Antitrust compliance in the United States
June 2014 | SPECIAL REPORT: MERGERS & ACQUISITIONS
Financier Worldwide Magazine
June 2014 Issue
“[P]otential benefits from a combination: 1. No meaningful direct competitor.” This is exactly the type of statement that will generate particular interest from the US antitrust agencies, leading them to question – or even challenge – a potential transaction. This statement was drafted by Bazaarvoice, Inc. in an informal company email identifying the many benefits of its planned acquisition of PowerReviews, Inc. The Antitrust Division of the US Department of Justice (DOJ) challenged the transaction, and, on 8 January 2014, the US District Court for the Northern District of California concluded that the combination violated Section 7 of the Clayton Act. Using Bazaarvoice as a cautionary tale, this article seeks to educate businesspeople on the importance of mindful document preparation to limit exposure to antitrust risk.
Section 7 of the Clayton Act prohibits transactions whose effect “may be substantially to lessen competition, or to tend to create a monopoly”. Section 7A of the Clayton Act, also known as the Hart-Scott-Rodino Act (HSR Act), provides a particularly useful tool to the antitrust agencies – the DOJ and the Federal Trade Commission (FTC) – in investigations of mergers and acquisitions. It requires the parties to file a Premerger Notification and Report Form with the DOJ and FTC if the proposed transaction meets certain size thresholds and does not fall into one of the HSR Act’s stated exemptions. The Form requests a significant amount of company and deal information from the parties. Additionally, the parties must submit documents prepared by or for officers or directors for the purpose of evaluating or analysing the transaction with respect to various competitive issues, such as market shares, competitors, markets, synergies/efficiencies, or revenue projections (Item 4 documents).
Item 4 documents typically include strategy presentations to management and deal analysis by third-party advisers, but handwritten meeting notes and informal email exchanges also fall within the broad definition. The agencies scrutinise these documents in evaluating whether the proposed transaction will have any anticompetitive effects. The agencies have 30 days from the date the Form is filed to review the transaction, and the parties may not close the transaction until the expiration or termination of the 30-day waiting period. If one of the agencies has substantive concerns about the proposed transaction, it may issue an extensive ‘second request’ for additional information, including more internal documents beyond those responsive to Item 4. If the agencies decide the transaction is anticompetitive and want to block it, they must establish product and geographic markets and demonstrate that the transaction will substantially lessen competition in that market.
Because the HSR Act requires that only transactions that meet certain size thresholds be reported, many transactions are closed without the agencies’ knowledge. This does not, however, prevent the agencies from challenging the transaction as violating Section 7. In fact, between 2009 and 2013, the DOJ investigated 73 non-reportable transactions, which accounted for 20 percent of the DOJ’s merger investigations during that time period. The DOJ ultimately challenged one in four of these investigated transactions.
Bazaarvoice’s acquisition of PowerReviews is a recent example of an agency challenge to an acquisition that did not meet statutory thresholds and therefore was not subject to the HSR Act. More significantly, the agency challenge did not occur until the transaction had been consummated. Nonetheless, the court did not limit its review to post-consummation evidence of competition and prices; rather, the court’s conclusion focused on internal records that would have been Item 4 documents had the transaction been reportable. These documents identified PowerReviews as Bazaarvoice’s only competitor and noted that PowerReviews’ existence suppressed Bazaarvoice’s price points. Many of the documents offered by the DOJ at trial were informal email exchanges among executives discussing the potential upside of the combination. Although Bazaarvoice called various customers to testify in support of the combination and identified likely entrants into the marketplace, the court was either not persuaded or could not see past the countless documents that cast doubt on the existence of a procompetitive rationale for the transaction.
In finding for the DOJ, Judge William Orrick repeatedly mentioned the internal documents and their inconsistency with Bazaarvoice’s arguments at trial: “[Bazaarvoice’s] defenses were often undermined by pre-acquisition statements from its and PowerReviews’s executives”.; “[A]nticompetitive rationales infused virtually every pre-acquisition document describing the benefits of purchasing PowerReviews”.; “The anticompetitive rationale for the acquisition remained constant in board presentations throughout the negotiation process, and it underlies many of the documents... that Bazaarvoice relied on at trial”.; “The documents indicate that both companies’ executives believed the merger would avoid price erosion and allow the merged firm to profitably raise prices as least five percent above pre-merger levels”.
The DOJ’s victory in Bazaarvoice highlights the importance of educating company personnel in appropriate document-preparation guidelines. Many statements that draw the agencies’ attention are simply inartfully worded statements made in an attempt to ‘sell’ the transaction internally. Additionally, many common words, such as ‘market’, have a specific, analytical meaning in an antitrust context. Such words should be used sparingly so as not to create a misleading impression. For example, if company documents repeatedly discuss the ‘New York market’, the company could inadvertently be implying that that geographic limitation defines the company’s competitive landscape.
Bazaarvoice is not an outlier. In another recent case, United States v. H&R Block, Inc., the DOJ prevailed largely on the basis of documents and statements from company insiders. In a speech following the DOJ’s successful challenge to H&R Block’s proposed acquisition of TaxACT, Inc., then-Acting Assistant Attorney General Joseph Wayland stated that “[i]n past merger trials, the [DOJ] has sought to present its case in large part through customer witnesses. That approach provided mixed results, and we needed a new strategy. In H&R Block, we decided to make our case primarily through the parties’ own documents and testimony from their executives.”
Moreover, on 1 January 2014, the European Commission implemented new procedures for antitrust merger control proceedings. These procedures increased the scope of company documents that must accompany a merger filing, requiring the production of documents similar to those required by Item 4, as well as certain ordinary course documents that are not required by Item 4. Moreover, the Commission does not recognise the attorney-client privilege for in-house counsel or US attorneys, so documents that may be withheld from production to the DOJ or FTC based on privilege may have to be produced to the Commission.
These cases and the Commission’s new procedure underscore the importance of collaborating with antitrust counsel to incorporate document-preparation guidelines into the company’s antitrust compliance program. Businesspeople should be sure to record the procompetitive rationales for a transaction and should refrain from using antitrust buzzwords that may be interpreted in a manner different than intended. By implementing these prophylactic measures, companies can limit their antitrust risk and the resulting lengthy and costly delay and its negative impact on a pending transaction.
Logan Breed is a partner and Tracy Januzzi is an associate at Hogan Lovells US LLP. Mr Breed can be contacted on +1 (202) 637 5600 or by email: logan.breed@hoganlovells.com. Ms Januzzi can be contacted on +1 (202) 637 5593 or by email: tracy.januzzi@hoganlovells.com.
© Financier Worldwide
BY
Logan Breed and Tracy Januzzi
Hogan Lovells US LLP