Be prepared for ever closer scrutiny
Pressure to grow revenue and stay innovative and competitive in demanding markets has led to more deals being pursued in consolidating sectors, where parties often face significant antitrust risk. Telecoms, media, pharmaceuticals and consumer goods are currently in the spotlight, but these sectors are not alone.
So-called “end-game” deals - possibly the last major consolidation in a sector where independent competitors may fall from 4 to 3 or 3 to 2 - are subject to increasingly in-depth scrutiny by authorities.
Our experience has revealed several notable trends that companies contemplating such deals in 2016 should anticipate in their planning.
Plan early: anticipate the regulators’ concerns from the outset
A well-structured antitrust strategy requires a sophisticated understanding of competitive conditions in all relevant markets and the way authorities world-wide are likely to analyse them. This involves a complex assessment of global, regional and local markets, politics and national interest, all of which need to be understood and addressed well before deals are officially notified.
Other key factors include how innovation and structural changes taking place in neighbouring markets or regions could impact competitive dynamics. Agency approaches to similar deals in the past, the parties’ ability to persuade agencies to depart from previously restrictive approaches or the likelihood of complainants making convincing arguments for more caution will also have a material impact.
When assessing which arguments to advance, parties need to be aware that agencies make increasing use of wide-ranging and detailed customer/supplier surveys as a “reality check” on their claims.
In some controversial “end-game” deals, rather than fighting against the tide of agency and industry stakeholder sentiment in Phase 1 and offering remedies that may not meet the Phase 1 test for simplicity and clarity, parties may see greater merit in subjecting themselves to a more detailed Phase 2 review. Approached this way, parties can use Phase 1 to ensure the case team has a proper understanding of key industry and economic facts, keeping their powder dry for the more detailed Phase 2 review. In our experience, Phase 2 reviews can sometimes lead to a better outcome for merging parties, although this strategy can be more complex and riskier where a Phase 2 review is likely to be required by multiple agencies world-wide.
“Before pressing the button on an “end-game” transaction, parties need to plan their regulatory strategy with enormous care - all the more so when multiple jurisdictions are involved. With a detailed knowledge of the key regulators world-wide, merging parties can best anticipate likely competition concerns and plan in advance how best to allay or remedy them.”
Rod Carlton, Partner, London
Remedies: start discussions early
In those deals where competition concerns are relatively easy to identify, with clear-cut solutions available, remedies may be tabled as the key issue from day one. In other cases, however, authorities will want to investigate and fully understand all the issues before engaging in such discussions.
In appropriate cases, remedy packages may be offered at the earliest stage of pre-notification, either on a “fix-it-first” basis or with upfront buyers already signed-up. Authorities are conscious that remedy discussions in complex deals take time, and so are receptive to parties opening negotiations at the earliest feasible stage. In practice, this is likely to involve parallel discussions on remedies and substantive concerns to avoid a deal being prohibited because the authorities have run out of time.
Parties may need to consider the feasibility of business carve-outs and the likely acceptability of buyers to authorities, whilst also being aware of internal separation and funding obligations that may continue for many months post-closing but pre-divestiture.
Complex remedies in public M&A also raise issues for parties and their advisers around appropriate communication with shareholders who are voting on the deal.
Evidence: prepare for forensic discovery of internal documents
As deal complexity increases, so does the need for thorough and robust evidence to rebut concerns and support the parties’ claims. Authorities are becoming more demanding about the level of evidence required, and increasingly sophisticated in the way they collect and analyse it.
Notification forms increasingly demand parties’ submissions to be accompanied by extensive supporting documents. Wide-ranging “requests for information” then often require significant volumes of internal documents and emails over periods of several years to be produced within tight timeframes. Internal documents carry significant weight as authorities test the parties’ claims against any other statements or correspondence. This applies to pre-existing documents and documents created during the deal process, underpinning the need for caution at all times over exchanges of correspondence or creation of documents which discuss competitive conditions. Caution must be exercised from well before a deal is on the table, to when the deal is being discussed and the business plan is being prepared to the end of the regulatory process and completion, as authorities may require internal documents to be produced at any time. Increasingly forensic discovery exercises have a significant impact on company resources. Wide-ranging searches of IT systems and devices may need to be conducted over multiple sites and geographies using terms and techniques that have been pre-agreed with the authorities.
Responses are often demanded within very tight timetables. There may be limited opportunity to review each document before it is submitted. Only legally privileged documents are likely to be considered by the authorities to be out of scope. It is therefore vital for parties to understand local privilege rules and avoid waiving privilege, refraining from sharing legal advice with third parties (including notably financial advisers) unless absolutely necessary.
The challenges these wide-ranging discovery exercises involve make it essential for parties to be able to call on large experienced teams at short notice.
“Enforcers look to parties’ internal documents and unguarded remarks outside the transaction context to glimpse what they consider the true nature of the relevant competitive landscapes. These ordinary course documents and casual comments can have an out-sized impact on risk profile, particularly in an end-game deal. For this reason, parties and their advisers should always exercise discretion when writing or speaking about competitive issues; keeping internal documents and public statements free of imprecise or overstated claims maximises the chances of success in the end-game.”
Mary Lehner, Counsel, Washington DC
Agency cooperation: anticipate evidence sharing but also areas of possible conflict
As discussed in Theme 8, authorities continue to cooperate more closely with each other to align timetables and, where possible, achieve consistent outcomes. Parties are expected to facilitate this process by granting waivers over confidentiality to allow authorities to share evidence. Robust systems and procedures are usually required to manage such disclosure.
Joint defence: protect against allegations of illegal conduct
In-depth document discovery throughout the investigation, combined with increased scrutiny over competitive information exchange and heavier sanctions for “gun-jumping”, mean that robust joint defence and clean team arrangements are a crucial part of merger control in complex deals.
Such arrangements allow parties (or just their respective external antitrust counsel) to share information that is necessary for antitrust assessment and notifications, whilst mitigating the risk of illegal conduct or early implementation.
Limiting information flow in this way is likely to restrict the ability of commercial teams to conduct detailed due diligence, valuation and contract negotiation, so careful planning and execution is necessary to strike the right balance between commercial need and antitrust risk. This can be particularly difficult where it is apparent from the outset that disposals will be required as part of remedy packages - antitrust advisers and commercial teams need sufficient information early on to quantify competitive overlaps and prepare divestments.
As well as protecting commercially sensitive information, these arrangements should ensure that the parties are able to comply with multiple regulatory demands in an effective and consistent manner. Agreements should clearly establish each party’s responsibilities with each relevant agency, whilst keeping the other party fully engaged in the process.
“With in-depth scrutiny of deals over many months and pressure from the business to plan integration, parties need robust procedures in place to avoid allegations of anticompetitive information exchange or pre-clearance implementation. Antitrust advisers should be consulted in any integration planning, as difficult judgement calls may need to be made to minimise the risk of heavy sanctions.”
Helmut Bergmann, Partner, Berlin
Deal timing and contractual obligations: manage expectations
A combination of factors, including more authorities exercising extensive powers of investigation, more use of upfront buyer remedies and “stop the clock” powers and extensive pre-notification reviews, has made predicting and managing timetables more challenging. This must be factored into deal documents. Overly ambitious long-stop dates should be avoided and each party’s respective obligations to ensure conditions are satisfied should be set out.
The most complex deals involve clear allocation of antitrust risk reinforced by tight contractual obligations. Where remedies are likely, we are seeing sizeable break fees which help purchasers and vendors quantify how far they are willing to go to get a deal through. A sophisticated understanding of all antitrust risks is crucial to protecting each party’s interests in these negotiations.
Looking ahead to 2016:
Companies planning strategic deals in 2016 are advised to:
- Analyse the evidence: Fully assess, understand and anticipate regulatory concerns well before deals are notified - in end-game deals this may include the construction and testing of remedies, even at pre-notification stage.
- Be prepared for forensic document discovery: Anticipate forensic document discovery during investigations by exercising caution over unhelpful document creation at all stages, and putting proper systems and processes in place to manage extensive demands from multiple authorities during reviews.
- Manage antitrust conduct risk arising from deal: Establish robust joint defence and clean team arrangements which facilitate the merger review process whilst avoiding allegations of illegal conduct.
“In Europe, the Commission is increasingly challenging 4-to-3 mergers on the basis of closeness of competition and removal of an important competitive force. This has implications for many deals in four-player markets.”
Thomas Wessely, Partner, Brussels