Principles of Merger Antitrust Law I: Substance, Reporting, Purchase Agreements

1. Principles of Merger Antitrust Law I:Substance, Reporting, Purchase Agreements Dale Collins Beau Buffier Kelly Karapetyan October 14, 2009

2. Why Think About Antitrust? Antitrust issues in transactions may affect: Whether a transaction should proceed at all Legal work in analyzing and preparing for regulatory review Cost and effort of regulatory review process Valuation of transaction Timing of transaction Structure of deal and the assets to be acquired Risk-shifting covenants (i.e., antitrust divestiture risk) Closing conditions Extent of due diligence and integration planning Content of press releases and customer/employee communications

3. Agenda Substantive merger antitrust principles Horizontal mergers Other theories of anticompetitive harm Merger control reporting United States Europe Rest of world Antitrust provisions in the purchase agreement Will not cover merger investigations or remedies ASK US BACK!

4. Substantive Merger Antitrust Principles 4

5. U.S. Legal Standard • Clayton Act § 7 prohibits mergers and acquisitions that may substantially lessen competition or create a monopoly • in any line of commerce (product market) • in any part of the country (geographic market) • Mergers tend to lessen competition when they threaten to hurt an identifiable set of customers through • Increased prices • Restricted market supply • Reduced product or service quality • Reduced rate of technological innovation or product improvement

6. Horizontal Mergers • Combination of two firms with competing products • Primary evidence probative of anticompetitive effect • Number of realistic alternatives available to customers • Company documents • Customer interviews 6

7. Horizontal Mergers • Key is number of practically available alternative suppliers: • 5  4 Almost always clears absent significant customer opposition • 4  3 Close case but can clear with some significant procompetitive justification, customer support and little customer opposition and no bad documents • 3  2 Usually challenged; requires compelling customer support to clear and no bad documents • 2  1 Always challenged; no efficiency defense

8. Horizontal Mergers Significant Competitors 8

9. Horizontal Mergers • “Realistic alternative supplier” • Customers must regard supplier as a realistic alternative to merging firms • Fringe firms do not count • Geographic coverage • Product breadth • Reputation • “Hot” company documents • Suggest the merging companies are close competitors of one another in some overlapping product • Suggest that there are few realistic alternatives to merging firms • Suggest that business model behind transaction is anticompetitive (e.g., higher prices, reduced innovation) 9

10. Horizontal Mergers • Customer complaints • Generally about price • 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 10

11. Horizontal Mergers • 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 • DOJ/FTC Merger Guidelines • NOT a good predictor of enforcement outcomes • But used as the roadmap in litigation 11

12. Other Theories of Anticompetitive Harm • Unilateral effects • Important special case in niche market segments • Merging firms offer a uniquely close substitutes for each other’s overlapping product • Elimination of potential entrants • Vertical mergers • Foreclosure of competitors • Input foreclosure • Distribution foreclosure • Raising costs to rivals • “Portfolio effects” • Have not seen in United States since 1960s • Used to block GE/Honeywell in the EU 12

13. FTC Second Requests by Theory 13

14. Defending a Transaction • Dual approach to defense: • Transaction is procompetitive • Transaction is not anticompetitive • Develop transaction rationale that will support these theories: • Combined company will make money by • Increasing value to customers and thereby increasing customer demand for its products • Not by squeezing customers on price, quality or service

15. Defending a Transaction • Best defense is a good offense: Customers benefit from the merger • Lower costs of production, distribution, or marketing make merged firm more competitive • Elimination of redundant facilities and personnel • Economies of scale or scope • 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 • One-stop shopping for customer convenience • Combining product lines 15

16. Defending a Transaction • Market will not allow merger to be anticompetitive • Merging parties may appear to compete but in fact they don’t • Merging parties compete but there are plenty of other significant competitors (“realistic alternative suppliers”) • Incumbent suppliers • Repositioned competitors • New entrants • Merging parties compete and there are few if any other actual competitors, but entry is easy and effective • There is some other reason why the combined firm will not be able to harm customers (e.g., “power buyers”)

17. The Obama Administration • Expect differences only at the margin • Somewhat higher confidence that they will not make an error • Identifying the problem • Fashioning a solution • More skeptical that markets are self-correcting • Less likely to credit repositioning in the substantive analysis • More demanding in remedies • Continue the skepticism regarding efficiencies • What deals would this administration challenge that Bush let go? • Maytag/Whirlpool • Sirius/XM • Renewed emphasis on finding anticompetitive vertical mergers

18. Merger Notification 18

19. HSR Act Process • Where thresholds met, mandatory notification and observance of waiting period under Hart-Scott-Rodino (“HSR”) Act by both parties to deal • Size-of-Transaction • Size-of-Person • Commerce • HSR Act prohibits closing of a transaction until after the applicable waiting period is over • Reviewed by FTC or DOJ • Some industries have special clearance regimes involving other bodies (e.g. Federal Reserve involvement in banking mergers) 19

20. HSR Act Waiting Periods • 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 • Possible outcomes: • Early termination of waiting period • Expiry of waiting period • Cleared after Second Request with or without remedies • Agencies make application for preliminary injunction in US Federal District Court 20

21. HSR Act Filing • Preparation of HSR Filing • Takes anywhere from a few days to a few weeks depending on the transaction • Key information required: • Transaction documents • Annual reports, financial statements and NAICS revenues • Corporate Structure Information: • Majority-owned subsidiaries • Significant minority shareholders • Significant minority shareholdings • “4(c)” documents 21

22. HSR Act Filing (cont’d) • 4(c) Documents • Studies, surveys, analyses or reports • Prepared by or for officers or directors of the company (and 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 22

23. HSR Reportability: When to Call Us • Asset Deal • Acquisition price + value of assumed liabilities approaches $65 million • Stock Deal • Acquisition price for voting securities to be acquired + value of voting securities already held approaches $65 million • Acquisitions of minority interests potentially reportable • Non-Corporate Interests (LLC/Partnership) Deal • Acquisition price for non-corporate interests to be acquired + value of interests already held approaches $65 million and acquisition confers control • Control based on economics: 50% or more of the profits and/or 50% or more of the assets upon dissolution 23

24. HSR Reportability 24

25. HSR Reportability • Determining Whether HSR Thresholds Are Satisfied • Size-of-transaction test • Look at the total value of the voting securities and assets of the acquired person which the acquiring person will hold as a result of the acquisition • Includes • The securities and assets being acquired PLUS • Any previously acquired voting securities PLUS • In some circumstances, the previously acquired assets of the acquired person 25

26. HSR Reportability • Determining Whether HSR Thresholds Are Satisfied • Different valuation rules apply depending on the type of acquisition: • Market price • Acquisition price (if determined) • Fair Market Value • Asset acquisitions (but not voting securities acquisitions) • Must include value of liabilities being assumed by acquiring person • Voting securities deals • Can exempt from the transaction value, any consideration specifically earmarked for debt repayment 26

27. Selected Exemptions • Intraperson exemption • Exempts acquisitions in which the acquired and acquired person are the same by reason of holdings of voting securities or having the right to 50% or more of the profits or assets upon dissolution of a non-corporate entity • Investment exemption • Hold no more than 10% of target’s outstanding voting securities (15% for certain Instituational Investors) • N.B. must be a purely passive investment intention 27

28. Selected Exemptions • Convertible voting securities • Exempts acquisitions of options, warrants and other convertible voting securities if the securities do not carry present voting rights (to elect board members) • HSR filing may be required prior to the conversion if thresholds are met • “Ordinary Course of Business” • Often comes up in the context of financial institutions buying/selling used durable good such as planes and rail cars which it owned for financing purposes and portfolios of financial products (e.g. loans). • As long as the financial institution maintains some type of similar financing unit, OCB can apply (but not with respect to portfolios of credit card receivables), even if a corporate unit it sold. 28

29. Foreign Acquisition Exemptions • Any acquisition of target with significant non-U.S. assets, exempt unless: • FMV of U.S. assets exceeds $65.2 million; or • Assets located outside the U.S. generated sales into the U.S. (in the aggregate) of more than $65.2 million in its most recent fiscal year 29

30. Foreign Acquisition Exemptions • “Foreign-Foreign No-Control”: Acquisitions of non-U.S. voting securities by non-U.S. persons exempt unless the acquisition will: • confer control of the issuer; and • the issuer (including all entities controlled by the issuer) either: • holds assets located in the United States (other than investment assets, voting or nonvoting securities of another person, and certain other assets) having an aggregate total value of over $65.2 million; or • made aggregate sales in or into the United States of over $65.2 million in its most recent fiscal year 30

31. HSR Act Review ProcessTypical 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) 31

32. Antitrust Considerations inDrafting Acquisition Agreements 32

33. Antitrust & Acquisition Agreements • 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 • Drop-dead date and termination provisions 33

34. Antitrust & Acquisition Agreements • “Consents and Approvals” Reps and Warranty • 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 34

35. Antitrust & Acquisition Agreements • Antitrust Conditions Precedent • Typical conditions (if applicable) • Expiration or termination of HSR waiting period • ECMR approval • For other jurisdictions, there are a variety of approaches • Ignore them • List each non-U.S. clearance specifically • Limit foreign antitrust clearance conditions to those “required by law” or that “would prohibit the consummation of the transaction” or that if not obtained (i) are or would be reasonably likely to have a material adverse impact or (ii) if not obtained would result in a criminal violation 35

36. Antitrust & Acquisition Agreements • “No Injunctions or Restraints” Condition • Typically provide that no restraint, preliminary or permanent injunction or other order or prohibition preventing the consummation of the transaction shall be in effect • 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) 36

37. Antitrust & Acquisition Agreements • ‘No Conflict/Absence of Litigation’ condition • Typically provides that no action is pending (or threatened) that seeks to delay or prevent consummation of the transaction • From a seller’s perspective, this could be too favorable as it would cover a challenge brought by a private party, or in non-U.S. jurisdictions, an appeal by a private party filed against an already approved transaction • For seller, watch for inconsistency between antitrust clearance conditions and generally worded conditions on “absence of litigation” or “no contravention of law” 37

38. Antitrust & Acquisition Agreements • Regulatory Approval/Best Efforts Covenants • Agreement to cooperate and obtain regulatory approvals using • Best efforts; or • Reasonable best efforts; or • Commercially reasonable best efforts • Filing Obligations and Timing • HSR default is 10 business days • Other jurisdictions may take significantly longer, so parties usually agree on filing these “as promptly as practicable” 38

39. Antitrust & Acquisition Agreements • Other provisions in best efforts covenants • Obligation to litigate in the event of a 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 • If advising seller, need to be careful that decision by buyer to litigate does not relieve it of any divestiture obligation (if there is one) • Coordination on dealing with government agencies • Advance notice and review of communications and submissions (buyer will usually want more control over process) • Right to attend meetings/conferences with Governmental authorities 39

40. Antitrust & Acquisition Agreements • Other provisions in best efforts covenants • Agreement not to take any action that will make antitrust approval more difficult • Agreement not to withdraw filings, extend waiting periods or enter into timing agreement without consent of other party (seller typically wants) • Agreement on timing of SR response (seller may want to impose a tight timeframe) • Agreement on exchanging information on settlement offers (very pro-seller) 40

41. Antitrust and Acquisition Agreements • Risk-Shifting Provisions • Typical provisions • No divestiture obligation • “Hell or Highwater” provision, requiring seller to do whatever it takes to obtain antitrust clearance • Reverse breakup fee • Many other alternatives, depending on the circumstances: • Divestiture obligations limited to certain product lines • Divestitures limited by revenue cap • Materiality cap on divestitures • “Take or pay” obligation • Divestiture obligation alters buyer’s bargaining power vis-à-vis the enforcement agency and can raise “road map” problem • Sometimes dealt with in a side-letter interpreting the acquisition agreement, but this may not be possible in public deals due to SEC disclosure requirements 41

42. Antitrust and Acquisition Agreements • Timing and Termination Issues • 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 42