I. Introduction

China’s Anti-Monopoly Law (AML) came into force in August 2008, and has been deemed “the equivalent of the United States’ (U.S.) Sherman Antitrust Act or the analogous portions of the Treaty Establishing the European Community.”

From the very beginning, the merger control regime in China has been more intensively scrutinized and analyzed than the enforcement of anti-competitive agreements and abuse of dominance, and many of the merger parties are multinational corporations whose mergers would be notified to multi-jurisdictions. Consequently, there were some controversial decisions, such as P3 Alliance, Google/Motorola, Seagate/Samsung, which are divergent from the decisions of the major merger authorities such as the European Union (EU) Commission or the U.S. FTC for the same cases. Some of the decisions made by the Ministry of Commerce (MOFCOM) were fraught with unusual analytical process and remedies. The Chinese competition authorities have also been involved in international cartels (e.g. LCD panel) as well as abuse of dominance cases (e.g. Qualcomm) that were investi-gated by a number of major jurisdictions. The international profile of the Chinese antitrust authorities is described as “one of the world’s youngest and least understood regulators.”

The AML has substantially adopted the EU legal framework and the U.S. competition regime, including not only the statutes and the regulation system, but also the competition agencies’ enforcement experience. With regard to the AML’s ultimate regulatory frame-work, it is obvious that the structure is more similar to EU regimes, since the AML also categorizes competition controls into three types: antitrust, abuse of dominance, and concentrations.

As this article will illustrate, a combination, a merger, or an ac-quisition (concentration) will result in an economic concentration by the absorber or acquiring entity and is one of the means by which a company may wish to implement a restructuring procedure. Merger control has a significant role in today’s economies; a fact that is underlined by the ever-increasing number of concentrations that take place. The purpose of merger legislation is to capture concentrations that may have anti-competitive effects on the market structure.

There are several reasons for firms to engage in concentrations. A merger or an acquisition is a common method that firms choose in order to be profitable and to sustain their viability and profitability through time. Mergers consolidate the ownership and control of business assets, including physical assets (e.g., plant) and intangibles (e.g., brand reputation). They can enhance corporate—and wider economic—performance by improving the efficiency with which business assets are used. Further reasons for firms to engage in com-binations, mergers, and acquisitions include economies of scale and economies of scope from which firms benefit, as well as efficiencies stemming from the tendency of some countries to endorse the con-cept of “national champions.” Furthermore, mergers may also satisfy the ambitions of executives for more power and greater control.

The recent financial crisis has illustrated the unprecedented difficulties that companies face, as well as the initiatives adopted at corporate and government level, in mitigating its adverse impact. A strategic response for struggling firms, and one of the means of implementing a successful debt restructuring process, is to combine or merge in order to achieve competitive and necessary efficiencies. Either a failing firm within a booming industry or firms in a distressed industry will choose to engage in a merger or acquisition as a means, inter alia, to ensure their viability or enhance their profitability. Given these enormous transformations, the applicability and importance of the failing firm and failing division defense might be crucial across all jurisdictions. As this paper will discuss, MOFCOM has not explicitly introduced such a policy in its merger assessment, which shows a clear lack of harmonization across major jurisdictions.

The importance of mergers (and thus of the failing firm defense) for the restructuring process is indicated, inter alia, by the U.S. Supreme Court in United States v. General Dynamics Corp. The Court upheld the proposition that private parties, shareholders, and creditors benefit from the merger of a failing firm. The shareholders are unlikely to lose the investment and likely to obtain additional benefits if the merger proves profitable. The creditors will benefit as a result of retaining their rights against the debtor and are likely to be reimbursed for the credit they have provided to the firm. On the contrary, in the event of bankruptcy, they are not likely to be able to recover their claims or investments.

Thus, the restructuring process can be used as a tool to determine if the whole firm or one of its divisions must be merged or acquired by another undertaking in order to maintain its viability and future prospects for profitability. In such a case, the only possible means of restructuring is through a successful concentration. This concentration may need to be assessed by the relevant competition authorities. If the authorities believe that the concentration will have anticompetitive effects, they may block it, resulting thus in the unsuccessful completion of the restructuring procedure. This article will address the concept of failing firm defense. In particular, it will deal with the implications of the failing firm defense in the EU and the U.S. The reason for choosing these jurisdictions is that both the EU and the U.S. have developed merger legislation and an extensive practice on the topic.

Each of the abovementioned jurisdictions has its own criteria for assessing the failing firm defense argument. The satisfaction of these criteria is an essential factor for a concentration that is likely to have anticompetitive effects to be allowed to proceed. In addition, each of the above jurisdictions has its own legislation regarding merger as-sessment. It would be necessary for the purposes of this Article and for a complete understanding of the implications of merger legislation, as they are identified through the failing firm defense, to provide a brief analysis of the legislation concerning the assessment of mergers in these jurisdictions. Thus, for each of the above jurisdictions, an analysis of the relevant legislation will be provided. It is imperative to tie the analysis of this legislation with its actual application in cases where the failing firm defense has been invoked. For each jurisdiction, the landmark cases related to the failing firm defense will be analyzed in order to evaluate how the competition authorities and the courts have assessed the failing firm defense. Apart from the analysis of competition legislation surrounding mergers, this article will also include a brief analysis of the restructuring process during which the failing firm defense may be invoked if it is decided that the means of viability of the firm is through a concentration.

This article will begin with a brief analysis of the main issues that surround the failing firm defense doctrine in the context of a concentration/corporate debt restructuring. Then, the notion of failing firm defense will be analyzed in general terms, since more details will be provided in the relevant section of the article dealing with each jurisdiction. The subsequent sections will deal with the different enforcement practices of the failing firm defense and failing division defense doctrines as these two have been developed in the legislation and case law of the United Kingdom, U.S., and China respectively. The penultimate section will expose some of the controversial issues surrounding the success of the failing firm defense doctrine. Finally, some concluding remarks regarding the failing firm defense, and failing division defense doctrines will be presented.