Aerospace and defense contractors engage in a wide range of mergers, acquisitions and joint venture transactions, which are often subject to heightened antitrust scrutiny. This article highlights some of the leading antitrust factors that contractors should consider when contemplating M&A transactions in their unique industry.
It is a general tenet that competition serves customers well, enabling them to acquire better products at lower prices. Of course, this premise underlies the antitrust laws. In the aerospace and defense industry, the customers are often government agencies that are monopsonists with significant purchasing leverage. Government customers often have contracting mechanisms that are not generally available in the commercial marketplace, such as the ability to receive certified cost and pricing data from contractors. From time to time, contractors have attempted to rely on arguments that the government’s buyer power and contracting rights ensure that contractors cannot impose unreasonable pricing on the government, even if there is no or limited competition. The antitrust regulators and the U.S. Department of Defense (DoD) have long rejected that notion, stressing that regulation is not a substitute for competition. A recent DoD study supports that general proposition, and provides data the DoD interprets as showing that the presence of competition improves contracting outcomes for the government. See DoD 2014 Annual Report on the Performance of the Defense Acquisition System. This report provides some interesting thoughts and data that may impact future antitrust agency reviews.
On 9 July 2014, the EU Commission (Commission) published a White Paper (White Paper) entitled Towards more effective EU merger control. The White Paper sets out the Commission’s current thinking on the application of merger control rules to the acquisition of non-controlling minority shareholdings. The Commission’s proposals concerning the application of merger controls to the acquisition of non-controlling minority shareholdings are, however, problematic and may lead to a dampening of investments in Europe. Interested parties, which include companies, industry associations and national competition authorities, have until 3 October 2014 to comment on the White Paper.
Under the current Council Regulation (EC) No 139/2004 (the Merger Regulation), the Commission is only able to review transactions that lead to a change of control. The Commission also has the power to review existing minority shareholdings held by the parties to a notifiable transaction, i.e., one resulting in a change of control. Acquisitions of non-controlling minority shareholdings (also referred to as structural links) by themselves, however, can only be carried out retrospectively under Articles 101 or 102 of the Treaty on the Functioning of the European Union (TFEU). In other words, under the Merger Regulation, acquisitions of non-controlling minority shareholdings are not subject to prior review by the Commission unless they result in a change of control, and are only subject to after-the-fact enforcement under Articles 101 and/or 102 TFEU. This leads to what the Commission perceives as an “enforcement gap” at EU level, which results in the Merger Regulation not being applied to non-controlling minority shareholdings that have the potential to harm competition, as exemplified by the recent Ryanair/Aer Lingus case.
In contrast, some EU Member States, such as Germany, and some major non-European jurisdictions (including the United States and Japan) are empowered to review some non-controlling minority shareholdings under their national merger control rules. In these jurisdictions, the Commission would contend that no enforcement gap exists, since non-controlling minority shareholdings can be subjected to prior review.
In view of concerns about the enforcement gap, in 2011, the Commission organised studies on the importance of minority shareholdings in the European Union. Subsequently, in June 2013, the Commission launched a public consultation (the consultation paper) on possible modifications to the Merger Regulation, including the expansion of merger controls to capture certain non-controlling minority shareholdings. The consultation paper also considered different models for reviewing non-controlling minority shareholdings. The responses to the consultation paper generally revealed a lack of consensus about the existence and extent of an enforcement gap. Equally, the responses demonstrated that the need to change the Merger Regulation to address a perceived enforcement gap remained a hotly disputed topic.
The 9 July White Paper contains the Commission’s proposed actions in response to the consultation paper. It covers the issue of minority shareholdings and also looks at other areas where the Commission sees the need for a revision of merger control rules, including mechanisms for referring cases between the Commission and the EU Member States. The White Paper was published together with the Commission [...]
Continue Reading
Recently the American Bar Association Section of International Law in partnership with the International Association of Young Lawyers (AIJA) held a conference entitled “Successful Transactions – What In-House Counsel Expect from their M&A and Antitrust Attorneys.” The conference provided parallel tracks in M&A and Antitrust with the focus of providing attendees a better understanding of issues in-house counsel face during an M&A transaction.
The opening session focused on the importance of project management. The panel consisted of outside counsel, in-house counsel and a consultant. The session started with the notion that clients find that outside counsel generally fall short on project management during M&A transactions. According to the panel, the key to project management is to manage and set realistic client expectations at the outset of any transaction. To provide clients with accurate expectations, outside counsel recommend having a kick-off meeting with the client to discuss the transaction’s structure, the applicable jurisdictions, the regulatory environments and the competitive nature of the industry, and to assess the client’s resources and risk tolerance. The antitrust attorneys also stressed the importance of involving antitrust counsel at the beginning of a transaction. Involving antitrust attorneys early can help most significantly with timing and expense. The most significant example of this is a second request. If antitrust counsel knows the facts of the transaction early he or she can assess the likelihood of the client receiving a second request which can affect cost, timing and ultimately a client’s willingness to continue pursuing the transaction.
To continue to manage the transaction the panel recommended that the lead M&A and antitrust counsel facilitate the following logistical tasks – coordinate efforts to gather and distribute information, set priorities and track work streams, identify and report back to the client on key issues and reevaluate priorities and strategy with clients as the matter develops.
In conclusion, the panel advised attendees that the best way to avoid project management failure is to be organized and communicate with the client and co-counsel. Under that framework the panel recommended that attorneys clearly define the scope of work, establish clear priorities, track the timeline and budget of the transaction, participate in transparent project planning, provide clear and timely reports, and be prepared for forward- looking legal issues like gun-jumping and other transaction-related issues.
Reports circulated out of Japan and Germany late last week indicating Deutsche Telekom AG, owner of T-Mobile US Inc., reached a tentative agreement to sell T-Mobile to Softbank, owner of Sprint Corp. The potential merger of the third and fourth largest wireless carriers has sent rumors of regulatory challenges flying. Other news agencies, like Reuters, have said that crucial details including “price and financing remain to be worked out.” None of the companies, however, have commented on the possible buyout.
Both Deutsche Telekom and Softbank have been frank about their desire to ink a deal. Likewise, leading regulators at the Department of Justice (DOJ) have raised public concerns about the anticompetitive effects of the potential deal. Earlier this year, William Baer, the assistant attorney general for the antitrust division at the DOJ, voiced his opinion that “consumers have benefitted from much more favorable competitive conditions” by having four major players in the wireless carrier industry. As a result, he has expressed hesitation about the DOJ antitrust division’s ability to clear the long-rumored deal, which would create a narrower sector.
Sprint’s chairman, Masayoshi Son, has countered with a public campaign touting the benefits of the tie-up, including creating a more equal competitor to level the playing field with rival behemoths Verizon and AT&T. Son has also encouraged regulators to more broadly consider access to internet, rather than the wireless industry alone. Along those lines, he has made several proposals regarding mobile broadband and promised that with “a three heavy-weight fight” he would engage in “a more massive price war, a technology war.”
Still, industry commentators doubt the ability of the deal to clear regulatory hurdles. Some have pointed to a lack of evidence from Son and Softbank showing that more effective price competition could flourish in a competitive environment with only three major players. Such data is likely crucial to the fate of the tie-up, as a lack of similar data helped bring down AT&T’s prior proposed deal to purchase T-Mobile. Additionally, the deal would require the Federal Communications Commission’s (FCC’s) approval alongside that of the DOJ. Many cite FCC Chairman Tom Wheeler’s cable and wireless industry experience as indicating opposition to the deal.
Reports stated that Deutsche Telekom, which owns a 67 percent stake in T-Mobile, may be interested in keeping a small portion of its ownership interest—perhaps as much as 15 percent—in T-Mobile. If Softbank moves forward, it may face challenges in a bid for T-Mobile, including cable giant Comcast.
The Higher Regional Court in Düsseldorf yesterday dismissed an action for damages of €1.1 billion brought by GN Store Nord against the German Federal Cartel Office. The judgment sheds some light on the possibility for companies to claim damages in the context of an unlawful prohibition of a proposed merger.
The Italian Competition Authority has updated its merger control turnover thresholds. Effective from 10 March 2014, Section 16 (1) of Law No 287 of 10 October 1990 requires prior notification of all mergers and acquisitions where:
Italy’s merger control thresholds are adjusted annually to take into account increases in the gross domestic product deflator index. The updated thresholds are published in the Authority’s Bulletin once the index is announced officially.
Recently, the Authority launched a consultation on its proposed amendments to the Italian merger control thresholds, namely:
For more information, please contact your regular McDermott Will & Emery lawyer or an author.
In a challenge brought both by private plaintiffs and the government, a court has ruled that a health system’s acquisition of a competing physician group practice violated the antitrust laws where the transaction resulted in the health system employing 80 percent of the primary care physicians in one area. Hospitals and health systems pursuing physician practice mergers should carefully consider the implications of this decision on proposed acquisitions and should incorporate antitrust due diligence into their transaction planning.
The wireless industry has seen steady consolidation since the late 1980s. Recently, in late 2013, reports began circulating about a potential merger between Sprint and T-Mobile, the nation’s third and fourth-largest wireless carriers, respectively. Last week, however, in an interview with the Wall Street Journal, William Baer, the assistant attorney general for the antitrust division at the Department of Justice (DOJ), cautioned that it would be difficult for the Agency to approve a merger between any of the nation’s top four wireless providers.
T-Mobile’s CEO, John Legere, stated that a merger between his company and Sprint “would provide significant scale and capability.” Baer, on the other hand, warned that “It’s going to be hard for someone to make a persuasive case that reducing four firms to three is actually going to improve competition for the benefit of American consumers,” As a result, any future consolidation in the wireless industry is likely to face a huge hurdle in the form of DOJ’s careful scrutiny of any proposed transaction.
Much of the DOJ’s interest in the wireless industry stems from the Agency’s successful challenge of a proposed merger between T-Mobile and AT&T in 2011. Since then, Baer believes consumers have benefitted from “much more favorable competitive conditions.” In fact, T-Mobile gained 4.4 million customers in 2013, bringing optimism to the company’s financial outlook after years of losses. In the final two quarters of 2013, T-Mobile’s growth bested that of both Sprint and AT&T. The low-cost carrier attracted customers and shook up the competition by upending many of the terms consumers had come to expect from wireless carriers, as well as investing in network modernization and spectrum acquisition. This flurry of activity has pushed the competition to respond with its own deals, resulting in “tangible consumer benefits of antitrust enforcement,” according to Baer.
The DOJ’s antitrust division has kept careful watch over the wireless industry the past few years. That scrutiny will remain, as the Agency persists to advocate that four wireless carriers are required for healthy market competition. The cards are beginning to play out from the Agency’s decision, and as Baer stated, “competition today is driving enormous benefits in the direction of the American consumer.”
On January 17, 2014, the Federal Trade Commission (FTC) announced revised, higher Hart-Scott-Rodino (HSR) pre-merger notification filing thresholds. The FTC adjusts the HSR thresholds annually to represent the increase or decrease in GNP. These revised thresholds will become effective 30 days from the date on which notice is published in the Federal Register, which should occur within the next week. As such, we expect that these new thresholds will become effective by late February. Once we know the precise effective date for these adjusted thresholds, we will publish an On The Subject that can be distributed to clients. Clients with transactions pending may benefit from the higher threshold if the transaction closes on or after the effective date and ultimately falls below the revised threshold.
Most notably, the size-of-transaction threshold, which frequently determines whether a transaction requires an HSR notification, will increase from $70.9 million to $75.9 million. Other thresholds will increase as well, including thresholds for the size-of-person test, filing fees and certain exemptions. The revised thresholds are as follows:
Original Threshold
2014 Adjusted Threshold
$10 million $15.2 million $50 million $75.9 million $100 million $151.7 million $110 million $166.9 million $200 million $303.4 million $500 million $758.6 million
Generally, a transaction requires an HSR notification if it meets the applicable size-of-transaction and/or the size-of-person tests, described briefly below, and does not fall within any exemptions.
A transaction meets the size-of-transaction test if, as a result of the transaction, the acquiring party holds assets, voting securities or a controlling interest in a non-corporate entity valued in excess of
For the size-of-person test, upon the effective date of these revised thresholds, a transaction resulting in the acquiring party holding assets, voting securities or a controlling interest in a non-corporate entity valued at $75.9 million or more, but less than $303.4 million, is generally reportable if one party has net sales or total assets of at least $10 million, as adjusted ($15.2 million upon the effective date of these revised thresholds), and the other party has net sales or total assets of at least $100 million, as adjusted ($151.7 million upon the effective date of these revised thresholds).
Although the filing fees for HSR notifications will not change at this time (although this is something currently under review), the thresholds (based upon the size-of-transaction) that determine the correct filing fee will also adjust:
Filing Fee
Size-of-Transaction
$45,000 $75.9 million, but less than $151.7 million $125,000 $151.7 million, but less than $758.6 million $280,000 $758.6 million or more
Again, these revised thresholds will become effective 30 days after publication of notice in the Federal Register.
Subscribe
