Question
December 5, 2003
VIA EMAIL
Michael Verne
Compliance Specialist
Federal Trade Commission
Premerger Notification Office
6th Street and Pennsylvania Avenue, N.W.
Washington, D.C. 20580
Fax (202) 326-2624
Re: Gun Jumping Under the Hart-Scott-RodinoAntitrust Improvements Act of 1976 (the "HSRAct"): (redacted)'s letter to Employees regarding their Employment Status
Dear Mr. Verne:
Ivery much appreciate your time and assistance during the telephone conversationyou and I had yesterday concerning (redacted) letter to employees regardingtheir employment status and Gun Jumping under the H ct. Following that call,you reviewed an earlier copy of this letter and asked that I speak with NaomiLicker of Compliance at the FTC. Earlier today, I spoke with and emailed thatearlier draft to Ms. Licker. Following her review of that, she concurred withyour initial advice. Accordingly, the substance of the view you and sheexpressed is memorialized below. Thanks again for your insights, time andthoroughness in this matter.
Facts
We discussed the following hypothetical.
(Redacted) and Buyer have entered into (andannounced) a definitive merger agreement, pursuant to which (redacted) willbecome the wholly owned subsidiary of Buyer. Buyer is significantly larger than(redacted) in both revenues and number of employees. HSRapplies to the deal but the parties have not yet cleared the HSRwaiting period.
(Redacted) financial performance has not beenstellar in the last year and, absent the acquisition, "Will-need to layoff some employees. In fact, prior to entry into the acquisition agreement (andunrelated to the deal), (redacted) had already completed a reduction in forcein the last few months.
Uponannouncing the transaction, (redacted) advised its employees that (redacted)would inform them in the near future if they were likely to terminated as aresult of the transaction. As part of its planning for the post-merger period,(redacted) has identified roughly 5% to 15% of the work force who will likelynot have jobs if (redacted) completes the proposed transaction. Buyer has beeninvolved in this post-merger planning and would agree that these people wouldlikely not be employed post-merger. Note that in announcing the transaction, theparties also announced that the deal would yield synergies. This headcountreduction would generate some of these synergies -- for instance, the partiesanticipate that eliminating redundant positions in the accounting/financedepartment would yield savings.
Moreover, if the transaction does not close,(redacted) will be in financially poor condition and will be "damagedgoods" in the M&A market. (Redacted) management currently believesthat lay-offs in that eventuality are almost certain, absent n extraordinaryevent. (Redacted) management also currently believes that at least some ofthese same employees likely to e i aced as a result of the transaction wouldalso likely be downsized if the transaction does not close.
Sometime has passed since (redacted) advised its employees that it wouldreveal who will be let go as a result of the deal and (redacted) has notyet advised those of its employees of their status in light of the merger. As aresult, morale has declined while uncertainty has climbed. (Redacted) hashistorically had very low turnover. In recent years, (redacted) retention haslikely strengthened further by the weak job market in its sector. Sinceannouncing the transaction and in the absence of guidance on which employeesmay be terminated in the transaction, (redacted) has suffered departures fromseveral people who, whether or not the deal is consummate , (redacted) wouldwant to retain.
(Redacted) has repeatedly advised its employeesthat the transaction is subject to a number of approvals and closing conditionsand that they are obligated to continue to face the market independently andcontinue to make their independent sales unless and until the merger isfinalized.
(Redacted) wants to send a letter to variousemployees indicating that these employees may well be let go it and when thedeal closes and that if they stay through the closing, they would be entitledto receive enhanced severance benefits. The letter would further state that thedeal is contingent upon a variety of closing conditions and would advise themthat, if the deal does not close for any reason, would at that time reachdecisions on future employment. (Redacted) believes that sending such a letterwould, among other things:
- protect the value of (redacted) current human resource assets by stemming the loss of the people who are key to (redacted);
- enable (redacted) to make good on its word to let the employees know where they stand; and
- boost morale by alleviating some uncertainty and by enabling the potentially displaced workers to plan for the future.
Pleasenote that the workers at issue are, in general, not competitively instrumentalto the future of (redacted) (whether or not this transaction closes) sotheir departure would not weaken the assets or materially diminish(redacted) current value. In fact a primary motivation for(redacted) sending the letter is to maintain moral and provideinformation about incentives to stay management feels that failure to do sowould adversely impact (redacted) as an independent en t if the deal doesnot close.
Howthis differs from Input/Output:
Input/Output (see FTC Releasedated April 12, 1999and related documents at http://www.ftc.gov/os/1994/04/inputoutput.pdf), theonly reported FTC matter involving HSR GunJumping from the perspective of communications with employees rather thancustomer-facing conduct and competitive coordination, differs significantlyfrom the foregoing fact pattern.
In Input/Output the FTC assertedthat following the execution of the acquisition agreement, Input/Output beganto exercise operational control over DigiCOURSE by, among other things, installinga new management team to operate Input/Output which included both the existingoperations of Input/Output and all operations of DigiCOURSE. SeeComplaint at Paragraph 15.
Input/Output also took thefollowing actions, which the FTC found to have constituted such a transfer:
- announcing and implementing effective immediately, a reorganization of Input/Output into product-based divisions, which included DigiCOURSE and the existing operations of Input/Output;
- as part of the reorganization, senior executives from both companies took new positions and titles at the helm of t operations as art of the reorganization, employees moved offices from DigiCOURSE to Input/Output and received email addresses and access to internal reports at Input/Output and business cards (as approved by Input/Output President). Those cards were distributed to customers. Also, employees were instructed to answer the Input/Output phones under the Input/Output name;
- DigiCOURSEs President, Mr. Kelm, who was also the President of Input/Output went to the UK to settle a dispute between Input/Output and a customer, with the aid of two other DigiCOURSE employees and signed settlement term sheet on behalf of Input/Output.
- That same President provided comments (at the request of Input/Output on a separate potential acquisition Input/Output was contemplating;
- That same President of Input/Output presided over the management of DigiCOURSE business at the relevant times;
Complaint at paragraph 15.
The above led the FTC to concludethat (redacted) had taken "operational control over (redacted)business," which "constitute a transfer of beneficial ownership"prior to HSR clearance.
In the matter we discussed involving (redacted)and Buyer, there is no reorganization, no distribution of new titles andpositions, no changes in reporting responsibility, no change of business cardsor manner of answering the phones, establishing of email accounts, orcoordination on other potential M&A activities.
Onlya small and select group of senior executives will be told their expected newposition or title in the course of the report on status. We further believethat (redacted) need to stem the loss of current employees comports with thefiduciary duties of (redacted) officers and directors and is also a laudablegoal from an antitrust gun-jumping perspective.
Issue
You were kind enough to answer the followingquestion concerning the above statement of facts. I have summarized thequestion and your answer below.
Q:Would it be permissible under the HSR Act for (redacted) to notifycertain employees that those employees are likely to be let go if Buyer'sacquisition of' (redacted) consummate.
A:Yes. You advised that although Buyer concurs in terms of who will likely nothave a job with (redacted) post-merger, (redacted) is acting independently innotifying its employees and preserving its value. Because there appears to beno impermissible Buyer involvement in (redacted) proposed notification, sendingthis letter does not present a Gun Jumping problem under the HSRAct.
I hope that this letter accurately summarizes theadvice we discussed earlier today. If any portion of the above summary isinaccurate, please let me know.
Thank you again for your time andhelp.