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15. Merger Antitrust Risk Assessment
and Contractual Risk Allocation
Antitrust LawSpring 2015 NYU School of Law
Dale Collins
Antitrust LawSpring 2015 NYU School of LawDale Collins
Dealing with merger antitrust risk Thinking systematically about antitrust risk Inquiry risk
Who has standing to investigate or challenge the transaction? What is the probability that one of these entities will act?
Substantive risk When is a merger anticompetitive? How can we practically assess antitrust risk?
Remedies risk What are the outcomes of an antitrust challenge? Will the transaction be blocked in its entirety? Can the transaction be “fixed” and if so how?
Allocating the antitrust risk in the purchase agreement
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Antitrust LawSpring 2015 NYU School of LawDale Collins
THINKING SYSTEMATICALLY ABOUT ANTITRUST RISK
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Antitrust LawSpring 2015 NYU School of LawDale Collins
Types of antitrust risks Three types of risk
Inquiry risk: The risk that legality of the transaction will be put in issue Substantive risk: The risk that the transaction will be found to be anticompetitive
and hence unlawful Remedies risk: The risk that the transaction will be blocked or restructured
The three risks are nested The substantive risk does not arise unless
there is an inquiry The remedies risk does not arise unless
the transaction is found to be anticompetitive
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Remedies risk
Substantive risk
Inquiry risk
Antitrust LawSpring 2015 NYU School of LawDale Collins
Costs associated with antitrust risk Delay/opportunity costs
Possible delay in the closing of the transaction and the realization of the benefits of the closing to the acquiring and acquired parties
Management distraction costs Possible diversion of management time and resources into the defense
of the transaction and away from running the business
Expense costs Possible increased financial outlays for the defense of the transaction
Outcome costs—Four possible outcomes: The inquiry terminates without resolution The transaction is cleared on the merits The transaction is blocked and the purchase agreement is terminated The parties restructure (“fix”) the deal to eliminate the substantive antitrust
concern “Fix-it-first”—Restructuring the deal preclosing to avoid a consent decree Post-closing “fix” under a judicial consent decree (DOJ) or a FTC consent order
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Antitrust LawSpring 2015 NYU School of LawDale Collins
Costs and benefits of continuing the defense For a “fixable” deal
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$
Time
Marginal benefits from continuing defense
Marginal costs from continuing defense
Query: Why are the curves shaped (roughly) as they are?
Antitrust LawSpring 2015 NYU School of LawDale Collins
Inquiry risk—Two questions Who has standing to investigate or challenge the transaction?
What is the probability that one or more of these entities will act?
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Antitrust LawSpring 2015 NYU School of LawDale Collins
Inquiry risk Preclosing
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Potential plaintiff Considerations Risk assessment
Injured private parties No damages to recover
Courts historically very reluctant to grant preliminary or permanent injunctions
Very low—usually no payoff unless
1. a competitor or customer will fund the suit, or 2. a hostile target will challenge the transaction to buy time to find a more suitable acquirer
State attorneys general(NAAG)
Constrained enforcement resources
No damages to recover
But can obtain injunctions
Very low, unless transaction
1. threatens employment, or2. threatens widespread price increases to voters
DOJ/FTC HSR Act suspensory period and second request powers
Substantial congressional funding for merger enforcement
Large experienced staff dedicated to merger antitrust enforcement
Courts will enter preliminary and permanent injunctions upon proper showing
High if
1. there is any indication that the transaction may be anticompetitive, or 2. the transaction has a high public profile and has attracted political interest
Antitrust LawSpring 2015 NYU School of LawDale Collins
Inquiry risk Postclosing
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Potential plaintiff Considerations Risk assessment
Injured private parties Can recover damages and in principle can obtain a permanent injunction of divestiture
Courts historically very reluctant to find mergers anticompetitive after DOJ/FTC clearance
Extremely low
Actions on the merits are likely to be very lengthy and costly to prosecute, with a negligible chance of success
State attorneys general(NAAG)
Can recover damages (parens patriae) and obtain injunctions
But constrained enforcement resources
Even in state actions courts historically very reluctant to find mergers anticompetitive after DOJ/FTC clearance
Extremely low
Actions on the merits are likely to be very lengthy and costly to prosecute, with a negligible chance of success
DOJ/FTC Courts will enter preliminary divestiture permanent injunctions upon proper showing
But
No HSR Act leverage
Substantial disincentive to find that a “cleared” transaction is anticompetitive and should have been challenged
“Eggs may be scrambled” with no effective relief
Extremely low, unless
1. the transaction was not HSR reportable and hence not reviewed, but customers complain about anticompetitive effects (especially price increases), or
2. the transaction was reviewed but customers complain and the actual anticompetitive effects are apparent and significant
Antitrust LawSpring 2015 NYU School of LawDale Collins
Inquiry risk Bottom line on challengers
Absent special circumstances, competitors, customers, targets, and state attorney attorneys general can usually be ignored in the risk calculus
If the state attorneys general are interested, they usually piggyback on the DOJ/FTC investigation
In the vast majority of cases all of the action is with the federal antitrust agencies No significant difference in the inquiry risk between the DOJ and FTC
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So when will the DOJ/FTC investigate a transaction?
To answer this question, we first need to examine when a transaction is likely to anticompetitive and so attract the investigating agency’s attention
Antitrust LawSpring 2015 NYU School of LawDale Collins 13
Clayton Act § 7 Provides the U.S. antitrust standard for mergers
Simple summary: Prohibits transactions that— may substantially lessen competition or tend to create a monopoly in any line of commerce (product market) in any part of the country (geographic market)
No person engaged in commerce or in any activity affecting commerce shall acquire, directly or indirectly, the whole or any part of the stock or other share capital and no person subject to the jurisdiction of the Federal Trade Commission shall acquire the whole or any part of the assets of another person engaged also in commerce or in any activity affecting commerce, where in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.
Antitrust LawSpring 2015 NYU School of LawDale Collins 14
“May be to substantially lessen competition” No operational content in the statutory language itself
What does in mean to “substantially lessen competition”? Judicial interpretation has varied enormously over the years
Modern view:1 Transaction threatens—with a reasonable probability—to hurt an identifiable set of customers through: Increased prices Reduced product or service quality Reduced rate of technological innovation or product improvement (Maybe) reduced product diversity
1. The modern view dates from the late 1980s or early 1990s, after the agencies and the courts assimilated the 1982 DOJ Merger Guidelines.
Antitrust LawSpring 2015 NYU School of LawDale Collins 15
Theories of anticompetitive harm Major theories
Elimination of horizontal competition among current rivals Unilateral effects
Merger of uniquely close competitors1
Anticompetitive effect depends only on the elimination of “local” competition between the merging firms
Assumes other firms in the market continue to compete as they did premerger Coordinated effects
Merger of significant competitors where customers have few realistic alternatives Anticompetitive effects depends on an anticompetitive oligopolistic response by
other firms in the market Elimination of a “maverick”
Vertical harm—Major in EU/gaining traction in U.S Foreclosure of competitors (upstream or downstream)/Raising costs to rivals Anticompetitive information access
1 This requirement, which was part of the 1992 DOJ/FTC Horizontal Merger Guidelines, was dropped in the 2010 revisions.
NB: In the U.S., to be actionable vertical theories require some likely demonstrable anticompetitive marketwide effect on customers
Antitrust LawSpring 2015 NYU School of LawDale Collins 16
Theories of anticompetitive harm Other possible theories
Elimination of actual potential competition Strict requirements
Oligopolistically performing market in which one of the merging parties is an incumbent firm
Entry is imminent and substantial by the other merging party Entry by that merging party would deconcentrate the market and substantially
increase its competitive performance Entry by other firms is either distant/not foreseeable or would not be substantial Acquisition eliminates independent entry and negates its procompetitive benefits
But DOJ/FTC could bring a case on this theory if the evidence is compelling Elimination of perceived potential competition
Almost impossible to satisfy requirements Oligopolistically structured market in which one of the merging parties is an
incumbent firm The other merging party is perceived by the incumbent firms as ready to enter the
market Market performing significantly more competitively than structure of suggest
because incumbent firms have moderated their prices (“limit pricing”) to discourage that firm from actually entering
No other firm is perceived by the incumbent firms as a threat that would cause them to moderate their anticompetitive behavior
Acquisition eliminates the threat of entry, so that incumbent firms no longer have an incentive to moderate prices
Not seriously used in the U.S. as a theory of anticompetitive harm for over 30 years
Historically has had at best limited success in the United States when it was invoked
Antitrust LawSpring 2015 NYU School of LawDale Collins
But this is all too complicated— Very true
Basic distinction Discovery: How do the agencies detect an anticompetitive merger? Explanation: How do the agencies demonstrate that a merger is anticompetitive?
The formal theories go more to explanation than discovery Theories in 1992 Merger Guidelines very information-intensive
Especially since both unilateral and coordinated effects theories require market definition as a prerequisite
Consequently, not overly useful for screening purposes either by agencies or parties Particularly problematic for parties in assessing antitrust risks prior to signing a merger
agreement
Impetus for 2010 Merger Guidelines revisions In fact, the agencies were not using the 1992 Guidelines for merger antitrust
assessment 2010 revisions motivated in part by DOJ/FTC desire to describe more what the
agencies actually do
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Antitrust LawSpring 2015 NYU School of LawDale Collins
Assessing substantive antitrust risk So how do the DOJ/FTC approach merger antitrust investigations?
Recall that the purpose of merger antitrust law is to prevent the creation or facilitation of market power to the harm of customers in the market as a whole through— Increased prices Decreased product or service quality Decreased rate of technological innovation or product improvement [Maybe] decreased product variety1
Economic theory not well-developed in predicting— Consequences of transaction for nonprice market variables Consequences of changes in nonprice market variables for consumer welfare
Implication: Need strong direct evidence to proceed on a theory other than a price increase
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1 Recognized as a dimension of anticompetitive effect in the 2010 DOJ/FTC Merger Guidelines.
Absent compelling evidence of significant customer harm from other sources, only price increases count
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Antitrust LawSpring 2015 NYU School of LawDale Collins
Assessing substantive antitrust risk So how do the DOJ/FTC approach merger antitrust investigations?
They ask a simple, basic question:
If the answer is YES, the investigating agency will find a way to package it into a cognizable theory of anticompetitive merger harm and pursue enforcement action
If the answer is NO, the investigating agency will close the investigation without taking enforcement action
Is the merger likely to result in a price increase of other competitive harm to any identifiable customer group?
Antitrust LawSpring 2015 NYU School of LawDale Collins
Assessing substantive antitrust risk Harm can be to any identifiable group of customers
Does not have to affect all customers Sufficient if some identifiable group of customers
That is, some group that can be characterized systematically Some common groups
Customers in a particular geography Customers of a particular type of product Customers of a particular type of product in a particular geography
If a relevant market is necessary, the agencies will seek to define the market to be the customer group threatened with harm Success in court has been mixed Not always consistent with the market definition paradigms in the case
law and 1992 Horizontal Merger Guidelines 2010 Horizontal Merger Guidelines drafted in part to provide more
flexibility 20
The agencies believe that no customer group is too small to deserve antitrust protection
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Antitrust LawSpring 2015 NYU School of LawDale Collins
Assessing substantive antitrust risk Interesting factoids in agency prosecutorial decision making
The key factors in the decision to challenge horizontal mergers are: The existence of incriminating documents (or occasionally incriminating public
statements) Closeness and uniqueness of competition between the merging parties The number of other close competitors Customer complaints
The 2010 DOJ/FTC Horizontal Merger Guidelines are rarely invoked by the agencies or the parties But the 1992 DOJ/FTC Horizontal Merger Guidelines ceased being used in the mid-
1990s Formal market definition and HHIs play essentially no role and are rarely
addressed in the investigation Very information-intensive approach of questionable probative value Consequently, not particularly useful for screening by either agencies or parties
Measures of upward pricing pressure (UPP) are rarely cited
Antitrust LawSpring 2015 NYU School of LawDale Collins
Another basic distinction Truth v. evidence
Knowing that truth on their side of the deal gets the parties about 60% of the way to a successful outcome before the agencies
The remaining 40% comes from being able to prove the truth with evidence Having the truth but being unable to prove it will not win the day
The investigating agency also needs to be able to prove its case to the agency decision makers and, if necessary, in litigation
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So what are the sources of evidence?
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Antitrust LawSpring 2015 NYU School of LawDale Collins
Major sources of evidence Documents of the merging firms
Company responses to second request interrogatories
Interviews/testimony of merging firm representatives
Interviews with knowledgeable customers
Interviews with competitors
Customer and competitor responses to DOJ Civil Investigative Demands (CIDs) or FTC subpoenas
“Natural” experiments
Expert economics analysis
Antitrust LawSpring 2015 NYU School of LawDale Collins
Defense menu in horizontal transactions In decreasing order of strength
Parties do not compete with one another Parties compete only tangentially Parties compete but have significant other close and effective
competitors Parties do compete, have few existing competitors, but movement into
market is easy (no barriers to entry or repositioning), and would occur quickly if merged company acted anticompetitively
Some other reason deal is not likely to harm customers
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Antitrust LawSpring 2015 NYU School of Law Dale Collins
Basic test for horizontal mergers
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The chances of success improve if there are demonstrable powerful
forces that constrain price increases beyond the mere number of players (e.g., powerful customers, low barriers to entry or repositioning)
decrease if there are factors that facilitate the exercise of market power in the wake of the transaction (e.g., close and unique competition between the merging parties; merging parties are the largest firms)
Recent tightening in enforcement standards Chart reflects current enforcement tendencies at
both the DOJ and FTC Two years ago, 5 → 4 deals almost always
cleared and the chart would be compressed to begin at 4 → 3
Reduction in Bidders/Competitors*5 → 4 Usually clears if no bad documents and
no material customer complaints
4 → 3 Usually challenged unless there are no bad documents and there is a strong procompetitive business rationale, customersupport, and minimal customer complaints
3 → 2 Almost always challenged unless there areno bad documents, and there is a compelling business rational that is strongly supported by customers and no material customer complaints
2 → 1 Always challenged
* Critically, these must be meaningful and effective alternatives from the perspective of the customer; “fringe” firms that customers do not regard as feasible alternatives do not count
Antitrust LawSpring 2015 NYU School of LawDale Collins
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Exacerbating factors Incriminating (“hot”) company documents
Suggest that a strategy of the merged firm will be to raise prices, reduce production or capacity, or reduce the rate of innovation or product improvement
Suggest the merging companies are close competitors of one another in some overlapping product
Suggest that customers have few realistic alternatives to merging firm Suggest that the competitors pay attention to each other’s prices and are
careful not to destabilize high prices Suggest that the target company is a “maverick” that does not go along
with the higher prices that other companies want to charge Incriminating public statements
Occasionally, a senior executive of one of the merging parties (typically the buyer) will make an incriminating statement in a public forum, in the press, or on a blog
Expect these to be cited in any complaint challenging the transaction
Antitrust LawSpring 2015 NYU School of LawDale Collins
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Exacerbating factors Customer complaints
The merging companies are close competitors of one another in some overlapping product
Customer “plays” the companies off one another to get better prices Insufficient number of realistic alternatives to preserve price competition
post-merger Customer conclusion: Customer will pay higher prices as a result of the
merger
High barriers to entry, expansion, and repositioning Apparent barriers (e.g., high cost, required scale, time, reputation) High gross margins of the merging parties
Idea: If high premerger gross margins did not precipitate entry, expansion, or repositioning, then a slightly higher margin due to a postmerger anticompetitive price increase is not likely to precipitate this type of market correction either.
Customer complaints are second only to incriminating company documents in their probative value to the DOJ and FTC
Antitrust LawSpring 2015 NYU School of LawDale Collins
Other considerations High market shares
Not helpful BUT not decisive if sufficient alternatives exist
Effect on competitors In U.S., irrelevant unless it hurts customers BUT one of the best predictors of enforcement action in the EU
Efficiencies Heavily discounted by enforcement agencies BUT important to provide a procompetitive deal motivation
High visibility deals that threaten significant job loss Explains some Obama administration enforcement decisions (e.g.,
NASDAQ/NYSE) DOJ/FTC Merger Guidelines
NOT a good predictor of enforcement outcomes PNB presumption likely to the key in litigation
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Antitrust LawSpring 2015 NYU School of LawDale Collins
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Synergies Synergies play two roles in an antitrust merger analysis
They provide an explanation why the acquiring firm is pursuing the deal (and probably paying a significant premium) that does not depend on price increases to customers
In close cases, large synergies can tip the agencies into not challenging the deal
Types of synergies enabled by the deal Customer value-enhancing synergies
Make existing product better or cheaper, or Create new products or product improvement better, cheaper, or faster
Cost-saving synergies Reductions in duplicative costs Increases in the productive efficiency of the combined operation (e.g., through
best practices, transfer of more efficient production technology) Overall
Synergies are very helpful in fashioning a procompetitive narrative But agencies are (irrationally) skeptical about the existence of synergies Synergies will almost never outweigh evidence of anticompetitive effect
Antitrust LawSpring 2015 NYU School of LawDale Collins
Synergies Menu of customer benefits
Lower costs of production, distribution, or marketing make merged firm more competitive Elimination of redundant facilities and personnel Economies of scale or scope
Complementary product lines Broader product offering desired by customers Better integration between merging products further enhances customer value
Accelerated R&D and product improvement Greater combined R&D assets (researchers, patents, know-how) Complementaries in R&D assets Greater sales base over which to spread R&D costs
Better service and product support More sales representatives More technical service support
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Antitrust LawSpring 2015 NYU School of LawDale Collins
Delivering the defense The best way to assess the substantive risk is to develop the
defense with the supporting evidence
Canonical structure of the initial presentation of a complete defense The parties and the deal
Brief overview of the merging parties Brief overview of the deal (including terms, timing, and conditions precedent)
The deal rationale Ideally, a rationale that both makes the deal in the profit-maximizing interest of the
acquiring company’s shareholders and interest of customers (“win-win”) Include any cost, cross-marketing, or product development deal synergies
The market will not allow the deal to be anticompetitive This is equivalent to saying that customers can protect themselves from harm if the
merged firm sought to act anticompetitively
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The best defense is a good offense
Antitrust LawSpring 2015 NYU School of LawDale Collins
Putting it together: Some key questions All transactions
Why are the companies doing the deal? Is the business model behind the combination procompetitive or anticompetitive? How does the buyer expect to recoup any premium paid for the target?
Whatever the mechanism, will the combination likely result in increased prices to any identifiable group of customers? (The business people will know.)
What cost savings or other synergies are expected from the deal? Can persuasive evidence of likelihood, magnitude, and timing be presented to the agency?
Will the deal enhance the ability of the combined company to create better products or services faster or otherwise improve consumer welfare in the long run?
What will the customers in the industry say about the deal if asked by the investigating agency?
Are there customers that will support the deal? If so, what is the reason for the support?
For customers that might complain, is there a way to neutralize their concerns (e.g., extend the term of their premerger contracts to provide additional protection against price increases)
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Antitrust LawSpring 2015 NYU School of LawDale Collins
Putting it together: Some key questions All transactions (con’t)
What do the company documents say? About the reason for the deal? About competition between the merging parties (e.g., win-loss data)? About the likely competitive effect of the deal? About the premerger competitive landscape?
Does the company have good witnesses? On the strategic rationale and synergies? On each of the business lines likely to be investigated?
Same questions on documents and witnesses for the other merging party
If the investigating agency wants to challenge the deal, will it have customers that will testify against the deal?
Are their competitors or other parties that have the inventive and the wherewithal to work with the investigating agency to develop theories and evidence to challenge the deal?1
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1 The U.S. antitrust agencies give little credit to competitor testimony that a deal is anticompetitive. The idea is that an anticompetitive deal is likely to increase market prices and benefit competitors and that the real concern behind most competitor complaints is that the merged firm will become more efficient and procompetitively win business away from the complaining competitor. That said, the agencies are always willing to enlist competitors to help them better understand the market, gain access to industry customers, and generally develop evidence.
Antitrust LawSpring 2015 NYU School of LawDale Collins
Putting it together: Some key questions Horizontal transactions
Are the merging companies strong and close competitors with one another?
How many other effective competitors does each merging party have? Do customers play the merging parties off of one another to get better
prices or other deal terms? In bidding situations, do the merging firms frequently bid against one
another? How many other bids do they usually face? Do they frequently find themselves competing against one another in the “best and final” round of bidding?
Are the conditions in the marketplace conducive to direct oligopolistic coordination on price? If not, is there another mechanism for oligopolistic coordination (e.g.,
coordinated capacity reductions)? Is the target firm a “maverick” and engage in disruptive market conduct
(such as aggressive discounting)?
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Antitrust LawSpring 2015 NYU School of LawDale Collins
Putting it together: Some key questions Nonhorizontal transactions
Potential competition Is either of the merging parties a potential entrant into a market in which the other
company is an actual competitor? If so,
Is the target market highly concentrated? Is the target market performing more or less competitively or is it performing noncompetitively?
(The merging party that is the actual competitor will know) How likely is it that in the absence of the transaction the potential entrant merging party would in
fact enter the market and in what scale and in what time frame? Are their other firms equally likely to enter into the market on the same or greater scale and in the
same or less time as the potential entrant merging party? What would the effect of this entry be on the performance of the target market?
Vertical foreclosure Does one of the merging firms supply an important input or distribution/retail channel to
the other merging firm? If so,
Could competitors in practice protect themselves from harm in the event of foreclosure or higher input prices (or lower downstream prices) from the combined firm by either (a) dealing with other firms in the market, or (b)vertically integrating into the input or downstream market?
Vertical information conduits As a result of the transaction, will one merging party gain greater access to competitively
sensitive information of its competitors?
Antitrust LawSpring 2015 NYU School of LawDale Collins
ASSESSING REMEDIES RISKPREDICTING AGENCY MERGER REVIEW
OUTCOMES
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Antitrust LawFall 2014 Yale Law SchoolDale Collins
Possible outcomes in DOJ/FTC reviews
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Close investigation
Settle w/consent
decree
Parties terminate
transaction
Litigate
• Waiting period terminates at the end of the statutory period with the agency taking enforcement action
• Agency grants early termination prior to normal expiration
• DOJ: Seeks preliminary and permanent injunctive relief in federal
district court• FTC: Seeks preliminary injunctive relief in federal district
courtSeeks permanent injunctive relief in administrative trial• Typical resolution for problematic mergers
• DOJ: Consent decree entered by federal district court• FTC: Consent order entered by FTC in administrative
proceeding
• Parties will not settle at agency’s ask and will not litigate• Agency concludes that no settlement will resolve agency concerns
(AT&T/T-Mobile, NASDAQ/NYSE Euronext)
Antitrust LawFall 2014 Yale Law SchoolDale Collins
Assessing remedies risk
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Review slides on remedies in Unit 13 class notes
Antitrust LawSpring 2015 NYU School of LawDale Collins
ALLOCATING ANTITRUST RISK IN PURCHASE AGREEMENTS
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Antitrust LawSpring 2015 NYU School of LawDale Collins
Antitrust considerations Key antitrust issues
Relevant merger control filings Which merger clearances should be disclosed in reps and warranties? Which merger clearances should be closing conditions?
Cooperation on regulatory matters Where and when to make merger filings? How much information sharing? Agreement on specific tactics and timing? Agreement to litigate any challenges to the acquisition?
Antitrust risk-shifting provisions Settlement and divestiture commitments Reverse breakup fees Other payments
Drop-dead date and termination provisions
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Antitrust LawSpring 2015 NYU School of LawDale Collins
Merger control filings “Consents and approvals” reps and warranties
Merging parties typically represent that the execution of the agreement and consummation of the transaction will not require any consents and approvals except for compliance with the HSR Act or ECMR (if applicable)
For other jurisdictions: Parties can identify in advance all other specific jurisdictions, but this requires
significant due diligence and agreement up-front Parties typically refer to all “applicable”, “all required foreign approvals” or all
“necessary foreign approvals” (generally understood as those with mandatory suspensory effect)
May have a carve out for those foreign filings that would not have a material adverse effect if not obtained
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Antitrust LawSpring 2015 NYU School of LawDale Collins
Merger control filings Where do merger control filings need to be made?
Over 80 jurisdictions have merger control filing requirements Most are mandatory and suspensory—cannot close without filing and
obtaining clearance A few are voluntary (e.g., U.K., Australia, New Zealand, Singapore) A few are not suspensory (e.g., Argentina)
When do the merger filings have to be made? Two considerations
Starting the clock as quickly as possible Allowing sufficient time for preparation of defense and customer contacts
Which clearances will be incorporated in the closing conditions? Major jurisdictions almost always specifically identified Query: What if the closing conditions do not include clearance in a
suspensory jurisdiction in which a filing is required?
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Antitrust LawSpring 2015 NYU School of LawDale Collins
Litigation closing condition Common formulation: No threatened or pending litigation
Typically provides that no government action is pending or threatened that seeks to delay or prevent consummation of the transaction
Question: What constitutes a “threat” of litigation? Question: What about private party actions?
Alternative: No order “If you can close, you must close” Typically provides that no restraint, preliminary or permanent injunction
or other order or prohibition preventing the consummation of the transaction shall be in effect
Carve-out From a seller’s perspective, may wish to have a carve-out that prior to
asserting condition, the asserting party must be in compliance with its best efforts obligations (e.g., to settle or litigate)
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Antitrust LawSpring 2015 NYU School of LawDale Collins
Litigation covenant Are the parties committed to litigate in the event of an antitrust
challenge? May be imposed on buyer alone or on both parties Obligation may be to litigate through to a final, non-appealable judgment,
or something less Interactions with—
Any obligation to accept remedies in order to obtain clearance The drop-dead date
Should the drop-dead date automatically be extended? Should the unilateral right to terminate be symmetrical?
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Antitrust LawSpring 2015 NYU School of LawDale Collins
Restructuring obligations Can arise in two provisions
“Efforts” covenant Specific covenant to offer and accept remedies
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Antitrust LawSpring 2015 NYU School of LawDale Collins
Efforts covenant Sets standard for obligations to obtain antitrust clearances These covenants usually only provide vague parameters, but they
do provide a general guide of what is expected from both parties Best efforts; Reasonable best efforts; Reasonable efforts; or Commercially reasonable efforts
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Antitrust LawSpring 2015 NYU School of LawDale Collins
Efforts covenant Unqualified “best efforts” provision
Usually taken to imply an obligation to offer or accept restructuring relief if necessary to obtain antitrust clearance
Often coupled with express risk-shifting provision “Reasonable best efforts”/“commercially reasonable best efforts”
Something less than best efforts/something more than reasonable efforts Most common formulation in antitrust covenants Obligation not well defined by courts
Usually chosen precisely for this reason Conventional wisdom: Does not imply an obligation to offer or accept
material restructuring relief to obtain antitrust clearance Can add express proviso to make explicit or limit obligation
“Reasonable efforts” Generally regarded as imposing no obligations that would change the
transaction or reduce the benefit of the deal to the buyer in any meaningful way
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Antitrust LawSpring 2015 NYU School of LawDale Collins
Specific covenant re remedies Range of alternatives
“Hell or high water” provision Capped divestiture obligation Remain silent and rely on general efforts covenant Specifically exclude divestitures
Unqualified “hell or high water” provision Requires seller to offer whatever remedy is necessary to obtain antitrust
clearance Includes divestitures, licenses, behavioral undertakings, and hold separates Theoretically could require divestiture of entire target business
HOHW provisions are not self-executing—Agency still must agree to accept remedy In some deals, agency will not accept any consent decree (e.g.,
Staples/Office Depot, AT&T/T-Mobile, NASDAQ/NYSE Euronext)
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Antitrust LawSpring 2015 NYU School of LawDale Collins
Specific covenant re remedies Qualified remedies obligations
Limited to certain business, product lines, or assets Limited by revenue, EBITDA or materiality cap
Remain silent and rely on general efforts covenant Explicit no divestiture obligation “Road map” problem
Informs agency of issues and remedies available for the asking Queries:
Can the joint defense privilege or work product doctrine shield a risk-shifting provision from disclosure in an HSR filing or second request?
Even if there are, are there disclosure obligations under applicable securities laws?
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Antitrust LawSpring 2015 NYU School of LawDale Collins
Litigation Are the parties committed to litigate in the event of an antitrust
challenge? May be imposed on buyer alone or on both parties Obligation may be to litigate through to a final, non-appealable judgment, or
something less
Interaction of litigation provision with— Any obligation to accept remedies to obtain clearance
The more onerous the obligation, the more the buyer will want a credible threat to litigate The drop-dead date
A litigation obligation (or right) is meaningless in the absence of time to litigate Should the drop-dead date automatically be extended? Should the unilateral right to terminate be symmetrical?
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Antitrust LawSpring 2015 NYU School of LawDale Collins
Antitrust-related payments Antitrust reverse termination fees
Nonrefundable partial payments or “deposits”
Ticking fees
“Take or pay” obligation
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Antitrust LawSpring 2015 NYU School of LawDale Collins
Antitrust reverse termination fees Reverse breakup fee with an antitrust trigger
Payable by the buyer to the seller where: the transaction does not close before the purchase agreement is terminated,
and the only conditions not satisfied are the antitrust clearance conditions
Historically relatively rare, but seeing more often in modern agreements Sellers usually negotiate some form of remedy obligation and/or higher
purchase price to avoid reverse breakup fee Size of fee—Varies widely
Sample: January 1, 2005 – December 31, 2013 737 transactions 247 with reverse termination fees (all types) 73 with antitrust reverse termination fees
Percentage of transaction value Large: 39.81% (Monsanto acquisition of Delta and Pine Land) Small: 0.11% (CapitalSource’s proposed acquisition of TierOne) Mean: 5.8% Median: 4.3%
Highest absolute dollar value $4.2 billion (AT&T’s proposed acquisition of T-Mobile) (15.4%)
52
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Antitrust LawSpring 2015 NYU School of Law Dale Collins
0.5%
1.5%
2.5%
3.5%
4.5%
5.5%
6.5%
7.5%
8.5%
9.5%
11.0
%13
.0%
15.0
%17
.0%
19.0
%25
.0%
35.0
%
0
2
4
6
8
10
12
Frequency of Antitrust Reverse Breakup Fees(January 1, 2005 through December 31, 2014)
Percentage intervals
Nu
mb
er
of
tra
ns
ac
tio
ns
Antitrust reverse termination fees
Median = 4.3%
Mean = 5.7%
NB: The difference between the intervals is not uniform.
54
Antitrust LawSpring 2015 NYU School of LawDale Collins
Antitrust reverse termination fees Recent examples
Announcement Antitrust Reverse Breakup Fee
Date Acquiror Target Status Equity Value ($M) Amount ($M) % of Equity Value11/17/2014 Halliburton Baker Hughes Pending $34,600.00 $3,500.00 10.1%11/17/2014 Actavis Allergan Completed $67,365.83 $2,100.00 3.1%11/3/2014 Laboratory Corp. of Am. Covance Completed $5,960.57 $305.00 5.1%9/22/2014 Merck KGaA Sigma-Aldrich Pending $16,673.44 $934.38 5.6%9/21/2014 Siemens Dresser-Rand Group Pending $6,359.15 $400.00 6.3%9/4/2014 Mattress Firm Holding The Sleep Train Completed $440.00 $10.00 2.3%
8/20/2014 Infineon Technologies International Rectifier Completed $2,865.56 $70.00 2.4%8/1/2014 Scientific Games Bally Technologies Completed $3,194.97 $105.00 3.3%
7/28/2014 Zillow Trulia Completed $2,631.48 $150.00 5.7%4/30/2014 Exelon Pepco Holdings Pending $6,826.59 $180.00 2.6%3/2/2014 Media General LIN Media Completed $1,541.14 $55.10 3.6%
2/20/2014 Brookdale Senior Living Emeritus Completed $1,380.13 $143.00 10.4%2/19/2014 Signet Jewelers Limited Zale Completed $689.82 $53.40 7.7%1/28/2014 Martin Marietta Materials Texas Industries Completed $2,059.29 $140.00 6.8%12/8/2013 Sysco US Foods (p) Pending $3,500.00 $300.00 8.6%
8/27/2013 Akorn Hi-Tech Pharmacal Co. Completed $591.35 $48.04 8.1%
7/24/2013 Hanesbrands Maidenform Brands Completed $547.21 $30.00 5.5%
7/9/2013 The Kroger Co. Harris Teeter Completed $2,442.52 $200.00 8.2%
5/29/2013 Service Corp. Int'l Stewart Enterprises Completed $1,131.40 $75.00 6.6%
1/31/2013 Scientific Games Corp. WMS Industries Completed $1,419.16 $80.00 5.6%
3/20/2011 AT&T T-Mobile USA Failed $39,000.00 $4,200.00 10.8%
Antitrust LawSpring 2015 NYU School of LawDale Collins
Payments Ticking fees
Require buyer to pay interest on purchase price if transaction not closed by particular date
Aim to motivate buyer to obtain regulatory clearances quickly Relatively rare in public transactions
Dow Chemical/Rohm and Hass: 5% of equity value Boston Scientific/Guidant: 3% of equity value
Nonrefundable partial payments Like a ticking fee but requires more than the payment of interest Payable on a specified schedule
“Take or pay” clauses
55
Antitrust LawSpring 2015 NYU School of LawDale Collins
Cooperation covenants Specifies level of cooperation by parties in obtaining antitrust
clearances Typical requirements
Advance notice and review of communications and submissions with agency
Right to attend meetings/conferences with agency Subject to agreement by agency
Right to review 4(c) and second request documents Party interests
Buyer usually want to control process and not have seller operating independently with governmental authorities
Seller wants to know what is going on to ensure buyer is fulfilling efforts obligations
Both want to maximize knowledge of the evidence submitted to the agency
56
Antitrust LawSpring 2015 NYU School of LawDale Collins
Timing provisions Timing for filings
Often “as promptly as possible” But some delay (5-10 business days) may be desirable to permit:
Indepth substantive analysis Customer rollout Coordination in submitting required merger filings
Other timing-related provisions Provisions agreeing not to withdraw filings, extend waiting periods or
enter into timing agreement without consent of other party Seller may want to impose a specific deadline on second request
compliance
57
Antitrust LawSpring 2015 NYU School of LawDale Collins
Timing and termination Drop-dead date
Does it provide long enough for expected approvals? Firm termination date or extension (typically +120 days) in the event of a
second request or Phase II investigation? MAC clause: If business likely to deteriorate significantly during a
prolonged antitrust review, may need provisions to ensure MAC is not used to avoid any divestiture commitments or avoid payment of reverse breakup fees
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Antitrust LawSpring 2015 NYU School of Law Dale Collins 59
Risk-shifting summary Buyer-friendly Seller-friendly
Level of efforts Commercially reasonable efforts Reasonable best efforts Best efforts
Obligation to make divestitures Silent/expressly excluded Divestitures up to cap – measured in asset or revenue terms or MAC applying to part or all of acquired or merged business
Obligation to make any and all divestitures necessary to gain clearance no matter how much or what impact is (HOHW)
Timing for other aspects of regulatory review
Silent/may be deadline for submission of HSR filing
Silent/may be deadline for submission of HSR filing
Express timing for submission of filing, Second Request compliance and other milestones
Timing for offering divestitures Silent Silent Express timing for offering remedies to obtain clearance
Control of regulatory process Buyer controls; require cooperation from Seller and may give access and information
Buyer leads; Seller entitled to be present at meetings, calls; obligation on Buyer to communicate certain matters to Seller
Full involvement of Buyer in negotiations with regulators; Seller prohibited from communicating without Buyer (except as required by law)
Obligation to litigate Silent/expressly exclude/litigate at buyer’s option
Silent/expressly exclude Obligation to litigate if regulators block exercisable at seller’s option; does not relieve buyer of obligations to make divestitures
Termination provisions Open-ended, extendable at buyer’s option
Tolling at either party’s option Tolling at seller’s option
Reverse break-up fee None Possible Substantial fee; provision for interim payments and interest
Time to termination date As long as buyer anticipates needing to fully defend transaction on merits, plus ability to extend at buyer’s option
Tolling at either party’s option Tolling at seller’s option at specified inflection points (e.g., second rquest compliance, commencement of litigation)
“Take or pay” provision None None Requires payment of full purchase price by termination date even if transaction cannot close