Antitrust Law. The term failing company doctrine, also sometimes referred to as the “failing firm defense,” is a rule that permits a merger between competitors that otherwise would not be permitted under antitrust laws when one of the merging companies is bankrupt or close to failure.
The 1992 guidelines provide a limited defense for failing firms and failing divisions of firms. The defense is available if impending failure would cause the assets of one party to leave the market if the merger does not occur. Thus to establish a failing firm defense, the parties must show that the failing firm cannot (1) meet its financial obligations, (2) reorganize in bankruptcy, and (3) find another buyer whose purchase of the firm would pose lesser anticompetitive risks. The parties must further show that (4) without the merger, the failing firm’s assets will exit the market.