Avoiding antitrust pitfalls during pre-merger negotiations and due diligence
How to overcome the risks involved in sharing information with a competitor before and during merger negotiations—a concern that remains until the merger closes.
Companies considering acquisitions, mergers, or joint ventures typically have a legitimate need to access detailed information about the other party’s business in order to negotiate the deal and implement the merger. But some information of interest may be competitively sensitive, such as current and future price information, strategic plans, and costs. This is especially true if the companies compete with one another.
For prospective transactions involving a competitor or potential competitor, special care must be taken to minimize antitrust risks throughout premerger negotiation and due diligence process, as well as during the integration planning process.
Reasons for concern
Although less frequent than merger enforcement actions, the antitrust agencies have taken action against companies for unreasonable information sharing, whether as stand-alone conduct or during the merger process.
The reason for concern is simple: competitive harm from illegal information sharing can inflict harm to competition similar to the harm caused by an anticompetitive merger. Exchanging information about competitive plans, strategies, and crucial data such as prices and costs can facilitate coordination between firms (and, if accompanied by accommodating actions, could constitute an unlawful agreement).
Right up until consummation, the merger parties are still independent businesses and they must continue to operate independently – including safeguarding their competitively sensitive information—to ensure competitive vigor in the short term and also in the event that the merger does not happen.
Pre-merger information sharing may contribute to unlawful “gun jumping” in violation of the HSR Act and Rules if it results in the buyer effectively gaining beneficial ownership of the seller prior to the close of the transaction.
Unlawful gun jumping may include the exchange of competitively sensitive information, but it typically also involves actual coordination of business activities during the HSR pre-merger review period. Such conduct could also constitute evidence of a standalone illegal agreement that violates Section 1 of the Sherman Act.
Managing the Risk: Set up a Process and Police it
Because sharing too much information during the pre-merger period could violate the antitrust laws, it’s important to have a plan in place to monitor and control the flow of information to outside parties. Staff’s recent experience indicates that companies could avoid both the appearance of and the actual misuse of competitively sensitive information by more consistently adhering to procedural safeguards designed to prevent misuse of competitively sensitive information.
What can antitrust counsel do?
Antitrust counsel can undertake several steps to help prevent problematic information sharing.
First, companies should be reminded that designing, maintaining, and auditing effective protocols to prevent anticompetitive information sharing are extremely important during pre-merger negotiations and due diligence. If competitively sensitive information must be exchanged for diligence and integration planning purposes, parties should employ third-party consultants, clean teams, and other safeguards that limit the dissemination and use of that information within the parties’ businesses. Clean teams should not include any personnel responsible for competitive planning, pricing, or strategy.
Second, antitrust counsel should ensure that merging parties follow whatever protocols they establish. Merging parties’ adherence to established protocols should be monitored with an eye towards identifying potentially problematic information sharing or sloppy information sharing practices.
Finally, if antitrust counsel discovers any problematic document sharing or coordination of business activities between the merging parties during the HSR waiting period, counsel should instruct the parties to stop the activity or document exchange immediately (because that is what the FTC staff will insist upon). For any problematic documentary information exchange uncovered, antitrust counsel should determine whether and how the information was used as well as the extent of the information exchanged, and would be well advised to inform FTC staff about this before staff discovers the documents in the merger investigation.
Establish appropriate protocols
Companies should consider the risks and establish appropriate protocols. At all times companies should take into consideration the sensitivity of the information offered to or requested by a counter-party and how the exchange of the information could affect competition, both in the short term and if the deal doesn’t happen. Once the process is set up, both parties should police the rules to ensure they are followed.
When the bidding process is complete, individuals who received confidential information must comply with all document destruction requirements in the confidentiality/non-disclosure/clean team agreements. Requiring bidders to destroy any independent internal analysis based on the confidential data and documents reduces the risk of future misuse of competitively sensitive information.
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