15. Merger Antitrust Risk Assessment and Contractual Risk Allocation Antitrust Law Spring 2015 NYU School of Law Dale Collins

15. Merger Antitrust Risk Assessment

and Contractual Risk Allocation

Antitrust LawSpring 2015 NYU School of Law

Dale Collins

Antitrust LawSpring 2015 NYU School of LawDale Collins

Dealing with merger antitrust risk Thinking systematically about antitrust risk Inquiry risk

Who has standing to investigate or challenge the transaction? What is the probability that one of these entities will act?

Substantive risk When is a merger anticompetitive? How can we practically assess antitrust risk?

Remedies risk What are the outcomes of an antitrust challenge? Will the transaction be blocked in its entirety? Can the transaction be “fixed” and if so how?

Allocating the antitrust risk in the purchase agreement

2


THINKING SYSTEMATICALLY ABOUT ANTITRUST RISK

3


Types of antitrust risks Three types of risk

Inquiry risk: The risk that legality of the transaction will be put in issue Substantive risk: The risk that the transaction will be found to be anticompetitive

and hence unlawful Remedies risk: The risk that the transaction will be blocked or restructured

The three risks are nested The substantive risk does not arise unless

there is an inquiry The remedies risk does not arise unless

the transaction is found to be anticompetitive

4

Remedies risk

Substantive risk

Inquiry risk


Costs associated with antitrust risk Delay/opportunity costs

Possible delay in the closing of the transaction and the realization of the benefits of the closing to the acquiring and acquired parties

Management distraction costs Possible diversion of management time and resources into the defense

of the transaction and away from running the business

Expense costs Possible increased financial outlays for the defense of the transaction

Outcome costs—Four possible outcomes: The inquiry terminates without resolution The transaction is cleared on the merits The transaction is blocked and the purchase agreement is terminated The parties restructure (“fix”) the deal to eliminate the substantive antitrust

concern “Fix-it-first”—Restructuring the deal preclosing to avoid a consent decree Post-closing “fix” under a judicial consent decree (DOJ) or a FTC consent order

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Costs and benefits of continuing the defense For a “fixable” deal

6

$

Time

Marginal benefits from continuing defense

Marginal costs from continuing defense

Query: Why are the curves shaped (roughly) as they are?


ASSESSING INQUIRY RISK

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Inquiry risk—Two questions Who has standing to investigate or challenge the transaction?

What is the probability that one or more of these entities will act?

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Inquiry risk Preclosing

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Potential plaintiff Considerations Risk assessment

Injured private parties No damages to recover

Courts historically very reluctant to grant preliminary or permanent injunctions

Very low—usually no payoff unless

1. a competitor or customer will fund the suit, or 2. a hostile target will challenge the transaction to buy time to find a more suitable acquirer

State attorneys general(NAAG)

Constrained enforcement resources

No damages to recover

But can obtain injunctions

Very low, unless transaction

1. threatens employment, or2. threatens widespread price increases to voters

DOJ/FTC HSR Act suspensory period and second request powers

Substantial congressional funding for merger enforcement

Large experienced staff dedicated to merger antitrust enforcement

Courts will enter preliminary and permanent injunctions upon proper showing

High if

1. there is any indication that the transaction may be anticompetitive, or 2. the transaction has a high public profile and has attracted political interest


Inquiry risk Postclosing

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Potential plaintiff Considerations Risk assessment

Injured private parties Can recover damages and in principle can obtain a permanent injunction of divestiture

Courts historically very reluctant to find mergers anticompetitive after DOJ/FTC clearance

Extremely low

Actions on the merits are likely to be very lengthy and costly to prosecute, with a negligible chance of success

State attorneys general(NAAG)

Can recover damages (parens patriae) and obtain injunctions

But constrained enforcement resources

Even in state actions courts historically very reluctant to find mergers anticompetitive after DOJ/FTC clearance

Extremely low

Actions on the merits are likely to be very lengthy and costly to prosecute, with a negligible chance of success

DOJ/FTC Courts will enter preliminary divestiture permanent injunctions upon proper showing

But

No HSR Act leverage

Substantial disincentive to find that a “cleared” transaction is anticompetitive and should have been challenged

“Eggs may be scrambled” with no effective relief

Extremely low, unless

1. the transaction was not HSR reportable and hence not reviewed, but customers complain about anticompetitive effects (especially price increases), or

2. the transaction was reviewed but customers complain and the actual anticompetitive effects are apparent and significant


Inquiry risk Bottom line on challengers

Absent special circumstances, competitors, customers, targets, and state attorney attorneys general can usually be ignored in the risk calculus

If the state attorneys general are interested, they usually piggyback on the DOJ/FTC investigation

In the vast majority of cases all of the action is with the federal antitrust agencies No significant difference in the inquiry risk between the DOJ and FTC

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So when will the DOJ/FTC investigate a transaction?

To answer this question, we first need to examine when a transaction is likely to anticompetitive and so attract the investigating agency’s attention


ASSESSING SUBSTANTIVE RISK

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Antitrust LawSpring 2015 NYU School of LawDale Collins 13

Clayton Act § 7 Provides the U.S. antitrust standard for mergers

Simple summary: Prohibits transactions that— may substantially lessen competition or tend to create a monopoly in any line of commerce (product market) in any part of the country (geographic market)

No person engaged in commerce or in any activity affecting commerce shall acquire, directly or indirectly, the whole or any part of the stock or other share capital and no person subject to the jurisdiction of the Federal Trade Commission shall acquire the whole or any part of the assets of another person engaged also in commerce or in any activity affecting commerce, 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 to tend to create a monopoly.


“May be to substantially lessen competition” No operational content in the statutory language itself

What does in mean to “substantially lessen competition”? Judicial interpretation has varied enormously over the years

Modern view:1 Transaction threatens—with a reasonable probability—to hurt an identifiable set of customers through: Increased prices Reduced product or service quality Reduced rate of technological innovation or product improvement (Maybe) reduced product diversity

1. The modern view dates from the late 1980s or early 1990s, after the agencies and the courts assimilated the 1982 DOJ Merger Guidelines.


Theories of anticompetitive harm Major theories

Elimination of horizontal competition among current rivals Unilateral effects

Merger of uniquely close competitors1

Anticompetitive effect depends only on the elimination of “local” competition between the merging firms

Assumes other firms in the market continue to compete as they did premerger Coordinated effects

Merger of significant competitors where customers have few realistic alternatives Anticompetitive effects depends on an anticompetitive oligopolistic response by

other firms in the market Elimination of a “maverick”

Vertical harm—Major in EU/gaining traction in U.S Foreclosure of competitors (upstream or downstream)/Raising costs to rivals Anticompetitive information access

1 This requirement, which was part of the 1992 DOJ/FTC Horizontal Merger Guidelines, was dropped in the 2010 revisions.

NB: In the U.S., to be actionable vertical theories require some likely demonstrable anticompetitive marketwide effect on customers


Theories of anticompetitive harm Other possible theories

Elimination of actual potential competition Strict requirements

Oligopolistically performing market in which one of the merging parties is an incumbent firm

Entry is imminent and substantial by the other merging party Entry by that merging party would deconcentrate the market and substantially

increase its competitive performance Entry by other firms is either distant/not foreseeable or would not be substantial Acquisition eliminates independent entry and negates its procompetitive benefits

But DOJ/FTC could bring a case on this theory if the evidence is compelling Elimination of perceived potential competition

Almost impossible to satisfy requirements Oligopolistically structured market in which one of the merging parties is an

incumbent firm The other merging party is perceived by the incumbent firms as ready to enter the

market Market performing significantly more competitively than structure of suggest

because incumbent firms have moderated their prices (“limit pricing”) to discourage that firm from actually entering

No other firm is perceived by the incumbent firms as a threat that would cause them to moderate their anticompetitive behavior

Acquisition eliminates the threat of entry, so that incumbent firms no longer have an incentive to moderate prices

Not seriously used in the U.S. as a theory of anticompetitive harm for over 30 years

Historically has had at best limited success in the United States when it was invoked


But this is all too complicated— Very true

Basic distinction Discovery: How do the agencies detect an anticompetitive merger? Explanation: How do the agencies demonstrate that a merger is anticompetitive?

The formal theories go more to explanation than discovery Theories in 1992 Merger Guidelines very information-intensive

Especially since both unilateral and coordinated effects theories require market definition as a prerequisite

Consequently, not overly useful for screening purposes either by agencies or parties Particularly problematic for parties in assessing antitrust risks prior to signing a merger

agreement

Impetus for 2010 Merger Guidelines revisions In fact, the agencies were not using the 1992 Guidelines for merger antitrust

assessment 2010 revisions motivated in part by DOJ/FTC desire to describe more what the

agencies actually do

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Assessing substantive antitrust risk So how do the DOJ/FTC approach merger antitrust investigations?

Recall that the purpose of merger antitrust law is to prevent the creation or facilitation of market power to the harm of customers in the market as a whole through— Increased prices Decreased product or service quality Decreased rate of technological innovation or product improvement [Maybe] decreased product variety1

Economic theory not well-developed in predicting— Consequences of transaction for nonprice market variables Consequences of changes in nonprice market variables for consumer welfare

Implication: Need strong direct evidence to proceed on a theory other than a price increase

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1 Recognized as a dimension of anticompetitive effect in the 2010 DOJ/FTC Merger Guidelines.

Absent compelling evidence of significant customer harm from other sources, only price increases count

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Assessing substantive antitrust risk So how do the DOJ/FTC approach merger antitrust investigations?

They ask a simple, basic question:

If the answer is YES, the investigating agency will find a way to package it into a cognizable theory of anticompetitive merger harm and pursue enforcement action

If the answer is NO, the investigating agency will close the investigation without taking enforcement action

Is the merger likely to result in a price increase of other competitive harm to any identifiable customer group?


Assessing substantive antitrust risk Harm can be to any identifiable group of customers

Does not have to affect all customers Sufficient if some identifiable group of customers

That is, some group that can be characterized systematically Some common groups

Customers in a particular geography Customers of a particular type of product Customers of a particular type of product in a particular geography

If a relevant market is necessary, the agencies will seek to define the market to be the customer group threatened with harm Success in court has been mixed Not always consistent with the market definition paradigms in the case

law and 1992 Horizontal Merger Guidelines 2010 Horizontal Merger Guidelines drafted in part to provide more

flexibility 20

The agencies believe that no customer group is too small to deserve antitrust protection

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Assessing substantive antitrust risk Interesting factoids in agency prosecutorial decision making

The key factors in the decision to challenge horizontal mergers are: The existence of incriminating documents (or occasionally incriminating public

statements) Closeness and uniqueness of competition between the merging parties The number of other close competitors Customer complaints

The 2010 DOJ/FTC Horizontal Merger Guidelines are rarely invoked by the agencies or the parties But the 1992 DOJ/FTC Horizontal Merger Guidelines ceased being used in the mid-

1990s Formal market definition and HHIs play essentially no role and are rarely

addressed in the investigation Very information-intensive approach of questionable probative value Consequently, not particularly useful for screening by either agencies or parties

Measures of upward pricing pressure (UPP) are rarely cited


Another basic distinction Truth v. evidence

Knowing that truth on their side of the deal gets the parties about 60% of the way to a successful outcome before the agencies

The remaining 40% comes from being able to prove the truth with evidence Having the truth but being unable to prove it will not win the day

The investigating agency also needs to be able to prove its case to the agency decision makers and, if necessary, in litigation

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So what are the sources of evidence?

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Major sources of evidence Documents of the merging firms

Company responses to second request interrogatories

Interviews/testimony of merging firm representatives

Interviews with knowledgeable customers

Interviews with competitors

Customer and competitor responses to DOJ Civil Investigative Demands (CIDs) or FTC subpoenas

“Natural” experiments

Expert economics analysis


Defense menu in horizontal transactions In decreasing order of strength

Parties do not compete with one another Parties compete only tangentially Parties compete but have significant other close and effective

competitors Parties do compete, have few existing competitors, but movement into

market is easy (no barriers to entry or repositioning), and would occur quickly if merged company acted anticompetitively

Some other reason deal is not likely to harm customers

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Antitrust LawSpring 2015 NYU School of Law Dale Collins

Basic test for horizontal mergers

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The chances of success improve if there are demonstrable powerful

forces that constrain price increases beyond the mere number of players (e.g., powerful customers, low barriers to entry or repositioning)

decrease if there are factors that facilitate the exercise of market power in the wake of the transaction (e.g., close and unique competition between the merging parties; merging parties are the largest firms)

Recent tightening in enforcement standards Chart reflects current enforcement tendencies at

both the DOJ and FTC Two years ago, 5 → 4 deals almost always

cleared and the chart would be compressed to begin at 4 → 3

Reduction in Bidders/Competitors*5 → 4 Usually clears if no bad documents and

no material customer complaints

4 → 3 Usually challenged unless there are no bad documents and there is a strong procompetitive business rationale, customersupport, and minimal customer complaints

3 → 2 Almost always challenged unless there areno bad documents, and there is a compelling business rational that is strongly supported by customers and no material customer complaints

2 → 1 Always challenged

* Critically, these must be meaningful and effective alternatives from the perspective of the customer; “fringe” firms that customers do not regard as feasible alternatives do not count


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Exacerbating factors Incriminating (“hot”) company documents

Suggest that a strategy of the merged firm will be to raise prices, reduce production or capacity, or reduce the rate of innovation or product improvement

Suggest the merging companies are close competitors of one another in some overlapping product

Suggest that customers have few realistic alternatives to merging firm Suggest that the competitors pay attention to each other’s prices and are

careful not to destabilize high prices Suggest that the target company is a “maverick” that does not go along

with the higher prices that other companies want to charge Incriminating public statements

Occasionally, a senior executive of one of the merging parties (typically the buyer) will make an incriminating statement in a public forum, in the press, or on a blog

Expect these to be cited in any complaint challenging the transaction


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Exacerbating factors Customer complaints

The merging companies are close competitors of one another in some overlapping product

Customer “plays” the companies off one another to get better prices Insufficient number of realistic alternatives to preserve price competition

post-merger Customer conclusion: Customer will pay higher prices as a result of the

merger

High barriers to entry, expansion, and repositioning Apparent barriers (e.g., high cost, required scale, time, reputation) High gross margins of the merging parties

Idea: If high premerger gross margins did not precipitate entry, expansion, or repositioning, then a slightly higher margin due to a postmerger anticompetitive price increase is not likely to precipitate this type of market correction either.

Customer complaints are second only to incriminating company documents in their probative value to the DOJ and FTC


Other considerations High market shares

Not helpful BUT not decisive if sufficient alternatives exist

Effect on competitors In U.S., irrelevant unless it hurts customers BUT one of the best predictors of enforcement action in the EU

Efficiencies Heavily discounted by enforcement agencies BUT important to provide a procompetitive deal motivation

High visibility deals that threaten significant job loss Explains some Obama administration enforcement decisions (e.g.,

NASDAQ/NYSE) DOJ/FTC Merger Guidelines

NOT a good predictor of enforcement outcomes PNB presumption likely to the key in litigation

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Synergies Synergies play two roles in an antitrust merger analysis

They provide an explanation why the acquiring firm is pursuing the deal (and probably paying a significant premium) that does not depend on price increases to customers

In close cases, large synergies can tip the agencies into not challenging the deal

Types of synergies enabled by the deal Customer value-enhancing synergies

Make existing product better or cheaper, or Create new products or product improvement better, cheaper, or faster

Cost-saving synergies Reductions in duplicative costs Increases in the productive efficiency of the combined operation (e.g., through

best practices, transfer of more efficient production technology) Overall

Synergies are very helpful in fashioning a procompetitive narrative But agencies are (irrationally) skeptical about the existence of synergies Synergies will almost never outweigh evidence of anticompetitive effect


Synergies Menu of customer benefits

Lower costs of production, distribution, or marketing make merged firm more competitive Elimination of redundant facilities and personnel Economies of scale or scope

Complementary product lines Broader product offering desired by customers Better integration between merging products further enhances customer value

Accelerated R&D and product improvement Greater combined R&D assets (researchers, patents, know-how) Complementaries in R&D assets Greater sales base over which to spread R&D costs

Better service and product support More sales representatives More technical service support

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Delivering the defense The best way to assess the substantive risk is to develop the

defense with the supporting evidence

Canonical structure of the initial presentation of a complete defense The parties and the deal

Brief overview of the merging parties Brief overview of the deal (including terms, timing, and conditions precedent)

The deal rationale Ideally, a rationale that both makes the deal in the profit-maximizing interest of the

acquiring company’s shareholders and interest of customers (“win-win”) Include any cost, cross-marketing, or product development deal synergies

The market will not allow the deal to be anticompetitive This is equivalent to saying that customers can protect themselves from harm if the

merged firm sought to act anticompetitively

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The best defense is a good offense


Putting it together: Some key questions All transactions

Why are the companies doing the deal? Is the business model behind the combination procompetitive or anticompetitive? How does the buyer expect to recoup any premium paid for the target?

Whatever the mechanism, will the combination likely result in increased prices to any identifiable group of customers? (The business people will know.)

What cost savings or other synergies are expected from the deal? Can persuasive evidence of likelihood, magnitude, and timing be presented to the agency?

Will the deal enhance the ability of the combined company to create better products or services faster or otherwise improve consumer welfare in the long run?

What will the customers in the industry say about the deal if asked by the investigating agency?

Are there customers that will support the deal? If so, what is the reason for the support?

For customers that might complain, is there a way to neutralize their concerns (e.g., extend the term of their premerger contracts to provide additional protection against price increases)

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Putting it together: Some key questions All transactions (con’t)

What do the company documents say? About the reason for the deal? About competition between the merging parties (e.g., win-loss data)? About the likely competitive effect of the deal? About the premerger competitive landscape?

Does the company have good witnesses? On the strategic rationale and synergies? On each of the business lines likely to be investigated?

Same questions on documents and witnesses for the other merging party

If the investigating agency wants to challenge the deal, will it have customers that will testify against the deal?

Are their competitors or other parties that have the inventive and the wherewithal to work with the investigating agency to develop theories and evidence to challenge the deal?1

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1 The U.S. antitrust agencies give little credit to competitor testimony that a deal is anticompetitive. The idea is that an anticompetitive deal is likely to increase market prices and benefit competitors and that the real concern behind most competitor complaints is that the merged firm will become more efficient and procompetitively win business away from the complaining competitor. That said, the agencies are always willing to enlist competitors to help them better understand the market, gain access to industry customers, and generally develop evidence.


Putting it together: Some key questions Horizontal transactions

Are the merging companies strong and close competitors with one another?

How many other effective competitors does each merging party have? Do customers play the merging parties off of one another to get better

prices or other deal terms? In bidding situations, do the merging firms frequently bid against one

another? How many other bids do they usually face? Do they frequently find themselves competing against one another in the “best and final” round of bidding?

Are the conditions in the marketplace conducive to direct oligopolistic coordination on price? If not, is there another mechanism for oligopolistic coordination (e.g.,

coordinated capacity reductions)? Is the target firm a “maverick” and engage in disruptive market conduct

(such as aggressive discounting)?

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Putting it together: Some key questions Nonhorizontal transactions

Potential competition Is either of the merging parties a potential entrant into a market in which the other

company is an actual competitor? If so,

Is the target market highly concentrated? Is the target market performing more or less competitively or is it performing noncompetitively?

(The merging party that is the actual competitor will know) How likely is it that in the absence of the transaction the potential entrant merging party would in

fact enter the market and in what scale and in what time frame? Are their other firms equally likely to enter into the market on the same or greater scale and in the

same or less time as the potential entrant merging party? What would the effect of this entry be on the performance of the target market?

Vertical foreclosure Does one of the merging firms supply an important input or distribution/retail channel to

the other merging firm? If so,

Could competitors in practice protect themselves from harm in the event of foreclosure or higher input prices (or lower downstream prices) from the combined firm by either (a) dealing with other firms in the market, or (b)vertically integrating into the input or downstream market?

Vertical information conduits As a result of the transaction, will one merging party gain greater access to competitively

sensitive information of its competitors?


ASSESSING REMEDIES RISKPREDICTING AGENCY MERGER REVIEW

OUTCOMES

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Antitrust LawFall 2014 Yale Law SchoolDale Collins

Possible outcomes in DOJ/FTC reviews

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Close investigation

Settle w/consent

decree

Parties terminate

transaction

Litigate

• Waiting period terminates at the end of the statutory period with the agency taking enforcement action

• Agency grants early termination prior to normal expiration

• DOJ: Seeks preliminary and permanent injunctive relief in federal

district court• FTC: Seeks preliminary injunctive relief in federal district

courtSeeks permanent injunctive relief in administrative trial• Typical resolution for problematic mergers

• DOJ: Consent decree entered by federal district court• FTC: Consent order entered by FTC in administrative

proceeding

• Parties will not settle at agency’s ask and will not litigate• Agency concludes that no settlement will resolve agency concerns

(AT&T/T-Mobile, NASDAQ/NYSE Euronext)

Antitrust LawFall 2014 Yale Law SchoolDale Collins

Assessing remedies risk

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Review slides on remedies in Unit 13 class notes


ALLOCATING ANTITRUST RISK IN PURCHASE AGREEMENTS

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Antitrust considerations Key antitrust issues

Relevant merger control filings Which merger clearances should be disclosed in reps and warranties? Which merger clearances should be closing conditions?

Cooperation on regulatory matters Where and when to make merger filings? How much information sharing? Agreement on specific tactics and timing? Agreement to litigate any challenges to the acquisition?

Antitrust risk-shifting provisions Settlement and divestiture commitments Reverse breakup fees Other payments

Drop-dead date and termination provisions

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Merger control filings “Consents and approvals” reps and warranties

Merging parties typically represent that the execution of the agreement and consummation of the transaction will not require any consents and approvals except for compliance with the HSR Act or ECMR (if applicable)

For other jurisdictions: Parties can identify in advance all other specific jurisdictions, but this requires

significant due diligence and agreement up-front Parties typically refer to all “applicable”, “all required foreign approvals” or all

“necessary foreign approvals” (generally understood as those with mandatory suspensory effect)

May have a carve out for those foreign filings that would not have a material adverse effect if not obtained

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Merger control filings Where do merger control filings need to be made?

Over 80 jurisdictions have merger control filing requirements Most are mandatory and suspensory—cannot close without filing and

obtaining clearance A few are voluntary (e.g., U.K., Australia, New Zealand, Singapore) A few are not suspensory (e.g., Argentina)

When do the merger filings have to be made? Two considerations

Starting the clock as quickly as possible Allowing sufficient time for preparation of defense and customer contacts

Which clearances will be incorporated in the closing conditions? Major jurisdictions almost always specifically identified Query: What if the closing conditions do not include clearance in a

suspensory jurisdiction in which a filing is required?

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Litigation closing condition Common formulation: No threatened or pending litigation

Typically provides that no government action is pending or threatened that seeks to delay or prevent consummation of the transaction

Question: What constitutes a “threat” of litigation? Question: What about private party actions?

Alternative: No order “If you can close, you must close” Typically provides that no restraint, preliminary or permanent injunction

or other order or prohibition preventing the consummation of the transaction shall be in effect

Carve-out From a seller’s perspective, may wish to have a carve-out that prior to

asserting condition, the asserting party must be in compliance with its best efforts obligations (e.g., to settle or litigate)

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Litigation covenant Are the parties committed to litigate in the event of an antitrust

challenge? May be imposed on buyer alone or on both parties Obligation may be to litigate through to a final, non-appealable judgment,

or something less Interactions with—

Any obligation to accept remedies in order to obtain clearance The drop-dead date

Should the drop-dead date automatically be extended? Should the unilateral right to terminate be symmetrical?

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Restructuring obligations Can arise in two provisions

“Efforts” covenant Specific covenant to offer and accept remedies

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Efforts covenant Sets standard for obligations to obtain antitrust clearances These covenants usually only provide vague parameters, but they

do provide a general guide of what is expected from both parties Best efforts; Reasonable best efforts; Reasonable efforts; or Commercially reasonable efforts

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Efforts covenant Unqualified “best efforts” provision

Usually taken to imply an obligation to offer or accept restructuring relief if necessary to obtain antitrust clearance

Often coupled with express risk-shifting provision “Reasonable best efforts”/“commercially reasonable best efforts”

Something less than best efforts/something more than reasonable efforts Most common formulation in antitrust covenants Obligation not well defined by courts

Usually chosen precisely for this reason Conventional wisdom: Does not imply an obligation to offer or accept

material restructuring relief to obtain antitrust clearance Can add express proviso to make explicit or limit obligation

“Reasonable efforts” Generally regarded as imposing no obligations that would change the

transaction or reduce the benefit of the deal to the buyer in any meaningful way

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Specific covenant re remedies Range of alternatives

“Hell or high water” provision Capped divestiture obligation Remain silent and rely on general efforts covenant Specifically exclude divestitures

Unqualified “hell or high water” provision Requires seller to offer whatever remedy is necessary to obtain antitrust

clearance Includes divestitures, licenses, behavioral undertakings, and hold separates Theoretically could require divestiture of entire target business

HOHW provisions are not self-executing—Agency still must agree to accept remedy In some deals, agency will not accept any consent decree (e.g.,

Staples/Office Depot, AT&T/T-Mobile, NASDAQ/NYSE Euronext)

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Specific covenant re remedies Qualified remedies obligations

Limited to certain business, product lines, or assets Limited by revenue, EBITDA or materiality cap

Remain silent and rely on general efforts covenant Explicit no divestiture obligation “Road map” problem

Informs agency of issues and remedies available for the asking Queries:

Can the joint defense privilege or work product doctrine shield a risk-shifting provision from disclosure in an HSR filing or second request?

Even if there are, are there disclosure obligations under applicable securities laws?

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Litigation Are the parties committed to litigate in the event of an antitrust

challenge? May be imposed on buyer alone or on both parties Obligation may be to litigate through to a final, non-appealable judgment, or

something less

Interaction of litigation provision with— Any obligation to accept remedies to obtain clearance

The more onerous the obligation, the more the buyer will want a credible threat to litigate The drop-dead date

A litigation obligation (or right) is meaningless in the absence of time to litigate Should the drop-dead date automatically be extended? Should the unilateral right to terminate be symmetrical?

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Antitrust-related payments Antitrust reverse termination fees

Nonrefundable partial payments or “deposits”

Ticking fees

“Take or pay” obligation

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Antitrust reverse termination fees Reverse breakup fee with an antitrust trigger

Payable by the buyer to the seller where: the transaction does not close before the purchase agreement is terminated,

and the only conditions not satisfied are the antitrust clearance conditions

Historically relatively rare, but seeing more often in modern agreements Sellers usually negotiate some form of remedy obligation and/or higher

purchase price to avoid reverse breakup fee Size of fee—Varies widely

Sample: January 1, 2005 – December 31, 2013 737 transactions 247 with reverse termination fees (all types) 73 with antitrust reverse termination fees

Percentage of transaction value Large: 39.81% (Monsanto acquisition of Delta and Pine Land) Small: 0.11% (CapitalSource’s proposed acquisition of TierOne) Mean: 5.8% Median: 4.3%

Highest absolute dollar value $4.2 billion (AT&T’s proposed acquisition of T-Mobile) (15.4%)

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53

Antitrust LawSpring 2015 NYU School of Law Dale Collins

0.5%

1.5%

2.5%

3.5%

4.5%

5.5%

6.5%

7.5%

8.5%

9.5%

11.0

%13

.0%

15.0

%17

.0%

19.0

%25

.0%

35.0

%

0

2

4

6

8

10

12

Frequency of Antitrust Reverse Breakup Fees(January 1, 2005 through December 31, 2014)

Percentage intervals

Nu

mb

er

of

tra

ns

ac

tio

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Antitrust reverse termination fees

Median = 4.3%

Mean = 5.7%

NB: The difference between the intervals is not uniform.

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Antitrust reverse termination fees Recent examples

Announcement Antitrust Reverse Breakup Fee

Date Acquiror Target Status Equity Value ($M) Amount ($M) % of Equity Value11/17/2014 Halliburton Baker Hughes Pending $34,600.00 $3,500.00 10.1%11/17/2014 Actavis Allergan Completed $67,365.83 $2,100.00 3.1%11/3/2014 Laboratory Corp. of Am. Covance Completed $5,960.57 $305.00 5.1%9/22/2014 Merck KGaA Sigma-Aldrich Pending $16,673.44 $934.38 5.6%9/21/2014 Siemens Dresser-Rand Group Pending $6,359.15 $400.00 6.3%9/4/2014 Mattress Firm Holding The Sleep Train Completed $440.00 $10.00 2.3%

8/20/2014 Infineon Technologies International Rectifier Completed $2,865.56 $70.00 2.4%8/1/2014 Scientific Games Bally Technologies Completed $3,194.97 $105.00 3.3%

7/28/2014 Zillow Trulia Completed $2,631.48 $150.00 5.7%4/30/2014 Exelon Pepco Holdings Pending $6,826.59 $180.00 2.6%3/2/2014 Media General LIN Media Completed $1,541.14 $55.10 3.6%

2/20/2014 Brookdale Senior Living Emeritus Completed $1,380.13 $143.00 10.4%2/19/2014 Signet Jewelers Limited Zale Completed $689.82 $53.40 7.7%1/28/2014 Martin Marietta Materials Texas Industries Completed $2,059.29 $140.00 6.8%12/8/2013 Sysco US Foods (p) Pending $3,500.00 $300.00 8.6%

8/27/2013 Akorn Hi-Tech Pharmacal Co. Completed $591.35 $48.04 8.1%

7/24/2013 Hanesbrands Maidenform Brands Completed $547.21 $30.00 5.5%

7/9/2013 The Kroger Co. Harris Teeter Completed $2,442.52 $200.00 8.2%

5/29/2013 Service Corp. Int'l Stewart Enterprises Completed $1,131.40 $75.00 6.6%

1/31/2013 Scientific Games Corp. WMS Industries Completed $1,419.16 $80.00 5.6%

3/20/2011 AT&T T-Mobile USA Failed $39,000.00 $4,200.00 10.8%


Payments Ticking fees

Require buyer to pay interest on purchase price if transaction not closed by particular date

Aim to motivate buyer to obtain regulatory clearances quickly Relatively rare in public transactions

Dow Chemical/Rohm and Hass: 5% of equity value Boston Scientific/Guidant: 3% of equity value

Nonrefundable partial payments Like a ticking fee but requires more than the payment of interest Payable on a specified schedule

“Take or pay” clauses

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Cooperation covenants Specifies level of cooperation by parties in obtaining antitrust

clearances Typical requirements

Advance notice and review of communications and submissions with agency

Right to attend meetings/conferences with agency Subject to agreement by agency

Right to review 4(c) and second request documents Party interests

Buyer usually want to control process and not have seller operating independently with governmental authorities

Seller wants to know what is going on to ensure buyer is fulfilling efforts obligations

Both want to maximize knowledge of the evidence submitted to the agency

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Timing provisions Timing for filings

Often “as promptly as possible” But some delay (5-10 business days) may be desirable to permit:

Indepth substantive analysis Customer rollout Coordination in submitting required merger filings

Other timing-related provisions Provisions agreeing not to withdraw filings, extend waiting periods or

enter into timing agreement without consent of other party Seller may want to impose a specific deadline on second request

compliance

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Timing and termination Drop-dead date

Does it provide long enough for expected approvals? Firm termination date or extension (typically +120 days) in the event of a

second request or Phase II investigation? MAC clause: If business likely to deteriorate significantly during a

prolonged antitrust review, may need provisions to ensure MAC is not used to avoid any divestiture commitments or avoid payment of reverse breakup fees

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Antitrust LawSpring 2015 NYU School of Law Dale Collins 59

Risk-shifting summary Buyer-friendly Seller-friendly

Level of efforts Commercially reasonable efforts Reasonable best efforts Best efforts

Obligation to make divestitures Silent/expressly excluded Divestitures up to cap – measured in asset or revenue terms or MAC applying to part or all of acquired or merged business

Obligation to make any and all divestitures necessary to gain clearance no matter how much or what impact is (HOHW)

Timing for other aspects of regulatory review

Silent/may be deadline for submission of HSR filing

Silent/may be deadline for submission of HSR filing

Express timing for submission of filing, Second Request compliance and other milestones

Timing for offering divestitures Silent Silent Express timing for offering remedies to obtain clearance

Control of regulatory process Buyer controls; require cooperation from Seller and may give access and information

Buyer leads; Seller entitled to be present at meetings, calls; obligation on Buyer to communicate certain matters to Seller

Full involvement of Buyer in negotiations with regulators; Seller prohibited from communicating without Buyer (except as required by law)

Obligation to litigate Silent/expressly exclude/litigate at buyer’s option

Silent/expressly exclude Obligation to litigate if regulators block exercisable at seller’s option; does not relieve buyer of obligations to make divestitures

Termination provisions Open-ended, extendable at buyer’s option

Tolling at either party’s option Tolling at seller’s option

Reverse break-up fee None Possible Substantial fee; provision for interim payments and interest

Time to termination date As long as buyer anticipates needing to fully defend transaction on merits, plus ability to extend at buyer’s option

Tolling at either party’s option Tolling at seller’s option at specified inflection points (e.g., second rquest compliance, commencement of litigation)

“Take or pay” provision None None Requires payment of full purchase price by termination date even if transaction cannot close