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Principles of Merger Antitrust
Law I:Substance, Reporting, Purchase Agreements
Dale CollinsBeau Buffier
Kelly Karapetyan
October 14, 2009
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Why Think About Antitrust? Antitrust issues in transactions may affect:
Whether a transaction should proceed at all Legal work in analyzing and preparing for regulatory review Cost and effort of regulatory review process Valuation of transaction Timing of transaction Structure of deal and the assets to be acquired Risk-shifting covenants (i.e., antitrust divestiture risk) Closing conditions Extent of due diligence and integration planning Content of press releases and customer/employee
communications
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Agenda Substantive merger antitrust principles
Horizontal mergers Other theories of anticompetitive harm
Merger control reporting United States Europe Rest of world
Antitrust provisions in the purchase agreement
Will not cover merger investigations or remedies
ASK US BACK!
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Substantive Merger Antitrust Principles
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U.S. Legal Standard
Clayton Act § 7 prohibits mergers and acquisitions that may substantially lessen competition or create a monopoly in any line of commerce (product market) in any part of the country (geographic market)
Mergers tend to lessen competition when they threaten to hurt an identifiable set of customers through Increased prices Restricted market supply Reduced product or service quality Reduced rate of technological innovation or product improvement
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Horizontal Mergers
Combination of two firms with competing products
Primary evidence probative of anticompetitive effect Number of realistic alternatives available to customers Company documents Customer interviews
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Horizontal Mergers
Key is number of practically available alternative suppliers: 5 4 Almost always clears absent significant customer
opposition 4 3 Close case but can clear with some significant
procompetitive justification, customer support and little
customer opposition and no bad documents 3 2 Usually challenged; requires compelling customer
support to clear and no bad documents 2 1 Always challenged; no efficiency defense
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Horizontal MergersS
igni
fican
t Com
petit
ors
Enforcement Outcomes
AllCustomer complaints
Hotdocuments
2 to 1 234/239 (98%) 40/40 (100%) 10/10 (100%)
3 to 2 242/278 (87%) 27/28 (96%) 4/5 (80%)
4 to 3 140/188 (74%) 13/14 (93%) 7/9 (78%)
5 to 4 58/92 (63%) 0/0 0/0
6 to 5 19/48 (40%) 3/3 (100%) 1/1 (100%)
7 to 6 3/23 (13%) 0/0 0/0
8 to 7 6/21 (29%) 0/0 0/0
9 to 8 0/11 (0%) 0/0 0/0
10 to 9 2/5 (40%) 0/0 0/0
10+ 0/20 (0%) 0/0 0/0
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Horizontal Mergers “Realistic alternative supplier”
Customers must regard supplier as a realistic alternative to merging firms
Fringe firms do not count Geographic coverage Product breadth Reputation
“Hot” company documents Suggest the merging companies are close competitors of one
another in some overlapping product Suggest that there are few realistic alternatives to merging firms Suggest that business model behind transaction is
anticompetitive (e.g., higher prices, reduced innovation)
Horizontal Mergers
Customer complaints Generally about price 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
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Horizontal Mergers
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
DOJ/FTC Merger Guidelines NOT a good predictor of enforcement outcomes But used as the roadmap in litigation
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Other Theories of Anticompetitive Harm Unilateral effects
Important special case in niche market segments Merging firms offer a uniquely close substitutes for each other’s
overlapping product
Elimination of potential entrants
Vertical mergers Foreclosure of competitors
Input foreclosure Distribution foreclosure
Raising costs to rivals
“Portfolio effects” Have not seen in United States since 1960s Used to block GE/Honeywell in the EU
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FTC Second Requests by Theory
Theory
Number ofSecond Requests
(FY1996-2007)
Horizontal (including unilateral effects)
210
Vertical 25
Potential competition 17
Buyer power (monopsony)
9
Joint venture 3
Other 5
Filing withdrawn 73
Closed after “quick look” 42
Total 384
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Defending a Transaction
Dual approach to defense: Transaction is procompetitive Transaction is not anticompetitive
Develop transaction rationale that will support these theories: Combined company will make money by
Increasing value to customers and thereby increasing customer demand for its products
Not by squeezing customers on price, quality or service
Defending a Transaction Best defense is a good offense: Customers benefit from
the merger Lower costs of production, distribution, or marketing make
merged firm more competitive Elimination of redundant facilities and personnel Economies of scale or scope
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
One-stop shopping for customer convenience Combining product lines
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Defending a Transaction Market will not allow merger to be anticompetitive
Merging parties may appear to compete but in fact they don’t Merging parties compete but there are plenty of other significant
competitors (“realistic alternative suppliers”) Incumbent suppliers Repositioned competitors New entrants
Merging parties compete and there are few if any other actual competitors, but entry is easy and effective
There is some other reason why the combined firm will not be able to harm customers (e.g., “power buyers”)
The Obama Administration
Expect differences only at the margin Somewhat higher confidence that they will not make an error Identifying the problem Fashioning a solution
More skeptical that markets are self-correcting Less likely to credit repositioning in the substantive analysis More demanding in remedies
Continue the skepticism regarding efficiencies What deals would this administration challenge that Bush let go?
Maytag/Whirlpool Sirius/XM
Renewed emphasis on finding anticompetitive vertical mergers
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Merger Notification
HSR Act Process
Where thresholds met, mandatory notification and observance of waiting period under Hart-Scott-Rodino (“HSR”) Act by both parties to deal Size-of-Transaction Size-of-Person Commerce
HSR Act prohibits closing of a transaction until after the applicable waiting period is over
Reviewed by FTC or DOJ Some industries have special clearance regimes involving other
bodies (e.g. Federal Reserve involvement in banking mergers)
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HSR Act Waiting Periods
Initial waiting period 30 calendar days generally 15 calendar days in the case of
a cash tender offer, or acquisitions under § 363(b) of bankruptcy code
Possible outcomes: Early termination of waiting period Expiry of waiting period Cleared after Second Request with or without remedies Agencies make application for preliminary injunction in US
Federal District Court
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HSR Act Filing
Preparation of HSR Filing Takes anywhere from a few days to a few weeks depending on
the transaction
Key information required: Transaction documents Annual reports, financial statements and NAICS revenues Corporate Structure Information:
Majority-owned subsidiaries Significant minority shareholders Significant minority shareholdings
“4(c)” documents
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HSR Act Filing (cont’d)
4(c) Documents Studies, surveys, analyses or reports Prepared by or for officers or directors of the company (and any
entities it controls) That analyze the transaction With respect to markets, market shares, competition,
competitors, potential for sales growth, or expansion into product or geographic markets
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HSR Reportability: When to Call Us Asset Deal
Acquisition price + value of assumed liabilities approaches $65 million
Stock Deal Acquisition price for voting securities to be acquired + value of
voting securities already held approaches $65 million Acquisitions of minority interests potentially reportable
Non-Corporate Interests (LLC/Partnership) Deal Acquisition price for non-corporate interests to be acquired + value
of interests already held approaches $65 million and acquisition confers control
Control based on economics: 50% or more of the profits and/or 50% or more of the assets upon dissolution
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HSR Reportability
"Size-of-Transaction“
As a result of the acquisition, the acquiring person holds voting securities and assets of the acquired person:
“Size of Person”
Acquiring person Acquired person
In excess of $260.7 million* Prima facie reportable without regard to size-of-person
Above $65.2 million up to and including $260.7 million*
1. $130.3MM (in total assets or annual net sales)
$13.0MM (in total assets or annual net sales of a person engaged in manufacturing)
2. $130.3MM (in total assets or annual net sales)
$13.0MM (in total assets of a person not engaged in manufacturing)
3. $13.0MM (in total assets or annual net sales)
$130.3MM (in total assets or annual net sales)
Up to and including $65.2 million*
Not prima facie reportable
* Subject to adjustment
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HSR Reportability
Determining Whether HSR Thresholds Are Satisfied Size-of-transaction test
Look at the total value of the voting securities and assets of the acquired person which the acquiring person will hold as a result of the acquisition
Includes The securities and assets being acquired PLUS Any previously acquired voting securities PLUS In some circumstances, the previously acquired assets
of the acquired person
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HSR Reportability
Determining Whether HSR Thresholds Are Satisfied Different valuation rules apply depending on the type of
acquisition: Market price Acquisition price (if determined) Fair Market Value
Asset acquisitions (but not voting securities acquisitions) Must include value of liabilities being assumed by acquiring person
Voting securities deals Can exempt from the transaction value, any consideration specifically
earmarked for debt repayment
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Selected Exemptions
Intraperson exemption Exempts acquisitions in which the acquired and acquired person
are the same by reason of holdings of voting securities or having the right to 50% or more of the profits or assets upon dissolution of a non-corporate entity
Investment exemption Hold no more than 10% of target’s outstanding voting securities
(15% for certain Instituational Investors) N.B. must be a purely passive investment intention
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Selected Exemptions Convertible voting securities
Exempts acquisitions of options, warrants and other convertible voting securities if the securities do not carry present voting rights (to elect board members)
HSR filing may be required prior to the conversion if thresholds are met
“Ordinary Course of Business” Often comes up in the context of financial institutions buying/selling
used durable good such as planes and rail cars which it owned for financing purposes and portfolios of financial products (e.g. loans).
As long as the financial institution maintains some type of similar financing unit, OCB can apply (but not with respect to portfolios of credit card receivables), even if a corporate unit it sold.
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Foreign Acquisition Exemptions Any acquisition of target with significant non-U.S. assets,
exempt unless: FMV of U.S. assets exceeds $65.2 million; or Assets located outside the U.S. generated sales into the U.S. (in
the aggregate) of more than $65.2 million in its most recent fiscal year
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Foreign Acquisition Exemptions “Foreign-Foreign No-Control”: Acquisitions of non-U.S.
voting securities by non-U.S. persons exempt unless the acquisition will: confer control of the issuer; and the issuer (including all entities controlled by the issuer) either:
holds assets located in the United States (other than investment assets, voting or nonvoting securities of another person, and certain other assets) having an aggregate total value of over $65.2 million; or
made aggregate sales in or into the United States of over $65.2 million in its most recent fiscal year
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HSR Act Review ProcessTypical Domestic Transaction
Announcedeal
File HSR forms
Second requestissued
Second requestconference
Second requestcompliance
Formal end of HSR waiting period
Final agencydecision
Initial waitingperiod
(30 days)
Document production and interrogatory responses(approximately 2-3 months)
Final waitingperiod
(30 days)
Voluntary extension(up to 3 months as necessary)
Customerrollout
– First telephone call (voluntary request)
– First presentation– Follow-up meetings– First DOJ/FTC customer
interviews– First DOJ/FTC competitor
interviews– Filings in other jurisdictions
– Second request conference– Collect and review documents– Prepare interrogatory responses– Depositions of employees– Additional meetings– Follow-up DOJ/FTC customer interviews and
affidavits– Follow-up DOJ/FTC competitor interviews
– Final meetings with staff– Meetings with senior staff
– Negotiate consent decree (if necessary)
0 0.5 month 1.5 months 3.5-4.5 months
4.5-5.5 months
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Antitrust Considerations inDrafting Acquisition
Agreements
Antitrust & Acquisition Agreements 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
Drop-dead date and termination provisions
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Antitrust & Acquisition Agreements “Consents and Approvals” Reps and Warranty
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 & Acquisition Agreements Antitrust Conditions Precedent
Typical conditions (if applicable) Expiration or termination of HSR waiting period ECMR approval
For other jurisdictions, there are a variety of approaches Ignore them List each non-U.S. clearance specifically Limit foreign antitrust clearance conditions to those “required by law”
or that “would prohibit the consummation of the transaction” or that if not obtained (i) are or would be reasonably likely to have a material adverse impact or (ii) if not obtained would result in a criminal violation
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Antitrust & Acquisition Agreements “No Injunctions or Restraints” Condition
Typically provide that no restraint, preliminary or permanent injunction or other order or prohibition preventing the consummation of the transaction shall be in effect
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 & Acquisition Agreements ‘No Conflict/Absence of Litigation’ condition
Typically provides that no action is pending (or threatened) that seeks to delay or prevent consummation of the transaction
From a seller’s perspective, this could be too favorable as it would cover a challenge brought by a private party, or in non-U.S. jurisdictions, an appeal by a private party filed against an already approved transaction
For seller, watch for inconsistency between antitrust clearance conditions and generally worded conditions on “absence of litigation” or “no contravention of law”
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Antitrust & Acquisition Agreements Regulatory Approval/Best Efforts Covenants
Agreement to cooperate and obtain regulatory approvals using Best efforts; or Reasonable best efforts; or Commercially reasonable best efforts
Filing Obligations and Timing HSR default is 10 business days Other jurisdictions may take significantly longer, so parties usually
agree on filing these “as promptly as practicable”
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Antitrust & Acquisition Agreements Other provisions in best efforts covenants
Obligation to litigate in the event of a 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 If advising seller, need to be careful that decision by buyer to litigate
does not relieve it of any divestiture obligation (if there is one) Coordination on dealing with government agencies
Advance notice and review of communications and submissions (buyer will usually want more control over process)
Right to attend meetings/conferences with Governmental authorities
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Antitrust & Acquisition Agreements Other provisions in best efforts covenants
Agreement not to take any action that will make antitrust approval more difficult
Agreement not to withdraw filings, extend waiting periods or enter into timing agreement without consent of other party (seller typically wants)
Agreement on timing of SR response (seller may want to impose a tight timeframe)
Agreement on exchanging information on settlement offers (very pro-seller)
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Antitrust and Acquisition Agreements Risk-Shifting Provisions
Typical provisions No divestiture obligation “Hell or Highwater” provision, requiring seller to do whatever it takes to obtain
antitrust clearance Reverse breakup fee
Many other alternatives, depending on the circumstances: Divestiture obligations limited to certain product lines Divestitures limited by revenue cap Materiality cap on divestitures “Take or pay” obligation
Divestiture obligation alters buyer’s bargaining power vis-à-vis the enforcement agency and can raise “road map” problem Sometimes dealt with in a side-letter interpreting the acquisition agreement,
but this may not be possible in public deals due to SEC disclosure requirements
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Antitrust and Acquisition Agreements Timing and Termination Issues
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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