U.S. Federal Trade Commission (FTC) General Counsel William Blumenthal recently delivered a major policy address on "gun jumping" or illegal premature coordination among merging parties. The purpose of the speech was to try to provide improved guidance on what types of premerger coordination activities are permitted and not permitted under the antitrust laws. The FTC general counsel stated that the antitrust agencies recognize that many forms of premerger coordination are "reasonable and even necessary," and he is concerned that merging parties may be acting too conservatively in limiting transition planning due to incorrect views on what the antitrust regulators view as excessive premerger coordination activities. While gun jumping will remain a concern, this speech appears to signal the view of an important regulator that carefully controlled transition planning can be accomplished in most circumstances.
Over the last decade the FTC and the U.S. Department of Justice (DOJ) Antitrust Division have brought six cases involving premature coordination or gun jumping among merging parties. Gun jumping is analyzed both under the Hart Scott Rodino (HSR) Act and section 1 of the Sherman Act. The HSR Act generally requires parties to file notifications and observe mandatory waiting periods prior to consummating transactions valued in excess of $53 million. HSR Act gun jumping can occur when the parties coordinate prior to the expiration of the HSR Act waiting period to a degree that the regulators may view the buyer as having obtained beneficial ownership of the seller’s operations. HSR Act violations can occur even if the parties to the transaction do not compete in the same markets. In transactions involving competitors, section 1 of the Sherman Act imposes a separate basis for liability. Parties to a transaction are viewed by the antitrust agencies as independent competitors until their transaction is actually completed. Coordination of competitive activities between merging parties that are competitors or detailed information exchanges that allow the parties to coordinate pricing (for example) can lead to Sherman Act section 1 challenge. Significantly, this liability can arise for preclosing activities that occur following the expiration of any applicable HSR Act waiting period. The DOJ and FTC have used both statutes to challenge what they view as inappropriate premerger coordination.
Every transaction raises unique issues that must be evaluated on a case-by-case basis. Nonetheless, the FTC speech, through examples, has provided informative insight on the analysis of contemplated premerger activities. In general, the FTC general counsel emphasized that for the vast majority of transactions that do not raise substantive antitrust issues, premerger coordination that is reasonably necessary to protect the transaction will not raise significant antitrust issues. Certain conduct, such as coordination on pricing and combining significant day-to-day operations/management preclosing, is almost always unlawful and almost never reasonably necessary to protect the merger.
In the speech, the FTC general counsel discussed three specific premerger coordination issues and ways to minimize antitrust concerns in transactions involving competitors.
Spillover Effects from Ordinary Due Diligence and Transition Planning
Antitrust regulators have concerns when competitors engage in information exchange or planning discussions for legitimate purposes that "spill over" into competitive activities and may impact ongoing competition between the merging parties. The FTC general counsel identified a number of possible solutions to minimize potential spillover concerns.
- Lagged or aggregated information minimizes issues may be used.
- Transition planning personnel should be different from the personnel involved in the day-to-day business operations (e.g., development of post-merger pricing should be walled off from the sales and marketing personnel who continue pricing during the premerger period).
- Although expensive, merging parties can outsource planning functions to consulting and accounting firms.
Planning for Post-Closing Matters Requiring Preliminary Premerger Implementation
The antitrust regulators recognize that certain planning activities are sometimes necessary to allow the transaction to achieve efficiencies. However, there are certain "extraordinary matters" (e.g., whether the target should proceed with a significant capital project) that raise antitrust concerns. In such cases, merging parties often need to discuss and take preliminary steps during the preclosing period, even though the actual implementation will not take place until after closing. Although the regulators are skeptical about whether such planning is necessary, the regulators will typically balance the need for the parties to realize efficiencies post-closing against the concern that a decision not to proceed with the project would reduce the seller’s competitiveness if the merger did not close. The antitrust regulators will analyze such issues on a case-by-case basis and often analyze the following factors:
- The most important factors are whether the decision not to proceed with a project is reversible if the merger does not close and whether the target’s competitiveness is harmed by the deferral or abandonment of the project. To the extent the target can easily restart or finish the project, then the regulators are likely to have fewer concerns about the planning discussions.
- Another important factor is how the decision on the project was made. If the decision was reached unilaterally by the target, there should be few issues. If the buyer mandated the target make the decision or if it was a joint decision, the regulators are likely to have significant questions.
- The regulators will also balance the magnitude of the efficiencies achieved and the need to undertake the planning activities preclosing with the potential harm to competition.
- One additional issue is how significant the project is for the seller and if it was disclosed to the buyer or reasonably foreseeable at the time of the merger agreement. To the extent the buyer was aware of the project at the time of signing, then it is more difficult to justify the need to stop the project preclosing.
Although preclosing agreements on pricing and customer allocation are not permissible, the FTC general counsel said that joint marketing of the transaction is permissible. For example, with appropriate guidance and controls, joint advertisements promoting the transaction and controlled joint customer/supplier calls to tout the benefits of the merger are generally permissible. The regulators would have concerns if the buyer tried to redirect the seller’s ordinary-course advertising program or to dictate the contents of the seller’s advertisements for products in which the buyer and seller compete. With respect to joint customer calls, the parties should not discuss ordinary-course competitive selling, and the buyer clearly cannot direct or control the seller’s sales force/function prior to closing.
The FTC policy address illustrates that there are very few bright-line rules regarding premerger conduct. With the appropriate legal counsel, merging parties can often meet their legitimate business objectives while managing the antitrust risk by tightly controlling their interaction prior to closing the transaction.
McDermott Will & Emery’s Antitrust & Competition Group regularly defends transactions before the U.S. and international competition authorities, providing guidance to clients regarding premerger reporting and the scope of permissible premerger activities.