In what appears to be the first gun jumping guidance issued by the Federal Trade Commission (“FTC”) since a 2005 speech made by then-General Counsel William Blumenthal, the FTC staff issued guidance on complying with the antitrust laws while conducting due diligence, negotiating a transaction and planning for integration. While much of the guidance is consistent with established practices, there are some points of emphasis and departure worth noting.
The exchange of information is central to the process of conducting due diligence, negotiating a transaction agreement and planning for integration. Yet the antitrust laws — the Sherman Act and HSR Act, among others — prohibit exchanges of information that without safeguards in place could harm competition, facilitate coordination or improperly transfer beneficial ownership prior to closing or if the transaction does not close. A reduction in competition may provide the FTC or DOJ with evidence the merger will reduce competition or result in an investigation that could delay obtaining clearance. As the FTC staff noted, the risk is greatest when the parties are actual or potential actual competitors. More recently, the agencies have also been leery of certain exchanges between vertically related firms. And the risk is higher when the information exchanged is competitively sensitive, such as pricing or cost information or strategic plans.
U.S. antitrust agencies are mindful of the need to share information during diligence, and the March 20, 2018 guidance emphasizes the FTC staff’s tolerance, so long as the information is not used by the parties to harm competition or by the buyer to try to influence or otherwise acquire control of the target company prior to closing.
The guidance sets out three major themes. First, parties should create, maintain and monitor a program that allows for diligence, negotiations and planning but prevents the information from being used commercially. The guidance appears to be asking the disclosing and receiving parties to take ongoing steps to ensure the protocols are followed, including the destruction of documents following the conclusion of the diligence process.
Second, companies and counsel should ensure that the protections are being followed. Again, this calls for a certain degree of monitoring by inside and outside counsel. The FTC seems to be asking competitors and the public to be more assertive in monitoring compliance.
Third, the guidance seems to ask more of outside counsel than previous guidance from the FTC. It asks counsel and the parties not only to monitor compliance and stop any breaches of the protocols but to self-report violations to the government.
In addition to reiterating previous guidance regarding procedural safeguards (such as use of third-party consultants or “clean teams”) for information exchange, the FTC seems to have altered or expanded its suggested safeguards in some areas. For example, the new guidance suggests:
- Redaction of customer names and other information to ensure other parties cannot “reverse engineer” missing information from information that is shared.
- A more narrow selection of clean team members. The FTC staff now says “[c]lean teams should not include any personnel responsible for competitive planning, pricing, or strategy,” but traditional guidance only excludes from the clean teams those “directly” responsible for competitive decision-making.
- Instead of relying on counterparties to comply with contractual commitments, parties and their counsel are asked to monitor compliance by the other side.
- Self-reporting of violations. Counsel is encouraged to investigate and fully disclose to the government problematic information exchanges, including how the information may have been used by the receiving party.
- Using electronic barriers to prevent information dissemination. For example, parties are encouraged to prohibit individuals with data room access from downloading or e-mailing confidential information in the data room and to check that employees do not save confidential information meant only for due diligence or clean team members on accessible share drives within the company.
As the FTC itself noted, “the main message is that companies should consider the risks and establish appropriate protocols.” We believe this guidance is coming on the heels of non-public investigations into exchanges of information that have not yet resulted in an enforcement action. But the guidance is a reminder of the importance of carefully establishing, following and monitoring a diligence and planning protocol.