_{Lastly, it has been argued that the second criterion entails a high degree of burden of proof} against the parties which may not be able to gather all the necessary information.77

As for the third criterion, as mentioned before, it has been reformulated in BASF case to the language that “in the absence of a merger, the assets of the failing firm would inevitably exit the market”. The reason of the reformulation was that the first two criteria were not sufficient to prove whether the assets could return or remain out of the market.78_{The purpose for the}

74_{Perpiñà [2015] (supra note 58), p. 106.}

75_{Perpiñà [2015] (supra note 58), p. 105-106 regarding the FFD counterfactual analysis, in comparison with the}

regular merger control analysis. See also Mike Walker and Pablo Florian, 'Failing firm defence: A new theory? AND Standard merger control or a special case?' [2010] No 2-2010 Tendances Concurrences: Revue des droits de la concurrence, p. 17.

76_{OECD 2009 (supra note 70), p. 184.}

77_{Antonio Bavasso and Alistair Lindsay, 'Causation in EC merger control' [2007] 3(2) Journal of Competition Law}

and Economics, p. 181-202. See also guest speaker Jorge Padilla at OECD 2009 (supra note 70), p. 211.

78_{Case BASF (see supra note 5), para. 141. See also OECD 2009 (supra note 70), p. 184 and Kyprianides [2012]}

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Commission is to make clear whether the assets would stay in the market, be liquidated or be reallocated into other markets.79_{Additionally, it has been argued that the “exit of the market”} criterion is very difficult to be proved by the parties, the same as the second criterion.80

The codification of the criteria brought transparency to the Commission’s assessment, but also raised flags for the interplay between the criteria and the counterfactual in order to prove the lack of causality. Under that framework three different interpretations were expressed. First, it has been argued that the notified concentrations need to satisfy both the counterfactual analysis and the formal criteria.81_{Second, a different argument revolves around the idea that the criteria are the} tool to understand whether a lack of causality between the transaction and deterioration of competition exists, thus when they are fulfilled the lack of causality criterion is fulfilled as well.82 Third, a criticism arose in times where even when a merger is the less anticompetitive option for the market, the Commission still can block it because it didn’t fulfill the cumulative criteria.83 Based on that criticism it is more effective to use a proper counterfactual than spending time trying to fulfill the cumulative criteria.84_{My personal view is aligned with the last of the interpretations,} by reason that the Commission will not follow blindly the relevant criteria which may lead to formalistic errors of its assessment. This interpretation is compatible with the Commission’s more effect-based approach, as the circumstances of each specific case could be taken into account.

The Commission itself has noted that the “lack of causality between the merger and any worsening of competitive conditions is at the heart of the analysis”, and that “while especially relevant”, the formal criteria listed in paragraph 90 of the Horizontal Merger Guidelines “are not exclusive and exhaustive in establishing that a merging party is a failing firm”.85

From that statement, the two of the three interpretations from the legal literature and the excessive analysis of the counterfactual in BASF case, as analysed before, it can be concluded at least that the Commission has incorporated an individual separate counterfactual analysis on top of the three criteria. Even though the formal criteria are not irrelevant, the Commission seems to

79_{OECD 2009 (supra note 70), p. 32.} 80_{Perpiñà [2015] (supra note 58), p. 107.} 81_{Kyprianides [2012] (supra note 59), p. 580.}

82_{Kokkoris [2006] (supra note 41), p. 496. See also Assimakis Komninos and Jan Jeram, 'Changing Mind in}

Changed Circumstances: Aegean/Olympic II and the Failing Firm Defence' [2014] 5(9) Journal of European Competition Law & Practice, p. 612.

83_{OECD (supra note 70), p. 35.}

84_{See Juergen Foecking and others, 'Competition and the financial markets: The role of competition policy in}

financial sector rescue and restructuring' [2009] Issue 1(1) Competition policy newsletter, p. 7-11.

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not be willing to limit its options by relying only on them. It seems that the Commission has embraced a more effect-based approach with the use of counterfactual analysis and is considering whether the approval of the merger is actually more beneficial in terms of competition than its blocking. That was meant to be the moving force for the Commission’s assessments in the following two cases.

Chapter 3 – The development of the doctrine in recent years as it is

illustrated from two decisions of the Commission

3.1. Was the Failing Firm Defence drawn too narrowly?

It has been argued that the failing firm criteria as codified in the Horizontal Merger Guidelines are drawn too narrowly. This opinion is based on the contradiction between the difficulty of proving the legal basis and the three criteria. In particular, the legal basis of the concept dictates that the deterioration of the competitive structure of the market that follow the merger cannot have been caused by the merger, meaning that it will not be worse post-merger than what it would have been in its absence.86_{However, the merging parties will have to prove more} than the absence of causation in order to establish the defence because they have to prove the fulfillment of the formal criteria.87_{For example, in order to prove that the assets of the failing firm} will exit the market in the absence of the merger there are “additional facts” required “showing that the merger is not the cause of any significant impediment to competition in the market”.88 Additionally it has been argued that the conditions, given their restrictive nature, should be enforced less narrowly at least during the economic downturn in order to avoid bankruptcies.89

That is why the Commission adopted an effect-based approach in order to judge the failing firm cases, putting the counterfactual on top. There have been two merger cases which the Commission cleared since the codification of the concept, namely the Nynas/Shell case and the

86_{Horizontal Merger Guidelines (supra note 6) para. 89 and Joint cases France and others (supra note 38), para. 114.}

See also Case BASF (supra note 5), paras. 157-160. This requirement is linked to the general principle set out in paragraph 9 of the Horizontal Merger Guidelines.

87_{The EU Merger Regulation: Substantive Issues (supra note 69), p. 570-571.} 88_{Ibid, p. 570.}

89_{Ioannis Kokkoris, 'The Crisis is Finally Biting! The Response of the EU Merger Control Regime to the Need for}

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Olympic/Aegean II case. Both of these cases prove the turn of the Commission’s assessment from a formalistic to an effect-based one.

3.2. Nynas/Shell case

3.2.1 Facts of the case

As mentioned before, the first case that was cleared from the European Commission fulfilling the conditions of the failing firm defence after BASF was the Nynas/Shell case in 2013.90 In this case there were two parties involved. On one side, Nynas AB, jointly controlled by Petróleos de Venezuela S.A and Neste Oil Oyj of Finland, was a company operating globally in the naphthenic base, transformer oils (TFO), process oils and bitumen sector.

On the other side, Shell Deutschland Oil GmbH was part of the Shell group of companies ("Shell"). Shell was a fully – vertically – integrated global group of energy and petrochemical companies involved in all activities from exploration and refining to distribution and retail sales.91

Nynas notified the European Commission for the upcoming acquisition of the Harburg refinery assets of Shell Deutschland. These assets were the Harburg base oil manufacturing plant producing base oil from distillates and certain parts of the refinery which were necessary to produce distillates from crude oil. Although these assets were of high importance for Nynas, they were only a part of the Shell Deutschland company and the remainder of the refinery was retained by Shell Deutschland.92

The acquisition was not a clear buy-out of the refinery assets by Nynas, but rather a leasing agreement. This agreement also gave Nynas the option to convert the covenant into an asset deal. This special element of the agreement led the Commission to the conclusion that the deal was an acquisition of the refinery assets on a lasting basis.93

First of all, the Commission established the two relevant product markets of the concentration, being the production and supply of naphthenic base and process oils for industrial applications and production and supply of TFOs.94_{As for the relevant geographical market, the}

90_{Case Nynas (supra note 8).} 91_{Ibid, paras. 2-5.}

92_{See more regarding the relevant assets ibid, para. 4.} 93_{Ibid, paras. 10-14.}

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Commission considered it is an EEA-wide market for both the naphthenic base and process oils95 and for the TFOs.96

Building on top of the market definition the Commission examined the companies that are active in the relevant market and came to the realization that Nynas was the largest producer and supplier of base and process oils in the EEA, with Shell being the second and having the Harburg refinery as its last in the EEA and the last in the EEA in general.97_{Only Ergon, a U.S. company,} could be considered a competitor importing its products to the EEA.98_{As for the market of TFOs,} Nynas again was the largest producer and supplier, Shell the second largest and Ergon the only realistically potential competitor after the conclusion of the acquisition.99

3.2.2. Counterfactual analysis and the fulfillment of the failing firm criteria

The aforementioned market situation in case of a potential clearness of the concentration would lead to the creation of a duopoly with Nynas having the dominant position in both markets and only Ergon being a substantial competitor. Even though the Commission didn’t specifically mention that the new entity would have a dominant position, it proceeded with the counterfactual analysis of the concentration.

In particular, the Commission, invoked the Court’s decision of Kali & Salz case and declared that “if the competitive structure of the market would deteriorate to the same or a greater extent without the concentration”100_{the concentration should be considered compatible with the} internal market and not impeding the effective competition. Also, it used the counterfactual analysis as a tool to determine that it “must compare the competitive conditions that prevail without the concentration with the conditions that would result from the concentration”.101_{An important} element of the counterfactual analysis would be the three criteria, as they had been established in the Horizontal Merger Guidelines, because, as the Commission stated, they are “of particular relevance” to the concept. From the start it is clear that the Commission will base its analysis on

95_{Case Nynas (supra note 8), para. 231.} 96_{Ibid, para. 265.}

97_{Ibid, paras. 267 and 271} 98_{Ibid, para. 273.}

99_{Ibid, paras. 285-292.} 100_{Ibid, para. 307.} 101_{Ibid, para. 308.}

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the counterfactual and the criteria of the failing firm defence will be an ancillary tool to the former.102

In general, the examination of the criteria of the failing firm defence was not very detailed, apart from the second criterion. As far as the first criterion is concerned, the Commission stated that the “continued operation of the Harburg BOMP would be more costly for Shell than its closure”.103_{That reason, together with the fact that the “decision to exit the market is in line” with} the business strategy of Shell104_{led to the conclusion that it “would be economically rational for} Shell to close down the Harburg site”.105_{This reasoning was sufficient for the Commission to} accept the fulfillment of the first criterion, namely that “it is very likely that the Harburg refinery will be closed and that the assets will in the near future be forced out of the market if not taken over by another undertaking, because of their poor financial performance and because of Shell's strategic focus on other activities”.106

Subsequently, the Commission continued its assessment examining the fulfillment of the second criterion on whether there is no less anti-competitive alternative purchase than the acquisition of the refinery by Nynas. In the examination of the criterion the Commission actually looked every possibility of any alternative purchase. More specifically, the assessment began with the Schell’s effort to divest during the period 2008-2010 the refinery assets, although without success even if there were some bids in place. The most attractive of those was coming from Essar, but the latter withdraw its interest of buying the refinery.107

The only other interest came from the negotiations between Ergon and Schell in 2011, which however ended up in a failure to conclude the agreement because Ergon “had no intention to make a credible binding offer”.108_{But, Ergon renewed its attempts in 2013, which led the} Commission to believe that Ergon is the only credible alternative purchaser of the Harburg refinery assets that would need to be assessed.109

102_{The fact that the Commission does not separate the counterfactual analysis with the criteria in different}

subcategories, or refer to the analysis as a response to the parties’ arguments regarding the “failing firm defence” is of great importance.

103_{Case Nynas (supra note 8), para. 317.} 104_{Ibid, para. 318.} 105_{Ibid, para. 317.} 106_{Ibid, para. 327} 107_{Ibid, para. 332.} 108_{Ibid, paras. 340-341.} 109_{Ibid, para. 330.}

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This last resort from the Commission to prove that there is an alternative purchaser didn’t actually materialize because as it was stated in the reasoning “it is unusual for a producer with overcapacity [Ergon] to invest in acquiring additional capacity”.110_{Thus, a decision of Ergon to} acquire the refinery was contradicting with its business strategy111_{and would be unlikely to} purchase the refinery assets. As a result, “no other undertaking is likely to have the ability and incentive to take over the Harburg refinery assets in the absence of the notified transaction”, which fulfills the second criterion regarding a less-anticompetitive alternative purchase.112

After the fulfillment of the first two criteria, anyone would expect the Commission to procced with an assessment for the third criterion of the Horizontal Mergers Guidelines regarding the failing firm defence. But, the Commission followed a different path in its reasoning, and did not actually examine the third criterion at all. The Commission was content with simply stating that “rebuilding the Harburg refinery assets elsewhere would be prohibitively expensive and would take a very long time” which, in the absence of the notified transaction, would lead the refinery assets to exit the market.113

Only after the criteria had been examined and fulfilled the Commission proceeded to evaluate what the impact of the notified acquisition would have been in the market and whether in the absence of the merger a further deterioration of the competitive structure of the market would have been created. This counterfactual analysis, in contrast with the analysis of the failing firm defence criteria, was extensively detailed. The Commission examined the market shares114_{, the} barriers to entry115_{, the supply capacity and the supply sources}116_{of the relevant markets in order} to reach its conclusion. This assessment led the Commission to conclude that the notified acquisition “not only preserves the existing production capacity of the Harburg refinery assets but is also likely to add more capacity through verifiable expansion” and preserves the lower price level in the naphthenic and transformer oils market.117_{This conclusion effortlessly allowed the}

110_{Case Nynas (supra note 8), 349.} 111_{Ibid, 350.}

112_{Ibid, para. 360.} 113_{Ibid, para. 361.}

114_{Ibid, paras. 385-386 and 496-497.} 115_{Ibid, paras. 401 and 503.}

116_{Ibid, paras. 422, 442-474 and 504.} 117_{Ibid, paras. 475, 504.}

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Commission to clear the transaction and hold that “the concentration will not significantly impede effective competition and must be declared compatible with the internal market”.118

3.2.3. Assessment of the decision

The Commission’s reasoning regarding the fulfillment of the failing firm defence criteria has received many objections and criticism from the legal literature. In regard to the first criterion it has been argued that the great and healthy financial position of the parent company, namely the Shell group, has not been taken into consideration.119_{In a situation like this, Shell would be able} to maintain with ease its division in the relevant market and not let it fail and exit the market. Also, the fact that the Commission did not actually examine Shell’s viability and its willingness or not to continue funding its subsidiary raised suspicions.

It is worth mentioning that under its assessment the Commission considered the refinery assets as a failing firm, while in reality it was a failing division, something that is reflected in the decision. In the past the Commission didn’t rule out the possibility for a failing division of a company to benefit from the failing firm defence but mentioned that the burden of proof is significantly higher than a regular failing firm case and more difficult to be fulfilled. The decisive remark is the existence of a real economic failure of the division and not a management decision by the company. 120_{This criterion has been set in other cases by the Commission}121_{which feared} that firms would try to create a virtual failing reality for their division, taking advantage of the failing firm defence to clear the notified merger. But in Nynas case, the Commission acted in opposition of its past reasoning by explaining that it accepts the fulfillment of the first criterion because Shell would take a strategic decision to close the refinery.

The fact that in its reasoning the Commission did not examine Shell’s great financial state as a potential salvation of the refinery and considered it as a firm and not as a division can easily lead to the conclusion that the first criterion would not have been fulfilled in case of a thorough examination. Furthermore, it can be concluded that the Commission’s approach was more lenient

118_{Case Nynas (supra note 8), para. 526.}

119_{Komninos and Jeram [2014] (supra note 82), p. 613; Perpiñà [2015] (supra note 58), p. 116.} 120_{OECD 2009 (supra note 70), p. 186.}

121_{See Commission decisions in Case IV/M.993, Bertelmann/Kirch/Premiere, Commission decision of 27 May}

1998, Case IV/M.1221 Rewe/Meinl, Commission decision of 3 February 1999 and Case COMP/M.2876 NewsCorp/Telepiu.

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than it was in the past both in examining the financial position of the parent company, hence the first criterion, and the failing division argument.

As for the second criterion, the Commission, as mentioned before, performed a thorough examination of all the previous negotiations for an alternative purchase of the refinery assets and the reason behind the respective failures of such endeavors. Of course, only Ergon was considered to be an alternative possible buyer but all the relevant materials and information were examined from the Commission leading to the fulfillment of the second criterion. Thus, in this regard, the Commission followed reasoning of its previous cases and didn’t changed anything on the concept. The same thing cannot be said for the criterion of the. Herein, as illustrated in the description of the case, the criterion seemed to be overlooked by reason of the fulfillment of the first two criteria.122_{The reasoning that rebuilding the assets would be expensive and time} consuming is not sufficient to prove that the assets would exit the market. Of course, the closure of the refinery and the absence of an alternative buyer can lead to the hypothesis of such exit, but given that the third criterion was reformulated in the BASF case by reason that the first two criteria were not sufficient to prove whether the assets could return to the market unveils the contradiction between the reasoning of the Commission in Nynas and its previous decisions.

Lastly, the Nynas case had a different structure from the previous failing firm defence cases, which led some to argue that it was more similar to a counterfactual analysis than a real failing firm defence case.123_{The negative effects that the concentration would cause were not} discussed in the decision, but the Commission proceed to examine and later on declare that the acceptance of the merger would lead to a better competition structure of the market than its rejection. This deviation from the reasoning of previous cases caused strong criticism from the legal literature and cannot be explained.124

Overall, even though part of the literature considers that the Nynas case did not adopt a more lenient approach125_{the facts of the case and the reasoning of the Commission, both in the}

122_{See also}_{Anna Tzanaki, 'Time to Bid Farewell to the Failing Firm Defense? Some Thoughts in the Wake of}

Nynas/Shell and Olympic/Aegean' (Competition Policy International, 2nd_January)

< https://www.competitionpolicyinternational.com/time-to-bid-farewell-to-the-failing-firm-defense-some-thoughts-in-the-wake-of-nynas-olympic-aegean> accessed 13 March 2019.

123_{Perpiñà [2015] (supra note 58), p. 115} 124_{See more Kokkoris [2014] (supra note 89).}

125_{See for example}_{Michele Giannino, 'There Is Always a First Time: The European Commission Applies the}

Failing Firm Defence to an Unprofitable Division in NYNAS/Shell/Harburg Refinery' [2014], Independent. Available at SSRN: https://ssrn.com/abstract=2544084 accessed 26 July 2019.

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merits and the structure where the counterfactual had a dominant presence and the failing firm criteria were stretched in order to be fulfilled, lead us to believe at a differentiation of the formalistic interpretation of the doctrine came into place which would be later confirmed in the Aegean/Olympic II case.

3.3. Aegean/Olympic II case

3.3.1. Facts of the case

The second case that the Commission cleared after the BASF case was the Aegean/Olympic II case which was actually the first and only case where the Commission withdraw its previous negative decision of not clearing the merger. 126

Aegean was a Greek airline company providing air transport of passengers in both domestic and international short-haul routes and had become the largest airline in Greece. On the other hand, Olympic was also an airline active in transport of passengers serving a number of short-haul destinations mainly in Greece. Olympic, previously a state-owned company, was acquired by an investment company, Marfin, due to its financial difficulties in 2009. 127

The two parties notified the Greek and Cypriot national competition authorities, which referred to the Commission regarding a second attempt for the acquisition of sole control by Aegean over Olympic.128_{As for the first attempt, the Commission in 2011 had blocked the merger} because “a quasi-monopoly on the Greek air transport market” in nine domestic routes would have been created leading to higher prices for the consumers. Additionally, the entry of potential competitors was deemed to be unlikely due to high entrance barriers. Lastly, the parties would enjoy post-merger a market share of 80% of flights and 90% of capacity on the domestic market.129 As for the assessment of the failing firm defence, even though the parties had not invoked it, none of the three cumulative criteria was met.

126_{See more in the Case No COMP/M.5830 Olympic/Aegean Airlines, Decision of 26 January 2011}

(Aegean/Olympic I) and Komninos and Jeram [2014] (supra note 82), p. 605.

127_{Case Aegean/Olympic II (supra note 9), paras. 12-13. See also, Komninos and Jeram [2014] (supra note 82), p.}

606.

128_{Case Aegean/Olympic II (supra note 9), paras. 1 and 15-17.}

129_{Case Olympic/Aegean Airlines I (supra note 126), paras. 511, 1692–1693, 2236– 2238. See also}_Ioannis

Kokkoris, 'The Two Shades of Grey: The Aegean/Olympic Air Transaction in 2011 and 2013' [2014] 11(2) International Corporate Rescue, p. 195 and case Olympic/Aegean II (supra note 9), paras. 20-25.

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In 2013 the Greek economy was still deteriorating, which led to a change of conduct in the notified merger. The overlapping routes between the two airlines in which no other competitor was operating were now seven from the previous seventeen and the problematic ones five from the previous nine.130

Based on this dramatic change of events, the concentration did not meet the EU dimension turnover threshold stipulated in Article 1 of the Merger Regulation131_{and it seemed more likely to} be cleared. However, after the referral from the national authorities the Commission took over the assessment of the case and performed a rigorous analysis. 132

3.3.2. Commission’s analysis

The Commission, as it had done in 2011, considered that the merger would create a quasi-monopoly on domestic routes which would increase the prices. 133_{Therefore, it proceeded with its} competitive assessment to make clear whether the concentration this time, as the time before, would significantly impede the effective competition of the market by creating or strengthening a dominant position. Strangely enough, as it would be revealed in the future, the Commission addressed the issue of the barriers for a potential competitor to enter to the market and declared that such entry would be unlikely.134_{That, in addition to the high market shares of the parties led} the Commission to conclude that in these five overlapping routes the parties were the closest competitors and a potential merger would “eliminate the important competitive constrain exerted” to each other. 135

Before examining the criteria of the failing firm defence, the Commission grasped the opportunity to clarify why it considers Olympic as a failing firm division as previously held in 2011.136_{According to the reasoning, in order to categorise Olympic as a failing division we have}

130_{Case Olympic/Aegean II (supra note 9), para. 631, where the five routes are described, in contrast with the case}

Olympic/Aegean Airlines I (supra note 126), para. 1692, where the nine routes are described.

131_{See Merger Regulation (supra note 1), art. 1(1-2).}

132_{Komninos and Jeram [2014] (supra note 82), p. 613; Perpiñà [2015] (supra note 58), p. 114–115.} 133_{Komninos and Jeram [2014] (supra note 82), p. 609.}

134_{Case Olympic/Aegean II (supra note 9), paras. 630, 645, 838. However, Ryanair, an Irish airline, only three}

months after the approval of the merger established two new bases in Greece and three domestic routes which overlapped with the problematic routes. Such entry illustrates the limited ability of the Commission to safely evaluate the future development of the Greek market. See more Komninos and Jeram [2014] (supra note 82), p. 611 and 615.

135_{Case Olympic/Aegean II (supra note 9), para. 631.} 136_{Ibid, para. 685.}

Failing Firm Defence under EU Merger Control: a legal concept or a political feasibility?