Giving Effect to the Remedy
By the time merging parties begin working with the antitrust authorities to design a remedy, the finish line is within sight. Nevertheless, this last hurdle – crafting a remedy that both addresses the authority’s substantive concerns and also preserves the commercial rationale for the deal – can be one of the most challenging parts of the merger review process. The merging parties need to balance commercial complexities and procedural intricacies to obtain government approval against a backdrop of complainants and potential purchasers leveraging the merger review process for their own commercial objectives. Moreover, when a deal spans multiple jurisdictions, increased international cooperation between authorities adds another layer of complexity.
This chapter focuses on designing an effective remedy in the United States and the European Union and identifies guideposts for merging parties to consider as they go through the different stages of securing approval for the remedy, documenting the transaction and identifying the purchaser for the divested business. There is a heavy focus on structural remedies because they are the most common (and increasingly preferred by antitrust authorities), but the chapter also touches on behavioural remedies where applicable.
Conceptualising the remedy
When the US Department of Justice (DOJ) or the Federal Trade Commission (FTC) (collectively, the US antitrust agencies) conclude after sufficient investigation that a proposed merger may substantially lessen competition, concerns about the transaction typically are cured through a negotiated settlement (as opposed to litigation). Given the tight statutory deadlines under the Hart-Scott-Rodino (HSR) Act, remedies are almost never negotiated and mutually agreed without an extension of the initial 30-calendar-day HSR waiting period. Rather, the US antitrust agencies will invariably issue a second request in matters that require a merger remedy, which extends the HSR waiting period to 30 calendar days after substantial compliance with the second request, and parties will use the second request period to negotiate and agree on a remedy; in practice, however, parties often do not substantially comply with the second request if merger remedies are expected.
The particular facts of a case and the relevant legal and economic principles dictate the remedy, which should address the theory or theories of competitive harm on which the merger was challenged. At a high level, however, the DOJ and the FTC apply the following general principles when considering a remedy:
- Remedies must ‘preserve’ competition. An appropriate merger remedy is one that effectively preserves or restores the levels of pre-merger competition. Although a remedy should always be sufficient to redress the loss of competition, the purpose of a remedy is not to enhance competition as compared with the pre-merger state.
- Remedies are not intended to determine market outcomes. The US antitrust agencies do not seek to determine outcomes or pick winners and losers.
- Relief must be more than temporary. Temporary relief should not be used to remedy persistent competitive harm; a consent order or decree that temporarily regulates conduct does not effectively redress persistent competitive harm resulting from an indefinite change in market structure.
- The parties to the merger should be the ones to bear the risk of a failed remedy. The risk of a failed remedy should fall squarely on the parties who seek to consummate the deal, not on consumers.
- The remedy must be enforceable. The remedial provisions in a consent decree must be specific and clear to ensure compliance and enforceability.
Advocacy regarding the remedy
There is no standard template to submit to the US antitrust agencies and there is no prescribed timeline for offering or approving remedies. Indeed, the question of when to offer remedies is a strategic decision that is often informed by the parties’ discussions with and success (or lack thereof) of substantive advocacy to the FTC or DOJ during the course of a merger investigation. Sometimes parties may choose to proactively propose a remedy if the potential roadblocks are clear; at other times, parties may engage in substantive advocacy to narrow the focus of the government’s investigation (or perhaps clear it altogether) before remedies are discussed. In either event, staff at the US antitrust agencies typically are very candid and provide feedback on the status of their investigations, the assets or businesses that raise competition concerns, and whether they believe remedies may be required.
Drafting the divestiture sale agreements
Once the broad contours of the remedy have been conceptualised and agreed with the government, the parties have some degree of autonomy to manage the sale process and the initial drafting of the divestiture agreements, particularly when the parties will be selecting an upfront buyer. However, the US antitrust agencies remain involved in the sales process and can (and often will) make parties reopen or amend otherwise final divestiture agreements if they deem it necessary to qualify as a satisfactory remedy package. Accordingly, it is recommended that parties provide the agencies with draft agreements as soon as practicable.
The US antitrust agencies will work closely with the divestiture purchaser and will be involved in the negotiation of the agreement. Staff at the US antitrust agencies will request information from the divestiture purchaser and may seek to discuss the agreement with the purchaser’s legal and operational personnel to assure that the agreement provides everything the purchaser needs to maintain or restore competition. Given that some of these discussions between the divestiture purchaser and the US antitrust agencies will take place without the merging parties and their counsel being present, there is an opportunity for the divestiture purchaser to wield some leverage and achieve concessions from the merging parties that they might not be able to get through a typical arm’s-length transaction.
Ultimately, the US antitrust agencies will focus on ensuring the divestiture agreement transfers all the necessary assets. Although the parties may not be able to provide a complete schedule of the assets to be divested until the eve of closing, blank schedules will not suffice and the agencies will not sign off on the divestiture until they are assured everything is included. Moreover, if the consent order (which, at the time the divestiture agreements are negotiated, may not yet be drafted) imposes additional obligations, US antitrust agencies will ensure that the divesture agreements are modified to assure that any additional obligations will be satisfied.
There are three main ways in which the remedy can be approved.
An upfront buyer (or divestiture with a pre-identified buyer) requires the parties to identify an acceptable buyer, negotiate terms with that buyer in parallel with the FTC or DOJ, and finalise and execute the divestiture agreements with that buyer before staff at the FTC or DOJ will initiate the process for a consent order or decree. An upfront buyer is the most commonly approved remedy in the United States. The US antitrust agencies generally prefer upfront buyers because, among other things, they provide certainty about the transaction (as compared with a selling trustee) and avoid the cost of a longer post-consummation sale process. Upfront buyers minimise loss of value of the divested assets and the risk of diminished competition. The agencies have a particularly strong preference for an upfront buyer when the merging parties propose to divest less than a stand-alone business or a ‘mix-and-match’ package of assets (e.g., assets from each of the merging parties that have previously not operated together or been under common ownership) or the agencies have concerns about the lack of an acceptable purchaser. This approach is designed to preserve competition and reduce the risk that the remedy will be ineffective or that harm to competition will occur in the interim between the closing of the principal transaction and implementation of the remedy.
In a post-order divestiture, the US antitrust agencies agree that the parties may close the principal transaction subject to their commitment to hold separate the divestment business until a suitable purchaser is identified (typically limited to between two and six months) and approved by the FTC or DOJ. The US antitrust agencies may agree to a post-order divestiture if the parties can show that:
- the assets to be divested are an ongoing, stand-alone business unit;
- the risk of lost business opportunities during the post-order or pre-divestiture period is low;
- the risk of the business deteriorating is low;
- the business does not rely on significant support from the merged firm to remain operational and viable; and
- there are multiple approvable buyers that are likely to bid for the assets.
The US antitrust agencies typically reserve the right to appoint a divestiture trustee to sell the divestiture assets (in some circumstances having the flexibility to sell alternative assets) if the merging parties are unable to complete the ordered sale within the period prescribed by the consent order or decree. Although the agencies require the divestiture to be accomplished as quickly as possible and, as noted above, have increasingly begun to prefer upfront divestitures, they are willing to grant short extensions to allow a reasonable period to divest the assets before a trustee is appointed, provided that the parties are in compliance with all terms of the US antitrust agencies’ proposed consent order or decree packages.
‘Fix it first’ (resolution without formal remedy)
In a fix-it-first solution, parties restructure their transaction to remedy the competition concerns they anticipate the agencies will raise. If this ‘fix’ addresses the competition concerns (without requiring post-consummation obligations to achieve the fix, such as a supply agreement) and does not diminish the competitiveness of the divestment business, the investigation can be closed without a final order (in the case of the FTC) or a final judgment (in the case of the DOJ). These solutions are rare and risky as there is no guarantee that the proposed fix will be accepted by the relevant agency. Unless the parties are highly confident that their fix-it-first remedy resolves fully the competition concerns of the relevant antitrust agency, this option may not be appropriate because of the risk that the agencies may insist on revisions to an otherwise ‘final’ executed agreement or, worse yet, reject the proposal completely after the parties and proposed purchaser have expended significant time, expense and resources.
Approval of the purchaser
Staff from the FTC or DOJ closely vet proposed purchasers to ensure they are competitively and financially viable. To that end, the parties (and proposed divestiture buyers) should be prepared to provide, among other items:
- recent financial statements of the proposed purchaser and an explanation of the structure and sources of funding for the investment;
- an account of recent transactions between the parties and the proposed purchaser;
- detailed business plans or other strategic documents demonstrating how the proposed purchaser will use the assets to compete in the relevant market, including a description of the strategic fit of the divestiture business, expected market approach, plans for customer retention, maintenance of current facilities and ensured access to sufficient raw materials, future projections of capital expenditures, and research and development spending, and practical considerations of how the divestiture buyer intends to use or move facilities and integrate the business;
- an analysis of how the divestiture will maintain or restore competition in the market;
- a detailed list of likely challenges with integration of the divested business and how the proposed divestiture buyer plans to address these; and
- access to management, sales and marketing representatives, and accounting and other personnel, for discussions with FTC or DOJ staff.
For an upfront buyer, the approval of the purchaser is part of the approval process for the divestiture agreements described above. During the approval or vetting process, the DOJ or FTC is likely to have unilateral discussions with the purchaser, unilateral discussions with the parties, combined meetings, calls and submissions, and occasionally conversations with third parties. As noted previously, these discussions can result in some modifications to both the agreements between the parties and the divestiture purchaser and the consent decree documents. Of particular focus will be whether the purchaser believes it has all the assets and rights it needs to replicate the competitive status quo in all the affected markets.
For post-order divestiture cases before the FTC, the parties must file an application for divestiture approval within an agreed period, which is notified for public comment before the FTC decides whether to approve the purchaser. In post-order divestiture cases before the DOJ, parties propose a purchaser and the DOJ assesses the fitness of that purchaser and has sole discretion to approve or disapprove it. In either case, a monitoring trustee appointed by the FTC or a US federal district court plays an important role in the sales process by ensuring that the parties comply with their consent decree order.
The commitments text
As noted above, the US antitrust agencies do not have a standard template that must be submitted to initiate the remedies process, but given the long-standing consent order and decree precedent, many of the requirements and provisions are fairly standardised, and parties should familiarise themselves with recent precedents of these documents in designing a remedy (as the US antitrust agencies do not always publicly or otherwise formally announce policy changes with respect to individual provisions).
For settlement discussions with the FTC, the parties and FTC staff  will negotiate a proposed settlement and finalise terms. FTC staff and management will recommend the proposed settlement to the FTC commissioners, and the commissioners ultimately approve or reject a proposed settlement by a majority vote.
The typical public filings associated with a final remedy package with the FTC include (but are not limited to) an agreement containing consent orders, a complaint, an order to maintain assets, a proposed decision and order, and an analysis to aid public comment (collectively, the FTC consent order package). Additionally, the commissioners may issue one or more public statements discussing their decision on the merits of the main transaction as well as the remedies. Parties will probably have an opportunity to preview and negotiate the proposed decision and order. Though parties may have an opportunity to preview the other documents in the FTC consent order package, the remaining documents often are not open to significant negotiation.
For settlement discussions with the DOJ, parties and DOJ staff from the reviewing section, including attorneys and economists, will negotiate terms. Approvals from the chief of the applicable section, the Director of Civil Enforcement, the Chief Legal Advisor and the assigned Deputy Assistant Attorney General are required before the proposed settlement is recommended for approval by the Assistant Attorney General (AAG). After obtaining the AAG’s approval, the final remedy package (discussed below) will be filed with a US federal district court pursuant to the Antitrust Procedures and Penalties Act (commonly known as the Tunney Act). Finally, a US federal district court judge must approve the final remedy package.
The typical public filings associated with a final remedy package with the DOJ include (but are not limited to) a complaint, a proposed asset preservation and hold separate stipulation and order, a proposed final judgment (PFJ), a competitive impact statement, and an explanation of consent decree procedures (collectively, the DOJ consent decree package, and together with the FTC consent order package, the US antitrust agencies consent order and decree packages). Similar to the FTC process, parties typically will not have the opportunity to review and provide comment on filings, although the DOJ will share the PFJ and proposed asset preservation and hold separate stipulation and order, and the parties will have a limited opportunity to negotiate certain provisions of these documents.
With respect to the commitments portion of the US antitrust agencies’ consent order and decree packages, the agencies generally require:
- a clear description of all assets to be divested to resolve the US antitrust agencies’ competitive concerns and maintain the pre-merger level of competition;
- a description of any transition service or other ancillary agreements necessary to support the viability of the divestiture business;
- a list of requirements to ensure that the divestment business is sold to a viable buyer that has sufficient financial wherewithal and experience, but is not already a significant competitor;
- a commitment from the parties to hold separate the divestment business to ensure that it remains independent from the parties and able to operate as a viable competitive force until the divestment is made;
- a representation from the parties that they can accomplish the remedy;
- details of the process for a monitoring trustee or divestiture trustee to be appointed. The monitoring trustee’s role is to oversee the merging parties’ compliance with their hold separate obligations, divestiture obligations and any conduct restrictions. In matters involving a post-order divestiture (discussed above), the divestiture trustee’s role is to step in if the divestment is not completed within a reasonable period to ensure that the remedy will be implemented in a timely and effective manner;
- certain reporting obligations (e.g., relating to ongoing compliance with the hold separate arrangement and the divestiture sale process); and
- the right for staff from the US antitrust agencies to access documents and employees (collectively, the US consent order and decree commitments).
Other key issues in remedy design
The other key issues in remedy design involve scrutinising the purchaser’s experience and incentive to compete in the relevant industry (favouring experienced proposed purchasers over those with little experience), requiring transitional agreements where needed, and broadening the remedy scope to ensure viability of the divestment – typically where the divestment is less than a stand-alone, viable business.
Other key issues include:
- continuing entanglements: supply agreements and technical assistance in connection with a proposed divestiture package may create ‘continuing entanglements’; therefore, the more a proposed buyer requires these provisions, and the longer those provisions are needed, the more difficult it may be to persuade the US antitrust agencies that such a divestiture would resolve the competition concerns;
- third-party consents: if third-party consents or approvals are required to effectuate the proposed remedy, the US antitrust agencies may require the parties to obtain all such third-party consents before staff at the FTC or DOJ recommend the remedy for approval; and
- profitability of parties’ proposed remedy package: business executives of parties involved in designing a remedy may often conflate the profitability of the assets comprising a proposed remedy package and the sufficiency of fully addressing the competition concerns of the US antitrust agencies. Although the expected profitability of the proposed remedy package is an important component, an approvable remedy package will also be expected to include the entirety of the assets in the relevant market to fully replicate the competitive constraint imposed by one of the two merging parties (similar to the EU requirement to remove the entire overlap between the parties’ activities).
Other key issues will be dependent on the type of proposed remedy: the US antitrust agencies are inclined to impose different requirements depending on the type of assets or business being divested. For example, for transactions in which the assets to be divested comprise less than an autonomous, ongoing business (e.g., a carve-out from a business unit) or if the assets to be divested are susceptible to deterioration pending divestiture, the US antitrust agencies are likely to require an upfront buyer (discussed in further detail below), which involves a higher level of scrutiny and time to secure approval.
Consent decrees and orders must include provisions allowing the agencies to monitor compliance. They frequently require the merging parties to submit periodic written reports and permit the agencies to inspect and copy all books and records, and to interview officers, directors, employees and agents, as necessary, to investigate any potential violations of the decree or order.
Compliance with consent decrees and orders is heavily scrutinised by the US antitrust agencies, which are not sympathetic to breaches as there is also a formal process for parties to obtain modifications from the agencies or a US federal district court, as applicable.
In a 2019 blog post, the FTC announced it would expand the language used in precedent orders to ensure that it receives complete compliance reports, and it publicly reminded respondents that failure to provide adequate compliance reports can lead to order violations, enforcement actions and civil penalties. Following this blog post, the FTC announced on 6 July 2020 that Alimentation Couche-Tard Inc and its former affiliate CrossAmerica Partners paid US$3.5 million in civil penalties to settle allegations that they violated the FTC’s consent order by, among other things, failing to divest the requisite assets within the agreed time frame and failing to provide accurate and detailed information in their compliance reports.
Conceptualising the remedy
When the European Commission (the Commission) identifies its competition concerns about a transaction, it is up to the parties to design a remedy to address those concerns. Owing to the timing constraints in Phase I, remedies can be accepted only if the competition problem can be readily identified and remedied with a clear-cut solution. The Commission will identify the product and geographical markets giving rise to competition problems and the parties are generally required to divest the entire overlap to secure approval. The tight 35-working-day time limit does not leave the parties (or the Commission) much room for manoeuvre. Conversely, in Phase II, the in-depth review allows the Commission to be more precise in its approach to focus on the specific areas where it has identified competition problems and, in some instances, to quantify the likely harm. This in turn allows the parties to craft a remedy to address the specific harm identified or to challenge the merits of the Commission’s assessment and try to limit the scope of the remedy required.
Advocacy regarding the remedy
Unlike the United States, where advocacy does not follow a rigid procedure, advocacy in the European Union normally involves meetings or calls with the Commission to present and explain the remedy, together with a formal submission, the Form RM, which covers:
- how the remedy addresses the competition concerns identified;
- why the divestment business constitutes a viable stand-alone business that can operate on a long-term basis. This requires that the divestment business can act independently of the merging parties with regard to the supply of inputs or other forms of cooperation other than during a transitory period;
- whether there are any legal obstacles (e.g., third-party consents or intellectual property licences) that could affect the ability of the parties to implement the remedy;
- why the divestment business will be acquired by a suitable purchaser in the time frame proposed; and
- whether the commitments deviate from the Model Text (see below).
The commitments text
The commitments set out the key terms of what the remedy entails and the obligations on the parties prior to, during and after the sale process. Parties must use the Commission’s model text for divestiture commitments (the Model Text). The template has spaces for a description of the business and some optional text; however, modifications that go beyond that are rarely permitted. The commitments include:
- a clear description of the scope of the divestment business, which must include all assets and personnel that contribute to its current operation or that are necessary to ensure its viability and competitiveness;
- an explanation of the responsibilities of the merging parties to address (1) the preservation of the divestment business’s viability and independence, (2) hold separate obligations (i.e., keeping the divestment business separate from the retained business), and (3) ring-fencing obligations (i.e., safeguarding competitively sensitive information about the divestment business from the merging parties);
- a section dealing with the requirements for a suitable purchaser that has sufficient financial resources, proven expertise and incentive to maintain and develop the divestment business as a viable and active competitive force in the marketplace. This must be finely balanced, as the authorities will not approve the purchaser if the divestiture would lead to its own set of competition concerns; and
- a description of the responsibilities of the monitoring trustee and divestiture trustee. The monitoring trustee acts as the ‘eyes and ears’ of the Commission and is tasked with overseeing the divestiture process and the management of the divestment business during the hold separate period to ensure that its viability, marketability and competitiveness are not affected. A divestiture trustee may need to be appointed if the parties are unable to complete the sale of the divestment business within the mandated time frame. The divestiture trustee is appointed as the agent to sell the business on behalf of the parties for any price and on any terms and conditions considered appropriate for an expedient sale.
In the case of behavioural remedies, the Commission will allow the deletion of provisions in the Model Text that are clearly irrelevant. However, it is always keen to ensure that any behavioural commitments have a long-lasting quasi-structural change on the market; therefore, many provisions are retained for this purpose.
Other key issues in remedy design
In practice, even once the parties and the Commission have agreed to the main scope of the remedy, they often end up debating issues ancillary to the scope of the remedy.
Additional purchaser criteria
The Commission has a strong preference for trade buyers in the same or related markets to ensure that the purchaser’s activities can be scaled up as quickly as possible to replicate the pre-merger competitive constraint the parties had on each other. In contrast to the position of the US antitrust agencies, the Commission often considers financial investors unsuitable and excludes them from the process by including additional clauses in the commitment text that mandate the type of experience that the purchaser must have. For example, in Synthomer/Omnova Solutions, the purchaser needed to ‘have the proven capability and incentive to sell VP Latex via an efficient an integrated sales network in the EEA’ and ‘proven knowledge regarding the relevant chemistry’.
Transitional service agreements
When part of a company is sold, existing ties with the remaining business need to be severed. Untangling centralised information technology (IT) and human resources systems is common and the Commission is accustomed to accepting transitional agreements for these services. When there are other shared services (in particular when the divestment business is being carved out of an existing business), negotiating the terms of the transitional service agreements to be enshrined in the commitments can be more painful, with the Commission seeking to ensure that the divestment business is able to compete independently from the seller in the short and medium term.
Broadening scope of remedy to ensure viability of divestment business
When it has not been possible to convince the Commission that the terms of the transitional services agreement will allow the divestment business to thrive, parties have been required to offer up parts of the business even where no competition concerns are identified, if they are required to ensure the long-term viability of the divestment business. For example, in Novelis/Aleris the parties agreed to divest Aleris’s entire aluminium body sheet business, including an integrated production facility in Duffel, to address the Commission’s competition concerns. Other products, including upstream inputs, were also manufactured at Duffel, and those were included in the divestment package even though there were no competition concerns about those products. The full divestment of the Duffel plant ensured that the divested business could viably, effectively compete with the merged entity.
Drafting the divestiture agreements
Under the commitments, the Commission not only approves the proposed purchaser but also ensures that the terms of sale are consistent with the commitments. Similar to the United States, this means that even when a binding sale agreement has been entered into and the parties submit it to the Commission for approval, the Commission can force the parties to reopen and renegotiate certain provisions. In practice, parties often circulate drafts of the transaction documents to the Commission to avoid any surprises once the documents have been executed.
The issues the Commission principally looks out for are whether (1) the agreements include everything it considers to be covered by the commitments, (2) the transaction documents include any other conditions precedent (such as third-party consents) other than those notified to the Commission in the Form RM, and (3) any purchase price adjustment mechanisms incentivise the purchaser to develop the business as a long-term viable competitor.
There are three scenarios that can affect the timing for approval of the purchaser and closing of the transaction.
The Commission adopts its clearance decision and the parties can close the principal transaction. This is used where the Commission is confident that a suitable purchaser will be found in a timely manner. The parties commit to enter a binding sale and purchase agreement that the Commission approves of within a specified period while holding the divestment business separate. Although kept confidential in the published version of the commitments, this period is typically six months, which limits the time that the divestment business is exposed to the commercial uncertainty and disruption of being transferred to a new owner. This initial period can be extended if the deadline is not met for reasons outside the merging parties’ control, although this rarely happens in practice. If the parties have not entered into a binding sale and purchase agreement by the deadline, the divestiture trustee is appointed.
An upfront buyer is typically required if the Commission has concerns about finding a suitable purchaser. The Commission issues its clearance decision but the parties cannot close the principal transaction until the purchaser and the divestment transaction agreements are approved by the Commission. The use of an upfront buyer increases the risk of a fire sale because it puts a premium on identifying a purchaser early in the process. This could also give the purchaser leverage with negotiating the divestiture agreements as it is able to hold up closing until it is happy with the terms of sale.
Under a fix-it-first solution, the merging parties need to identify a suitable purchaser and negotiate the divestiture agreements before obtaining merger clearance. This means that the Commission approves the transaction and the purchaser in a single decision. Given the significant timing pressures, and the continued risk that the Commission still needs to bless the solution, this process is less common. One advantage is that it allows the merging parties to tailor the remedy package for the identified purchaser, but it also exposes them to lobbying from the Commission to include more assets as part of the divestment. From the Commission’s perspective, it provides the certainty that the remedy will be implemented before the principal transaction has been closed and reduces the risk of asset degradation in the divestment business.
The number of divestments subject to an upfront buyer requirement or dealt with in a fix-it-first manner has increased over time but the Commission does generally only insist when it has serious doubts about the likelihood of finding a suitable purchaser and can be flexible even within a remedy package. For example, in AB InBev/SabMiller, the parties had identified a fix-it-first solution to address the competition concerns with Peroni and Grolsch beers. As the Commission’s review progressed, additional competition concerns were identified in relation to Pilsner Urquell beer and the parties offered up an additional divestment package for this using the standard process. This demonstrates that fix-it-first solutions are reserved for remedies when there is actual evidence of a limited pool of potential purchasers and will not be applied to the entire remedy package.
Approval of the purchaser
In a standard or upfront buyer scenario, parties need to submit a reasoned proposal to the Commission to obtain approval of the purchaser by demonstrating that the divestiture agreements are in line with the Commission’s approval decision and the obligations set out in the commitments, and the following purchaser requirements are met:
- the purchaser is independent of and unconnected to the parties;
- the purchaser has the financial resources, proven expertise and the incentive and ability to maintain and develop the divested business as a viable and active competitive force on the market; and
- the divestment to the purchaser does not create competition problems and there are no difficulties in obtaining any required merger control clearances for the divestment in a timely manner.
The monitoring trustee must submit a reasoned opinion attesting that the above criteria have been met. Before reaching its decision, the Commission may also have discussions with the proposed purchaser about its business plan to ensure that it will be a credible competitive constraint on the merged entity.
The Commission must reach its decision on whether to approve the purchaser without undue delay. If the purchaser is suitable, it will issue a purchaser approval decision. Decisions rejecting a purchaser are rare. Generally, communication between the parties and the Commission, either directly or through the monitoring trustee, allows for potential issues to be identified and resolved in advance of the Commission adopting its final decision.
Scrutiny of the divestiture process
The monitoring trustee has an important role in the sales process as it will ensure that the potential purchasers receive sufficient due diligence information relating to the divestment business in the data room and information memorandum if one is used. The monitoring trustee is required to send monthly written reports to update the Commission on the progress and describe any issues with compliance relating to the commitments.
The monitoring trustee can also be called on to resolve any disputes (e.g., with third-party rights) and provide any clarifications if there are doubts about the interpretation of the commitments or the divestiture agreements.
Once the purchaser has been approved by the Commission, the monitoring trustee needs to supervise the practical implementation of the sale (i.e., the splitting of assets, personnel and IT infrastructure from the divestment business) and confirm that it has been carried out in line with the commitments. The monitoring trustee will also oversee the length and use of any transitional services agreements between the merged entity and the purchaser to check that they are implemented in line with the commitments.
In the case of behavioural remedies, monitoring by the trustee is complicated, extensive and continuing. This burden explains in part why clear-cut structural remedies are preferred as these provide the Commission with certainty that the remedy will be implemented in a timely and effective manner.
The Commission ensures the enforceability of remedies by making its clearance decision subject to compliance with the commitments. In February 2019, the Commission sent a statement of objections alleging that Telefónica breached its obligation under the commitments to offer wholesale 4G services to all interested players at ‘best prices under benchmark conditions’. If the Commission determines that the commitments were breached, it has the power to revoke the merger approval and fine Telefónica Deutschland up to 10 per cent of its annual global turnover. This is the first time it has been made public that the Commission has taken such action, which contrasts with the United States, where the agencies have a long-standing history of prosecuting violations by issuing injunctions or fines to ensure that merger remedies are effective.
Although there are differences in the procedures in the United States and the European Union, there is a clear convergence in the authorities’ approaches and they have repeatedly shown that they are not afraid to take an increasingly aggressive and hands-on approach to ensure that remedies are effective in addressing their concerns.
To obtain clearance in a timely manner, parties need to be willing to engage with the authorities on remedies early in the process and align their approach across the various jurisdictions where filings are required.
1 Joshua L Shapiro is a partner and Mark R Butscha, Jr is a senior managing associate at Thompson Hine LLP.
2 In practice, both US antitrust agencies will request that parties enter into timing agreements if a second request is issued, and the model timing agreements contemplate that parties agree not to close the transaction for at least 60 calendar days after substantial compliance with the second request. See Federal Trade Commission [FTC], Bruce Hoffman, ‘Timing is Everything: The Model Timing Agreement’ (7 August 2018), http://www.ftc.gov/news-events/blogs/competition-matters/2018/08/timing-everything-model-timing-agreement; and US Department of Justice [DOJ], Division Update Spring 2019 (26 March 2019), http://www.justice.gov/atr/division-operations/division-update-spring-2019/merger-review-reviewed.
3 To complicate matters, the merger remedy approval processes at the DOJ and FTC differ slightly, the most notable difference being that the DOJ cannot unilaterally approve a merger remedy. These measures add complexity, time and expense to the merger remedy process.
4 DOJ, Merger Remedies Manual (2020), page 2.
5 See id., page 3; and FTC, ‘The FTC’s Merger Remedies 2006–2012: A Report of the Bureaus of Competition and Economics’ (January 2017), page 15.
6 DOJ, Merger Remedies Manual (2020), pages 4–5.
7 See id., page 4.
8 See id., page 5; see also Bruce Hoffman, Remarks at GCR Live 7th Annual Antitrust Law Leaders Forum (2 February 2018) at 6–7 (‘Since, in the context of merger remedies, we are considering divestitures or other remedies as a fix to an otherwise anticompetitive merger, it is entirely proper that the risk of failure be placed on the parties to the merger.’), https://www.ftc.gov/system/files/documents/public_statements/1318363/hoffman_gcr_live_feb_2018_final.pdf.
9 As noted below, upfront buyers are the most commonly approved remedy by the US antitrust agencies. With upfront buyers, the sale agreements with the divestiture buyer are typically finalised before the FTC or DOJ staff will initiate the process of drafting the consent order or decree.
10 Although the US antitrust agencies are typically not concerned with the price paid for the divestiture business, they will not approve the purchase price if it indicates that the purchaser is unable or unwilling to compete in the relevant market (e.g., if the business is being sold in a fire sale). DOJ, Merger Remedies Manual (2020), page 25.
11 The US antitrust agencies recognise that the objectives of the regulators may not match perfectly with those of the divestiture purchaser. Whereas the purchaser’s goal likely is a sufficient return on its investment, the US antitrust agencies are focused on whether the divestiture maintains or restores competition. Moreover, in some cases, divestiture purchasers may agree to certain provisions that later undermine their ability to compete effectively in the market. See FTC, Statement of the Federal Trade Commission’s Bureau of Competition on Negotiating Merger Remedies (2012), pages 12–13, https://www.ftc.gov/system/files/attachments/negotiating-merger-remedies/merger-remediesstmt.pdf.
12 See id.
13 See id., page 13.
14 Note that the existence of three different remedy types does not preclude the US antitrust agencies from determining that a combination of different remedy types may apply to two or more to-be-divested asset packages in a transaction. Also, this discussion omits rare types of divestiture agreements, such as a divestiture arising from a post-consummation challenge by the agencies.
15 DOJ, Merger Remedies Manual (2020), page 22 (‘In most merger cases, the Division will require the divestiture of a specific package of assets to an acceptable buyer that has been identified before the Division enters into the consent decree.’).
16 id.; see also FTC, ‘The uphill case for a post-Order divestiture’ (21 March 2019), https://www.ftc.gov/news-events/blogs/competition-matters/2019/03/uphill-case-post-order-divestiture.
17 DOJ, Merger Remedies Manual (2020), page 22.
18 ‘The FTC’s Merger Remedies 2006–2012: A Report of the Bureaus of Competition and Economics’ (January 2017), page 22.
19 DOJ, Merger Remedies Manual (2020), pages 10–11.
20 FTC, ‘A Guide For Respondents: What to Expect During the Divestiture Process’ (June 2019), page 2, https://www.ftc.gov/system/files/attachments/merger-review/a_guide_for_respondents.pdf; see also FTC, ‘The uphill case for a post-Order divestiture’ (21 March 2019), https://www.ftc.gov/news-events/blogs/competition-matters/2019/03/uphill-case-post-order-divestiture.
21 In a 2019 blog post, the FTC signalled such a risk in stating that the ‘parties should be aware of the significant risks and downsides to presenting a signed divestiture agreement to the Bureau as a fait accompli without having fully discussed it with staff’. FTC, Angelike Andrinopoulos Mina, ‘Unpacking Divestiture Packages’, 13 June 2019, http://www.ftc.gov/news-events/blogs/competition-matters/2019/06/unpacking-divestiture-packages.
22 Given capacity constraints, it is unlikely that staff at DOJ or FTC will vet more than one proposed purchaser for the same asset and will prefer to wait to do so until the final purchaser has been selected.
23 The DOJ and FTC will permit purchasers to secure financing, but staff at both agencies will scrutinise the arrangement and may even seek to interview the entity providing the financing. Seller financing, however, is unlikely to be accepted other than in exceptional circumstances (DOJ, Merger Remedies Manual (2020), at 26). That is because the seller’s retention of partial control over the assets could weaken the purchaser’s competitiveness or reduce the seller’s incentive to compete. Also, the continuing relationship could be used as a conduit for exchanging competitively sensitive information. The US antitrust agencies may permit the purchaser to make staggered payments to the seller, such as disbursement out of an escrow account pending final due diligence, provided that the payments are not tied to any performance benchmarks. (id.)
24 If the purchaser already owns overlapping assets or businesses, the purchaser will also need to address any potential competitive issues that they would create and any plans the purchaser has for resolution of these issues.
25 For example, a monitoring trustee may ensure potential purchasers receive sufficient due diligence information relating to the divestment business.
26 Such staff include attorneys in the Bureau of Competition’s investigating and compliance divisions, as well as economists from the Bureau of Economics.
27 FTC, ‘Statement of the Federal Trade Commission’s Bureau of Competition on Negotiating Merger Remedies’ (2012), page 4.
28 A recent example is Arko Holdings Ltd and Empire Petroleum Partners, LLC’s settlement with the FTC, which included an agreement to divest retail fuel assets in local petrol and diesel fuel markets across four states (FTC, In the Matter of Arko Holdings and Empire Petroleum Partners, http://www.ftc.gov/enforcement/cases-proceedings/201-0041/arko-holdings-empire-petroleum-partners-matter (last access 12 August 2021)).
29 A recent example is Novelis Inc and Aleris Corporation’s settlement with the DOJ, which included an agreement to divest retail auto body sheet operations in two states (DOJ, U.S. v. Novelis Inc. and Aleris Corporation, http://www.justice.gov/atr/case/us-v-novelis-inc-and-aleris-corporation (last visited 12 August 2021)).
30 Unlike the European Union, where private equity firms may be disfavoured because of the lack of industry experience, the latest DOJ Mergers Remedies Manual noted private equity purchasers may be preferred and have shown, in some instances, that they have flexibility in the investment strategy, were committed to the divestiture and were willing to invest more when necessary. The DOJ will also take into account whether the private equity firm has partnered with individuals or entities with relevant experience. DOJ, Merger Remedies Manual (2020), pages 24–25.
31 See id, page 23 (noting evidence of a purchaser’s intention to compete in the relevant market includes business plans, prior efforts to enter the market or status as a significant producer of a complementary product).
32 See FTC, ‘Statement of the Federal Trade Commission’s Bureau of Competition on Negotiating Merger Remedies’ (2012), page 9 (noting, as an example, the parties may be required to provide technical assistance to the buyer when, for example, the relevant product involves highly sophisticated or complex technologies).
33 See FTC, ‘The FTC’s Merger Remedies 2006–2012: A Report of the Bureaus of Competition and Economics’ (January 2017), page 32 (‘a proposal to divest selected assets as a remedy may need to include, for example, assets relating to complementary products outside of the relevant market; manufacturing facilities, even if the facilities also manufacture products outside of the relevant market; or use of applicable brands or trade names’).
34 See FTC, ‘Statement of the Federal Trade Commission’s Bureau of Competition on Negotiating Merger Remedies’ (2012), page 9; DOJ Merger Remedies Manual (2020), page 21.
35 FTC, ‘Statement of the Federal Trade Commission’s Bureau of Competition on Negotiating Merger Remedies’ (2012), page 14.
36 See id., at page 7.
37 FTC, Roberta Baruch and Bruce Hoffman, ‘Compliance reports: Reinforcing a commitment to effective orders’ (11 March 2019), http://www.ftc.gov/news-events/blogs/competition-matters/2019/03/compliance-reports-reinforcing-commitment-effective.
38 FTC, ‘Alimentation Couche-Tard Inc. and CrossAmerica Partners LP Agree to Pay $3.5 Million Civil Penalty to Settle FTC Allegations that they Violated 2018 Order’ (6 July 2020), http://www.ftc.gov/news-events/press-releases/2020/07/alimentation-couche-tard-crossamerica-partners-agree-to-pay-civil-penalty.
39 ‘RM’ meaning remedies.
41 A hold separate manager, which is an employee of the divestment business, is appointed to ensure the legal and physical separation of the assets to be divested day to day.
42 A rare example of this occurred in March 2018, in which the Commission approved the Bayer/Monsanto transaction subject to commitments, and BASF, the purchaser of the Bayer divestment business, was also required to make a divestment to address concerns about its acquisition of the divestment business. This was a departure from the usual practice that a suitable purchaser of a divestment business must raise no prima facie competition concerns.
43 The duties of the monitoring and divestiture trustees are set out in the model text for trustee mandates. See below for additional information about the divestiture trustee process and the monitoring obligations of the monitoring trustee.
44 Commission Decision of 26 March 2020 in Case COMP/M.8480 Synthomer/Omnova Solutions.
45 Commission Decision of 1 October 2019 in Case COMP/M.9076 Novelis/Aleris.
46 The Commission is increasingly requiring upfront buyers and, since 2017, there have been 20 examples of upfront buyer clauses being used (12 relating to Phase I cases and eight relating to Phase II cases).
47 Competition merger brief, issue 4/2016 (12 December 2016), http://ec.europa.eu/competition/publications/cmb/2016/kdal16004enn.pdf. See also Commission Decision of 15 December 2014 in Case COMP/M.7252 Holcim/Lafarge, which involved a hybrid fix-it-first and other remedies package.
48 A purchaser approval decision is typically not required in a fix-it-first solution in the European Union because the Commission approves the purchaser before issuing its merger clearance decision. However, in GE/Alstom, the Commission took a flexible approach to a fix-it-first process by clearing the transaction on the basis of the divestment of Alstom’s heavy-duty gas turbines business to Ansaldo. This was subject to the Commission’s subsequent approval of Ansaldo as the purchaser and the divestiture agreements in a purchaser approval decision around six weeks after the clearance decision of the principal transaction. See Commission Decision of 8 September 2015 in Case COMP/M.7278 General Electric/Alstom (Thermal Power – Renewable Power & Grid Business) and Purchaser Approval of 22 October 2015.
49 Case M.9003 Telefónica Deutschland/E-Plus (Article 14(2)(d) process). See https://ec.europa.eu/commission/presscorner/detail/en/IP_19_1371.