Global Antitrust Enforcement in M&A Transactions

Global M&A, Skadden's 2012 Insights, January 2012 has posted present Article.

United States 

In 2011, we saw a resurgence in antitrust challenges to mergers by the U.S. Department of Justice’s Antitrust Division (Antitrust Division) and the Federal Trade Commission (FTC). The Antitrust Division sought to enjoin transactions such as Verifone’s proposed acquisition of Hypercom (parties agreed to divestiture to settle litigation), Nasdaq OMX and the IntercontinentalExchange’s proposed acquisition of NYSE Euronext (parties abandoned the transaction), H&R Block’s proposed acquisition of TaxACT (Antitrust Division prevailed after full trial on the merits), and AT&T’s proposed (and later abandoned) acquisition of T-Mobile. Similarly, the FTC litigated and lost a federal court challenge to Labcorp’s consummated acquisition of Westcliff and lost its appeal in the Ovation Pharmaceuticals matter, where the FTC also litigated and lost a federal court challenge to a consummated acquisition.

From a practitioner’s perspective, industry structure remains a critical starting point for merger analysis. Each of these challenges involved markets that the antitrust agencies alleged were highly concentrated, and descriptions in the merging parties’ business and strategic planning documents frequently were cited as evidence supporting the agencies’ views of market structure. In addition, the antitrust agencies (especially the Antitrust Division) have shown a willingness to “fast track” problematic transactions for litigation without the need for a prolonged review. For example, in the NYSE matter, the parties announced the proposed merger on April 1, 2011, and the Antitrust Division announced its intention to enjoin the transaction only six weeks later and without the voluminous documents and data required by the Second Request process. Finally, the health care industry continues to be a primary focus for the FTC, with all health care mergers — including those for which Hart-Scott-Rodino (HSR) filings are not required — typically receiving heightened antitrust scrutiny. We expect these trends to continue, irrespective of the outcome of the 2012 election.

Last year we also saw the first substantial revisions to the HSR premerger filing form in nearly a decade. The most significant of the revisions eliminate or reduce, generally, the information and documents to be provided, but also require new, detailed information about (i) ex-U.S. manufacturing operations and (ii) “associates” of the acquiring filing person and their holdings, as well as the production of a new category of documents, called “4(d) documents,” that include synergies and efficiencies analyses. The new rules remain subject to ongoing clarification, and we will continue to alert clients when the premerger office provides guidance as to the scope and interpretation of the rules. In practice, the new HSR rules have had limited impact on filing parties, except for those with international manufacturing operations, which must now itemize their overseas products and related U.S. revenues, and private equity firms or master limited partnership buyers, which must now account for associates’ holdings.

Finally, the Antitrust Division issued a revised Policy Guide to Merger Remedies (Remedies Guidelines) earlier this year. The new Remedies Guidelines restate much of the Antitrust Division’s precedents for devising, implementing and enforcing remedy provisions and consent decrees in the merger context. Released in part to highlight the Antitrust Division’s approach to vertical transactions, which received significant attention following Comcast’s acquisition of NBC Universal and Ticketmaster’s merger with Live Nation, the Remedies Guidelines do not reflect a sharp change in the Antitrust Division’s policies. Rather, they highlight the greater flexibility and willingness on the part of the Antitrust Division to accept conduct, as opposed to structural, remedies, particularly in connection with vertical mergers.

European Union

There have been no significant changes in terms of merger enforcement in the EU in 2011, which is now a “well-oiled machine” in Commissioner Joaquín Almunia’s own words. Indeed, March 2011 marked two decades of enforcement of the EU Merger Regulation (EUMR), during which the European Commission (EC) reviewed 4,500 mergers and approved approximately 90 percent of them unconditionally.

Despite the fact that merger notifications increased slightly compared to 2010, last year was characterized by the deepening of the sovereign debt crisis and resulting recession in many EU countries. However, the crisis has not resulted in more lenient merger enforcement by the EC. This is evidenced by the prohibition of the Olympic Air/Aegean Airlines merger (M.5830) on the grounds that it would eliminate competition in many domestic air transport routes in Greece, the EU country at the epicenter of the EU financial crisis. As Commissioner Almunia has stated, the EC views effective merger control as a requirement for Europe to compete effectively in a globalized world economy, especially in times of recession.

In 2010, there was a lot of debate about whether the Upward Pricing Pressure (UPP) test introduced by the U.S. Horizontal Merger Guidelines would dispense with the need to define markets in the EU. The EC’s practice since then shows that market definition will remain the starting point for merger analysis in the EU, and that UPP, along with other econometric tools, will complement rather than replace market definition. The Unilever/Sara Lee Body Care decision (M.5658) is an illustration of this approach. In that case, the EC defined markets and subsequently, through the use of econometric models and other evidence, concluded that the merger would result in a price increase because some of the brands involved were close competitors. As a result, the EC required the divestiture of one of the brands in order to clear the merger. This approach is consistent with the U.S. approach, where industry structure remains a critical starting point for merger analysis.

On the remedies front, the EC has developed its practice of accepting nonstructural remedies to address foreclosure and interoperability concerns in nonhorizontal merger cases, even in Phase I, without a protracted Phase II investigation. In Intel/McAfee (M.5984), the EC had concerns that Intel, after its acquisition of McAfee, would foreclose security solutions and CPU/chipset competitors through technical tying and/or degradation or refusal of interoperability, given Intel’s position in CPUs/chipsets. To address these concerns, the EC accepted essentially interoperability commitments by Intel (i) to provide access to all necessary interoperability information for Intel’s CPUs/chipsets, (ii) not to impede the operation of competing security solutions from running on Intel CPUs and chipsets, and (iii) to avoid hampering the operation of McAfee’s security solutions when running on PCs containing CPUs or chipsets sold by Intel’s competitors.

Despite the mature state of EUMR enforcement on the substantive front, there are still procedural issues that could affect both the timing and substance of merger review under the EUMR.

The EC’s assessment of two parallel mergers in the hard disk drive (HDD) sector raised questions about the EC’s “priority rule,” a practice that it developed for parallel merger investigations. The mergers in question were Western Digital/Hitachi (M.6203) and Seagate Technology/Samsung Electronics (M.6214) (the WD merger and Seagate merger, respectively). The WD merger was announced on March 7, 2011, while the Seagate merger was announced on April 19, 2011. However, the Seagate merger was formally notified one day before the WD merger. As a result of the priority rule, which is based on a “first-come, first-served” approach, the EC assessed the Seagate merger as if the WD merger had not yet occurred, while the WD merger was assessed as if the subsequent Seagate merger already had occurred and Seagate/Samsung were a single entity. The strict application of the priority rule had a concrete impact, given that the WD merger was no longer assessed as a “4 to 3” deal, but instead as a “3 to 2” deal in certain HDD markets, and led to the imposition of remedies for the WD merger. In contrast, the Seagate/Samsung deal was assessed as a “4 to 3” deal and cleared unconditionally. The priority rule is under appeal before the European General Court by Western Digital, but in its current state, it complicates the antitrust risk assessment in M&A transactions that occur in oligopolistic markets with high barriers to entry.

Another procedural issue relates to transactions that do not automatically trigger the EUMR thresholds. Three of the nine Phase II decisions this year involved cases that did not trigger the EUMR thresholds but which were referred to the EC under Article 22 of the EUMR. Two of these decisions either resulted in significant commitments (Sygenta/Monstanto Sunflower Seed, M.5675) or were abandoned (SC Johnson/Sara Lee Household Insect Control Business, M.5669). The increased tendency of national competition authorities in the EU to refer cases to the EC, including authorities that did not originally have jurisdiction to review the deal, is a key parameter that could affect both the timing and substantive assessment of strategic M&A.

China, Brazil and India

China. 2011 was the third full year of enforcement by China’s Ministry of Commerce (MOFCOM) of the Chinese Antimonopoly Law (AML). MOFCOM has continued to vigorously enforce the AML and establish its presence as one of the “gateway” competition authorities for global M&A transactions.

MOFCOM has increased its clout by taking enforcement action for the first time against a transaction involving a Chinese State Owned Enterprise (SOE). On November 10, 2011, MOFCOM imposed remedies for the establishment of a joint venture between General Electric and Shenhua (a Chinese mining/energy SOE), to license coal-water slurry gasification technology to industrial and power projects in China. MOFCOM cleared the joint venture subject to commitments by Shenhua not to compel licensees of competing gasification technologies to use GE/Shenhua’s technology.

On August 29, 2011, MOFCOM adopted Provisional Rules for Assessing the Competitive Effects of Undertakings, which lays out basic principles for MOFCOM substantive merger review that reflect MOFCOM’s experience so far.

However, despite the progress made on the substantive front, the MOFCOM merger review process remains very lengthy, even for transactions raising insignificant merits issues. The vast majority of the notified transactions in 2011 led to Phase II investigations because of the lengthy decision-making process, which involves interagency consultations with many other Chinese government agencies.

Brazil. The new Brazilian Competition Law (Law No. 12529) was adopted on November 30, 2011, and will enter into force on May 28, 2012. The new law will include, among other things, a bar on closing that will prevent the parties from closing a transaction before a clearance is issued. This will be a major change compared to the current system, which does not have an automatic bar on closing, and would put Brazil on the map as one of the key jurisdictions that could affect the timing of global M&A deals.

India. The Competition Bill of 2007, which amends the Competition Act, 2002, introduced a mandatory preclosing filing system that also applies to M&A transactions that do not involve Indian companies. The new regime entered into effect as of June 1, 2011. However, the number of Indian merger notifications triggered from global M&A transactions under the new regime is less significant than originally anticipated, due to a transitory de minimis exception that exempts transactions where the target company has Indian turnover or assets below certain thresholds.