Negotiating Remedies: A Perspective from the Agencies

Introduction

The United States federal enforcement agencies have begun a transition in administrations since the last edition of this chapter. Those changes are under way – the Federal Trade Commission (FTC) has a new chair, and we await a new Antitrust Assistant Attorney General to lead the Department of Justice Antitrust Division (DOJ). Although there have not been any formal revisions to the agencies’ approach to merger remedies, the Antitrust Division’s new Merger Remedies Manual (2020, the DOJ Remedies Manual), and various statements by FTC Commissioners in some recent cases, demonstrate that merging firms and their counsel should not assume that all past policies will continue.^[2] This chapter therefore sets out what parties can expect to have to show when settling merger cases and notes where those required showings may become more demanding in the future.

The DOJ’s Remedies Manual was issued around the time the 2020 edition of this Guide was published. Practitioners should familiarise themselves with it. A review of the table of contents alone should generate no surprises to practitioners. It is not significantly different from earlier versions and the FTC has not indicated that it will follow the Manual. Nevertheless, it distils the overall approach that both agencies take when negotiating solutions to mergers that they have concluded could harm competition and are therefore unlawful.

Negotiating with the agency – the essentials

The FTC and DOJ consider remedies an integral part of the fact-based analysis in every merger case, applying clear policies and procedures to the facts of the case in a regularised way.^[3] A successful remedy discussion therefore requires the merging parties – and divestiture buyers – to understand those policies and procedures: how staff analyse the case, what remedy they are looking for and why, and how the overarching need to minimise the risk of failure will drive much of the agencies’ demands. Although the overall approach to resolving merger cases remains, recent cases show the agencies’ willingness to consider new approaches to finding solutions and a commitment to assuring effective relief once a remedy is imposed.^[4] The FTC has created a pharmaceuticals task force to examine, in part, whether long-standing approaches to mergers in that industry warrant reconsideration.^[5] And the FTC’s multimillion-dollar civil penalties settlement for failures to complete, and report on, a seemingly simple divestiture requirement in 2020 reaffirmed its intention to hold parties to their obligations.^[6] These developments and others show that old assumptions should not be considered immutable.

The agencies’ goal in all settlement discussions is to fully restore or maintain the competition that the merger would eliminate.^[7] Unless the agency can conclude that a remedy will fully maintain competition, it is likely to reject the proposal and sue to block the merger.^[8] The agency will resist partial solutions that leave problems unresolved.^[9] The parties should be prepared, therefore, to show how their proposed remedy will solve the competitive problems identified by the agency.^[10] If the parties have any doubts about staff’s views, they should ask. The agency staff will almost always discuss their concerns. In any event, if the parties are unclear about the agency’s view, settlement discussions will quickly identify areas of disagreement.

For horizontal mergers, both agencies have emphasised a strong preference for a complete divestiture of one side’s overlapping assets in the markets alleged in the complaint. A complete divestiture is the cleanest way to quickly create a robust competitor to compete with the merged firm.^[11] The divestiture should transfer the current (and expected future) market share and competitive presence of one of the merging firms to a new firm.^[12] Although the parties may continue discussing the substantive case, extended discussion about why something less than one side’s market presence should be divested is unlikely to persuade staff but will delay settlement. Reaching early agreement with the agency on this point usually focuses the rest of the discussions on the particulars of which assets and businesses must be divested and how.

Separately, however, the parties must also have a solid understanding of the businesses involved in the merger:

• how (and where) the products are made;
• other products that may also be made at the same location;^[13]
• what critical inputs are needed (and where they come from);
• the role of any sales organisation;
• supplier and customer relationships; and
• the importance of research and development.

A successful divestiture is one in which the buyer obtains (or already has) all the pieces that are critical to the success of the business operation.^[14] Settlement discussions can be delayed if information needed to design a successful divestiture is not readily available to the parties or their counsel.^[15] A complete understanding of both the relevant markets and the way firms operate in those markets will allow the parties and agency staff to agree on what must be divested.

Three risks in every divestiture remedy

The agency will expect the parties to show how their proposal eliminates, or reduces to an acceptable level, three broad categories of risk to a successful remedy. The first risk is that the divested assets will fail to maintain competition because they are insufficient to create a robust competitor. ‘Asset risk’ is heightened when the proposed divestiture excludes assets (including research facilities and intellectual property), contracts or other arrangements that are important to the competing business’s success (even though outside the relevant antitrust market), and marketing divisions. Accordingly, the agency will strongly prefer a divestiture of ‘an ongoing business’.^[16]

The second risk is that the buyer will fail to compete successfully with the divested assets, because the buyer lacks other critical assets, or financial or management resources. ‘Buyer risk’ increases as less than a full business is divested. Although both agencies will insist on doing full due diligence on any buyer and will assure the buyer conducts its own diligence, buyer risk cannot be fully eliminated. The agency will expect the parties to minimise that risk and will not accept a proposed remedy if it believes the risk is unacceptably high.

The third risk is ‘implementation risk’. Even if the divestiture business is robust and the agency is satisfied that the proposed buyer has the financial and business capacity to take the divested business and compete successfully, the transfer may nonetheless fail for unanticipated reasons, and the buyer may not become an effective competitor. The agencies will examine the actual mechanics of the divestiture in great detail, and, as with the other risks, will not accept a proposed remedy if the implementation risk is unacceptably high.

These three risks are interrelated. A ‘complete business’ divestiture will reduce the risk that a buyer will fail to obtain all needed assets and relationships and will greatly reduce the risk that the divestiture itself will not proceed smoothly. Similarly, a buyer that fully understands the markets, has deep financial resources, has conducted its due diligence, and has developed a robust business plan will present less risk that the asset package may have failed to include some important piece. Finally, a proposal to divest a complete business to a well-prepared and well-financed buyer will reduce implementation risk. Accordingly, parties should stand ready to explain how their proposal addresses and minimises these risks, so as to reach an expedited settlement.

Timing concerns and related decisions

Settlement negotiations take time, and the search for an acceptable divestiture buyer often takes longer than the parties anticipate. Parties must decide, therefore, how soon to engage with staff. It is generally better to begin discussions as soon as possible, but serious discussions cannot proceed before the agency has determined where the competitive problems lie. Parties should not attempt to reach a quick settlement in one market in the hope that staff do not identify a competitive problem in another.^[17] If an additional market problem is identified late in discussions, the staff will insist that it be remedied along with the previously identified problems. That is likely to delay reaching an agreement. A complete settlement is therefore most likely to happen sooner if the parties engage with the staff as soon as there is agreement on the markets that need to be addressed.

The parties must also fully understand their own goals when entering negotiations. Whether deal timing, the scope of any required divestitures, or other factors are most important, parties should be clear about what they are trying to achieve. They must understand how their positions may conflict with the agency’s goals and cause delay.

Finally, parties will need to decide what they will and will not continue to debate. Merging parties often disagree with staff on some or even all markets. In matters involving multiple products, further investigation may lead staff to drop markets from their concern, and the parties may continue to urge staff to drop others. At some point, however, it will become clear that the parties and staff may have to ‘agree to disagree’ to reach a settlement.^[18]

Merging parties are rarely neutral about when their deal can close – for them, sooner is always better than later. Factors that drive the parties’ timing concerns can include financing arrangements (and expiring lending commitments), any required shareholder votes, deal termination contract provisions, seasonality in certain markets, and sometimes the presence of competing interest for the firm being acquired. Most importantly, the parties should be planning their work backwards from any critical dates, with a full understanding of what the agency’s staff need to do, what issues are being addressed and how the interests of other parties (including potential buyers for divested assets) will affect the process.

Not all deadlines are equally important. In particular, staff are likely to give more weight to third-party obligations and commitments than to simple wishes to close by a particular date. For example, the parties may have a general desire to close their merger by the end of a particular month, or before the start of a period of high demand.^[19] These dates are important to the parties, but they are probably less immutable than the end of lender financing (when interest costs may need to be renegotiated). The parties should be aware of all their timing concerns and plan accordingly.

Further, the parties should not assume that the staff will know how any third-party timing drives the process. The parties must alert staff early to those critical timing issues. Waiting until late in the process to alert staff that ‘financing will run out in three weeks’ will almost always be counterproductive. The staff will not shortcut their work to allow the parties to meet a critical date that should have been revealed much sooner.

Parties should also be prepared to document their timing concerns, especially if they are asking the staff and decision makers to expedite internal processes. They should produce documents showing, inter alia, where the financing provisions contain terminations, and how a jurisdiction’s corporate and securities laws require action by a certain date. Staff may nevertheless question how firm a deal deadline is. Although contractual deadlines may give one of the parties the opportunity to abandon the deal, both parties often are committed to closing. Staff will not ignore these arguments, but none of them can be assumed to be dispositive.^[20]

Parties must also recognise that continuing to discuss the antitrust merits with the staff to try to carve markets out of the case, or suggesting that they may not settle at all, force the staff to continue their work towards a possible court challenge. Those efforts will take time away from the staff’s work to design the remedy, review proposed buyers and draft the settlement papers.^[21] As a practical matter, staff cannot simultaneously focus fully on the underlying case (and, especially, prepare for a court challenge) and negotiate a settlement. Preparing for court will be staff’s priority.

Timing for a merger subject to the Hart-Scott-Rodino (HSR) Act is often covered by a timing agreement^[22] between the parties and the agency’s staff. Parties agree not to certify compliance with the second request without giving advance notice to staff.^[23] These agreements allow all parties to focus on settlement discussions and other aspects of the investigation, and not immediately on a possible court challenge. If the parties either certify their compliance or announce their ending of the timing agreement, however, staff will very likely stop discussing settlement and turn their full attention to preparing the case for a court challenge. Staff will not jeopardise their litigation position by diverting trial preparation resources to settlement discussions as the deadline for filing their complaint approaches.^[24]

Finally, the particular details about the proposed remedy can affect the timing of settlement – the assets proposed for divestiture can affect both the likely buyers and the time needed for review. For example, it is generally easier, and probably quicker, to be prepared to divest an entire business that contains the overlap products than it is to divest a selected group of assets (a carve-out). However, parties sometimes prefer to divest a smaller set of assets used only for the markets at issue. As discussed in other chapters, both agencies are likely to require an upfront buyer for those assets, and selection of that buyer and staff’s review will take longer than would a review of a ‘going concern’ divestiture.^[25] In addition, the particular asset package may be acceptable only in the hands of a very few approvable buyers. Parties need to understand the trade-off between the divestiture proposal and the time needed to review it.^[26]

The agencies generally do not have a preference for whether the parties divest the acquirer’s assets (A-side) or the target’s (B-side), but they generally reject divestitures of a mixture of assets from each party.^[27] In most cases the parties prefer to divest the smaller of the overlap products. But staff are likely to resist a divestiture that raises risks about the package, the proposed buyer or implementation of the remedy if the alternative divestiture can be ‘clean’.^[28] That trade-off raises many issues beyond timing alone, but the parties should understand that straightforward remedies can be resolved, documented and completed more quickly.^[29]

Although this chapter discusses how the agencies approach settlement negotiations, recent announcements about other ‘deal timing’ issues could affect how parties approach the process. The Acting Director of the FTC’s Competition Bureau posted an official blog on 3 August 2021 that has cast some uncertainty on firms’ closing calculations.^[30] Citing the recent ‘surge’ in merger filings (under the HSR Act), Holly Vedova announced: ‘For deals that we cannot fully investigate within the requisite timelines, we have begun to send standard form letters alerting companies that the FTC’s investigation remains open and reminding companies that the agency may subsequently determine that the deal was unlawful.’ Although this announcement does not change the legal status of any deal – the FTC or DOJ have always been able to challenge a deal after it closes, regardless of its reportability – the announcement raises several questions that are unanswered to date:

• Will all firms whose deals are subject to a formal FTC investigation receive such ‘close at your risk’ letters?
• Will the DOJ begin sending these types of letters as well?
• What does the FTC expect from a firm that receives such a letter – is there an implied request that it delay closing?
• How, if at all, will timing agreements be affected by this new policy?
• At what point will the FTC inform the firms whether the investigation has been closed?

It is understandable that this announcement has created uncertainty for practitioners, and it is too soon to assess the impact these letters will have, but presumably any negotiations about a remedy should not be halted by issuance of a letter; that is to say, if parties are already discussing a remedy, they are unlikely to be closing their deals during that process.

Issues regarding divestiture buyers

The scope of divestiture – which assets and related relationships – is often the most difficult aspect of a settlement. The parties’ preference to divest as little as possible will generally raise the ‘asset risk’. When the parties propose to divest less than a ‘stand-alone business’, the agencies will almost always insist on identifying that buyer, with a contract, before agreeing to settle – the ‘upfront buyer’.^[31] When the agency requires an upfront buyer, it is precisely because the agency insists that the parties must support their particular divestiture proposal by showing that a buyer exists who stands ready to acquire the divestiture assets and is capable of successfully competing with them.^[32]

The parties’ choice of a divestiture buyer will always raise basic issues that the staff must investigate. This section discusses what the parties must show when proposing an upfront buyer. The agency will require the same information and conduct the same analysis as it would for a divestiture after the remedy is final, but the dynamics of overall settlement discussions will raise additional issues.^[33]

Any proposed buyer must be able to take the divested assets and succeed with them, meeting the stated goal of ‘maintaining or restoring competition in the relevant market’.^[34] The parties, with the proposed buyer’s help, must therefore show that their proposal will meet that goal. That showing should address the three broad risks already discussed: (1) whether the proposed divestiture assets will give the proposed buyer what it needs to compete successfully; (2) whether the proposed buyer has the financial and management ability to take those assets and compete; and (3) whether the proposed buyer has a well-prepared plan for taking the assets and integrating them into its existing business operations.

The merging parties have the burden of showing that their proposal should be accepted – this obligation covers all aspects of the showing, although some information will necessarily come directly from the proposed buyer.^[35] The information needed to show that the assets are an acceptable package is fairly straight­forward and will flow directly from the relevant market analysis of the investigation. The parties should keep in mind, however, that assets that are outside the precise antitrust market may need to be divested to create a viable business. These may include assets needed to provide critical inputs (speciality products); research and development assets; contractual relationships with suppliers, distributors or customers; and a sales force.^[36] The parties’ willingness to divest more – making a true ongoing business – will better assure that a proposed buyer will get all assets needed to succeed.

The greatest focus will often be on the particular buyer’s own assets, business plans and financial wherewithal. The parties should have a good basic understanding of the proposed buyer, and they should be prepared to explain why they chose that buyer and why they believe it will succeed. Staff will then turn their attention to the proposed buyer itself and will probably request information that the parties themselves do not have. Review of the buyer will move more quickly if the parties have fully explained that process to the buyer and explained why the buyer will need to provide further information to the agency.^[37]

The agency’s staff will examine three main areas of the buyer’s capability by reviewing documents and meeting with and interviewing the buyer’s most knowledgeable employees. The buyer will be expected to explain its own market position and relationship to the relevant markets in the case. For example, it may be involved in a related business or may be a competitor in a geographical market not implicated by the proposed merger. Staff will expect the buyer to explain its plans for acquiring the divested assets, integrating them into its own operations, expanding its business and becoming competitive with the parties.^[38] Depending on the particular matter, those plans may need to address, for example, expanding production capacity at an existing plant (if acquiring particular manufacturing assets), or increasing and expanding the buyer’s existing sales force. Buyers often present their case by bringing the relevant personnel and presenting well-drafted plans to the agency staff during the course of one or several interview sessions.^[39]

The proposed buyer must also show that it has a well-capitalised financial plan: capital to make the divestiture purchase and to fund integration, and a willingness to pursue expansion efforts over the time needed to become fully established. If the buyer is relying on third-party financing, it will need to provide documentation to show the terms of that financing, and how it would deal with any contingencies.

The proposed buyer may need to provide financial projections, including the assumptions used, to show its anticipated performance during the early years after divestiture. The details will depend on the industry, the assets and the buyer. The agency will conduct its own review of those arrangements and may raise detailed questions about financial projections and assumptions.^[40] The agency staff may request any documentation that the proposed buyer used to obtain outside financing or high-level corporate authorisation for the purchase.^[41] This documentation should explain how the buyer sees its opportunity and risk, including how its position may change if the performance assumptions (sales, costs) do not bear out.

As with most issues involving merger review, the specific areas for analysis and the degree to which they are critical will vary with the case. The agency’s review will take time, and it is best to address these issues as soon as a potential buyer is identified. Questions that arise towards the end of the process will undoubtedly cause delay.^[42]

The agencies have long made clear that if the parties advocate for a divestiture of less than an ongoing business, they will almost certainly have to propose a particular buyer. As the size of the offered package diminishes, the need for a close and thorough review of the buyer increases. Conversely, in cases where parties are willing to divest a complete business covering the affected markets (i.e., entire production facilities, with inputs, suppliers and customer contracts, and a complete production and marketing workforce), the agencies will be more willing to allow that divestiture to occur after the settlement and after the merger is consummated. In those cases, nevertheless, the parties must show that there are approvable firms available to buy the divested assets.^[43] The difference is in the level of review that the agency will undertake during settlement. For upfront buyers, agency staff will insist on seeing the final negotiated divestiture contracts, financing arrangements and business plans. For post-order divestitures, the agency will expect those documents and arrangements to be presented when the merged firm makes its request for agency approval of the proposed divestiture.^[44] The effort and time needed during settlement is greater for upfront buyers, but the parties will need to make some initial showing of likely interested and approvable buyers even for a post-order divestiture plan.^[45] That is to say, if the agency staff doubt that the buyers really exist, they will insist on an upfront buyer.

A remedy requiring divestiture of a complete business is likely to require the parties to enter some interim arrangement to hold the to-be-divested business separate from the merged firm pending divestiture and to maintain their competitive vigour. The agencies have used hold separate and asset-maintenance agreements and orders for many years, and the terms are very similar from case to case. A review of the agencies’ public record will show the general approach. Parties should plan accordingly and should be prepared to establish an acceptable arrangement. The agencies will almost certainly require appointment of a third-party monitor, who will oversee the held separate arrangement, report to the agency, and otherwise help minimise any problems that may arise in the interim.^[46] As with other terms, engaging early with the agency staff about the hold separate and any required monitor will help to avoid delay.^[47]

Other standard provisions and party obligations

Most merger settlements contain several standard provisions with which the parties should become familiar. For divestitures that raise potentially difficult technical issues (such as the transfer of complex intellectual property), whether to an upfront buyer or in a later post-decree divestiture, the agency will probably require a transition services agreement between the merging parties and the buyer, to guarantee that the merged firm meets its obligations to ensure the buyer receives the needed information. Further, as noted in the FTC Merger Remedies Report, transfer of certain ‘back office’ functions from the parties to the buyer has at times been more difficult than anticipated.^[48] Accordingly, the agency may require that transfer function to be recorded in an additional agreement between the parties and the buyer (it may be a part of any transition services agreement). Just as for hold separates, a monitor is likely to be required to oversee that process.

Similarly, if the buyer will need an interim supply of a critical input while it completes its own alternative arrangements, the parties may need to negotiate and enter a supply agreement, which is likely to be overseen by the same monitor. The supply agreement will specify the terms of that obligation, including volumes, pricing and delivery details. This agreement will need to run long enough to allow the buyer to separate seamlessly from the parties, but not so long as to create a long-term dependency – generally 18 to 24 months, depending on the case.

The agencies’ final settlement documents also contain routine reporting and access provisions, and examples of them all^[49] can be found by a simple review of any recent merger settlement.^[50]

On 21 July 2021, the FTC rescinded its 1995 policy statement on ‘prior approval’ provisions in merger orders.^[51] As the FTC’s press release describes, until 1995 all merger orders included a provision requiring the parties to obtain the FTC’s affirmative approval before making another acquisition in the same market.^[52] In 1995, the FTC determined to require prior approval provisions only if there was a credible risk that the party would make the same or a similar acquisition, and would instead rely on the HSR Act for its ability to review planned mergers otherwise. The decision to rescind the 1995 policy leaves some questions unanswered:

• Having rescinded the policy, does the FTC intend to require a prior approval provision in every merger order going forward?
• If not, what factors might lead the FTC to require a provision?
• Most important, if the provision will not be required in every case, will it become a subject for negotiation and possible dispute in future settlement negotiations?

For now, parties should anticipate that they may be asked to agree to such a provision, and they should be prepared to discuss its need and the scope and duration of any such provision.

Final timing and the agency’s schedule

The agencies have a general working rule for how much time is needed to review and approve the settlement before the underlying merger can proceed. At the FTC, the Bureau of Competition generally requires two weeks to review the final arrangements and the commissioners generally require two weeks to review the settlement. At the DOJ, time must be allowed for a final review by the Assistant Attorney General. These periods are often shortened for contingencies, but the parties should anticipate building in enough lead time to their discussions.

At the FTC, it is not necessary that the parties meet with commissioners or senior management in the Bureau of Competition, and the parties should discuss with staff whether they need to seek meetings before they arrange them. Senior leadership will already be aware of the matter (and will have approved the settlement before the agency staff reach final terms), and it is generally unnecessary to seek a meeting if the staff has not indicated one is needed. Similarly, unless a commissioner’s office has raised an issue it wants addressed or has identified other problems or concerns, there is no need to schedule those meetings. The staff will alert the parties if an issue arises that would be best dealt with at such a meeting. At the DOJ, parties should take their cue from the staff concerning the need to meet with the Antitrust Division’s leadership.

Parties’ obligations after settlement

After the settlement is complete and approved by the agency or filed with the court, the parties must remain attentive to their continuing obligations. The upfront divestiture should be completed expeditiously, supply deliveries should begin as scheduled, and technology transfers should be completed cooperatively. The parties should address any questions raised by the monitor as soon as they can. As with all remedy compliance, it is better to bring issues to the agency’s attention quickly so they can be resolved, and not allow small concerns to become major problems.^[53] Ongoing communication by all parties with the agency staff is always advised.^[54] The parties will need to file any required compliance reports on time, including a full description of their compliance with the remedy’s terms, and they should understand that continuing oversight of their compliance will be a regular part of the agency’s work during the relevant terms of the remedy.

Any doubt about the agencies’ requirement for full compliance with all order terms should be dispelled by noting DOJ’s contempt fine in Novelis (mentioned earlier) and the FTC’s 2020 civil penalty settlement involving Alimentation Couche-Tard.^[55] In July 2020, the FTC filed its civil penalty settlement against Couche-Tard, calling for US$3.5 million in civil penalties for Couche-Tard’s numerous violations of its 2018 consent order to divest 10 retail fuel stations in 10 markets in Minnesota and Wisconsin. In addition to failing to divest any of the 10 stations by the order’s deadline, Couche-Tard also failed to maintain one of the stations (which led to its closure) and failed to explain its efforts completely in its regular compliance reports to the FTC. The court complaint alleges 13 violations in all (divestiture failures for each of the 10 stations, violations of the order to maintain assets, and violations of the two separate reporting obligations under the divestiture order and the order to maintain assets). Although the divestiture delays were not particularly long – three months – the parties’ failure was not considered reasonable. At a maximum civil penalty of over US$43,000 per day (per retail station), the penalty could have been much higher. But Novelis and Alimentation Couche-Tard should remind firms that when they commit to settle a case, they must be prepared to satisfy all their obligations.

Notes