Global M&A — Top Tips to Help Antitrust Clearance
Early attention to the antitrust considerations of a given transaction can go a long way towards promoting the chances of timely or even early clearance of a transaction.
As an initial matter, parties should focus their attention on two distinct issues: (1) whether the transaction requires premerger notification under any relevant merger control laws, and (2) whether the transaction gives rise to potential substantive antitrust concerns. It is important to understand that transactions may require notification even where no substantive antitrust issues exist. The inverse is also true: substantive antitrust concerns may exist in transactions that do not require premerger notification and, in some jurisdictions (the U.S., for example), the relevant competition authority may investigate even non-notifiable transactions.
In any event, understanding any notification requirements, substantive issues, and the likelihood of investigation across jurisdictions is an important early step as this will inform deal timing and process prior to closing, as well as potentially significant legal fees and costs. It will also likely inform drafting of the purchase agreement and how it allocates antitrust risk between the parties.
There is no “one size fits all” solution for a given transaction; rather, the approach should be tailored to the deal and specifics of the relevant market(s) involved. That being said, there are certain things parties can do that will have benefits across jurisdictions:
- Engage antitrust counsel early in the deal process – Doing so will allow counsel to conduct an initial substantive antitrust assessment and identify any key issues or hurdles that the deal is likely to face. This will not only allow for more informed decision making through the due diligence process, but will also ensure that any required filings or likely investigations are planned for and anticipated within the deal timeline and costs.
- Plan – Having a solid plan in place can significantly increase the likelihood of an efficient merger review in a number of jurisdictions. If potential antitrust concerns are identified, develop a plan of attack, generally and tailored to each jurisdiction. Once the deal is signed, buyer and seller should work together under a joint defense arrangement to refine and implement the coordinated plan.
- Understand your facts and how to present the procompetitive reasons for the deal – Antitrust counsel and economists can be helpful to parties in identifying and developing procompetitive themes, as well as identifying and explaining potentially harmful facts. These themes should be emphasized in all filings and submissions, as well as with targeted advocacy pieces as needed.
- Be mindful of company statements both internally and externally – Reviewing agencies will often look at the parties’ press releases and investor briefings respecting the transaction. Certain internal documents will also be relevant in some jurisdictions (e.g., U.S. and the EU) very early in the review period. For this reason, all public and internal communications regarding the transaction should be carefully reviewed before being finalized to avoid the use of careless language that might raise unnecessary questions or issues.
- Understand the importance of customer and competitor feedback – The reviewing agencies in many jurisdictions – including the EU and U.S. – will collect feedback from customers and other market participants. The agencies will typically place the greatest weight on hard data and customer feedback, and may also consider arguments and comments from other market participants. It is helpful to develop an understanding early in the diligence process regarding any complaints or concerns that customers (or market participants) may have regarding the transaction, so that appropriate responses may be prepared.
Developing an understanding of relevant merger control regimes, their nuances and timelines, and the approaches that may be particularly useful during the review period in a given jurisdiction will also be helpful.
In the EU
There are no set formulas or guarantees as clearance is largely fact dependant. Recent experience suggests the Commission is reviewing mergers more rigorously than in the past so it is important to be well prepared in terms of documentation supporting evidence. Here are some things companies can do to considerably increase the chance of a speedier EU clearance:
- Fill out full Form CO including affected markets in pre-notification – If the merger requires a full Form CO, the parties should complete their paperwork and advocate their case assertively to the Commission. Don’t expect handholding. The Commission will not disclose its view of the case until after formal notification when the public comments stage is concluded; most likely at the State of Play meeting.
- Use economists for bidding data – The Commission have their own economists and may want to seek data and other complex evidence. For bidding markets, having economists prepare bidding data upfront can save a lot of time when the Commission eventually asks for it later.
- Future Risks and Trends – Predicting the future conditions of competition is not easy for the Commission or the parties but this part of the process will play an important role. Be prepared to back up claims you make about future trends in your industry particularly relating to future Chinese competition. The Commission has grown sceptical of arguments relating to future competition from Chinese companies as it is an argument the Commission has heard too many times without evidence. Parties attempting to argue that the proposed transaction is necessary, or at least not competitively harmful, due to growing Chinese competition, must be prepared to provide credible evidence to back it. It is also important to concentrate your future analysis on what the market may look like in 5-10 years’ time and how the merger will affect innovation in that market. The Commission is increasingly adopting a forward looking review in its increasing pro consumer agenda
- Remedies – If you believe that the transaction will create high market shares and/or give rise to substantial competition issues, it is important that you have thought out prior to formal notification a possible remedies package with detailed arguments and back up evidence how this would cure any competition concerns. This should be only be deployed post the State of Play meeting if it becomes apparent that the Commission has significant concerns which cannot be rebutted.
In the U.S.
Where a U.S. filing is required, the following can be helpful in promoting an efficient review:
- Be prepared to engage with the reviewing agency, as needed - Assuming an HSR filing is required, there are a number of approaches that can be taken.
- The parties may choose to file and simply wait to see if there are any questions from the government – a “duck and cover” approach that takes into account the fact that many deals, even some with overlaps, will not prompt a call from the agencies.
- For transactions that appear likely to draw some limited questions from the reviewing agency, it is helpful to anticipate those questions and prepare responses. For example, if the parties know that their documents refer to competition between the buyer and the seller, it will be helpful to understand the competitive overlap in detail and be ready to address any agency questions quickly.
- For transactions that seem likely to draw an “access letter” – a relatively standard set of requests from the reviewing agency during the initial waiting period - having the anticipated responsive materials ready when the access letter is received allows for more efficient use of the waiting period. Under this approach, the parties provide the agency responsive information quickly so that it may be vetted during the initial waiting period, rather than drawing a second request.
- Where a deal presents obvious and significant antitrust issues, the parties may consider going to the agencies with a presentation immediately after the premerger filing is made or even contacting the agencies prior to filing.
- Consider the need for remedies – Where a transaction presents significant antitrust concerns, it is possible that the only path to closing the deal will be an agreement with U.S. and/or foreign competition authorities on a remedy. Understanding that possibility from the beginning of deal negotiations permits your client to consider transaction structure and how to provide for those potential remedies in the acquisition agreement. This may also affect the termination date of the agreement (allowing time for a complete merger review and remedies agreement) as well as allocation of the significant fees and costs associated with the lawyers, experts, filing fees, and the remedy itself.
Around the World
Many countries around the world have laws that require parties to transactions meeting certain thresholds to notify the transaction and obtain clearance prior to closing. The applicable thresholds vary greatly by jurisdiction. Many are based on the turnover of the parties in the given jurisdiction, but some thresholds are based on different metrics (e.g., the parties’ market shares or asset values in the jurisdiction or the value of the transaction).
Where filings are required in multiple jurisdictions worldwide, it is important to consider how to best manage and coordinate them from an early stage. For example:
- Plan and prioritize the timing of filings – The length of the merger review period will vary by jurisdiction. If an acquisition requires a filing in more than one jurisdiction, parties should analyse the different review periods and prioritise and plan the timing of filings accordingly to allow more time for jurisdictions with longer review periods.
- Understand that competition authorities may coordinate with one another or consider other jurisdictions’ reviews – The agencies in the U.S. and EU work closely with many antitrust authorities but will place considerable weight on each other’s processes (i.e. the EU will consider the U.S. agency review; the U.S. will also consider the EU agency review). Coordinating the EU and U.S. processes can improve the review experience in both jurisdictions and reduce duplicate information requests. Be mindful, however, that other jurisdictions may also coordinate their reviews and/or may request that the parties submit materials that have provided to other agencies in connection with other reviews.
- Present consistent market share data across all geographies – The parties should take care to define markets and organize market share data to submit the same data (or, at least, data derived using the same process for calculations, sources, etc.). Submission of inconsistent data can be accidental, but can undermine the reviewing agency’s confidence in the figures presented and, ultimately, lead to more questions and greater time resolving any agency concerns.
This article first appeared in Law360.
French Supreme Court Upholds Exclusive Supply Obligation where Necessary to Franchise Network
By Kathie Claret and Emmanuelle Mercier
Exclusive supply clauses are a frequent feature of franchise contracts. In accordance with EU Law, the French Supreme Court, by a decision of 20 December 2017, ruled that the validity of such clauses depends on whether they are necessary for the preservation of the identity and reputation of the franchise network.
In the case under consideration, a bakery had entered into a nine-year franchise contract which contained an exclusive supply clause. The clause provided that the franchisee must purchase exclusively from a particular supplier that had developed a new concept for the manufacture of traditional bread made with natural yeast.
The franchisee terminated the contract before its agreed term, and the franchisor and the supplier claimed damages for the losses incurred as a result of the breach of the franchise contract. In defense, the franchisee argued that the exclusive supply agreement was an anticompetitive restraint of trade.
Regarding the supplier’s claim, the French Supreme Court held that the franchise contract created a direct right for the benefit of the supplier. This interpretation of an exclusive supply clause as giving a direct right to the supplier is clearly a warning for franchisees not to breach their obligations because it implies an additional risk of being sued for damages in case of breach of contract.
Regarding the franchisee’s position, the French Supreme Court, implicitly following the position of the European Commission in Article 190-b) of its Guidelines on Vertical Restraints, which provides that “a non-compete obligation on the goods or services purchased by the franchisee falls outside the scope of Article 101(1) where the obligation is necessary to maintain the common identity and reputation of the franchised network” and that “in such cases, the duration of the non-compete obligation is also irrelevant under Article 101(1), as long as it does not exceed the duration of the franchise agreement itself”. The Court held that the exclusive supply clause at issue constituted a crucial element for the image and identity of the franchise network and was therefore valid.
Hence, in the decision under consideration, the French Supreme Court acknowledged that exclusive supply clauses contained in franchise contracts are valid, regardless of their duration, if they are necessary for the preservation of the identity and reputation of the franchise network.
Resale Price Maintenance And Restrictions On Online Selling Still Dominate CMA Concerns
By Robert Bell
The Competition and Markets Authority (CMA), the principal UK competition regulator, maintains a register of competition law advisory and warning letters it sends to businesses it believes could be breaching competition law. On 12 February 2018, the CMA announced that it had updated its competition law advisory and warning letters register. The subject of these letters and the sectors upon which they focus provide an interesting insight into the type of practices and the industries the CMA has in its sights. Those companies receiving letters should take immediate action to ensure their practices comply with competition law. Failure to do so could result in substantial penalties in the event of a subsequent CMA investigation.
So why does the CMA use advisory and warning letters and if it is so concerned about these practices, why does it not commence proceedings against the companies involved?
The letters are a cost effective way to sound a warning shot to individual companies and companies in a particular sector of the economy where the CMA has information either from its own intelligence or from other sources that these businesses may be resorting to certain business practices which may restrict or distort competition. The CMA uses these letters to warn businesses that it is concerned that they might be breaking competition law and to encourage them to comply with competition law. However the CMA has limited resources and it has decided for the time being not to open proceedings in these cases on the grounds of priority.
If a company receives a warning or an advisory letter it does not mean that they have breached competition law. Warning and advisory letters both explain the CMA’s concerns about business practices and recommend that the business to whom they are addressed should carry out a self-assessment of their business practices to ensure compliance with competition law. A warning letter will request the business concerned to write to the CMA with details of what it has done or is planning to do to ensure compliance with competition law. An advisory letter on the other hand will simply request that the company let the CMA know that it has received the letter. Nevertheless although there are no immediate consequences, companies who have previously received one of these letters are likely to be dealt with more harshly if in the future they are discovered breaching competition law.
The latest revision discloses that in 2017, the CMA sent a total of only 19 warning letters. This was down considerably on the two previous years. In 2016 the CMA sent out 63 and the year before 85. The register reveals that in 2017 the CMA’s concerns related primarily to forms of resale price maintenance (RPM). Suppliers and manufacturers ensured retailers adhered to RPM through restricting discounts and/or threats or financial incentives to sell at a particular price. In other cases suppliers sought to ensure pricing levels were kept high by making retailers adhere to its minimum advertised price (MAP) online. This latter practice, whilst lawful in the US, is a serious infringement of competition law in the EU and has in the past and still does cause considerable confusion in the minds of US companies trading in Europe.
Also of note are a number of cases involving restrictions to selling products online which continue to be a problem despite featuring in the register from previous years. Market and customer allocation between distributors and an arrangement to raise prices for certain brands appeared as a particular issue in the industrial tools and services sector. The industry focus of the other warning letters are on the general retail and wholesale sector. This includes the sale of vaping products, garden furniture, recreational products, cosmetic products, bathroom fittings, vehicle maintenance and industrial products.
The latest update to the register discloses that in 2017, the CMA sent a total of 42 advisory letters. This was more than in 2016 (31 letters) and considerably more than the year before (13). Of the practices highlighted, resale price maintenance continued to be a firm favourite. However many of the suspected infringements related to price coordination due to sharing of current and future pricing information and other sensitive information between businesses. Attempts to restrict retailers’ freedom to price online, was also the subject of a number of letters. The market sectors identified include modelling and model agency services, cosmetic products and treatments, light fittings, munitions, healthcare services, agricultural machinery, the recreation and leisure sector, sports equipment, health products and treatments, personal care products, vehicle maintenance, hand tools and outdoor cooking equipment.
As mentioned above, although the CMA has decided at the present time not to advance proceedings against companies in the relevant sectors, the fact warning and advisory letters have been sent should alert companies to the potential unlawful nature of the practices identified. We recommend that these companies should urgently undertake compliance audits of their practices. If they wait until the CMA is knocking at the door, the ramifications for these companies (including substantial financial penalties) could be severe.
German Court rules on price comparison sites and selective distribution
By Eckart Budelmann
On 12 December, 2017, the German Federal Court of Justice (Bundesgerichtshof) decided that ASICS must not ban its dealers from using price comparison sites. According to the decision, so-called per se prohibitions that are not subject to quality requirements are illegal. The court found that the infringement of competition law was so obvious that no hearing was required to further discuss the effects of the anti-competitive behaviour. A prohibition on dealers using price comparison sites constitutes an inadmissible "hardcore restriction" of online sales under EU competition law.
In the statement of reasons for its judgment, the court further emphasizes that in view of the large range of products available on the internet and the large number of suppliers, price comparison sites are of key importance for consumers. Consumers simply cannot find these dealers if manufacturers impose a ban on retailers using price comparison sites or the manufacturers' brand names for search engine advertising. In addition, many manufacturers of brand products have set up their own online shops and cooperate with large marketplaces like Amazon. If these manufacturers simultaneously introduce restrictions on their predominantly small and medium-sized dealers, the online business will ultimately be concentrated in the hands of the manufacturers themselves, a few large retailers and even fewer leading marketplaces.
The European Court of Justice (ECJ) has also repeatedly dealt with restrictions on retailers' online sales by brand manufacturers. In 2011 the ECJ decided that a per se prohibition of online sales violates competition law. However, in a decision passed in early December 2017 it decided that the luxury goods manufacturer Coty, may in fact prohibit its dealers selling its goods on online marketplaces. In the present case, the German Federal Court of Justice made reference to these decisions but takes the view that sports and running shoes do not represent highly priced luxury goods.
By Gabriele Bricchi and Cora Steinringer of Pirola Pennuto Zei & Associati
The Italian Antitrust Authority has consumer protection powers to investigate and fine companies for unfair commercial practices and misleading advertisements – a task to which it has dedicated, in the last years, more attention and time.
The Italian Antitrust Authority continued its efforts, focusing on national and international airlines to protect consumer rights in Italy, and in particular with regard to the so called ‘No Show Rule’.
No Show Rule
Airlines require passengers to travel as per the itinerary shown on their ticket, from the place of departure via any agreed connecting points to the final destination, and vice versa. Each leg of the journey is linked to a specific segment on an electronic ticket. If all the segments are not used in sequence, the ticket as a whole will lose its validity. In other words, if the passenger does not take the outbound flight - a so called ‘no show’ -, the airlines consider as a rule (also contained in the terms and conditions) that the ticket is no longer valid. The passenger is not allowed to board on the return flight, unless he buys a one way ticket for this flight paying the difference to the price already paid.
The Italian Antitrust Authority regards the above outlined No Show Rule an unfair commercial practice due to the fact that the passenger already paid in advance for the ticket, is not duly informed about the No Show Rule, could not take the outbound flight due to inconvenient circumstances, and is prevented from taking the return flight he paid for.
Distinguishing themselves from railways or low cost carriers, which issue single or one-way tickets for each leg and do not apply the No Show Rule, the big airlines argue that they do not sell individual flight segments, but a journey (roundtrip) which is a single product with a specific price attached to it based on market conditions. Therefore, it is normal having passengers on board of one flight who paid different prices due to different products (with or without connecting flights), and/or different tariffs/fares for the same journey (more or less flexible conditions), and/or different competitive conditions in the end to end market. This causes huge market segmentation with specific rules, like the coupon sequence, and specific market prices that are considered necessary by the airlines in order to continue to compete also in indirect markets. In addition, with regard to pricing, airlines need to be able to determine the optimal capacity to schedule for that flight sector and, therefore, maximise the efficient use of its assets. In turn, this minimises the number of “no shows” experienced by airlines allowing them to reduce the need to “overbook” by allowing them to forecast passenger numbers with greater accuracy.
The Italian Antitrust Authority does not completely ignore the above economic arguments of the airlines. However, the position of the Italian Antitrust Authority is the following in order to be considered compliant with Italian consumer protection law:
Air carriers have to grant consumers buying a ticket in Italy a specific procedure that enables them to inform the air carrier in advance that they want - even when they have not taken the outbound flight - to take the already bought return flight without any additional payment. Generally, airlines now allow passengers to take the return flight, subject to the condition that they inform by phone or email the airline within 24 hours from departure of the missed outbound flight that they want to take the return flight. If the passenger does not inform the airline within that deadline, the airline can apply the above mentioned no show rule and deny boarding on the return flight.
Furthermore, air carriers have to inform consumers in a clear, easily understandable way in the Italian language, about the above rules during the booking process (in a way that can be easily noticed), as well as in the terms and conditions and on the itinerary receipt.