Q&A: Antitrust due diligence in M&A

August 2022  |  SPECIAL REPORT: COMPETITION & ANTITRUST

Financier Worldwide Magazine

August 2022 Issue

FW discusses antitrust due diligence in M&A with David Cardwell at Baker Botts LLP and Ilana Kattan at Hogan Lovells LLP.

FW: How would you describe general antitrust trends, and the level of monitoring and enforcement activity by government authorities? Have any recent legal and regulatory developments affected this space?

Cardwell: One of the most significant developments in recent years has been the willingness of antitrust authorities to scrutinise merging companies’ pre-closing conduct. What you have seen in recent years is a substantial uptick in ‘gun jumping’ enforcement actions. Although the sharing of information between a prospective purchaser and a seller or target company may not always raise gun jumping issues as such, the willingness of antitrust enforcers to examine how a buyer and seller have interacted in the lead up to closing a transaction means that information sharing during the due diligence phase may well come under scrutiny. Where a prospective purchaser is seeking to buy an actual or potential competitor, the use of clean teams to conduct diligence is therefore increasingly important. Enforcers are well aware of the way that diligence processes are run and are equally mindful of the potential for competitively-sensitive information to be shared. Minimising such exchanges to what is actually required, and ensuring that exchanges are done in a sanitised and controlled way, can help companies avoid future regulatory grief if an enforcer has reason to examine their conduct.

Kattan: Under the Biden administration, the current leadership of both the US Federal Trade Commission (FTC) and the Antitrust Division of the US Department of Justice (DOJ) have demonstrated an increasingly aggressive antitrust enforcement agenda. For example, in just the first year-and-a-half of the Biden administration, the DOJ tried its first criminal wage fixing case and criminal employee non-solicit case, revised its leniency policy to impose additional requirements on companies seeking to avoid criminal conviction and penalties when they self-report criminal antitrust violations, and announced potentially prosecuting monopolisation claims as criminal offences. The agencies have also taken an aggressive enforcement stance toward mergers. FTC and DOJ leadership have expressed scepticism of allowing mergers to close subject to remedies, such as divestitures, and emphasised that the agencies should be more aggressive in suing to block transactions. Both agencies are also investigating mergers under broader theories of harm than ever before.

“Sellers and buyers need to understand that a merger investigation can expose them to unrelated civil or criminal antitrust investigations and prosecutions, as well as costly private litigation.”
— Ilana Kattan

FW: As part of an M&A transaction, how important is it for a prospective buyer to conduct due diligence on potential antitrust problems at the target company – even if the underlying deal itself may raise no antitrust concerns? What consequences might befall those acquirers that overlook this area?

Kattan: It can be critical for a potential buyer to conduct due diligence on a target company’s antitrust compliance, particularly in industries that may be susceptible to cartel activity or in which there is past evidence of anticompetitive behaviour. Antitrust due diligence arms a buyer with the information needed to decide whether to proceed with the transaction and, if the buyer decides to proceed, to assess what steps may be required to mitigate its risk. A buyer that fails to identify antitrust problems at the target may unknowingly acquire significant liability. For example, if the target is part of a price-fixing conspiracy, the target is at risk for criminal penalties, such as fines and imprisonment, as well as civil fines, and trebled damages in any follow-on litigation. A buyer may be able to shift the target’s civil liability onto the seller contractually, but it will remain on the hook for the target’s criminal liability and may suffer reputational harm and business disruption during any investigation or litigation.

Cardwell: Conducting due diligence on potential antitrust problems needs to be treated by a prospective buyer as essential, quite separately from the question of whether there is any form of overlap or other substantive antitrust issue raised by the proposed transaction. An outstanding claim based on competition law, involvement of the target company in unlawful agreements or practices, engagement in unilateral conduct – all of these issues could have serious consequences for a purchaser regardless of a lack of any overlaps or substantive antitrust issues related to the deal. A purchaser that has overlooked such diligence could stand to suffer serious losses in the form of liability for penalties imposed for breaches of competition law, potential follow-on damages actions from customers, even criminal liability – quite apart from the associated reputational damage.

FW: What specific issues need to be examined when evaluating a target’s potential antitrust exposures? What are the benefits of doing so?

Cardwell: Specific issues that should be addressed include assessment of any third-party agreements that could have an effect on competition and may involve terms that give rise to competition law infringements. Some of the most serious forms of unlawful conduct, including price fixing and market sharing agreements, would rarely show up in documents provided in virtual data rooms, which are generally covert by definition. Unilateral conduct can be similarly difficult to spot, though attention should be paid to key terms in customer contracts including, for example, exclusivity clauses, non-competes, and so on. The benefits of spending the time to conduct this review is that although there may not be a document providing clear-cut evidence of an infringement, a prospective purchaser may spot signs of problems, which can form the basis for further, targeted questions to the seller.

Kattan: At a general level, the buyer’s counsel will want to understand a target’s touchpoints with competitors, including any agreements with competitors and any trade association activity, any company history of antitrust violations, investigations or litigation, any pending or threatened antitrust investigations or litigation, any complaints raised internally or externally, or even chatter, about potential antitrust violations, and information about the target’s antitrust compliance policy, including the contents of the policy and details on antitrust training for employees. The buyer’s counsel may also want to review the target’s agreements to see if there are any provisions that may violate the antitrust laws. The benefit of conducting antitrust due diligence is that it allows the buyer to assess the risk of acquiring the target and to make an informed decision about whether to proceed with the transaction.

FW: Are there any red flags that buyers should be aware of when assessing a target’s antitrust compliance efforts?

Kattan: The clearest red flag would be evidence that the target company has entered into an agreement with its competitors that amounts to a criminal violation of the antitrust laws: price fixing, bid rigging, market or customer allocation, wage or salary fixing, and agreements not to compete for employees. While they are not the only antitrust violations that can lead to significant fines, they are the ones that can result in criminal liability. The DOJ is also considering criminally prosecuting companies for monopolisation, but there has not yet been any guidance on what cases the DOJ will choose to prosecute criminally. Another red flag would be discovering that the target company not only lacks an antitrust compliance policy, but also does not have a strong culture of compliance. If a company does not have a strong culture of compliance or a culture that is at least conducive to compliance, then the antitrust laws may not be top of mind for employees.

Cardwell: An obvious but sometimes overlooked red flag can be the absence of any formal or institutionalised compliance policy. The absence of an antitrust-specific compliance policy which relates to the target company specifically is not automatically a worrying sign: a seller may have a perfectly adequate policy which is not specific to the target, so it is a good question to ask a seller. By the same measure, the existence of an antitrust compliance policy in no way guarantees that the target company has in fact stuck by its terms, so it is important not to place too much reliance on the existence of a policy. It is possible that other information provided via diligence provides some reassurance in respect of a target’s compliance efforts; for example, internal policy documents that show that major customer or supplier contracts are required to be run by in-house legal teams for checks on antitrust, among other matters.

“The existence of an antitrust compliance policy in no way guarantees that the target company has in fact stuck by its terms, so it is important not to place too much reliance on the existence of a policy.”
— David Cardwell

FW: For its part, what antitrust issues might affect the seller itself? What due diligence checks should it conduct as part of the deal?

Cardwell: The seller should be particularly focused on establishing the extent of any potential substantive antitrust issues that a particular buyer may raise – this will help the seller to anticipate potential issues with the purchaser securing merger control clearance for the transaction. The seller should plan for the possibility that it needs to gather substantial amounts of information on the buyer itself, so that it can independently assess the scope of any substantive issues. At the lower end of the scale, this would involve the seller’s antitrust counsel reviewing any substantive assessment completed by the buyer, while at the more involved end the seller may instruct its counsel to carry out its own assessment. The nature and extent of any prospective substantive issues can affect transaction negotiations directly; for example, if a buyer is likely to face regulatory headwinds, a seller may adopt an aggressive posture with regard to the buyer offering a ‘hell or high water’ commitment to do whatever it takes to secure merger clearance, as well as possible break-up fees, ticking fees, and so on.

Kattan: A seller may want to conduct reverse due diligence to assess the target’s antitrust compliance, particularly if the buyer’s stock is used as consideration in the transaction. This will allow the seller to understand its own risk before entering into a definitive agreement to sell the target and will enable the seller to negotiate effective antitrust risk shifting provisions in the agreement. For example, if the deal requires the parties to make antitrust merger filings, an authority may discover evidence of an antitrust violation during the authority’s merger investigation. This type of discovery will, at best, slow down clearance of the deal but it may also jeopardise deal clearance and the deal itself. Sellers and buyers need to understand that a merger investigation can expose them to unrelated civil or criminal antitrust investigations and prosecutions, as well as costly private litigation.

FW: What essential advice would you offer to buyers on mitigating the risk of being exposed to antitrust liabilities in M&A? What steps should they take to strengthen antitrust compliance of the acquired company post-deal?

Kattan: Buyers should ensure that they conduct due diligence on a target’s antitrust compliance. If issues are identified during due diligence, there are a number of steps a buyer can take to mitigate its risk. For example, the buyer can negotiate certain contractual protections, such as seeking a representation or warranty that there are no pending or threatened antitrust investigations or claims against the target, or requiring the seller to indemnify the buyer for any civil antitrust liability. Assuming the buyer has a robust antitrust compliance programme, then at closing, the target company and its employees should become subject to that policy and receive training on their obligations. To the extent there is any ongoing conduct that violates the antitrust laws, the conduct must be stopped immediately, and antitrust counsel should be consulted.

Cardwell: To the extent that a potential antitrust infringement or liability is identified during the buyer’s due diligence efforts, the buyer will want to gather as much information about the specific issue before making a determination as to how it handles any potential liability. The rules and case law concerning parental liability for antitrust infringements in the European Union (EU) and elsewhere are complex and while some liability may be borne by the seller regardless of whether a transaction has closed, the buyer must ensure that any potential exposure is mitigated, including in the potential use of appropriate antitrust indemnities. Post-closing, the buyer should be very clear about adoption of antitrust compliance policies that it may have in place and should spend substantial time and effort not only in promoting its compliance policies, but in training employees, even reflecting key terms of the policy in employees’ contract terms. Ultimately, the buyer may also want to run an antitrust audit of the target’s affairs, carrying out a targeted review of documents and communications in order to flush out any potential antitrust issues that could not have been identified pre-closing, during the due diligence phase.

FW: To what extent do you expect to see rising demand for antitrust due diligence in the M&A space over the coming years? Is this an integral part of providing adequate protection for buyers and sellers?

Cardwell: What we have seen as a trend for many years now is increasing levels of attention paid by clients to the antitrust part of their due diligence efforts. Some of this is fed by major cases and developments in the antitrust space, with headline grabbing infringement decisions and penalties, all of which can focus minds on antitrust and the potential implications of missing something significant during due diligence. I expect that trend to continue as enforcers around the world continue to open major antitrust investigations and make a push on increased enforcement of the existing rules and being inventive in coming up with new rules, for example in the digital sector. I would hope that it goes without saying that conducting antitrust due diligence is essential for a prospective purchaser to make sure that it can take a well-informed decision not only on the warranties and conditions in its deal agreements, but actually as to whether it is actually comfortable proceeding with a deal in the first place.

Kattan: Today, many buyers do not incorporate antitrust into their due diligence investigations of targets beyond the standard litigation or investigation due diligence. In the present heightened enforcement climate, and with the FTC and DOJ implementing and announcing enforcement policy changes relatively frequently, we should expect to see more companies incorporate antitrust due diligence as a matter of routine into their M&A diligence. Conducting antitrust due diligence will help ensure that buyers can make informed decisions about whether to enter a given transaction and can take steps to mitigate the risk of entering into a transaction with a target that carries potential antitrust liability.

 

David Cardwell is a partner in the antitrust and competition practice of Baker Botts’ Brussels office. His practice focuses on UK and EU competition law, including a particular concentration on EU and international merger control laws, and UK competition law, both mergers and behavioural matters. Mr Cardwell is recognised for his expertise in handling complex, cross-border merger reviews and has represented clients in significant mergers across many industry areas, including the energy, technology, pharmaceutical, media, automotive and heavy industry sectors. He can be contacted on +32 (2) 891 7330 or by email: david.cardwell@bakerbotts.com.

As counsel on the antitrust, competition and economic regulation team at Hogan Lovells, Ilana Kattan advises companies on the antitrust risks of their transactions and shepherds them through complex and in-depth merger control processes in the US and abroad. She also represents companies before the antitrust enforcement agencies, including the US Department of Justice and the Federal Trade Commission, on conduct investigations, and advises companies on a range of antitrust issues, including licensing agreements, joint ventures and other collaborations, and behavioural issues. She can be contacted on +1 (202) 637 5626 or by email: ilana.kattan@hoganlovells.com.

© Financier Worldwide

THE PANELLISTS

 

David Cardwell

Baker Botts LLP

 

Ilana Kattan

Hogan Lovells LLP

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