The Antitrust Division of the U.S. Department of Justice (DOJ) has had a busy summer updating its merger policies. First, it issued a new merger remedies guidelines in June, followed up shortly thereafter, in collaboration with the FTC, with new rules for submission of information for qualifying transactions under the Hart Scott Rodino (HSR) Act. This article will summarize both developments.
The Updated Merger Remedies Guide
On June 17, the DOJ issued its updated merger remedies guidelines (The “Updated Guidelines”), the first revision since the DOJ issued its initial guidance in 2004. The Updated Guidelines finally acknowledge the benefit of certain conduct-related remedies in mergers that the DOJ has been implementing as a matter of practice over the past few years. Commentators have point to conduct-oriented remedies in recent consent decrees in cases such as U.S. v. Ticketmaster Entertainment, Inc., U.S. v. Comcast Corp. and U.S. v. Google, Inc. as the bases for the updated Guidelines.
As with any merger remedy, either structured or conduct based, the key is preserving competition in the relevant market, not protecting particular competitors. Accordingly, once the DOJ identifies a merger as anti-competitive, it crafts a remedy that preserves competition; it does not select a winner among competitors.
Historically, the DOJ favored structural remedies for mergers that raised competitive concerns. Typically, such remedies have fallen into several discrete categories. First, there is the divestiture of all assets necessary for the divested entity be a viable long-term competitor. This has required an in-depth analysis and determination of the assets at issue, and has included physical assets, such as factories, supply sources and infrastructures, and intangible assets, such as intellectual property. Such remedies usually stop short of the divestiture of an entire business unit. In other circumstances, the DOJ may require the divestiture of an entire business unit in order to ensure that the relevant product remain in the market. The DOJ would use this remedy if it feels that a purchaser would need access to production facilities and one supply chain of the entire business unit. The sale of an entire business unit would ensure that a new entrant could enter the market and be competitive almost immediately. Sometimes, the DOJ takes a more narrow approach and requires only the divestiture of intangible assets, either through a sale of intellectual property rights or the licensing of such rights to a competitor or possible market entrant.
The Updated Guidelines also signal an apparent change in DOJ acceptance of certain types of structural remedies. The Updated Guidelines now recognize that a “crown jewel” provision, previously disfavored, may be utilized in appropriate circumstances. Such a provision requires that an attractive set of assets be divested if the original proposed sale is not accomplished in a timely manner. The “crown jewel” provision ensures that the parties remain motivated to ensure the divestiture package is sold to a suitable buyer.
The Updated Guidelines also allow for the use of upfront buyers, where the parties propose the sale of a select package of assets to a particular buyer already vetted and approved by the parties.
The Updated Guidelines also expand the use of hold separate agreements and divestiture trustees. These remedies allow the parties to temporarily transfer the agreed upon assets to a neutral third-party while an acceptable buyer is located.
As noted at the outset, the Updated Guidelines recognize that conduct remedies --particularly in certain vertical mergers -- can also be effective, and can also serve a purpose in horizontal mergers when used in conjunction with certain structural remedies. Conduct remedies, i.e., requirements that limit or restrict how a merged entity could do business post-merger, focus on what the merged entity can do in the relevant market, and do not necessarily lead to the addition of any competitors. Previously, conduct related remedies had not been favored or allowed because monitoring compliance was too cumbersome and the results were uncertain.
Conduct remedies highlighted by the Updated Guidelines include firewalls, non-discrimination provisions, mandatory licensing, transparency, and anti-retaliation provisions. The Updated Guidelines emphasize that a conduct remedy must be clearly and carefully drafted to prevent or limit a party’s attempt to evade the intent of the remedy, and should be specifically tailored to address the competitive concerns raised by the merger.
Firewall provisions help prevent the sharing of information in a vertical merger. For example, and as cited by the Updated Guidelines, in a vertical merger, the DOJ may be concerned that a monopolist upstream firm that merges with one of its several downstream distributors will share information with its newly acquired distributor that will result in anticompetitive behavior with the remaining downstream rivals.
Non-discrimination provisions in a vertical merger require the merged entity to provide access to its products and services on equal terms. This remedy was utilized in the Comcast merger. It requires an upstream monopolist that merges with a downstream entity that competes with several other downstream entities, to provide its products to the other downstream entities upon equal terms and with equal access. Otherwise, the DOJ is concerned that the merged entity will provide its newly acquired division with better prices, quicker delivery, or better quality products. Non-discrimination provisions are akin to anti-retaliation provisions, also endorsed by the Updated Guidelines, dealing with the merged entity’s competitors.
Other types of conduct remedies can be crafted as necessary, based upon the market and the anti-competitive concerns. According to the Updated Guidelines, other approved conduct remedies include reporting of otherwise non-reportable mergers or restrictions on the acquisition of scarce assets needed for operations, such as raw materials or personnel.
The Updated Guidelines also stress the role of the newly created General Counsel’s office within the DOJ, which is charged with ensuring that merger parties are complying with consent decrees issued in merger cases. This change is consistent with how the FTC is structured, and can result in greater consistency between the two agencies in handling mergers and merger remedies.
The New Updated HSR Rules
On the heels of the DOJ’s release of its Updated Merger Remedies Guidelines, it joined the FTC in the issuance of revised HSR rules, effective August 18, 2011. The new HSR rules require the submission of additional documents under a new Item 4(d), the reporting of additional revenues under Item 5, and the disclosure of associated entities and related information under Item 6. The HSR form has also been amended to reflect these new rules.
The new Item 4(d) expands on the concepts behind the previous, and still effective, Item 4(c). New Item 4(d) is broader than 4(c), however, and requires the submission of any Confidential Information Memorandum (CIM), or equivalent documents, prepared within one year prior to filing an HSR form, regardless of whether the CIM specifically addresses the transaction to be reviewed. Item 4(d) also requires submission of pitch books (even those prepared prior to engagement by the parties to the reported transaction) and other analyses compiled by third parties such as investment bankers and consultants. Item 4(d) also requires the submission of synergies analyses relating to the reported transaction.
Item 5 of the HSR form has been expanded to require the disclosure of revenues for foreign manufactured products that are sold in the U.S., either at wholesale or retail, or which are shipped directly to U.S. customers. Previously, foreign manufactured products sold in or into the U.S. only had to be disclosed under the six-digit NAICS codes if the goods were sold through related U.S. operations. Parties now have to organize and group the revenues according to the cumbersome 10-digit NAICS codes.
Item 6 has also been expanded to capture information on "associated" entities. Previously, in transactions involving private equity funds or hedge funds, for example, acquiring funds need not have produced information about related funds in the same industry, even if the funds were managed by the same general partner or were under some other common management structure because the general partner or manager did not have "control" of all of the funds. Now, acquiring entities that have minority interests in funds that are in the same line of business with the acquired entity have to disclose the minority interests and management interests in these other entities.