antitrust compliance in m&a: due diligence, pre-merger...
TRANSCRIPT
Antitrust Compliance in M&A: Due Diligence,
Pre-Merger Communications, Conduct Prior
to Closing
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WEDNESDAY, AUGUST 1, 2018
Presenting a live 90-minute webinar with interactive Q&A
Matthew J. Bester, Director of Competition Law, Accenture, Washington, D.C.
Creighton Macy, Partner, Baker & McKenzie, Washington, D.C.
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ANTITRUST COMPLIANCE IN M&A
Due Diligence, Pre-Merger Communications, & Conduct Prior to Closing
Matthew Bester & Creighton MacyAugust 1, 2018
INTRODUCTION
Scenario: You’ve worked out the thousands of details necessary to close
an acquisition, you’re getting close to the signing date, and then . . . your
antitrust colleague asks whether the deal team considered the relevant
antitrust issues that may stem from the acquisition.
6
M&A AND ANTITRUST LIFE CYCLE
Pre-merger
diligenceAssess
antitrust risk
Determine filing
requirements
Manage sensitive
information
Close and
integrateTrain on gun
jumping
7
AGENDA
1The Merger Laws & Determining
When an Antitrust Filing is Necessary
2Defining Competitively Sensitive
Information for Antitrust Purposes
3Taking Appropriate Actions Pre-
Signing to Avoid Antitrust Scrutiny
4
Understanding the Scope of Permitted
Actions and Communications Pre-
Closing
8
1 The Merger Laws & Determining When an Antitrust Filing is Necessary
“may” substantially reduce competition ✔
✔ “probabilities, not certainties” that the deal
will reduce competition
U.S. MERGER LAW
✔ Forward looking
10
Significantly Impede Effective Competition✔
✔ Balance of probabilities, based on a body
of clear and compelling evidence
EU MERGER LAW
✔ Forward looking
11
Copyright © 2017 Accenture All rights reserved. Attorney Client Communication – Attorney Work Product – Privileged and Confidential
Transaction thresholds Parties must wait for clearanceCommerce nexus
WHEN IS AN HSR FILING REQUIRED?
Title 01 Title 021
EU MERGER CONTROL
2 3Exclusive jurisdictionAcquirer and target
EU-based
turnover thresholds
Acquirer and target
Global turnover
thresholds
13
Iconix purchased Rocawear assets for $200MM
Parties filed HSR forms but zero Item 4 documents
Transaction was not anticompetitive, but parties
fined $550,000 for failing to produce required docs
HSR DOCUMENT REQUIREMENT
U.S. v. Iconix
Brand Group
14
01At least 100
countries
MERGER FILINGS ACROSS THE WORLD
02Both sides’
global and
local sales03
Market
Shares 04Local asset
values
15
WHAT ARE REGULATORS LOOKING AT?
Customers
Market SharesCompetition
Price/Margin Competitors
16
✓ How will customers react to a change in price or
quality?
✓ Will suppliers have meaningful choices?
✓ What are the alternative sources of this product?
✓ Do you have to go to a different geographic area to
get the same/similar replacements
✓ Do the merging parties see each other as their
closest substitutes? Is one of them a “maverick”?
▪ Bidding against each other?
▪ Copying each other’s innovations or pricing structures?
✓ Are they pursuing the same customers?
✓ Are there risks of market foreclosure?
(SOME) KEY AGENCY QUESTIONS
17
NEGOTIATING (ANTITRUST) DEAL TERMS
✓ There are several antitrust related deal points to be negotiated—for routine and complex deals—notably:
▪ Efforts – standard effort (e.g., reasonable) level required
▪ “Hell or High Water” – obligation to litigate throughout
▪ Remedies – buyer to ameliorate concerns to get deal cleared
▪ Termination Fee – protect one or both of the parties if decide against pursuing the deal because of regulatory concerns or timing
• E.g., AT&T reportedly paid T-Mobile over $4 billion after transaction abandoned
• E.g., Halliburton reportedly paid Baker Hughes $3.5 billion after transaction abandoned
▪ Timing Provisions – Specify a date by which the deal must be closed or when filings
must be submitted
18
2 Defining Competitively Sensitive Information for Antitrust Purposes
Prices Customer
Lists Marketing
Plans
Production Costs
Risks Quantities
Investments Turnover Technologies
Sales Capacities
R&D Programs
WHAT IS COMPETIVELY SENSITIVE INFORMATION?
20
WHAT THE AGENCIES SAY
“The main message is that companies should consider the risks and establish
appropriate protocols. At all times companies should take into consideration the
sensitivity of the information offered to or requested by a counter-party and how the
exchange of the information could affect competition, both in the short term and if
the deal doesn’t happen. Once the process is set up, both parties should police the
rules to ensure they are followed.”
Federal Trade Commission Blog, 2018
Avoiding Antitrust Pitfalls During Pre-Merger Negotiations and Due Diligence
21
What is the purpose? What is the reason? Who sees it?
• Evaluating deal
• Planning integration
• Limited set of
employees
• Not market-facing
employees who
compete against target
• Clean team
PROPER CSI EXCHANGE
• Needs to be clear
purpose that is deal-
related for sharing
information
22
23
Diligence or
Integration Teams
▪ Certain Employees
▪ Consultants
▪ Information exchange is limited to Non-CSI
Clean Team
(if Necessary)
▪ Certain Employees (Selective)
▪ Consultants
▪ Access to all (or most) information
▪ Aggregates information for Diligence Teams
STRUCTURING DILIGENCE FLOW
24
Request
▪ Diligence Team requests information (via lawyers)
▪ Lawyers discuss request with Clean Team and Diligence Team
Input/Review
▪ Clean Team requests info from Diligence Team
▪ If required, further discussion with Diligence Team and lawyers
Output
▪ Clean Team aggregates information
▪ Output reviewed and authorized by lawyer
Clean Teams
Firewalls
Data
Employees
CLEAN TEAM PROCESS
WHAT THE AGENCIES SAY
“Right up until consummation, the merger parties are still independent
businesses and they must continue to operate independently…The FTC
therefore looks carefully at pre-merger information sharing to make sure
that there has been no inappropriate dissemination of or misuse of
competitively sensitive information for anticompetitive purposes.”
Federal Trade Commission Blog, 2018
Avoiding Antitrust Pitfalls During Pre-Merger Negotiations and Due Diligence
25
WHAT IF IT GOES WRONG?
Separate
investigationAdditional
antitrust risk
Fines Longer
investigation
Exchanging price information could be seen as facilitating illegal coordination
in violation of Section 1 of the Sherman Act.
26
WHAT THE AGENCIES SAY
“Note that if FTC staff uncover documents in their merger review indicating
that a problematic exchange occurred, or that the parties may not have fully
lived up to the protocols they established to protect confidential information,
this may well result in FTC staff pursuing a separate investigation,
potentially costing additional time and resources.”
Federal Trade Commission Blog, 2018
Avoiding Antitrust Pitfalls During Pre-Merger Negotiations and Due Diligence
27
Settled FTC allegations stemming from CSI pre-close
exchange in M&A transaction between Bosley and Hair
Club
Bosley exchanged future product offerings, price floors
and discounts, plans for business expansion and
contraction, and current business operations and
performance
Bosley required to institute antitrust compliance program
and end CSI exchange with competitors
EXCHANGING CSI IMPROPERLY
Bosley Inc. et al.
28
1. Pharmacy (Omnicare) alleged that healthcare providers (UnitedHealth and PacifiCare
Health) traded CSI during pre-merger due diligence conversations
2. Allowed them to coordinate drug pricing negotiations with Omnicare to get bargain-
basement prices for PacifiCare
1. No “smoking gun” evidence excluding the possibility of independent action
2. Ambiguous circumstantial evidence cannot support an inference of conspiracy
1. Answered pricing questions in general terms
2. Restricted exchanges of sensitive information to high level, aggregated estimates
3. Retained assistance of outside counsel to review CSI and restricted access to the
information cleared by counsel
PROPER EXCHANGE OF CSI
Omnicare v.
UnitedHealth Group
29
DOJ’s ongoing seafood packaging investigation—
merger announced in late 2014
The civil section reviewing the merger found
alleged criminal conduct
The parties abandoned the transaction—and
multiple people have pled guilty as a result of the
ongoing investigation
UNINTENDED MERGER REVIEW CONSEQUENCES
30
Monitoring01 Exchange CSI with outside counsel and third parties assisting in transaction
evaluation
Deliver CSI on an aggregated and historic level02
03 Establish a clear structure on how information can be used and who can see it
04 Screen information from people in competition-sensitive roles
KEY POINTS
31
3 Taking Appropriate Actions Pre-Signing to
Avoid Antitrust Scrutiny
✓ Voicemail
✓ Text messages
✓ Handwritten notes
✓ Formal and informal presentations
✓ Instant Messaging and Apps
✓ Social Media!
PRE-MERGER COMMUNICATION
33
“These statements were primarily made in
the ordinary course of business and are
therefore likely to accurately reflect an
unvarnished viewpoint.
They express the opinion of knowledgeable
industry leaders. And they are consistent with
the expert analysis.
Together, the expert analysis and the other
evidence paint a picture of new entry not
being particularly likely, and the barriers to
entry being high.”
Purposes in Litigation:
• Define a relevant market
• Demonstrate closeness of competition between two merging parties
• Impeach a witness
• Bolster a testifying economist’s economic analysis
• Helpful for plaintiffs and defendants
AETNA/HUMANA
34
• In 2013, the US Department of Justice
challenged the acquisition of
PowerReviews, a product rating and
review firm, by its competitor
Bazaarvoice.
• The case went to trial and, in January
2014, a federal court agreed with the DOJ
that the transaction would substantially
reduce competition and violated the
antitrust laws.
• Documents created by Bazaarvoice were
the primary evidence presented by the
DOJ at trial.
BAZAARVOICE/POWERREVIEWS
35
BAZAARVOICE/POWERREVIEWS
36
“Strategic Opportunity: Acquire TaxAct and eliminate the
brand to regain control of industry pricing and avoid further
price erosion.
…
Benefit to Taxpayers: None”
H&R BLOCK/TAXACT
37
The DOJ’s complaint challenging Halliburton’s proposed
acquisition of Baker Hughes noted that “Defendants have
admitted in regulatory filings that ‘[t]here is no realistic
substitute for LWD [Logging While Drilling] services in
offshore drilling.’”
HALLIBURTON/BAKER HUGHES
38
“BAD” DOCUMENTS—TELL STORIES
“Staples’ and Office Depot’s own documents state that they are the only
participants in a ‘two player’ national market. . . . As Staples explained at an
internal Leadership Summit, ‘There are only two real choices for
customers,’ Staples and Office Depot. Office Depot similarly made clear to
a customer that ‘[o]n a national scale, Office Depot’s competition is
Staples.’ ”
— Complaint for Temporary Restraining Order and Preliminary Injunction
FTC, et. al. v. Staples, Inc., et al.
D.D.C. December 9, 2015
39
“BAD” DOCUMENTS—TELL STORIES
“Much of our story was told through Bazaarvoice documents. One
executive candidly stated that the transaction would eliminate
Bazaarvoice’s ‘primary competitor’ and provide ‘relief from . . . price
erosion;’ another observed that Bazaarvoice would have ‘no meaningful
direct competitor’ after the acquisition.”
— Bill Baer
Former Acting Associate Attorney General, Department of Justice
Former Director of the Bureau of Competition at the Federal Trade Commission
Remarks Delivered at American Antitrust Institute’s 17th Annual Conference (2016)
40
41
Impeach Witnesses
Appear in the media
BAD DOCUMENTS ALSO…
Damage supplier and customer relationships
Negatively affect company reputation
Start another investigation
Help plaintiffs survive a motion to dismiss
Monitoring01 Ordinary course documents are a key piece of evidence
Assume the government will read your documents02
03 Write accurately
KEY POINTS
04 Highlight the competitive benefits of the transaction (cost savings, innovation,
quality improvements, synergies, increased output, lower prices)
42
4 Understanding the Scope of Permitted Actions
and Communications Pre-Closing
Deal assessment✔
✔ Due diligence
PERMISSIBLE PRE-CLOSING CONDUCT
✔ Touting the benefits of merging
✔ Planning for Day 1 of integration
44
Jointly selling/marketing products X
Exchanging CSI without safeguards
IMPERMISSIBLE GUN JUMPING
Implying that the two companies are
one
Combining R&D or other functions
X
X
X
45
GUN JUMPING—DOJ—RECENT EXAMPLE
• Stemming from Duke Energy’s acquisition of Osprey Energy Center
• Duke allegedly took control over Osprey’s output and received the right to Osprey’s day-to-day profits and losses—before making HSR notifications
• DOJ alleged that “from the moment” the agreement took place, Osprey stopped acting as an independent competitor
• Settlement required Duke to pay fine of $600,000
Duke Energy 2016
46
• Fined company €80 million for allegedly implementing two transactions before receiving regulatory clearance
• Integrated business management, shared CSI, and coordinated product strategy
GUN JUMPING—EUROPE—RECENT EXAMPLE
• Fined Netherlands telecom company again €125 million for implementing transaction with PT Portugal before receiving regulatory clearance
• No objection to the underlying deal
• Purchase agreement permitted veto over target’s ordinary business
• Obtained sensitive information about the target without a confidentiality agreement
• Instructed how target should conduct marketing campaign
French Competition Authority 2016 European Commission 2018
47
Monitoring01 Planning Day 1 is ok, implementing the plan is not
Two companies must remain separate entities02
03 Exchanging information needs to be managed carefully
KEY POINTS
04 Talking with customers, employees about the benefits of the deal is ok
48
AND IF THE DEAL DOES NOT HAPPEN
“And finally, when the bidding process is complete, individuals who received
confidential information must comply with all document destruction requirements in
the confidentiality/non-disclosure/clean team agreements. Requiring bidders to
destroy any independent internal analysis based on the confidential data and
documents reduces the risk of future misuse of competitively sensitive information.”
Federal Trade Commission Blog, 2018
Avoiding Antitrust Pitfalls During Pre-Merger Negotiations and Due Diligence
49
✓ While companies are still separate, some antitrust risk
remains.
▪ However, once they have merged operations, the two companies are
now one and cannot be held liable under antitrust laws aimed at illegal
agreements between competitors.
✓ Therefore—once there are no more regulatory hurdles
….Close!
REGULATORY APPROVALWHAT TO DO?
50
QUESTIONS ?
51
Matthew BesterAccenture202.533.1100
Creighton MacyBaker & McKenzie202.452.7000