Avoiding antitrust pitfalls during pre-merger negotiations and due diligence

Most antitrust practitioners are attuned to advising clients about the antitrust risk that a proposed acquisition may violate Section 7 of the Clayton Act. But counsel and clients must also be conscious of the risks of sharing information with a competitor before and during merger negotiations—a concern that remains until the merger closes.

Companies considering acquisitions, mergers, or joint ventures typically have a legitimate need to access detailed information about the other party’s business in order to negotiate the deal and implement the merger. But some information of interest may be competitively sensitive, such as current and future price information, strategic plans, and costs. This is especially true if the companies compete with one another. For prospective transactions involving a competitor or potential competitor, special care must be taken to minimize antitrust risks throughout premerger negotiation and due diligence process, as well as during the integration planning process.

Although less frequent than merger enforcement actions, the antitrust agencies have taken action against companies for unreasonable information sharing, whether as standalone conduct or during the merger process. For instance, the FTC charged a hair transplant services company with violating the FTC Act after it was discovered during the FTC’s review of a proposed merger that the merging firms’ CEOs repeatedly exchanged company-specific information about future product offerings, price floors, discounting practices, expansion plans, and operations and performance. Even though the FTC did not challenge the merger, it concluded that the exchange facilitated coordination and endangered competition, including by reducing each firm’s uncertainty about its rival’s specific product offerings, prices, and plans. The FTC also determined that the exchange served no legitimate business purpose. In another case, the FTC challenged both the merger and the exchange of competitively sensitive information between two welded-seam aluminum tube manufacturers. The FTC found the sharing of non-aggregated, customer-specific information, including current and future pricing plans, particularly harmful to competition because the two companies competed against each other in two highly concentrated markets. According to the Commission, “[t]his transfer had the potential to harm competition in the interim pre-consummation period and in the event the acquisitions were delayed, modified, or abandoned, may have led to even greater and more long-lasting harm.”

The reason for concern is simple: competitive harm from illegal information sharing can inflict harm to competition similar to the harm caused by an anticompetitive merger. Exchanging information about competitive plans, strategies, and crucial data such as prices and costs can facilitate coordination between firms (and, if accompanied by accommodating actions, could constitute an unlawful agreement). Right up until consummation, the merger parties are still independent businesses and they must continue to operate independently­­ including safeguarding their competitively sensitive information—to ensure competitive vigor in the short term and also in the event that the merger does not happen. The FTC therefore looks carefully at pre-merger information sharing to make sure that there has been no inappropriate dissemination of or misuse of competitively sensitive information for anticompetitive purposes.

Note that pre-merger information sharing may contribute to unlawful “gun jumping” in violation of the HSR Act and Rules if it results in the buyer effectively gaining beneficial ownership of the seller prior to the close of the transaction. See United States v. Computer Assocs. Int’l, Inc. (2002) (merger agreement required buyer pre-approval for seller to offer customers discounts greater than 20% off list price). Unlawful gun jumping may include the exchange of competitively sensitive information, but it typically also involves actual coordination of business activities during the HSR pre-merger review period. Such conduct could also constitute evidence of a standalone illegal agreement that violates Section 1 of the Sherman Act. See United States v. Gemstar-TV Guide Int’l., Inc. (2003).

Managing the Risk: Set up a Process and Police it
Because sharing too much information during the pre-merger period could violate the antitrust laws, it’s important to have a plan in place to monitor and control the flow of information to outside parties. Staff’s recent experience indicates that companies could avoid both the appearance of and the actual misuse of competitively sensitive information by more consistently adhering to procedural safeguards designed to prevent misuse of competitively sensitive information.

Antitrust counsel can undertake several steps to help prevent problematic information sharing. First, companies should be reminded that designing, maintaining, and auditing effective protocols to prevent anticompetitive information sharing are extremely important during pre-merger negotiations and due diligence. If competitively sensitive information must be exchanged for diligence and integration planning purposes, parties should employ third-party consultants, clean teams, and other safeguards that limit the dissemination and use of that information within the parties’ businesses. Clean teams should not include any personnel responsible for competitive planning, pricing, or strategy.

Second, antitrust counsel should ensure that merging parties follow whatever protocols they establish. Merging parties’ adherence to established protocols should be monitored with an eye towards identifying potentially problematic information sharing or sloppy information sharing practices. Finally, if antitrust counsel discovers any problematic document sharing or coordination of business activities between the merging parties during the HSR waiting period, counsel should instruct the parties to stop the activity or document exchange immediately (because that is what the FTC staff will insist upon). For any problematic documentary information exchange uncovered, antitrust counsel should determine whether and how the information was used as well as the extent of the information exchanged, and would be well advised to inform FTC staff about this before staff discovers the documents in the merger investigation. Note that if FTC staff uncover documents in their merger review indicating that a problematic exchange occurred, or that the parties may not have fully lived up to the protocols they established to protect confidential information, this may well result in FTC staff pursuing a separate investigation, potentially costing additional time and resources.

Below are suggestions for safeguarding competitively sensitive information during a transaction. The suggestions are not exhaustive and are not the only means of safeguarding competitively sensitive information. Ultimately, assessing whether safeguards actually prevent anticompetitive information exchanges will depend on the facts and circumstances of each case.

For the disclosing party:

• Share the least amount of information needed for effective due diligence. Information shared should be narrowly tailored and reasonably related to a specific due diligence or premerger integration planning issue. Tailoring the amount of information shared to the stage of the process can also help. At earlier stages in the sale process, a larger number of firms may view the information while considering whether to bid for the target company. Less information is typically needed at those earlier stages. At later stages in the sale process, fewer firms may view the information, but more detailed information may be needed to assess the business or asset package and finalize a bid. This will require stronger safeguards, such as clean team agreements. Clean team agreements limit access to competitively sensitive information in data rooms to select individuals (clean team members) who require access to evaluate the assets. Clean team members should be scrutinized to confirm they do not occupy business roles that could enable them to misuse the information for anticompetitive purposes.
• Mask customer identities and aggregate all competitive information. Consider using an independent agent to identify, collect, and disseminate competitively sensitive information in an aggregated or other form that shields customer-specific and other competitively sensitive information.
• Redact documents and information to shield customer identities and other information. In particular, ensure that materials made available to bidders who could misuse it in an anticompetitive manner do not inadvertently reveal confidential customer information that was intended to be redacted. This is especially important if competitors are considering a bid. Note that the more competitively sensitive the information, the stronger the protections needed. If the relevant market has only a few well-known players and some or all of them are evaluating the business or asset package, greater efforts may be necessary to ensure redactions are effective.
• Examine all materials made available to bidders that may raise competitive concerns, including schedules later added to data rooms. Consider whether bidders can piece the documents together in a manner that inadvertently reveals confidential information.
• Reduce the risk of overbroad dissemination of confidential information by prohibiting individuals with data room access from downloading or e-mailing confidential information in the data room.
• Ensure document destruction instructions at the end of the due diligence process are clear, including penalties or consequences for a breach; follow-up to ensure instructions are followed.

For the receiving party:

• Ensure all employees with access to confidential information understand the terms of all confidentiality and non-disclosure agreements, including clean team agreements.
• Establish clean teams and employ third-party consultants for competitively sensitive information that must be exchanged.
• Outside counsel should vet clean team members for the role, including any individuals added to a clean team at a later date. Clean teams should have separate protocols that establish how competitively sensitive information should be treated and with whom it can be shared (e.g., inside the clean team and with outside consultants, but not with any business personnel not on the clean team).
• Check that employees do not save confidential information meant only for due diligence or clean team members on accessible share drives within the company.
• If reports from consultants and the clean team must be provided to other business personnel, those reports should contain blinded, aggregated versions of the competitively sensitive information and be subject to review by counsel before dissemination.

The main message is that companies should consider the risks and establish appropriate protocols. At all times companies should take into consideration the sensitivity of the information offered to or requested by a counter-party and how the exchange of the information could affect competition, both in the short term and if the deal doesn’t happen. Once the process is set up, both parties should police the rules to ensure they are followed.

And finally, when the bidding process is complete, individuals who received confidential information must comply with all document destruction requirements in the confidentiality/non-disclosure/clean team agreements. Requiring bidders to destroy any independent internal analysis based on the confidential data and documents reduces the risk of future misuse of competitively sensitive information.