U.S. Department of Justice Updates Guidance on Merger Remedies
On September 3, 2020, the Antitrust Division of the U.S. Department of Justice (the “Division”) updated its 2004 “Policy Guide to Merger Remedies,” which had been reinstated when the Division withdrew the 2011 version of that guide in September of 2018. The Division’s issuance of the new Merger Remedies Manual (the “Manual”) provides much-needed guidance to businesses and lawyers concerning the Division’s approach to seeking remedies when a merger is likely to violate Section 7 of the Clayton Act, or Sections 1 and 2 of the Sherman Act.
The stated goal of the Manual “is to provide Division attorneys and economists with a framework for structuring and implementing appropriate relief short of a full-stop injunction in merger cases.” That goal fits squarely with the overall objective pursued by the Division: To preserve competition and protect against the harm to consumers that results from mergers which substantially lessen that competition. The Manual sets forth six key principles intended to facilitate a determination of whether a remedy is needed, and if so, what form (structural or conduct) that remedy should take. These principles are:
- remedies must preserve competition;
- remedies should not create ongoing government regulation of the market;
- temporary relief should not be used to remedy persistent competitive harm;
- the remedy should preserve competition, not protect competitors;
- the risk of a failed remedy should fall on the parties, not consumers; and
- the remedy must be enforceable.
While the Manual makes many things clear, one thing that is made crystal clear is the Division’s preference for structural remedies, and divestiture in particular. In addition, the Manual also clearly and consistently expresses the Division’s preference for remedies (and the structuring of remedies) in ways that minimize or eliminate ongoing government oversight. If the transaction as proposed by the parties is likely to substantially lessen competition, but an injunction is neither feasible nor desirable, the Division will attempt to structure a divestiture that ensures “that the [divestiture] purchaser possesses both the means and the incentive to maintain the level of premerger competition in the market of concern.”
To that end, the Manual identifies what a divestiture should look like by discussing six important considerations. First, the Manual states that a divestiture must include all assets necessary for the purchaser to be an effective, long-term competitor. Those assets may be tangible or intangible, but if they are intangible, the remedy must provide the purchaser with consistent rights to them. While the Manual states the Division’s preference for a divestiture of an existing standalone business, it also recognizes that divestiture of more than an existing standalone business (inside or outside of the U.S.) may be required when necessary to preserve competition. The Manual also recognizes that in certain limited circumstances, a purchaser may be permitted to purchase fewer assets than are required to be effective in the market long-term.
Second, the Manual notes that structural remedies (as opposed to conduct remedies) are preferred in both horizontal and vertical merger cases “because they are clean and certain, effective, and avoid ongoing government entanglement in the market.” However, the Manual recognizes that in certain circumstances, conduct remedies may be appropriate, such as where a divestiture involves both the transfer of personnel and a limitation on a party’s ability to re-hire the transferred personnel. When attempting to establish that “stand-alone” conduct relief is appropriate, the parties must prove that: (1) a transaction generates significant efficiencies that cannot be achieved without the merger, (2) a structural remedy is not possible, (3) the conduct remedy will completely cure the anticompetitive harm, and (4) the remedy can be enforced effectively.
Third, the Manual recognizes that certain “fix-it-first” remedies, in other words, where the parties take some action prior to closing (e.g., “the sale to a third party of a subsidiary or division or of specific assets from one or both of the merging parties”), that action must fully eliminate the Division’s anticipated competitive concerns in a way that removes the need to file a case challenging the merger. However, the Division must be given sufficient time and information to examine both the underlying transaction and the proposed “fix-it-first” remedy. Timing, in the sense of timely communication to the Division, is critical. In other words, a “fix-it-first” remedy presented to the Division once it has decided to, but not yet initiated, litigation, is clearly stated in the Manual as “unlikely” to be accepted “in lieu of filing a consent judgment in federal district court.” Also, if the “fix-it-first” remedy is proposed after a case is filed, the Manual clearly states that the “Division reserves its right to seek to bifurcate the proceeding into a liability phase and a remedy phase.”
Fourth, the Manual notes that while the Division “typically reviews mergers prior to consummation,” it may also review consummated transactions. The legal analysis, though it stems from a likely actual harm to competition from a closed deal rather than likely harm to competition from a proposed deal, is basically the same. However, crafting effective remedies for consummated transactions (unscrambling the eggs) often creates challenging circumstances that may involve the unwinding of a transaction, a bigger divestiture, transitional assistance to a divestiture purchaser, etc.
Fifth, the Manual expresses a preference for cross-jurisdictional (state and foreign) collaboration to avoid duplicative or competing remedies that are difficult or costly to enforce.
Sixth, the Manual sets out a list of remedial characteristics which, if present, are likely to increase “the risk a remedy will not preserve competition:”
- divestiture of less than a standalone business;
- mixing and matching assets of the merging firms;
- allowing the merged firm to retain certain rights to critical intangible assets;
- ongoing entanglements; and
- substantial regulatory or logistical hurdles.
The Manual also reminds parties that the Division has to approve a proposed purchaser for the divested assets, with that approval based on meeting three “fundamental” tests:
- the divestiture must not itself cause competitive harm;
- the Division must be certain that the purchaser has the incentive to use the divestiture assets to compete in the relevant market; and
- the Division must evaluate the fitness of the proposed purchaser to ensure that the purchaser has sufficient acumen, experience and financial capability to compete effectively in the market over the long term.
In addition to approving the divestiture buyer, the Manual notes that while the Division is not concerned, generally, with the price paid for the divested assets, it will be concerned if the price and other terms indicate that a buyer may be unwilling or unable to compete in the relevant market. One new development present in the Manual is the Division’s explicit statement that it will evaluate both strategic and private equity purchasers using the same criteria, even citing a study by the Federal Trade Commission which noted that in some cases, funding from a private equity divestiture buyer was “important to the success of the remedy because the purchaser had flexibility in investment strategy, was committed to the divestiture, and was willing to invest more when necessary.” Whether this relatively favorable view of private equity buyers (or the aforementioned preference for minimizing or eliminating government involvement in the development of remedies will persist if the administration changes next January remains to be seen). Paying too little and paying too much are both discussed with the same bottom line: What is the effect of paying too little or too much on the goal of the divestiture, which is to preserve competition? The last point made in respect of the Division’s review of the divestiture buyer and transaction is that the Division strongly disfavors seller financing, because (with examples listed), (1) it can create an environment for the ongoing involvement of the seller in the business being divested, which creates potential anticompetitive issues, and (2) the need for seller financing, if resulting from an inability to get conventional commercial financing, may indicate that the buyer is not viable (which risks the failure of achieving the preserve competition goal).
The last section of the Manual addresses the consent decree and divestiture process in terms of timing, substance, procedure and content. Broad parameters are specified regarding how a decree (usually in effect for a term of 10 years) should be drafted to support proper implementation, noting first that divestitures should not be delayed (the Manual specifies that 60-90 days is a common timeframe to complete a divestiture). The Manual specifies that “hold separate” and “asset preservation” provisions are usually necessary, in order to “maintain the independence and viability of the divested assets and to effectively preserve competition in the market during the pendency of the divestiture.” Also, the Manual includes the Division’s requirement that a selling trustee provision be included in the decree to ensure that the Division can seek appointment of a trustee if the selling party is unable to complete the divestiture in accordance with the decree. And, a monitoring trustee provision should also be included in the decree “when technical expertise unavailable within the Division is critical to an effective divestiture.”
The Manual notes that restraints on the resale of divestiture assets ordinarily will not be required and that a decree should include prior notice provisions as “appropriate,” where further transactions may weaken the competitive landscape. Also, the Manual requires that the decree must always bind the entities against whom enforcement may be sought, which would usually result in both parties to the transaction being bound by the decree even if both parties are not required to divest. Next, the consent decree must provide the Division with a means to investigate compliance, including through the use of written reports or inspections. Finally, decrees must allow effective enforcement, such as allowing the Division to “establish the violation and the appropriateness of any remedy by a preponderance of the evidence” or allow for early termination of the decree upon a petition by the Division.
All in all, the Manual resolves several years of debate and dialogue about merger remedies, the policies behind them, whether structural or conduct remedies were favored or disfavored as a matter of policy, and, as a result, ought to bring a greater sense of clarity for practitioners faced with the need to develop remedial actions that satisfy the Division’s competition concerns. While it is true that the Manual, as it fairly immediately states (in Footnote 2) “has no force or effect of law…has no legally binding effect,” it is, nonetheless, a guide, and if followed, client-beneficial outcomes will be accomplished. In keeping with the Manual’s stated desire to “strictly” enforce all merger remedies, the Manual states that “the evaluation and oversight over all Division remedies” shall reside with the Office of Decree Enforcement and Compliance (the “ODEC”), reporting to the Office of the Chief Legal Advisor. The ODEC was created in August of 2020, prior to the issuance of the Manual, but following a reassignment of certain enforcement responsibilities within the Division.
Saul Ewing Arnstein & Lehr’s mergers & acquisitions and antitrust law practitioners regularly assist acquiring companies and targets entering into transactions in evaluating such transaction for potential antitrust concerns or issues. For more information, contact the authors or the attorney at the Firm with whom you are regularly in contact.