The Top Five (Avoidable) Antitrust Traps in M&A Transactions
In M&A transactions, the parties are often focused on negotiating the transfer of assets or equity, and may treat antitrust as a mere procedural milestone. Parties may neglect potential antitrust concerns until after the agreement is negotiated. By that point, however, important negotiating and strategic planning opportunities may have been lost, and substantive antitrust defense of a deal may be compromised by imprudent document creation or other missteps along the way. Neglecting antitrust considerations until late in the transaction planning process may lead to unnecessary expense and delay. Five avoidable antitrust pitfalls to keep in mind when planning a transaction are discussed below.
1. Developing an Antitrust Strategy
Potential antitrust issues will inform the parties’ strategy in connection with several threshold negotiation issues including due diligence, deal timing and contract negotiations. As a consequence, it is essential to scope out whether the proposed transaction raises potential antitrust concerns at the earliest stages of the transaction planning process. Some preliminary questions to ask include:
Do the parties compete with one another?
Do either or both of the companies have significant market shares in these overlap areas?
Will the transaction result in the consolidation of the market to only a few competitors?
Do the parties believe that customers will have competitive concerns about the proposed combination?
Does one party supply the other, and if so, is the buyer acquiring a key input that might foreclose its competitors from access to a step in the supply chain?
Besides discussions with business personnel, strategic plans prepared in the ordinary course of business may provide an unfiltered view of the competitive landscape and whether the business considers the other party as a competitor and to what extent.
Recognizing up front whether a transaction may raise antitrust issues and forming an antitrust strategy to address those issues can impact how the parties engage with one another throughout deal negotiations and pre-closing integration planning, as discussed further below. An antitrust strategy can also facilitate the parties’ ability to manage the regulatory review process more effectively by proactively addressing the anticipated concerns of their customers and, ultimately, the antitrust agencies. Being proactive in approaching antitrust concerns allows parties to budget their time and money accordingly and avoid surprises along the way.
2. Document Control
Careless document creation can make an easy deal hard by raising questions where there otherwise would not be any. Conversely, careful wording can make a hard deal easier to defend. Whether or not the parties anticipate significant antitrust issues, careful document creation is a best business practice that can mitigate against undue costs and delays in the course of an antitrust review.
Documents prepared by the parties and their advisors that evaluate the deal are the most important information in the regulators’ initial review, and can make or break the antitrust review of a deal. When creating transaction-related documents, parties should be careful to avoid antitrust “buzz words,” such as: market leader; dominant position; high entry barriers; rationalize pricing or competition; achieve pricing power; avoid a price war; foreclose competition; or increase costs for rivals. This obviously applies to all press releases, talking points, frequently asked questions and Securities and Exchange Commission (SEC) filings, but also to all internal presentations, documents and communications – including “private” e-mail correspondence.
The recently revised joint Horizontal Merger Guidelines by the Department of Justice (DOJ) and Federal Trade Commission (FTC) emphasize the evidentiary importance of parties’ ordinary course documents, such as business and strategic plans. Consequently, regardless of whether a company is currently contemplating a transaction, it should exercise care in how it discusses and documents competition and pricing decisions in internal documents because these documents will carry greater probative weight in an antitrust review than the deal-related documents prepared with the antitrust agencies as the anticipated audience. Further, in the event the deal evaluation documents were not carefully created, ordinary-course documents that contradict the puffery in the deal-related documents will be helpful in defending the merits of the transaction.
3. Informed Contract Negotiation
Understanding the potential antitrust regulatory obligations and concerns that a transaction may raise allow the parties to enter into better informed deal negotiations. From a procedural standpoint, parties need to consider their merger notification obligations for purposes of determining various conditions to closing. Considering both procedural and substantive issues, parties need to ensure that they build in enough time to allow for resolution of any anticipated merger reviews and negotiate how closely they will cooperate with one another to complete those reviews. With respect to substantive antitrust concerns, the parties need to consider how much antitrust risk they are willing to accept. For example, the seller may feel strongly about a “hell or high water” clause or a break-up fee, whereas the buyer may not be willing to accept so much antitrust risk. The parties cannot make informed decisions about termination provisions or other contingency planning without first exploring the relevant antitrust issues.
4. Merger Notification Assessment
While parties need to analyze whether they are subject to merger notification regulations in various jurisdictions around the world, applying the U.S. merger notification regulations under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act) can be complicated and yield unexpected results. Generally, acquisitions of voting securities, assets or a controlling interest in a non-corporate entity (such as an LLC or partnership) valued above $263.8 million (adjusted annually for the change in gross national product), or above $66.0 million, but below $263.8 million if the parties also meet certain net sales/total assets thresholds, are reportable where no exemptions apply.
The size-of-transaction is measured according to what a party will hold “as a result of” (that is, following) the transaction. Thus, for example, acquiring one more share of stock (whether on the open market or through some other channel) where a shareholder already holds stock of an issuer, and the aggregate value of the stock to be held as a result of the transaction is in excess of the reporting thresholds may require an HSR notification. Other examples of reportable transaction that might not be intuitive include: conversion of non-voting stock, options or warrants; transactions where the seller receives stock as consideration; and secondary acquisitions, i.e., the indirect acquisition of minority interests held by a target.
Parties need to be sensitive to these types of situations, and plan ahead to avoid a situation where they have unwittingly acquired equity interests or assets without first observing the waiting period under the HSR Act, which can result in civil penalties of up to $16,000 per day.
Finally, parties need to be sensitive to a growing number of foreign filing requirements whenever a transaction has an international component. Notification thresholds are surprisingly low in many jurisdictions, and substantial lead time is required for the preparation of non-U.S. notifications. Disparate waiting periods across jurisdictions will effect transaction timing. As a consequence, parties should undertake a review of potential obligations early in the transaction planning process to avoid delays and added expense.
5. Avoiding Gun Jumping
So-called “gun-jumping” can occur in two contexts. First, there is procedural gun-jumping, whereby one party takes beneficial ownership of voting securities, assets or non-corporate interests without first observing the statutory waiting period under the HSR Act. Such activity may result in civil penalties of up to $16,000 per day that the parties are not in compliance with the HSR Act. This prohibition applies regardless of whether or not the parties compete with one another. Parties can avoid this risk by continuing to operate as separate independent entities and not consummating the transaction prior to the expiration or termination of the HSR waiting period.
Second, there is substantive gun-jumping, whereby competitors that are planning a transaction begin to act in concert prior to the closing of the transaction, giving rise to claims of unlawful collusion under Section 1 of the Sherman Act. The DOJ and FTC understand that the parties need to exchange certain information through due diligence and integration planning, and need to preserve the value of what the buyer has agreed to acquire through restrictive covenants on the seller prior to closing. However, the agencies become suspicious when the information exchanged is competitively sensitive or not appropriately quarantined, or the buyer’s restrictions on the seller’s independent operation prior to close goes beyond trying to merely preserve the value of the business.
To reduce the risk of gun-jumping, parties should avoid the following:
Do not exchange competitively sensitive information without prior consultation with antitrust counsel.
If the exchange of competitively sensitive information is necessary to evaluate whether to proceed with the transaction, or to close the transaction,
Consider implementing “clean teams” to handle the information, and keep it from personnel who could act on it in the course of their day-to-day job functions,
Consider outsourcing pre-closing integration planning functions,
Use historical or aggregated information, and
Limit the data to that which is relevant and necessary to the process of negotiating and consummating the transaction.
Do not include covenants in the transaction agreement that effectively allow the buyer to take beneficial ownership or exercise pre-closing control of the target.
The parties may undertake integration planning prior to closing, but should not implement those plans until after closing. Parties should undertake these activities pursuant to integration planning guidelines developed in consultation with antitrust counsel.
Parties should be sensitive to antitrust issues – both procedural and substantive – at the earliest stages of the planning process in any proposed transaction. These issues will impact due diligence, contract negotiations, deal timing and integration planning. Prudence and careful planning will avoid surprises—and resulting expense and delay. Moreover, failure to involve antitrust counsel early on in the process may jeopardize the parties’ ability to obtain antitrust clearance for their deal and, worst case, it may give rise to additional antitrust risks separate and apart from the underlying transaction itself.