Issues and Challenges

In representing clients in transactions, it is advisable at the outset to outline the process for reviewing transactions in the relevant jurisdiction(s) and ensure that the client has a good understanding of what is entailed in each stage of the process. Some corporations have had extensive experience with the antitrust merger review process in the United States and/or abroad while others (both large and small) have not. Even where the client is relatively sophisticated about the merger review process, an experienced and skilled antitrust lawyer will have greater knowledge of the legal requirements and the practical realities of the process. The client will have detailed knowledge of the industry and market participants . An effective antitrust lawyer will form a cooperative partnership with the client in which each brings something unique to the table. A good antitrust lawyer brings considerable experience with merger review in the United States to bear in a way that addresses the clients objectives in the merger, and elicits the industry facts and market-based arguments that may persuade an otherwise reluctant antitrust agency to let the transaction proceed. The client provides the factual basis from which those arguments can be formed .

To be more specific, the role of the antitrust lawyer in a merger involves multiple facets.

At the outset, antitrust counsel should advise a company whether and to what extent its potential merger is likely to be permitted or challenged by the relevant competition law authorities. This involves review of the industry and market facts (usually in an unavoidably short time and on the basis of information that is necessarily less than complete), and then providing an accurate prediction as to (1) whether the transaction can be consummated, (2) how long it is likely to take to complete the merger review process, and (3) whether and how much of the assets of the combined company are likely to have to be divested in order to complete the transaction.

Antitrust counsel should be involved in negotiating the antitrust risk allocation in the merger or asset purchase agreement. A seller wants to have reasonable assurance that the merger will be completed because its business may be damaged during the course of the investigation. A buyer doesnt want to commit to a level of divestitures that undercuts the synergies and strategic rationale for the merger. The sensitivities on each side vary depending on the particular circumstances of the parties in that some mergers are more likely to require higher levels of divestiture than others, some sellers have reason to want greater assurances of consummation than others, and the strategic imperatives of individual sellers differ . The right advice is necessary to assure that an agreement can be reached and each side is appropriately protected.

Antitrust counsel should advise companies throughout the merger review process on integration planning and avoiding concerns by the government agencies (particularly the FTC) about parties not engaging in what is referred to as antitrust gun jumping. Mergers may ultimately succeed or fail as a business matter based on the level of advance planning that the acquirer can do, and it is very important to be able to hit the ground running once a merger is completed. Conversely, there is often a not inconsiderable possibility that the merger will not be completed for any number of reasons, so that the acquired company needs to preserve the confidentiality of its most sensitive business information until it is clear that the transaction will proceed. The diverging needs of the parties can normally be accommodated in ways that dont create legitimate concerns of enforcers concerning antitrust gun jumping, but this requires the ongoing involvement of the antitrust adviser.

Once the parties have entered into a binding agreement, antitrust counsel should work with the company and the other partys antitrust counsel to prepare the filing required under what is referred to in the US as the Hart-Scott-Rodino (HSR) Act and represent the company through the merger review process at the FTC/DOJ. It is also necessary to deal with any issues that may be raised by state attorneys general, who look at some mergers, usually in tandem with the federal antitrust authorities, and there may be a role to play with regard to any regulatory authorities that have concurrent jurisdiction ( e.g., the Federal Communications Commission in telecommunication mergers).

While most mergers make it through the US review process without incident or at worst with some level of divestiture, there are a few each year that are challenged in court . If a merger is ultimately challenged by the FTC, DOJ, a state attorney general or a private party (private merger challenges are permitted in limited circumstances, and are rarely brought), antitrust counsel will work with litigators to defend the company and the merger.

Finally, from time to time some antitrust counsel represents companies in connection with hostile takeovers. In such transactions, antitrust counsel, whether representing the target or the raider, become involved in attempts by the target to persuade the government agencies (federal as well as state attorneys general) that the merger creates a competitive problem. There is also the possibility of the target bringing its own suit in federal court since targets have standing to bring such suits in certain federal appellate circuits.

Clients need to understand that even relatively small transactions are subject to review by the federal antitrust authorities in the United States under the HSR Act. Subject to certain recognized exemptions, a transaction whose value exceeds $50 million but is less than $200 million is typically reportable if it involves (1) a party with more than $100 million of total assets or sales and (2) the other party has more than $10 million in assets or sales. Transactions above $200 million generally are reportable without reference to the size of the transaction parties. If an HSR filing is required and the transaction raises potential competitive concerns, the client should be advised that completing the government review of the merger may entail a substantial amount of time and money. The agencies may learn of the competitive issues because they are revealed through the filing itself or when viewed together with other publicly available information. Even when that is not the case, the antitrust authorities may be prompted into investigating the transaction by complaints from interested third parties ( i.e., competitors , customers or suppliers).

To complete a reportable corporate merger or acquisition, the parties must file an HSR pre-merger notification and report form with the FTC and the DOJ. The filing triggers a mandatory waiting period of 30 days (15 days in cash tender offers). During the first waiting period, the FTC or DOJ may choose to conduct an initial review to determine whether the transaction appears to raise antitrust issues that merit a full investigation. If concerned about the mergers possible anti-competitive effects at the end of the initial waiting period, the reviewing agency will issue a request for additional information and documentary materials (a Second Request). The typical Second Request is an intensely burdensome set of document and information requests . The issuance of a Second Request causes a new waiting period of typically 30 days (10 days in cash tender offers) to commence, and this new waiting period does not begin to run until the parties have substantially complied with the Second Request. In many mergers, compliance with the Second Request can take months to complete, and in some very large transactions it has taken longer than a year. When dealing with a Second Request, the parties will normally have to copy prodigious amounts of documents and incur large expenses to search databases, computer systems, e-mail servers and the like. The only easy way around a Second Request is to convince the government, normally in the initial waiting period, that the transaction doesnt warrant a full investigation.

In addition to the burdens of a Second Request, the US merger review process frequently entails substantial time for employees to be interviewed or have their depositions taken by the reviewing agency. Many investigations cannot be completed successfully without extensive substantive submissions (referred to as white papers). It is frequently necessary to meet with the investigating staff, supervisory personnel and the head(s) of the agency the Assistant Attorney General in charge of the Antitrust Division or the five Federal Trade Commissioners. In some cases, the process is prolonged by the need to negotiate a consent decree resolving certain antitrust concerns identified by the government. As a result, a full merger review is a time intensive process. You simply cannot convince one of the federal antitrust enforcement agencies to permit a transaction to proceed that appears to raise serious antitrust issues without a great deal of information and argument showing that there is not a competitive problem.

In effectively representing corporate clients in connection with the antitrust review of mergers and acquisitions, there are a number of strategies and methodologies that are useful to follow.

Learn the facts as rapidly and efficiently as you can.

Understand that the facts will come out. It is ineffective and counterproductive to make arguments that are not well grounded in the facts, so avoid them.

Work cooperatively with the reviewing agency to the maximum extent that is consistent with your clients interest.

Understand that adopting a confrontational approach with the government will cause them to play hardball, so dont do it except in very unusual cases.

Recognize that the government has interests that differ from your clients, and that some of the requests the government makes are not consistent with your clients interest. In such circumstances, either think of a way to avoid the problem or assert the clients interest vigorously but not in an unnecessarily confrontational way. Keep in mind that there are times where it is important to answer the questions asked without volunteering additional information. An antitrust lawyer must develop a well honed skill for knowing when that is appropriate and defensible conduct and when it is not.

The US agencies must go to court to stop mergers; they cannot block them on their own. Always be prepared to litigate the tough cases or at least let the government think that you are prepared to do so (again, this can be done in a non-confrontational way). The reviewing agency may hesitate to bring what it regards as a weak case or may be willing to accept a modest remedy that it wouldnt take in a stronger case.

Keep the clients objectives firmly in mind and be realistic about what you are trying to achieve during the course of the investigation. There are situations where it would be a great victory for the client to get the transaction through with a modest divestiture. In such a case, try to get the transaction completed with no divestment if that is in the clients interest, but not in a manner that may undercut the settlement that your client would be very pleased with at the end of the process. Remember that fighting on the merits in what is likely to be a lost cause may cause delay. This delay may impact the realization of synergies that may be of sufficient magnitude to outweigh the benefits that would come from avoiding all divestitures after the delay in obtaining these synergies is factored in. Advise the client of these countervailing considerations, and suggest the best way to address them.

There are two key factors that often dramatically impact the outcome of government investigations that may not be recognized initially by many clients.

First, what is said in party documents is critically important to whether a merger is challenged. This is particularly true as to what is said in socalled Item 4(c) documents. These are documents that discuss the merger. Specifically, Item 4(c) of the HSR Form requires the submission of:

All studies surveys, analyses and reports prepared by or for a director or officer of the filing company (or any of its subsidiaries) that analyze or evaluate the transaction in question with regard to competition, competitors markets, market shares, potential for sales growth or geographic market expansion.

These documents are submitted as part of the initial HSR filing, and they are looked at very carefully by reviewing staffs in the first waiting period. Item 4(c) documents can have a disproportionate effect on the outcome of an investigation; indeed, bad 4(c) documents may themselves trigger an investigation that might not otherwise occur. Only the final version or the last draft of each 4(c) document is called for by the Form. So it is very important for antitrust counsel to review potential 4(c) documents in draft form before they are finalized. Clients should be encouraged to take out or correct unhelpful and inaccurate statements that are made by merger advocates within a company. The agencies maintain that Item 4(c) covers offering memoranda and investment banker books even when the specific acquirer of the company or assets in question had not been determined when the document was prepared. Antitrust counsel should have an opportunity to provide comments on such materials as soon as possible.

Second, customer reaction matters considerably, and competitors can be an important source of information for the reviewing agency. When customers are unhappy about a merger, it is more likely that there will be a full investigation, significant divestitures will be required and the merger will be challenged by the agency or even blocked in court. In many mergers, customers and competitors are themselves sophisticated companies with their own antitrust lawyers who know how to make their views known to the government in an effective manner. In any event, the government is going to ask such third parties about basic industry facts that the client is asserting . If customers in particular disagree with the clients version of reality, it is going to be hard to convince the government; this is the case even if it is only a vocal minority of customers who are providing a different story. So if a merger appears to raise an antitrust issue, I advise the client to promote the merger to its customers from the outset and let those who express concern know why the merger is not a problem. This is good business practice in any event. A merger is a major event for customers, and each party has important business reasons to be reassuring customers that they should continue existing business relationships while a merger is pending.

Ive been asked about the attributes essential to be a great antitrust lawyer. In mergers and acquisitions, there are several important ones that I have identified:

It is important to be able to reasonably predict what is likely to happen during the merger process, and to be able to work the process to achieve as good or better a result than the client might reasonably expect. This involves not only extensive experience but a great deal of common sense. Be objective. Dont be reluctant to tell the client things that the client may not be happy to hear (at least at first blush), if that is necessary to help the client understand and successfully negotiate the process. Be prepared to try to convince the client to pursue the course that you believe is most consistent with its interests.

At the same time, there are frequently very smart people at the client who know the industry much better than the lawyer ever will and also have their own business experiences that may be usefully applied to the merger review process. Discussions about strategic alternatives should be two-way communications in which good client ideas end up being pursued but where the client is convinced not to pursue courses that are likely to prove unhelpful.

Know when to make something a big issue with the government and when not to do so. There are some antitrust lawyers who seem to always want to pick fights with the government and others who never seem to perceive the need to do so. Neither of these approaches is optimal. There are times when being forceful is necessary and times when it is counterproductive. Know when to take either approach consistent with the clients interests. At all times, it is important for the antitrust lawyer and the client to maintain credibility with the government attorneys through fair dealing.

Keep in mind that not all deals are the same. For example, the approach to Second Request compliance and how quickly the issue in a merger investigation can be brought to a head may be very different where the client is a software company being acquired by a larger competitor that is losing key employees every day that the review continues than for a client that expects and can withstand a long review process.