Regardless whether a private equity add-on or growth-oriented expansion target, the strategic acquisition of a competitor signals antitrust issues. In virtually all acquisitions and mergers there are various regulatory concerns and compliance issues. But negotiations with a competitor raise antitrust concerns, even in the earliest phases.
If your business is contemplating an acquisition of or a merger with a competitor – or if the target could be a competitor reasonably soon if it desired to – it is important to plan how the antitrust laws may influence the deal. Here are some considerations when entering into discussions with a competitor target.
Develop a sound rationale. Be sure to have a well-developed rationale for the transaction. Simply wanting to increase prices is not allowed. If the antitrust regulators, a private plaintiff or a court eventually scrutinize your deal, it is important to present a clear picture from the onset that you had more positive reasons for pursuing the acquisition, such as increasing the range of products available to customers or funding expanded research and development.
Prepare a written agenda. Whenever meeting with competitors regarding a potential transaction, have a written agenda that spells out the topics that will be discussed. It is best to have an attorney (preferably an M&A expert sensitive to the antitrust laws) review the agenda before the meeting. Even better is to have legal counsel attend the meeting to ensure that discussions do not stray into areas that should be avoided.
Be selective with studies and analyses. Be careful about what is put in writing regarding the transaction. If the deal is over the thresholds set forth in the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR), and you must make filings with the Department of Justice and the Federal Trade Commission prior to closing the deal, the company will be required to turn over all studies, surveys, analyses and reports that were prepared by or for any officer or director (or in the case of unincorporated entities, individuals exercising similar functions) for the purpose of evaluating or analyzing the acquisition with respect to market shares, competition, competitors, markets, and potential for sales growth or expansion into product or geographical markets. The regulators read this language broadly, and even consider any e-mail that addresses one of these topics as required to be produced. Failing to meet this requirement can lead to a fine of many hundreds of thousands of dollars, even if the regulators do not act to block the deal. In addition, in any private antitrust litigation that may be commenced resulting from the transaction, teams of lawyers will be scouring the company’s files for evidence of an anticompetitive motive or knowledge that the deal could have anticompetitive effects.
Use a clean team. Handle disclosures made during due diligence very carefully. In the event the deal does not close, regulators could consider the negotiations a sham, and treat the exchange of information during due diligence to be evidence of an intent to fix prices, allocate customers, or otherwise act anti-competitively. The parties’ competitively-sensitive information, such as prices it charges customers or pays for key inputs, or future business plans, should be shared only with a “clean team” of the other party’s business personnel or outside experts that may not be in a position to use their competitor’s information. Additionally, this information should be shared as late in the due diligence process as possible.
Document how to respond to any regulatory Challenge. Consider including in the definitive agreement a provision that describes the parties’ obligations to go forward with the transaction if regulators challenge it, and who bears the responsibilities and burdens if such a challenge occurs. Common topics addressed include which party (if either) has the right to determine strategy in responding to a regulatory inquiry, how the costs of an investigation or litigation will be allocated, whether the buyer has any obligation to make divestitures or other changes the government may require, and whether the parties must consummate the deal on whatever terms the regulators may demand, or whether they can walk away if any concession is required.
Avoid executory integration. If not an ink and close transaction, and there is a period between execution of the definitive agreement and the closing, be sure not to integrate operations, or otherwise act as one company, prior to closing. This is referred to as gun jumping, and is investigated and acted upon by the DOJ and the FTC, even if the transaction ultimately closes. This type of conduct may include altering production plans, terminating workers, jointly meeting with customers, or agreeing not to pursue new business before closing. At worst, it can constitute an express anticompetitive agreement between two companies that are, after all, still competitors until closing. It also runs afoul of the requirement in the HSR Act that companies must abide by a waiting period before integrating their operations.
Deals below the Hart-Scott-Rodino threshold may still be scrutinized. A transaction below the HSR threshold may still be challenged later. An aggrieved customer, for example, could still file a private antitrust action – especially a much more daunting class action – against the company, seeking damages that are trebled in an antitrust action. And the DOJ or FTC could still review the deal as well, even after closing. The regulators may discover the transaction through a review of business publications, or a complaint from someone in the market. They can, and often will, then proceed to extract a remedy from the surviving company, even seeking to completely unwind the transaction in some instances.
Obtain customer statements. If a firm is anticipating some scrutiny from regulators, it may be a good idea, albeit awkward and sometimes difficult, to solicit statements, (or even affidavits) from customers that the transaction does not cause them any concern. But customers should not be offered any special promises or incentives to give the statements, such as a promise that prices for that customer will not increase after closing. Those sort of sweetheart deals are likely to be discovered, and will only make the regulators more suspicious of motives.
- Mark Greenfield and Jeremy Rist are both partners at law firm Blank Rome LLP