protecting the deal during merger review

Protecting the Deal during Merger Review

Successful Transactions – What In-House Counsel Expect

from their M&A and Antitrust Attorneys

AIJA/ABA conference – Chicago – June 6, 2014

Speakers

Rafique Bachour, Freshfields Bruckhaus Deringer LLP

Lisl J. Dunlop, Shearman & Sterling LLP

Nick Koberstein, Abbott Laboratories

Kyoung Yeon Kim, Yulchon LLC

Program Chairs

Susana Cabrera, Garrigues LLP

David Mamane, Schellenberg Wittmer Ltd

Protecting the Deal 6 June 2014 /31

Table of Contents

1. Coordinating timing of international merger review filings

2. Counsel/client relationship and engaging with the agencies

3. Managing a Second Request/Phase 2 process

4. Remedy negotiations

5. Carve-outs and Hold Separates

6. Follow-on M&A litigation


Over 125 competition law regimes (national and regional) … and more in the pipeline


General

> Web of international merger control regimes is growing and process is

becoming more complex> Degree of procedural divergence> Varying levels of sophistication> Increased inter-agency cooperation

> Appetite for increasing scope of deals to be reviewed> Reviews are taking longer> Possible solution to diverging timelines – greater alignment of differing

procedures in pre-notification?


Key factors in coordinating timing

> ‘Pragmatic’ approach to identifying where filings will be made, and how

to tie these to conditionality > Develop understanding of local processes and practice in order to

identify all potential timing obstacles > Crucial to have a ‘roadmap’ leading to clearances, and adjust on on-

going basis if need be> Order in which authorities are approached and filings submitted> Managing collaboration between authorities – considering when to

grant waivers


Global Transaction – Antitrust Filings

> Where to notify?> 120 countries (approximately) have merger control laws

> Filing requirements need to be assessed in multiple jurisdictions> Thresholds based, inter alia, on parties’ revenues/assets, market shares

> Many jurisdictions prohibit (“suspend”) closing pending clearance –

deal cannot close until last clearance obtained> Suspensory jurisdictions of note are US, EC, Canada, China and Japan

> Suspensory jurisdictions are the priority


US v. EC – Key differences in merger review process

> Different processes: US vs EU> HSR filing typically submitted soon after deal is signed, with relatively few

documents and minimal information required> In potentially problematic deals, agency reviews company documents and

interviews third parties during the initial 30 day waiting period > On the other hand, pre-notification of Form CO can take months involving

numerous drafts and questionnaires from EC staff

> US and EC use different methods of fact gathering> US relies mostly on documents, continual dialogue with the parties and their

counsel, and interviews of industry participants> EC gets virtually no documents, relies on questionnaire/interrogatory

responses, and has relatively little dialogue with the parties and their counsel


US v. EC – Key differences in merger review process (cont’d)

> US agencies typically willing to narrow issues and scope of

investigation more quickly than EC> In complex deals, EC’s process does not provide the staff with as much

information in early stages so EC takes longer to get a good understanding

of the overlap markets and competitive dynamics> EC may react negatively if US process appears to move quickly leaving the

EC behind, so parties must proceed cautiously


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Counsel’s role in M&A review:Filing and during the review period

> Who will be in charge of the filing(s)?> Licensed attorney in the subject jurisdiction> Buyer’s counsel or/and Seller’s counsel – depends upon the filing obligation

(e.g., joint filing) but equally responsible for the preparation of filing in most

cases> Template or questionnaire for preparation of the filing> POA – notarization or legalization > Former officers at the agencies – helpful but not decisive factor> More than one representative?

Once engaged, the counsels from all subject jurisdiction need to be

coordinated on their filings (e.g., market definition, timing, waiver of

confidentiality, …)


Counsel’s role in M&A reviewFiling and during the review period

> Being engaged and discuss with the agencies in early stage> Jurisdictions adopt similar or different process for this early discussion before

the formal filing> Having the same picture with the agencies from the early stage is necessary

to avoid possible wrong and unfavorable assumption

> Seamlessly communicate with the agencies and the parties throughout

the process> Closely follow up the sequence to get clearance as soon as possible> Deal with any unreasonable or undue request for information or data from

the agencies


Counsel’s role in M&A reviewFiling and during the review period

> Seamlessly communicate with the agencies and the parties throughout

the process (continued)> Be trusted – tackling the third parties’ opinions which often tend to be biased> Guide the parties and coordinate the meetings, conference calls, any on-site

investigation by the agencies, and the contents of discussion / information or

data to be subject to submission in advance or whenever appropriate> Properly suggest an expert opinion or economist’s report on the case> Be guaranteed – confidentiality issues with the submitted information or data

> against any third party disclosure including press release; and > on sharing the submitted information or data with the agencies in other

jurisdictions (MOUs among the agencies, waiver forms, ….)


Counsel’s role in M&A review:After the review period

> Negotiate with the agencies on category and level of the remedies> Some of the jurisdictions do not have a formal negotiation procedure> Often behavioral remedies are preferred to structural remedies

> Advise or Appeal the agencies decision in the administrative procedure

or lawsuit before the court> Appealing in the administrative procedure is often not effective> Legal dispute before the court takes substantial time and costs but sometimes

inevitable

> Follow up and advise the parties on the implementation of the remedies> The parties need clarification or legal advice on the implementation of the

behavioral remedies> Structural remedies can be modified later by the agencies due to several

reasons (e.g., repeated failure to find buyer candidate(s), …)


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Managing a Second Request:What is a “Second Request”

> Initiates “Phase II” of US merger investigation process> Detailed information request to help the agency understand the

industry, the company and the company’s view of competition> Typically takes 2-4 months to comply

> No set timelines – timing in the hands of the parties> Clock stops until compliance

> Two components:> Large-scale document submission

> E-mail, e-documents & paper files from multiple employees> Typically TB of data processed and reviewed

> Detailed interrogatories > Data and narrative responses


Managing a Second Request:Process

> Work closely with inside counsel and counsel for other party to plan

and prepare for Second Request> Dedicated team> Timeline for compliance – coordinate with other filing timelines> Identification and retention of litigation support services – document/data

management and reviewers> Inside/outside team for interrogatories – include economists> Collection of organization charts and preparation for agency meetings to limit

Second Request> Identification of data and document systems and networks

> “Day 31” activities> Issue document retention notices> Presentations to employees – “Town Hall” meetings> Start interviews, collection and development of responses


Managing a Second Request:Dealing with Agencies

> Negotiations to narrow scope of Second Request> Product areas> Custodians> Types of data

> Continue to work with agency to take areas “off the table”> Substantive presentations> Selective document/data production> Depositions/Investigative Hearings

> Initiate remedy discussions at any time in the process> Agencies will not accept remedy without some information production, but

can be limited to “quick look”


Managing an EU Phase II process - General

> Number of procedural hurdles…> RFIs - including, with increasing regularity, large internal document

requests> Statement of Objections (and, regularly, follow-up letter of facts) - including

corresponding access to (large) Commission file> Oral hearing (optional)> State of play meetings (up to four)> Remedy negotiations

> …Set against a challenging timeline> Review period 90 working days, with possibility of extension by a further

35 working days > Strict deadline for offering remedies (no later than working day 65 or

equivalent)


Managing an EU Phase II process Key strategic considerations

> Prepare team and client for extensive document trawl exercises

(internal correspondence and the Commission’s file) and possibility of

‘misinterpretation’> Pick your battles

> Oral hearing> Procedural battles e.g. over privilege or confidentiality redactions are often

hard fought but can have little impact on analysis

> Press/lobbying strategies> To be considered in light of decisional hierarchy and levels at which need

to build consensus > May need to be wider than Commission hierarchy – Commission has

seemed willing to be steered by third parties in an apparent effort to

prevent appeals

> Timing and nature of remedy discussions


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Initial considerations

> Identifying the issues> Nature / scope

> Structural /quasi-structural/ behavioural

> Timing> Pre- or post-notification?> Phase I or Phase II - different thresholds?

> Structuring negotiation> Staggered or all-in? > Alternatives (useful where insufficient time for sequential rounds of market

testing)> Upfront-buyers > Crown jewels


Other key issues

> Deal structure / type of transaction> Public M&A – managing conflict between providing enough transparency

to shareholders and retaining negotiation ‘wriggle’ room with relevant

authority

> Contractual provision> Buyer retains complete discretion on remedies> Pre-agreed scope / threshold?> Joint action / mutual consent? > Seller friendly “hell or high water” clause – can give authority a negotiating

advantage?

> Multi-jurisdictional element – managing authority cooperation to

prevent extensive or inconsistent remedies> To be considered on facts – aiming for same (limited) remedy globally or

are different/localised remedies more appropriate?


Contractual provisions – Buyer friendly

> Buyer friendly – No obligation to propose or accept remedies

“the Purchaser is not obliged to propose, effect or agree to the sale,

divestiture, license or other disposal of any assets or businesses of the

Purchaser or the Target, or to take any other action that [, in the reasonable

view of the Purchaser] limits the right of the Purchaser to own or operate any

part of its business or the Target’s business”


Contractual provisions – “Neutral”

> Buyer undertaking obligation limited by value cap

“the Purchaser is not obliged to propose, effect or agree to the sale,

divestiture, license or other disposal of any assets or businesses of the

Purchaser or the Target, or to take any other action if the sale, divestiture

license or other disposal would represent an aggregate value in excess of

[US$[X] of the Target’s revenues in the 12 months ending [date]] OR [[X] % of

the Target’s revenue in the 12 months ending [date]] OR [X]% of the Target’s

EBITDA …;”


Contractual provisions – “Hell or high water”

> Seller friendly – Obligations on buyer to propose and accept remedies

‘Hell or high water’“The Purchaser shall, at its own cost, use its best endeavours to ensure that the

Purchaser Conditions are fulfilled promptly after the date of this Agreement … Without

prejudice to the generality of this clause, the Purchaser shall in any event:

… offer such undertakings to any Governmental Entity (and not withdraw) within a

reasonable time of submitting the relevant submission, notification or filing any

undertakings that may, in the sole discretion of the Seller, from time to time be

necessary or desirable for the purpose of obtaining clearance at the first stage of the

Governmental Entity’s review process. For the avoidance of doubt, such undertakings

may include the divestment of, or behavioural undertakings relating to, all or part of any

business, activities or assets of any enterprise that is controlled by or affiliated with the

Purchaser Group or the Target Companies. The Purchaser shall use its best

endeavours to perform any such undertakings that are offered to and accepted by any

Governmental Entity”


Fix-it-first• Requires binding agreement on sale of divestment business prior to approval of merger by regulator

• Sometimes used in US

Upfront buyer

• Requires buyer of divestment business to be approved prior to closing of notified merger by Merging Parties

• Typically used in US - e.g. Western Digital/HGST, Panasonic/Sanyo

Other variations

Post-approval divestment

• Crown jewels: alternative divestment package to be sold if original package does not sell within the required time

• Choose-it-first: where various divestment options are identified as remedies and Merging Parties can choose which to close - sometimes used by EC, but normally at request of Merging Parties - e.g. Panasonic/Sanyo (China vs Japan plant)

• Disposal of remedy business commences after regulatory approval is received; Merging Parties allowed period of time (typically 6 months) to sign deal with buyer (to be approved by regulator) plus another period of time to close divestment (typically 2-3 months)

• Typically used by EC - e.g. Abbott/Solvay Pharma

Timing options Comments

Timing options for merger remedies


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Hold-separate and ring-fencing

EC’s best practice guidelines

Hold-separate obligations

• Hold Separate Manager - appointed by Merging Parties; normally the existing manager of Divestment Business- responsible for managing the Divestment Business as a distinct entity - supervised by the Monitoring Trustee

• Monitoring Trustee has authority, where relevant, to:- exercise the Merging Parties’ rights as shareholders in the Divestment Business- replace members of the supervisory board or non-executive directors of the board of directors

who have been appointed on behalf of the Merging Parties

Ring-fencing obligations

• Ring fencing of competitively sensitive information- to be implemented by Merging Parties and Hold Separate Manager- participation of Divestment Business in a central information technology network to be severed- exceptions subject to approval of Monitoring Trustee (e.g. information necessary for the

divestiture or required by law)

• Non-solicitation clause:- key personnel (c. 2 years)

• Non-compete clause:- protecting customers of the Divestment Business for a start-up period- enables Divestment Business to be active as a viable competitor

Non-solicitation & non-compete clause

Related commitments


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Follow-on M&A litigation

> If parties cannot resolve agency concerns at staff and senior levels

and clock has run, agencies must seek injunction in US District Court

to stop the deal> Slightly different processes for FTC and DOJ

> Fast-track litigation> Massive third-party discovery exercise> Party and expert discovery> Usually completed within 3-4 months

> Timing can put deal in jeopardy> DOJ matters – decision within 6 months of complaint> FTC matters – PI within 3-4 months; Commission decision 1 year from

complaint

> Litigation process affects remedy discussions in different ways


Let’s discuss!

protecting the deal during merger review

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