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THE THRESHOLD
Newsletter Of The Mergers &
Acquisitions Committee
Volume XIV
Number 2
Spring 2014
FROM THE CHAIR
To All Committee Members:
Welcome to the Spring edition of
The Threshold! And for those of you who
may be reading this at the J.W. Marriott
Hotel, welcome to the Spring Meeting! This
issue is packed with informative articles that
merger practitioners should find both useful
and timely.
We lead off with Ronan Harty’s very
interesting interview of FTC Chairwoman
Edith Ramirez that touches on a number of
hot merger topics, including acquisitions of
physician groups, merger retrospective
studies, potential competition mergers,
patent portfolio acquisitions, and
international merger enforcement. Next,
Bruce Hoffman critiques the DOJ remedy in
the American/US Airways merger,
concluding that the remedy “inflicts harms
and bestows benefits on passengers that
appear unrelated to any merger effect”
CONTENTS
Interview with Chairwoman Edith Ramirez
by Ronan P. Harty 3
Boarding For an Unknown Destination: The
Remedy in the American / USAirways
Merger
by Bruce Hoffman 13
Dead on Arrival: Can Efficiencies Revive an
Otherwise Unlawful Hospital Merger in
Court? by John Matthew Schwietz 30
Navigating the Weeds of Foreign Investment
Review: A Case Study of Archer Daniels
Midland/Graincorp. and BHP Billiton/
Potash Corp.
by Julie Soloway and Leah Noble 41
The EU Merger Simplification Package:
What's New and What Are the
Consequences?
by Gavin Bushell and Luca Montani 55
Future Forecasting in Potential
Competition: Stormy Days or Clear
Visibility – Summary of ABA Brown Bag
Program
by George Laevsky 68
International Roudup
by Julie Soloway and David Dueck 75
About the Mergers and Acquisitions 86
Committee
About the Threshold 87
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alleged in the complaint. John Matthew Schwietz addresses whether efficiency claims can
rescue a horizontal hospital merger that is otherwise “dead on arrival” in court after challenge by
the FTC; he concludes that recent court decisions “do not inspire hope,” and that the merging
parties’ best shot is presenting such claims to the FTC during the investigation phase. Gavin
Bushell and Luca Montani discuss the ins and outs, and the consequences, of the recent EU “Merger
Control Simplification Package.”
Julie Soloway and Leah Noble discuss the foreign investment review processes in Canada
and Australia that led to rejection of the ADM/GrainCorp and BHP Billiton/Potash Corp.
mergers—despite the fact that the mergers were cleared by the national competition authorities.
Julie is doing double duty for this issue, also collaborating with David Dueck on the International
Roundup, which discusses recent developments concerning the failing firm defense in the EU,
UK, and Australia, and efforts to streamline merger review in Europe, China, and Turkey.
Finally, we have an interesting summary of a recent M&A Committee Brown Bag program on
the current state of potential competition analysis in merger review, prepared by George
Laevsky.
The committee has been hard at work, not only on this issue of The Threshold, but also
on a new edition of the Premerger Notification Practice Manual, a new edition of the Mergers
and Acquisitions book, the soon-to-be completed second request cost study, and several changes
to our committee website, including the update through December 2013 of our invaluable (or so
we think) product market catalogue, the addition of a new resource base of antitrust-related
merger agreement clauses, and the conversion of our website to the ABA Connect platform.
The next Threshold will be out in the Summer. As always, we would be delighted to
publish letters to the editor commenting on any past articles, and we would be doubly delighted
to hear from you about any articles you would like to write yourself.
Enjoy the newsletter!
--Paul B. Hewitt
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INTERVIEW WITH CHAIRWOMAN EDITH RAMIREZ1
By Ronan P. Harty
What are the principal items on your competition agenda as Chairwoman?
I have focused on the healthcare and technology sectors since I first joined
the Commission in 2010, and those sectors continue to be a priority for me as
Chairwoman. As is well known, these have been important priorities for the
Commission for many years. Let me say a few words about each area.
Healthcare accounts for over 17% of GDP, and study after study tells us
that vigorous competition in healthcare markets reduces costs, improves quality,
and expands access for consumers. The Commission has a great record
promoting competition in healthcare markets. Our Supreme Court victory in the
Actavis case will make it easier to challenge anticompetitive pay-for-delay
settlements. In addition to pressing forward with two ongoing actions, including
Actavis, we continue to look carefully at settlements filed under the Medicare
Modernization Act to determine whether there are other enforcement actions we
should pursue in light of the Supreme Court’s ruling. Preventing anticompetitive
provider consolidation is another healthcare priority that has deep roots at the
Commission. While hospital mergers can generate important efficiencies that
benefit consumers, we will continue to look carefully at acquisitions that are
likely to enhance market power.
Promoting competition in high-technology markets is also a priority.
Innovation drives economic growth and expands consumer welfare. Innovation
also plays a central role in the competitive dynamics of high-tech markets. Firms
1 Edith Ramirez is Chairwoman of the U.S. Federal Trade Commission. She was appointed to the
FTC by President Obama and was sworn in as a Commissioner on April 5, 2010. She was
designated to serve as Chairwoman effective March 4, 2013. Prior to joining the Commission,
Ramirez was a partner in the Los Angeles office of Quinn Emanuel Urquhart & Sullivan LLP.
She graduated from Harvard Law School cum laude (1992) and holds an A.B. in History magna
cum laude from Harvard University (1989).
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in this sector are more likely to compete on the basis of new products and
business models rather than on price. So the risk of harm to competition and
consumers through a lessening of incentives to innovate tends to be more acute.
Consistent with our 2010 Horizontal Merger Guidelines, we will be on the
lookout for transactions in this area that raise competitive concerns. Of course,
evaluating competitive effects in rapidly evolving markets requires the
Commission to make educated predictions about the future. But that’s something
we do every day when we evaluate mergers in a variety of industries, and is not
something we can avoid where the competitive landscape is shifting more rapidly.
We will also continue to take a hard look at exclusionary tactics that discourage
entry from nascent rivals. Our staff has a wealth of experience in both merger and
conduct enforcement in high-technology markets, and the Commission has
demonstrated its ability to make tough calls based on the evidence in each matter,
pursuing a challenge against Intel for exclusionary tactics in 2009, while voting
unanimously to close its investigation of Google’s product design decisions in
2012.
My policy agenda also tracks these interests. The Commission’s unique
advantage as a competition and consumer protection agency rests in part on our
expertise in research and policy analysis, and our authority to collect nonpublic
information to conduct industry studies. We can often accomplish as much for
consumers through policy and advocacy as we can through enforcement. The
Commission, for example, has always taken a leadership role on policy issues at
the intersection of competition and intellectual property, and I hope to build on
that record during my tenure.
Our proposed study of patent assertion entities is one important project in
this area. The available evidence suggests the PAE activity may be affecting
incentives to innovate and compete in ways that we do not yet fully understand.
We know that litigation activity by PAEs is on the rise, but we have little more
than anecdotal evidence on PAE activity outside of the courtroom. Under
Section 6(b) of the FTC Act, we have the authority to collect nonpublic
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information to conduct industry studies, and last fall the Commission voted
unanimously to issue a Federal Register Notice seeking comment on a proposed
PAE study focusing on the economic costs and benefits of PAE activity. We are
completing our analysis of the nearly 70 comments we received and will soon be
seeking OMB approval to proceed with the proposed study. The Commission is
uniquely positioned to expand the empirical picture on the costs and benefits of
PAE activity. We have a talented and dedicated team of lawyers and economists
working on this study, and I am excited about moving forward with it.
While the Commission has always been active when it comes to hospital
mergers, we are also seeing challenges to physician acquisitions, for example
the Reno consent last year and the St. Luke's litigation. Do you anticipate
continued active enforcement in this area? Many of these types of
acquisitions (physician acquisitions) do not meet HSR thresholds. So, how do
you ensure that you are able to review such acquisitions?
The FTC will continue to carefully review all types of combinations
between healthcare providers. As I’ve already noted, we have good evidence that
mergers between providers that enhance market power can increase costs and
reduce quality and access to healthcare services. While these acquisitions can
also generate efficiencies, where we have evidence that a merger is likely to
enhance market power, parties must be able to verify any efficiency claims and
show that the efficiencies are merger-specific and of a character and magnitude
that would outweigh any likely anticompetitive effects in the relevant market.
In the St. Luke’s case, the court carefully considered whether efficiencies
provided a defense to the Commission’s challenge and concluded they did not.
St. Luke’s acquisition of the Saltzer Medical Group would have combined the
largest provider of adult primary care services in Nampa, Idaho with its closest
rival in a very concentrated market. The parties claimed that the merger would
have created valuable efficiencies by permitting more integrated patient care and
greater sharing of electronic medical records. While the court was persuaded that
team-based care and shared electronic records can improve quality and reduce
costs, it concluded that the parties could have achieved those same efficiencies
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through collaborative arrangements short of a merger. So the court correctly
concluded that the merger was unlawful.
As to your point about reporting thresholds, it is true that small provider
acquisitions often fall below HSR reporting thresholds. However, we typically
learn about potentially problematic mergers from a variety of sources, including
state attorneys general, commercial health plans, others in the marketplace, media
reports, and our own monitoring. And we make sure – through publications like
this and other public engagement – that our views about the potential
anticompetitive risks of these combinations are well known to all participants in
healthcare markets.
The FTC has a reputation as an agency that works effectively and in a
bipartisan way. That’s not always the case in Washington. What’s the
FTC’s recipe for success?
As an independent agency with important law enforcement
responsibilities, we take great pride in our bipartisan and consensus-oriented
culture. While my colleagues and I may at times see things differently, we work
hard to understand one another’s perspectives and always aim for consensus. We
are all committed to protecting consumers and promoting competition, and the
vast majority of our decisions are unanimous. But let me also emphasize that the
FTC has a great reputation mainly due to our talented and hardworking staff. Not
only are they on the front lines in everything we do, but it is also the high quality
of their work that enables informed dialogue among Commissioners, including in
those instances when we don’t all agree on the outcome.
Are there any ongoing FTC studies of the effects of your merger enforcement
program in healthcare or other areas?
I think retrospectives are an important tool that can be used to improve the
quality of merger enforcement programs. Done well, retrospectives may be able
to tell us whether we are providing consumers with good value for their
enforcement dollar. They can also help us educate courts. As is well known,
retrospectives helped the FTC reinvigorate its hospital merger enforcement
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program about a decade ago. Retrospectives that focus on remedies, particularly
whether divestitures are effective in restoring the competition lost through an
otherwise anticompetitive transaction, can also help improve merger enforcement.
The Commission’s divestiture policies today are grounded in part on what we
learned from our 1999 divestiture study.
At the same time, merger retrospectives are resource intensive, and it is
not easy to design a study that provides us with unbiased answers to the relevant
enforcement questions. But good retrospectives can make us a more effective
agency and I am working with our Bureaus to identify possible projects.
What are your views on potential competition? Typically, we see potential
competition cases in the pharma and medical device industries but the FTC
recently obtained an enforcement action in the Nielsen/Arbitron matter.
Does that signal that we are likely to see more potential competition cases in
the future?
I think Nielson/Arbitron can be seen as an example of the Commission’s
commitment to promoting competition in the high-tech sector. We challenge
mergers where the evidence provides us with a sound basis to believe that
competitive harm is likely, and that was the case in Nielson/Arbitron. Internal
documents and statements from the parties showed that the parties had each
invested significant time and resources to develop an audience measurement
product that covered multiple platforms and were beginning to offer them to
customers. There was broad consensus among media companies and advertisers
that Nielsen and Arbitron were the two firms best positioned to develop a cross-
platform measurement product in the foreseeable future that would satisfy
emerging demand. The evidence also showed that these products would likely
compete directly for business. Taken together, the evidence provided ample
reason to believe the transaction was likely to harm competition, and I was very
comfortable supporting a challenge and settlement in that matter.
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We have seen a number of transactions in recent years in the IT sector
involving the sales of large patent portfolios. Is there something unique about
the Section 7 analysis when the buyer is a patent assertion entity?
We apply the same basic analytic tools and economic principles to
evaluate mergers irrespective of the business models of the transacting parties.
As always, we are concerned with transactions that enhance market power or
facilitate the exercise of market power. In a situation involving the acquisition of
a large patent portfolio, the relevant question under Section 7 would be whether
the transfer is likely to enhance market power.
For example, with regard to the upstream technology market, we would
want to understand whether the transaction combined important substitute patents,
and whether there were any merger specific efficiencies associated with the
combination. We would also ask if the patents at issue are important to
competition in one or more downstream markets, and, if so, whether the buyer’s
incentives to license those patents are likely to differ from those of the seller post-
acquisition and how that change would be likely to affect downstream
competition. The downstream product market analysis would follow the same
basic framework we apply to other vertical mergers, such as the GE/Avio
transaction earlier this year.
In some cases, the incentives of PAEs to assert and license patents may
differ from those of operating companies. Operating companies that are
themselves vulnerable to infringement claims may refrain from asserting patents
against entities that could strike back. Since PAEs are not generally susceptible to
countersuit, the transfer of a large portfolio from an operating company to a PAE
might lead to more assertion activity. If PAEs assert these patents against firms
that have already embedded the patented technology in products, the transfer
could also increase the risk of patent hold-up, which may distort incentives to
innovate and reduce consumer welfare.
I am committed to using all of the agency’s tools to protect consumers
from harmful PAE activity, including using our antitrust enforcement authority to
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stop anticompetitive portfolio acquisitions by PAEs. However, it is also
important to understand that antitrust cannot provide a solution to some of the
broader competition policy risks that may be associated with PAE acquisitions.
To reduce the threat of patent hold-up more broadly throughout the marketplace,
policymakers should continue to pursue reforms that improve the patent system.
Much has been said about Section 5 and there appears to be a clamoring
from the bar and others for guidance on what is commonly called the
Commission’s “standalone” Section 5 authority. Does the Commission plan
on issuing a policy statement on Section 5? Why or why not?
The Commission is clearly engaged on this issue and several of us have
explained our views publicly. I favor developing Section 5 enforcement
principles using a common law approach. Congress deliberately drafted Section 5
broadly to provide the agency with the administrative flexibility to address unfair
methods of competition that would have been difficult to define adequately in
advance and that would necessarily change over time with economic learning and
an evolving competitive landscape. Courts have successfully developed the
contours of both the Sherman and Clayton Acts using a case-by-case approach,
and I believe the Commission can and should follow that approach for Section 5.
While I recognize that a predictable enforcement environment promotes
economic growth, an enforcement policy that places too much weight on certainty
has economic costs as well. As I noted in a speech I gave at a recent symposium
at GMU, an approach that is excessively concerned about over-enforcement does
not serve the marketplace as whole. While erring on the side of under-
enforcement may provide certainty to incumbents, it can impose a great deal of
uncertainty on nascent rivals seeking to challenge a dominant firm or business
model.
In my view, our enforcement actions themselves provide useful guidance
for the business community. Our most recent cases show that the Commission
will challenge conduct that courts may conclude falls outside the scope of the
Sherman Act, but only where we have reason to believe the conduct is likely to
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cause harm to competition and where the harm outweighs cognizable efficiencies.
We applied this very familiar rule of reason approach in our Google/MMI and
Bosley actions last year, and it is the standard that I think ought to be applied in
future actions.
You were in Beijing recently to meet with MOFCOM. What is your
impression of the way in which China is handling merger reviews? Is there
anything you would like to see them change?
We have followed the evolution of MOFCOM’s merger review process
with great interest. The FTC, together with the Department of Justice, provided
MOFCOM with input on the merger provisions of the draft Anti-Monopoly Law
through the consultation process prior to adoption of the law in 2007. We have
been in regular contact since that time regarding implementation, and even more
so since 2011 when we entered into a Memorandum of Understanding with
MOFCOM and the other two Chinese competition agencies. I am impressed that,
in just over five years, MOFCOM’s Antimonopoly Bureau has built the capacity
to analyze complex merger issues with skill. AMB staff are diligent and appear
eager to learn from the experiences of enforcers around the world.
With that said, I am concerned about some aspects of MOFCOM’s review
process. Merger review goes more slowly in China than in most other
jurisdictions with a pre-merger notification program. MOFCOM has reported that
87% of the mergers they review move to a second phase investigation, similar to a
second request here, even though ultimately MOFCOM imposes conditions on
less than 5% of all reported transactions. In most jurisdictions, less than 10% of
reported transactions go to a second stage investigation, with the percentage
below 5% in the United States. These numbers suggest that a large number of
transactions that do not pose competitive issues are subject to a lengthy review in
China, imposing costs on the merging parties and consuming MOFCOM’s limited
enforcement resources. Recently, MOFCOM released rules on “simple”
transactions, which may make it easier for MOFCOM to complete many more
investigations within the initial 30-day review period. I hope these new rules will
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allow MOFCOM to focus its resources on those mergers that pose genuine
competitive concerns.
I am also concerned about the role that industrial policy plays in
MOFCOM’s merger enforcement program. The AML expressly requires that
MOFCOM take economic development into account in merger review. As a
matter of practice, MOFCOM will often consult with other ministries, including
those responsible for designing and implementing China’s industrial policies. In
my view, antitrust enforcement should focus on promoting competition and
consumer welfare, and should not be used as a tool for industrial policy.
However, where an enforcement agency is obliged to consider other goals, it is
particularly important to the global regulatory environment that the agency do so
in a manner that is transparent.
Are we seeing greater convergence in international merger enforcement?
Does the Commission plan any initiatives in this area?
The FTC has worked hard to reduce the burdens on parties that can be
associated with differences in merger analysis and procedures across jurisdictions,
and I think the trend toward convergence is continuing. The FTC promotes
convergence on sound antitrust principles through our work in multilateral
organizations and our bilateral relations with counterpart agencies around the
globe.
By way of example, as you touched on earlier, I recently participated in
the second FTC/DOJ Joint Dialogue with China’s three competition agencies, at
which senior officials addressed antitrust policy and practice issues, including
those related to merger review, timing, and remedies. We also just concluded a
trilateral meeting with the Canadian and Mexican competition agencies and held
bilateral meetings over the past year with the European Commission, Japan, and
India at which we discussed merger policy convergence and cooperation.
Additionally, through consultations and cooperation on merger cases under
concurrent review, we have addressed key policy and procedural issues that have
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helped bring our approaches to merger policy and practices closer. We also
continue to strengthen case cooperation and coordination to reach compatible
results on individual cases of mutual interest. Thermo Fisher/Life Technologies is
a recent example of a case in which we cooperated with antitrust agencies in
many jurisdictions, including Australia, Canada, China, the European Union,
Japan, and Korea to reach compatible results on a global scale. We have also
been active with technical assistance to a broad array of young agencies.
The FTC remains committed to working towards even greater
convergence of competition policy and practice internationally, and we look
forward to working with the Antitrust Section and others to do so.
Justice Brandeis once said, “You can judge a person better by the books on
his shelf than by the clients in his office.” What books have you been reading
recently?
I hope Judge Brandeis would view me as a good commissioner, as my
daily reading mainly consists of staff memos, white papers and case law. I wish I
had time to read more widely and am always on the lookout for good books. The
last book I read was La Sombra del Viento by Spanish author Carlos Ruiz Zafón,
which I thoroughly enjoyed. I’m about to start Quiet by Susan Cain, which I am
looking forward to reading. It was recommended to me a while ago, and I was
finally prompted to buy it after listening to Cain speak at the HLS “Celebration
60” conference last fall. Another book that I hope to get to soon is Thanks for the
Feedback by Douglas Stone and Sheila Heen. It relates to an issue that I have
given significant thought to in the past while working with young law firm
associates, and am thinking a great deal about now at the FTC – how to ensure
that staff are fully engaged and that those of us who are managers are effective
supervisors and mentors. Thanks for the Feedback was recommended to me as
having useful insights on that subject.
If anyone has any other good reading suggestions, I would love to hear
them.
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BOARDING FOR AN UNKNOWN DESTINATION: THE REMEDY IN THE AMERICAN /USAIRWAYS MERGER
D. Bruce Hoffman1
On August 13, 2013, the United States, joined by seven States and the
District of Columbia (collectively, “DOJ”), filed suit to block the proposed
merger of American Airlines and US Airways. The complaint2 made sweeping
allegations that the merger would spur nationwide coordinated price increases and
service reductions, inflict consumer harm on over a thousand routes served by
both American and US Airways, and produce a near-monopoly in slots at Reagan
National Airport (“DCA”). But a scant three months later, DOJ and the airlines
announced a settlement which was essentially limited to addressing the airlines’
slot overlap at DCA, plus a few slots at LaGuardia (“LGA”) and a handful of
gates and related facilities at a few other airports around the country.3 The
settlement has been harshly criticized for failing to address the harms alleged in
the complaint, and also for requiring that the divested assets go to one set of
competitors—the so-called “Low Cost Carriers,” or LCCs, such as Southwest and
JetBlue.
Litigation has consequences: as a result, there is no requirement that a
settlement reached during litigation mirror the allegations of a complaint. But
1 Bruce Hoffman is a partner and head of antitrust at Hunton & Williams LLP. Thanks to Brian
Hauser of Hunton & Williams for extensive assistance with this article, Jeff Ogar for helpful
thoughts about airline mergers and related issues, Ronan Harty for suggestions and (particularly)
patience, and Gil Ohana for editing. The author represented Delta in its acquisition of Northwest
and its slot swap transaction with USAirways, but is not representing Delta or any other airline in
connection with this matter. This article does not purport to represent the views of Hunton &
Williams or any of its clients.
2 This article focuses on the Amended Complaint filed by the United States, the States of Arizona,
Florida, Michigan, Pennsylvania, Tennessee, Texas, and Virginia, and the District of Columbia,
against US Airways Group, Inc. and AMR Corporation, in the United States District Court for the
District of Columbia on September 5, 2013 (“Compl.”).
3 See Proposed Final Judgment, Competitive Impact Statement, etc., filed on November 12, 2013.
The Competitive Impact Statement is cited as “CIS” below.
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here there is a fundamental divergence between the complaint, the remedy, and
the antitrust laws. That divergence could perhaps be reconciled—though with
potential implications for the scope of the remedy—but DOJ has not provided the
analysis that would be necessary to do so.
I. The Merger and the Complaint
On February 13, 2013 American Airlines (then in bankruptcy) and US
Airways announced a merger. That merger would combine the third and fifth
largest US airlines to create the largest airline in the world. In the U.S., the four
largest remaining airlines—the new American, Southwest, United, and Delta—
would carry over 80% of domestic passenger traffic.4
On August 13, 2013, the complaint was filed, followed on September 5 by
an amended complaint (on which this article focuses). The complaint is detailed
and lengthy, and a full description of it and the amended complaint is beyond the
scope of this article. But its central themes are easily summarized.
The complaint drew a sharp distinction between so-called “legacy
airlines” and LCCs. Legacy airlines are the descendants of the nation’s historic
airlines, and typically operate hub-and spoke networks serving numerous
destinations with mixed fleets of aircraft and multiple classes of service.5 The
complaint alleged that post-merger there would only be three such airlines:
American, United, and Delta.6
LCCs, on the other hand, typically operate point-to-point service with
simple aircraft fleets appealing primarily to leisure travelers, though business
travelers do patronize LCCs.7 Southwest, by some measures the nation’s largest
airline, is the most prominent LCC. Among the numerous other LCCs are
4 Compl. ¶ 36.
5 E.g., Compl. ¶ 32.
6 E.g., Compl. ¶¶ 1, 3.
7 E.g., Compl. ¶¶ 17, 32, 47, 93.
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JetBlue, Spirit, Virgin America, and Allegiance. The complaint alleged that while
LCCs may drive down average prices on routes they serve, they do not presently
offer good substitutes for the legacy airlines, for reasons including their lack of
hub and spoke networks, preferences of many passengers for legacy airlines’
offerings, and the LCCs’ absence from many routes.8
Against this backdrop, the complaint alleged that the merger would result
in three major legacy airlines that, as the DOJ put it, “prefer tacit coordination
over full-throated competition.”9 The merger would reduce the number of legacy
airlines from four to three, and align the economic incentives of those that remain,
allowing increased coordination on price and service.10
This “alignment” would
occur by eliminating two forms of maverick competition by the existing legacy
airlines. First, the complaint contended that US Airways (“US”) is a price
maverick. In essence, according to the complaint, US’s hub and route structure
was inherently less lucrative than the other legacy airlines’, giving US an
incentive to compete directly with the other legacy airlines on price (particularly
by offering low prices on connecting routes that compete with other airlines’
direct routes).11
Second, according to the complaint, American (“AA”) was
poised to become a service maverick on exiting bankruptcy, dramatically
increasing capacity (and thereby inevitably driving prices down) while the other
legacy airlines had been attempting to reduce industry capacity.12
The complaint also observed that slots at DCA—one of the four airports in
the US subject to slot constraints—would be very highly concentrated. Slots are
rights to take-off or land; airports subject to slot limitations are restricted in the
number of take-off or landing operations they can permit in any given day.
8 Compl. ¶ 93; see also CIS at 5-6.
9 Compl. ¶ 3.
10 Id.
11 Comp. ¶¶ 5-6.
12 Compl. ¶¶ 8-9.
16
Without slots, airlines cannot serve a slot-constrained airport, and limits on slots
constrain airlines’ ability to expand service. 13
The complaint then alleged two relevant antitrust markets, both consistent
with longstanding DOJ precedent:
1) Scheduled air passenger service between cities (city-pairs), such
as Washington-Chicago. Also consistent with DOJ practice, the complaint
observed that in some cases consumer preferences and price
discrimination may support smaller relevant markets involving service
between particular airports, such as between DCA (highly preferred by
business travelers) and other airports. This allegation put into play well
over 1000 relevant markets.14
2) Slots at DCA. Slots are bought and sold, and since they are
necessary for flight operations at slot-controlled airports, the DOJ has in
the past contended that slots at particular airports are relevant markets.15
However, while slots were alleged to be a relevant market, the complaint
and other filings in the case generally described the competitive effects
related to slot concentration in terms of their effects on downstream
competition, i.e., the effect of slot holdings on city-pair concentration and
the ability of competing airlines to enter city-pair routes originating or
terminating at the slot-controlled airport.
The complaint began its analysis of effects by alleging a structural case
based on concentration in each set of relevant markets.16
It claimed that the
merger would increase the HHI beyond the level at which anticompetitive effects
13 Compl. ¶ 10. The other slot-constrained US airports are all in the New York area: JFK,
LaGuardia, and Newark.
14 Compl. ¶¶ 24-29, 38; see also CIS at 4-5.
15 Compl. ¶¶ 30-31; see also CIS at 5.
16 See Compl., ¶¶ 36-40.
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are presumed likely in over 1000 city-pairs. It further alleged that the merger
would substantially increase HHI in the already highly-concentrated market for
DCA slots, again resulting in a structural presumption of increased prices
(apparently for air service using those slots).
The complaint operationalized the structural presumption through what
appeared to be two theories. First, the complaint alleged a theory of coordinated
interaction on price and service among the remaining legacy airlines.17
By
reducing the number of legacy airlines and eliminating two mavericks, the
complaint alleged that the merger would generally increase price and service
coordination, elevating price and reducing service. The complaint noted that the
LCCs would not constrain this effect because of the difference between their
products and customers and those of the legacy airlines.18
Second, the complaint appeared to allege a unilateral effects theory in
numerous markets where the merger would eliminate competition between AA
and US, particularly markets involving routes originating or terminating at
DCA.19
This included seventeen nonstop direct overlaps (traditionally, the
greatest area of DOJ concern), and included lost competition on routes DOJ
alleged the airlines had planned to fly prior to the merger, such as planned entry
by US on DCA-MIA. But it also included over 1000 other overlaps, including
connecting routes, on which DOJ alleged prices would rise due to the loss of
competition between AA and US. Finally, the DOJ alleged that US used its large
slot holdings at DCA inefficiently, and was hoarding them to block entry (noting
that competition from JetBlue had reduced fares on the limited routes it had been
able to fly after obtaining slots at DCA, notably DCA-BOS).
17 See Compl., ¶¶ 41-81; see also CIS at 5-6.
18 Compl. ¶¶ 47, 93; see also CIS at 5-6.
19 See Compl. ¶¶ 82-90; see also CIS at 6.
18
Thus, the complaint alleged sweeping theories of anticompetitive effects
extending across the nation to over 1000 city-pair relevant markets—effects
which the numerous LCCs allegedly would not constrain.
II. The Settlement
The settlement, announced just three months later, painted a different
picture.
The settlement itself involved relatively modest relief. The merged airline
(NewAA) would divest 104 slots at DCA—effectively eliminating any increase in
slot concentration there.20
It would also shed 34 slots at LaGuardia (LGA), one of
the three slot-constrained New York airports.21
And it would divest
accompanying gate and other ancillary ground facilities at DCA and LGA, as well
as two gates each plus ancillary facilities at Chicago O’Hare (ORD), Los Angeles
International (LAX), Boston (BOS), Miami (MIA), and Dallas-Love Field
(DAL).22
The DOJ’s competitive impact statement explaining the effects of the
settlement conceded that “[t]he proposed remedy will not create a new
independent competitor, nor does it purport to replicate American’s capacity
expansion plans or create Advantage Fares [allegedly disruptive low connecting
fares used by US on certain routes] where they might otherwise be eliminated.”23
Instead, DOJ argued that the divestitures in the settlement would “create network
opportunities for the purchasing carriers that would otherwise have been out of
reach for the foreseeable future. Those opportunities will provide increased
incentives for those carriers to invest in new capacity and expand into additional
20 CIS at 2.
21 Id.
22 CIS at 2-3.
23 CIS at 8.
19
markets.”24
This set of divestitures, the DOJ contended, “promises to impede
the industry’s evolution toward a tighter oligopoly by requiring the divestiture of
critical facilities to carriers that will likely use them to fly more people to more
places at more competitive fares. In this way, the proposed remedy will deliver
benefits to consumers that could not be obtained by enjoining the merger.”25
By
“carriers that will likely use [slots] to fly more people to more places at more
competitive fares,” DOJ meant LCCs, to whom it required the divestitures be
made, to the exclusion of the legacy airlines.26
III. The Criticism and DOJ’s Response
Under the Tunney Act, Section 2(b) of the Antitrust Procedures and
Penalties Act, 15 U.S.C. § 16, following the filing of a propose settlement of a
DOJ antitrust case any person may file comments with the United States, after
which the court determines whether entry of the final judgment called for by the
settlement “is in the public interest.”27
The settlement attracted numerous comments. Criticism of the settlement
was extensive and harsh.28
Some of the key themes in the critiques include the
following:
24 Id.
25 Id.
26 CIS at 9-10.
27 15 U.S.C. § 16(e)(1).
28 See, e.g., February 7, 2014 letter from the American Antitrust Institute, the Airline Passengers
Organization, the Association for Airline Passenger Rights, the Business Travel Coalition, the
Consumer Travel Alliance, and FlyersRights.Org to William H. Stallings (the “AAI Comments”);
January 9 2014 Comments and January 16, 2014 Supplemental Comments of the Wayne County
Airport Authority Concerning Potential Anti-Competitive Impacts of the Proposed DOJ
Settlement (“Wayne County Comments”); Comments of Delta Air Lines, Inc. Concerning
Proposed Final Judgment As To Defendants US Airways Group, Inc. and AMR Corp., January 21,
2014 (“Delta Comments”); Tunney Act Comments of Relpromax Antitrust Inc., February 7, 2014
(“Relpromax Comments”); and Response of Plaintiff United States to Public Comments on the
Proposed Final Judgment, filed March 10, 2014 (“DOJ Resp.”) at 2 and n. 1.
20
(1) The remedies did not address the overwhelming majority of
alleged harms. As the American Antitrust Institute (AAI) pointed out, the
divestitures at best would address only eighteen of the one hundred city-
pair routes where concentration post-merger would be highest.29
Numerous commentators made similar points.30
(2) Given the complaint’s insistence that LCCs cannot presently
check coordinated interaction among the legacy airlines, there was no
apparent reason to believe that divesting slots to LCCs would address the
coordination theories described in the complaint.31
(3) The remedy would fail to address, and in fact inflict harm on,
consumers, including those flying from DCA to small airports that would
likely lose service as a result of NewAA’s net loss of slots—service LCCs
would be extremely unlikely to replace.32
This criticism seems to be
29 AAI Comments at 5, n. 7.
30 See, e.g., Delta Comments at 6-8; Relpromax Comments at 7-8. AAI also argued that DOJ’s
approach violated the legal principle that harms and benefits be considered only on a market-by-
market (here, city-pairs) basis (the “out of market efficiencies” rule). AAI Comments at 4, 11.
However, AAI appears to have misunderstood this principle, for two reasons. First, as the DOJ
and FTC have long recognized, the principle does not apply when out-of-market efficiencies are
“inextricably intertwined” with a merger’s benefits. United States Department of Justice and
Federal Trade Commission, 2010 Horizontal Merger Guidelines, n. 14. Even assuming that city-
pairs are relevant markets, that is nearly always the case in airline mergers, because harms in
particular city-pairs cannot be specifically remedied by divestitures, and the benefits of airline
mergers (which are often extensive but were given little discussion in any of the public analyses of
the merger) likewise typically cannot be isolated and preserved. Taken to its logical conclusion,
AAI’s argument would likely require prohibiting any airline merger with any overlap on any city-
pair: that is to say, effectively any airline merger. Second, the cases casting doubt on out-of-
market efficiencies relied heavily on the fact that the benefits of the mergers at issue flowed to
entirely different people than those affected by the harms. See, e.g., Kottaras v. Whole Foods
Market, Inc., 281 F.R.D. 16, 25 (D.D.C. 2012 (“a merger that substantially decreases competition
in one place—injuring consumers there—is not saved because it benefits a separate group of
consumers by creating competition elsewhere.”) (emphasis added). However, in airline mergers
that frequently is not the case. For example, passengers living in Dallas or Charlotte might lose
some competition on particular routes from this merger (such as Dallas-Phoenix, or Charlotte-
DCA), but the exact same passengers might benefit from the increased connectivity out of Dallas
or Charlotte provided by the merger’s combination of the two airlines’ networks. The limited case
law on out-of-market efficiencies does not address this scenario.
31 E.g., AAI Comments at 4-11; Relpromax Comments at 8-9.
32 E.g., Wayne County Suppl. Comments at 1-2; Delta Comments at 25-30.
21
proving to be correct. For example, NewAA has eliminated or reduced
service to numerous cities from DCA and LGA as a result of its net loss of
slots, and it does not appear that the recipients of those slots have replaced
much of that lost service.33
The DOJ filed a detailed response to the criticisms. Much of that response
focused on legal points explaining why the attacks on the settlement fell short of
the demanding standard for rejecting a settlement under the Tunney Act, or
addressing comments not clearly related to Tunney Act issues (such as claims of
political pressure on DOJ).34
The DOJ’s substantive defense of its remedies,
while quite detailed, boils down to two simple propositions. First, the DOJ
conceded that its remedies do not address the merger’s increase in concentration
on the overwhelming majority of city-pair routes.35
But the DOJ argued that no
remedy could address that issue, because no divestiture can require an airline to
serve any particular city-pair,36
and its remedy would at least reduce prices on
routes the LCCs choose to serve. Second, while the settlement did not prevent the
effects of the merger that allegedly increased the risk of coordination (the alleged
reduction of legacy carriers from four to three, and the elimination of US’s and
AA’s incentives to behave like mavericks),37
providing additional slots to LCCs at
DCA and LGA would allow LCCs to expand and, potentially, gain the ability to
33 See, e.g., Wayne County Suppl. Comments at 2. Delta also argued that the DAL divestitures
would harm it and its customers by essentially evicting it from DAL, the closest airport to
downtown Dallas. Delta Comments at 30-34.
34 DOJ Resp. at 15-21, 44-50.
35 See, e.g., DOJ Resp. at 27-30.
36 DOJ Resp. at 29-30, and n. 52. In fact, for virtually all city-pairs, there may not be an asset that
could be divested that relates specifically to that city-pair, because planes can fly anywhere, gates
are rarely if ever in short supply, and even slots cannot generally be restricted to serving particular
routes.
37 DOJ Resp. at 8-9.
22
disrupt that coordination at some point in the future (while providing lower prices
to at least some passengers in the interim).38
IV. Analysis
The settlement is drastically different from the complaint. That, in itself,
is not necessarily cause for concern about a settlement. Cases change when
they’re litigated. The facts and economic analysis don’t always turn out as
anticipated, and the parties’ view of the issues may evolve. The DOJ clearly has
latitude to accept a settlement that reflects the lessons learned during litigation
and the risks of proceeding to trial.
Here, though, there is a fundamental tension between the complaint’s
allegations, the settlement, and the requirements and limitations of the antitrust
laws under which the complaint was filed. While perhaps not an appropriate
matter for Tunney Act review,39
that tension raises significant issues of antitrust
policy.
To understand this issue, it’s necessary to go back to the legal foundation
of merger enforcement: section 7 of the Clayton Act, 15 U.S.C. § 18. That statute
prohibits mergers “where in any line of commerce or in any activity affecting
commerce in any section of the country, the effect of such acquisition may be
substantially to lessen competition, or tend to create a monopoly.”40
In other
words, merger enforcement is intended to preclude substantial competitive harm
in relevant markets. And, accordingly, merger remedies should address the
identified harms in the identified markets.41
38 DOJ Resp. at 9-15, 23-30.
39 E.g., DOJ Resp, at 21-22.
40 15 U.S.C. § 18.
41 Antitrust Div. Policy Guide to Merger Remedies, 2-4 (June 2011).
23
The theories of harm identified in the complaint cannot be reconciled with
the settlement that purports to remedy them.42
Why is this so? Because in order
for the DOJ’s remedy to work, LLCs have to be competitive constraints on legacy
airlines and relevant markets cannot be city-pairs. If those two conditions hold,
the remedy might work but the complaint would be wrong. If either of those
conditions does not hold, the complaint might be right, but the remedy does not
work. In other words, based on the information provided to the public, the
complaint and the remedy can’t both be right.
As described above, the complaint’s basic theories were (1) the merger
would increase the risk of coordinated interaction by reducing the number of
legacy airlines from four to three, and (2) the merger would directly harm
consumers by reducing the number of competitors on over 1000 city-pairs, which
would result in price increases on those city pairs. For those harms to be
remedied by slot divestitures at two airports to LCCs who are not likely to use the
slots to fly the routes affected by the merger, it must be the case that (1) LCCs
constrain coordinated interaction by legacy airlines, and (2) prices on
concentrated routes must be affected by competition on other routes, i.e.,
competition must occur at a network level, not a city-pair level.43
The complaint, however, alleged precisely the opposite. And, if LCCs
constrain coordination by legacy airlines, or if competition is not on a city-pair
basis, the complaint simply fails to allege a viable theory of anticompetitive harm
sufficient to justify challenging the merger.
First, if LCCs constrain coordination, rather than a 4-3 merger this merger
was more like an 11-10 merger (with the addition to the market of LCCs
42 As noted above, DOJ has urged that a challenge to the merits of the original antitrust case is not
permissible under the Tunney Act.
43 Otherwise, there is no justification under Clayton 7 for divesting a slot to an LCC to use that
slot to fly a route not affected by the merger for the benefit of passengers unharmed by the merger,
unless relevant markets are broader than particular city-pair routes, or perhaps under the
“inextricably intertwined” principles discussed earlier.
24
Southwest, JetBlue, Allegiant, Alaska, Frontier, Spirit, and Virgin America along
with US, AA, DL, and UA).44
Moreover, the remaining competitors are not
small, fringe firms. They include Southwest, arguably the largest airline in the
U.S., and a number of the fastest-growing, lowest-priced, highest-service airlines
in the business (e.g., Spirit and Allegiant on price, and JetBlue and Virgin
America on service), none of whom face any material obstacles to entry or
expansion at the overwhelming majority of airports and on the overwhelming
majority of affected city-pairs, and each of whom offer differentiated service
under different business models than the legacy airlines.45
Coordinated
interaction theories are not normally considered plausible under these sorts of
market conditions.
Second, if city-pairs are not relevant markets, the concentration indices
and price effects described in the complaint would be erroneous and irrelevant.
Moreover, if there were price disparities between concentrated and
unconcentrated city-pairs, if city-pairs are not relevant markets, those effects
would likely caused by factors other than market power, and thus would be
neither a concern of merger enforcement nor capable of being remedied by such
enforcement.
Assuming, however, that the complaint was not fundamentally wrong, the
settlement not only fails to remedy the harms identified in the complaint, but
inflicts harms and bestows benefits on consumers without regard to any merger
effects—and that is not what the Clayton Act requires.46
44 Entry and exit are not uncommon in the airline industry, so this list could be subject to change
or debate, but by any definition, the number of competitors is large.
45 See supra. See also John Kwoka, Kevin Hearle, and Phillippe Allepin, Segmented Competition
in Airlines: The Changing Roles of Low-Cost and Legacy Carriers in Fare Determination
(February 6, 2013), available at SSRN: http://ssrn.com/abstract=2212860 or
http://dx.doi.org/10.2139/ssrn.2212860, at 4-6, and generally.
46 Once again, with the possible exception of “inextricably intertwined” efficiencies.
25
First, as noted above, with perhaps a handful of exceptions the divestitures
do not address harms on routes where concentration is increased by the merger.
For example, a passenger formerly able to choose between AA and US in flying
between Charlotte and Miami will lose that choice with no new choice to replace
it. Thus, if the relevant markets are city-pairs, the remedy does not address the
harm alleged from the merger.
Second, if LCCs do not restrain coordination by legacy carriers,
divestiture of slots to LCCs will not address the increased coordination allegedly
caused by the merger. This is true both on the city-pair level (since the complaint
articulates no theory by which LCCs could constrain coordination on routes they
do not fly) and more generally. Neither the complaint, nor the CIS, nor the
DOJ’s response to the criticisms of the merger provide any argument explaining
how the divestitures would address coordination on capacity or service (and if
city-pairs are markets, there is no reason to think they would, except where LCCs
that acquire divested slots and facilities actually enter). To the contrary, by
arguing that LCCs cannot address such coordination now, the DOJ essentially has
ruled out any claim that enabling relatively modest expansion by some LCCs
(limited to flights to or from a handful of airports) could have any effect on the
alleged legacy airline coordination, at least in the foreseeable future.
Third, as commentators have noted, the remedy harms passengers who
likely would not have been harmed by the merger. Stripping the merged airline of
slots at DCA and LGA has resulted in the termination of service on less-profitable
routes that were served by either US or AA premerger, but not both. To the
extent those routes are relevant markets, passengers traveling them would not
have been affected by the merger. But the settlement has caused them to lose
service they previously enjoyed.
DOJ’s defense of its remedy increases the tension with the Clayton Act.
In essence, DOJ argues that it is threading a competitive needle that will allow it
to stitch together a superior industry structure sometime in the future. According
26
to DOJ, while it is true that the LCCs today or immediately post-remedy can
neither constrain legacy airline coordination nor prevent the vast majority of price
increases on particular city-pairs, the remedy will help them acquire the assets and
size to do so someday. And, in the meantime, the remedy will produce lower
prices on the routes the LCCs receiving slots choose to fly for the passengers who
choose to use those routes (and, potentially, for connecting itineraries involving
those routes).
The primary thrust of this remedy—setting the stage for more robust
future competition by strengthening selected competitors—seems quite
speculative. As complaint alleges, the LCCs are ill-suited to address the harms
alleged at any time in the near future. DOJ has not provided any timeline by
which its hoped-for industry reconfiguration will occur, or by which the LCCs
will achieve sufficient scale to challenge the legacy airlines in the arenas in which
the legacy airlines allegedly coordinate. Given Southwest’s size, it is unclear
what more DOJ might believe is needed, or even if it is attainable. The remedy
here, though, seems a Lilliputian step in that direction.47
Further, DOJ’s professed reasons for favoring LCCs amount to preferring
their current business models and hoping that they’ll continue to pursue them.
But nothing in the settlement requires any LCC to do so. Moreover, the
complaint provides some evidence that it is unlikely LCCs will ever constrain
alleged coordination among legacy airlines. The complaint alleges that the LCCs
cannot constrain the legacy airlines now because they do not offer the breadth of
service, nor engender the customer loyalty, that the legacy airlines provide with
their far-reaching hub-and-spoke networks. But that implies that in order to beat
the legacy airlines at this game, the LCCs will likely have to look more like
legacy carriers, at least to some extent. And, as some commentators have
observed, doing so would likely require the LCCs to change their structure—
which would change their costs, their business model, and might well be expected
47 See Relpromax Comments at 8 (comparing effects of divestiture on relative sizes of LCCs).
27
to cause them to behave like the legacy airlines allegedly do.48
If so, while the
number of competitors in various markets might expand—perhaps impeding
coordination—those additional competitors may not pursue the LCC business
model on which DOJ places considerable weight as an obstacle to coordination.
Finally, DOJ’s claim of benefits from the reduction of prices on routes the
LCCs choose to enter suffers from two problems. First, as noted above, those
benefits do not directly address either the alleged harms from the merger or the
harms inflicted by the remedy. Second, the hoped-for LCC price reductions
bestow benefits unrelated to the merger on passengers unaffected by the merger.
To illustrate this, consider the example DOJ provides of reduced prices on
Newark-Houston and Newark-St. Louis following the slot divestitures required in
UA/CO.49
While this is difficult to determine with certainty, it appears that prior
to acquiring Continental, United did not fly nonstop between Newark and either
Houston or St. Louis.50
Thus, while DOJ’s remedy may have benefited
passengers on those routes, they were not going to be harmed by the merger.
They simply received a windfall. Likewise, here passengers benefiting from
increased service between, say, DCA and Orlando will receive windfall benefits.51
Put differently, the professed benefits of the remedy are out-of-market benefits.
To summarize, DOJ’s complaint, remedy, and the Clayton Act seem
incompatible. If the complaint’s description of the relevant markets and
competitive harms is correct, the remedy does not appear to be directly related to
any alleged “substantial lessening of competition in any line of commerce” and
48 AAI Comments at 10; Delta Comments at 20-24, 26-28; Relpromax Comments at 8-9. There is
some evidence that this is already happening. AAI Comments at 8; see also Kwoka, Hearle, and
Alepin at 7-9.
49 CIS at 10.
50 UA may have flown this route via connections, but if airlines behaved then the way the DOJ
alleges they behave now, the UA connections would not have affected the pre-merger price, and
thus the merger likely would not have harmed passengers on those routes.
51 It is true that many of the passengers at issue may be the same people who would be harmed by
increased concentration on city pairs, and that might support DOJ’s approach to benefits. But
DOJ has not made this argument.
28
does not appear to correct any such lessening caused by the merger. Further, the
remedy appears to bestow benefits and inflict harms on consumers without any
connection to any such lessening of competition. The remedy here more closely
resembles a tax imposed on the transaction, the proceeds of which are then used
by the government to benefit particular preferred competitors in the hopes that
doing so will eventually make the market more competitive. This is a wide-
ranging endeavor that is very difficult to connect to antitrust law. If, on the other
hand, the complaint was fundamentally erroneous, then the justification for
imposing a remedy seems absent, and its connection to any kind of antitrust
theory obscure. Finally, under either scenario, the remedy seems to provide little
more than a hope that things may improve in the future, without any clear path to
that desired outcome.
There are two other possibilities. First, it could be that in airline mergers
there simply are no practical remedies for competitive harms from mergers, and
the best that can be done is to weigh total harms and benefits in deciding whether
to approve a merger. The DOJ hints at this in the CIS and its response to the
comments on the settlement. But if this is the correct reading of events, it would
be greatly beneficial if DOJ would be far more explicit on this point. DOJ’s
filings to date fail to describe the benefits that would offset the harms DOJ
continues to assert, and provides no means for industry participants, practitioners,
or the public to assess and weigh those harms and benefits. Further, this still
leaves unanswered the deeper question raised by DOJ’s remedies here. In the
past, the DOJ seems to have sought to block airline mergers when the aggregate
harms exceeded benefits (e.g., the proposed United/US Air merger, which the
United States sued to stop in 2001), or cleared them without conditions when the
reverse was true (e.g., Delta/Northwest). But here the DOJ has done something
different. It imposed remedies that harm some consumers and benefit others in
what could be an attempt to address the total welfare effect of the transaction,
without clearly explaining what it was doing. Whether DOJ’s approach was
correct is a serious issue that is difficult to assess absent more explanation from
DOJ.
29
Second, it is possible DOJ simply concluded it could not win the case and
took whatever remedy it could get. That often happens in litigation between
private parties with only their own economic interests to consider. But should the
DOJ engage in such a practice? Or should it either litigate and, if necessary,
lose—or simply drop cases that turn out to be unmeritorious? And, in any event,
if DOJ is simply extracting the most from what turned out to be a bad hand, it
would be beneficial to the public if it provided more information explaining that
that is what it was doing.
Conclusion
The DOJ’s challenge to the AA/US merger was comprehensive. It
described sweeping nationwide harms, as well as harms in an enormous array of
narrow antitrust markets. The settlement, however, leaves the alleged harms
largely unaddressed. It instead transfers assets from the merging firms to another
set of firms to facilitate the recipients’ development as future competitors. In so
doing, the remedy inflicts harms and bestows benefits on passengers that appear
unrelated to any merger effect. Whether this was in fact what DOJ intended is
unclear, but there is not enough information provided to conclude otherwise.
And, if that is what the settlement is intended to do, further public debate may be
merited on whether market engineering of this nature is an appropriate role for an
antitrust enforcer applying Section 7 of the Clayton Act, as opposed to an industry
regulator.
30
DEAD ON ARRIVAL: CAN EFFICIENCIES REVIVE AN OTHERWISE UNLAWFUL HOSPITAL MERGER IN COURT?
John Matthew Schwietz1
Efficiencies have come a long way with respect to their recognition in
merger analysis. Historically, courts have deliberately disregarded efficiencies or
treated them with hostility until it eventually became “economically irrational” to
do so.2 The increased recognition of efficiencies is also apparent in each
successive publication of the United States Department of Justice’s and Federal
Trade Commission’s (“Agencies”) Horizontal Merger Guidelines, which
progressively reflect the Agencies’ willingness to consider efficiencies during
merger review.3
A major concern when analyzing efficiencies is whether or not the merger
at hand will produce efficiencies that are likely to reverse its potential
anticompetitive effects.4 Courts use a “sliding scale” approach when balancing
claimed efficiencies against potential anticompetitive effects.5 This approach
requires that, if a merger’s potential harm is substantial, the parties must produce
“extraordinarily great cognizable efficiencies” to survive.6 The Agencies
specifically recognize that efficiencies in hospital merger context present both
1 John Matthew Schwietz is J.D. Candidate, University of Minnesota Law School (2014)
2 See Thomas B. Leary, Comm’r, FTC, Efficiencies & Antitrust: A Story of Ongoing Evolution,
Remarks at the ABA Section of Antitrust L., 2002 Fall Forum (Nov. 8, 2002), available at
http://www.ftc.gov/speeches/leary/efficienciesandantitrust.shtm) (hereinafter “Leary Remarks”)
(citing Williamson, Economics as an Antitrust Defense, 58 Am. Econ. Rev. 18 (1968).
3 See Leary Remarks.
4 Robert F. Leibenhuft, Asst. Dir., Bur. of Comp., FTC, Antitrust Enforc. & Hosp. Mergers: A
Closer Look, text of remarks before the Alliance for Health, Grand Rapids, Mich. (June 5, 1998)
(hereinafter “Leibenhuft Remarks”).
5 D. Daniel Sokol & James A. Fishkin, Antitrust Merger Efficiencies in the Shadow of the Law, 64
VAND. L. REV. 45, 47-48, 65 (2011) at 64 (hereinafter “S/F”) (citing id. at 720); see also Merger
Guidelines § 10.
6 S/F at 60-61 (citing Merger Guidelines § 10 (emphasis added)).
31
“ample reasons for skepticism” as well as unique opportunities.7 Perhaps the most
unique opportunities efficiencies offer in the context of hospital mergers are
patient care benefits that result from the consolidation of clinical services.8
Typically, efficiencies that yield short-term positive effects and pass savings on to
customers are given the most weight.9 Nevertheless, efficiencies have yet to
revive an otherwise unlawful merger in court.10
This is no longer the case merely
because courts continue to lack the utility to examine “difficult economic
problems.”11
Instead, parties’ often-claimed efficiencies are simply not merger-
specific and are “notoriously difficult to measure.”12
For litigators hoping to revive an otherwise unlawful merger in court, it is
important to note that efficiencies are typically the last factor courts consider.13
In
other words, some mergers may appear to have ended up in court dead on arrival,
requiring extraordinary efficiencies arguments to resuscitate the merger. Two
fairly recent cases broadly illustrate how litigators should (or perhaps, should not)
present efficiencies claims in court: FTC v. OSF Healthcare System, and FTC v.
ProMedica Health System, Inc.14
7 Id.; see Christine A. Varney, Comm’r, FTC, New Directions at FTC: Efficiency Justifications in
Hosp. Mergers & Vertical Integ’n. Concerns, text of remarks before Health Care Antitrust Forum
(May 2, 1995) (hereinafter “Varney Remarks”).
8 See Tenet, 186 F.3d at 1054.
9 Id. at 31 n. 15.
10 John Miles, Analyzing Hospital Mergers-Other Factors-Efficiencies, 3 HEALTH L. PRAC. GUIDE
§ 12:36 (2012). (citing ProMedica, 2011 WL 1219281 (citation omitted)).
11 See U.S. v. Topco Assoc’s., Inc., 405 U.S. 596, 609 (1972).
12 See id.; Miles (citing FTC v. Univ. Health, 938 F.2d 1206, 1223 (11th Cir. 1991)); FTC v.
Butterworth Health Corp., 946 F. Supp. 1285, 1301 (W.D. Mich. 1996).
13 Debra A. Valentine, Gen. Counsel, FTC, Health Care Mergers: Will We Get Efficiencies Claims
Right?, text of remarks before St. Louis Univ. Sch. of L. (Nov. 14, 1997) (hereinafter “Valentine
Remarks”); see Varney Remarks.
14 852 F. Supp.2d 1069 (N.D. Ill. 2012); 2011 WL 1219281 (N.D. Ohio).
32
Case Analysis I: The OSF Healthcare System Court’s Sliding Scale Required
OSF to Produce Substantial, Non-Speculative Efficiencies.
In the first case, OSF Healthcare System, the FTC challenged the
proposed merger-to-duopoly of St. Anthony Medical Center and Rockford
Memorial Hospital in Rockford, Illinois.15
They were separately owned and
operated by OSF Healthcare and RHS (hereinafter referred to as “OSF-RHS”).16
Through their negotiations, OSF agreed to acquire RHS’s assets; become its sole
corporate member; and combine operations to create a new health care system. 17
In OSF, the applicable primary product markets at issue were “general
acute care [(GAC)] inpatient services . . . sold to commercial health plans” and
“primary care physician services.”18
These markets included a “broad cluster” of
overnight hospital stays, surgical procedures, and emergency and internal
medicine services.19
The court defined the relevant geographic market as the area
within a “30 minute drive-time radius” from Rockford, Illinois.20
With respect to
patient admissions and patient days21
, the merger’s resulting HHI22
would have
increased 151 and 161 percent, respectively.23
In addition, the new health care
15 See OSF, 852 F. Supp.2d at 1069.
16See id. at 4.
17 Id. at 1072.
18 See id. at 1075-76.
19 Id.
20 See Tenet, 186 F.3d at 1052; id.
21 Def. of Patient Day, http://medical-dictionary.thefreedictionary.com/patient+day, (last viewed
May 17, 2013) (“Each day represents a unit of time during which the services of the institution or
facility are used by a patient).
22 See Def. of Herfindahl-Hirschman Index – HHI, http://www.investopedia.com/terms/h/hhi.asp
(last viewed May 15, 2013) (“A commonly accepted measure of market concentration[ that] is
calculated by squaring the market share of each firm competing in a market, and then summing the
resulting numbers. The closer a market is to being a monopoly, the higher the market's
concentration . . . .”)).
23 OSF, 852 F. Supp.2d at 1079.
33
system would have controlled 59 percent of the GAC market based on patient
admissions and 64 percent of that market based on patient days.24
The Court had “No Trouble” Finding the OSF and RHS Merger
Presumptively Unlawful.
Given the relevant markets at issue, the court had “no trouble” finding the
proposed merger to be presumptively illegal, as the market concentration
calculations “far surpass[ed]” the percentages that are regularly deemed illegal.25
To rebut the FTC’s case, OSF-RHS claimed its merger would result in substantial
efficiencies, including “recurring” and “one-time capital avoidance savings.”26
Specifically, OSF-RHS made five cost-savings claims, including:
(1) $15.4 million in “annual, recurring cost savings” from
clinical and operational consolidation;
(2) $114.1 million in avoiding one-time capital expenditures
for building a new bed tower at one of its locations;
(3) $6.4 million through avoiding the replacement of
outdated equipment and by purchasing a single, shared
surgical da Vinci Robot;
(4) $7 million based on the replacement cost of a trauma
helicopter; and
(5) $7.8 million per year by enhancing “clinical
effectiveness.”27
The merging parties also argued that their merger would lead to certain
community benefits for the Rockford area such as “improved quality of care” and
the development of “centers of excellence.”28
The purported “community
24 Id. at 1078.
25 Id. (citing U.S. v. Phila. Nat’l Bank, 374 U.S. 321, 363 (1963); Univ. Health, 938 F.2d at 1219
(holding that the FTC “clearly established a prima facie case of anticompetitive effect” when the
merged entity would control approximately 43 percent of the GAC market with three remaining
competitors)).
26 OSF, 852 F. Supp.2d at 1079, 1088-91.
27 Id.
28 OSF, 852 F. Supp.2d at 1093.
34
benefits” were alleged to increase the hospitals’ ability to attract specialists and
develop a residency program.29
With respect to OSF-RHS’s cost savings claims, the judge found that “a
substantial portion” of them were “overstated, . . . speculative, [and] inadequately
substantiated.”30
This finding was due in part to “conflicting expert testimony” on
the subject of efficiencies and the uncertainty surrounding “whether, and to what
extent, the proposed consolidations would” actually occur.31
The court also
summarily dismissed the consolidation arguments after OSF-RHS failed to offer
evidence (and failed to study) the consolidations’ feasibility, as OSF-RHS had no
“specific plans” for the consolidations to occur.32
The other examples of capital spending avoidance savings OSF-RHS
identified “suffer[ed] from similar infirmities.”33
Specifically, these claimed
savings were based solely on the success of service line consolidations, the scope
of which was uncertain.34
“[T]o the extent that the proposed savings [we]re
speculative or otherwise not cognizable, these secondary benefits [we]re likewise
speculative or not cognizable . . . .”35
As such, the projected savings were deemed
“too speculative” and the claimed efficiencies were deemed not cognizable.36
With respect to OSF-RHS’s “community benefits” arguments, the court
found that a merger was not necessary to implement graduate education programs
in Rockford.37
The hospitals could have simply implemented a joint-residency
29 Id.
30 Id.
31 Id.
32 Id. at 1090-91.
33 Id.
34 Id.
35 Id.
36 Id. at 1091-92.
37 Id.
35
program via partnerships to accomplish this goal.38
Under the sliding scale
approach, the court found that the private equities were too speculative to revive
the unlawful merger in court.39
Case Analysis II: The ProMedica Court Required ProMedica to Present
“Extraordinary Efficiencies.”
In the second case, FTC v. ProMedica Health System, Inc., the FTC
sought to enjoin ProMedica from further consolidating its operations with St.
Luke's Hospital in Ohio.40
At the time, ProMedica was a “dominant,” not-for-
profit integrated healthcare system that served Ohio’s Lucas County.41
This area
includes the City of Toledo and adjacent areas of southeastern Michigan.42
There,
ProMedica operated three GAC hospitals that offered inpatient obstetrics
services.43
Its market share from July 2009 to March 2010 accounted for nearly 50
percent of the GAC services patient days and 71.2 percent of obstetrics services
patient days. 44
Meanwhile, St. Luke's was a non-profit, low-cost, high-quality
GAC community hospital, located in southwestern Lucas County where it
provided a “full array” of GAC services.45
Like in OSF, this case also presented high market concentration levels.46
The relevant product markets at issue were a cluster of GAC inpatient services
sold to commercial health plans and “inpatient obstetrical services.”47
Also
similar to OSF, the ProMedica court found that the market shares and HHI levels
38 Id.
39 Id.
40 2011 WL 1219281 at 1 (N.D. Ohio).
41 Id. at 2.
42 Id.
43 Id. at 1-2.
44 Id. at 3.
45 Id.
46 Id. (citing Heinz, 246 F.3d at 721–22).
47 Id. at 55.
36
here “far exceed[ed]” those that regularly establish presumptive illegality.48
Accordingly, the burden to rebut the FTC’s prima facie evidence shifted to
ProMedica to present efficiencies that outweigh the merger’s anticompetitive
effect.49
In order to revive the merger in court, application of the sliding scale
required that the District Court find ProMedica’s efficiencies to be
“extraordinary,” which it did not.50
The Sliding Scale Approach Effectively Rendered ProMedica’s
Speculative Efficiencies Arguments Dead on Arrival.
To support its efficiencies claims, ProMedica produced an economic
report that represented an “initial plan,” based on “preliminary” estimates that
were “subject to further analysis, revision, and substantiation.”51
However, this
tentative sentiment from the report was merely illustrative of the several problems
ProMedica faced, making it improbable the court would ever tip the sliding scale
in its favor.
The first problem ProMedica encountered was that its purported
efficiencies were not clearly cognizable. For example, ProMedica argued that
certain revenue enhancements were efficiencies despite that they “merely shifted
revenue” among market participants and did not reduce costs or increase inputs.52
Also, the District Court described as “suspect” ProMedica’s capital cost
avoidance claims because ProMedica had no investment plans for the saved funds
that would pass savings onto customers.53
ProMedica also claimed that it might
avoid $100 million in construction and equipment costs for building a new
hospital at its “Arrowhead” location.54
However, this plan did not convince the
48 Id. at 56 (citing Heinz, 246 F. 3d at 716).
49 See Univ. Health, 938 F.2d at 1218.
50 ProMedica, 2011 WL 1219281 at 3 (citing Heinz, 246 F.3d at 721–22).
51 Id. (citation omitted) (emphasis added).
52 Id. at 36.
53 Id.
54 Id.”
37
court because, even though ProMedica “owned the Arrowhead land for a decade,”
it failed to take any recent steps consistent with its intent to build on the site.55
ProMedica also made several unsuccessful cost avoidance arguments and
its other claimed efficiencies were simply “speculative,” as “[v]irtually all of
the[m] contained the caveat that they ‘may’ be accomplished.”56
First, it claimed
it could avoid spending $30 million on constructing an additional bed tower.57
Second, it averred it could save St. Luke's between $7.6 and $15.6 million in
“information technology upgrade” costs.58
The District Court dismissed both
claims and described them as unsubstantiated because ProMedica’s pre-merger
strategic plans never included adding a bed tower in the “near future.”59
So the
avoided construction costs ProMedica pointed to were not costs that ProMedica
anticipated incurring before the merger.
Like in OSF, the District Court found that ProMedica’s arguments
regarding savings from consolidation were insufficient. Because ProMedica failed
to undertake any “detailed analysis” of its proposed clinical consolidations, its
$1.45 million in consolidation savings claims were “unsubstantiated.”60
Further,
when ProMedica claimed it could save $1.4 million through lowering post-merger
physician insurance coverage costs, it failed to compare those costs on an “apples
to apples” basis and based the calculation on a different, less robust type of
insurance coverage.61
Ultimately, the District Court found that ProMedica’s
efficiency claims were “unsubstantiated and speculative” because they lacked
55 Id.
56 Id. at 38 (citation omitted).
57 Id. at 37.
58 Id.
59 Id.
60 Id.
61 Id. at 38 (citation omitted).
38
detail about how prices the hospitals paid differ and “omitted analyses of
ProMedica's capacity to absorb St. Luke's volumes.”62
Several of ProMedica’s Claimed Efficiencies were Not Merger-
Specific.
In addition, several of ProMedica’s claims were simply deemed not
merger-specific. For example, the court noted that St. Luke’s could achieve a
“substantial amount” of the claimed efficiencies through affiliation with a
different Lucas County hospital.63
In fact, the court cited a then-recent St. Luke's
Board presentation that described several opportunities such an affiliation could
create, specifically noting that it could provide “endless” benefits and be just as
valuable as a partnership with ProMedica.64
In addition, ProMedica alleged that it
could save $4.5 million by closing a family practice residency program.65
The
District Court found that this claim was not merger-specific, as ProMedica could
have eliminated one of its residency programs on its own without the
acquisition.66
Likewise, the District Court found the information technology
upgrades claims to be largely overstated because ProMedica failed to account for
certain subsidies that could have “substantially lower[ed]” St. Luke’s overall costs
absent a merger.67
The final asserted revenue enhancement regarded the addition of St.
Luke's to the Paramount provider network.68
Here again, the District Court found
that the alleged efficiencies could be achieved without the acquisition because St.
Luke’s was already interested in participating in the network.69
Ultimately, the
62 Id. at 39.
63 Id.
64 Id.
65 Id. at 40.
66 Id.
67 Id.
68 Id.
69 Id.
39
court found that ProMedica failed to prove efficiencies that were: “(1) verifiable;
(2) not attributable to reduced output or quality; (3) merger-specific; and (4)
sufficient to outweigh the transaction's anticompetitive effects.”70
It Remains to be Seen Whether or Not Real, Cognizable Efficiencies
can Revive an Otherwise Unlawful Merger in Court.
Because the Agencies are charged with the important task of protecting
consumer welfare, it should be no surprise that the few cases that reach the courts
often go in the Agencies’ favor. As the above cases illustrate, efficiencies are
typically the last factor a court will consider in merger cases. This is especially
the case, as seen above, when parties merely rely on the the impressive-sounding
quantity of unsubstantiated arguments rather than making quality, substantiated
efficiencies arguments.
Practitioners should note that although OSF and ProMedica do not inspire
hope that courts will see efficiencies as a reason to permit an otherwise anti-
competitive hospital merger, the robust efficiencies discussions from these cases
signal that courts are willing to examine proffered efficiencies claims carefully.
Much of the uncertainty regarding efficiencies in these cases appear to be due to
the fact that the sliding scale significantly weighed in the Agencies’ favor and the
merging parties presented - at best - speculative efficiencies arguments. By the
time the court considered the arguments (regardless of their merit), it was likely a
case of too little, too late – the court had already formed the view that the merger
was anti-competitive, and only very concrete and credible efficiencies claims
would cause the court to reexamine that conclusion. The parties in these cases
failed to carry that heavy burden, by failing to take advantage of the unique
opportunities for efficiencies arguments that hospital mergers can present.
While prospective merging parties prepare for Agency challenges, they
must consider how best to develop evidence of efficiencies that the court is likely
70 Id. at 57 (citing Heinz, 246 F.3d at 721; Univ. Health Inc., 938 F.2d at 1223; see also Merger
Guidelines § 10.
40
to recognize. Merging parties should recognize that the courts will not consider
efficiencies are merely “promises about post-merger behavior.”71
Generally,
merging parties must substantiate and support their efficiencies claims to an
extent that allows a court to verify “by reasonable means (1) the[ir] likelihood and
magnitude . . ., (2) how and when each will be achieved (and the costs of doing
so), (3) how each will enhance the merged firm's ability and incentive to compete,
and (4) why each one is merger-specific.”72
If a hospital merger case does in fact
reach the courts, it would be wise to center these arguments around patient care
benefits, clinical services consolidations, and most importantly, short-term
positive effects regarding customer savings. In other words, merging parties must
demonstrate exactly where they will save money through consolidation and show
the court exactly how those savings will be passed on to patients.
Finally, if merging hospitals sufficiently bolster their efficiencies claims
with cognizable, non-speculative, merger-specific arguments during the
government merger investigation, the Agencies may be less likely to challenge the
mergers to begin with. After all, if any type of merger will breathe more life into
in-court efficiencies arguments, it appears likely that it will be in the hospital
context.
71 S/F at 64 (citing Heinz, 246 F.3d at 721).
72 Valentine Remarks.
41
NAVIGATING THE WEEDS OF FOREIGN INVESTMENT REVIEW: A CASE STUDY OF ARCHER DANIELS MIDLAND/GRAINCORP. AND BHP BILLITON/POTASH CORP.
Julie Soloway and Leah Noble1
“We want the Canadian economy to remain open to foreign direct investment.”2
– Canadian Prime Minister, Stephen Harper, November 8, 2013
“From today, I declare that Australia is under new management and that Australia is once
more open for business.” 3
– Australian Prime Minister, Tony Abbott, September 7, 2013
I. Introduction
Foreign investment review involves a complicated matrix of legal
considerations and, frequently, non-legal considerations. In Canada, the legal
considerations for evaluating whether a proposed investment is likely to be of net
benefit to Canada are set out in Section 20 of the Investment Canada Act
(“ICA”).4 In Australia, the legal considerations for evaluating whether a
1 Julie Soloway is a Partner and Leah Noble is an Associate in the Competition, Antitrust &
Foreign Investment group at Blake, Cassels & Graydon LLP, based in Toronto, Canada. The
views herein are those of the authors and not necessarily of Blakes or any of its clients. This paper
is provided for information purposes only. The information contained within it does not constitute
legal advice and may not be relied upon as legal advice or otherwise quoted or cited without the
express written consent of the authors.
2 Andrea Hopkins, Update 1- Canada PM: foolish for foreign investment rules to be too clear,
Reuters (Nov. 8, 2013), available at:
http://uk.mobile.reuters.com/article/euMergersNews/idUKL2N0IT1EK20131108?feedType=RSS
&feedName=euMergersNews.
3 BBC, Australia election: Tony Abbott defeats Kevin Rudd (Sept. 7, 2013), available at:
http://www.bbc.com/news/world-asia-24000133.
4 RSC 1985, c 28 (1st Supp). Section 20 includes a non-exhaustive list of considerations.
42
proposed investment is contrary to the national interest are set out in its Foreign
Investment Policy.5 Governments are frequently required to balance the economic
benefits of the proposed investment, its effect on international relations,
reciprocity, the government’s current industrial policies and national security,
among other considerations. Striking the appropriate balance is challenging.
Consequently, merging parties may perceive foreign investment review as
opaque and unduly influenced by politics, competing stakeholder interests, the
media, protectionist policies, and even xenophobia. In fact, in tough cases, the
foreign investment review process in Canada and Australia may appear dissimilar
from the law upon which it is based. Nowhere in the foreign investment review
laws and policies of either jurisdiction will you find references to non-legal
considerations, such as political optics, the timing of upcoming elections, media
perceptions, or popular opinion as factors in the review process. Yet, these are
weeds that have overtaken and obscured the well-bordered garden of legal factors
generally associated with foreign investment review, such as capital expenditures,
employment, and competition. Navigating these weeds strategically and
efficiently requires a combination of specialized expertise in planning and
executing the proposed investment as well as a clear understanding of the current
government’s policies and objectives.
Below we describe and compare two cases where proposed foreign
investments were rejected by host governments and how politics, competing
stakeholder interests and the media culminated to influence the foreign investment
review process: the Treasurer of Australia’s November 2013 decision to block
Archer Daniels Midland Co.’s (“ADM”) U.S. $2 billion takeover of GrainCorp.
Ltd. (“GrainCorp.”) and the Canadian Minister of Industry’s 2010 decision to
block the CAN $40 billion proposed acquisition by Anglo-Australian BHP
5 Government of Australia, Australia’s Foreign Investment Policy (2013), available at:
https://www.firb.gov.au/content/_downloads/AFIP_2013.pdf. The Foreign Investment Policy
includes a non-exhaustive list of considerations for evaluating whether the proposed investment is
contrary to national interest and it does not have express legislative force.
43
Billiton (“BHP”) of Potash Corporation of Saskatchewan (“PCS”). These cases
illustrate the complex matrix of legal and non-legal considerations that shape the
foreign review process. These cases are also reminders that governments can
exercise their authority to block foreign investments, even in jurisdictions that
generally seek to be perceived as welcoming and are reliant upon foreign capital.
Until recently, foreign investment review was not generally at the forefront when
planning a transaction. For instance, in Canada, the ICA was relatively dormant
for the first twenty years of its operation.6 However, over the last 5 years, foreign
investment review has become a critical element of a transaction involving a
foreign investor, whether the reviewing agency is in the U.S., Canada, Australia
or elsewhere.
II. Overview
a. ADM/GrainCorp.
On May 1, 2013, ADM announced that it intended to make a cash offer to
acquire the outstanding common shares of GrainCorp., Australia’s largest grain
handler.7 GrainCorp. has an expansive network of grain elevators in Australia,
including seven of ten bulk export grain elevators in eastern Australia. ADM is
one of the largest agricultural processors in the world. ADM’s rationale for the
transaction was to enable it to better meet global demand for crops and food,
particularly in Asia and the Middle East.
The proposed investment was subject to both competition and foreign
investment review. Competition review approval by the Australian Competition
and Consumer Commission (“ACCC”) was secured at the end of June, less than
two months after the transaction was announced. In forming its view that the
6 Brian A. Facey and Joshua A. Krane, Investment Canada Act: Commentary and Annotation,
2014 ed. (Markham: LexisNexis Canada Inc., 2013) at iv.
7 ADM currently holds 19.85% of GrainCorp.
44
proposed acquisition would be unlikely to substantially lessen competition, the
ACCC consulted with grain growers, industry bodies and competitors about the
likely effect of the proposed transaction. In contrast, GrainCorp.’s interactions
with Australia’s Foreign Investment Review Board (“FIRB”) and the Federal
Treasurer (the “Treasurer”), which administers the Foreign Acquisitions and
Takeovers Act 1975 (“FATA”), were more complex.
On October 4, 2013, the Treasurer announced that he had signed an
interim order under the FATA to extend the statutory time period to evaluate the
proposed investment.8 On November 26, 2013, ADM unveiled an extensive and
detailed package of additional undertakings related to the proposed investment.9
Three days later, the Treasurer announced that the proposed investment was
contrary to Australia’s national interest and he prohibited ADM’s proposed
investment in GrainCorp. The Treasurer advised that of the 131 significant
foreign investment applications that the FIRB has received since the election in
September 2013, this is the only one that has been prohibited.10
b. BHP/PCS
On August 18, 2010, BHP announced an all-cash hostile bid to acquire
PCS.11
At the time, PCS was the world’s largest integrated fertilizer company as
8 The order extended the statutory deadline for review to 90 days. The standard for review in
Australia is generally 30 days.
9 Press Release, ADM Announces Package of Enhanced Commitments for GrainCorp Acquisition
(Nov. 26, 2013), available at:
http://origin.adm.com/news/_layouts/PressReleaseDetail.aspx?ID=550. Key undertakings
included: an additional $200 million investment to strengthen Australian agricultural
infrastructure, with specific emphasis on rail enhancement projects; price caps on grain handling
charges at silos and ports; commitment to grain infrastructure access for growers and third parties;
commitment to “open access” regime for port services; a grower and community advisory board
with representation from New South Wales, Victoria and Queensland, as well as regular public
grower consultation; and support for expanded grain stocks information arrangements.
10 Press Release, Foreign investment application: Archer Daniels Midland Company’s proposed
acquisition of GrainCorp Limited (Nov. 29, 2013), available at:
http://jbh.ministers.treasury.gov.au/media-release/026-2013/. [Treasurer Hockey].
11 Press Release, BHP Billiton Announces All-Cash Offer to Acquire PotashCorp (Aug. 18, 2010),
available at:
45
well as the largest producer of potash worldwide by capacity. BHP was a large
diversified natural resources company with significant holdings in commodity
businesses including aluminum, energy coal and metallurgical coal, and silver. It
also had substantial interests in oil, gas, liquefied natural gas and diamonds.
On November 3, 2010, the Canadian Minister of Industry announced that
he was not satisfied that BHP’s offer to acquire all of the outstanding common
shares of PCS was likely to be of net benefit to Canada.12
At the time, the
Minister advised that BHP had 30 days to make further representations and
undertakings. The following day, the Competition Bureau of Canada announced
it had cleared the transaction.13
On November 15, 2010, BHP withdrew its offer
to acquire PCS.14
Despite BHP’s offer of unprecedented undertakings,15
BHP
http://www.bhpbilliton.com/home/investors/news/Pages/Articles/BHP%20Billiton%20Announces
%20All-Cash%20Offer%20To%20Acquire%20PotashCorp.aspx.
12 Press Release, Minister of Industry Confirms Notice Sent to BHP Billiton Regarding Proposed
Acquisition of Potash Corporation (Nov. 3, 2010), available at:
http://www.ic.gc.ca/eic/site/064.nsf/eng/06031.html.
13 Bill Koenig and Simon Casey, BHP Says No Action From Canadian Competition Bureau,
Bloomberg (Nov. 5, 2010), available at: http://www.bloomberg.com/news/2010-11-05/bhp-
reports-no-action-letter-from-canadian-competition-bureau.html.
14 Press Release, BHP Billiton Withdraws Its Offer to Acquire PotashCorp and Reactivates Its
Buy-back Program (Nov. 15, 2010), available at:
http://www.bhpbilliton.com/home/investors/news/Pages/Articles/BHP%20Billiton%20Withdraws
%20Its%20Offer%20To%20Acquire%20PotashCorp%20And%20Reactivates%20Its%20Buy-
back%20Program.aspx.
15 BHP’s proposed undertakings included: a US $450 million commitment to exploration and
development over 5 years that were over and above commitments to spending that were previously
made regarding development of the Jansen greenfield potash project; an additional US $370
million commitment to invest in infrastructure funds in the Provinces of Saskatchewan and New
Brunswick; an application for a listing on the Toronto Stock Exchange; foregone tax benefits,
which BHP was legally entitled to; relocation to Saskatchewan and Vancouver of over 200
additional jobs from outside Canada; and maintenance of operating employment at PotashCorp’s
Canadian mines at current levels for five years, which would have increased overall employment
at the combined Canadian potash businesses by 15% over the same period. BHP also made a
number of additional undertakings in relation to Saskatchewanian and Canadian participation in
senior management roles within the combined potash business, within a new Potash Advisory
Board and also on the Board of BHP Billiton. For further details see, Press Release, BHP Billiton
Withdraws Its Offer to Acquire PotashCorp and Reactivates Its Buy-Back Program (Nov. 15,
2010), available at:
http://www.bhpbilliton.com/home/investors/news/Pages/Articles/BHP%20Billiton%20Withdraws
46
determined that the condition of its offer relating to receipt of a net benefit
determination by the Minister of Industry under the ICA could not be satisfied.
III. The Juggling Act: Balancing Competing Political and Stakeholder
Interests During High-Profile Foreign Investment Reviews
Governments often are required to navigate and balance political and
stakeholder interests during a foreign investment review. Political interests may
be compounded when the local government is not in a majority position16
and
voter support is potentially at stake. Balancing competing stakeholder interests is
even more challenging when the media becomes a forum for stakeholders to
recast the proposed investment. ADM/GrainCorp. and BHP/PCS both illustrate
how governments grappled with balancing competing political and stakeholder
interests under the spotlight of the media during high-profile foreign investment
reviews. Each transaction is discussed in turn below.
%20Its%20Offer%20To%20Acquire%20PotashCorp%20And%20Reactivates%20Its%20Buy-
back%20Program.aspx. BHP also identified potential undertakings in its offer announcement,
see: Press Release, BHP Billiton Announces All-Cash Offer To Acquire PotashCorp (Aug. 18
2010), available at:
http://www.bhpbilliton.com/home/investors/news/Pages/Articles/BHP%20Billiton%20Announces
%20All-Cash%20Offer%20To%20Acquire%20PotashCorp.aspx.
16 Canada and Australia’s system of government is a parliamentary democracy. In an election,
constituents vote for individuals to represent their electoral district in the House of Commons.
The party with the majority of seats in the House of Commons is asked by the Governor General
to form the government, and the leader of that party becomes the Prime Minister. The party
opposed to the government is called the spposition, with the largest of these parties being the
“official” opposition. In a minority government, a political party or a coalition of parties do not
have the majority of seats to form a government, but rather receive the support of outside parties to
meet the required majority votes. Generally, a minority government tends to be less stable
because the opposition party can overturn the government with a vote of no confidence. A vote of
no confidence is a parliamentary motion that demonstrates that the elected parliament no longer
has confidence in the appointed government. With a no confidence vote, the government must
either resign or ask the Governor General to dissolve the Parliament and call an election. For
further details see, Robert Marleau and Camille Montpetit, Parliamentary Institutions, House of
Commons Procedure and Practice (Jan. 2000), available at:
http://www.parl.gc.ca/marleaumontpetit/DocumentViewer.aspx?Sec=Ch01&Seq=2&Language=E
; see also: Australian Government, Department of Foreign Affairs and Trade, Australia’s system
of government (Feb. 2008), available at: https://www.dfat.gov.au/facts/sys_gov.html.
47
a. ADM/GrainCorp.
In September 2013, Australia’s opposition defeated the governing Labour
Party in a general election that returned a coalition of the Liberal Party and
National Party to power for the first time in six years. On election night, the
incoming Prime Minister and Liberal Party Leader exuberantly declared that,
“Australia is under new management and that Australia is once more open for
business.”17
Despite this statement, the Liberal Party’s coalition partner, the
National Party, vigorously opposed the proposed investment. As such, the Liberal
Party was challenged with trying to maintain credibility, while simultaneously
appeasing its coalition partner. During the foreign investment review, the Labour
Party made statements in the media to highlight the division in the Liberal Party
and National Party coalition.18
After the Treasurer’s announcement to block the
proposed investment, the Labour Party Treasury spokesman criticized the
Treasurer.19
Other commentators have observed the political nature of the foreign
investment review process in Australia.20
Many Australian farmers also vigorously opposed the proposed
investment.21 In eastern Australia, approximately 85% of Australia’s bulk grain
17 BBC, Australia election: Tony Abbott defeats Kevin Rudd, (Sept. 7, 2013), available at:
http://www.bbc.com/news/world-asia-24000133.
18 Linda Botterill, Libs vs Nats: GrainCorp stoush shows cracks run deep in the Coalition, The
Conversation (Nov. 18 2013), available at: http://theconversation.com/libs-vs-nats-graincorp-
stoush-shows-cracks-run-deep-in-the-coalition-20102; see also: Peter Ryan, ADM confident of
GrainCorp takeover despite division among Coalition MPs, ABC (Nov. 11, 2013), available at:
http://theconversation.com/libs-vs-nats-graincorp-stoush-shows-cracks-run-deep-in-the-coalition-
20102.
19 Government rejection of GrainCorp takeover by US company Archer Daniels Midland ‘weak’,
Opposition says, ABC (Nov. 29, 2013), available at: http://www.abc.net.au/news/2013-11-
29/federal-government-rejects-foreign-takeover-of-graincorp/5124262.
20 Greg Golding, Australia’s Experience with Foreign Direct Investment by State Controlled
Entities: A Move Towards Xenophobia or Greater Openness?, 37 Seattle U.L. Rev. 533 (2014),
available at:
http://digitalcommons.law.seattleu.edu/cgi/viewcontent.cgi?article=2214&context=sulr.
21 Peter McCutcheon, GrainCorp. takeover bid: Abbott Government tested as farmers voice
opposition to sale to ADM, ABC (Oct. 10, 2013), available at: http://www.abc.net.au/news/2013-
10-09/graincopr-takeover-abbott-government/5012256.
48
exports are handled through GrainCorp.’s ports network.22 Many Australian
farmers rely on GrainCorp.’s infrastructure and expressed concern about losing
guaranteed access to these ports.23
Further, the National Party’s base has
historically been rural Australia, which is home to many farmers. Therefore, the
National Party had an incentive to side with the farmers and oppose the proposed
investment.
On certain occasions, ADM/GrainCorp. was recast in the media to
threaten Australia’s food security. For instance, the Deputy Prime Minister and
leader of the rural-based National Party, said that it was “very important for
Australia to maintain control of its own food security.” The Deputy Prime
Minister also stated that ADM’s proposed investment raised questions about
Australia’s capacity to make decisions about whether Australia wants to expand
its grain industry and “whether [Australia] want[s] to be the food bowl of Asia.”
These headline grabbing sound bites can influence the public’s perception of the
proposed investment and distract from the more substantive issues.
In the Treasurer’s announcement to block the proposed investment, he
acknowledged that the concerns of stakeholders factored into his decision.24 He
also noted that allowing the proposed investment to proceed, “could risk
undermining public support for the foreign investment regime and ongoing
foreign investment more generally.”25 The Treasurer also acknowledged that
ADM/GrainCorp. had been one of the most complex cases to come before the
FIRB.26
22 Treasurer Hockey, supra note 10.
23 Peter Lewis, Farmers worried ADM’s planned GrainCorp takeover could cut access to shipping
and storage facilities, ABC (Nov. 20, 2013), available at: http://www.abc.net.au/news/2013-11-
20/logistics-concerns-over-graincorp/5104280.
24 Treasurer Hockey, supra note 10.
25 See id.
26 See id.
49
b. BHP/PotashCorp.
As a minority government with a potential Federal election looming, the
Conservative Party of Canada experienced similar internal strife and challenges
balancing stakeholder interests during its review of the BHP/PCS transaction.
The Conservative Party has historically had a strong base in Western Canada,
including the Province of Saskatchewan. The Premier of Saskatchewan is a
member of the Conservative Party and was the most vocal opponent of the
transaction. Some of the thirteen Conservative Party Members of Parliament that
were from Saskatchewan also opposed the proposed investment. There was a
financial incentive for the Province of Saskatchewan to oppose the proposed
investment because PCS is an important source of tax revenue for the Province.27
BHP offered to make commitments to remedy the tax loss concerns.28
At the time, the Prime Minister was known for supporting international
trade and he initially appeared to support the proposed investment. However, if
BHP’s proposed investment was approved, the Prime Minister risked alienating
the Conservative Party’s Western Canadian base and some of his Cabinet
Members. Moreover, the Conservative Party may have recognized that it could
not afford to lose voter support, especially given its minority government status
and the possibility of an election. Consequently, the Prime Minister became
increasingly vocal against the transaction.
The Premier leveraged the media to effectively gain momentum for his
position and even appeared to sway the Canadian Prime Minister.29
For example,
27 Brenda Bouw and Steven Chase, Block Potash Corp. takeover, Saskatchewan to tell Ottawa,
The Globe and Mail (Oct. 19, 2010), available at: http://www.theglobeandmail.com/globe-
investor/block-potash-corp-takeover-saskatchewan-to-tell-ottawa/article1215260/#.
28 Press Release, BHP Billiton statement regarding comments by the Government of
Saskatchewan (Oct. 20, 2010), available at:
http://www.bhpbilliton.com/home/investors/news/Pages/Articles/BHP%20Billiton%20statement%
20regarding%20comments%20by%20the%20Government%20of%20Saskatchewan.aspx.
29 Nathan Vanderklippe, How Brad Wall turned public opinion against the Potash deal, The Globe
and Mail (Nov. 4, 2010), available at: http://www.theglobeandmail.com/news/politics/how-brad-
wall-turned-public-opinion-against-the-potash-deal/article1241327/ [Brad Wall and the Media].
50
the Premier and the Government of Saskatchewan engaged The Conference Board
of Canada (the “Conference Board”) to study the risks and opportunities related to
BHP’s hostile bid for PCS.30
The Conference Board found that the proposed
investment presented few negative takeover effects, except for the potential for
the Province of Saskatchewan to lose several billion dollars in tax revenue.31
The
Premier used the findings to bolster his position. The Premier was often quoted in
the media and relentlessly lobbied the Canadian Government to build support to
oppose the transaction. After the Minister of Industry announced that the
proposed investment was not approved, the Premier declared that, “[i]t was a very
important day for the country and for the province.”32
As in ADM/GrainCorp., there were vocal stakeholders that attempted to
intervene in the BHP/PCS foreign investment review process. For instance, First
Nations leaders reportedly asked to participate in discussions with the
Government of Canada regarding the proposed investment.33 At one point, First
Nations leaders even reportedly began collaborating with merchant banks,
pension funds and Chinese investors to prepare a multibillion-dollar competing
bid for PCS.34 PCS shareholders also opposed BHP’s bid. In particular, one
significant shareholder, who was known has an activist investor, publicly
30 Saskatchewan in the Spotlight: Acquisition of Potash Corporation of Saskatchewan Inc. – Risks
and Opportunities, The Conference Board of Canada (Oct. 1, 2010), available at:
http://www.gov.sk.ca/adx/aspx/adxGetMedia.aspx?mediaId=1245&PN=Shared.
31 See id.
32 Brad Wall and the Media, supra note 29.
33 The Federation of Saskatchewan Indian Nations and the Aboriginal Potash Group Look to
Enforce Their Right to be Consulted Regarding Hostile Bid for Potash Corporation of
Saskatchewan, MarketWired (Oct. 29, 2010), available at: http://www.marketwired.com/press-
release/federation-saskatchewan-indian-nations-aboriginal-potash-group-look-enforce-their-right-
1344182.htm. The Federation of Saskatchewan Indian Nations and the Aboriginal Potash Group
filed a notice with Industry Canada, which oversees the Canadian foreign investment review
regime, regarding the duty of the Canadian Government to consult with First Nations in respect of
any decision regarding the transfer of control of the properties of PCS that could in any way affect
the First Nation’s historical rights and interests with respect to their traditional territories.
34 Edward Welsch, The Secret $25 Billion Rival Bid For Potash Corp. (Nov. 16, 2010), available
at: http://blogs.wsj.com/deals/2010/11/16/the-secret-25-billion-rival-bid-for-potash-corp/.
51
criticized BHP’s bid as being too low.35 The offer price also created difficulties
securing support from PCS’s Board of Directors.36 Further, PCS published its
“Pledge to Saskatchewan”, which effectively was a set of undertakings of its own
to sway public support and make BHP increase its commitments.37
ADM/GrainCorp. and BHP/PCS illustrate how political and stakeholder
interests can influence foreign investment reviews, the complexity of the foreign
investment review process and the challenges that local governments and foreign
investors encounter when navigating competing interests. It is preferable to
identify political and stakeholder interests as early as possible and work with
stakeholders to secure approval. These challenges are compounded when the
media becomes involved. In particular, transactions involving state-owned-
enterprises and national champions tend to attract an even higher degree of media
attention. Experienced legal counsel will be able to identify when transactions are
likely to attract media attention and plan a merger strategy that accounts for such
attention.
c. Reflections
Since the fall of 2010, the fertilizer industry has undergone substantial
change. Russian potash producer Uralkali announced in July 2013 that it was
dissolving its potash export cartel with Belarusian state-owned Belaruskali, and
world potash prices dropped.38 Consequently, share prices of major North
American potash producers such as PCS dropped. PCS is part of the Canpotex
35 Kill BHP bid for PotashCorp: Jarislowsky, CBC News (Oct. 15, 2010), available at:
http://www.cbc.ca/news/business/kill-bhp-bid-for-potashcorp-jarislowsky-1.900196.
36 Press Release, PotashCorp’s Board of Directors Rejects BHP Billiton’s Unsolicited, Non-
Binding Proposal as Grossly Inadequate (Aug. 17, 2010), available at:
http://www.potashcorp.com/news/990/; see also: Press Release, PotashCorp Adopts Shareholder
Rights Plan (Aug. 17, 2010), available at: http://www.potashcorp.com/news/991/.
37 Press Release, PotashCorp’s “Pledge to Saskatchewan” (Oct. 13, 2010), available at:
http://www.potashcorp.com/news/1009/.
38 Emiko Teazono, Cartel break-up reshapes fertilizer market, Financial Times (Oct. 2, 2013),
available at: http://www.ft.com/intl/cms/s/0/6b87c14c-2b80-11e3-bfe2-
00144feab7de.html#axzz2vD8tn8cx.
52
export cartel with Mosaic and Agrium. Canpotex and Belarusian Potash Co., the
Uralkali/Belaruskali cartel, have traditionally set identical prices.39
In December 2013, PCS announced that it was cutting 18% of its
workforce because of weakening demand.40 Almost three years earlier, BHP had
made unprecedented commitments to the Canadian government in connection
with its proposed investment in PCS, which included undertakings to relocate 200
additional jobs from outside Canada to Saskatchewan and Vancouver and
maintaining operating employment at PCS’s Canadian mines at current levels for
five years.41
These undertakings would have increased overall employment at the
combined Canadian potash businesses by 15% until 2015. These considerations
beg the question, was blocking BHP’s bid to acquire PCS actually of net benefit
to Canada?
Time will determine if similar issues will be raised with respect to
ADM/GrainCorp. The Treasurer has acknowledged that Australia requires
foreign investment to grow and that Australia will continue to welcome and
support foreign investment that is not contrary to its national interest.42 This
sentiment was echoed shortly thereafter by the Prime Minister of Australia.43
39 Bertrand Marotte, Russia pulls out of cartel, potash prices plunge, BNN (July 30, 2013),
available at: http://www.bnn.ca/News/2013/7/30/Potash-plunges-as-Russia-quits-cartel.aspx.
40 Peter Koven, Potash Corp slashes 18% of its workforce because of weak demand, Financial Post
(3 December 2013), available at: http://business.financialpost.com/2013/12/03/potash-corp-
slashes-18-of-its-workforce-as-demand-weakens/.
41 Press Release, BHP Billiton Withdraws Its Offer to Acquire PotashCorp and Reactivates Its
Buy-back Program (Nov. 15, 2010), available at:
http://www.bhpbilliton.com/home/investors/news/Pages/Articles/BHP%20Billiton%20Withdraws
%20Its%20Offer%20To%20Acquire%20PotashCorp%20And%20Reactivates%20Its%20Buy-
back%20Program.aspx.
42 Treasurer Hockey, supra note 10.
43 Tim Binsted, Philip Coorey and Joanna Heath, Abbott backs Hockey as GrainCorp shares
plummet, Financial Review (Nov. 29, 2013), available at:
http://www.afr.com/p/business/companies/abbott_backs_hockey_as_graincorp_NCmrWeaJLbeHe
yOUlfPyXP.
53
However, despite these reassurances, the Australian dollar temporarily fell to a
2.5 month low following the Treasurer’s announcement.44
IV. Navigating Foreign Investment Transactions45
Negotiating the terms of a transaction involving a foreign purchaser
requires an appreciation of the nature and type of risks that frequently arise under
the applicable foreign investment review regime so that the parties to the
transaction may apportion such risks in a conscious and deliberate manner. Risk-
allocation strategies will vary from transaction to transaction and from jurisdiction
to jurisdiction. The foreign investment review regimes in each jurisdiction are
country-specific and nuanced.
Merger agreements ordinarily contemplate the degree of effort that the
purchaser is required to exert to secure foreign investment review approval.
Often securing such approval requires the foreign investor to provide
undertakings to the local government. Given the open-ended nature of potential
undertakings with a foreign government, transaction agreements need to delineate
the boundaries of the purchaser’s obligation to provide undertakings. The parties
must consider whether to insert a clause providing that foreign investment
approval must be granted on terms and conditions satisfactory to the buyer “acting
reasonably” or whether something more is required, up to a condition requiring
the purchaser to accept any terms required to get a deal done. Furthermore,
parties to transaction agreements must consider whether to provide a reverse
break fee compensating the target in the event that the purchaser fails to obtain
foreign investment review approval.
44 Jason Scott and Elisabeth Behrmann, ADM’s $2 Billion GrainCorp Takeover Bid Blocked by
Australia, Bloomberg Businessweek (Nov. 29, 2013), available at:
http://www.businessweek.com/news/2013-11-28/australian-treasurer-hockey-rejects-adm-
takeover-of-graincorp.
45 Julie Soloway and Charles Layton, Foreign Investment Review in Canada: Assessing Risk in
the Wake of Nexen, Competition Policy International, Antitrust Chronicle, Vol. 4, No. 2, Spring
2013. This section incorporates part of this paper with the permission of the authors.
54
Covenants typically address the level of cooperation that will occur
between the parties in furtherance of securing foreign investment review
approval, or more particularly, the degree to which the vendor can oversee the
negotiation process. Such covenants will address the target’s ability to review and
comment on foreign investment review filings, draft undertakings, and other
submissions to a foreign investment review authority. Covenants may also
determine whether the target is permitted to attend meetings with the regulator.
The risk-allocation considerations outlined above are often the subject of
hard bargaining between the parties negotiating an agreement. The specific
approach to allocating risk is always the product of the dynamics underlying each
particular transaction. Legal counsel familiar with the particulars of the
governing foreign investment review regime and local government should be
involved as early as possible to strategically plan and execute the foreign
investment and merger review processes.
V. Conclusion
ADM/GrainCorp. and BHP/PCS illustrate the complicated matrix of legal
considerations and, non-legal considerations involved in a foreign investment
review. In both instances, the local government struggled with striking a balance
among competing stakeholder interests. These cases illustrate that foreign
investment reviews have the potential to become tangled in the weeds of non-
legal considerations, which may overtake and obscure the well-bordered garden
of legal factors generally associated with foreign investment review. Navigating
these weeds strategically and efficiently requires a combination of specialized
expertise in planning and executing the proposed investment as well as a clear
understanding of the current government’s policies and objectives.
55
THE EU MERGER SIMPLIFICATION PACKAGE: WHAT'S NEW AND WHAT ARE THE CONSEQUENCES?
Gavin Bushell and Luca Montani1
On December 5, 2013, the European Commission (the "Commission")
adopted a new merger filing regime - effective January 1, 2014 - under a "Merger
Control Simplification Package", comprising a new implementing regulation and
amended merger notification and referral forms.2
Though billed as reducing the administrative burden - particularly for non-
problematic deals - a careful read of the fine print shows the information burden
may increase, potentially dramatically in some cases.
Speed-read summary:
• The "Simplified Procedure" merger review category expands:
deals involving competitors with low combined market shares (under 20%) or
small increments in share (under 50% combined share with a de minimis
increment) and/or no threat of input foreclosure (upstream/downstream market
shares under 30%) qualify for the Simplified Procedure and need only submit a
"Short Form CO" notification.
• Joint ventures: deals involving joint ventures outside of the
European Union (which can be notifiable in the EU because the parents meet the
EU revenue thresholds, even if their joint venture's business has zero impact in
Europe) qualify for a "Super-Simplified Procedure". Other deals with no overlaps
can also benefit from this new process.
1 Gavin Bushell is a Partner in the European Competition Law Practice of Baker & McKenzie in
Brussels. Luca Montani is a paralegal in the same practice. For more information, see
http://www.bakermckenzie.com/Belgium/EuropeanCompetitionLawPractice/.
2 Commission Implementing Regulation 1269/2013, 2013 O.J. (L 336) 1 [hereinafter
Simplification Package].
56
• Mandatory submission of documents going back years before the
deal: the document burden increases. Deal-related internal documents must now
be submitted even with Short Form CO filings except if there are no market
overlaps or the joint venture has no activities in the EEA. For long-form filings,
market related reports for the last two years plus any analysis of both the
transaction filed, and any alternative transactions considered, must be submitted.
• "All plausible" markets: the data burden also increases. The forms
- both the standard Form CO and the Short Form CO - now require that data be
collected and presented to correspond to "all plausible" product and geographic
market definitions based on previous Commission and Court precedents as well as
the bases of industry reports.
If your company or your clients are contemplating a deal that may trigger
a filing at the European Union level, these changes will need to be taken into
account. Be ever mindful of the data and document disclosure requirements, and
ensure that you have appropriate document creation guidelines in place so that
your or your client's internal documents do not create any "hostages to fortune".
Background: the European Union Merger Regulation ("EUMR")
Since 1990, merger control across the European Union has been regulated
by the Commission.3 Any transaction meeting the relevant criteria
4 of the EUMR
3 Since 2004, the EUMR regime has been governed by Regulation 139/2004 on the control of
concentrations between undertakings. See Council Regulation 139/2004, 2004 O.J. (L 24) 1.
4The transaction must constitute concentration (an acquisition of control on a lasting basis arising
from either a merger, an acquisition or the creation of a joint venture performing on a lasting basis
all the functions of an autonomous economic entity) having a Community dimension. See id. arts.
1, 3. The EUMR applies if the relevant thresholds are met, irrespective of any substantive effects
the concentration may have on European competition. Id. art. 1. If the EUMR does not apply,
merging parties must consider the application of national merger control law. See id. art. 4(5).
57
cannot be implemented until it has been notified to, and approved by, the
Commission.5
If a filing is required, the parties are encouraged by best practice to engage
in "pre-notification" talks with the Commission to discuss the transaction and the
draft notification with the case team before submitting a formal notification
(thereby starting the statutory merger timetable). Pre-notification discussions
allow the parties and the Commission to confirm whether a Simplified Procedure
is applicable.
Since 1994, the notifying parties have had the possibility of submitting a
Short Form CO to the Commission in conditions meriting a Simplified Procedure.
These conditions were originally set out in a formal notice from the Commission
in 2004.6 The benefits of the Simplified Procedure include a less intensive data
disclosure burden, an absence of market testing and the prospect of obtaining
clearance from the Commission promptly within the 25 working day deadline of
Phase I (in some cases clearances have been obtained on working days 18-22).
Cases that do not meet the criteria of the Simplified Procedure must be filed using
the normal Form CO and follow the normal procedure.7
The Merger Control Simplification Package (the "Package")
The Commission's intention in adopting the Package is to reduce the
burden on companies by "cutting red tape". Previously in the years through to
2013, approximately 60% of all notified cases to the Commission were made on
the basis of a Simplified Procedure (in 2013, of the 277 notified cases, 166 were
handled under the Simplified Procedure). The Commission hopes that the
5 A fine of up to 10% of the aggregate worldwide turnover of the party(ies), on which the filing
obligation rests, may be imposed for failing to notify the concentration, implementing a
concentration in breach of the standstill provision, or for implementing a transaction in breach of a
prohibition decision. Id. art. 14(2).
6 See Commission Regulation 802/2004, Annex II, pmbl. 1.1 2004 O.J. (L 133) 1, 22.
7 See id. art. 1.2, at 23.
58
proposed changes will increase this percentage to 70%, allowing more
transactions to benefit from a shorter and less burdensome procedure. The
Commission also suggests that notifying parties will benefit from a reduction in
lawyers' fees and the amount in-house work prior to the notification.8
Expansion of the Simplified Procedure to more cases
The EUMR previously allowed for the Simplified Procedure only in four
scenarios:
Firstly, in the case of a joint venture, which has no, or negligible actual
of foreseen activities within the European Economic Area (EEA)
(where the value of the turnover and the assets transferred to the joint
venture is below €100 million in the EEA).9
Secondly, in the case where there are no horizontal or vertical overlaps
between the parties to the transaction.
Thirdly, in the case where there are overlaps between the parties to the
transaction but the combined horizontal market shares are no more
than 15% and the market shares of the parties in vertically related
markets are no more than 25%.
Finally, where a party acquires sole control of an undertaking over
which it already had joint control.10
The Package's principal change is to increase the level of the
shareholdings in the third limb above by 5% (to 20% for horizontal overlaps and
30% for vertical overlaps).11
Additionally, the Package has also introduced a
8 See Press Release, Eur. Comm’n, Mergers: Commission Adopts Package Simplifying
Procedures under the EU Merger Regulation—Frequently Asked Questions (Dec. 5, 2013),
available at http://europa.eu/rapid/press-release_MEMO-13-1098_en.htm.
9 The EEA comprises the 28 Member States of the European Union plus Norway, Iceland and
Liechtenstein. See Agreement on the European Economic Area art. 128, May 2, 1992, 1994 O.J.
(L 1) 3, 30 (entered into force Jan. 1, 1994).
10 Commission Regulation 802/2004, supra note 6, Annex II, pmbl. 1.1.
11 Simplification Package, supra note 2, Annex II, pmbl. 1.1.
59
"safe harbour" for transactions involving a minor increment. Therefore,
transactions may also benefit from the Simplified Procedure where the horizontal
market share threshold is exceeded but where the parties' combined market share
is less than 50% and the Herfindahl–Hirschman Index ("HHI") delta is less than
150.12
These changes will allow more cases to benefit from the Simplified
Procedure.
Interestingly, a "Super-Simplified Procedure" has been introduced for
joint ventures that are active entirely outside the EEA and where there are no
overlaps between the parties (either horizontally or vertically). In such cases, the
parties may avoid the pre-notification discussions (and the two-to-three weeks
they can take) and proceed to formally file a Short Form CO to the Commission
together with a case allocation form (and without supplying any detailed market
data or internal documents). Based on 2008-2010 figures, the Commission
estimates that around 25% of all cases may be lodged without pre-notification
contacts.13
However, it should be noted that the Commission may revert to the
standard Form CO when it is difficult to define the market or the parties' market
shares, or when the "concentrations involve novel legal issues of a general
interest"14
or constitute "situations which exceptionally require a closer
investigation".15
Such situations may arise if one of the parties involved is a new
or potential entrant or an important patent holder, of if the market is already
concentrated or has barriers to entry, or the parties are active in closely related
12 Id. at 19. The Commission often applies the well-established Herfindahl-Hirschman index as a
measure of concentration. It is calculated by summing the squares of the individual market shares
of all the firms in the market. It gives proportionately larger weight to larger firms in the market.
The Commission considers that the change in HHI resulting from a merger (the difference
between the pre- and post-merger HHI being referred to as the "delta") is a useful proxy for the
change in concentration directly brought about by the merger.
13 See Press Release, supra note 8.
14See Commission Notice on a Simplified Procedure for Treatment of Certain Concentrations
under Council Regulation (EC) No 139/2004, para. 8, 2005 O.J. (C 56) 32, 33.
15 Id. para. 9.
60
neighboring markets, or the Commission has concerns that coordination may arise
as a result of the new market structure post-merger.
Information requirements for the notification of transactions to the
Commission
The Package introduced several amendments to both the Short Form CO
and standard Form CO merger notification forms,16
with the stated aim of
reducing information requirements that very often proved to be an unnecessary
burden on notifying parties.17
Summary details are set out below.
Waivers from information requirements
Previously, the Commission informally accepted waivers from
information disclosure requirements on an ad hoc basis.18
The Package formalises
to a certain extent this practice by encouraging notifying parties to submit waiver
requests during the pre-notification period. The notifying parties must submit,
along with the draft Form CO, requests for waivers of information that they
consider to be unnecessary, along with the reasons as to why it is considered
unnecessary. Waiver requests can be made in the text of the Form CO itself or by
separate letter/email from the parties or their legal representatives. The
Commission will normally respond to the request within five working days.
However, there is an express clarification that the grant of any such waiver does
not preclude the Commission for asking for the information later (pursuant to an
information request).19
16 In addition to the Form CO and Short Form CO, the form used to request referral of jurisdiction
from and to the Commission (the Form RS) has been partially amended, focussing only on the
crucial elements to allow the Commission and the Member States to identify the best placed
authority to review the transaction.
17 The Commission itself acknowledged that previous information requirements "very often
proved to be unnecessary to analyze a notified merger." See Press Release, supra note 8.
18 Commission Regulation 802/2004, supra note 6, art. 4(2).
19 Simplification Package, supra note 2, Annex I, pmbl. 1.4(g).
61
The Form CO itself identifies the following categories of information as
particularly suitable candidates for a waiver:
the list of all other undertakings active in relevant markets in which the
undertakings concerned hold an interest of 10 % or more;
acquisitions in relevant markets by the parties in the last 3 years;
the supporting documents assessing the transaction and the relevant
markets (see below);
the identification of all relevant markets and plausible alternatives;
the total size of markets by value/volume data;
the EU-wide capacity data for the relevant markets, as well as capacity
data shares of the parties and their levels of capacity utilisation;
copies and descriptions of important cooperation agreements of the
parties in the relevant markets; and
the contact details for trade associations.20
Whilst this clarification is welcomed, it does not constitute a significant
change in practice, as parties to date regularly benefit from waivers to these
requirements.
Summaries of economic data and databases
The preamble to the Form CO now invites (but does not require) parties to
consider whether quantitative economic analysis for the affected markets is likely
to be useful and, if so, to briefly describe the data that each of the undertakings
concerned collects and stores in the ordinary course of its business operations and
which could be useful for such analysis. Examples include bidding data (for
markets characterised by tender procedures), scanning data (for markets involving
20 Id.
62
products sold in retail outlets) and data on customer switching (e.g. where
gathered by regulatory or public authorities).21
Disclosure of Supporting Documents
The document disclosure requirements of the Form CO have been
broadened (reflecting the recent practice of the Commission to ask for increasing
amounts of internal documents including emails). From January 1, 2014,
documents prepared by or for or received by any member of the board of
directors, the board of management, or the supervisory board, as applicable in the
light of the corporate governance structure must be disclosed (key changes
italicised).22
Furthermore, important new categories of documents to be provided are:
Analyses, reports, studies, surveys, presentations and any comparable
documents relating to the transaction rationale, including documents where the
transaction is discussed in relation to potential alternative acquisitions.
Analyses, reports, studies, surveys, presentations and any comparable
documents from the last two years for the purpose of assessing any of the affected
markets with respect to market shares, competitive conditions, competitors (actual
and potential) and/or potential for sales growth or expansion into other product or
geographic markets. This last category is potentially very onerous, as such
documents need not be related to the transaction in question.23
The expansion of document disclosure requirements also affects the
revised Short Form CO, which now requires parties to a transaction that has
horizontal or vertical overlaps, yet remaining under the Simplified Procedure, to
produce internal documents (i.e. copies of all presentations prepared by or for or
21 Id. pmbl. 1.8.
22 Id. § 5.4.
23 Id.
63
received by any members of the board of management, or the board of directors,
or the supervisory board, as applicable in the light of the corporate governance
structure, or the other person(s) exercising similar functions, or the shareholders'
meeting analyzing the notified concentration). This is an important change and
will increase the burden on parties using the Simplified Procedure.24
The preamble to the Form CO now states that supporting documents must
be provided in "a useable and searchable format"25
– so all pdf scans of hard
copy documents should be prepared using OCR (optical character recognition).
Overall, these changes will increase the statutory document disclosure
burden on parties, although, as noted above, these categories of documents (and
more) are already being required by case teams. The revised EUMR disclosure
requirements inch ever closer to intensity of the "Second Request" under the U.S.
Hart Scott Rodino merger rules - particularly in Phase II cases.
Greater reliance on documentary evidence is increasing made by the
Commission in recent cases (like the U.S. DOJ and FTC). Be ever mindful of
these data and document disclosure requirements, and ensure that you have
appropriate document creation guidelines in place so that your or your client's
internal documents do not create any "hostages to fortune".
Disclosure of Market Data
The new Form CO requires parties to identify all "plausible" alternative
relevant geographic and product market definitions, which "can be identified on
the basis of previous Commission decisions and judgments of the Union Courts
and (in particular where there are no Commission or Court precedents) by
reference to industry reports, market studies and the notifying parties' internal
documents".26
It remains to be seen whether this provision will in fact curb the
24 Id. Annex II § 5.3.
25 Id. Annex I, pmbl. 1.5.
26 Id. § 6.
64
tendency of case teams to request increasingly segmented and alternative data on
varying market definitions. The standard Form CO now also asks for new
categories of data on:
how customers purchase products or services (e.g. requests for
proposal and bidding procedures);27
product differentiation in terms of quality ("vertical differentiation")
and other product characteristics ("horizontal" and "spatial
differentiation"), rivalry between the parties and closeness of
substitution, including for different customer groups;28
and
firms that have exited the market in last 5 years.29
There are also changes to the conditions on which market data must be
presented in the Form CO. As the horizontal market share threshold for the
Simplified Procedure has increased by 5% (to 20%), this has in turn increased the
threshold of those markets for which parties are required to provide the most
detailed substantive information ("affected markets") in the standard Form CO.
Thus, the affected markets thresholds are now 20% for horizontal relationships
and 30% for vertical relationships. The definition has also been clarified to make
it clear that horizontal/vertical relationships must arise in the same geographic
market as well as the same product market.30
For "other" markets (potential
competition, conglomerate markets and markets in which a party holds important
IP rights) the threshold has also been raised to 30%.31
Below these levels,
overlaps between the parties are only considered to be "reportable markets" and
there data disclosure requirement is significantly lighter.
27 Id. § 8.2(c).
28 Id. § 8.3.
29 Id. § 8.6(g).
30 Id. § 6.3.
31 Id. § 6.4. The definition of a potential competitor has been changed to include undertakings that
have developed or pursued plans to enter a market within the last three years (up from two years).
Id. § 6.4(a).
65
Where there are reportable markets, the Short Form CO now asks for
information on the nature of the parties' business, main subsidiaries, brands,
product names and trademarks. Additional information is also required for
transactions that qualify for the Simplified Procedure on the basis of the small
increment threshold: market shares over 3 years; details of research, development
and innovation; and whether any of the special circumstances are present (i.e.
degree of market concentration, whether the transaction combines important
innovators, or eliminates an important competitive force or a company with
pipeline products).32
Where there are no reportable markets, the revised Short
Form CO now requires parties to provide descriptions of their business, the
target's current and future activities, and an explanation as to why the transaction
does not give rise to any reportable markets (i.e. where there are either horizontal
or vertical relationships between the parties).33
Finally, the revised notification forms encourage parties to submit a list of
all the jurisdictions where the transaction is notified, in order for the Commission
to identify opportunities to liaise with foreign antitrust authorities such as the U.S.
DOJ or FTC.34
More potential changes in the pipeline
In June 2013, the Commission launched a public consultation on its
proposals to expand its powers to review non-controlling minority interests.35
The
public consultation generated a broad and comprehensive responsive from
stakeholders. Despite this, Commission official are privately stating that the
32 Id. Annex II § 7.
33 Id. § 8.
34 Id. Annex I, pmbl. 1.9; id. Annex II, pmbl. 1.7.
35 The public consultation comprises a Commission Staff Working Paper and two Annexes (one
on the relevant economic literature and one surveying EU and national approaches to structural
links) and ended in September 2013. See Towards More Effective EU Merger Control, EUR.
COMM’N – COMPETITION – PUB. CONSULTATIONS,
http://ec.europa.eu/competition/consultations/2013_merger_control/ (last visited Mar. 12, 2013).
66
Commission intends to regulate such interests, particularly where they represent a
material structural link between competitors.
No changes to the law are expected in 2014, particularly as the
Commission prepares for a change in leadership (Vice-President Joaquin
Almunia's present term ends in October 2014). However, a further "white paper",
refining the Commission's proposals is expected in due course. The Commission
is expected to put forward two options: (i) a “notification system”, which would
extend the current system of ex-ante control of concentrations to minority
interests, or (ii) a “voluntary system”.
The latter will be based either on (i) a self-assessment system, with the
parties self-assessing the creation of the structural link and the Commission
holding the power to decide if and when to open an ex-post investigation; or (ii) a
transparency system, where the parties to a “prima facie problematic structural
link” would have to file a short information notice to the Commission. This notice
would then be published in order to make third parties and EU Member States
aware of the transaction.
Commentators are anticipating the Commission to press for new powers
using the voluntary system. Watch this space.
Concluding Remarks
The expansion of the Simplified Procedure, and the provision of a Super-
Simplified Procedure, will certainly benefit notifying parties and are
developments to be welcomed. However, the expansion of the document burden,
as well as the potential data burden, has potentially increased the cost and effort
of filing a merger transaction in Europe.
More fundamentally, there is an absence from the Package of any kind of
indicative commitment from the Commission to deal with pre-notification
procedures in a more efficacious manner. Past practice has witnessed pre-
67
notification in certain cases extending to six months or longer in complex cases,
with parties seemingly at the mercy of case teams intent on uncovering every
stone and pebble. It would have been useful if the Commission had provided
indicative timeframes for handling pre-notification matters, particularly in
Simplified Procedure cases.
68
FUTURE FORECASTING IN POTENTIAL COMPETITION: STORMY DAYS OR CLEAR VISIBILITY – SUMMARY OF ABA BROWN BAG PROGRAM
George Laevsky1
On February 4, 2014, the ABA Antitrust Mergers and Acquisitions
committee sponsored a telephonic brown bag panel discussion to explore the
future of the potential competition doctrine, which enables antitrust enforcers to
challenge prospective business combinations on the basis of potentially stifling
future competition in a relevant market. The expert panel consisted of: Michael
Moiseyev, Assistant Director of the Federal Trade Commission (FTC) Mergers 1
section; Jonathan Klarfeld, Deputy Assistant Director of the FTC Mergers 1
section; Andrea Murino, a partner at Wilson Sonsini Goodrich & Rosati; and Matt
Reilly, a partner at Simpson Thatcher & Bartlett LLP. The panel was moderated
by David Wales, a partner at Jones Day.
I. Brief Overview of the Potential Competition Doctrine
The potential competition doctrine provides antitrust enforcers with two
possible theories for challenging mergers and acquisitions involving potential
competitors that are likely to impact future competition in an overlapping product
market. The first theory involves “perceived” potential competition. Perceived
potential competition issues may arise where the behavior of incumbent firms,
including the acquiring company, in a concentrated market is constrained by the
perception that supracompetitive pricing may induce entry by the target company.
The antitrust agencies are concerned that a large incumbent firm’s acquisition of a
perceived potential competitor may lessen competition in a concentrated market
and lead to higher prices.
1 George Laevsky is an antitrust associate in Akin Gump Straus Hauer & Feld LLP’s Washington,
D.C. office. The analysis and conclusions provided in this article do not necessarily represent the
views of the author, Akin Gump Strauss Hauer & Feld LLP, or Akin Gump’s clients.
69
The second theory involves ‘actual” potential competition. This theory
comes into play where one of the combining companies would likely have entered
a concentrated market but for the merger. The antitrust theory of harm focuses on
the proposed transaction eliminating an important competitor by preempting them
from independently launching a competing product. Actual potential competition
cases may involve nascent markets where competition is still in its incipiency.
The antitrust enforcers frequently employ the actual potential competition
doctrine in pharmaceutical and medical device transactions due to the overarching
regulatory framework for product approval and generic entry.
II. The Enforcers’ Perspective on Potential Competition
Mr. Moiseyev began by providing an overview of the potential
competition doctrine and noting that the antitrust enforcers are very comfortable
launching potential competition investigations. The early potential competition
case law emerged from the notion that de novo entry was preferable to a company
entering a market via the acquisition of a market participant. During those
investigations, the government went to great lengths to establish that the acquiring
firm would enter the market, even if the underlying evidence of the potential entry
and uniqueness of the potential entrant was thin.
Over the last two decades, however, the Federal Trade Commission has
developed the modern potential competition analysis through bringing cases in the
medical device and pharmaceutical drug industries. These industries are
particularly susceptible to potential competition scenarios due to the high initial
investment costs and regulatory barriers that must be crossed before bringing a
medical device or pharmaceutical drug to the market. Given the high barriers to
de novo entry, the agencies carefully review development pipelines to ensure that
acquisitions by incumbent firms of potentials entrants who are already well down
the regulatory approval path do not harm future competition.
Despite the potential competition doctrine being readily utilized by the
FTC, there is a dearth of contemporary guiding legal precedent. Most of the
70
meaningful potential competition cases are thirty years old. Moreover, while the
Supreme Court has affirmed the validity of the perceived potential competition
doctrine, it has not yet ruled on the validity of the actual potential competition
doctrine.2 Mr. Moiseyev commented, however, that the appellate courts have
historically been fairly receptive to the actual potential competition doctrine, and
that the doctrine is rooted in fundamentally sound economic principles.
Mr. Moiseyev commented that there has been a long-standing debate
about how much and what type of evidence is required to prove potential
anticompetitive effects in these cases. Although all pre-closing merger
investigations are innately forward looking, dealing with potential competition
issues adds an additional layer of complexity to the process. Potential competition
matters do not readily lend themselves to traditional antitrust analysis due to
inherent data limitations associated with projecting the competitive effects of
future entry.
FTC potential competition investigations therefore typically rely on
business projections generated by the merging parties as a primary source of
information on how competition is likely to be impacted by the potential entrant.
These business projections are typically presented to the company’s senior
management to justify investing in the research and development of a new
product, and as such often constitute reasonably reliable evidence that—as Mr.
Klarfeld noted—receive full evidentiary weight in court. The antitrust agencies
therefore place significant weight on the merging parties’ business projections and
are comfortable using them as the basis for bringing an enforcement action.
Double potential competition cases—where each party to a prospective
merger is a potential entrant into a brand new prospective market—further
complicate the antitrust analysis. It is difficult to rely on market share projections
if the emerging market has not yet been formed or is in its early infancy when the
2 See United States v. Marine Bancorp, 418 U.S. 602, 639-40 (1974); United States v. Falstaff
Brewing Corp., 410 U.S. 526, 537-38 (1973); ABA ANTITRUST LAW DEV. at 377 (7th ed. 2012).
71
business projections were made. In such cases, the FTC tries to find natural
experiments—as in Whole Foods—to develop an understanding of how an
emerging geographic or product market is likely to develop. Mr. Moiseyev also
commented that the value of economic models is a function of the quality of the
underlying data, and that in potential competition cases data deficiencies can
sometimes impair the usefulness of economic analysis and economic models. The
type of industry being investigated can dictate the robustness of the available
economic data and the usefulness of relying on economic testimony to support a
potential competition case.
III. Private Practitioner Concerns
Ms. Murino indicated that unfortunately the Horizontal Merger Guidelines
are of limited value when trying to determine what potential competition evidence
will look like and how the agencies will interpret the evidence. There are often
disconnects between the emphasis that businesses place on forward-looking entry
projections and the weight ascribed to these projections by the antitrust agencies.
Ms. Murino recommended interviewing a client’s business directors to foster a
comprehensive understanding of the company’s three year outlook in order to
provide the antitrust agencies with a firmer understanding of what markets the
company is genuinely preparing to enter in the near future.
Mr. Reilly commented that antitrust counsel should investigate whether
any existing evidence indicates that entry would likely be significantly more
difficult than outlined in the client’s business projections. In markets where actual
entry has already occurred, looking at a company’s performance relative to their
projections may indicate that the client is unlikely to realize projected future
market shares in the relevant time frame. These insights can help foster a better
understanding how a proposed transaction will impact future competition.
Mr. Reilly remarked that counseling clients is potential competition cases
may be difficult in light of the high degree of unpredictability that the cases
present. Ms. Murino added that there are difficulties in convincing clients to agree
72
to divest their research and development of products in their pipeline that are not
yet in commercial circulation. Clients are also uneasy with the possibility that the
government may decide to regulate the company’s conduct in emerging markets
by imposing conduct remedies pursuant to the potential competition doctrine.
IV. Nielson/Arbitron and Other Potential Competition Investigations
Mr. Klarfeld provided an overview of the Neilson/Arbitron transaction and
subsequent Consent Order settling charges that the transaction may substantially
lessen future competition in the emerging national syndicated cross-platform
audience measurement services market (“cross-platform market”).3 The
Neilson/Arbitron transaction was announced at a time when the cross-platform
market was nascent. Both companies were striving to offer cross-platform ratings
in the near future – Nielsen projected offering cross-platform ratings in 2014,
while Arbitron was partnering with comScore to develop a similar cross-platform
ratings product for a cable network. Industry experts viewed both companies as
competitively significant entrants due to their respective expertise and dominance
in the television and radio ratings markets.
The FTC spent months gathering information from the merging parties,
third-party potential entrants and potential customers to develop an understanding
of how the emerging cross-platform market would evolve. The investigation
revealed that Neilson and Arbitron viewed each other as key competitors in an
emerging cross-platform market. The FTC also found that other potential entrants
were unlikely to develop cross-platform offerings as quickly as Nielson and
Arbitron due to their ability to build on their existing ratings technology and
expertise.
Mr. Klarfeld commented that there was initial concern whether the agency
had achieved a thorough understanding of the contours of the developing market,
3 The Nielsen/Arbitron Agreement Containing Consent Order is accessible on the Federal Trade
Commission’s Website at
http://www.ftc.gov/sites/default/files/documents/cases/2013/09/130920nielsenarbitrondo.pdf.
73
the degree to which the Neilson and Arbitron products would compete, and the
extent to which companies could quickly develop a similar product—put another
way, how concentrated would the cross-platform market actually be? These
lingering questions were addressed throughout the course of the investigation,
with FTC ultimately concluding that the Nielson/Arbitron cross-platform products
would likely constitute close competitors in the emerging market.
Mr. Wales inquired how the agencies are able to identify the other
potential competitors in high-tech emerging markets, where, unlike in
pharmaceuticals, the FTC does not have the option of contacting the FDA and
identifying all of the potential competitors who have filed abbreviated new drug
applications. Mr. Klarfeld responded that the agencies determine potential
competitors by analyzing the parties’ HSR filings and relying on potential
customers to identify likely potential competitors who possess the technological
capabilities and expertise to successfully develop a competing product. The
agencies face the same evidentiary burdens irrespective of the underlying industry
and therefore use all of their resources to ensure that they have the clearest
understanding possible of what competition will look like in the emerging market.
Mr. Reilly commented that the agencies do a good job of identifying
parties who have the technological capabilities to enter, especially when the
emerging market requires specialized expertise. The bottleneck is generally not
identifying who the potential entrants are, but analyzing whether they would
enter/compete as the fourth or fifth potential entrant into the emerging market.
Ms. Murino identified the Google/ITA transaction as an example of the
Department of Justice investigating potential competition cases. The government
was concerned that Google’s proposed acquisition would decrease future
investment in developing competitive flight search engines and required Google
to preserve their pre-acquisition level of R&D spending. Ms. Murino noted that
the Google/ITA transaction provides a clear example of how it is possible to tailor
74
potential competition case remedies to alleviate the antitrust enforcers’ concerns,
while still enabling the merging parties to achieve their proposed efficiencies.
Mr. Moiseyev commented that although the antitrust agencies pursue
divestiture remedies in almost all potential competition matters where they
conclude the merger will cause competitive harm, the agencies do undertake a
case-by-case approach to devising remedies. Mr. Moiseyev contrasted
pharmaceutical potential competition cases—which typically require the
divestiture of the research, testing and development of the competing product—
with the Google/ITA and Nielson/Arbitron cases that contained conduct remedies.
These examples demonstrate how the antitrust agencies take into account the
pertinent facts and antitrust theory of harm when tailoring relief in potential
competition enforcement actions.
75
INTERNATIONAL ROUNDUP
Julie Soloway and David Dueck1
A number of recent changes in merger policy worldwide have been
striking in their similarities, both in terms of the issues that are being dealt with
and in terms of the solutions to these issues that are being adopted in many
jurisdictions. For instance, the European Commission, the United Kingdom, and
Australia have all recently dealt with the potential application of a “failing firm”
defense to mergers involving firms in serious financial difficulty. Both Europe
and China are carrying out efforts to simplify merger review in their respective
jurisdictions, and Turkey has introduced a Draft Act to streamline its merger
review regime with the explicit goal of making it more similar to competition
policy in the European Union. Finally, merging parties have had to face certain
jurisdictional complications in Africa, and there are fears that coming new
competition enforcement by the Eurasian Economic Community could create
jurisdictional complications for competition authorities in Russia, Belarus, and
Kazakhstan.
I. The “Failing Firm” Defense: EU, UK, and Australia
In Europe and the UK, merging parties have successfully used the “failing
firm” defense in three recent cases, but recent experience in Australia illustrates
that competition authorities will not clear a merger simply because the target firm
happens to be in financial difficulty. The “failing firm” defense can be used to
permit an acquisition that may otherwise lessen competition if the target firm
qualifies as “failing”, such that the transaction in question would not actually lead
1 Julie Soloway is a partner and David Dueck is a Student-at-Law in the Competition, Antitrust
and Foreign Investment group at Blake, Cassels & Graydon LLP (“Blakes”). The views expressed
herein are the authors’ own and do not necessarily reflect those of Blakes or its clients. Note that
the contents of this paper is provided for information purposes only and does not constitute legal
advice and may not be relied upon as legal advice or otherwise quoted or cited without the express
written consent of the authors.
76
to a reduction in competition. Generally, competition authorities will be reluctant
to accept such a defense unless three stringent criteria are satisfied: 1) without a
takeover, the target company would leave the market “in the near future” due to
financial difficulties; 2) the target company’s assets would also inevitably leave
the market without a takeover; and 3) there is realistically no alternative purchaser
that presents fewer competition concerns.2
i) Europe
The European Commission recently unconditionally approved the
acquisition of Olympic Air by Aegean Airlines on the basis of the “failing firm”
defense, even though it had rejected the “failing firm” defense for this same
transaction just a few years earlier. In its decision clearing the merger in October
2013, the European Commission found that Olympic Air was “a failing firm” that
was “highly unlikely to become profitable in the foreseeable future under any
business plan.”3 Therefore, it concluded that Olympic would be forced to exit the
market in the near future due to financial difficulties if it was not acquired by
Aegean.4 Just a little over two years earlier, however, the European Commission
had prohibited the proposed transaction, concluding it was “unlikely that Olympic
would be forced out of the market in the near future because of its financial
difficulties if not taken over by another undertaking.”5 Instead, it concluded that
the most likely outcome would involve Olympic Air continuing domestic
2 Press Release, Australia: Mergers and acquisitions: The “failing firm” defense for companies in
financial difficulty (Jan. 31, 2014), available at:
http://www.mondaq.com/australia/x/289488/Antitrust+Competition/Mergers+and+acquisitions+T
he+failing+firm+defence+Recent+merger+decisions+by+the+European+Commission+and+UK+c
ompetition+authorities+indicate+a+more+sympathetic+approach+to+acquisitions+of+companies+
in+financial+difficulty.
3 Press Release, European Union, Mergers: Commission approves acquisition of Greek airline
Olympic Air by Aegean Airlines (Oct 9, 2013), available at: http://europa.eu/rapid/press-
release_IP-13-927_en.htm.
4 See id.
5 European Commission, Declaring A Concentration To Be Incompatible With The Internal
Market And The EEA Agreement (Commission Decision, Public Version C (2011) 316 final,
2011), available at: para 2070,
http://ec.europa.eu/competition/mergers/cases/decisions/m5830_20110126_20610_2509108_EN.p
df.
77
operations in Greece but withdrawing from international operations.6 It also
found there to be other bidders interested in acquiring its assets.7
Likewise, the European Commission cleared a proposed acquisition by
Sweden’s Nynas AB of refinery assets in Germany that were owned by Shell
Deutschland Oil GmbH. In spite of the fact that the merged entity would become
the only naphthenic base and process oil producer in the European market as well
as the largest producer of transformer oils, Shell demonstrated that continued
operation would be economically unsustainable. Furthermore, there were no
alterative buyers. As the Commission Vice President of competition policy,
Joaquín Alumnia, stated, “If this acquisition did not take place, the Harburg plant
would simply close down, dramatically reducing production capacity in Europe
for a number of specific oil products. We authorized this acquisition because it is
the only way to avoid a price increase for consumers.”8
The UK Competition Commission approved the acquisition of Ultralase
Limited by Optimax Clinics Limited on November 20, 2013 based on a successful
“failing firm” defense. An investigation into the financial situation of Ultralase
led the UK Competition Commission to conclude that Ultralase would have failed
financially and exited the laser eye surgery market if the proposed transaction was
not permitted to proceed.9 It also concluded that there was no credible alternative
purchaser that would have acquired the firm aside from Optimax.10 Furthermore,
the two merging parties were the second and third largest players in the laser eye
surgery market, and the UK Competition Commission concluded that the largest
6 See id, available at: para 2068.
7 See id, available at: para 2076.
8 Press Release, European Union, Mergers: Commission approves acquisition of Shell’s Harburg
refinery assets by Nynas AB of Sweden (Sept 2, 2013), available at: http://europa.eu/rapid/press-
release_IP-13-804_en.htm.
9 UK Competition Commission, Optimax Clinics Limited and Ultralase Limited: A report on the
completed acquisition by Optimax Clinics Limited of Ultralase Limited (Nov 20, 2013) available
at: s 5.25, http://www.competition-
commission.org.uk/assets/competitioncommission/docs/2013/optimax-ultralase/final_report.pdf.
10 See id, available at: s 5.44.
78
player in the market would have captured the majority of the increased sales
resulting from the exit of Ultralase from the market.11 Therefore, the UK
Competition Commission concluded that the transaction would not lead to any
substantial lessening of competition.
ii) Australia
As recent experience in Australia illustrates, however, competition
authorities will not clear a merger merely because the target firm happens to be in
financial difficulty. The Australian Competition and Consumer Commission
(“ACCC”) announced on January 17, 2014 that it would oppose the proposed
acquisition of the Delta Imaging Group (“Delta”) by Sonic Healthcare Limited
(“Sonic”) even though Delta was in liquidation. This decision was based on the
ACCC’s conclusion that the proposed transaction would likely substantially
lessen competition in the market for the supply of MRI services in Newcastle and
Maitland and in the market for the supply of general diagnostic imaging services
in Maitland.12
Outside of the public hospital system, Sonic would be the only supplier of
Medicare eligible MRI services in Newcastle and Maitland if the transaction were
to go through. Furthermore, Sonic would operate four out of five radiology
practices outside of the public system and only one of two private radiology
companies supplying general diagnostic imaging services in Maitland. The
ACCC was not satisfied that the public hospital providers of MRI and general
diagnostic imaging services would be able to impose a sufficient constraint on
Sonic.13 In addition, the ACCC was concerned that new entry would be unlikely
to constrain Sonic given the significant barriers to entry in the industry, including
11 See id, available at: s 6.75.
12 Press Release, Australian Competition & Consumer Commission, ACCC to oppose Sonic’s
acquisition of the assets of Delta Imaging Group (Jan 17, 2014), available at:
http://www.accc.gov.au/media-release/accc-to-oppose-sonic%E2%80%99s-acquisition-of-the-
assets-of-delta-imaging-group.
13 See id.
79
high sunk costs in acquiring equipment, shortages of skilled labor, and the
difficulty of obtaining additional licenses for fully or partially funded MRI units
from the Federal Government.14
Although Delta was in liquidation, the ACCC did not make any reference
to a “failing firm” defense in its announcement that it would oppose the
transaction or in its Statement of Issues, and it is unclear to what extent the
parties’ submission might have included any reference to this factor. If the parties
decide to proceed with the transaction anyway, leading the ACCC to challenge
the acquisition in the Federal Court, it will be interesting to see what weight might
be given to any “failing firm” argument the parties might make by virtue of Delta
being in liquidation.
II. Streamlining Merger Review: Europe, China, and Turkey
In an effort to streamline its merger review process, the European
Commission has introduced measures intended to reduce the informational burden
on merging parties for mergers that are less likely to involve significant
competitive concerns. Similarly, China has proposed regulations setting out the
categories of transactions which will benefit from a simplified merger review
process, although it has yet to specify exactly how merger review will change in
these circumstances. Turkey has also sought to streamline its merger review
procedure by aligning it with the merger review regime in the European Union.
Each of these jurisdictions will be discussed in turn below.
14 Press Release, Australian Competition & Consumer Commission, Statement of Issues: Sonic
Healthcare Limited – proposed acquisition of assets of Delta Imaging Group (Dec 5, 2013),
available at:
http://registers.accc.gov.au/content/trimFile.phtml?trimFileTitle=MER13+10837.pdf&trimFileFro
mVersionId=1130891&trimFileName=MER13+10837.pdf.
80
i) Europe
On January 1, 2014, a set of measures introduced by the European
Commission came into effect with the goal of simplifying its merger review
process. These modifications will allow the European Commission to treat
between 60 to 70 percent of mergers under the simplified review procedure,
which is 10 percent more than was previously the case.15
Merging parties will qualify for this simplified procedure where the
combined market share of two merging parties with a horizontal overlap is below
20 percent (increased from 15 percent); where the combined market share of two
merging parties in vertically related markets is below 30 percent (increased from
25 percent); and where the increase in market shares is “small” when combined
market shares are between 20 and 50 percent.16
Under this simplified procedure there will be a reduction in certain types
of information that parties are required to send to the European Commission in
order to notify a merger. For instance, the European Commission will no longer
require internal board presentations that analyze options for alternative
acquisitions, and internal business reports assessing affected markets will only be
required for the last two years, rather than the previous three years. Parties will
also have more discretion to decide whether or not to engage in pre-notification
contacts with the European Commission and whether to apply for waivers
exempting them from the production of certain information, such as lists of
acquisitions made in the last three years.17
15 Press Release, European Union, Mergers: Commission cuts red tape for businesses, (December
5, 2013), available at: http://europa.eu/rapid/press-release_IP-13-1214_en.htm.
16 European Commission, Commission Notice on a simplified procedure for treatment of certain
concentrations under Council Regulation (EC) No 139/2004 (2013/C 366/04, 2013), available at:
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52013XC1214(02):EN:NOT.
Note that a “small” increase in market share when combined market shares are between 20% and
50% is defined as an increase in the Herfindahl-Hirschman Index (HHI) that is less than 150.
17 Press Release, Australia: In brief: Legal changes around the competition world in Belgium,
COMESA, European Union, France, Netherlands, United States (Jan 31, 2014), available at:
81
However, in other respects, the required information will increase, with
the introduction of a requirement for the parties to provide all supporting
documentation concerning the affected market that was received by any member
of the board of management over the last two years. Previously, only information
concerning the proposed transaction was required, and this only applied to
information prepared by any member of the board of directors itself.
Furthermore, parties must now provide all plausible alternative product and
geographic market definitions, and detailed market information must be provided
for each of these plausible market definitions.18
ii) China
In a similar effort to streamline merger review, China’s Ministry of
Commerce (“MOFCOM”) issued a final version of its draft regulation setting out
a simplified merger-review program in February 2014. According to MOFCOM
estimates, as many as 60 percent of notified transactions could be cleared within
the 30-day Phase I timeframe, resulting in a significant reduction in time for many
parties seeking approval from MOFCOM.19
Transactions qualifying for simplified review will include horizontal
transactions with a combined market share of less than 15 percent; vertical
transactions with individual market shares of less than 25 percent; transactions
with no horizontal or vertical relationship between the parties and a combined
http://www.mondaq.com/australia/x/289496/Trade+Regulation+Practices/In+brief+Legal+change
s+around+the+competition+world+in+Belgium+COMESA+European+Union+France+Netherland
s+United+States.
18 Press Release, European Union: European Commission’s “Simplified” Merger Control
Notification Procedures To Be Effective in 2014 (Dec 30, 2013), available at:
http://www.mondaq.com/unitedstates/x/282774/Antitrust+Competition/European+Commissions+
Simplified+Merger+Control+Notification+Procedures+To+Be+Effective+In+2014.
19 Press Release, China: China’s Simplified Merger Review Program May Significantly Reduce
Wait Times for Certain Global Transactions (Feb 21, 2014), available at:
http://www.mondaq.com/x/294472/Antitrust+Competition/Chinas+Simplified+Merger+Review+P
rogram+May+Significantly+Reduce+Wait+Times+for+Certain+Global+Transactions.
82
market share of less than 25 percent; joint ventures established outside of China
that do not operate in China; acquisitions of foreign assets or securities of
companies operating outside of China; and situations where controlling
stakeholders in a joint venture leave the joint venture without a replacement.
However, MOFCOM has not yet provided guidance on how the
notification and review process will proceed in these simplified cases. Nothing in
the draft regulation at this point provides for a reduction in the amount of
information required or any other simplification in the procedure. It is expected
that MOFCOM will provide further details in this regard in order to complete this
simplified regime.20
iii) Turkey
A set of proposed amendments to Turkey’s competition laws were sent to
the Turkish Grand National Assembly for approval on January 23, 2014, and there
are two primary motivations underlying these amendments. One goal of these
amendments is to make Turkish competition policy consistent with changes to
competition policy in the European Union given Turkey’s status as a candidate
state to join the European Union. In addition, the amendments are designed to
make the Competition Act more compatible with how the law has actually been
applied through communiqués that have been issued as secondary legislation
since the introduction of the Turkish Competition Act in 1997.21
One of the major changes introduced by the proposed amendments would
be the adoption of a de minimis rule wherein the Competition Board could
disregard agreements, practices, and decisions that do not exceed a certain market
20 Faaez Samadi, China finalizes guidance on simplifying mergers, GLOBAL COMPETITION
REVIEW (Feb 17, 2014), available at:
http://globalcompetitionreview.com/news/article/35262/china-finalises-guidance-simplifying-
mergers/.
21 Press Release, Turkey: Draft Act On The Protection of Competition Was Published (Feb 26,
2014), available at:
http://www.mondaq.com/x/295608/Antitrust+Competition/Draft+Act+On+The+Protection+Of+C
ompetition+Was+Published.
83
share or threshold. In addition, the amendments adopt a “substantial lessening of
effective competition” test instead of the current “dominant position” test for
mergers and acquisitions. An exemption for acquisitions by inheritance would be
eliminated. Furthermore, a four-month extension would be provided for cases
requiring in-depth assessments instead of the Phase II procedure currently in
place, and the review period for mergers and acquisitions would be increased
from 30 calendar days to 30 business days.22
If passed by the Turkish Grand National Assembly, these changes would
bring the Turkish merger review process into much closer alignment with the
merger review process in the European Union, given that many of these changes
are closely based on current EU competition law. Regardless of whether or not
Turkey ultimately joins the European Union, the greater clarity and consistency
resulting from this harmonization of competition policy will likely be a welcome
development for many merging parties.
III. Jurisdictional Complications: COMESA and the Eurasian Economic
Commission
i) Africa
In the recent case of Polytol v Mauritius23, the Common Market for
Eastern and Southern Africa (“COMESA”) had to deal with the complications
resulting from a collision between national and multi-national competition
authorities, which has important implications for merging parties in the region.
Certain member states that had not adopted the COMESA Treaty as domestic law
in their national jurisdictions, including Kenya, Mauritius, and Zambia, had taken
the position that COMESA regulations were not enforceable in their jurisdictions.
22 Press Release, Turkey: On The Verge of Change: Turkish Competition Law (Feb 3, 2014),
available at:
http://www.mondaq.com/x/290632/Antitrust+Competition/On+the+Verge+of+Change+Turkish+
Competition+Law.
23 COMESA Court of Justice (First Instance Division), Polytol Paints & Adhesives Manufacturers
v Republic of Mauritius, ref. 1 of 2012, judgment of August 31, 2013.
84
Moreover, the attorney general of Kenya wrote a letter to the CCC shortly after
the merger control regime was established asking whether national regulators or
the regional regulator takes precedence in reviewing mergers.24 This left a great
deal of uncertainty for merging parties as to which respective jurisdiction would
require merger notification.
However, this appears to have been clarified in Polytol v Mauritius25,
where the COMESA Court of Justice rejected the argument of the Government of
Mauritius that the COMESA Treaty had no legal force until ratified domestically.
Instead, it found that the Government of Mauritius could not use its internal laws
as an explanation or defense for not implementing the COMESA Treaty.26
Therefore, it appears that parties to M&A transactions may be able to avoid
making notifications to national competition authorities provided that those
transactions are notifiable to the COMESA Competition Commission.
Nevertheless, it remains to be seen how the national courts in those countries
which have not ratified the COMESA Treaty domestically will regard this
judgment given that the enforcement of judgments from the COMESA Court of
Justice requires the cooperation of the domestic national courts.27
ii) The Eurasian Economic Community
Similar jurisdictional complications could also soon arise with the creation
of the Eurasian Economic Commission. As part of a new economic union
24 Katy Oglethorpe, COMESA receives first merger filing, GLOBAL COMPETITION REVIEW
(Mar. 27, 2013), available at: http://globalcompetitionreview.com/news/article/33317/comesa-
receives-first-merger- filing/.
25 COMESA Court of Justice (First Instance Division), Polytol Paints & Adhesives Manufacturers
v Republic of Mauritius, ref. 1 of 2012, judgment of August 31, 2013.
26 Press Release, COMESA Court of Justice rules that Mauritius breached FTA rules (Sept 19,
2013), available at: http://www.trademarksa.org/news/comesa-court-justice-rules-mauritius-
breached-fta-rules.
27 Press Release, Australia: In brief: Legal changes around the competition world in Belgium,
COMESA, European Union, France, Netherlands, United States (Jan 31, 2014), available at:
http://www.mondaq.com/australia/x/289496/Trade+Regulation+Practices/In+brief+Legal+change
s+around+the+competition+world+in+Belgium+COMESA+European+Union+France+Netherland
s+United+States.
85
between Russia, Belarus, and Kazakhstan, the Eurasian Economic Commission
will finally begin exercising its competition enforcement powers later on this year
following more than 20 years of negotiations laying the groundwork for a new
economic union.28 However, the establishment of the Eurasian Economic
Commission may create a new set of challenges for competition enforcement in
the member states. Although Russia’s Federal Antimonopoly Service (“FAS”)
has more than two decades of experience enforcing merger policy, the other
member states do not have the same level of experience, and the new Eurasian
Economic Commission will now have the power to handle all cross-border
mergers in the region. The deputy head of the FAS, Andrey Tsyganov, has noted
that the Eurasian Economic Commission’s lack of experience may create
challenges for the FAS in the short term on top of the inevitable complications
arising from the existence of an additional level of enforcement.29
28 Eurasian Economic Commission, Eurasian Economic Integration: Facts and Figures, 2013,
available at:
http://www.eurasiancommission.org/ru/Documents/broshura26Body_ENGL_final2013_2.pdf.
29 Faaez Samadi, New Eurasian commission adds layer of complexity for FAS, GLOBAL
COMPETITION REVIEW (Feb 20, 2014), available at:
http://globalcompetitionreview.com/news/article/35287/new-eurasian-commission-adds-layer-
complexity-fas/.
86
About the Mergers and Acquisitions Committee
The Mergers and
Acquisitions Committee focuses on issues relating
to mergers, acquisitions
and joint ventures.
Committee activities and
projects cover private
litigation, both state and
federal enforcement, and
international merger
enforcement activities.
Chair:
Paul B. Hewitt
Akin Gump Strauss Hauer &
Field LLP
(202) 887-4120
Vice-Chairs:
Norman Armstrong
Federal Trade Commission
(202) 326-2072
Ronan Harty
Davis Polk & Wardwell LLP
(212) 450-4870
Mary N. Lehner
Freshfields Bruckhaus
Deringer LLP
(202) 777-4566
Young Lawyer
Representative:
Rani Habash
Dechert LLP
(202) 261-3481
Council Representative: Paul H. Friedman
Dechert LLP
(202) 261-3398
Robert L. Magielnicki
Sheppard Mullin Richter &
Hampton LLP
(202) 218-0002
Mary K. Marks
Greenberg Traurig LLP
(212) 801-3162
87
About The Threshold
The Threshold is published periodically
by the Mergers and Acquisitions
Committee of the American Bar
Association Section of Antitrust Law.
The views expressed in the Newsletter
are the authors’ only and not
necessarily those of the American Bar
Association, the Section of Antitrust
Law, or the Mergers and Acquisitions
Committee. If you wish to comment on
the contents of the Newsletter, please
write to American Bar Association,
Section of Antitrust Law, 321 North
Clark, Chicago, IL 60610.
Co-Editors-in-Chief:
Beau Buffier Shearman & Sterling LLP (212) 848-4843 [email protected] Michael Keeley Axinn Veltrop & Harkrider LLP (202) 721-5414
Gil Ohana Cisco Systems (408) 525-6400
Editorial Assistant:
Brad Janssen Shearman & Sterling LLP (212) 848-4885 [email protected]
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