Non-compete provisions help protect a buyer’s significant investment in an acquired business. Although non-compete clauses often play a vital role in M&A deals, they are not immune from antitrust scrutiny.
Since September 2019, the FTC has challenged noncompete provisions in at least three transactions. These demonstrate that the Commission and other antitrust enforcers are closely scrutinising non-competes and will not hesitate to challenge problematic provisions, even when the underlying transaction raises no substantive antitrust issues or when the provision relates to minority investments.
Parties to a commercial transaction can easily manage this scrutiny by tailoring the scope.
Click here to read the full article in our latest International News.
The FTC and DOJ proposed new Hart–Scott–Rodino (HSR) rules that, if issued in final form, will significantly change HSR practice for Private Equity (PE) companies.
The Proposed Rules are subject to comment for 60 days after they are published in the Code of Federal Regulations (CFR) and will not go into effect until after that comment period, when they could be issued as proposed, modified, or simply not issued.
Under the current rules, HSR focuses on the Ultimate Parent Entity (UPE). For LLCs and partnerships, that means that each fund in a family is normally its own UPE. Other funds managed by the PE sponsor are deemed “associates” of the UPE, but are not part of the UPE or “Person” making the filing. Only limited information needs to be provided about “associates,” and only if the associate operates in a similar field to the target company. The proposed rules will treat all funds and portfolio companies, as well as the PE sponsor, as part of the same “Person” for purposes of determining the filing requirements, and also for completing the HSR form.
There is also a proposed exemption for acquisitions of less than 10% of an issuer, regardless of investment intent, if the acquiring person is not in a competitive relationship with the target. This might reduce filing obligations for companies like hedge funds that might take actions that disqualify themselves from the current investment only exemption.
What This Means:
The Proposed Rules change the calculus on whether filings may be required and what needs to be reported if a filing is required as “Associates” would now be deemed part of the same “Person” for the purposes of the HSR Act. Filings are evaluated based on what an “Acquiring Person” will hold. This is not a change, but changing who is deemed to be in the “Person” could affect transactions in a number of ways. Below are some examples of the potential impact.
More transactions are likely to require filings
For example, if a sponsor manages Fund 1 and Fund 2 and the sponsor arranges a transaction for Fund 1 to acquire USD $80 million of target stock, Fund 2 to acquire $60 million, and co-investors to acquire USD $20 million, currently no filing would be required, while under the Proposed Rules a filing would be required.
Currently, no HSR filing is required because Fund 1 is its own “Person” and its acquisition does not exceed the transaction filing threshold (USD $94 million). The same would be true for Fund 2’s acquisition of the USD $60 million—also below the threshold.
Under the Proposed Rules, an HSR filing would be required because the “Person” would include the sponsor, Fund 1 and Fund 2 (altogether). The “Person” would be acquiring USD $140 million in stock and that acquisition would exceed the USD $94 million size of transaction filing threshold.
Another scenario not currently requiring a filing, but would [...]
Under current EU merger control rules, whether a concentration has to be notified to the European Commission (“Commission”) depends, among other things, on the level of revenue generated by the parties worldwide and in the European Union. A key question that has sparked considerable debate in recent years is whether the current merger control thresholds cover all transactions that have the potential to harm competition, or whether there is a so-called “enforcement gap”.
On September 11, during the International Bar Association’s 24th Annual Competition Conference, Competition Commissioner Margrethe Vestager announced that the Commission intends to change its approach towards referrals to the EU from national competition authorities. Commissioner Vestager noted that although the current, revenue-based thresholds set out in the EU Merger Regulation generally work well, revenue does not always reflect a company’s significance – particularly in innovative sectors, such as the pharmaceutical and digital sectors. In other words, innovative firms with low revenues may have a significantly out-sized market presence.
This issue is not entirely new, and has been debated in recent years – for example, in connection with possibly amending the thresholds set out in the EU Merger Regulation. On this point, however, Commissioner Vestager pointed out that “changing the merger regulation, to add a new threshold like this, doesn’t seem like the most proportionate solution”.
Instead, as a solution to this shortfall, Commissioner Vestager stated that the Commission intends to broaden its approach to cases referred to it from one or more EU Member States, stating that the Commission will “[…] start accepting referrals from national competition authorities of mergers that are worth reviewing at the EU level – whether or not those authorities had the power to review the case themselves”.
The current referral system set out in the EU Merger Regulation enables the Commission to review concentrations that fall below the EU thresholds. Indeed, in recent years, certain significant transactions have been reviewed by the Commission only after an upward referral, as they did not fulfil the jurisdictional thresholds of the EU Merger Regulation, including for example Apple/Shazam (2018), Microsoft/GitHub (2018) and Facebook/WhatsApp (2014). Under the current rules, the Commission can review transactions which fall below the EU merger control thresholds on the basis of referrals from national competition authorities where:
the concentration is notifiable in at least three Member States; or
where the concentration affects trade between Member States and threatens to significantly affect competition within the Member State(s) making the request for a referral.
The Commission has discouraged national competition authorities from referring cases to the Commission in instances when they themselves did not have the power to review because national merger control thresholds were not met.
The proposal announced by Commissioner Vestager would change this approach, and would allow a broader universe of cases – including those which fall below national thresholds – to be referred to the Commission. Ms. Vestager explained that “those referrals could be an excellent way to see the mergers that matter at a European scale, but [...]
In the United States, despite requesting additional time to review pending mergers, the US antitrust agencies have continued their work through the COVID-19 pandemic. The Department of Justice (DOJ) and Federal Trade Commission (FTC) reached settlements with a number of merging parties during Q2 2020, and the FTC is proceeding to trial in several merger cases. Both the FTC and the DOJ are conducting investigational hearings and depositions via remote videoconferencing technology such as Zoom. The FTC also announced it prevented 12 deals from closing in 2020 despite the COVID-19 pandemic. Five of the transactions were blocked and another seven were abandoned due to antitrust concerns, putting the FTC on pace for one of its busiest years for merger enforcement in the past 20 years.
In Europe, in light of the COVID-19 outbreak, the European Commission (EC) warned that merger control filings would likely not be processed as swiftly as usual. The EC encouraged parties to postpone merger notifications because the EC envisaged difficulties, within the statutory deadlines imposed by the EU Merger Regulation, to elicit relevant information from third parties, such as customers, competitors and suppliers. In addition, the EC foresaw limitations in accessing information on a remote basis. This period thus saw a drop in merger notifications to the EC; however, notifications increased in June and July.
The US Federal Trade Commission (FTC) recently extracted a $3.5 million civil penalty from two companies involved in a gas station merger. The FTC asserts the companies violated their settlement agreement with the government, which required the divestment of 10 gas stations within 120 days from the date of the settlement agreement. The parties overshot the divestiture deadline by more than three months. The Commission stated its deadlines are not a suggestion and it will not permit parties to profit from order violations of any kind, including late divestitures.
FTC commissioner Rohit Chopra’s dissenting statement, made in an unrelated case just two weeks prior to this fine, emphasized that divestitures should be completed promptly and raised concerns with settlements involving divestitures that are made “after a prolonged period of time.” Taken together, if there is a change in administrations in November, we may see even more focus on requiring buyers up front or buyers in hand for mergers that require divestitures to gain clearance.
WHAT HAPPENED:
On July 6, 2020, the FTC imposed a $3.5 million civil penalty on two companies relating to 10 gas stations the Commission required the companies to divest within 120 days of the settlement, to gain clearance for their recent transaction. The companies failed to divest the gas stations by the June 15, 2018, Commission deadline.
The FTC noted that “Commission orders carry the force of law” and Commission “deadline[s are] not a suggestion.”
The FTC emphasized that it will “vigorously pursue and penalize” parties who attempt to “profit from order violations of any kind, including late divestitures.” The daily civil penalty is $43,280.
The Commission voted 5–0 on this settlement and civil penalty.
The divestitures were ultimately made more than three months after the original agreed-to deadline.
The Commission also claimed that the compliance reports submitted to the FTC were not complete, and the incomplete reports, in and of themselves, constituted consent order violations, commencing the daily civil penalty clock.
On June 26, 2020, less than two weeks before the civil penalty in the gas station matter was made public, Commissioner Chopra issued a dissenting statement in the Matter of Eldorado Resorts and Caesars Entertainment. In that case, the Commission allowed the assets to be divested to be retained by Eldorado for a period of roughly a year post-closing. During that period, the divestiture buyer would seek state gaming licensures needed to take ownership, and the casinos to be divested would be operated by an independent trustee.
Commissioner Chopra argued that “the Commission should not agree to merger settlements unless divestitures are completed promptly to a qualified buyer ready and willing to compete on day one.”
He also stated that “[i]t is risky and makes little sense to propose a complex settlement with a prolonged divestiture period and unorthodox terms to justify a merger that has no meaningful benefits, particularly given [...]
Since September 2019, the Federal Trade Commission has challenged noncompete provisions in at least three transactions. These challenges demonstrate that the FTC will challenge noncompete provisions even when it concludes that the underlying transaction raises no substantive antitrust issues and when the provision relates to minority investments.
Noncompete provisions help protect a buyer’s significant investment in an acquired business by restricting the seller from turning around and starting a new business that devalues the business sold. Although noncompete clauses often play a vital role in mergers and acquisitions, they are not immune from antitrust scrutiny. The recent challenges to noncompete provisions show that the FTC and other antitrust enforcers are closely scrutinizing noncompetes and will not hesitate to challenge problematic provisions — whether standalone or as part of a larger challenge to a transaction.
Parties to a commercial transaction, however, can easily manage these risks by carefully tailoring the scope of the noncompete to the transaction at hand. This article reviews recent enforcement actions involving noncompetes and provides practical guidance for mitigating antitrust risk associated with these valuable provisions.
If you missed our latest webinar, enjoy the replay below and learn more as we provide highlights on competitor collaborations, avoiding violations in labor markets, provider M&A and partial acquisitions.
Competitor Collaborations
Antitrust compliance remains an important priority in the US. While companies have been engaged in finding creative solutions to COVID-19 challenges and regulators are expressing a willingness to be more flexible in interpreting and enforcing the law, the pandemic is not a carte blanche to engage in anti-competitive
Regulators are more prone to accept collaborations limited in scope to respond to COVID-19 and its aftermath, and arrangements undertaken at the behest of or in partnership with government actors. Companies should avoid high-risk conduct such as direct exchanges of competitively sensitive
Procompetitive agreements not relating to price, wages or market/product allocations remain possible. Companies should conduct an antitrust analysis before entering new collaborations and consider whether it would be helpful or advisable to engage with federal antitrust authorities or state governments to receive
Avoiding Antitrust Violations in Labor Markets
COVID-19 does not change antitrust rules for labor Antitrust laws apply to labor markets just as they do to markets for goods and services. Agreements with competing employers not to recruit, to set employee compensation or hours or to exchange confidential compensation information that reduces compensation can violate the antitrust laws. The Department of Justice (DOJ) will prosecute certain labor market antitrust violations criminally.
Establish guardrails to minimize antitrust risk in labor markets. Non-solicitation covenants that are part of broader collaborations should be tailored in scope to minimize antitrust Compensation benchmarking and salary surveys should be done in compliance with DOJ, FTC guidance.
Provider M&A
Antitrust planning for transactions should begin early in the deal. This allows the antitrust strategy to be developed and pursued based on specific facts. This planning should include due diligence regarding market conditions, the rationale or justification for pursing the transaction and the financial position of the Parties should also adopt protocols for document creation and communications.
Parties should consider transaction efficiencies, and how they benefit payors and patients. Clearly articulating the deal’s cost, access, quality and other benefits can help reduce deal delays from antitrust
Partial Acquisitions
Partial acquisitions potentially may help healthcare entities mitigate both the financial impact of the COVID-19 crisis and antitrust Acquiring a minority share in a rival can be less competitively restrictive than doing a full-scale merger or acquisition, because by law the parties must remain and act as separate and independent competitors.
But anticompetitive effects can result from a partial acquisition and the FTC/DOJ Horizontal Merger Guidelines identify three reasons why: the partial buyer may be able, through board seats or governance rights, to influence the target’s decisions; the buyer may have an incentive to compete less aggressively to protect its investment; and the buyer may have access to its rival’s [...]
In the United States, The Federal Trade Commission (FTC) and Department of Justice (DOJ) faced new issues this quarter with the unprecedented challenges brought about by the COVID-19 global pandemic. In March, the agencies made certain changes to the merger review process to accommodate businesses and counsel working remotely. However, merger reviews, challenges, trials and consents have continued as usual at both agencies despite the additional obstacles.
In Europe, the European Commission (EC) also put in place special measures to ensure business continuity in the enforcement of merger control during the COVID-19 crisis. The first quarter of 2020 also saw the United Kingdom’s official departure from the European Union, which has consequences on the enforcement of EU competition law in the United Kingdom.
On Feb. 11, the Federal Trade Commission announced that it had issued special orders to five large technology companies, requesting information on prior acquisitions completed by the companies during the past 10 years. The FTC’s announcement follows several recent high-profile events relating to technology mergers, including the FTC’s Hearings on Competition and Consumer Protection in the 21st Century and the FTC’s creation of a Technology Task Force.
The key question driving the FTC’s special orders is whether nonreportable deals might warrant further investigation or challenge. The special orders present challenges and opportunities for the five companies and for other acquisitive companies that may face questions down the road.
To access the full article, featured in Law360, please click here.
The DOJ Antitrust Division’s recent challenge to the United Technologies/Raytheon merger highlights a few key considerations for antitrust reviews of aerospace and defense industry transactions. The case is a useful illustration of important principles applicable to this unique industry.
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