On April 23, 2002, the U.S. Department of Justice Antitrust Division (DOJ) filed a proposed settlement with Computer Associates International Inc. and Platinum Technology International, Inc. by which Computer Associates agreed to pay $638,000 in civil penalties for alleged violations of the Hart-Scott-Rodino Act (HSR) and agreed to restrictions designed to prevent future recurrence of the conduct challenged in the lawsuit. The following describes certain types of conduct of concern to antitrust regulators and recommends actions to lessen risks of improper "gun jumping."
DOJ’s Challenge to Computer Associates’ Alleged Conduct
Computer Associates was a competitor of Platinum prior to the completion of its acquisition in May 1999. The transaction was subject to a DOJ Consent Order pursuant to which Computer Associates agreed to divest certain product lines in order to complete the transaction. Following completion of that transaction, the DOJ continued to investigate Computer Associates’ activities that had occurred between the time Computer Associates agreed to acquire Platinum and the May 1999 closing.
The DOJ filed suit in September 2001, challenging alleged gun jumping behavior. The suit alleged that Computer Associates violated Section 1 of the Sherman Antitrust Act by engaging in price-fixing with its competitor. The DOJ also alleged that Computer Associates violated the HSR Act by effectively obtaining control, or acquiring beneficial ownership, of Platinum prior to the expiration of the HSR waiting period. The DOJ’s allegations focused on the "conduct of business" restrictions that limited Platinum’s competitive activities after signing the merger agreement with Computer Associates and prior to the completion of the transaction.
The DOJ’s complaint alleged that the "conduct of business" provisions contained in the merger agreement went beyond reasonable and customary conditions. The restrictions allegedly placed severe restraints on Platinum’s ability to engage in business as a competitive entity independent of Computer Associates’ control. For example, Platinum could not, without Computer Associates’ prior written approval, offer discounts greater than 20 percent off of list prices; vary the terms of customer contracts from an agreed-upon standard contract; offer computer-consulting services for more than 30 days at a fixed price; or enter into contracts to provide Year 2000 remediation services.
The DOJ alleged that those restrictions caused Platinum to significantly change its business practices. For instance, the DOJ alleged that, prior to entering the agreement with Computer Associates, Platinum had frequently offered discounts of greater than 20 percent. These large discounts ceased after the merger agreement was signed. The DOJ also claimed that, in order to ensure compliance with the conduct of business restrictions, Computer Associates was given essentially unrestricted access to Platinum’s highly confidential and competitively sensitive information. This information included the identity of Platinum’s prospective customers and bid opportunities and the specific price, discounts and contract terms to be offered for those upcoming bids. The DOJ alleged that Computer Associates placed senior executives in Platinum’s facilities for the purpose of monitoring its business, including monitoring its prospective bid opportunities. The DOJ claimed that this activity constituted a violation of the HSR Act, through a transfer of beneficial ownership, and a Sherman Act Section 1 price fixing violation.
Terms of the Computer Associates Settlement
Computer Associates settled the DOJ action by agreeing to pay $638,000 in civil penalties to settle the HSR Act claims and implementing procedures to prevent specified future behavior. The behavioral restrictions on Computer Associates prevent the company from, in future transactions,: establishing any price or discount for any product or service of another party prior to consummation of the transaction; obtaining the right to negotiate, approve or reject any bid or customer contract for any product or service of the other party to be sold in the United States; or requiring another party to provide bid information for any product or service (subject to limited due diligence, as described below).
The Consent Order, interestingly, lays out certain activities in which Computer Associates may engage. These include agreeing that the acquired person shall continue to operate in the ordinary course of business consistent with past practices and requiring the acquired person not to engage in conduct that would cause a material adverse change in the business; prohibiting the acquired person from offering or entering into any contract that grants its customers enhanced rights or refunds upon the change of control of the acquired person; and agreeing that either party may conduct reasonable and customary due diligence prior to closing the transaction and conducting such due diligence.
More important, however, the order places restrictions on the due diligence activities for any transaction in which Computer Associates and the other party are competitors. In such transactions, Computer Associates may obtain bid information for prospective bidding opportunities only for purposes of due diligence and only if a bid is material to understanding the future earnings and prospects of the acquired party. Moreover, material prospective bid information can only be exchanged subject to a non-disclosure agreement that limits the use of the information and prohibits its disclosure to any Computer Associates employee who is directly involved in marketing, pricing or sales of any product that is a subject of pending competitive bids.
The DOJ’s Competitive Impact Statement for the Computer Associates settlement makes clear that many other customary covenants in merger agreements will not be deemed inconsistent with the HSR Act. Acceptable restrictions include covenants in which a seller limits its ability to declare or pay dividends or distributions of its stock; issue, sell, pledge or encumber its securities; amend its organizational documents; acquire or agree to acquire other businesses; mortgage or encumber its intellectual property or other material assets outside the ordinary course; make or agree to make large new capital expenditures; make material tax elections or compromise material tax liability; pay, discharge or satisfy any claims or liabilities outside the ordinary course; and commence lawsuits other than routine collection of bills. The purpose of these provisions is to prevent the to-be-acquired business from taking actions that could seriously impair the value of the business the acquiring firm has agreed to buy. The agencies will, however, challenge "ordinary course" provisions if they are being used by the acquirer to prevent the seller from engaging in activities that really are within its ordinary course of business. The substance of any conduct restrictions, and the manner in which they are enforced and monitored, will take precedence over the language of the contractual commitments themselves.
The implications of the Computer Associates settlement and the other recent agency challenges to gun jumping activity are significant for merging parties. The agencies have made the enforcement of the HSR Act’s procedural requirements against premerger coordination an enforcement priority. The antitrust agencies will aggressively investigate any activity that appears to be excessive premerger coordination, even in cases where the underlying transaction does not raise competitive concerns. Antitrust agency staff have also made clear that joint operating agreements or joint marketing agreements entered into by parties to a merger or acquisition agreement may constitute premature transfers of control in violation of the HSR Act.
The antitrust agencies also are concerned about post-transaction planning activities that may cross the line into pre-transaction coordination in violation of the HSR Act. Additionally, agency staff members have indicated that the confines of the conduct they will challenge as gun jumping are not clear. They may attempt to provide more guidance on the scope of permissible premerger coordination activities over the course of the next year. Furthermore, the antitrust agencies understand the importance of parties being able to conduct effective due diligence, but they will be wary of due diligence that exceeds the proper scope of what parties need in order to evaluate the transaction, or due diligence that may infect the competitive decisionmaking of rival firms.
Agency staff members have indicated that several types of conduct raise red flags for premerger coordination because they may curtail a firm’s ability to compete, either while the transaction is under review or in the event the transaction is not completed for any reason. Potentially problematic activities include the following: merger partners making joint calls to customers to discuss details of future business relationships; wholesale moves of staff from the seller to the buyer during the pendency of the HSR waiting period; exercise by the acquiring company of decisionmaking authority over the seller’s investments, research and development activities, new product launches and other types of competitive strategic decisions; and placement of representatives of the acquiring firm in the facilities of the acquired company to review or evaluate any business activities of the acquired firm.
The Computer Associates case is only the most recent example of aggressive agency challenges to parties’ conduct during the HSR waiting period. Agency staff understand the rationale for detailed information exchanges as part of the due diligence process, and the need for reasonable restrictions on a selling party during the pendency of the transaction. Nevertheless, agency staff members have shown that they will react aggressively when they believe that information exchanges or "conduct of business" limitations cross the line from serving legitimate business needs to illegal gun jumping. The agencies will challenge alleged gun jumping activity even if there is a strong business rationale or justification for the exchange and even if the conduct does not have an immediate effect on competition between the merging parties. If the agency does not ultimately challenge questionable activity as gun jumping, it will likely divert staff resources to investigate that activity. That diversion of resources will almost invariably slow the pace of the underlying merger investigation, which is usually highly undesirable for merging parties.
However, parties can normally meet their legitimate business objectives by tightly controlling the processes by which they interact prior to closing their transaction. For instance, parties may employ third parties, or an internal "clean team," to evaluate contracts or other highly sensitive business information. In other cases, such as allowed in the Computer Associates Consent Order, detailed due diligence that might be inappropriate for line employees whose day-to-day competitive decisions could be affected by reviewing a seller’s information can, instead, be reviewed by other less problematic employees. In some cases a dedicated clean team can be assigned to post-merger integration planning on the transaction if the individuals are not engaged in daily competitive activities for their respective firms. The third party or internal clean team may report information in an aggregated format that substantially reduces the antitrust risk of the activity compared to sharing detailed, customer specific cost, pricing or competitive efforts that have been at the heart of several of the agency gun jumping cases.
McDermott, Will & Emery’s Antitrust Group regularly provides guidance to clients regarding premerger reporting, the scope of permissible premerger activities and defending transactions before the U.S. and international competition authorities.