On December 22, 2004, the President of the Court of First Instance denied Microsoft’s request to delay the implementation of the European Commission’s order that (1) Microsoft offer a version of Windows without Windows Media Player, and (2) Microsoft make availability its interoperability interfaces to server work group competitors, so that they could better compete with Microsoft in the market. According to the Court, Microsoft has not shown that it might suffer serious and irreparable damage as a result of implementation of the contested decision.
In late June 2004, Microsoft asked the Court of First Instance for interim relief from the order of the Commission–in other words, Microsoft asked that the penalties set forth in the Commission’s order be suspended pending final resolution of the Commission’s complaint. Hearings on Microsoft’s request for relief from the Commission decision took place in early October. Yesterday’s decision only concerns that interim relief order.
The Court’s decision, on both the requirement that Microsoft disclose interoperability interfaces to competitors in the work group server market, and offer a version of Windows without its media player tied to it, found that the Commission set forth a “prima facie case” that Microsoft violated EC competition laws. Because the Commission set forth its prima facie case, it was entitled to proceed with its case through final judgment. Because Microsoft could not demonstrate “irreparable” damage by being required to disclose interoperability information to work group server competitors, and could not demonstrate irreparable harm by being required to unbundle Windows from Media Player, the Court concluded that Microsoft MUST IMMEDIATELY comply with the terms of the order.
In other words, the order requires Microsoft to make available the interoperability information to its work group server competitors, and offer a version of Windows without Media Player bundled in with the OS.
Practical Consequences of the Order:
(1) Microsoft still has the right to be heard on both of these issues in Europe through a full hearing on the merits. This is not a final decision from the Court of First Instance that the Commission was right in its conclusions that Microsoft violated the EC’s competition laws. Instead, one could view this just as a procedural loss for Microsoft. Microsoft also has the right to appeal to the Court of Justice (both this approval of the interim order, as well as any final judgment of the Court of First Instance)
However, the loss is significant. Microsoft is going to have to offer an unbundled version of Windows that does not contain its Media Player, and offer the work group server interoperability information to competitors immediately. The work group server information disclosure is likely less serious, as Microsoft already resolved this dispute with Sun, as part of a global settlement with the company last summer. However, the Media Player decision is troubling for Microsoft. Even though the order is confined to the EU, it remains to be seen how and whether Microsoft can offer an unbundled Windows in Europe and not do the same thing in the U.S.
(2) The Court’s language is fairly harsh toward Microsoft and generous to the Commission. Even though this decision is really light on the facts, and a more complete analysis is necessary, I think that this is a very bad sign for Microsoft going forward. I would think that Microsoft must believe that if and when there is a complete ruling from the Court, that it will lose, and may try to mitigate its losses by settling with companies like Real. The barebones analysis provided by the Court seems very favorable toward the Commission.
As a side note, Microsoft issued a press release saying (1) that it intends to immediately comply with the terms of the Commission, and (2) will try to settle this dispute, once and for all, BUT, will continue with its appeal.
New Item 2.01 of Form 8-K, similar to the old Form 8-K requirements, provides that when a registrant disposes of a “significant” amount of assets, the company may be required to file pro forma financial information, as required by Article 11 of Regulation S-X. We understand based on conversations we have had with staff members in the Office of the Chief Accountant at the SEC that registrants should file such pro forma financial information within four business days of consummation of the disposition transaction (unless and until the SEC provides guidance otherwise). This is a change from the old Form 8-K requirements which, as explained in the 2000 edition of the SEC’s accountant’s manual, provided a 15-day period after the disposition for registrants to amend their original Form 8-K filings to include pro forma financial information. On a side note, we understand that the staff is working on updating the SEC’s accountant’s manual which will now have a red cover instead of the yellow cover many practitioner’s are familiar with from the 2000 edition.
Federal Holidays not a “Business Day”
As a holiday reminder, practitioners and bidders engaged in year-end tender offers should note that both Friday, December 24, and December 31, 2004 are not considered “business days” for purposes of the SEC tender offer rules. Accordingly, when counting the minimum number of days in a tender offer or subsequent offering period such days would not count toward the twenty and three business day minimum periods for tender offers and subsequent offering periods, respectively.
Experts expect that the European Court of First Instance will issue its decision whether to uphold the European Commission’s decision concerning Microsoft’s bundling of its Media Player with the Windows Operating System any day. The decision of the Court will be momentous, regardless of whether it affirms or reverses the decision of the EC, and will have a profound effect on Microsoft’s OS-application bundling practices. Let’s recap where we are today, and after the decision is issued, I’ll highlight the Court’s decision and reasoning.
On March 24, 2004, the EC announced that it concluded its five-year investigation into Microsoft’s business practices. Among other things, the EC concluded that Microsoft abused its position of dominance in the OS market, in violation of Article 82, by tying WMP to the OS. The Commission fined Microsoft €497 million, and ordered Microsoft to sell a version of its Windows OS without WMP within 90 days of the issuance of the decision.
In the EC’s decision, the Commission decided that under a rule-of-reason analysis, the forced bundling of WMP with the Windows OS was illegal, balancing the procompetitive justifications proffered by Microsoft for its practice against its negative effects on the media player market, in a manner similar to that set forth by the D.C. Circuit in its Microsoft case. The EC analyzed Microsoft’s conduct and reached its decision to condemn Microsoft’s bundling practice
Microsoft’s bundling practice has been dubbed “technology tying” in antitrust parlance, and has been treated leniently under U.S. antitrust laws (in fact, the same practice condemned by the EC has been generally okayed here in the States).
The development of the law of technology ties are likely to have a profound effect on the development of future operating systems and the long-term viability of many independent application providers who offer products that function in such OS’s. With dominant OS providers like Microsoft reaching further into the application world—through the development and/or acquisition of applications that function on their dominant OS environments—OS providers increasingly are becoming competitors to independent application providers, while at the same time providing the industry-standard OS on which these applications run.
The ability to technologically tie a dominant OS to an application raises some significant antitrust issues. On one hand, the ability to bundle a dominant OS with an application may provide some technological benefit to consumers with more seamless integration, reduced transaction costs, and the ability to provide application interfaces to content developers. On the other hand, such bundling may foreclose independent application providers from space on the OS, significantly diminishing their ability to compete, and as a result, limiting consumer choice. Moreover, with the ability to tie applications to their OS’s, companies like Microsoft may have a reduced incentive to develop premier applications for their OS’s, since they know that most OEMs and customers will simply accept an inferior bundled product, rather than spend the additional money to purchase an independent application, even if superior to the bundled one. Especially in the computer industry, where margins for OEMs are already razor thin, the temptation for OEMs will be to accept free, forced bundles to the exclusion of separate applications that must be installed, and potentially maintained and serviced by the OEMs. The end result is a potential threat to competition and to consumers as well.
Next time, we’ll look to see how the Court of First Instance comes down on the technology tying issue and analyze what the decision means for OS providers like Microsoft as well as the law of tying in general.
Loving a good debate and an “open dialogue” I was pleased to receive an important reaction to my recent posting about directors retaining separate counsel to conduct separate due diligence during an acquisition. The response came from a senior west coast based executive who suggested that separate due diligence counsel “might reaffirm a suspicion in some minds that much of the Sturm und Drang surrounding Sarbanes-Oxley is being whipped up by the service providers in their own interests without verifiable commensurate value to the stockholders… [and] I do get bombarded with stuff, and my Board members do too, that sometimes makes me want to pull my hair out. For many of us on the business side, there is a sense of piling on…. [but] outside of this one small lapse, I always enjoy yours and Wilson’s insights. Thanks!”
For those of you who may have been busy over the past year with the many SOX-related developments coming out of the SEC and SROs, you may have missed two recent no-action letters issued by the Office of Mergers & Acquisitions on the subject of “formula pricing”. By way of background, M&A practitioners are likely familiar with the landmark no-action letter issued to Lazard Freres & Co. (August 11, 1995) which allowed a third-party bidder in an exchange offer to determine the final offer price based upon a pre-disclosed formula, hence the term “formula pricing”.
In Lazard, the staff provided relief from Rule 14e-1(b) and allowed the bidder’s final offer price or ratio to be “fixed” as late as two business days prior to the expiration of the offer. Two years later the staff issued a no-action letter to AB Volvo (May 16, 1997) which expanded the relief for formula pricing mechanisms to include offers where one of the subject securities sought in the offer was only listed on the Stockholm Stock Exchange and not a national securities exchange or Nasdaq in the U.S.
This past year the staff issued letters to Epicor Software Corporation (May 13, 2004) and TXU Corporation (Sept. 13, 2004) which further expanded and clarified the staff’s relief in the context of: (i) a third party exchange offer where the trading prices for the subject securities were publicly available only on the Euronext and Euronext Amsterdam in the Netherlands (Epicor) and (ii) an issuer tender offer where the formula pricing was based on the subject company’s common stock price instead of the trading price of the securities actually sought in the offers (i.e., convertible debt and similar derivative securities) (TXU).
In both cases, the final price was determined using a fixed formula that was disclosed in the offering materials and the final price was announced by means of a press release issued before the opening of the market on the second business day preceding the expiration date (i.e., before the opening of the market on the 19th day in a 20-day offer).
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.