by Kay Lynn Brumbaugh
The word “antitrust” often conjures up visions of competitors fixing prices in smoke-filled back rooms or, more recently, posh hotels in exotic locations in a Matt Damon movie.While such meetings certainly occur and price-fixing offenses are aggressively prosecuted, there are other less obvious, but risky, antitrust issues that arise in traditional corporate matters.
Is the transaction HSR reportable?The Hart-Scott-Rodino Antitrust Improvements Act, 15 U.S.C. § 18a (HSR Act), requires parties to certain transactions to notify, provide information to and obtain approval from the Federal Trade Commission (FTC) and Department of Justice (DOJ) before closing. The HSR filing allows the Government to investigate transactions for adverse effects on competition. Although the reporting rules are complex, start with the size of transaction to assess if an HSR filing is required. A filing may be required if the transaction will result in the acquirer holding U.S. assets, voting securities or certain non-corporate interests with a value currently more than $75.9 million. The transaction size threshold is adjusted annually.
A no-close waiting period of 30 calendar days begins after both parties make HSR filings, though parties may request early termination of the waiting period. Some HSR filing exemptions exist for certain types of transactions, including most traditional real estate transactions, acquisitions of up to $500 million of producing oil and gas reserves, and acquisitions of foreign assets, among others. Be careful when analyzing HSR reportability because penalties for failing to file are substantial, including daily fines, delays in closing, lawsuits and potentially unwinding the transaction. Also, know that the FTC and DOJ have authority to investigate transactions that are not HSR-reportable if they raise competitive issues.
Do the diligence and transition planning processes create antitrust risk?Antitrust risks may arise in the due diligence and transition planning phases from the sharing of competitively sensitive information. Should discussions end without a deal, the types of information exchanged during the negotiations should not be the sort to limit the companies’ incentives to compete vigorously. For example, if seller tells buyer of a planned future price increase during the discussions, and buyer decides to increase its prices at the same time, antitrust regulators would likely suspect price-fixing even if buyer’s decision was an independent decision for internal business reasons. That is not to say that the buyer is prohibited from obtaining information necessary to evaluate a potential transaction, but consideration must be given to what information reasonably needs to be shared to evaluate the transaction, when the information needs to be shared and with whom should it be shared. Mere curiosity is an insufficient reason to obtain competitively sensitive information.
Are the companies acting as separate companies until closing?Prior to closing, the activities of the merging companies are subject to Section 1 of the Sherman Act which prohibits agreements in restraint of trade, and, if an HSR filing is required in connection with the transaction, the activities are also subject to the HSR Act and its prohibitions against the transfer of beneficial control to the acquiring company (also known as “gun jumping”). Gun jumping risks often manifest themselves in the conduct of business provision in an agreement, whereby the seller agrees to conduct its business in a certain manner before closing. Antitrust risk increases should the buyer attempt to exercise undue control over the seller’s business before closing. For example, if the buyer requires approval of ordinary course business decisions or sets materiality thresholds so low as to intrude on normal operations of the seller. Federal antitrust authorities will investigate a transaction even if there is no substantive antitrust concern if they believe the buyer is exercising beneficial control over the seller prior to the expiration of the HSR waiting period. And given that the parties’ agreement must be provided with the HSR filing, assume that the Government will review the conduct of business covenants.
Is the covenant not to compete too broad?Covenants not to compete are common in Mergers & Acquisitions agreements and generally not antitrust violations if ancillary to an otherwise lawful agreement, have a legitimate business purpose and are narrowly tailored to achieve the business objective. They are risky when they are too broad in scope and too long in duration. For example, when acquiring certain assets from a competitor, a non-compete provision affecting the assets being acquired is reasonable. But a provision limiting a competitive product not being acquired is unreasonable and may be viewed as an unlawful agreement not to compete.