Antitrust Compliance in M&A: Due Diligence, Pre-Merger...

Antitrust Compliance in M&A: Due Diligence,

Pre-Merger Communications, Conduct Prior

to Closing

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WEDNESDAY, AUGUST 1, 2018

Presenting a live 90-minute webinar with interactive Q&A

Matthew J. Bester, Director of Competition Law, Accenture, Washington, D.C.

Creighton Macy, Partner, Baker & McKenzie, Washington, D.C.

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ANTITRUST COMPLIANCE IN M&A

Due Diligence, Pre-Merger Communications, & Conduct Prior to Closing

Matthew Bester & Creighton MacyAugust 1, 2018

INTRODUCTION

Scenario: You’ve worked out the thousands of details necessary to close

an acquisition, you’re getting close to the signing date, and then . . . your

antitrust colleague asks whether the deal team considered the relevant

antitrust issues that may stem from the acquisition.

6

M&A AND ANTITRUST LIFE CYCLE

Pre-merger

diligenceAssess

antitrust risk

Determine filing

requirements

Manage sensitive

information

Close and

integrateTrain on gun

jumping

7

AGENDA

1The Merger Laws & Determining

When an Antitrust Filing is Necessary

2Defining Competitively Sensitive

Information for Antitrust Purposes

3Taking Appropriate Actions Pre-

Signing to Avoid Antitrust Scrutiny

4

Understanding the Scope of Permitted

Actions and Communications Pre-

Closing

8

1 The Merger Laws & Determining When an Antitrust Filing is Necessary

“may” substantially reduce competition ✔

✔ “probabilities, not certainties” that the deal

will reduce competition

U.S. MERGER LAW

✔ Forward looking

10

Significantly Impede Effective Competition✔

✔ Balance of probabilities, based on a body

of clear and compelling evidence

EU MERGER LAW

✔ Forward looking

11

Copyright © 2017 Accenture All rights reserved. Attorney Client Communication – Attorney Work Product – Privileged and Confidential

Transaction thresholds Parties must wait for clearanceCommerce nexus

WHEN IS AN HSR FILING REQUIRED?

Title 01 Title 021

EU MERGER CONTROL

2 3Exclusive jurisdictionAcquirer and target

EU-based

turnover thresholds

Acquirer and target

Global turnover

thresholds

13

Iconix purchased Rocawear assets for $200MM

Parties filed HSR forms but zero Item 4 documents

Transaction was not anticompetitive, but parties

fined $550,000 for failing to produce required docs

HSR DOCUMENT REQUIREMENT

U.S. v. Iconix

Brand Group

14

01At least 100

countries

MERGER FILINGS ACROSS THE WORLD

02Both sides’

global and

local sales03

Market

Shares 04Local asset

values

15

WHAT ARE REGULATORS LOOKING AT?

Customers

Market SharesCompetition

Price/Margin Competitors

16

✓ How will customers react to a change in price or

quality?

✓ Will suppliers have meaningful choices?

✓ What are the alternative sources of this product?

✓ Do you have to go to a different geographic area to

get the same/similar replacements

✓ Do the merging parties see each other as their

closest substitutes? Is one of them a “maverick”?

▪ Bidding against each other?

▪ Copying each other’s innovations or pricing structures?

✓ Are they pursuing the same customers?

✓ Are there risks of market foreclosure?

(SOME) KEY AGENCY QUESTIONS

17

NEGOTIATING (ANTITRUST) DEAL TERMS

✓ There are several antitrust related deal points to be negotiated—for routine and complex deals—notably:

▪ Efforts – standard effort (e.g., reasonable) level required

▪ “Hell or High Water” – obligation to litigate throughout

▪ Remedies – buyer to ameliorate concerns to get deal cleared

▪ Termination Fee – protect one or both of the parties if decide against pursuing the deal because of regulatory concerns or timing

• E.g., AT&T reportedly paid T-Mobile over $4 billion after transaction abandoned

• E.g., Halliburton reportedly paid Baker Hughes $3.5 billion after transaction abandoned

▪ Timing Provisions – Specify a date by which the deal must be closed or when filings

must be submitted

18

2 Defining Competitively Sensitive Information for Antitrust Purposes

Prices Customer

Lists Marketing

Plans

Production Costs

Risks Quantities

Investments Turnover Technologies

Sales Capacities

R&D Programs

WHAT IS COMPETIVELY SENSITIVE INFORMATION?

20

WHAT THE AGENCIES SAY

“The main message is that companies should consider the risks and establish

appropriate protocols. At all times companies should take into consideration the

sensitivity of the information offered to or requested by a counter-party and how the

exchange of the information could affect competition, both in the short term and if

the deal doesn’t happen. Once the process is set up, both parties should police the

rules to ensure they are followed.”

Federal Trade Commission Blog, 2018

Avoiding Antitrust Pitfalls During Pre-Merger Negotiations and Due Diligence

21

What is the purpose? What is the reason? Who sees it?

• Evaluating deal

• Planning integration

• Limited set of

employees

• Not market-facing

employees who

compete against target

• Clean team

PROPER CSI EXCHANGE

• Needs to be clear

purpose that is deal-

related for sharing

information

22

23

Diligence or

Integration Teams

▪ Certain Employees

▪ Consultants

▪ Information exchange is limited to Non-CSI

Clean Team

(if Necessary)

▪ Certain Employees (Selective)

▪ Consultants

▪ Access to all (or most) information

▪ Aggregates information for Diligence Teams

STRUCTURING DILIGENCE FLOW

24

Request

▪ Diligence Team requests information (via lawyers)

▪ Lawyers discuss request with Clean Team and Diligence Team

Input/Review

▪ Clean Team requests info from Diligence Team

▪ If required, further discussion with Diligence Team and lawyers

Output

▪ Clean Team aggregates information

▪ Output reviewed and authorized by lawyer

Clean Teams

Firewalls

Data

Employees

CLEAN TEAM PROCESS

WHAT THE AGENCIES SAY

“Right up until consummation, the merger parties are still independent

businesses and they must continue to operate independently…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.”

Federal Trade Commission Blog, 2018

Avoiding Antitrust Pitfalls During Pre-Merger Negotiations and Due Diligence

25

WHAT IF IT GOES WRONG?

Separate

investigationAdditional

antitrust risk

Fines Longer

investigation

Exchanging price information could be seen as facilitating illegal coordination

in violation of Section 1 of the Sherman Act.

26

WHAT THE AGENCIES SAY

“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.”

Federal Trade Commission Blog, 2018

Avoiding Antitrust Pitfalls During Pre-Merger Negotiations and Due Diligence

27

Settled FTC allegations stemming from CSI pre-close

exchange in M&A transaction between Bosley and Hair

Club

Bosley exchanged future product offerings, price floors

and discounts, plans for business expansion and

contraction, and current business operations and

performance

Bosley required to institute antitrust compliance program

and end CSI exchange with competitors

EXCHANGING CSI IMPROPERLY

Bosley Inc. et al.

28

1. Pharmacy (Omnicare) alleged that healthcare providers (UnitedHealth and PacifiCare

Health) traded CSI during pre-merger due diligence conversations

2. Allowed them to coordinate drug pricing negotiations with Omnicare to get bargain-

basement prices for PacifiCare

1. No “smoking gun” evidence excluding the possibility of independent action

2. Ambiguous circumstantial evidence cannot support an inference of conspiracy

1. Answered pricing questions in general terms

2. Restricted exchanges of sensitive information to high level, aggregated estimates

3. Retained assistance of outside counsel to review CSI and restricted access to the

information cleared by counsel

PROPER EXCHANGE OF CSI

Omnicare v.

UnitedHealth Group

29

DOJ’s ongoing seafood packaging investigation—

merger announced in late 2014

The civil section reviewing the merger found

alleged criminal conduct

The parties abandoned the transaction—and

multiple people have pled guilty as a result of the

ongoing investigation

UNINTENDED MERGER REVIEW CONSEQUENCES

30

Monitoring01 Exchange CSI with outside counsel and third parties assisting in transaction

evaluation

Deliver CSI on an aggregated and historic level02

03 Establish a clear structure on how information can be used and who can see it

04 Screen information from people in competition-sensitive roles

KEY POINTS

31

3 Taking Appropriate Actions Pre-Signing to

Avoid Antitrust Scrutiny

✓ E-mail

✓ Voicemail

✓ Text messages

✓ Handwritten notes

✓ Formal and informal presentations

✓ Instant Messaging and Apps

✓ Social Media!

PRE-MERGER COMMUNICATION

33

“These statements were primarily made in

the ordinary course of business and are

therefore likely to accurately reflect an

unvarnished viewpoint.

They express the opinion of knowledgeable

industry leaders. And they are consistent with

the expert analysis.

Together, the expert analysis and the other

evidence paint a picture of new entry not

being particularly likely, and the barriers to

entry being high.”

Purposes in Litigation:

• Define a relevant market

• Demonstrate closeness of competition between two merging parties

• Impeach a witness

• Bolster a testifying economist’s economic analysis

• Helpful for plaintiffs and defendants

AETNA/HUMANA

34

• In 2013, the US Department of Justice

challenged the acquisition of

PowerReviews, a product rating and

review firm, by its competitor

Bazaarvoice.

• The case went to trial and, in January

2014, a federal court agreed with the DOJ

that the transaction would substantially

reduce competition and violated the

antitrust laws.

• Documents created by Bazaarvoice were

the primary evidence presented by the

DOJ at trial.

BAZAARVOICE/POWERREVIEWS

35

BAZAARVOICE/POWERREVIEWS

36

“Strategic Opportunity: Acquire TaxAct and eliminate the

brand to regain control of industry pricing and avoid further

price erosion.

…

Benefit to Taxpayers: None”

H&R BLOCK/TAXACT

37

The DOJ’s complaint challenging Halliburton’s proposed

acquisition of Baker Hughes noted that “Defendants have

admitted in regulatory filings that ‘[t]here is no realistic

substitute for LWD [Logging While Drilling] services in

offshore drilling.’”

HALLIBURTON/BAKER HUGHES

38

“BAD” DOCUMENTS—TELL STORIES

“Staples’ and Office Depot’s own documents state that they are the only

participants in a ‘two player’ national market. . . . As Staples explained at an

internal Leadership Summit, ‘There are only two real choices for

customers,’ Staples and Office Depot. Office Depot similarly made clear to

a customer that ‘[o]n a national scale, Office Depot’s competition is

Staples.’ ”

— Complaint for Temporary Restraining Order and Preliminary Injunction

FTC, et. al. v. Staples, Inc., et al.

D.D.C. December 9, 2015

39

“BAD” DOCUMENTS—TELL STORIES

“Much of our story was told through Bazaarvoice documents. One

executive candidly stated that the transaction would eliminate

Bazaarvoice’s ‘primary competitor’ and provide ‘relief from . . . price

erosion;’ another observed that Bazaarvoice would have ‘no meaningful

direct competitor’ after the acquisition.”

— Bill Baer

Former Acting Associate Attorney General, Department of Justice

Former Director of the Bureau of Competition at the Federal Trade Commission

Remarks Delivered at American Antitrust Institute’s 17th Annual Conference (2016)

40

41

Impeach Witnesses

Appear in the media

BAD DOCUMENTS ALSO…

Damage supplier and customer relationships

Negatively affect company reputation

Start another investigation

Help plaintiffs survive a motion to dismiss

Monitoring01 Ordinary course documents are a key piece of evidence

Assume the government will read your documents02

03 Write accurately

KEY POINTS

04 Highlight the competitive benefits of the transaction (cost savings, innovation,

quality improvements, synergies, increased output, lower prices)

42

4 Understanding the Scope of Permitted Actions

and Communications Pre-Closing

Deal assessment✔

✔ Due diligence

PERMISSIBLE PRE-CLOSING CONDUCT

✔ Touting the benefits of merging

✔ Planning for Day 1 of integration

44

Jointly selling/marketing products X

Exchanging CSI without safeguards

IMPERMISSIBLE GUN JUMPING

Implying that the two companies are

one

Combining R&D or other functions

X

X

X

45

GUN JUMPING—DOJ—RECENT EXAMPLE

• Stemming from Duke Energy’s acquisition of Osprey Energy Center

• Duke allegedly took control over Osprey’s output and received the right to Osprey’s day-to-day profits and losses—before making HSR notifications

• DOJ alleged that “from the moment” the agreement took place, Osprey stopped acting as an independent competitor

• Settlement required Duke to pay fine of $600,000

Duke Energy 2016

46

• Fined company €80 million for allegedly implementing two transactions before receiving regulatory clearance

• Integrated business management, shared CSI, and coordinated product strategy

GUN JUMPING—EUROPE—RECENT EXAMPLE

• Fined Netherlands telecom company again €125 million for implementing transaction with PT Portugal before receiving regulatory clearance

• No objection to the underlying deal

• Purchase agreement permitted veto over target’s ordinary business

• Obtained sensitive information about the target without a confidentiality agreement

• Instructed how target should conduct marketing campaign

French Competition Authority 2016 European Commission 2018

47

Monitoring01 Planning Day 1 is ok, implementing the plan is not

Two companies must remain separate entities02

03 Exchanging information needs to be managed carefully

KEY POINTS

04 Talking with customers, employees about the benefits of the deal is ok

48

AND IF THE DEAL DOES NOT HAPPEN

“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.”

Federal Trade Commission Blog, 2018

Avoiding Antitrust Pitfalls During Pre-Merger Negotiations and Due Diligence

49

✓ While companies are still separate, some antitrust risk

remains.

▪ However, once they have merged operations, the two companies are

now one and cannot be held liable under antitrust laws aimed at illegal

agreements between competitors.

✓ Therefore—once there are no more regulatory hurdles

….Close!

REGULATORY APPROVALWHAT TO DO?

50

QUESTIONS ?

51

Matthew BesterAccenture202.533.1100

Creighton MacyBaker & McKenzie202.452.7000