In recent years, the Federal Trade Commission (FTC) and the Department of Justice (DOJ)—the two US agencies responsible for reviewing and challenging transactions that may lessen competition—have increasingly challenged non-reportable and consummated transactions. There have been several such challenges so far in 2011, and at least nine in 2010 (all but one of which resulted in a settlement).
The number of challenges is up significantly over historical trends. Some of these challenges have been to very small acquisitions. For example, the DOJ recently sued to break up a US$3 million acquisition of a chicken processing facility. These challenges highlight the need for parties to remain sensitive to antitrust risks even where the transaction may not meet the premerger reporting thresholds of the Hart-Scott-Rodino Antitrust Improvements Act (HSR Act).
Generally, under the HSR Act, parties must notify the FTC and DOJ of acquisitions of voting securities, assets or a controlling interest in a non-corporate entity (such as an LLC or partnership) valued above US$66 million if the parties also meet certain net sales/total assets thresholds and no exemptions apply. Transactions subject to the HSR Act must be reported prior to closing, and the parties must wait 30 calendar days from the filing of the notification before closing. The agencies may decide to investigate the transaction further, thereby extending the 30-day review period and preventing the parties from closing, pending completion of the review.
The US merger notification statute and regulations enumerate the thresholds for reporting a transaction to the US government. They do not limit the jurisdiction of the FTC and DOJ, and the agencies are free to review transactions that do not meet the reporting thresholds. Section 7 of the Clayton Act gives the FTC and DOJ jurisdiction to challenge any acquisition that may result in a substantial lessening of competition. Further, there is no statute of limitations, so the FTC and DOJ’s authority to review a transaction may continue indefinitely after the transaction has closed.
The antitrust agencies may learn about a non-reportable transaction from any number of sources, such as: customers, competitors, press, industry trade groups, disgruntled bidders for the target company, securities or bankruptcy-related filings, foreign merger notifications or discussions with foreign competition authorities, or subsequent HSR Act filings (unrelated to the current transaction).
Once the FTC or DOJ learns of a non-reportable transaction that causes competitive concerns, the agencies may investigate using various methods. The agencies may ask the parties to provide information voluntarily to help them assess the transaction, or may issue a Civil Investigative Demand or subpoena requiring the parties, or non-parties, to submit documents and testimony. Because non-reportable transactions are not subject to the HSR Act, the parties are not required to observe a waiting period before closing. As such, the agencies may ask the parties to agree not to close during the investigation, or may seek a preliminary injunction in federal district court to stop the parties from consummating the transaction pending the outcome of their investigation, if it has not closed already. If the transaction has closed, the agencies still can sue to force a divestiture, either in federal court or, for the FTC, in an administrative trial.
Given the current climate of aggressive antitrust enforcement, parties to nonreportable transactions should remain sensitive to the potential antitrust risks. Understanding the antitrust risks will inform deal negotiations and integration planning and implementation. While an acquisition may raise significant competitive concerns, there may be an easy remedy that the parties would be willing to accept and for which they can plan. Conversely, some transactions may not present any appropriate remedy other than complete abandonment or divestiture of the entire acquisition. The parties need to consider how much antitrust risk they are willing to accept. For example, the buyer may want to negotiate provisions into the contract to provide for some compensation from the seller, such as an adjustment to the purchase price, in the event the FTC or DOJ challenges the transaction postclosing. On the other hand, the seller may not be amenable to accepting any risk. With respect to integration planning and implementation, the buyer should be careful to avoid engaging in any conduct post-closing that may draw antitrust scrutiny or may provide the agencies with direct evidence of a transaction’s anticompetitive effects. For example, a post-acquisition price increase may be used as evidence that the transaction was anticompetitive.
The lack of any premerger notification obligations does not obviate the need for careful document creation. Where the FTC and DOJ learn of an acquisition that may raise potential competitive concerns, they may seek both transactionrelated documents as well as documents created in the ordinary course of the parties’ businesses. Careless document drafting can create a Sisyphean task of trying to convince an already sceptical agency of the compet it ively benign nature of a transaction. Conversely, careful wording can make a hard deal easier to defend. Whether or not the parties anticipate signif icant antitrust issues, careful document creation is a best business practice that can mitigate against undue costs and delays in the course of an antitrust review.
Documents prepared by the parties and their advisors that evaluate the deal are the most important information in the regulators’ initial review, and can make or break the antitrust review of a deal. When creating transaction-related documents, parties should be careful to avoid antitrust “buzz words”, such as market leader, dominant position, high entry barriers, rationalise pricing or competition, achieve pricing power, avoid a price war, foreclose competition or increase costs for rivals. This obviously applies to all press releases, talking points, frequently asked questions and US Securities and Exchange Commission filings, which may be the source from which the agencies f ind out about the transaction in the first instance. However, this guidance also applies to all internal presentations, documents and communications, including “private” e-mail correspondence.
Whether a transaction meets the reporting thresholds of the HSR Act is not the determining factor when assessing the potential antitrust risks. Parties must remain vigilant in protecting their interests in getting the deal done. This means understanding the potential antitrust risks, anticipating the outcomes that the parties would be willing to accept, careful creation of documents and avoiding antitrust scrutiny by not engaging in anticompetitive behaviour post-closing. Early involvement of antitrust counsel in the transaction planning process can help parties understand these risks and how to navigate them so as to avoid unnecessary scrutiny, delay and expense.