On June 12, 2003, U.S. Federal Trade Commission (FTC) Administrative Law Judge D. Michael Chappell ruled that Chicago Bridge & Iron Company (CB&I) violated the antitrust laws with its February 2001 acquisition of certain assets of the Engineered Construction Division and the Water Division of Pitt-Des Moines, Inc. (PDM). Judge Chappell held that the acquisition threatened to substantially lessen competition in four relevant markets involving industrial storage tanks and thermal vacuum chambers. Judge Chappell ordered CB&I to divest to an FTC-approved buyer various physical assets, intellectual property and any uncompleted construction contracts that were acquired from PDM. CB&I has announced that it will appeal the ruling to the full FTC. This case demonstrates the antitrust agencies’ increasing willingness to challenge consummated transactions.
CB&I’s acquisition of PDM’s assets was valued at $84 million and the companies filed their transaction in compliance with Hart-Scott-Rodino (HSR) premerger notification requirements in 2000. The FTC decided not to request additional information from the companies and the HSR waiting period expired. Subsequently, the FTC raised questions about the transaction and continued investigating the matter, but the parties closed the transaction in February 2001 while that investigation was ongoing. In October 2001, the FTC issued an administrative complaint against CB&I alleging that its acquisition of PDM’s assets was anticompetitive and created a monopoly in certain markets. This matter is significant because the government prevailed in a post-merger challenge after a full administrative trial, and it was not settled by consent decree.
Increased Government Challenges to Consummated Transactions
The U.S. government’s challenges to consummated transactions are not a new development, but the antitrust agencies have shown a renewed interest in these actions. A combination of factors has led to this development. In 2001, the HSR filing thresholds for transactions increased from $15 to $50 million. The higher thresholds, combined with a reduction in the level of transactions in the United States, has caused antitrust agencies to devote greater resources to investigating consummated transactions. The agencies currently are investigating or litigating numerous consummated transactions, including several hospital acquisitions.
The antitrust agencies have challenged at least a dozen consummated transactions in the last six years as listed below:
- Chicago Bridge & Iron Co./Pitt-Des Moines, Inc. (2003)
- Dairy Farmers of America/Southern Belle Dairy Co. (2003)
- New Times Media/Village Voice Media (2003)
- MSC Software/Universal Analytics, Inc. (2002)
- Hearst Co./J.B. Laughery (2001)
- Airgas, Inc./Mallinckrodt, Inc. (2001)
- Ceridian Co./NTS Co. and Trendar Co. (2000)
- Miller Industries, Inc./Vulcan Equipment, Inc. and Chevron, Inc. (2000)
- Boral Ltd./LaFarge SA (joint venture called Monier Lifetile LLC) (1998)
- ADP, Inc./AutoInfo, Inc. (1997)
- Insilco Co./Helima-Helvetion Co. (1997)
- Mahle GmbH/Metal Leve SA (1997)
Government challenges to consummated transactions arise in several contexts. In some cases, the government has alleged that the parties interfered with the HSR process by withholding important documents or by failing to notify the government of the transaction altogether (e.g., Hearst, ADP and Mahle). In several instances, the government challenged consummated transactions that were not HSR-reportable (e.g., DFA, New Times, MSC, Miller and Monier Lifetile). Finally, the government has challenged consummated transactions that were properly notified under the HSR Act, but the government identified significant concerns only after the HSR waiting period had expired (e.g., CB&I and Ceridian).
The agencies learn about potentially anticompetitive, consummated transactions through several means. For example, staff lawyers at the agencies spend a significant amount of time reading trade journals and other publications to uncover potentially anticompetitive transactions. Customers may call the agencies to complain about price increases or other allegedly anticompetitive behavior.
The remedies sought in a post-closing challenge can be quite burdensome. Most of the government’s challenges have resulted in consent decrees that require asset divestitures. In some situations, the government has required parties to divest entire business operations, or to license key intellectual property, to create a new competitor. In the Hearst case, the government alleged both egregious violations of the HSR Act and dramatic price increases resulting from the transaction. The government obtained disgorgement of the company's allegedly unlawful profits.
Proactive Counseling Is Important to Managing Risks of a Post-Closing Challenge
There are numerous precautions, specific to each transaction, that can be taken to reduce the likelihood of a post-closing government investigation or challenge. In addition, parties can take steps to allocate the antitrust risks.
Antitrust counsel can help determine whether risks exist.
Regardless of whether a transaction is reportable, identifying the potential risks associated with the regulatory review is crucial. Antitrust counsel can help assess the risk associated with a non-reportable transaction so parties to the transaction are fully informed about the likelihood of a government investigation. It should not be assumed that a challenge is unlikely just because a transaction is small in size. The government has shown that it is willing to challenge very small transactions that may impact local markets (e.g., New Times).
Antitrust counsel can help minimize risks.
It is important to develop strategies, arguments and approaches to successfully guide a transaction through any regulatory review. Counsel can help educate executives and employees on the elements of the transaction that will be viewed favorably and the aspects that may be viewed unfavorably by the regulators. For example, counsel can assist companies in documenting and presenting the efficiencies and synergies created by their transaction. Counsel also can help develop an effective communication plan that informs customers about the reasons for, and benefits of, the transaction. In some cases, it may make sense to notify the FTC and U.S. Department of Justice of the transaction even if an HSR filing is not required. The antitrust agencies often are receptive to this idea and will create a structure similar to the HSR waiting periods in order to review a transaction submitted on a voluntary basis. Such an approach will decrease the risk of a post-closing challenge.
Antitrust counsel can create contractual mechanisms to help control risks.
Most companies are familiar with contract provisions that specify closing will not occur during the HSR waiting period. Similar provisions can be drafted for non-reportable transactions to provide acquiring companies with options on whether to close on a transaction that is subject to an ongoing government investigation. Conversely, companies that are being acquired may wish to include provisions that require the buyer to close on the transaction even if it is being investigated or compensate the seller for failing to close. In addition, counsel can draft provisions that reimburse sellers for legal expenses related to a post-closing investigation or challenge. Many other alternatives are available and can be used to help manage, or allocate, the antitrust risks.
McDermott, Will & Emery lawyers have played significant roles in seven of the consummated transaction challenges listed above. Several of our lawyers prosecuted three of these matters while they were employed at the FTC. On two of the transactions listed above, we represented third parties that were involved in causing the agency to bring an action. On two other matters, parties retained McDermott, Will & Emery to assist after the government made clear it would challenge the transaction.
Our Antitrust Group regularly defends transactions before U.S. and international competition authorities, providing guidance to clients regarding premerger reporting and the scope of permissible premerger activities. We are available to assist companies in proactively addressing potential antitrust issues in transactions and to assist those companies potentially harmed by consummated transactions