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The Two Shades of Grey: The Aegean/Olympic Air Transaction in 2011 and 2013
Professor Ioannis Kokkoris, Chair in Law and Economics, University of Reading, UKIntroduction
This paper provides an illustration of the European Commission’s application of the failing firm defence in its assessment of a merger involving a firm that is on the verge of failure. The paper will focus on a merger that was notified to the European Commission in 2010 but met with the Commission’s prohibition as it was deemed to significantly impede effective competition. Then, in a continuously deteriorating market the transaction was notified again in 2013 and was approved by the Commission as a result of the fact that the target company was failing amidst a crisis that has already been lasting for five years.
A combination, merger and/or acquisition (hereinafter '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 which 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 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 combinations, mergers and/or acquisitions include economies of scale and economies of scope that firms benefit from as well as efficiencies stemming from the tendency of some countries to endorse the concept of 'national champions'. Furthermore, mergers may also satisfy the ambitions of executives for more power and greater control.
The importance of mergers (and thus of the failing firm defence) for the restructuring process is indicated, inter alia, by the US Supreme Court in United States v. General Dynamics Corp. The US Supreme Court upheld that private parties, shareholders and creditors benefit from the merger of a failing firm. The shareholders are unlikely to lose the investment and are 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.
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