In a number of jurisdictions, antitrust authorities may challenge consummated mergers even when the parties were not required to report those deals in the first instance or where the parties reported the deals, but the authorities did not initiate challenges after their pre-closing review. This article identifies some examples of merger challenges in these circumstances and other antitrust risks that arise with nonreportable mergers, and discusses lessons parties should draw from the antitrust authorities’ enforcement practices.

UNITED STATES

Section 7 of the Clayton Act — which was enacted many years before the Hart-Scott-Rodino (HSR) Act pre-merger notification statute — allows antitrust authorities to challenge the acquisition of stock or assets, and without regard to whether the acquisition requires a pre-merger notification. Indeed, the antitrust agencies, the Department of Justice (DOJ) and the Federal Trade Commission (FTC), have investigated and challenged several transactions that were not reportable under the HSR Act or that were reported by the parties but not challenged by the agencies following an initial, pre-closing review.  

For example, in 2017 the DOJ sued Parker-Hannifin Corp. and CLARCOR Inc., alleging that Parker-Hannifin’s US$4.3 billion acquisition of CLARCOR seven months prior created an unlawful monopoly for aviation fuel filtration systems. The DOJ sought a court order to partially unwind the deal, even though the parties went through the HSR notification process and the Act’s waiting period expired. The timing of the DOJ’s challenge was a function of when it learned about the overlap in fuel filtration products. The DOJ learned about overlaps in this area after its initial review and the expiration of the waiting period, as a result of post-merger complaints from customers. The case is a reminder that merging parties may need to be proactive in addressing certain overlaps during the review process, as well as anticipating and addressing potential customer complaints. 

Earlier in 2017, the FTC challenged a consummated deal that was not subject to HSR reporting requirement. FTC v. Mallinckrodt, No. 1:17-cv-00120 (D.D.C. filed Jan. 18, 2017). In particular, the FTC alleged that Mallinckrodt subsidiary Questcor Pharmaceuticals, Inc. harmed competition by acquiring Synacthen Depot (a possible competitor to a Questcor product). In exchange for settling the allegations, Mallinckrodt agreed to pay US$100 million in equitable relief and sublicense Synacthen Depot for certain medical purposes. 

In May 2019, following a full hearing on the merits, Chief Administrative Law Judge D. Michael Chappell upheld the FTC’s challenge to a consummated, nonreportable transaction between manufacturers of microprocessor prosthetic knees. In September 2017, Otto Bock acquired Freedom Innovations for an undisclosed sum. The FTC challenged the transaction in December 2017 alleging that Freedom Innovations was Otto Bock’s closest competitor. Finding that competition between Otto Bock and Freedom Innovations led to lower prices for customers and increased innovation in the relevant market for microprocessor prosthetic knees, Judge Chappell concluded that the FTC met its burden of showing that the merger may substantially lessen competition. Judge Chappell’s order, subject to appeal, would require Otto Bock to divest all of Freedom Innovations’ assets to a buyer approved by the FTC. 

These cases are a reminder that regardless of the thresholds for HSR pre-merger notifications — there is no de minimis exception to the antitrust laws that would allow a deal to avoid antitrust scrutiny simply because it fell below the pre-merger notification threshold. When a nonreportable merger is likely to raise significant antitrust concerns or be subject to significant customer complaints, the parties should consider the risk of challenge and whether that risk can be mitigated effectively by bringing the merger to the agencies’ attention before closing. 

UNITED KINGDOM AND AUSTRALIA

In the U.K. — and this is expected to remain post-Brexit — merger filings are done voluntarily. However, where the parties decide not to notify, they risk that the Competition and Markets Authority (CMA), within the four-month period following a transaction becoming public, will refer the merger for a Phase II review. Should that happen, an adverse report could follow, requiring divestment or other remedies. In some cases, where a merger is completed at the time of notification or while the review is in progress, the remedy imposed may require unwinding the deal. 

This is what happened in 2016, when the CMA ruled against Intercontinental Exchange’s (ICE) 2015 buyout of Trayport. The CMA concluded that the merger would result in substantially lessened competition in the supply of tradeexecution services and trade clearing services to energy traders. Specifically, the CMA found that ICE could use its ownership of Trayport’s trading platform to reduce competition between itself and rivals in wholesale energy trading. The CMA found that ICE’s divestiture of Trayport was the only effective remedy.

This case is the first vertical merger since the CMA’s 2014 formation that resulted in a full divestiture order in the U.K. It demonstrates that the risk of an acquisition being blocked does exist, even when pre-merger notification is voluntary. 

Similar examples exist in other jurisdictions where merger notification is voluntary. The Australian Competition & Consumer Commission (ACCC), for example, in July 2018, blocked the proposed acquisitions of Aurizon’s Queensland intermodal business and its Acacia Ridge Terminal by Pacific National. In face of ACCC opposition the Queensland intermodal business transaction fell through, with the asset ultimately acquired by Linfox in October 2018. Until the Federal Court removed constraints on the Acacia Ridge Terminal transaction on May 15, 2019, Aurizon had been prevented from closing and had to continue operating its loss-making intermodal freight business. 

OTHER PRE-MERGER RULES APPLY

Moreover, even where a transaction is not reportable, or does not require agency clearance, the parties must still comply with other competition rules in the premerger phase. This is true in the U.S., where the FTC issued updated guidance in March 2018 regarding informationsharing between merging parties before a transaction closes.

The guidance addressed what antitrust authorities refer to as gun-jumping, e.g., pre-closing sharing of competitively sensitive information or coordinated business activities, which can violate the HSR Act as well as substantive antitrust laws. The guidance explains that “[u]nlawful gun jumping may include the exchange of competitively sensitive information, but it typically also involves actual coordination of business activities” prior to HSR clearance. The guidance included a discussion of past enforcement activities that illustrate, among other things, that the FTC will bring antitrust enforcement actions against anti-competitive conduct that is separate from the merger’s own competitive effects. For example, the guidance highlighted the FTC charging aluminum tube manufacturers with FTC Act violations because they shared competitively sensitive information during due diligence. The FTC then separately challenged the merger itself as anticompetitive. Ultimately, the FTC required the buyer to divest two mills. 

Similar rules apply in other jurisdictions. In July 2018, the ACCC instituted its first gun-jumping case, against Cryosite Limited (Cryosite), in connection with Cryosite’s sale of its assets to Cell Care Australia (Cell Care). The two companies were competitors in cord blood and tissue banking services. Cryosite had agreed to refer all new customers to Cell Care even before the acquisition was completed, while Cell Care agreed that it would not market to Cryosite’s existing customers. According to the ACCC, these restraints amounted to cartel conduct because they restricted or limited the supply of cord blood and tissue banking services, and allocated potential customers between Cell Care and Cryosite. On February 13, 2019, the Australian Federal Court fined Cryosite Limited A$1.05 million for engaging in cartel conduct in its asset sale agreement with Cell Care Australia Pty Ltd. Although, in January 2018, the parties announced that they would not go ahead with the proposed acquisition. Under Australian law, penalties can be both civil and criminal (up to 10 years imprisonment). Corporate penalties can be the greater of A$10 million (circa US$7 million), three times the total benefit from the violation, or 10% of the Australian annual turnover.

These enforcement actions serve as a reminder of gun-jumping risks regardless of whether a deal is subject to pre-merger notification requirements. Indeed, gunjumping cases can be brought, as in the case against Cryosite, against merging parties that do not even consummate their deal.

AVOIDING CLOSING RISKS

The key lesson from the above examples is that parties should not presume a merger will not be subjected to antitrust scrutiny or challenged merely because it was not reportable or because it was reported but not challenged following the original pre-closing agency review. On the contrary, even in these circumstances, parties should manage potential investigation and closing risks, in the event that some aspect of the deal faces agency scrutiny. Merging parties may want to consider advising the antitrust authorities of potential overlaps created by their deal and be prepared to address anticipated customer complaints. Anticipating those concerns by presenting a positive competitive analysis — including taking customer views of the deal into account — may avoid post-merger challenges.  

It is also crucial for the merging parties to remain independent competitors until closing. Procedures should be considered to ensure the merging parties do not share competitively sensitive information (e.g., current and future prices, customers, or strategies) and that they do not begin to coordinate their market actions before closing. Understanding the potential for antitrust exposure before proceeding with a transaction is essential. Without such an appreciation, parties may be confronted with lengthy, unanticipated, and costly investigations and/or litigation, and could even be required to unwind their deal.