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Antitrust M&A Snapshot | Q3 2022

In the United States, the US Department of Justice (DOJ) and the Federal Trade Commission (FTC) lost four merger challenges (Illumina/GRAIL, UnitedHealth/Change Healthcare, U.S. Sugar/Imperial Sugar and Booz Allen/EverWatch) in September. The losses demonstrate that parties willing to litigate can have success in court. The absence of “smoking gun” documents and lack of a presumption of anticompetitive effects (based on market shares and concentration) made these cases very difficult for the government. The judges in these cases tended to credit structural and behavioral remedies that the government felt were insufficient and were persuaded by real-world testimony from executives and third parties contradicting the government’s theories of changed economic incentives from the transactions.

In July 2022, the European Parliament published the final text of the European Union’s upcoming instrument to address distortive foreign subsidies, following a provisional political agreement reached between the EU lawmakers in June (Foreign Subsidies Regulation). The Foreign Subsidies Regulation introduces a new mandatory screening mechanism including notification obligations and the European Commission’s right of ex officio investigations, which will have a considerable impact on M&A transactions and procurement procedures.

The Foreign Subsidies Regulation will enter into force once it is formally adopted by EU lawmakers and published in the Official Journal. It will become directly applicable across the European Union six months after entry into force. The notification obligations will start to apply nine months after entry into force. The Commission also is currently drafting procedural rules on how to notify transactions, how to calculate time limits, and the process for preliminary reviews and in-depth probes when there is a suspicion of distortive foreign subsidies.

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DOJ Prosecutes Attempted Collusion among Business Competitors for First Time in Decades

On October 31, 2022, the US Department of Justice’s (DOJ) Antitrust Division (Division) made good on its intention earlier this year to revitalize efforts surrounding criminal enforcement of Section 2 of the Sherman Act when the president of a paving and asphalt contractor in Montana pleaded guilty to one count of attempting to monopolize the market for certain construction services in Montana and Wyoming. This is the Division’s first criminal prosecution of a Section 2 case in approximately 50 years. While criminal enforcement of antitrust laws has traditionally focused on per se anticompetitive agreements between two or more horizontal competitors, Section 2 primarily focuses on conduct by one firm or company with significant market power. This announcement—and subsequent criminal resolution—marks a significant departure from long-standing DOJ antitrust enforcement of monopolization claims and is a landmark result for the Division’s continued expansion of its criminal enforcement efforts.

Most notably, seemingly unilateral conduct that “attempts” to collude is now subject to criminal prosecution under Section 2, even if such an attempt did not result in any agreement. In contrast, there is no “attempt” component of a Sherman Act Section 1 charge, where the Division has traditionally investigated and prosecuted per se criminal price fixing, bid rigging and market allocation conduct requiring an agreement or “meeting of the minds” between horizontal competitors.

According to court documents, the DOJ alleged that Nathan Nephi Zito attempted to monopolize the markets for highway crack sealing services administered by Montana and Wyoming by proposing that his company and its competitor allocate regional markets. Zito approached a competitor about a “strategic partnership” and proposed that his company would stop competing for projects administered by South Dakota and Nebraska and the competitor would stop competing for projects administered by Montana and Wyoming. Zito allegedly offered a $100,000 payment as additional compensation for lost business in Montana and Wyoming and proposed that they enter into a transaction to “disguise their collusion.” The competitor company then approached the government and cooperated in its investigation, including by recording phone calls with Zito.

This case, the first Section 2 criminal resolution in decades, was prosecuted in coordination with the Procurement Collusion Strike Force (PCSF), which remains a top priority for the DOJ. The PCSF has been quite active in recent months, obtaining several convictions and bringing new indictments.

Although Section 2 is regularly associated with unilateral monopolist conduct, it also makes it a crime to attempt to monopolize or to conspire to monopolize. The “attempt” provision is what the Division relied on to obtain a conviction in this case, which is essentially an attempted but unconsummated Section 1 market allocation case where one of the potential conspirators cooperated with the government rather than entering into a potentially collusive agreement.

Key takeaways from this case include the following:

  • Now companies need to consider potentially collusive agreements with competitors—or attempts to do the same—that may exclude other competitors from a market in their antitrust risk evaluations. In practice, this could significantly broaden the scope of any compliance [...]

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Why Courts Are Rejecting Agencies’ Merger Challenges

The US Department of Justice’s and the Federal Trade Commission’s losses in three merger challenges in September and a fourth in October demonstrate that merging parties can close difficult transactions if willing to fight the agencies in court. In this Law360 article, McDermott’s Jon B. Dubrow, Joel R. Grosberg and Matt Evola discuss these four cases and what they mean for merging parties.

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Seven Corporate Directors Resign: DOJ Ramps Enforcement Against Board Members Serving on Competitors’ Boards

WHAT HAPPENED

  • Seven directors resigned from corporate boards following promises of enforcement of Clayton Act Section 8 (15 U.S.C. § 19) by the US Department of Justice (DOJ), Antitrust Division (the Division), the Division announced Wednesday.
  • The directors served on the boards of corporations that the DOJ asserted competed in a variety of sectors, including information technology, software, and manufacturing.

WHAT’S THE LEGAL CONCERN

  • Section 8 prohibits “interlocking directorates” (per se violation), which occur when the same individual serves simultaneously as an officer or director of two competing companies (direct interlocks) or when different individuals on boards of competing companies act on behalf of and at the direction of a single firm (indirect interlocks through deputization). In its press release, the DOJ noted that some of the interlocks arose because a private equity firm appointed different personnel to the boards of competing companies.
  • The goal of Section 8 and the DOJ action is to decrease potential opportunities for the exchange of sensitive information between competitors and the risk of anticompetitive conduct more generally.
  • Exemptions might apply. There are de minimis exemptions if a) the competing sales are less than $4.1 million (threshold updated annually); b) the competing sales of either corporation represent less than 2% of its total sales; or c) the competing sales of each corporation are less than 4% of its total sales. A careful analysis (similar to that done in merger analysis) is necessary to determine whether an exemption might apply.
  • Not just corporations? While the plain language of Section 8 refers to interlocks involving “corporations,” the DOJ has stated its view that Section 8 also covers interlocks between non-corporate entities, such as LLCs (this is an open area of law).
  • Not just the same person? While the plain language of Section 8 states that it applies when the same “person” sits on the board or acts as an officer of two competitors, the DOJ interprets Section 8 broadly to mean that two different individuals appointed by a common entity cannot serve on boards of competitors because the entity is a “person” and is serving on the boards through its designees.

WHAT ARE THE RISKS

  • Interlocks can create significant antitrust risk. While the DOJ’s concerns with interlocks seem to be assuaged with the quick removal of the Corporate Director identified, interlocks have served as the factual underpinning for antitrust conspiracy claims. Therefore, companies should be proactive in eliminating problematic interlocks, as the interlock combined with parallel action by competitors in an industry could serve as the factual basis for long and costly conspiracy investigations or litigation and could support complaint allegations to defeat a Twombly-based motion to dismiss.

ANTICIPATE CONTINUED ENFORCEMENT

  • While the resignations are not novel, they represent a major amplification of corporate responses to what Assistant Attorney General Jonathan Kanter has described as “an extensive review of interlocking directorates across the entire economy” and [...]

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Antitrust M&A Snapshot | Q2 2022

In the United States, parties continue to be cautious in litigating challenged transactions. Since January 2021, the US Federal Trade Commission (FTC) and Department of Justice (DOJ) filed lawsuits (or threatened to sue) to block 16 transactions. Of those transactions, 12 were abandoned and six are in various stages of litigation. The data suggest that the FTC’s and DOJ’s aggressive merger enforcement policy is raising the stakes for parties to potential mergers and acquisitions, including an increased willingness by the agencies to litigate potentially problematic transactions.

Between May 6 and June 3, 2022, the European Commission (Commission) held a public consultation to seek views on the draft revised Merger Implementing Regulation (Implementing Regulation) and the Notice on Simplified Procedure. This consultation was launched in the context of the Commission’s review process of the procedural and jurisdictional aspects of EU merger control.

On April 20, 2022, the UK government proposed new measures to boost consumer protection rights and competition rules. In particular, the UK government’s reforms aim to strengthen the Competition & Markets Authority’s (CMA) powers and alleviate burdens on smaller companies.

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International News Spotlight on Competition Law

In line with the evolution of the economy and the ongoing growth of online business and global trade, we’re seeing a corresponding increase in competition regulation and a rise in enforcement across all authorities. In our latest International News, we take a deep dive into the issues at play.

The growth of the online economy has triggered the US Federal Trade Commission’s (FTC) update of its 20 year old .com Disclosures: How to Make Effective Disclosures in Digital Advertising guide, and the development of an analytical framework for all digital distribution across the European Union. In just one seismic shift under the new EU Vertical Block Exemption Regulation 2022/720, dual-pricing, i.e., setting different wholesale prices for online/offline sales by the same distributor, is no longer considered a hardcore restriction unless its purpose is to prevent the effective use of the internet to sell the goods or services.

In the United States, there is an increased focus on anticompetitive mergers and acquisitions (M&A). The Biden Administration, the Department of Justice Antitrust Division, and the FTC have all stated that the regulatory landscape needs to be reshaped to better reflect dynamic markets, and their priority is the aggressive pursuit of litigation against offending parties rather than the granting of consent decrees. The tendency to “sin first and beg forgiveness later” will emphatically no longer work, as a recent French gun-jumping case demonstrates.

Both the United States and the European Union have also turned their attention to investigating wage fixing and no-poach labour market violations that are not connected with M&A or business collaborations. It’s clear that competition/antitrust authorities are determined to expand their remit.

Read our full Spotlight on Competition Law here.




DOJ to Merging Parties: The Time of “Underenforcement” is Over; Fix-It-First or Risk Being Challenged

WHAT HAPPENED

During a conference last week, Ryan Danks, Director of Civil Enforcement at the US Department of Justice’s Antitrust Division (DOJ), suggested that merging parties—not the antitrust enforcement agencies—should devise fixes for allegedly anticompetitive transactions.

Danks stated “that something is broken about the way that the antitrust community talks about remedies in the context of mergers, where parties will bring in a three-to-two or four-to-three or even a two-to-one [transactions] and say ‘now we want you, government, to work with us to figure out how to fix this’ . . . that’s not our job. Our job is to maintain competition.”

Danks added that merging parties bear the responsibility for remedying their anticompetitive transactions and have more information on the businesses, allowing them to formulate strong solutions. Such “fix-it-first” approaches may allow merging parties to complete their transactions quicker, avoiding lengthy merger reviews and consent decree negotiations.

Danks also suggested that “the simplest remedy . . . is to just stop an anticompetitive transaction from occurring,” strongly hinting that today’s DOJ would rather challenge an entire transaction than work with the parties on devising a remedy to address specific competitive concerns in limited product or geographic markets.

Jonathan Kanter, Assistant Attorney General for the Antitrust Division, conveyed similar views in two speeches last week, making it clear that merger enforcement at the DOJ will become even more vigorous.

On September 13, 2022, Kanter:

  • Warned that “[c]ompanies considering mergers that may harm competition should know that the Antitrust Division will not back down from a fight so long as that threat remains.”
  • Emphasized that the Clayton Act’s “expansive definition of antitrust liability” requires the government only to prove that a transaction’s effect “may be substantially to lessen competition.” According to Kanter, antitrust agencies have, for too long, “underenforced a statute that was meant to be prophylactic” by focusing on concrete evidence of a merger’s effect on prices.

On September 16, 2022, Kanter said that antitrust enforcers “can no longer be so cautious to avoid overenforcement that [they] intentionally underenforce the law.”

Moving away from negotiating settlements that allow transactions to proceed while resolving anticompetitive issues is part of a trend of dramatic policy and procedural changes at both the DOJ and Federal Trade Commission (FTC) designed to discourage mergers and acquisitions (M&A), such as:

  • Suspending early termination of the Hart-Scott-Rodino Act (HSR) waiting period for transactions that do not raise competitive issues
  • Sending merging parties “close at your own risk” letters, informing the parties that antitrust investigations are ongoing despite expiration of the HSR waiting period
  • Insisting on inclusion of prior approval/prior notice provisions in all merger settlements
  • Including new topics, such as the impact on labor and environment, in Second Requests and adding additional hurdles to modifying Second Requests.

WHAT THIS MEANS FOR MERGING PARTIES

Merging parties should increasingly consider resolving likely competitive issues with their transaction before the antitrust [...]

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DOJ Revamps Corporate Criminal Enforcement Policies with Continued Emphasis on Compliance

At a September 15, 2022, speech at New York University School of Law, US Deputy Attorney General (Deputy AG) Lisa Monaco announced several new policies intended to further the aggressive stance the US Department of Justice (DOJ) has taken under the Biden administration to corporate criminal enforcement.

The DOJ’s landmark new policies are focused on encouraging and enticing companies to self-report criminal violations and cooperate in DOJ investigations. They include:

  • First, for the first time, every DOJ component that prosecutes corporate crime will have to develop a formal program to incentivize voluntary self-disclosure. Importantly, the DOJ will not seek a guilty plea when a company has voluntarily self-disclosed, cooperated in the DOJ’s investigation and remediated misconduct.
  • Second, companies seeking cooperation credit need to come forward and disclose important evidence to the DOJ quickly. Companies—and prosecutors evaluating those companies—will now be “on the clock.” Undue or intentional delay in providing information and documents will result in a reduction or outright denial of cooperation credit.
  • Third, the DOJ will now formally encourage companies to hold in escrow or claw back compensation from executives and employees responsible for wrongdoing.

Deputy AG Monaco provided additional guidance with respect to significant changes announced in October 2021, including on how prior criminal, civil and regulatory misconduct by companies will be evaluated when deciding an appropriate resolution, and how and when monitors should be imposed.

Deputy AG Monaco also announced that the DOJ would seek an additional $250 million in targeted resources for corporate criminal enforcement and other corporate crime initiatives.

IN DEPTH

While Deputy AG Monaco continued to emphasize—as she did in speeches in October 2021 and March 2022—that the DOJ’s No. 1 priority remains individual “accountability” and prosecutions, the recent announcement is the latest in a series of ambitious steps taken by the DOJ under the Biden administration to further the Department’s ongoing and increasing emphasis on misconduct at the corporate level. Taken collectively, the mixture of carrots, sticks and potential additional resources demonstrates the DOJ’s continued focus on pursuing corporate wrongdoing and the need for companies to proactively assess their compliance programs and ensure they are well-positioned to respond to the DOJ’s boundary-shifting approaches.

NEW DOJ-WIDE VOLUNTARY SELF-DISCLOSURE PROGRAM

Among the more significant changes, every DOJ component that prosecutes corporate crime will, for the first time, be required to have a documented policy that incentivizes voluntary self-disclosure. Deputy AG Monaco highlighted the success of a handful of self-disclosure programs that several DOJ components have already developed, such as the long-standing Antitrust Division Leniency Program and the Foreign Corrupt Practices Act (FCPA) unit’s self-reporting program. She also stated that if a DOJ component does not have such a formal, documented policy, they must draft one. In support of this policy, she noted that the DOJ’s “goal is simple: to reward those companies whose historical investments in compliance enable voluntary self-disclosure and to incentivize other companies to make the same investments going forward.”

Deputy AG Monaco also announced several [...]

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Cartel Corner | August 2022

Without question, 2022 has been a remarkably busy time for the US Department of Justice’s (DOJ’s) Antitrust Division (Division). Over just a few months, the Division rolled out meaningful revisions to its leniency policy aimed at encouraging prompt reporting of criminal violations, announced that it will (for the first time in nearly  50 years) bring criminal monopolization cases under Section 2 of the Sherman Act, continued to increase enforcement resources, and brought a number of new cases and obtained multiple guilty pleas.

However, activity does not always mean success. If there is any theme that defines the Division’s efforts over the last quarter, it is this: If at first you don’t succeed, try, try again. That is exactly what the Division has done. It tried two labor markets cases, ultimately losing both on a new and untested legal theory. And, over strong objections from a district court, the Division pursued an unprecedented third trial against those in the broiler chicken industry, resulting in a full acquittal for all defendants. None of this, however, has deterred the Division from continuing to pursue new investigations and bring new cases under novel legal theories.

In this installment of Cartel Corner, we examine recent and significant developments in antitrust criminal enforcement and profile what the Division has highlighted as its key enforcement priorities. If the past is prologue, we are bound to see more aggressive antitrust enforcement in the months to come, testing the boundaries of current antitrust law. Whether the Division can ultimately shift those boundaries, however, remains to be seen.

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DOJ Antitrust Head Signals Aggressive Enforcement against Private Equity Transactions

US antitrust enforcers have signaled that private equity firms are the prime targets for upcoming aggressive antitrust merger enforcement. In a recent interview, US Assistant Attorney General Jonathan Kanter stated that the motive of a private equity firm may be “designed to hollow out or roll up an industry and essentially cash out,” which “is often very much at odds with the law, and very much at odds with the competition we’re trying to protect.”[1] His comment comes after Lina Khan, the current Federal Trade Commission (FTC) Chairwoman, stated that private equity roll-ups would be a focal point for the FTC.[2] It is not entirely unsurprising that progressive antitrust enforcers are focusing on private equity after the industry announced a record 14,730 deals last year globally worth $1.2 trillion, which was nearly double the previous high in 2007.[3] The above comments provide several key takeaways for stakeholders going forward:

  • As a general matter, these statements further solidify the notion that antitrust merger enforcement is going to continue to be extremely aggressive and indicate that the US Department of Justice (DOJ) and the FTC may closely scrutinize private equity transactions even if there is no obvious horizontal or vertical issue. For example, the DOJ and the FTC have already started investigating less traditional theories of harm, such as the impact on labor and the environment.
  • Private equity firms should expect the potential for heightened scrutiny in instances where a private equity firm has engaged in serial acquisitions within the same industry (known as roll-up transactions), especially in healthcare-related fields. It will be important for stakeholders to not only evaluate the current acquisition for competitive issues, but to also consider the impact of a long-term “roll-up” plan and its influence on pricing, service, and quality.
  • Watch for agencies to bring more Clayton Act Section 8 cases, which prohibits interlocking directorates (aka a single firm appointing officers and directors at multiple competitors).[4] Private equity firms often will appoint personnel to the boards of the firm’s portfolio companies, which may consist of horizontal competitors. Going forward, these appointments will require additional attention to avoid running afoul of Section 8.
  • The DOJ and the FTC will also have an enhanced focus on the impact of private equity firms acting as divestiture buyers when the agency orders merging parties to divest assets to preserve competition. Assistant Attorney General Kanter stated, “[I]n many instances, divestitures that were supposed to address a competitive problem have ended up fueling additional competitive problems.”[5]

While the degree to which agencies will more closely scrutinize private equity transactions remains unclear, it is crucial for private equity firms to engage antitrust counsel early in the transaction process both to evaluate the transaction at hand, as well as any future transactions that may, together, bring about enhanced regulatory scrutiny.

[1] Stefania Palma and James Fontanella-Khan, “Crackdown on buyout deals coming, warns [...]

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