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Respect for merger review process at the top of enforcers’ agenda: top tips for survival

Over recent months, competition authorities around the globe have shown no signs of backing down from intervening in mergers which they consider raise competition concerns. It is therefore important for merging parties to prepare competition workstreams as early as possible and engage proactively with authorities. As authorities place an ever-stronger reliance on internal documents to inform their view of a transaction and the markets, parties should focus on document preparation from the early stages. The greater coordination we have been seeing between authorities also increases the importance of maintaining a cohesive strategy across all filings to avoid getting caught out.

Prohibitions, prohibitions, prohibitions

The EC has prohibited three mergers in recent months, while in the UK, there have been three effective prohibitions (including cases which have resulted in divestment of the UK business). It appears that in a further five cases the parties abandoned the deal upon referral to Phase 2 or after receiving the CMA’s provisional findings. The authorities’ approach has been largely attributed to the growing public perception that, despite the “consumer welfare” goal of competition regulation, ordinary consumers do not feel that competition law works for them. Nor can they rely on markets to self-correct their own failures.

The U.S. authorities have also been vigorously challenging mergers, including based on vertical theories of harm as illustrated by a number of contentious FTC decisions. State attorneys general have become more active in intervening where they believe that federal enforcement falls short. Examples are the Colorado AG’s challenge in UnitedHealth/DaVita endorsed by the Democratic Commissioners, plus several states’ objections to the DOJ settlement in Sprint/T-Mobile.

Tougher remedy requirements

Merging parties are finding themselves subject to tougher remedy requirements. Remedies that would have previously been considered sufficient to address competition concerns are now found wanting. This is because authorities are keen to ensure that the divested business will remain viable and competitive going forward and now regularly seek divestiture commitments as a condition to closing the main deal (a so-called “upfront buyer” remedy). This means that parties can only close the main transaction once they have signed a binding sale and purchase agreement for the divestment business with a purchaser approved by the authority.

Around 85% of U.S. and 35% of EU divestiture remedy cases now require an upfront buyer. The U.S. agencies have even imposed global hold separates in some deals in lieu of an upfront buyer requirement (see e.g. Bayer/Monsanto and Linde/Praxair). The consequences of a global hold separate can be far-reaching and potentially costly, as the parties will not be able to integrate their operations anywhere in the world before the U.S. agencies agree to lift the hold separate order – which typically will only occur once the divestiture sales have closed. There are also signs that U.S. courts may seek to play a more active role in approving settlements with the DOJ in a departure from their historical practice. We saw this in CVS/Aetna, where the judge held hearings to consider whether the agreed divestiture to WellCare was an adequate remedy.

Parties must devote considerable time and resources to prepare complex asset divestitures. It is not uncommon for merging parties to negotiate – and in some cases even sign – divestiture agreements with potential buyers well before the main deal is approved. Sometimes this occurs even before the authority has engaged with the parties regarding remedies. While such strategies gain time, they carry significant risks if, contrary to the parties’ expectations, the authority requires a different divestment and/or buyer. Not every proposed buyer will be a “suitable” buyer. In particular, strategic buyers operating in the same industry as the divestiture business may not be acceptable. Conversely, there has been some increased reluctance to accept private equity buyers on the basis of a perceived lack of market-specific expertise.

“The challenges for companies seeking to combine their activities are continuing to increase. Merger enforcement is on the rise across the world with higher intervention rates, longer and more demanding reviews and sometimes tougher remedies than expected. A good early analysis of the possible antitrust risks and, where possible, early engagement with the agencies may be important to avoid unpleasant surprises and unforeseen delays for your deal.”

- Gerwin van Gerven

Greater reliance on internal documents

Authorities are relying more heavily on parties’ internal documents – e.g. board papers, presentations and certain internal emails – to draw conclusions on market definition and the competitive assessment. Requests by the EC to produce millions of pages of documents on short notice are becoming commonplace, resulting in parties undertaking significant document trawl exercises using e-discovery tools. Meanwhile, the ACCC has flagged that it intends to take a more document-heavy, evidence-based approach, including issuing more compulsory requests for documents.

Failure to comply fully with document requests within a short time frame will mean delays in the review timetable. Sanctions are also possible for the provision of incomplete or misleading information. For example, in August the CMA fined Rentokil Initial £27,000 for failing to provide without reasonable excuse the information requested during the CMA's Phase 1 investigation into its acquisition of the pest control business of MPCL Ltd (formerly Mitie Pest Control Ltd). Rentokil argued that it had received the CMA’s approval regarding its internal document search methodology, which it had then applied in good faith. But according to the CMA the company was ultimately responsible for ensuring that the manual searches it conducted produced sufficiently robust results.

Greater coordination among agencies

Increased coordination and dialogue among authorities can be a very good thing; for example, in Linde/Praxair, close regulatory cooperation enabled the EC to rely on the U.S. remedy to issue its clearance decision. But it can also play against the parties, with complaints, concerns or evidence presented before other authorities being taken into account. In AB InBev/SAB Miller, the EC relied heavily on internal documents that were identified by the DOJ, and which were ultimately used as evidence for the EC to ask the parties for additional remedies.

Stricter enforcement of suspension obligations

The EC’s record €124.5 million fine imposed on Altice last year is a cautionary tale of how things can go wrong pre-closing and highlights the importance of ensuring appropriate pre-closing covenants and safeguards for exchanging commercially sensitive information. More recently, Canon has been the subject of gun-jumping fines in China, the U.S. and the EU in relation to its two-step acquisition of Toshiba Medical Systems. While an outlier case based on extreme facts, the conclusions by the EC and DOJ this summer are a clear reminder that caution should be exercised when using two-step structures given the risk of authorities “looking through” and treating them as one transaction that transfers control of the target after the first step.

The bigger question is whether more robust structures would carry a lower risk of being viewed as breaches of the EU and U.S. gun jumping rules. In this regard, we expect that internal documents will be key to the assessment of whether a warehousing or option structure can be considered genuine.

Meanwhile, SAMR continues to aggressively pursue failures to notify and has already imposed five penalties this year, while the ACCC issued its first gun-jumping fine – against Cryosite Limited – in February.

“Enforcement of global deals has become more connected, with agencies often coordinating in relation to evidence and outcomes. Against this background, the best strategy is to be open and consistent. Telling a different story to different agencies may lead to delays and make the parties lose credibility.”

- Antonia Sherman

Top tips for getting your deal over the line without surprises
Prepare and prioritise

Assess deal documents and data against potential competition concerns, prepare and map out filings and strategy for clearances. Allocate risk and then stick to the narrative. Don’t forget foreign investment screenings. In sensitive/ political deals plan government affairs and PR strategy in advance of announcement.

Consider deal drivers and valuation

What is the narrative for deal rationale and what do internal documents and evidence say about this? Valuation is particularly important where target is a potential entrant or active in digital sectors.

Don’t score an own goal via internal documents

Consider what documents say when read “cold”. Put in place document creation guidelines early and ensure that they are implemented. Be ready for huge document trawls: on big deals, forensic software will be needed.

Prepare the exit ramps

Identify buyers with a critical eye, they will play an important role. Note increasing requirements being placed on “suitable” buyers. Consider a wider than conventional remedies assessment – at what point do the deal economics break?

Watch out for gun jumping and accuracy of filings/responses to information requests

Put in place guidelines (including around any integration planning) from the outset and ensure that they are implemented in practice. Mistakes will be costly (see Altice).