In October 2004, the Antitrust Division of the Department of Justice issued its Policy Guide to Merger Remedies. The policy guide set forth significant principles for the development of remedies in all DOJ merger cases. The policy guide explains:
· remedies are necessary only where the Department believes an antitrust violation will occur;
· remedies must be based upon a careful application of sound legal and economic principles;
· the goal of remedies is to restore competition;
· remedies should benefit competition, not competitors;
· remedies must be enforceable; and
· the Department will enforce remedies it imposes.
The policy guide also set forth how remedies will ordinarily be administered, setting forth basic tenets as to the favored administration of remedies:
· the Department favors structural remedies to conduct remedies;
· divestitures must include all assets necessary for the purchaser of the assets to compete effectively in the market, and can include the divestiture of a business unit, or additional assets, if necessary; and
· fix-it-first remedies can resolve competitive concerns, without the necessity of a formal consent decree process.
What does this policy guide mean and how does it change current thinking on remedies? The policy guide reinforces two important points: (1) non-structural remedies generally will not solve competitive concerns associated with mergers, and (2) important differences between the DOJ and FTC still exist when it comes to implementing remedies to solve antitrust concerns with mergers.
First, where it is possible to structure an asset divestiture or business-line spin-off to solve a competitive problem arising from a merger, the DOJ will not be disposed to allow the merging parties to agree to a behavioral (i.e., non-structural) solution to solve that competitive problem.
Why? The DOJ does not want to engage in the perpetual policing of such remedies because they are difficult to administer and monitor. Studies—including a significant report issued by the FTC in 1999—show that where the antitrust agencies are forced to police companies’ behavior as part of a consent decree, such remedies too often do not work to benefit the market.
One does not need to look any further than a recent action brought by the FTC against Boston Scientific for skirting its obligations to assist a competitor in a medical device market to cure a competitive problem raised by the company’s acquisition of two of its catheter competitors. In connection with its investigation into those acquisitions, the FTC decided that the market for certain catheters had become too concentrated. Thus, as a condition to allowing the merger to proceed, the FTC required Boston Scientific to license its catheter technology and improvements in that technology to a third-party (Hewlett-Packard).
Boston Scientific’s compliance with that consent decree was spotty, at best, and HP was never able to develop the catheter technology to become a viable competitor to Boston Scientific, primarily because of Boston Scientific’s behavior (for example, Boston Scientific did not provide improvements to the technology to HP in a timely fashion). Other examples of such failures are described in detail in the FTC’s 1999 study.
Because of the shortcomings associated with such non-structural relief, the DOJ’s new remedy guidelines state that the DOJ will not approve non-structural remedies that require ongoing monitoring a company’s behavior, where structural alternatives are available. It is far easier to simply require an asset sale that does not require an ongoing relationship between the seller and buyer, than to structure a remedy that requires ongoing interaction between competitors.
The remedy guide also reinforces a difference between DOJ and FTC thinking regarding remedies. The DOJ still allows, and in fact encourages, “fix-it-first” remedies to restore competitive problems in a market. Fix-it-first remedies are those remedies that are privately negotiated by the merging parties—for example, where the merging parties arrange a sale of their overlapping assets to a third party before engaging the DOJ regarding the merger.
Normally, such remedies would be ordered by the government and memorialized as part of a consent decree. The DOJ encourages parties to privately resolve potential competitive concerns arising from their mergers, where possible, and will not require the issuance of a consent decree where the parties come up with a viable fix-it-first remedy. On the other hand, the FTC does not encourage—and in fact discourages—such private fixes to cure competitive concerns.
Even where the parties do privately resolve competitive concerns with a merger, the FTC will still require a consent decree to memorialize that fix, in order to maintain the authority to police such mergers (see, for example, the Autodesk/Softdesk consent, where Autodesk privately licensed Softdesk’s technology to a third-party prior to consummation of the merger. The FTC required that already negotiated agreement to be memorialized as part of a consent decree).
On Friday, November 19th the ABA Subcommittee on Proxy Statements and Business Combinations chaired by Dennis Garris (partner at Alston & Bird), met in Washington DC. At this meeting senior members of the SEC staff, including Brian Breheny, Chief of the Office of Mergers & Acquisitions (OM&A), and Nick Panos, Special Counsel in OM&A, addressed several topics of interest to M&A practitioners.
One issue that may come as a surprise to many is the staff’s position that materials prepared by an investment bank as “pitch materials” and provided to a company that is considering a potential transaction may be deemed a “report, opinion or appraisal” under Item 1015 of Reg MA (formerly known as Item 9 reports), that must be summarized in the company’s SEC filings relating to such transaction, even where the investment bank is not retained by the company to advise on the transaction and does not receive any fees or other compensation in connection with the transaction.
The key to the staff’s decision rests with the degree to which the materials contain substantive analysis and the extent to which the Company’s Board considers and relies upon the materials in its deliberations with respect to the proposed transaction. In the situation discussed by the staff, although the bankers argued that the materials were “pitch materials,” the staff deemed the materials a report since the materials consisted of multiple presentations to the Board over an extended period of time and included specific analyses and recommendations that contributed valuable information used to structure the transaction presented to security holders. The staff also reminded the audience that when there are material differences between preliminary and final versions of an Item 1015 report, each version will be viewed as a separate report that must be summarized in the company’s SEC filings.
Also of interest is the staff’s continued position that insurgents who solicit proxies by sending management’s proxy card to security holders and request that such cards be returned to management may continue to rely on the exemption in Rule 14a-2(b)(1) under the Securities Exchange Act despite the Second Circuit’s recent decision to the contrary in MONY Group, Inc. v. Highfields Capital Management, 368 F.3rd 138 (2nd Cir. 2004). While staff is adhering to its long-standing position that such activities are exempt solicitations and insurgents need not file their own proxy statements, they are advising callers who seek guidance on this issue that the Second Circuit takes a different view.
Lastly, it was noted that Mara Ransom, Special Counsel in OM&A, is currently working on a rulemaking project that will hopefully resolve some of the conflicting case law on the “best-price” provisions in Rule 14d-10 under the Securities Exchange Act. As many of you know the Seventh and Ninth Circuits have split, with each adopting different tests as to when severance payments, golden parachutes and similar compensation arrangements in business combination transactions run afoul of the best-price rule. Brian Breheny expects to have something published by early next year. We are hopeful!
Here’s a VERY interesting recent development in the M&A arena.
The Board of Directors of Visx Inc., in its recent merger with Advanced Medical Optics Inc., hired their own separate counsel to conduct due diligence in the transaction. Though predicted for sometime as likely to occur in today’s SOX environment this is the first Board we’ve heard of taking this step.
While an obvious additional cost for the transaction it would appear to be another (and welcome) revenue avenue for the legal community.
Following the chaotic election season, the country now knows that President George W. Bush will serve an additional four years as President of the United States. We have a good idea what that means for the big ticket items—tax policy, foreign policy, the War on Terror, and education—but what exactly does it mean for antitrust?
Four years ago when Tim Muris took over from Bob Pitofsky the position of Chairman of the Federal Trade Commission, and Charles James took over from Joel Klein as the chief antitrust enforcer at the Department of Justice, many predicted significant changes in antitrust enforcement goals. To a large degree, those predictions were incorrect. In particular the FTC continued aggressively to enforce the antitrust laws, with changes only at the margins from the previous administration.
Today, we’ll look very briefly at what the FTC has accomplished over the last four years, and what we should expect from a new administration. For those of you who do not pay as close attention to the machinations of the FTC as some of us do, Chairman Muris recently stepped down from his post at the FTC, and Deborah Majoras was named interim Chair of the FTC (she was a recess appointment by the President, who did not win confirmation from the Senate for a full appointment). Now that President Bush has won reelection, we should expect that Majoras’ appointment will be made permanent, and that she can now move forward to place her imprimatur on the policies of the FTC.
When he took over as Chair of the FTC, Tim Muris promised “continuity” in antitrust enforcement, and made that a recurring theme of the early speeches and papers put forth during his administration. It also was a theme in his enforcement agenda—from merger policy, to enforcement guidelines, to other areas of non-merger civil antitrust enforcement.
The FTC continued aggressively to investigate mergers in all industries—obtaining antitrust relief involving mergers in everything from super premium ice cream, to software, and from pickles and canned tuna to hospitals.
Chairman Muris also made it clear that it would be a goal of the FTC to stop what he saw was rampant abuse of the patent process by pharmaceutical companies, which he believes harm competition by excluding generic alternatives from the market. During his tenure, the FTC successfully sued companies for improperly listing patents in the Orange Book in attempt to extend the life of pioneer drugs, and thwarted efforts of drug companies to use the provisions of the Hatch-Waxman Act to bottleneck generics from entry into the market through abuses in the patent settlement process.
The FTC, under Tim Muris, also made it a point to bring actions against companies which sought to extend or maintain their monopolies through the abuse of the government or quasi-government process. For example, we saw the FTC bring action against several companies for interfering with the standard-setting process. In addition, the FTC continued to bring actions against physician groups for illegally colluding to bargain for better rates.
Chairman Muris also strived to make the decision-making process at the FTC more transparent. Under his watch, the FTC issued numerous guidelines and retrospectives, including a paper that provided insight into the FTC’s thinking of the State Action doctrine, how to improve competition in drug, health care and petroleum markets, as well as a seven-year retrospective of FTC merger challenges, that provided statistical information as to when the FTC would most likely challenge mergers.
And unlike past administrations, the FTC under Chairman Muris provided a great deal of insight into why the agency decided not to challenge mergers—for example, the FTC issued extensive decisions explaining the decision not to challenge the Cruise Line merger, the RJR Reynolds/Brown & Williamson merger, and the merger of two drug companies, Genzyme and Novazyme.
Chairwoman Majoras has not yet set forth a broad vision for change or continuity at the FTC, nor has she provided an indication that there will be significant changes in antitrust policy (quite likely because her appointment would only have been temporary had President Bush not secured reelection). Nevertheless, as we all have the tendency to do, we still can make several modest observations about what we should expect during the next several years from the FTC:
* Chairwoman Majoras was formerly at the Department of Justice, and primarily was responsible for the Department’s Microsoft case and settlement. To some, the DOJ’s settlement of the Microsoft case without seeking more extensive relief from the company for its antitrust transgressions (some argued that Microsoft should have been split into two or more separate companies) failed to fulfill its enforcement responsibilities. Whether the Microsoft settlement represents Majoras’ belief that the government should take a laissez faire approach to antitrust enforcement—or instead simply represented the best relief that the DOJ could achieve in that particular case—remains to be seen.
* We know that Majoras already has a good working relationship with the Justice Department (she is the first person to hold both the Chair position at the FTC and a senior position at the DOJ), and likely will make it a priority to work closely with the DOJ to ensure enforcement continuity between the two agencies. One notable shortcoming of antitrust agencies over the last four years was the continuing in-fighting between the agencies over which should have jurisdiction to review matters (the agencies have concurrent jurisdiction to review antitrust matters). With her DOJ past and good-working relationship with the Justice Department, Majoras should be able to smooth over the rough patches, resulting in a more efficient antitrust enforcement.
* The merger wave of the 1990s is not expected to return with the same vigor, but surely there will be more activity than there has been in the past four years. Chairwoman Majoras likely will be faced with a greater number of decisions on whether to challenge mergers than Chairman Muris. Because we likely will see a new wave of consolidation in the high-tech, retail and health care markets, it will be interesting to see whether the FTC closely scrutinizes the new wave of consolidation, or holds back on enforcement even in consolidating industries. During Muris’ administration the FTC continued aggressively to pursue merger enforcement in markets that were significantly consolidated, with a few notable exceptions that may have been challenged in an even more enforcement-friendly administration (for example, in the Cruise Lines and Tobacco mergers).
* Under Chairman Muris’ watch, the FTC was criticized by some for failing to pursue certain types of aggressive private-market abuse cases. During the last four years, the FTC brought very few actions alleging that private conduct, rather than abuse of the government process cases, violated the antitrust laws. In fact, in speeches and in briefs to the appellate courts, many suggested that the FTC presented a more “business-friendly” approach to antitrust, curbing the enthusiasm, for example, to require owners of “essential facilities” to share their assets with competitors, and to challenge aggressive bundled pricing strategies. Notably, the FTC did not bring a single action involving “vertical” restraints during the Muris administration (i.e., restraints involving relationships between different levels of the distribution chain). It remains to be seen whether the FTC, under Majoras, will continue to eschew enforcement in that area.
For antitrust practitioners, it will be interesting to see where Majoras takes the FTC. Those who predicted a lax enforcement regime under a Republican administration learned quickly that under Chairman Muris, the FTC still remained active in antitrust enforcement. Before we conclude otherwise over the next few years, we should take a wait-and-see approach with Majoras as well.
**Note: Here’s an interesting exchange we recently had with a reader arising from mine and Larry’s M&A Deal Points Study.**
Dear Deal Guys,
I was wondering whether one of the variables you analyzed included whether the indemnification provisions apply both pre and post closing, or just post closing? I suppose it’s arguably implicit in the findings re exclusive remedies, but I’ve often seen those provisions phrased with the intro “Provided that the Closing has occurred . . .”
On the one hand I’d be surprised if you had looked into this, but on the other, the study is so all-inclusive that I had to ask.
Thanks again for any perspective you can provide.
Inquisitive in Illinois