In a recent speech, the FTC’s General Counsel, William Blumenthal, provided his perspective on certain gun jumping issues. While reiterating that merging firms are separate entities and may not engage in collective actions that adversely affect competition, Blumenthal expressed concern “that we may have been too successful [in educating the public about violations and discouraging similar conduct] – that our message may have been heard by some in our audience to prohibit conduct beyond what we intended.” In particular, he recognized that due diligence and transition planning “are necessary and, within appropriate limits, unobjectionable from an antitrust enforcement perspective.”
Under Section 1 of the Sherman Act, premerger coordination to protect a transaction is subject to a reasonableness analysis, balancing the potential adverse effects against the justification for the conduct, taking into account available alternatives. Certain types of conduct (e.g., coordination on pricing) will rarely, if ever, be reasonably necessary to protect a transaction.
Under Section 7A, the test is different – whether the arrangement shifts beneficial ownership (from an antitrust perspective, not in a narrower 13D sense) – though he suggested that the analysis yields consistent conclusions. While recognizing that it is common for merger agreements to transfer certain indicia of beneficial ownership (e.g., risk of loss and benefit of gain) through purchase price and capital adjustment provisions as well as limitations on investment discretion, Blumenthal concluded that:
“I don’t mean to suggest that these commonplace provisions, together or in isolation, are problematic – they’re not. Nor are they or other factors dispositive of the Section 7A analysis. My point is that the typical merger begins at the time of the agreement by shifting a number of pebbles on the scale of beneficial ownership. At a certain point, if too many other pebbles have accumulated on the buyer’s tray through indicia such as access to confidential information and control over key decisions, one can reasonably find that the scale has tipped in the direction of the buyer.”
At the end of the speech, Blumenthal focused on three specific areas of concern:
1. Ways to minimize the antitrust issues that will often arise in the context of ordinary due diligence and transition planning – which may include discussions regarding post merger matters including prices, marketing, assignment of customers and accounts to their formerly-separate sales forces, narrowing of product lines, strategy, identity and branding, and capital and investment decisions;
2. Types of questions the staff of the FTC will often ask in assessing the appropriateness of coordinating extraordinary planning decisions that parties often wish to make during the premerger period – e.g., the decision whether or not a party to a merger should proceed with a significant capital project which will not be required if the merger is consummated; and
3. While the joint marketing of products involving the coordination of pricing or allocation of customers or accounts, is not permissible, this prohibition does not generally apply to the joint marketing of the underlying transaction through joint advertisements and press releases.
Here are some background materials that describe six gunjumping cases brought by the FTC alleging excessive coordination. We have posted some law firm memos on this development in our “Antitrust” Practice Area. Thanks to Kevin Miller of Alston & Bird!