On April 23 2002 the Antitrust Division of the US Department of Justice announced a proposed settlement in a case that highlights the division's commitment to ensuring that merging firms refrain from 'gun-jumping' - that is, coordinated activities before the merger is actually concluded. In United States v Computer Associates International Inc the Antitrust Division obtained a $638,000 civil penalty and a detailed consent decree in response to provisions in the merger agreement and pre-closing conduct that restricted second defendant Platinum technology International, inc's independence during the pre-merger waiting period.

The case arose in March 1999, when Computer Associates and Platinum agreed to merge. Their merger agreement required that Computer Associates approve all Platinum contracts offering customers:

  • more than a 20% discount;

  • non-standard terms;

  • services for more than 30 days at a fixed or capped price; or

  • year 2000 remediation services.

Computer Associates also installed an employee at Platinum's headquarters to review and approve customer contracts and undertake other management activities. The Antitrust Division concluded that these actions substantially eliminated price competition between the parties and effectively transferred control of Platinum's business to Computer Associates prior to closing.

Although the Antitrust Division resolved its concerns about the merger in May 1999, letting it proceed after some divestitures, it continued to seek sanctions for the parties' pre-closing business coordination. The proposed settlement filed last month provides that Computer Associates and Platinum will pay $638,000 in civil penalties, and enjoins them from entering into any agreement with any prospective merger partner that, prior to consummation of the merger:

  • establishes any price or discount for any product or service of the other party;

  • grants to one party to the transaction the right to negotiate, approve or reject any bid or customer contract for any product or service of the other party; or

  • requires a party to provide bid information to the other party for any product or service to be purchased, used or re-sold in the United States.

The settlement also imposes extensive monitoring provisions, allowing the Antitrust Division to ensure that the injunction is obeyed in the future.

The settlement expressly provides that several common merger terms - such as requirements that prospective partners continue to operate in the ordinary course of business consistent with past practices pending closing, and not engage in conduct that would cause a material adverse change in the business - are not prohibited by the injunction. The settlement provides no guidance about what steps merging parties may take to determine whether any particular conduct will be deemed outside 'the ordinary course' or will be deemed to cause a 'material adverse change' in the business being acquired.

The proposed settlement stipulates that Computer Associates and a prospective merger partner may engage in joint bidding or buyer/seller relationships while a merger agreement is pending, provided that these activities would be lawful in the absence of the merger. However, the settlement sounds a further note of caution with respect to exchanges of customer information for pending sales or bids where Computer Associates and a prospective merger partner are competitors. It provides that pre-closing, such information can only be exchanged for legitimate due diligence purposes, and then must only be exchanged under an agreement that prohibits disclosure to any employee of the party receiving the information who is directly involved in marketing, pricing or sales of any product or service that is the subject of the pending bids.

During the recent spring meeting of the American Bar Association's Section of Antitrust Law, some Antitrust Division officials expressed the personal view that joint meetings with a customer should be forbidden in the pre-closing period, even if done at the customer's request. They also implied that it might not be appropriate to give the acquiring person 'approval authority' over non-standard actions of the target pre-closing.

This proposed settlement serves notice that the Antitrust Division will closely scrutinize pre-closing activities, and that persuading antitrust agencies that a proposed transaction does not present competitive problems or that those problems may acceptably be remedied will not necessarily save parties from penalties for impermissibly coordinating their pre-closing activities. Accordingly, parties contemplating a merger would be well advised to consider the antitrust implications of their due diligence exchanges, pre-closing covenants and transition planning.

For further information on this topic please contact Philip C Larson, Jeffrey H Blattner or F Joseph Gormley at Hogan & Hartson LLP's Washington office by telephone (+1 202 637 5600) or by fax (+1 202 637 5910) or by email ([email protected] or [email protected].com or [email protected]). Alternatively, contact Michele S Harrington at Hogan & Hartson's McLean office by telephone (+1 703 610 6100) or by fax (+1 703 610 6200) or by email ([email protected]).