Key Principles of Merger Remedies Around the World

Most transactions are not anticompetitive and many benefit consumers. Competition laws are designed to address those transactions that are likely to substantially lessen competition in a relevant market. Harm can result either from a firm’s acquisition of market power or the increasing likelihood of anticompetitive coordination. Cognisable harm can be either pecuniary (e.g., higher prices or lower output) or non-pecuniary (e.g., loss of innovation or diversity) in nature. In some jurisdictions, the competition law mandate specifies a broader ‘public interest standard’ or other social policies, such as ‘black empowerment’; even within the ‘consumer welfare’ standard, the law may be broad enough to address certain societal and industrial objectives, such as wage inequality, when in respect of competition effects. Furthermore, the Federal Trade Commission (FTC) has indicated that it believes its mandate extends beyond consumer welfare to cover a broader range of harm as ‘unfair methods of competition’.^[2]

In some jurisdictions, such as the European Commission (EC), the competition authorities’ decision not to approve a transaction effectively kills it. In other jurisdictions, such as the United States^[3] and Canada, the competition authority must challenge the transaction in a court to block its consummation, and the judge ultimately decides the legality of the transaction. In both types of jurisdictions, transaction parties will frequently try to resolve the concerns of a competition authority by offering potential remedies and, if accepted by the competition authority, entering into a consent decree.

Core universal goal: preserving competition

The universal goal of remedies is preserving competition that would otherwise be lost because of the transaction, while permitting, if possible, the realisation of efficiencies and other benefits.^[4]

On 3 September 2020, the US Department of Justice issued a new Merger Remedies Manual (the DOJ Manual).^[5] The DOJ Manual identified the principles that apply to structuring and implementing remedies in both horizontal and vertical merger cases:

• the remedy must preserve competition;
• the remedy 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 transaction parties, not on consumers; and
• the remedy must be enforceable.

These principles align with the guiding principles of other jurisdictions, which focus on structuring an effective remedy, duration, practicality and mitigation of risk. Although the DOJ Manual was officially withdrawn in April 2022, these general principles are consistent with the current leadership’s concerns. Notably, in 2022, the DOJ did not enter into any consent decrees to resolve antitrust concerns raised by a transaction.^[6]

Structuring an effective remedy

The starting point for each competition authority is the determination of the nature and scope of potential competitive harm within the jurisdiction before requiring or agreeing to propose remedies. Next, to be effective, the remedy must be tailored to the harm. In addition, effective remedies preserve the efficiencies created by a merger, to the extent possible, while preserving competitive markets.

Duration

A remedy should seek to address the competitive harm for its expected duration. Since a transaction indefinitely changes the incentives of the merged firm and the structure of the market, a remedy that temporarily regulates conduct will typically be inadequate to remedy persistent harm from a loss in competition. Therefore, as discussed in greater detail in other chapters of this book, the most common remedy is to require a divestiture of a business or assets designed to preserve a competitive market indefinitely. Generally, US agencies will impose a variety of behavioural conditions to support a structural divestiture, not instead of a divestiture. The Competition and Markets Authority of the United Kingdom (CMA) has similarly reaffirmed its reluctance to accept behavioural conditions alone to resolve competition concerns in a recent merger decision.^[7] Transition services arrangements and supply arrangements have become more routinely included beyond the pharmaceutical industry, in which they have been used for decades.^[8] Mandatory licensing provisions may also alleviate competitive concerns by enabling competitors’ access to a key input. Divestiture agreements may pair the transfer of personnel to the divestiture buyer with temporary limits on the merged firm’s ability to rehire these employees.

Behavioural obligations remain more common in other jurisdictions, including China,^[9] India^[10] and Japan.^[11] The EC has accepted behavioural remedies to resolve certain vertical and conglomerate effect concerns.^[12] One of the criticised aspects of behavioural remedies is determining the appropriate duration to ensure that competition is preserved.

Practicality

As indicated in the International Competition Network’s (ICN) Merger Remedies Guide, a ‘remedy should be capable of being implemented, monitored, and enforced bearing in mind the need for detecting non-compliance and the resources involved in the enforcement of the remedy’.^[13] Competition authorities are reticent about adopting regulatory-like remedies (e.g., price controls) that require monitoring of internal company conduct and that may not easily ensure compliance. In addition, undertakings typically contain provisions that permit modification in the event of changed circumstances. The ongoing oversight (compliance reporting) functions will also be considered. A monitor, paid for by the merged firm, may be used in some situations. In certain limited circumstances, a firewall provision may be effective if the concerns raised by the transaction are limited to obtaining access to rivals’ competitively sensitive information.^[14]

Mitigation of risk

Inherent in any remedy is the potential risk that the competition authority’s goal of preserving competition will not be achieved. The three most common risks are (1) a package or composition risk, (2) a purchaser risk and (3) implementation risks. The extent to which a particular jurisdiction will knowingly tolerate risk varies depending on the specific laws and policies of that jurisdiction, including the extent to which the authority has the power to remedy failings after entering into the consent and the transaction’s closing.

Package and composition risks

This risk factor relates to the adequacy of the business or assets to be divested in a structural remedy, as well as the efficacy of the conditions and prohibitions prescribed in a behavioural remedy. In January 2017, the FTC issued a retrospective study,^[15] reviewing 89 merger orders entered into between 2006 and 2012. The FTC concluded that, although its merger remedy practices are generally effective, certain areas needed to be adjusted.

First, the study found that divestiture buyers of a more limited package of assets were deemed not to succeed at times, even when the buyer was identified up front. The FTC indicated that, in future, parties can expect that proposals to divest selected assets will undergo more detailed scrutiny and that the FTC will accept a proposal of less than the entire ongoing business only if the parties and the divestiture buyer demonstrate that divesting the more limited asset package is likely to maintain or restore competition. An example cited is that ongoing business divestiture is infeasible. In addition, the FTC indicated that it may require divestiture of assets (including manufacturing facilities) relating to additional complementary products, the use of brand or trade names, or other affirmative conduct obligations, including facilitating the transfer of customers, to ensure the buyer’s viability.

Second, the study indicated that divestiture buyers have sometimes had unforeseen complexities in transferring critical back-office functions and need more time to transition these services. The FTC indicated that it is important that the divestiture buyer is able to conduct due diligence to understand what back-office support services it needs and that it will undertake additional scrutiny in this area. In addition, the FTC takes the position that critical back-office functions on a transitional basis must be supplied to the divestiture buyer at no more than the parties’ cost.

In addition, agencies have more frequently required divestitures to include out-of-market assets (i.e., a divestiture package that goes beyond the assets in the relevant market) to ensure that the divestiture buyer has adequate assets to be effective.^[16] In fact, in Bayer/Monsanto, which resulted in the largest divestiture package in DOJ history with a comprehensive package of assets worth US$9 billion, the consent required the package to include other assets sufficient for BASF, the divestiture buyer, to maintain the viability and competitiveness of the divested businesses following its acquisition of the assets, and provided BASF a one-year window after closing to identify additional assets that were reasonably necessary to ensure the continued competitiveness of the divested businesses.^[17]

The same is true in consummated merger challenges. In both Chicago Bridge^[18] and Polypore,^[19] the FTC required the parties to include assets outside the market to restore competition within the relevant market and to provide the divestiture buyer with the ability to compete. In addition, in Valeant,^[20] the FTC required Valeant not only to divest the entire hard contact lens business it had acquired from Paragon Holdings in 2015, but also the assets it had later acquired that the FTC deemed necessary to ensure that the divested business would continue to have access to the discs that are made into the finished contact lenses. Similarly, when affirming the administrative law judge’s decision in Otto Bock, the FTC concluded that the divestiture of the acquired companies’ overlapping microprocessor prosthetic knee business might be inadequate to resolve competitive concerns since the company bundles the knee product line with its prosthetic foot business and that both product lines may be needed by a buyer to compete effectively.^[21]

In certain industries, the package risk includes the potential that the assets will deteriorate significantly prior to divestiture (or even following divestiture if the divestiture buyer is unable to stave off the deterioration). Two ‘failed’ FTC divestitures illustrate this risk. First, in 2015, the FTC approved the divestiture of 146 supermarkets to Haggen Holdings LLC (Haggen) to resolve concerns about Albertsons’ acquisition of Safeway.^[22] On 14 August 2015, Haggen announced that it would close 27 acquired stores and, on 8 September 2015, it filed for Chapter 11 bankruptcy to permit it to reorganise with only its core profitable stores. On 24 September 2015, Haggen announced that it would exit from California, Arizona and Nevada, and continued to operate only 37 stores in those states. Haggen, Cerberus International and Safeway petitioned the FTC on 23 September 2015, seeking approval on an expedited basis of a modification of the consent to permit Albertsons to rehire Haggen employees who were otherwise being terminated by Haggen, without violating the consent order.^[23] The FTC had no choice but to grant this request.

Third, the divestiture buyer in the Dollar Tree/Family Dollar^[24] transaction had mixed success in the stores it acquired. Of course, the divestiture occurred in a very challenging retail industry environment generally.

Purchaser risk

The identity of the divestiture buyer may, on rare occasions, potentially contribute to the divestiture’s lack of success. The FTC’s November 2012 order approving the divestiture of Hertz’s Advantage low-cost rental business and rights to operate 29 Dollar Thrifty airport locations to Simply Wheelz – a subsidiary of Franchise Services of North America, which at that time operated U-Save Car Rental – may be such a case.^[25] Four months after the FTC issued its final order, Simply Wheelz filed for bankruptcy, reportedly in part owing to Hertz exercising its right to terminate its fleet-leasing arrangement with Advantage, since Advantage owed Hertz more than US$39 million. Both US agencies (and increasingly other jurisdictions) require the parties to identify an acceptable upfront buyer before accepting divestiture packages. The upfront buyer requirement is justified by the agencies as being necessary to ensure that the divestiture will be effective in maintaining competition at the same level as it had been prior to the transaction. The transaction parties, however, can face substantial delay from the process: the need to identify a divestiture buyer, negotiate a divestiture agreement, and have that buyer and the divestiture package vetted by the agencies before the main transaction is permitted to proceed can literally add months to the merger review process.

The factors considered by competition authorities when approving a divestiture buyer that can mitigate purchaser risk are as follows:

• the financial capability to purchase the divested business and make necessary investments, and a commitment to remain in the market;
• the managerial expertise to run the business; and
• the operational capacity and resources to run the divested business, particularly if the divestiture consists of less than a stand-alone business.

Implementation risk

Competition authorities consider the risk of potential failure either because of the merged firm’s conduct or other market factors, and the potential for circumvention. For post-closing divestitures, hold separate or asset preservation agreements can help to prevent interim competitive harm to the divestiture assets. In addition, to reduce implementation risk, undertakings frequently provide that the competition authority may require the divestiture to occur ‘at no minimum price’ after the initial period for a merged firm-driven sale has passed and the divestiture process has been relinquished to a divestiture trustee. Use of a monitor with industry experience can mitigate some of the implementation concerns in a transaction involving ongoing behavioural provisions.

Remedies in a global competition setting

The DOJ, FTC and EC have a longstanding tradition of close cooperation in antitrust enforcement and policy. In 2011, the three agencies affirmed their strong commitment to cooperation by adopting joint Best Practices on Cooperation in Merger Investigations. The extent of international cooperation on mergers is steadily growing. The ICN mergers working group currently includes over 60 countries. The Organisation for Economic Co-operation and Development (OECD) Competition Committee also regularly meets and has roundtable discussions. In 2013, the OECD held a Roundtable on Remedies in Cross-Border Mergers. There are also a number of bilateral agreements between agencies to facilitate cooperation. For example, with Brexit, the UK, Australian and German competition authorities released a joint statement in April 2021 on their common understanding on the need for rigorous and effective merger enforcement.^[26]

As a result of these initiatives, competition authorities today routinely cooperate during the investigation stage. This cooperation can extend to the remedies stage. The ICN’s Merger Remedies Guide indicates that each competition authority should exercise its own judgement in reaching its decision regarding the need for a remedy.^[27] Nevertheless, in many investigations, coordination among competition authorities may avoid conflicting remedies (i.e., when one or more authority enters into separate remedy orders) or, in some cases, even the need for a particular jurisdiction to enter into a remedy itself because of the actions taken by another jurisdiction.^[28] Coordination and cooperation are needed particularly when the authority reaches the conclusion that an effective remedy should include assets outside its jurisdiction. Some jurisdictions may decide that, acting alone, they do not have the ability to order a structural remedy involving assets outside their jurisdiction because they lack the means to enforce the remedy, and therefore must accept behavioural remedies^[29] or have other jurisdictions impose the structural remedies.

By way of example, in Holcim/Lafarge,^[30] the FTC conditioned clearance on the divestiture of plants and terminals, including a terminal in Alberta, Canada, and a cement plant in Ontario, Canada. Canadian assets that were named in the FTC consent decree were included by the FTC as necessary to remedy competitive concerns in northern US markets. The Canadian consent – entered into the same day – provided mirror provisions.

Similarly, in ZF Friedrichshafen AG/TRW Automotive Holdings Corp,^[31] the FTC conditioned approval of a US$12.4 billion merger that would create the world’s second-largest auto parts supplier with the divestiture of TRW’s linkage and suspension business in North America and Europe, even though only suppliers that have production facilities in the United States, Canada and Mexico were deemed eligible to compete for US business.^[32] The FTC’s order followed the EC’s clearance, which was subject to Friedrichshafen’s commitment to divest TRW’s chassis components businesses in the European Economic Area.

In addition, in NXP Semiconductors, the parties agreed to divest all NXP assets that are used primarily for manufacturing, research and development of radio frequency (RF) power amplifiers, including a manufacturing facility in the Philippines, a building in the Netherlands to house management and some testing laboratories, and all patents and technologies used exclusively or predominantly for the RF power amplifier business, based on the finding that the market for RF power amplifiers is worldwide. The FTC worked with the staff of antitrust agencies in the European Union, Japan and South Korea on all aspects of the analysis, including potential remedies, to reach compatible approaches on an international scale.

Other notable transactions that have required review and remedies in multiple jurisdictions include:

• AbbVie/Allergan, in which the European Union and the FTC approved AstraZeneca as the suitable buyer of the assets;^[33]
• Essilor Luxottica/Grandvision;^[34]
• Google/Fitbit;^[35]
• GE/Alstrom, in which the EC and the DOJ adopted aligned remedies;^[36] and
• Microsoft/Activism, in which the UK and European Union required remedies.^[37]

Although the principles for merger remedies are well-established, as discussed in this chapter and throughout the book, how these principles are applied to specific transactions is highly fact-dependent as well as subject to current enforcement policies of the relevant authorities.

Notes