Republication:
Avoiding antitrust pitfalls during pre-merger
negotiations and due diligence
By: Holly Vedova, Keitha Clopper, and Clarke Edwards,
Bureau of Competition, FTC
March 20, 2018
Information
sharing: Hart-Scott-Rodino Act: Competition: Merger: Pre-merger:
Antitrust: FTC:
Most antitrust practitioners are attuned to advising
clients about the antitrust risk that a proposed acquisition may violate
Section 7 of the Clayton Act. But counsel and clients must also be conscious of
the risks of sharing information with a competitor before and during merger
negotiations—a concern that remains until the merger closes.
Companies considering acquisitions, mergers, or joint
ventures typically have a legitimate need to access detailed information about
the other party’s business in order to negotiate the deal and implement the
merger. But some information of interest may be competitively sensitive, such
as current and future price information, strategic plans, and costs. This is
especially true if the companies compete with one another. For prospective
transactions involving a competitor or potential competitor, special care must
be taken to minimize antitrust risks throughout premerger negotiation and due
diligence process, as well as during the integration planning process.
Although less frequent than merger enforcement actions,
the antitrust agencies have taken action against companies for unreasonable
information sharing, whether as standalone conduct or during the merger process.
For instance, the FTC charged a hair transplant services company
with violating the FTC Act after it was discovered during
the FTC’s review of a proposed merger that the merging firms’ CEOs repeatedly
exchanged company-specific information about future product offerings, price
floors, discounting practices, expansion plans, and operations and performance.
Even though the FTC did not challenge the merger, it concluded that the
exchange facilitated coordination and endangered competition, including by
reducing each firm’s uncertainty about its rival’s specific product offerings,
prices, and plans. The FTC also determined that the exchange served no
legitimate business purpose. In another case, the FTC challenged both the merger and the
exchange of competitively sensitive information between two
welded-seam aluminum tube manufacturers. The FTC found the sharing of
non-aggregated, customer-specific information, including current and future
pricing plans, particularly harmful to competition because the two companies
competed against each other in two highly concentrated markets. According to
the Commission, “this transfer had the potential to harm competition in the
interim pre-consummation period and in the event the acquisitions were delayed,
modified, or abandoned, may have led to even greater and more long-lasting
harm.”
The reason for concern is simple: competitive harm from
illegal information sharing can inflict harm to competition similar to the harm
caused by an anticompetitive merger. Exchanging information about competitive
plans, strategies, and crucial data such as prices and costs can facilitate
coordination between firms (and, if accompanied by accommodating actions, could
constitute an unlawful agreement). Right up until consummation, the merger
parties are still independent businesses and they must continue to operate
independently including safeguarding their competitively sensitive
information—to ensure competitive vigor in the short term and also in the event
that the merger does not happen. The FTC therefore looks carefully at
pre-merger information sharing to make sure that there has been no
inappropriate dissemination of or misuse of competitively sensitive information
for anticompetitive purposes.
Note that pre-merger information sharing may contribute
to unlawful “gun jumping” in violation of the HSR Act and Rules if it results
in the buyer effectively gaining beneficial ownership of the seller prior to
the close of the transaction. See United States v. Computer Assocs. Int’l,
Inc. (2002) (merger agreement required buyer pre-approval for
seller to offer customers discounts greater than 20% off list price). Unlawful
gun jumping may include the exchange of competitively sensitive information,
but it typically also involves actual coordination of business activities
during the HSR pre-merger review period. Such conduct could also constitute
evidence of a standalone illegal agreement that violates Section 1 of the
Sherman Act. See United States v. Gemstar-TV Guide Int’l.,
Inc. (2003).
Managing the Risk: Set up a Process and Police it
Because sharing too much information during the pre-merger period could violate
the antitrust laws, it’s important to have a plan in place to monitor and
control the flow of information to outside parties. Staff’s recent experience
indicates that companies could avoid both the appearance of and the actual
misuse of competitively sensitive information by more consistently adhering to
procedural safeguards designed to prevent misuse of competitively sensitive
information.
Antitrust counsel can undertake several steps to help
prevent problematic information sharing. First, companies should be reminded
that designing, maintaining, and auditing effective protocols to prevent
anticompetitive information sharing are extremely important during pre-merger negotiations
and due diligence. If competitively sensitive information must be exchanged for
diligence and integration planning purposes, parties should employ third-party
consultants, clean teams, and other safeguards that limit the dissemination and
use of that information within the parties’ businesses. Clean teams should not
include any personnel responsible for competitive planning, pricing, or
strategy.
Second, antitrust counsel should ensure that merging
parties follow whatever protocols they establish. Merging parties’ adherence to
established protocols should be monitored with an eye towards identifying
potentially problematic information sharing or sloppy information sharing
practices. Finally, if antitrust counsel discovers any problematic document
sharing or coordination of business activities between the merging parties
during the HSR waiting period, counsel should instruct the parties to stop the
activity or document exchange immediately (because that is what the FTC staff
will insist upon). For any problematic documentary information exchange
uncovered, antitrust counsel should determine whether and how the information
was used as well as the extent of the information exchanged, and would be well
advised to inform FTC staff about this before staff discovers the documents in
the merger investigation. Note that if FTC staff uncover documents in their
merger review indicating that a problematic exchange occurred, or that the
parties may not have fully lived up to the protocols they established to protect
confidential information, this may well result in FTC staff pursuing a separate
investigation, potentially costing additional time and resources.
(…) Share the least amount of information needed for
effective due diligence. Information shared should be narrowly tailored and
reasonably related to a specific due diligence or premerger integration
planning issue. Tailoring the amount of information shared to the stage of the
process can also help. At earlier stages in the sale process, a larger number of
firms may view the information while considering whether to bid for the target
company. Less information is typically needed at those earlier stages. At later
stages in the sale process, fewer firms may view the information, but more
detailed information may be needed to assess the business or asset package and
finalize a bid. This will require stronger safeguards, such as clean team
agreements. Clean team agreements limit access to competitively sensitive
information in data rooms to select individuals (clean team members) who
require access to evaluate the assets. Clean team members should be scrutinized
to confirm they do not occupy business roles that could enable them to misuse
the information for anticompetitive purposes.
(…) Ensure all employees with access to confidential
information understand the terms of all confidentiality and non-disclosure
agreements, including clean team agreements.
Establish clean teams and employ third-party consultants
for competitively sensitive information that must be exchanged.
(…) And finally, when the bidding process is complete,
individuals who received confidential information must comply with all document
destruction requirements in the confidentiality/non-disclosure/clean team
agreements. Requiring bidders to destroy any independent internal analysis
based on the confidential data and documents reduces the risk of future misuse
of competitively sensitive information.
