Should the Failing Company Doctrine Be Reconsidered in an Innovation Economy?

Several years ago, I published an academic article abroad entitled The Introduction and Implementation of the Failing Company Doctrine into the Legal and Economic Systems of Israel. It examined one of competition law’s intriguing doctrines: the Failing Company Doctrine. The doctrine allows, in exceptional circumstances, approval of a merger that does not meet ordinary competition rules when the alternative is the company’s collapse and loss of its economic value. For years, I viewed the doctrine primarily as a legal and economic mechanism. More recently, after examining innovation management and the ISO 56000 standards, I began looking at it from another perspective. Does the way we assess a “failing company” still suit an economy based on knowledge, technology and innovation? When the doctrine took shape, companies derived most of their value from tangible assets: factories, equipment, inventory and infrastructure. Today, much of many companies’ value lies in intangible assets: • Intellectual property (IP) • Organizational knowledge • Research and development capabilities • Technologies • Data • Innovation capabilities This means that financial failure does not necessarily indicate the loss of a company’s potential to create value. A company may have lost its ability to operate independently while still holding innovation assets that could generate significant value if integrated into another organization. Here, I see an interesting connection with innovation management principles reflected in ISO 56002 and ISO 56008. These standards do not address competition law and are not intended to determine whether a merger should be approved. They do, however, provide a structured framework for identifying, evaluating and managing innovation assets and capabilities — assets that traditional financial measures sometimes fail to reflect adequately. This also highlights the importance of effective internal audit and forward-looking corporate governance. Internal audit today is not limited to examining compliance risks or financial failures. It also provides boards with an objective picture of innovation risk management and the resilience of an organization’s intangible assets. Such strategic assessment supports informed M&A decisions long before the legal dilemma of rescuing a failing company arises. In my view, this raises a broader question. In the future, the economic assessment underlying the Failing Company Doctrine might also draw on innovation management and audit tools to evaluate not only a company’s financial position but also the value of its knowledge and technology assets. I am not proposing to change the doctrine’s legal tests. However, when considering whether a merger is preferable to a company’s collapse, it may be appropriate to account systematically for the value of innovation assets — assets that may disappear if the company ceases to exist. If so, the question is not only: Is the company failing? But also: Can we measure the value that could be lost if it disappears? In my opinion, this is not only a legal or economic question. It is also a question of innovation, strategy, internal audit and corporate governance.