8. Mergers and Acquisitions II: Merger Review and Challenges

1. 8. Mergers and Acquisitions II:Merger Review and Challenges Antitrust Law: Case Development and Litigation Strategy Spring 2013 NYU School of Law Dale Collins

2. Topics • More on inquiry risk • Who has standing to challenge? • Who has the incentives to challenge? • Merger review under the HSR Act • Premerger notification • DOJ/FTC merger reviews • DOJ/FTC merger review outcomes • Remedies risk • Litigating antitrust merger cases • Forum • Standard for injunctive relief

3. The Risk Approach to Merger Antitrust Analysis

4. Thinking systematically about antitrust risk • Inquiry risk—Will the legality of the transaction will be put in issue? • Who has standing to investigate or challenge the transaction? • What is the probability that someone with standing will spot the transaction as potentially anticompetitive? • What is the probability that one of these entities will pursue the transaction? • Substantive risk—Will the transaction be found unlawful? • Will the merger be found to be anticompetitive? • How can we practically assess the risk? • Remedies risk—Will the transaction be blocked or restructured? • 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?

5. Types of antitrust risks • 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 Inquiry risk Substantive risk Remedies risk

6. 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

7. Costs and benefits of continuing the defense • For a “fixable” deal $ Marginal costs from continuing defense Marginal benefits from continuing defense Time Query: Why are the curves shaped (roughly) as they are?

8. Inquiry Risk

9. Who has standing to challenge?

10. Who has the incentives to challenge? • Preclosing

11. Who has the incentives to challenge? • Postclosing

12. Who has the incentives to challenge? • 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

13. Merger Review under the HSR Act:Premerger Notification

14. HSR Act • Hart-Scott-Rodino Act1 • Enacted in 1976 and implemented in 1978 • Applies to large mergers, acquisitions and joint ventures • Imposes • Preclosing reporting to both DOJ and FTC by each transacting party • Post-filing waiting period before parties can consummate transaction • Authorizes investigating agency to obtain additional information and documents from parties during waiting period through a “second request” • Designed to alert DOJ/FTC to pending transactions to permit them to investigate—and, if necessary, challenge—a transaction prior to closing 1 Clayton Act § 7A, 15 U.S.C. § 18a.

15. Reportability • HSR Act applies to acquisitions of • Voting securities • Assets • Basic structure • Prima facie reportability • Size of transaction • In some cases, size of parties • Applies to the enterprise, not just the formal parties to the transaction • Exemptions

16. Prima facie reportability1 * Based on the value of voting securities and assets the acquiring person will hold as a result of the acquisition, including the value of any previously acquired voting securities. 1See Revised Jurisdictional Thresholds for Section 7A of the Clayton Act, 78 Fed. Reg. 2406 (Jan. 11, 2013) (effective Feb. 11, 2013).

17. Notification thresholds 1See Revised Jurisdictional Thresholds for Section 7A of the Clayton Act, , 78 Fed. Reg. 2406 (Jan. 11, 2013) (effective Feb. 11, 2013).

18. Filing fees 1See Revised Jurisdictional Thresholds for Section 7A of the Clayton Act, 78 Fed. Reg. 2406 (Jan. 11, 2013) (effective Feb. 11, 2013).

19. HSR Act filing • Uses a prescribed form • Requires no presentation of any antitrust analysis • Key information required: • Transaction documents • Annual reports and financial statements • Revenues by NAICS codes • Corporate structure Information • Majority-owned subsidiaries • Significant minority shareholders • Significant minority shareholdings • “4(c)” and “4(d)” documents

20. HSR Act filing • 4(c) and 4(d) documents • 4(c) documents • Studies, surveys, analyses or reports • Prepared by or for officers or directors of the company (or any entities it controls) • That analyze the transaction • With respect to markets, market shares, competition, competitors, potential for sales growth, or expansion into product or geographic markets • 4(d) documents • Confidential Information Memoranda (“CIM”) • Third party advisor documents • Synergy and efficiency documents • Failure to provide all 4(c) and 4(d) documents • Makes the HSR filing ineffective, so that the waiting period never started • Usually discovered by investigating agency in the document production in a second request • Agencies have required parties to refile and go through the entire process (including a second second request) • Also, fines for closing a transaction without observing the applicable waiting period

21. Selected exemptions • Intraperson • Acquired and acquired person are the same • Investment • Hold no more than 10% of target’s outstanding voting securities • 15% for certain institutional Investors • N.B. Acquirer must have a purely passive investment intention • Convertible voting securities • Acquired securities have no present voting rights • Acquisitions of non-U.S. assets • Must not generate sales in or into the U.S. of more than $63.4MM • Acquisitions of non-U.S. voting securities by non-U.S. persons that either • Do not confer control over the target, or • Do not involve assets in the U.S., or sales in or into the U.S., over $63.4MM

22. Merger Review under the HSR Act:DOJ/FTC Merger Reviews

23. Waiting periods • General rule • Cannot close a reportable transaction until the waiting period is over • Initial waiting period • 30 calendar days generally • 15 calendar days in the case of • a cash tender offer, or • acquisitions under § 363(b) of bankruptcy code • Extended waiting period • Waiting period can be extended by issuance of a second request in initial waiting period • Waiting period extends through • Compliance by all parties with their respective second requests • PLUS 30 calendar days • 10 calendar days in case of a cash tender offer • Investigating agency may grant early termination at any time

24. Initial waiting period investigation • Review of the HSR forms by the FTC Premerger Notification Office • DOJ and FTC decide which, if either, of the agencies will do the investigation (“clearance”) • Initial contact by investigating staff • Usually occurs 10-15 days into the 30-day initial waiting period • Staff asks the parties to provide certain materials voluntarily • Most recent strategic, marketing and business plans • Internal and external market research reports for last 3 years • Customer lists of the firm’s top 10-20 customers • Including the name and telephone number of contact person • Product lists and product descriptions • Competitor lists and estimates of market shares • Staff invites parties to make a presentation on the transaction • Wants to see business people in addition to lawyers

25. Second request investigations • Second request • HSR Act authorizes investigating agency to issue one request for additional information and documentary material during the initial waiting period to each reporting party • Extends waiting period until • All parties comply with their respective second requests, and • Observe a final waiting period (usually 30 days) following compliance

26. Second request investigations • Second request • Blunderbuss request • If you can only ask once, ask for everything • Typically takes 6-16 weeks to comply • Often covers 60-120 custodians • Agencies are making meaningful efforts to reduce this number—targeted 30-35 • Interrogatories, including: • Detailed sales data • Bid and win/loss data • Requirements for entry into the marketplace • Rationale for deal • Document requests, including: • Business, strategic and marketing plans • Pricing documents • Product and R&D plans • Documents addressing competition or competitors • Customer files and customer call reports • Covers e-mail and other electronic documents • Non-English language documents must be translated

27. Second request investigations • Depositions of business representatives of parties • Often 3-5 employees for each party • Often senior person knowledgeable about U.S. sales and competition for U.S. customers • Can include sales representatives for key accounts • R&D directors (if R&D is important to defense) • In Washington • Transcribed and under oath • Typically each lasts 6-8 hours • Documents and testimony from customers and competitors • Presentations by economic experts of parties

28. Final waiting period • Timing • Begins when parties submitted proper second requests responses • Ends 30 calendar days later • 10 days in a cash tender offer • Parties often voluntarily “extend” the final period • Provides additional time for agency to complete investigation • Usually better than being sued! • May be necessary to complete meetings • May be necessary if a consent decree is being negotiated • Meetings • One or more meetings with the investigating staff to make final arguments • Meeting with DOJ section chief/FTC assistant director • Meeting with responsible DOJ deputy assistant attorney general/FTC Director of the Bureau of Competition • Meeting with DOJ Assistant Attorney General/individual meetings with five FTC commissioners

29. HSR Act review process • Typical domestic transaction Formal end of HSR waiting period Second request issued Announce deal Second request compliance Final agency decision File HSR forms Second request conference Final waiting period (30 days) Initial waiting period (30 days) Document production and interrogatory responses (approximately 2-3 months) Voluntary extension (up to 3 months as necessary) 0 0.5 month 1.5 months 3.5-4.5 months 4.5-5.5 months Customer rollout – First telephone call (voluntary request) – First presentation – Follow-up meetings – First DOJ/FTC customer interviews – First DOJ/FTC competitor interviews – Filings in other jurisdictions – Second request conference – Collect and review documents – Prepare interrogatory responses – Depositions of employees – Additional meetings – Follow-up DOJ/FTC customer interviews and affidavits – Follow-up DOJ/FTC competitor interviews – Final meetings with staff – Meetings with senior staff – Negotiate consent decree (if necessary)

30. Merger Review under the HSR Act:Merger Review Outcomes

31. Possible outcomes in DOJ/FTC reviews • Terminations without enforcement action • Early termination in the initial waiting period • Normal expiration of the initial waiting period • Early termination in the extended waiting period • Normal expiration in the extended waiting period • Terminations with enforcement action • Consent settlement imposing obligations on merged firm as a condition to clearance • DOJ investigations: Consent decree entered by federal district court • FTC investigations: Consent cease and desist order entered by Federal Trade Commission • “Fix-it-first”—parties restructure transaction to eliminate agency concerns prior to closing • Eliminates need for a consent decree or consent order • Litigation • Preclosing: Investigating agency seeks preliminary injunction in federal court • Postclosing: Investigating agency seeks restructuring permanent injunction in federal court (DOJ) or in administrative proceeding (FTC)

32. Remedies RiskPredicting Agency Merger Review Outcomes

33. Agency perspectives • If a competitive concern exists, the solution must— • Fix the agency’s competitive concern • Be workable in practice • Must not involve the agency in continuous oversight

34. Adjudicated relief/consent decrees • Usual outcome: Overwhelmingly consent relief • Rare for merger cases to go to court • But— • Agency starting point: • Consent solutions should match adjudicated permanent injunctive relief, assuming that agency establishes a violation • Agency negotiates consent relief— • Not only to remediate competitive concern with the immediate deal • But also with an eye to implications for consent decree negotiations in future deals • Upshot • Agencies have found that they do not have to give much away in negotiations

35. Horizontal remedies—Agency requirements • Almost always require the sale of a complete “business” • Agency: Essential to the effectiveness/viability of the solution • Exceptions: • Divestiture buyer has necessary infrastructure and limited divestiture assets will enable rapid and effective entry into divestiture business • Divestiture assets are commonly traded (e.g., grocery stores) • Will permit “trade up” solutions • Buyer may sell its own business in order to purchase a larger business

36. Horizontal remedies—Agency starting point • Everything associated with the divested business must go • Agency will negotiate exclusions • But must be convinced that the exclusions will not undermine the effectiveness or viability of the solution

37. Horizontal remedies—Elements • Divest physical assets • Production plants, distribution facilities, sales office, R&D operations • All associated equipment • Leases/property from which business operated • Divest IP • Sale of any IP rights used exclusively in the divestiture business • Sale and license back/license of IP rights used in both retained and divested operations • Divestiture buyer must have ability to develop and own future IP

38. Horizontal remedies—Elements • Make “key” employees available for hire by divestiture buyer • All employees necessary for • production, • R&D, • sales & marketing, and • any other specific function connected with the divestiture business • Must facilitate access to employees • Cannot make counteroffer or offer other inducement to prevent defection

39. Horizontal remedies—Elements • Assign/release customer contracts and revenues • If not assignable, offer customers ability to terminate with no penalties in order to rebid business • Transfer business information • Especially customer-related information • Provide transition services and support

40. Horizontal remedies—Agency right of approval • Agency will demand right of approval over divestiture buyer • In agency’s sole discretion • Remedy must eliminate agency’s antitrust concerns • Buyer must have no antitrust problem in acquiring divested business • Buyer must be capable of replacing competition lost as a result of the acquisition

41. Horizontal remedies—Divestiture deadlines • Agency will require a very tight deadline for closing the divestiture • May require a buyer “up front” • Almost always results in a “fire sale” Practice note: Unless protected by attorney-client privilege or the work doctrine, business documents and financial modeling of possible divestitures will be disclosable in response to the second request.

42. Vertical remedies • To remedy foreclosure concerns • Non-discriminatory access undertakings • Undertakings to maintain open systems to enable interoperability (e.g., Intel/McAfee) • To remedy anticompetitive information access • Information firewalls

43. Panasonic/Sanyo—Horizontal • FTC concern • Merging parties produce the highest quality NiMH batteries and are closest competitors – effectively control the market • Consent decree—Divestiture of Sanyo’s NiMH assets • Buyer upfront—Fujitsu • Divestiture package • Manufacturing facility in Takasaki, Japan • Supply agreement for NiMH battery sizes not produced at Takasaki • All Sanyo IP, including patents and licenses related to portable NiMH batteries • Access to identified “key” employees • Financial incentives to employees (up to 20% of salary) to move to divestiture buyer • Transition services and support for 12 months

44. Comcast/NBCU—Vertical • DOJ concern • JV between Comcast, NBCU and GE would give Comcast control over NBCU’s video programming • Consent decree • Continue to license NBCU programming content to competing multichannel video programming distributors • License the JV’s programming to emerging online video distributor competitors • Commercial arbitration if cannot reach agreement on license terms • Prevents restrictive licensing practices • Hulu • Comcast to relinquish voting and other governance rights in Hulu • Comcast precluded from receiving confidential or competitively sensitive information about Hulu’s operations

45. Litigating Antitrust Merger Cases

46. Antitrust merger litigation generally * May bring state claims in state court

47. Preliminary injunction standards • DOJ • Clayton Act § 15: Authorizes the district courts in antitrust cases brought by the Attorney General to “make such temporary restraining order or prohibition as shall be deemed just in the premises.”1 • Test: Traditional four-factor test: • Likelihood of the plaintiff's success on the merits • Threat of irreparable injury to the plaintiff in the absence of the injunction • Possibility of substantial harm to other interested parties from a grant of injunctive relief • Interest of the public • No requirement to show irreparable harm • Likelihood of success key • Usually requires a showing that there is a “reasonable probability of success at trial” • Some older decisions require only that the case “raise questions going to the merits which are so substantial and complex as to warrant ... maintaining the status quo until they have been resolved.” • Courts give lip service to other factors, but rather if ever important in DOJ cases • Type of relief • Blocking preliminary injunction • “Hold separate” injunctions that allow the deal to close are regarded as insufficient 1 15 U.S.C. § 25.

48. Preliminary injunction standards • FTC • FTC Act § 13(b): Authorizes district court to enjoin consummation of a merger pending completion of an FTC administrative adjudication “[u]pon a proper showing that, weighing the equities and considering the Commission's likelihood of ultimate success, such action would be in the public interest.”1 • No requirement to show irreparable harm • Test: Must show a “likelihood of success” on the merits at trial by • Showing at least a “fair and tenable chance” of success2, or • Raising questions “so serious, substantial, difficult and doubtful as to make them fair ground for thorough investigation, study, deliberation and determination by the FTC in the first instance and ultimately by the Court of Appeals.” • Application • While law recognizes FTC as an “expert agency” that (in principle) is entitled to some deference and recite the above test, most courts in practice appear to hold the FTC to the same standard as the DOJ (a “likelihood of success on the merits”) even if they do not explicitly say so • Type of relief: Blocking injunction 1 15 U.S.C. § 53(b).2E.g., FTC v. Beatrice Foods Co., 587 F.2d 1225, 1229 (D.C. Cir. 1978).3E.g., FTC v. Whole Foods Mkt., Inc., 548 F.3d 1028, 1035 (D.C. Cir. 2008) (Brown, J.).

49. Preliminary injunction standards • Private parties • Clayton Act § 16: Provides private persons (including states) with a right of action to "sue for and have injunctive relief ... when and under the same conditions and principles as injunctive relief against threatened conduct that will cause loss or damage is granted by courts of equity.”1 • Interpreted to include TROs and preliminary injunctions • Test: Same as DOJ + irreparable harm • Irreparable harm is harm no remediable by damages • Also requires actual or threatened antitrust injury and prudential standing • The equities and the public interest count in the analysis (although still secondary to likelihood of success on the merits) • Type of relief • While private parties can obtain preliminary injunctive relief, courts are reluctant to grant it • Especially true when deal has been challenged and settled by the DOJ or FTC • Courts typically find that harm is not irreparable → Damages are sufficient 1 15 U.S.C. § 26.