On September 3, 2020, the Department of Justice Antitrust Division (DOJ) updated its 2004 Merger Remedies Manual (see here). The updated Manual clarifies important aspects of the DOJ’s merger remedy practice about which there has been uncertainty. It also provides useful guidance to businesses on recurring issues that are crucial in DOJ’s process of evaluating proposed remedies to address competitive concerns.
The revised Manual is an important reminder to merging parties that successful outcomes in merger reviews will sometimes turn as much or more on planning ahead for a successful remedy process than on predicting the outcome of the agency’s review of the transaction’s competitive merits. When considering a transaction where remedies may be required, parties need to plan ahead by gaining a clear-eyed perspective of the type of remedy the agency might accept to settle (rather than litigate) competitive concerns, and carefully evaluating the business feasibility – and effect on deal value – of such a remedy. This is even more the case with the revised Merger Remedies Manual, which signals that DOJ may sometimes take a harder line than it did in the past.
We first identify the key areas where DOJ has clarified issues on which there has been uncertainty. We then describe areas where DOJ provides useful guidance regarding current practice that businesses contemplating transactions should carefully study.
Key Implications for Businesses
- Parties Will Need to Sign a Divestiture Agreement With an “Upfront” Buyer in Most Cases (IV.A). DOJ underscores that an “upfront” buyer for the divested business(es) is required “in most merger cases”. When an upfront buyer is required, the merging party must sign an acceptable purchase agreement with an acceptable buyer before DOJ will accept the remedy and clear the transaction. An upfront buyer is not necessary only in “limited circumstances” where DOJ is “satisfied that the package will be sufficient to attract a purchaser in whose hands the assets will effectively preserve competition, and that there will be a sufficient number of acceptable potential purchasers for the specified asset package.” An upfront buyer requirement can have considerable implications for deal timing and value, and merging parties are often well advised to begin seeking interest from potential buyers the agency is likely to find acceptable well before they wish to close. Although DOJ’s statement largely reflects its emerging practice, at least until recently, many believed that DOJ was less likely than the Federal Trade Commission (FTC) to require upfront buyers.
- Stand-Alone Conduct Remedies are Disfavored but Remain Possible (III.B.2). DOJ “strongly” prefers “structural” remedies (i.e., a divestiture) to “stand-alone conduct” remedies – for example, an information firewall or commitment to supply rivals to address vertical competitive concerns. DOJ deems stand-alone conduct remedies “inappropriate except in very narrow circumstances.” Specifically, to persuade DOJ to accept a conduct remedy rather than require a divestiture, parties must demonstrate that: “(1) a transaction generates significant efficiencies that cannot be achieved without the merger; (2) a structural remedy is not possible; (3) the conduct remedy will completely cure the anticompetitive harm, and (4) the remedy can be enforced effectively.” Parties will often prefer a conduct remedy to a divestiture to address vertical concerns, and conduct remedies have traditionally been common in vertical transactions. Recent DOJ statements, however, suggested that the agency might no longer accept stand-alone conduct remedies.1 The revised Merger Remedies Manual is an important clarification that conduct remedies will not be a non-starter going forward, though the DOJ will strictly scrutinize all proposed conduct remedies.
- DOJ Will “Scrutinize Critically” Divestitures of Less Than an Existing Ongoing Business (III.A.3; III.F). DOJ “prefers” divestitures that consist of existing ongoing business and will “scrutinize critically a merging firm’s proposal to sell less than the entirety of an existing standalone business.” Merging parties will often prefer to divest a package of assets that do not constitute an ongoing business, typically because an ongoing business would represent a substantially broader divestiture or a potential divestiture buyer is interested in only a narrower set of assets. The Merger Remedies Manual states that DOJ “may consider” such a remedy consisting of assets from one merging party only if: “(1) there is no existing standalone business smaller than either of the merging firms and a set of acceptable assets can be assembled from one of the merging firms, or (2) certain of the entity’s assets are already in the possession of, or readily obtainable in a competitive market by, the divestiture purchaser.” Although “mix-and-match” remedies – consisting of assets from both merging parties – may be acceptable “in limited circumstances,” such remedies are “disfavored” and will be viewed with “skepticism.” Where merging parties will be seeking to persuade DOJ to accept a carve-out remedy, it is all the more critical to plan well head, particularly because success will often depend significantly on the existing capabilities of the proposed divestiture buyer. DOJ makes clear than “any risk of [remedy] failure should be borne by the merging parties” and is quite explicit regarding the consequence of a failure to convince the agency that a proposed carve-out remedy will fully restore competition lost from the merger: “[i]f the Division is not satisfied that the parties have addressed the risk of a failed remedy, a more appropriate course may be to sue to block the transaction.”
- Private Equity or Other Investment Firms May Be Acceptable Divestiture Buyers (V.B). Some have perceived that private equity or other investment firms might be disfavored as buyers of divested assets. The Merger Remedy Manual makes clear, however, that DOJ will use “the same criteria to evaluate both strategic purchasers and purchasers that are funded by private equity or investment firms,” and “in some cases a private equity purchaser may be preferred.” When considering investment firms as potential buyers of divested assets, merging parties should bear in mind DOJ’s observation that “[p]rivate equity purchasers often partner with individuals or entities with relevant experience, which may inform the Division’s evaluation of whether the purchaser has sufficient experience to compete effectively in the market over the long term.” Careful consideration of what will be required to convince the agency to accept an investment firm as a buyer is likely to be particularly important when the merging parties seek to divest less than an ongoing business, and the potential buyers’ business expertise or complementary assets are crucial considerations in DOJ’s evaluation of the proposed divestiture.
Other Notable Points: The updated Merger Remedies Manual also discusses a potentially important structural change in how DOJ administers the remedy process and provides guidance regarding its practices for recurring issues in the remedy process.
- Creation of the Office of Decree Enforcement and Compliance (VII.A). The Manual briefly discusses DOJ’s new Office of Enforcement and Compliance, which was announced on August 20, 2020: “To ensure that the enforcement of merger remedies is rigorous and benefits from learning across the Division, the evaluation of and oversight over all Division remedies resides in the Office of Decree Enforcement and Compliance.”2 The precise role the new office may play in DOJ’s remedy negotiation process is not entirely clear, and we anticipate that the Office’s role will become more defined over time. It remains to be seen whether the Office will function similarly to the FTC’s Compliance Division, which has intensive involvement in evaluating merger remedy proposals and has developed deep specialized expertise over several decades.
- Standard for Accepting a Proposed Remedy Buyer (IV.B). DOJ articulates and elaborates on a three-part standard for evaluating proposed divestiture purchasers: (1) “divestiture of the assets to the proposed purchaser must not itself cause competitive harm”; (2) DOJ “must be certain that the purchaser has the incentive to use the divestiture assets to compete in the relevant market”; and (3) the proposed purchase must have “sufficient acumen, experience, and financial capability to compete effectively in the market over the long term.” Although this standard does not break new ground, merging parties should carefully consider the Manual’s elaboration of these standards when evaluating the likelihood that DOJ will accept potential divestiture buyers.
- Characteristics that Increase the Risk a Remedy Will Not Preserve Competition (III.F). The Manual provides a helpful list of characteristics of proposed remedies that, based on its experience, DOJ believes “increase the risk that a remedy will not effectively preserve competition”, and states that “[p]roposed remedies that feature one or more of these characteristics are at greater risk of being found” unacceptable: (1) “[d]ivestiture of less than a standalone business”; (2) “[m]ixing and matching assets of both firms”; (3) “[a]llowing the merged firm to retain rights to critical intangible assets”; (4) “[o]ngoing entanglements” between a merging party and the divestiture buyer (e.g., supply agreements); (5) “[s]ubstantial regulatory or logistical hurdles” (e.g., the divestiture purchaser must establish a new legal entity or obtain regulatory approvals). Although the presence of one or more of these factors will not necessarily doom a proposed remedy, merging parties should bear in mind that the more of them that are present, the longer DOJ’s evaluation is likely to take and the greater the risk that the DOJ will reject the remedy proposal.
- Remedies for Consummated Transactions (III.D). Although the overwhelming majority of merger challenges take place before the transaction closes, the US antitrust agencies regularly challenge consummated transactions (usually ones that were not notifiable). The updated manual provides brief commentary regarding remedies for consummated transactions, observing that “remedying a consummated deal . . . may pose unique challenges,” particularly because parties may already have integrated the acquired assets. In evaluating potential risks of a challenge to a consummated transaction, merging parties should bear in mind DOJ’s statement that unwinding the transaction or even requiring a divestiture that is broader than the acquired assets may be necessary to remedy the effects of a consummated anticompetitive merger.
DOJ’s updated Merger Remedies Manual provides important counsel for merging parties. When planning transactions that may require an antitrust remedy, parties can substantially increase their odds of a successful outcome by carefully studying the Manual and taking its lessons to heart.