Download Customers benefit from the merger

Principles of
Merger Antitrust Law I:
Substance, Reporting, Purchase Agreements
Dale Collins
Beau Buffier
Kelly Karapetyan
October 14, 2009
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
2
Agenda

Substantive merger antitrust principles



Merger control reporting




Horizontal mergers
Other theories of anticompetitive harm
United States
Europe
Rest of world
Antitrust provisions in the purchase agreement
Will not cover merger investigations or remedies
ASK US BACK!
3
Substantive Merger Antitrust Principles
4
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
5
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
6
Horizontal Mergers

Key is number of practically available alternative
suppliers:

54

43

32

21
Almost always clears absent significant customer
opposition
Close case but can clear with some significant
procompetitive justification, customer support and little
customer opposition and no bad documents
Usually challenged; requires compelling customer
support to clear and no bad documents
Always challenged; no efficiency defense
7
Horizontal Mergers
Significant Competitors
Enforcement Outcomes
All
Customer
complaints
Hot
documents
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
8
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)
9
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
10
Horizontal Mergers

Other considerations

High market shares



Effect on competitors



In U.S., irrelevant unless it hurts customers
BUT one of the best predictors of enforcement action in the EU
Efficiencies



Not helpful
BUT not decisive if sufficient alternatives exist
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
11
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
12
FTC Second Requests by Theory
Theory
Number of
Second 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
13
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
14
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



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



Elimination of redundant facilities and personnel
Economies of scale or scope
More sales representatives
More technical service support
One-stop shopping for customer convenience

Combining product lines
15
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”)
16
The Obama Administration

Expect differences only at the margin




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?



Somewhat higher confidence that they will not make an error
Identifying the problem
Fashioning a solution
Maytag/Whirlpool
Sirius/XM
Renewed emphasis on finding anticompetitive vertical mergers
Merger Notification
18
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)
19
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
20
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
21
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
22
HSR Reportability: When to Call Us

Asset Deal


Stock Deal



Acquisition price + value of assumed liabilities approaches $65
million
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
23
HSR Reportability
"Size-of-Transaction“
“Size of Person”
As a result of the acquisition,
the acquiring person holds
voting securities and assets of
the acquired person:
Acquiring 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*
Up to and including $65.2
million*
Acquired person
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)
Not prima facie reportable
* Subject to adjustment
24
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

25
HSR Reportability

Determining Whether HSR Thresholds Are Satisfied

Different valuation rules apply depending on the type of
acquisition:




Asset acquisitions (but not voting securities acquisitions)


Market price
Acquisition price (if determined)
Fair Market Value
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
26
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
27
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.
28
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
29
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
30
HSR Act Review Process
Typical Domestic Transaction
Announce
deal
Formal end of
HSR waiting period
Second request
issued
File
HSR forms
Second request
conference
Initial waiting
period
(30 days)
0
Second request
compliance
Document production and interrogatory responses
(approximately 2-3 months)
0.5 month 1.5 months
Final agency
decision
Final waiting
period
(30 days)
Voluntary extension
(up to 3 months as necessary)
3.5-4.5 months
4.5-5.5 months
Customer
rollout
–
–
–
–
–
–
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
– Final meetings with staff
Collect and review documents
– Meetings with senior staff
Prepare interrogatory responses
Depositions of employees
Additional meetings
– Negotiate consent decree
Follow-up DOJ/FTC customer interviews and
(if necessary)
affidavits
Follow-up DOJ/FTC competitor interviews
31
Antitrust Considerations in
Drafting Acquisition Agreements
32
Antitrust & Acquisition Agreements

Key Antitrust Issues

Relevant merger control filings



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



Which merger clearances should be disclosed in reps and
warranties?
Which merger clearances should be closing conditions?
Settlement and divestiture commitments
Reverse breakup fees
Drop-dead date and termination provisions
33
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
34
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
35
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)
36
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”
37
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”
38
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
39
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)
40
Antitrust and Acquisition Agreements

Risk-Shifting Provisions

Typical provisions




Many other alternatives, depending on the circumstances:





No divestiture obligation
“Hell or Highwater” provision, requiring seller to do whatever it takes
to obtain antitrust clearance
Reverse breakup fee
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
41
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
42