title · sidley austin llp 3 . antitrust from 30,000 feet • antitrust law is concerned with...

MARCHMADNESS:EMERGINGLEGALISSUESANDTRENDS

Session 7: 4:20-5:20 Presented by Sidley Austin

Title:

Strategies to Keep Antitrust Issues from Tripping up Mergers and Acquisitions

Speakers:

Peter Huston, Partner, Sidley Austin John R Seward, Associate Director of Antitrust

Compliance, Intel Corp

Avoiding Antitrust Potholes and Landmines on the Road to Closing Your Deal Peter Huston, Partner, Sidley Austin

John Seward, Associate Director of Antitrust Compliance, Intel Corporation

March 2018

Overview •  Legal/regulatory framework

–  Premerger notification

•  Managing document creation

•  Managing pre-closing activities

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Antitrust from 30,000 feet •  Antitrust law is concerned with consumer welfare

–  competition increases consumer welfare (lower prices and better products/services)

–  concentrations of market power can potentially hurt consumer welfare

•  Antitrust law worries about two things: –  harm to competition when competitors combine, increasing market power, either through

collusion, merger or joint venture

–  harm to competition when companies with market power exclude rivals through “unfair” competition

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Antitrust from 30,000 feet •  Antitrust law is concerned with consumer welfare

–  competition increases consumer welfare (lower prices and better products/services)

–  concentrations of market power can potentially hurt consumer welfare

•  Antitrust law worries about two things: –  harm to competition when competitors combine, increasing market power, either through

collusion, merger or joint venture

–  harm to competition when companies with market power exclude rivals through “unfair” competition

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Collision course: Companies are constantly in search of market power; Antitrust enforcers seek to block harmful accumulations of market power

Federal antitrust statute governing mergers and acquisitions •  Clayton Act § 7 prohibits deals “where . . . the effect . . . may be substantially to

lessen competition . . .”

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Merger investigations: Redundant authority •  More than 100 foreign jurisdictions now have some form of merger control

regime; many have cooperation agreements

•  In the U.S., both the FTC and the DOJ Antitrust Division enforce Clayton Act § 7 –  They won’t double team you: If they investigate, it will be one or the other, but not both

–  The FTC and DOJ have each developed expertise in certain industries; jump ball on others

•  State authorities can also investigate

•  Private parties can also challenge mergers in the U.S.

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Hart-Scott-Rodino Act framework •  Certain deals must be reported in advance to the FTC and the DOJ, regardless

of whether there are competitive overlaps

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Hart-Scott-Rodino Act framework •  HSR filings trigger a waiting period (generally 30 days) during which the FTC or

DOJ reviews the deal for potential anticompetitive effects

–  Waiting period can be terminated early

–  “Pull and refile” can add about 30 more days

–  Initial investigation may include customer interviews and requests for voluntary production of documents and/or data

•  Failing to file when you should have can be costly

–  Fine recently increased to $40,000 per day

•  The HSR Rules specifically prohibit structuring a transaction to avoid reporting

•  If no HSR filing is required, the transaction can still be challenged

•  Reviewing agency may extend waiting period until 30 days after parties substantially comply with “Second Requests”

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Second requests •  Extremely broad requests for documents, data, and narratives

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Second requests •  Complying with second requests is expensive and time consuming

•  Warn clients up-front on the burdens and timing


Source: Dechert Antitrust Merger Investigation Timing Tracker (DAMITT)

Contractual provisions to manage risk


Covenants Considerations Efforts Level •  Typically “reasonable best efforts”

•  Antitrust sensitive deals define these efforts to avoid ambiguity in what that means.

Cooperation •  Will one side take the lead on strategy? •  Will buyer and seller provide an opportunity to each other to participate in all

communications with the government or review all material submissions?

Remedial Obligations

•  Requires upfront antitrust risk analysis to determine likely remedies •  Litigation in lieu of or in addition to divestiture?

Risk-Shifting/ Material Adverse Effect

•  Divestiture caps – business lines, revenues, assets, EBITDA? •  Effects – de minimis; standard materiality; or measured against combined

company, buyer, or target? •  Hell or High Water (HOHW): best efforts or with some caveat?

Reverse Breakup Fee

•  3-10% of equity value typical in sensitive deals •  Often in lieu of HOHW

Closing Conditions •  Consider whether some, but not all, jurisdictional approvals required

Outside Date •  Even simple multi-jurisdictional deals can take months to be cleared •  Complex deals longer – average Second Request takes 10 months •  Factor in sufficient time for review

HSR item “4(c)” documents •  HSR form Item 4(c) calls for documents prepared in connection with the deal by

or for any officer or director that analyze the transaction with respect to –  market shares

–  competition

–  competitors

–  markets

–  potential for sales growth

–  expansion into product or geographic markets

•  Government often looks at these first

•  Hot vs. cold vs. non-existent 4(c) documents


What is the government looking for? •  Is the deal going to create or enhance market power?

–  Is it going to allow the parties to increase prices or reduce output?

–  Is quality or innovation going to suffer?

–  What is the market?

–  Is the market concentrated?

–  Are the merging parties close competitors?

–  Are there barriers to entry?


Bad documents •  Deal-related documents that . . .

–  Describe the dominant position the merged firm will have after the deal

–  Describe the anticompetitive motive for the deal

–  Describe the anticompetitive effects the deal will have

•  Strategic and business planning documents that . . . –  Describe the market as highly concentrated

–  Describe a highly competitive relationship between the merging parties

–  Describe high barriers to entry


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HowBazaarvoiceReferredtoPowerReviews

–Then-CFOStephenCollins,Mar6,2011

Itisworthconsidering.Totakeouttheonlycompetitorwehave….GX-315

–Co-founderBrantBarton,Apr21,2011

***

Subject:CONFIDENTIAL–ReasonstoconsiderPowerReviews…asourfirstacquisition.

Pros

Eliminationofourprimarycompetitor

GX-316

Potentiallytakingoutouronlycompetitor,whoisbothsuppressingourpricepoints(byasmuchas15%accordingtoOsborne)…couldbeahighlystrategicmove….

–BrettHurt,May4,2011

GX-518

–BrantBarton,May20,2011

Eliminateprimarycompetitor,therebyreducingcomparativepricingpressure….

GX-521

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–BrantBarton,Apr21,2011

Pros •  Elimination of our primary competitor in

both the US and Europe. An expected impact of this consolidation is relief from the price erosion that Sales experiences in 30-40% of deals, per Osborne, of up to 15-30%. In addition, the market will place a premium on us having such a dominant market position, which is a powerful competitive moat.

Reasons to Consider PowerReviews GX-316

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GX-610

19

GX-40

20

Menlogeddon GX-34

21

Bazaarvoice violated Section 7 of the Clayton Act by purchasing its closest and only serious competitor . . .

DOJ Complaint v. Anheuser-Busch InBev and Grupo Modelo 45. The specifics of ABI’s pricing strategy are governed by its “Conduct Plan,” a

strategic plan for pricing in the United States that reads like a how-to manual for successful price coordination. The goals of the Conduct Plan include: “yielding the highest level of followership in the short-term” and “improving competitor conduct over the long-term.”

46. ABI’s Conduct Plan emphasizes the importance of being “Transparent – so competitors can clearly see the plan;” “Simple – so competitors can understand the plan;” “Consistent – so competitors can predict the plan;” and “Targeted – consider competition’s structure.” By pursuing these goals, ABI seeks to “dictate consistent and transparent competitive response.” According to ABI, its Conduct Plan “increases the probability of [ABI] sustaining a price increase.”


Whole Foods CEO to board re purpose of Wild Oats acquisition “By buying [Wild Oats] we will . . . avoid nasty price wars . . . which will harm [Whole Foods’] gross margins and profitability. By buying [Wild Oats] . . . we eliminate forever the possibility of Kroger, Super Value, or Safeway using their brand equity to launch a competing national natural/organic food chain rival to us. . . . [Wild Oats] is the only existing company that has the brand and number of stores to be a meaningful springboard for another player to get into this space. Eliminating them means eliminating this threat forever, or almost forever.”


DOJ Complaint v. H&R Block and TaxACT 44. Internal H&R Block documents repeatedly recognize the competitive

significance of “[e]liminati[ng this] competitor” and pulling the maverick off of the market. For example, in an internal H&R Block presentation discussing the potential acquisition of TaxACT, one of the “[s]trategic [o]pportunities” of the acquisition is: “Acquire TaxAct and eliminate the brand to regain control of industry pricing and avoid further price erosion.” Compared to the benefits of this acquisition to H&R Block, the benefit to taxpayers, as set forth in the same document, stands in stark contrast: “None.”


Key issues raised by M&A documents •  What is the commercial rationale for the transaction?

–  Efficiencies, cost reductions and customer benefits are good, especially if they cannot be realized through other means

–  Raising prices to customers, decreasing product quality or service, and increasing competitors’ costs are bad

•  Do the documents present an inaccurate picture of the industry? –  Puffing about market strength can be harmful

–  Focusing on narrow niches and failing to note broader sources of competition can be harmful

•  What are the conditions for entry or expansion in the industry? –  Low barriers mean anticompetitive conduct by the merged firm would be defeated by

entry or expansion of competitors


Dos and don’ts •  Do . . .

–  Create a culture that encourages care in how written materials describe competitors and competition

–  Involve antitrust counsel early when considering a merger or acquisition to analyze issues and vet language

–  Explain the pro-competitive aspects of the deal in potential 4(c) documents

–  Make sure the other party to the transaction is cognizant of potential antitrust issues


Dos and don’ts •  Don’t . . .

–  Use incendiary language about competitors in ordinary course documents

–  Use hyperbolic language about the firm’s competitive strength or position in the market

–  Use loaded antitrust terms like “barriers to entry”


Pre-closing coordination – basic guiding principles •  In general, parties should operate independently until closing, coordinating only

when reasonably necessary to protect the integrity of the transaction

•  Buyers seek to ensure that the value of the business being acquired is maintained between signing and closing

•  Legitimate restrictions on major changes to the business are permitted

•  As to day-to-day operations, it typically is acceptable to require seller to operate in accordance with its ordinary past practices

•  The permissible degree of coordination generally increases as closing draws nearer

•  But premature or excessive coordination can lead to collusion claims


Pre-closing coordination in HSR-reportable deals •  If the transaction is subject to HSR reporting, the buyer should avoid exercising

premature control over the seller’s operations

•  This is considered “gun-jumping.” I.e. de facto closing without having gone through HSR

•  This principle applies regardless of whether the parties are competitors

•  The key concept is that the parties may engage in integration planning but may not implement such plans until the HSR waiting period expires or is terminated


Limits on pre-closing coordination under § 1 of the Sherman Act •  If competitors, the parties must take extra care in negotiations, due diligence,

transition planning, and other deal-related activities –  For purposes of antitrust law, merging parties remain independent entities until closing

–  They should limit or channel the exchange of competitively sensitive information

–  Forward-looking and non-public information is the most sensitive: Pricing; strategic/marketing/product plans; customer specific information; detailed costs

–  They should not agree to set prices or discounts, to divide customers or territories, or to coordinate on other attributes with Sherman Act sensitivity

•  If not competitors, parties have considerably greater flexibility


Information exchange best practices •  Limit and control access and distribution on a strict “need to know” basis

•  Provide historic information

•  Aggregate where possible

•  Mask customer/vendor identities

•  Question the need for sensitive information –  Keep overlaps in mind

–  Consider prejudice to disclosing party if deal fails

•  Consider the use of a “clean team” –  Third-party consultants

–  Client personnel who do not (and won’t) have commercial responsibility


Pre-closing coordination – topics that generally are safe •  The parties should feel free to discuss the following matters without concern for

substantial exposure: –  The structure of the transaction, including (a) the organizational form to be adopted and

(b) the business units to be combined

–  The consideration to be provided by either party to the other

–  The degree to which the negotiations will be non-exclusive

–  Other provisions of the type that are customarily included in letters of intent or agreements in principle

–  The manner in which the transaction will be announced to the public, and the strategy for influencing public reaction

–  The manner in which due diligence will be conducted


Pre-closing coordination – topics that warrant advice of counsel •  In general, the parties may discuss the following matters, but they should consult

with counsel before getting too deeply into specifics: –  The objectives, strategic purpose, and rationale for the transaction

–  The manner in which the parties will conduct their respective businesses between the signing of an agreement and the closing of the transaction

–  The efficiencies to be realized from the transaction

–  The costs of the parties in operating their respective businesses

–  The historical, aggregated prices of the parties


Pre-closing coordination – topics that should be avoided •  The parties should avoid discussion of the following matters:

–  Their current or future prices or recent disaggregated prices

–  Current or future customer selection

–  Specifics of how they will operate their respective businesses if the transaction does not proceed

•  Where the parties cannot exchange or discuss information directly, they may be able to satisfy their business objectives by outsourcing analysis to third-party advisors, such as accounting firms or investment banks –  Sensitive information is firewalled from business personnel for whom access is not

permitted

–  Third-party advisors convey conclusions in summary, aggregated form


Thank you.

SIDLEY AUSTIN LLP 35 ThesematerialshavebeenpreparedbySidleyforinformationalpurposesonlyanddonotconstitutelegaladvice.Thisinformationisnotintendedtocreate,andreceiptofitdoesnotconstitute,anattorney-clientrelationship.Youshouldnotactonthisinformationwithoutconsultingprofessionaladvisers.AttorneyAdvertising-SidleyAustinLLP,OneSouthDearborn,Chicago,IL60603,+13128537000.Priorresultsdonotguaranteeasimilaroutcome.PhotosmayincludeSidleyalumniorotherindividualswhoarenotSidleylawyers.Photosmaybestockphotographs.Thankyou.

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