Post-Deal Upset Order Roils Market

An FTC administrative law judge in Chicago has given corporate executives something else to worry about when closing a deal. His decision marked the first time, legal experts say, that a federal antitrust action formally has overturned a consummated merger. Although post-deal consideration is not itself new, in other cases an upset order was avoided by settlement agreements. By scuppering a two-year old merger, Administrative Law Judge Michael Chappell reinforced warnings that antitrust risks may not end when a merger closes. According to his decision, the February 2001 acquisition of the engineered construction division of Pitt-Des Moines Inc. by Chicago Bridge & Iron Co. must be undone within 180 days. Chicago Bridge released the results of the judge’s ruling on June 13. The ruling is unusual because the FTC acted after the expiration 30-day waiting period mandated by the Hart-Scott-Rodino Act (HSR) before a merger can be completed. Since the HSR period ended, the agency was unable to stop the merger by issuing a “second request” for more details on the deal. Instead, several months after the HSR period ended, the FTC filed an administrative complaint to take the deal apart. The company said it would appeal Chappell’s decision. “CB&I believes that the FTC administrative law judge’s ruling is inconsistent with the law and the facts present at trial,” the company said in a statement. Antitrust lawyers say that the possibility of a reversal, such as in the Chicago Bridge case, has always existed. But now that the government has attempted to undo a done deal, advisers must examine these competition aspects of transactions more carefully, they note. “You have to determine as early as possible whether there is any regulatory risk to closing,” says Mark Popofsky, a partner at in the Washington office of law firm Kaye Scholer. If risk is found, he adds, the two sides must rely on their antitrust counsel to decide whether to close the deal. If the buyer and seller could rely on a specific time limit, they could wait for the government’s post-HSR review, but there aren’t any time limits. In addition, because many deals have a short shelf life, Popofsky says, the parties must depend on their antitrust counsel for a determination of how successfully the deal might be defended if it is challenged. Another tactic dealmakers could employ would be to write in clauses that would protect the buyer if the deal were challenged by the government after it closes. But that is not a simple matter, according to Stephen Mahinka, a partner at Morgan Lewis & Bockius in Washington. “It can be difficult for the parties to negotiate some protections for the buyer if the deal is challenged after it closes,” he comments. Mahinka adds that any considerations that might be inserted may make it harder to close the deal. The seller generally wants to close the transaction and move on. While the specifics will vary in individual mergers, it can be hard to write in post-deal protection for the buyer that is agreeable to the seller. So where does that leave dealmakers? Mahinka says that principals and advisers should be aware of the possibility of a post-deal challenge from regulators but shouldn’t overreact. He suggests that the parties consider provisions that can be put in to address these concerns, but he adds that the practical considerations of any given deal will determine how much weight actually can be put on such clauses. Copyright 2003 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com