Mergers & Acquisitions

McDermott’s Annual EU Competition Review summarizes key developments in EU competition rules. During the previous year, several new regulations, notices and guidelines were issued by the European Commission. There were also many interesting cases decided by the General Court and the Court of Justice of the European Union. All these new rules and judicial decisions may be relevant for your company and your day-to-day practice.

In our super-connected age, we can be inundated by information from numerous sources and it is difficult to select what is really relevant to one’s business. The purpose of this review is to help general counsel and their teams to be aware of the essential updates.

This review was prepared by the Firm’s European Competition Team in Brussels, Paris and Germany.

Access the full report.

On 16 January 2019, the Court of Justice of the European Union (CJEU) dismissed the appeal by the European Commission (Commission) against the 2017 judgment of the General Court of the European Union (GCEU). This annuls the Commission’s decision to block the proposed acquisition of TNT Express NV (TNT) by United Parcel Services (UPS) in its entirety (C-265/17 P). The judgment reminds the Commission that it must maintain a balance between the need for speed and the observance of the rights of the defence in merger proceedings.

IN DEPTH

Background

By decision on 30 January 2013, the Commission blocked the proposed acquisition of TNT by UPS (Case M.6570).

On 7 March 2017, the GCEU annulled the Commission’s decision in its entirety on the grounds that (i) the Commission infringed UPS’s rights of defence by failing to communicate to UPS the final version of an econometric model on which it relied in its prohibition decision and that (ii) UPS might have been better able to defend itself if it had at its disposal the final version of that model.

The Commission challenged the GCEU judgment before the CJEU. First, the Commission argued that it was not required to communicate the final econometric analysis to UPS. Second, the Commission claimed that even if UPS’s rights of the defence had been infringed, the GCEU should have dismissed UPS’s plea alleging infringement of the rights of the defence as ineffective because a significant impediment to effective competition (“SIEC”) could in any event be established in Denmark and the Netherlands without having to rely on the econometric model concerned.

Continue Reading EU Court of Justice Confirms Annulment of Commission Prohibition Decision Due to a Procedural Irregularity

On January 31, the Board of the Mexican Competition Authority—the Federal Economic Competition Commission (COFECE)—approved REMY Holdings International’s acquisition of BorgWarner’s vehicle aftermarket business. However, the companies failed to file and were fined for their misconduct (~$153,134). The fine was less severe because the parties voluntarily acknowledged their failure to notify COFECE.

WHAT HAPPENED:

  • On October 3 2016, BorgWarner Inc. (BorgWarner) agreed to sell its REMY light vehicle aftermarket business to an investor group led by Torque Capital Group. The sale included manufacturing facilities in Mexico, US, Belgium, Tunisia and Hungary. The purchase price was approximately $80 million.
  • The deal between BorgWarner and REMY exceeded the thresholds provided in the Federal Economic Competition Law (LFCE), yet COFECE was not notified of the transaction until October 2018.
  • Under the LFCE, failure to notify a concentration is considered severe misconduct. The parties’ voluntary acknowledgement of the failure to notify, however, was a mitigating factor in determining the appropriate fine.
  • In light of the above, the COFECE fined each party MXN 1,460,800 (~$75,230).

WHAT THIS MEANS:

  • For transactions having an impact in the Mexican territory, it is advisable to verify whether a COFECE filing is required. While the fines in this matter were limited, COFECE fines can be very significant.
  • Failure to notify a concentration can be fined with up to five percent of the parties’ turnover.
  • In addition, the COFECE will analyze the impact of the transaction. If the COFECE finds that the transaction harms competition, the transaction will be deemed illicit and the parties may face additional fines of up to eight percent of their turnover.
  • In determining the amount of the fines, the COFECE will consider mitigating circumstances, such as the parties´ voluntary recognition of the infringement.
  • This decision is another example of the importance of performing an international antitrust filing assessment (often referred to as a multi-jurisdiction assessment or “Multi-J”) in all transactions having an international component. Antitrust agencies worldwide are increasing their focus on failures to notify and gun jumping generally. Last July, the Australian Competition and Consumer Commission brought its first ever gun jumping case against Cryosite and Cell Care Australia. Similarly, in April, the European Commission imposed a record fine of EUR 124.5 million on Altice for implementing its acquisition of PT Portugal before notification or approval by the Commission.

Sara Fernandez, a visiting international attorney in the Washington, DC office, also contributed to this post.

The European Commission recently reaffirmed that industrial policy objectives have no role to play when it comes to applying the EU merger control rules. Despite unusually intense industrial and political pressure to get the Siemens/Alstom railway merger done, Competition Commissioner Vestager has forcefully reiterated that the substantive test under the EU Merger Regulation remains exclusively competition based.

Read the full article.

On January 28, the US Federal Trade Commission (FTC) announced that it had accepted a proposed settlement with office supply distributors Staples and Essendant in connection with Staples’ proposed $482.7 million acquisition of Essendant. The settlement suggests that the FTC is currently more willing than the US Department of Justice (DOJ) to accept conduct remedies to resolve competitive issues raised by vertical mergers.

WHAT HAPPENED:

  • The FTC Commissioners voted 3-2 to accept a proposed settlement establishing a firewall to prevent Staples from receiving competitively sensitive customer information from Essendant.
  • Staples is the largest reseller of office products in the US, and one of only two retail office supply superstores in the US. Essendant is one of only two nationwide office product wholesale distributors. In September 2018, Staples agreed to acquire Essendant.
  • Staples competes with various resellers to sell office supplies to mid-sized companies. Many of those resellers rely on Essendant as their wholesale distributor. In that role, resellers have to provide Essendant with detailed information about their end customers’ identities, purchasing history, product preferences and similar data.
  • The FTC alleged in its complaint that the transaction was likely to harm competition by giving Staples access to the commercially sensitive information (CSI) of Essendant’s resellers and those resellers’ end customers. The FTC contended that access to that information could allow Staples to offer higher prices than it otherwise would when bidding against a reseller for an end customer’s business.
  • To address this competitive concern, the FTC imposed a conduct remedy. Specifically, the FTC required the parties to establish a firewall limiting Staples’ access to the CSI of Essendant’s resellers and the end customers of those resellers.
  • Two FTC Commissioners issued dissenting statements, arguing that the settlement does not fully remedy the transaction’s likely anticompetitive effects. In the dissenters’ view, the evidence suggests that the integrated firm could implement a strategy of raising costs for Staples’ reseller rivals.

WHAT THIS MEANS:

  • The settlement indicates that the FTC remains willing to cure competitive issues raised by vertical mergers with conduct remedies, such as firewalls, instead of imposing a divestiture or seeking to block the deal.
  • Under Makan Delrahim’s leadership, the DOJ’s Antitrust Division has been less receptive of conduct remedies, even in vertical merger cases. Delrahim has stated that conduct remedies are fundamentally regulatory and are inconsistent with the DOJ’s role as a law enforcement agency.
  • The DOJ refused to accept conduct remedies to resolve the competitive issues arising from AT&T’s acquisition of Time Warner. DOJ challenged the transaction in federal court. In June 2018, a DC district court judge ruled against the DOJ, and the case is currently on appeal to the DC Circuit.
  • One of the FTC Commissioners, Rebecca Kelly Slaughter, argued in her dissenting statement that the FTC should be more willing to challenge, and seek to block vertical mergers when it identifies competitive concerns. That position is more aligned with the DOJ’s currently stated policy, but overall the FTC appears more willing to accept conduct remedies than the DOJ.

Consistent with Assistant Attorney General Delrahim’s speech on September 25, 2018, the DOJ released a new Model Timing Agreement which sets out that it will require fewer custodians, take fewer depositions, and commit to a shorter overall review period in exchange for the provision of detailed information from the merging parties earlier in the Second Request process than has previously been required.

WHAT HAPPENED:

  • In November, the US Department of Justice (DOJ) published a new Model Timing Agreement (the Model) much like the FTC’s model published earlier this year. Timing agreements are agreements between agency staff and merging parties that outline expected timing for various events (g., production of documents and data, timeline for depositions and front-office meetings if needed) and help provide clarity for the agencies to conduct an orderly investigation during a Second Request.
  • By providing this Model, the DOJ is signaling that it wants certainty on timing during its Second Request reviews and that this Model is a fast way for the parties and the DOJ to come to agreement on these issues.
  • Some highlights of the DOJ Model include:
    • Parties must wait 60 days after substantial compliance to consummate transactions and give 10 days’ notice prior to closing.
    • The Model limits the number of custodians to 20 per party and depositions to 12 per party, except in extenuating circumstances.
    • The Model reserves the DOJ’s ability to add 5 more custodians at any time prior to filing a complaint, with the requirement that parties must produce those individual’s responsive documents within 15 days or the agreed timing will be tolled.
    • For document productions, depending on production method (technology assisted review or linear review), all responsive, non-privileged documents must be produced approximately 30-45 days before substantial compliance. Production of potentially privileged documents ultimately deemed not privileged must be produced approximately 10-25 days before the substantial compliance certification date.
    • Most data productions are required 30-45 days before substantial compliance.

Continue Reading THE LATEST: DOJ Announces New Model Timing Agreement for Merger Investigations

The Premerger Notification Office (PNO) of the Federal Trade Commission (FTC) recently formalized a new position on Hart-Scott-Rodino Act (HSR Act) reporting obligations for certain not-for-profit, non-stock transactions. The change is currently in effect and applies to transactions that have not yet closed. The change in position will require reporting of many hospital transactions that have not traditionally been treated as reportable events. The biggest area of change relates to affiliation transactions where hospitals or health systems affiliate under a new parent entity.

Under its previous position, the PNO focused on whether a transaction results in a change of “control” of the board of directors of one or more of the combining entities. Under its new position, the PNO will focus on beneficial ownership–whether one party receives beneficial ownership over the assets of another party as a result of the transaction. Now, a potentially reportable acquisition can occur even when there is no change in the control of the board of directors of one of the combining entities because formal board control is not the exclusive method of obtaining beneficial ownership.

In a recently published Tip Sheet, the PNO provided analysis of reportability for three types of not-for-profit combinations that it regularly sees, which we summarize below. The first two examples involve traditional application of the rules to hospital transactions, while the third example represents the PNO’s newly formed position on affiliations. Note that in all of the examples below, we focus on the nature of the transaction structure to evaluate whether a potentially reportable acquisition of assets has occurred. In any specific transaction, the parties would also need to evaluate whether the statutory thresholds are met (e.g., the $84.4 million size-of-transaction test), as well as whether any exemption applies.

1. A simple acquisition in which an existing acquiring person (g., a not-for-profit hospital) is deemed to hold the assets of the acquired entity (e.g., another not-for-profit hospital) as a result of the acquisition. This can happen in a variety of ways, such as a straight asset acquisition or a transaction in which one not-for-profit becomes the sole corporate member of another. If one not-for-profit obtains the right to manage and operate another through a corporate transaction, that is likely a reportable structure.

a. PNO conclusion: This structure is reportable as an asset acquisition.

2. A transaction in which the existing not-for-profit entities remain independent but form a new joint venture entity as a jointly owned subsidiary or affiliate. The pre-existing entities remain separate persons for HSR Act purposes.

a.  PNO conclusion: This structure is reportable. However, the 16 C.F.R. § 802.40 exemption for the formation of a not-for-profit joint venture is likely to apply.
b. The illustration below depicts this structure:

3. A transaction in which the existing not-for-profit entities consolidate under a new not-for-profit entity. The existing entities lose their separate pre-acquisition identities or become wholly owned subsidiaries of the new entity. The exact structure of board appointment for the members of the not-for-profit entities does not drive the reportability assessment.

a. PNO conclusion: Under the PNO’s new position, the transaction is reportable as a consolidation.
b. The illustration below depicts this structure:

In the Tip Sheet, the PNO described several factors that it has considered relevant to the analysis of beneficial ownership in the context of hospitals affiliating under a new entity:

  • The new entity becomes the corporate member of the affiliating hospital entities
  • The new entity has the right to authorize and/or approve the articles, bylaws, and other governance documents of the affiliating hospital entities
  • The new entity has the right to authorize and/or approve the sale or lease of the affiliating hospital assets
  • The new entity has the right to appoint and/or approve the senior officers of the affiliating hospital entities
  • The new entity has the right to devise and/or approve the strategic plans, capital budgets and expenditures, and significant contracting of the affiliating hospitals

Overall, not-for-profit hospital systems need to plan for HSR Act filings being required for many transactions that, under prior PNO analysis, would not have required notification. While the FTC would routinely investigate hospital affiliations that did not require HSR Act filings, the FTC will have additional procedural leverage when there is a mandatory filing, which creates the statutory waiting periods and Second Request mechanisms.

The Department of Justice (DOJ) and six broadcast television companies reached settlements last week after the DOJ claimed that the companies shared competitively sensitive information that allowed the parties to alter the way prices were set in the television spot advertising market. Assistant Attorney General Makan Delrahim explained in a speech at the ABA Antitrust Section Fall Forum on November 15 that the government’s investigation was triggered by information produced in the merger investigation of two of the defendants, Sinclair and Tribune, which was abandoned earlier this year. The case has important implications for companies and serves as a cautionary tale related to information sharing.

WHAT HAPPENED:

  • The investigation reportedly began from DOJ’s review of the $3.9 billion proposed acquisition of Tribune by Sinclair earlier this year. The parties abandoned the merger this past summer after the Federal Communications Commission (FCC) referred the matter to an administrative law judge and delayed approval.
  • On November 13, DOJ filed a complaint and competitive impact statement against six television broadcast station companies, each of whom sells spot advertising to advertisers in the US or owns and operates broadcast television stations. With the complaint, DOJ simultaneously filed six proposed settlements with defendants.
  • The complaint alleges that the defendants and other broadcasters reciprocally exchanged revenue pacing information and other forms of competitively sensitive sales information in specific designated marketing areas in real time for each individual competitor. Pacing information shows a station’s remaining advertising inventory and that station’s performance compared to the market.
  • DOJ claimed that the information sharing occurred both directly between parties and through Sales Reps Firms, who represent broadcast stations in negotiations with advertisers or advertisers’ agents over spot advertising. This indirect sharing occurred despite the existence of firewalls to prevent coordination and information sharing between sales teams at the Sales Reps Firms representing competing stations. DOJ claimed that the exchanges occurred with defendants’ knowledge and frequently at defendants’ instruction.
  • As a result of the information sharing, DOJ argued that the stations were able to understand the availability of spot advertisement inventory on competitors’ stations in real time. DOJ also argued that the stations used the information to anticipate whether other companies would raise, maintain, or lower prices for spot advertising. The information exchanges therefore “distorted the normal price-setting mechanism in the spot advertising market and harmed the competitive process” and were unreasonable restraints of interstate trade and commerce.
  • The settlements that are proposed by DOJ prohibit defendants from sharing competitively sensitive information directly or indirectly. The settlements require defendants to institute antitrust compliance officers, and compliance and reporting programs, and to fully cooperate in the DOJ’s ongoing investigation. The final judgments are set to expire seven years from the date of entry, but give DOJ the ability to terminate after five years.
  • The proposed settlements indicate that DOJ recognizes certain allowable exchanges of information. DOJ explains that aggregated competitively sensitive information may be communicated if it is handled by a fully independent third party, so long as the information is historical total revenue or other geographic or characteristic information, and is sufficiently aggregated so it does not allow recipients to identify the specifics.

WHAT THIS MEANS:

  • This case is an example of DOJ strictly enforcing the rules on information sharing between competitors. The proposed settlements clarify that high-level, aggregated, historical information may be shared, but not real-time information about individual competitors.
  • DOJ is not retracting its position on exchanges of price and cost information that fall in the “antitrust safety zone” described in the 1996 Statement of DOJ and Federal Trade Commission (FTC) Enforcement Policy on Provider Participation in Exchanges of Price and Cost Information. In that statement, DOJ and FTC together outlined that surveys managed by third parties, that contain information greater than 3 months old, and that have at least five providers reporting, with no individual representing more than 25 percent of the data, can be shared without challenge though the surveys include prices for services, wages, salaries, or other sensitive information. These guidelines were not followed in the case at hand, which illustrates the importance of staying in the “safety zone.”
  • The matter also demonstrates how a merger investigation can lead to a collateral investigation and significant consequences for the parties.
  • Companies, especially those in consolidated industries such as the television broadcasting business here, are best served by confirming that all parties understand the guidelines regarding information sharing, and instituting antitrust compliance programs to ensure that guidelines are followed.

United States: July – September 2018 Update

Both US antitrust agencies marked the third quarter of 2018 with significant policy announcements regarding the merger review process. The announced reforms seek to expedite the review process through cooperation between the agencies and the merging parties. Moving first, the Federal Trade Commission (FTC) revealed a Model Timing Agreement that provides the FTC Staff with earlier notice of the parties’ intent to substantially comply with a Second Request. Earlier notice allows the FTC Staff to create a more effective timeline for meetings with division management, front office staff and the Commissioners. Less than two months after the FTC revealed its Model Timing Agreement, the Antitrust Division of the US Department of Justice (DOJ) announced procedural reforms aimed at resolving merger investigations within six months of filing. The DOJ will commit to fewer custodians and depositions in exchange for the merging parties providing key information earlier in the investigation. Overall, these reforms appear to be a positive step forward for parties considering future transactions, but their effectiveness remains uncertain as the agencies start a difficult implementation period. While the FTC timing agreement may provide more certainty around the process, it does not reduce the review timing and actually extends it.

EU: July – September 2018 Update

The European Commission (EC) remained quite active clearing mergers in the third quarter of 2018. Most notably, the EC cleared Apple’s acquisition of Shazam without imposing conditions despite the EC’s stated concerns about access to data as a competitive concern. The EC opened a Phase II investigation into the transaction to investigate the potential for Apple to obtain a competitive advantage over competing music streaming services by accessing Shazam’s consumer data obtained through its music recognition services. In this case, the EC did not find evidence that the access to Shazam’s data would provide Apple a competitive advantage. In addition, the EC found that there were no concerns about Apple potentially restricting Shazam as referral source for Apple’s competitors. Going forward, it is clear that access to data is an issue that the EC will continue to investigate, but it is also clear that the EC is taking a careful approach in assessing when that access will truly lead to a competitive harm.  Continue Reading Antitrust M&A Snapshot

Antitrust laws protect competition and consumers. Antitrust enforcement is prevalent in actions concerning manufacturing and consumer goods, among other things. However, recent enforcement activity by the Federal Trade Commission (FTC) and Department of Justice’s Antitrust Division (DOJ) serves as a reminder that the services industry, particularly healthcare services, is not immune to antitrust scrutiny as well.

Antitrust enforcement and healthcare policy were two priorities under President Obama. So, too, was antitrust enforcement within healthcare markets. The current administration prompted speculation on whether it would change its emphasis in any of these respects. We examine in this article whether the Trump Administration, now a year and a half into its term, has shifted focus or instead has stayed in the hunt for antitrust violations in the healthcare industry. As discussed below, the record of healthcare antitrust enforcement actions over the last five years, spanning both administrations, demonstrates that healthcare has been and remains a priority for civil and criminal antitrust enforcement by the US antitrust agencies and state Attorneys General. Continue Reading Healthcare and Antitrust Enforcement: Continuity through the Administrations