The US Federal Trade Commission recently announced increased thresholds for the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and for determining whether parties trigger the prohibition against interlocking directors under Section 8 of the Clayton Act.
Alimentation Couche-Tard Inc. (ACT) and its subsidiaries (including Circle K Stores, Inc.) are engaged in the retail sale of gasoline and diesel fuel in the United States, as well as in the operation of convenience stores. ACT is the largest convenience store operator in terms of company-owned stores and is the second-largest chain overall in the United States.
Pursuant to an Equity Purchase Agreements, dated July 10, 2017, ACT would acquire, through its wholly owned subsidiary Oliver Acquisition Corp., all of the equity interests of certain Holiday subsidiary companies.
The FTC defined the relevant product markets as the retail sale of gasoline and the retail sale of diesel.
The FTC defined local geographic markets, identifying ten separate geographic markets in Wisconsin (including Hayward, Siren and Spooner) and Minnesota (including Aitkin, Hibbing, Minnetonka, Mora, Saint Paul and Saint Peter).
In its complaint, the FTC stated that the “relevant geographic markets for retail gasoline and retail diesel are highly localized, ranging up to a few miles, depending on local circumstances” and “[e]ach relevant market is distinct and fact-dependent, reflecting the commuting patterns, traffic flows, and outlet characteristics unique to each market.” Additionally, the FTC stated that “[c]onsumers typically choose between nearby retail fuel outlets with similar characteristics along their planned routes.”
In its complaint, the FTC alleged that post-merger the transaction would reduce the number of independent competitors from 3-to-2 in five local markets, and from 4-to-3 in five other local markets.
The FTC also stated that new entry was unlikely to mitigate the impact of the transaction in these local areas because there are significant entry barriers in the retail gasoline and diesel fuel business, including “the availability of attractive real estate, the time and cost associated with constructing a new retail fuel outlet, and the time associated with obtaining necessary permits and approvals.”
The FTC alleged that the proposed acquisition would result in (1) an increased likelihood that ACT and its subsidiaries would unilaterally exercise market power in the relevant markets; and (2) an increased likelihood of collusive or coordinated interaction between the remaining competitors in the relevant markets.
The FTC accepted a consent order in which ACT agreed to divest certain of its subsidiary’s and Holiday’s retail fuel outlets and related assets to remedy concern in ten local geographic markets in Wisconsin and Minnesota. ACT must complete the divestiture to a Commission-approved buyer within 120 days after the acquisition closes.
WHAT THIS MEANS:
Local geographic markets are highly fact specific. Factors used to determine local geographic markets for retail gasoline and retail diesel include: commuting patterns, traffic flows and outlet characteristics unique to each market.
In certain markets where only two or three independent competitors will remain post-transaction, the FTC may allege that the transaction will increase the likelihood of coordination though no collusive or coordinated interaction is alleged. Certain aspects of the fuel industry make it vulnerable to coordination including: [...]
Senator Elizabeth Warren (D-MA) gave a speech at the Open Markets Institute on December 6 entitled “Three Ways to Remake the American Economy for All”, in which she repeatedly positioned antitrust policy as a tool to rebalance competition between “big, powerful corporations” and “just about everyone else.”
Senator Warren spoke critically about recent antitrust enforcement and advocated three steps for improving antitrust enforcement: (1) block mergers that choke-off competition; (2) crack down on anticompetitive conduct; and (3) get all government agencies to defend competition.
On mergers, Senator Warren asserted that “settlement agreements that allowed bad mergers if the companies promised to take actions” have not worked out because “those expertly crafted provisions have been epic failures” and that “[s]tudies show that those settlement conditions often fail to bring about the cost savings and other benefits giant corporations promised.”
She advocated that to improve antitrust enforcement “we need to demand a new breed of antitrust enforcers … Enforcers who will turn down papier-mache settlement agreements and actually take cases to court.”
Senator Warren stated that increased enforcement is needed not just for horizontal mergers between direct competitors, but also for vertical mergers (e.g., between customers/suppliers). In her view, the “Chicago School party line” that vertical mergers do not harm competition may be accepted theory, but is “not often the reality” when large companies are involved.
On anticompetitive conduct, Senator Warren singled out no-poach agreements as an area for increased enforcement—specifically franchises that do not allow an employee of one franchisee to be hired by another franchisee.
On getting other agencies to defend competition, Senator Warren noted that while not enforcers like DOJ, other government agencies like the Defense Department, the Food and Drug Administration, the Federal Deposit Insurance Corporation and the Federal Communications Commission, can significantly impact competition through regulation and purchasing.
Finally, Senator Warren highlighted several consolidated industries that she views as significantly concentrated for which she would like to see increased antitrust focus including: airlines, banking, healthcare, pharma, agriculture, telecom and tech.
WHAT THIS MEANS:
Senator Warren’s theme that antitrust can be used to protect small businesses, entrepreneurs, innovators, workers and just about everyone else from the “rich and powerful” shows that increasing antitrust enforcement has become a key party line for the upcoming midterm elections.
Additionally, Senator Warren stated that “[t]he individuals who lead the [FTC and DOJ] determine the federal government’s competition priorities,” and have a significant impact on antitrust enforcement by deciding which cases to open or take to court. Given these statements and that several high-profile mergers will be decided before the midterms, we expect that Senator Warren will continue to highlight the potential impact of high-profile mergers on small business and individuals.
French merger control applies if the turnovers of the parties to a transaction (usually the acquirer(s) including its (their) group(s) of companies, and the target) exceeded, in the last financial year, certain (cumulative) thresholds provided in Article L. 430-2, I of the French Commercial Code (the “Code”):
Combined worldwide pre-tax turnover of all concerned parties > €150 million; and
French turnover achieved by at least two parties individually > €50 million euros; and
The transaction is not caught by the EU Merger Regulation.
Specific (and lower) thresholds exist for mergers in the retail sector or in French overseas departments or communities[1].
In the situation of an acquisition of joint control, a transaction can be notifiable where each of the acquirers meets the thresholds even if the target has no presence or turnover in France.
There is no exception applicable to foreign-to-foreign transactions.
Acquisitions of ‘non-controlling’ minority shareholdings are not notifiable.
Filing is mandatory and failure to file or early implementation can be sanctioned
Under Article L. 430-3 of the Code, a notifiable merger cannot be finalized before its clearance by the French Competition Authority (the “FCA”) but the Code does not provide any specific deadline for the notification. There is no filing fee.
Failure to notify a reportable transaction can be sanctioned by the FCA as follows:
A daily penalty can be imposed on the notifying party(ies) until they notify the operation or demerge, as the case may be; and
A fine can be imposed on the notifying party(ies) up to:
For corporate entities: 5% of their pre-tax turnover in France during the last financial year;
For individuals: €1.5 million.
Due to the suspensive effect of the filing, these sanctions also apply when the parties start to implement a notified transaction before receiving clearance (so-called ‘gun jumping’) from the FCA.
Nevertheless, individual exemptions may be granted by the FCA to allow undertakings to close before receiving clearance; in practical terms, exemptions are exceptional and limited to circumstances where insolvency proceedings have been opened, or are about to be opened, in relation to the target.
Timeline of merger control procedure
The majority of notified transactions are cleared in Phase I, which lasts 25 business days as from the receipt by the FCA of a complete notification.
A simplified procedure, which lasts for about 15 business days, is available for non-problematic acquisitions, which is often the case for transactions involving private equity funds. Simplified procedures accounted for about 50% of the notified transactions between May 2016 and May 2017.
Phase II is reserved for problematic acquisitions requiring a deeper examination and takes at least an additional 65 business days.
In addition, parties can pre-notify a transaction with the FCA. The pre-notification procedure can prove to be very useful in order to confirm the notifiability of a transaction, the nature and amount of information that will be required by the FCA [...]
Alimentation Couche-Tard Inc. (ACT) is a Canadian corporation and is engaged in the retail sale of gasoline and diesel fuel in the United States. Circle K Stores, Inc. (Circle K) is a wholly owned subsidiary of ACT. Circle K indirectly owns all of the membership interests in CrossAmerica GP LLC, CrossAmerica Partners LP’s (CAPL) general partner.
Pursuant to three separate Asset Purchase Agreements, dated August 4, 2017, ACT would acquire ownership or operation of all Jet-Pep, Inc. retail fuel outlets. Specifically, Circle K would acquire 18 retail fuel outlets, a fuel terminal and related trucking assets and CAPL would acquire 102 Jet-Pep retail fuel outlets.
While the purchases did not require an HSR filing, the FTC learned of the transaction, investigated and required remedies before allowing the transaction to proceed.
The FTC defined the relevant product markets as the retail sale of gasoline and the retail sale of diesel.
The FTC defined the geographic markets as local markets and identified the three separate geographic markets in Alabama including Brewton, Monroeville and Valley.
In its complaint, the FTC alleged that post-merger the “number of competitively constraining independent market participants” would be reduced “to no more than three in each local market.”
The FTC alleged that the proposed acquisition would result in (1) an increased likelihood that ACT would unilaterally exercise market power in the relevant markets; and (2) an increased likelihood of collusive or coordinated interaction between the remaining competitors in the relevant markets.
The FTC accepted a consent order in which ACT agreed to divest certain Jet-Pep retail fuel outlets and related assets to remedy concern in three local geographic markets in Alabama. ACT must complete the divestiture to a Commission-approved buyer within 120 days after the acquisition closes.
WHAT THIS MEANS:
This consent decree is a reminder that even when a transaction is not HSR reportable, the transaction may still be reviewed and challenged by the FTC and DOJ.
Local geographic markets are highly fact specific. Factors used to determine local geographic markets for retail gasoline and retail diesel include: commuting patterns, traffic flows and outlet characteristics unique to each market.
If the proposed divestiture package is something less than a complete, autonomous and operable business unit, the parties must show that their proposed package will enable the buyer to maintain or restore competition in the market.
FTC and DOJ may not require a buyer-up-front where they have significant experience in the industries at issue, and where the ownership interest is a high-value, low-risk asset (e.g., retail fuel business) that is likely to generate substantial interest from more than one potentially acceptable buyer.
On Thursday, November 16, 2017, newly confirmed Assistant Attorney General for Antitrust Makan Delrahim, speaking at the American Bar Association Section of Antitrust Law’s Fall Forum, explained where antitrust enforcement fits in the broader Trump administration effort to reduce federal regulations.
Delrahim remarked that “antitrust is law enforcement, it’s not regulation.” Antitrust enforcement “supports reducing regulation, by encouraging competitive markets that, as a result, require less government intervention.” Delrahim explained that “[v]igorous antitrust enforcement plays an important role in building a less regulated economy in which innovation and business can thrive, and ultimately the American consumer can benefit.” As a result, the government can minimize regulation related to price, quality, and investment.
Delrahim announced that the Antitrust Division of the US Department of Justice (DOJ) would seek to reduce the number of long-term consent decrees and “return to the preferred focus on structural relief to remedy mergers that violate the law,” thereby limiting the use of behavioral remedies in consent decrees particularly in vertical transactions, where such remedies have historically been common. According to Delrahim, “a behavioral remedy supplants competition with regulation; it replaces disaggregated decision making with central planning.” Delrahim also expressed concern that behavioral remedies simply delay the exercise of otherwise anticompetitive market power.
Mentioning by name several consent decrees in vertical transactions containing behavioral provisions in merger cases brought by the Obama administration, Delrahim expressed concern that these remedies “entangle the [Antitrust] Division and the courts in the operation of a market on an on-going basis.” Delrahim cautioned that the lack of enforceability and reliability of behavioral remedies diminish the effectiveness of antitrust enforcement, a risk that consumers should not have to bear.
WHAT THIS MEANS:
Delrahim’s stance on behavioral remedies starkly contrasts with previous DOJ policies, followed under both Democratic and Republican administrations. Prior administrations strongly preferred structural remedies, but recognized that behavioral remedies could be appropriate particularly for vertical transactions that presented pro-competitive benefits. The DOJ’s most recent policy paper on remedies (issued by the Obama administration) exemplifies this view, stating: “conduct remedies often can effectively address anticompetitive issues raised by vertical mergers.”
Despite the new administration’s disfavored view of behavioral remedies for a vertical merger, such remedies are not off the table. To secure a DOJ consent decree with behavioral remedies for a vertical merger, parties will likely have to show that the transaction “generates significant efficiencies that cannot be achieved without the merger or through a structural remedy.” Delrahim unambiguously stated that this is “a high standard to meet.”
Delrahim’s speech appeared aimed at several high profile vertical transactions that are currently under review by the DOJ, likely seeking to explain why the DOJ will insist on structural remedies in transactions where most outside observers thought a behavioral remedy may suffice.
It is possible that Joe Simons, President Trump’s unconfirmed appointee for Chairman of the Federal Trade Commission, may take a differing stance on behavioral remedies, following prior policy statements. This could result in a slight [...]
Between 2012 and 2013, Marine Harvest ASA (“Marine Harvest”), a Norwegian seafood company, acquired Morpol ASA (“Morpol”), a Norwegian producer and processor of salmon. Marine Harvest notified the transaction to the European Commission under the European Union’s Merger Regulation (“EUMR”), but implemented it prior to the European Commission having granted clearance. In 2014, the European Commission imposed a EUR 20 million fine on Marine Harvest for “jumping the gun”. On 26 October 2017, the General Court of the European Union (“General Court”) confirmed the European Commission’s decision (“Decision”).
WHAT HAPPENED:
On 14 December 2012, Marine Harvest entered into a share and purchase agreement (“SPA”) with companies owned by Jerzy Malek, the founder and former CEO of Morpol. Under the SPA, Marine Harvest acquired 48.5% of the shares in Morpol (“Initial Transaction”). The Initial Transaction was closed on 18 December 2012. On 15 January 2013, Marine Harvest submitted a mandatory public offer for the remaining 51.5% of the shares in Morpol (“Public Offer”). Following settlement and completion of the Public Offer in March 2013, Marine Harvest owned a total of 87.1% of the shares in Morpol (together, the “Transaction”).
Marine Harvest established first contact with the European Commission on 21 December 2012 by submitting a “Case Team Allocation Request”, which initiates the pre-notification process under the EUMR. After submitting various drafts and answers to requests for information, Marine Harvest formally notified the Transaction on 9 August 2013. On 30 September 2013, the European Commission cleared the Transaction subject to some conditions.
On 31 March 2014, the European Commission formally launched a separate investigation into alleged “gun jumping” by Marine Harvest, and in the decision of 23 July 2014, the European Commission imposed a fine of EUR 20 million on Marine Harvest (“Fining Decision”). The European Commission held that Marine Harvest, by implementing the Initial Transaction, had acquired de facto control over Morpol. By acquiring de facto control, Marine Harvest had infringed Art. 7(1) EUMR (“Standstill Obligation”). Under the Standstill Obligation, transactions requiring notification to, and clearance by, the European Commission may not be implemented prior to clearance.
The European Commission rejected Marine Harvest’s argument that the implementation of the Initial Transaction was covered by an exemption provided for in Art. 7(2) EUMR (“Public Bid Exemption”). Under the Public Bid Exemption, the acquisition of control from various sellers through a public bid, or a series of transactions in securities, can be implemented prior to clearance. However, this applies only if the transaction is notified without delay to the European Commission, and if the acquirer does not exercise the respective voting rights. According to the European Commission, the Public Bid Exemption is not intended to cover situations involving the acquisition, from a single seller, of a “significant block of shares” which in itself confers de facto control.
Marine Harvest appealed against the Fining Decision to the General Court. However, with the Decision, the General Court confirmed the European Commission findings, both on substance on with respect to the level of the fine.
On February 14, 2017, Integra agreed to purchase Johnson & Johnson’s Codman neurosurgery business (excluding Codman’s neurovascular and drug deliver businesses) for $1.045 billion.
Seven months later, on September 25, 2017, the Federal Trade Commission (FTC) agreed to clear the transaction subject to the parties divesting five neurosurgical tools and associated assets including the relevant intellectual property (IP), manufacturing technology and know-how, and research & development (R&D) information related to the five tools. Additionally the buyer of the divested assets can freely negotiate to hire any employees that worked on sales, marketing, manufacturing, or R&D for the divestiture products. The parties must also supply Natus Medical Incorporated (Natus) with cranial access kits often sold with the divestiture assets until Natus can start sourcing them independently.
The FTC required that the parties divest the following medical devices:
Intracranial pressure monitoring systems, which measure pressure inside the skull. The FTC determined that Integra (68 percent) and Codman (26 percent) combined market share in the United States would be 94 percent and that only fringe competitors with limited presence would have remained.
Cerebrospinal fluid collections systems, which drain excess cerebrospinal fluid and monitor pressures within the fluid. The FTC found that Integra (57 percent) and Codman (14 percent) would combine for 71 percent market share in the United States and would have reduced the number of significant competitors from three to two.
Non-antimicrobial external ventricular drainage catheters, which funnel excess cerebrospinal fluid form the brain to cerebrospinal fluid collection systems to relieve intracranial pressure. Here, the FTC said Integra (29 percent) and Codman (17 percent) are the number two and three competitors accounting for 46 percent of the market in the United States and would have reduced the number of significant competitors from three to two.
Fixed pressure valve shunts, which are used to treat excessive accumulation of cerebrospinal fluid. The FTC found that Integra (23 percent) and Codman (15 percent) were the number two and three competitors would control 38 percent of the US market and, again, that the number of competitors would have been reduced from three to two.
Dural grafts, which are used to repair or replace the membrane that surrounds the brain and spinal cord and keep cerebrospinal fluid in place. The FTC determined that the merger would have reduced the number of significant competitors from four to three with Integra (66 percent) and Codman (nine percent) combining for 75 percent market share.
Under the terms of the settlement, the parties must divest within 10 days of closing to Natus, which is a global health care company with an existing neurology business including systems that are complementary to the divestiture assets.
On December 1, 2016 Parker-Hannifin agreed to acquire Clarcor for $4.3 billion.
The merger agreement included a $200 million divestiture cap – that is, Parker-Hannifin was required, if necessary, to divest assets representing up to $200 million in net sales to obtain antitrust clearance.
The initial antitrust waiting period under the Hart-Scott-Rodino Act (HSR Act) expired on January 17, 2017.
Parker-Hannifin completed the acquisition on February 28, 2017.
Nearly seven months later on September 26, 2017, the DOJ filed suit in US District Court for the District of Delaware seeking to require Parker-Hannifin to divest either its or Clarcor’s aviation fuel filtration assets.
The DOJ did not include in its complaint an allegation or statement that the parties increased prices.
The DOJ press release indicates that the parties “failed to provide significant document or data productions in response to the department’s requests.” We believe that this refers to the DOJ’s post-closing investigation.
The DOJ did not suggest in its complaint or the press release that the parties failed to provide required documentation under the HSR Act (e.g., Item 4 documents). During the initial 30-day HSR waiting period, the parties are under no obligation to submit documentation or data to DOJ or FTC requests – all responses are voluntary.
WHAT THIS MEANS
Challenges to transactions after the HSR waiting period expired are rare and typically involve a situation where the parties failed to supply required documentation under the HSR Act.
Challenges post-HSR clearance are even rarer when the parties complied with their obligations under the HSR Act and supplied all required documentation (e.g., Item 4 documents).
The DOJ’s post-HSR clearance action demonstrates that the DOJ may still challenge a transaction post-closing if it later discovers a niche problematic overlap that it did not discover during the initial HSR waiting period.
While this challenge may be an aberration, it raises additional considerations when drafting risk allocation provisions in merger agreements for HSR reportable transactions because merger agreements do not typically account for a post-HSR clearance challenge from the DOJ or FTC.
DOJ action in this matter suggests the Trump administration is unlikely to be lax in its merger enforcement and will continue to analyze competition in narrow markets.
As reported previously, German competition law was recently amended. The amendments included with the introduction of a “size of transaction”-threshold a notable change with respect to German merger control. The following is a reminder of five important features of German merger control which you should be aware of:
The jurisdictional thresholds of German merger control are easily triggered
German merger control applies if the parties to a transaction (usually the acquirer and the target) exceeded, in the last financial year, certain turnover thresholds. In an international context, these thresholds are relatively low and easily triggered:
Joint worldwide turnover of all parties > € 500 million, and
German turnover of at least one party > € 25 million, and
German turnover of another party > € 5 million.
There is a new “size of transaction”-threshold
Since June 2017, German merger control can also be triggered if a newly introduced “size of transaction”-threshold is exceeded:
Joint worldwide turnover of all parties > € 500 million, and
German turnover of at least one party > € 25 million, and
“value of compensation” > € 400 million, and
The target company has “significant business activities” in Germany (which may be activities with revenues < € 5 million).
The “value of compensation” includes the purchase price and all other assets and non-cash benefits, as well as liabilities assumed by the purchaser.
Acquisition of minority shareholdings may be notifiable
Similar to the HSR Act, but different to European Union merger control and most European jurisdictions, German merger control is not limited to the “acquisition of control”. Additional triggering events are
The acquisition of 25% or more of the shares in a company, and
The acquisition of a shareholding below 25% if this, combined with other factors (e.g. the right to appoint one out of five members of the board), may have an impact on competition (“acquisition of ability to exercise competitively significant influence”).
Review of joint venture situations
German merger control may apply in joint venture situations that are often not covered by other merger control laws:
German merger control may apply to the setting up of a joint venture company, even if the joint venture will have no activities in Germany. The jurisdictional thresholds may be satisfied by the parent companies alone. While there is an exemption for transactions with “no effect in Germany”, it is interpreted very narrowly and applies only in exceptional circumstances.
German merger control applies to all joint venture situations where two or more parties acquire or continue to hold a shareholding of 25% or more. Examples: – A and B set up a 50/50 production joint venture. – A acquires sole control and a 70% shareholding, and B acquires a non-controlling 30% shareholding. – A sells 75% of a fully owned subsidiary to B, and retains only a 25% minority shareholding. – A, B and C each own 1/3 in a joint venture company. C divests his shareholding [...]