The European Commission’s positions on inability to pay competition fines, and on the failing firm defence under the merger regulation are superficially different, but the underlying policy concern is the same.

The Commission’s 2006 Fining Guidelines envisaged the possibility that some fines ought to be reduced if a firm is unable to pay:

“35. In exceptional cases, the Commission may, upon request, take account of the undertaking’s inability to pay in a specific social and economic context. It will not base any reduction granted for this reason in the fine on the mere finding of an adverse or loss-making financial situation. A reduction could be granted solely on the basis of objective evidence that imposition of the fine as provided for in these Guidelines would irretrievably jeopardise the economic viability of the undertaking concerned and cause its assets to lose all their value.” (emphasis added)

This last element, that a fine should not cause the assets “to lose all their value” was clarified in an Information Note jointly agreed by Commissioners Almunia and Lewandowski:

“8. With respect to the condition that the company’s assets have to lose “all their value”, it has become apparent that a literal interpretation of this wording would rather lead to a systematic rejection of all ITP claims since individual assets practically never lose completely their value, even if the company that participated in the anticompetitive practice goes bankrupt (because the assets normally will retain a certain operational and resale value). The Commission therefore interprets this condition as requesting that the fine would not only be likely to lead to the bankruptcy of an undertaking as such, but also that it would cause its productive assets to lose “significantly” their value. This would be the case if the bankruptcy would lead to the disappearance of the undertaking as a going concern (because of dismantling and/or closure), its jobs being lost and the assets (property, buildings, machinery etc.) being sold separately at substantially discounted prices. Conversely, there would be no significant asset loss if there are clear indications that the undertaking will be acquired and its business will be continued as a going concern (i.e. without job losses, etc.) by another company, even if the infringing undertaking as a legal entity would declare bankruptcy.” (emphasis added)

This makes clear that bankruptcy in itself is not a reason for reducing or eliminating a fine. Only if the undertaking would not continue as a going concern should the Commission accept an inability to pay application. If a competition fine would lead to the removal of the firm as a competitive force on the market, then competition on the market may best be served by reducing or not imposing the fine.

The Commission may be faced with a similar problem under the Merger Regulation. If a merger would lead to a significant impediment to effective competition, but one of the firms may – absent the merger – fail, then competition on the market may best be served by allowing the merger. This is usually referred to as the failing firm defence.

However, the wording of the failing firm defence under the Merger Regulation is a little different to the wording in relation to a firm being unable to pay a competition fine. In the Horizontal Merger Guidelines, the Commission sets out three criteria which must be fulfilled for the failing firm defence to be met:

“The Commission considers the following three criteria to be especially relevant for the application of a “failing firm defence”. First, 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. Second, there is no less anti-competitive alternative purchase than the notified merger. Third, in the absence of a merger, the assets of the failing firm would inevitably exit the market.” (emphasis added) (at paragraph 90).

The Commission points out in the next paragraph that this isn’t an exception to the merger control rules, but rather an application of the principle that there has to be, “causality between any given merger and any deterioration of competitive conditions in the market that can be expected to occur.’ You could also see this as an application of the principle that the competition rules should not decrease competition on a market. The Commission should not prohibit a merger – or impose a cartel fine – that would weaken competition on a market.

Notwithstanding this common aim, the criteria set out are rather different.

In the inability to pay scenario, the Commission refers to causality plus the potential loss of asset value; in the failing firm scenario, the Commission mentions causality, the lack of alternative solutions (not relevant to a cartel or other antitrust fine) and the exit of productive assets from the market. The latter formulation with its focus on the exit of productive assets from the market seems better aligned with what the public policy should be: if productive assets are being lost to society, then society is worse off; if a shareholder of a company that has been involved in a cartel simply loses the value of its investment, then that is a problem for the shareholder, not for society. That an undertaking goes bankrupt is not in itself a loss of productive assets to society; an undertaking ceasing to be a going concern is more likely to lead to a loss of productive assets to society; better yet, however, would be an explicit recognition that the policy objective underlying inability to pay is the loss of productive assets, for which an undertaking ceasing to be a going concern is at best an imperfect proxy.

This is certainly hinted at in the emphasised section above in the Almunia / Lewandowski information note that the underlying concern is in fact the loss of productive assets – in the reference to the undertaking not surviving as a going concern or the assets being sold separately – and this is a useful clarification of the 2006 Fines guidelines.

Perhaps if there is ever to be a revision to the Fines Guidelines, this hint could be taken up more fully, and the language on inability to pay aligned more closely with the language on failing firm.

[Update: 18 April 2014: this post has been slightly rewritten to – hopefully – make the flow of the argument clearer. No change of substance or argument was intended.]