Avoiding the issue

Antitrust enforcement of merger and acquisition (M&A) activity has been occurring at a frantic pace in recent years. The two federal U.S. antitrust agencies, the Federal Trade Commission (FTC) and the Department of Justice (DOJ) Antitrust Division, have been extremely aggressive in investigating and challenging transactions that may be harmful to competition and recently have brought a string of lawsuits opposing M&A deals, large and small, in a variety of industries. Several of these challenges were resolved through settlements, some are pending and other transactions were blocked or abandoned. Even for transactions that are reviewed and ultimately cleared, merger investigations are taking longer to complete.

What do these cases mean for companies and deal-makers? These recent challenges demonstrate the willingness of the antitrust agencies to litigate and their ability to win. These cases also reaffirm that deals of any size and scope, in any industry, are potentially open to lengthy and costly antitrust scrutiny. The solid waste and recycling industry, with its long history of antitrust enforcement of M&A transactions and other conduct, is not immune. This trend highlights why it is critical for buyers and sellers to consider carefully, and as early as possible, the antitrust risks when contemplating transactions and take appropriate steps to mitigate those risks.

LEGAL FRAMEWORK

The concern with mergers and acquisitions under antitrust laws is the creation or enhancement of market power. A merger enhances market power if it is likely to encourage firms to raise their price, reduce output, diminish innovation or otherwise harm customers as a result of weakened competitive constraints or incentives. Antitrust concerns are most common in mergers of close competitors in concentrated markets, though other types of transactions, such as acquisitions of key suppliers or customers, also can pose an issue.

The key law in this area is Section 7 of the Clayton Act, which prohibits mergers and acquisitions that may substantially lessen competition in a relevant market. The Clayton Act was amended by the Hart-Scott-Rodino Antitrust Improvements Act (“HSR Act”) to require companies planning large transactions to notify the government of their plans in advance. These laws afford the federal government an opportunity to review and, if appropriate, seek to stop potentially anti-competitive incipient transactions. State attorneys general and private parties also can challenge M&A deals for violating Section 7 of the Clayton Act.

Under the HSR Act, many mergers and acquisitions valued above $78.2 million, adjusted annually, must be reported to the FTC and DOJ. In HSR-reportable transactions, the parties must observe a waiting period (usually 30 calendar days) prior to closing to give the agencies time to review the transaction for competitive concerns. Failure to comply with the HSR Act can carry a penalty of up to $16,000 per day.

A common misconception is that if an HSR filing is not required, either because a deal falls below the dollar threshold or one of the limited exemptions from HSR applies, the transaction is safe from antitrust scrutiny. This is wrong. The antitrust agencies have legal jurisdiction over all M&A transactions that affect U.S. commerce, irrespective of the size of the parties, the transaction or the markets involved. Moreover, deals can be challenged anytime, even years after closing. The FTC and DOJ actively have pursued nonreportable transactions in recent years.

RECENT TRENDS

The antitrust agencies have been on a roll in blocking mergers and acquisitions they have determined to be bad for competition. A sampling of recent cases shows they run the full gamut in terms of size, geographic scope and industry. Some of these have been reported widely in the press, such as the FTC’s successful bid to block Sysco Corp.’s proposed $3.5 billion acquisition of competing broadline food distributor US Foods in June 2015.

Other successful challenges have involved smaller transactions and received less widespread attention, yet the consequences for the transacting parties have been just as severe. In 2014, the FTC and the Idaho Attorney General obtained a court ruling that the previously consummated $28 million acquisition by St. Luke’s Health System of Idaho’s largest independent, multispecialty physician practice group, Saltzer Medical Group, violated the antitrust laws. The court agreed with the government that the acquisition gave the combined entity a dominant market position for primary health care services in Nampa, Idaho, and likely would lead to anticompetitive price increases. St. Luke’s was ordered to fully divest itself of Saltzer’s physicians and assets, and in 2015 that decision was affirmed on appeal.

The St. Luke’s/Saltzer case is one example in an ever-growing list of non-HSR-reportable transactions that have been challenged by the antitrust agencies and have resulted in asset divestitures or other remedies. In the four-year period from 2009 to 2013 (the most recent period for which data is available), almost 20 percent of DOJ merger investigations involved nonreportable deals, and more than 1 in 4 of those investigations resulted in a challenge.

The St. Luke’s/Saltzer case also shows that the agencies are willing to scrutinize deals even where the geographic impact is limited to a single local area. This is especially relevant in the solid waste and recycling industry, in which many companies serve customers within a small geographic radius, such as a metropolitan area or county. In March 2015, for example, the DOJ required Waste Management Inc. to divest commercial waste collection routes in three areas in Kansas and Arkansas as a condition to its $405 million acquisition of Deffenbaugh Disposal Inc.

Of course, only a small percentage of all transactions are actually challenged on antitrust grounds. Every year, hundreds of deals are reported to the FTC and DOJ under the HSR Act and are cleared, in many cases quickly. However, another subset of transactions do pass antitrust muster but only after a lengthy, burdensome and expensive review process. That review is taking longer on average, with the agencies sometimes demanding massive volumes of documents and extensive data from the transacting parties. Companies in many recently completed mergers had to wait more than a year for a final decision. These lengthy investigations create uncertainty for employees, customers and investors. While the HSR Act does afford merging parties certain timing protections, as a practical matter companies usually agree to give the government additional time if they believe that could help to avoid a lawsuit challenging the deal.

REDUCING RISK

Despite the current aggressive antitrust enforcement climate, companies can take steps to reduce the risk of an investigation or challenge and avoid unnecessary delays:

1. Be prepared. Transacting parties should perform antitrust due diligence early and irrespective of deal size, especially in a strategic combination of competitors. An upfront antitrust assessment can ensure that companies go into a deal with their eyes wide open and can help avoid unpleasant surprises down the road.
2. Set realistic timelines. Another benefit of doing an antitrust analysis early is that this can inform the business team in developing a realistic closing timeline. If the deal is HSR-reportable, the parties will need to factor in the HSR waiting period and the likelihood of an in-depth review.
3. Pay attention to antitrust language in the contract. Many M&A agreements contain antitrust-related provisions, such as antitrust-specific representations and warranties, conduct of business covenants, cooperation provisions, risk-shifting covenants, conditions precedent to closing and antitrust breakup fees. These provisions can be critical in allocating antitrust risk between buyer and seller and in defining each party’s role in the antitrust process.
4. Be careful when creating documents. Internal business documents, including emails, of transacting parties can carry substantial weight in an antitrust analysis. Government agencies and courts believe the best predictors of a merger’s likely impact on competition are the views of the merging parties as expressed in their own documents. Companies, therefore, should be sensitive to the implications that the content and phrasing of business documents may have for current and future transactions. Personnel should take basic precautions to avoid creating documents that convey misleading and inaccurate impressions or that suggest an anticompetitive motive for or impact from a proposed transaction.
5. Don’t forget your customers. Customer complaints are a common means by which antitrust agencies learn of nonreportable acquisitions and often carry significant weight.
6. Don’t ignore non-HSR-reportable transactions. Companies that assume a small deal is safe from antitrust examination may do so at their peril, especially if the merging businesses are close competitors in a market with few players. The optimal strategy for a specific transaction depends on many factors, including the substantive antitrust risk, the probability of government detection and the parties’ desire for preclosing certainty.

Many of these preventive measures require involving specialist antitrust counsel familiar with the nuances of antitrust M&A review.

Daniel Hemli is a partner, Jacqueline Java is counsel and Rebekah Scherr is an associate at Bracewell LLP, which represented Southern Waste Systems/Sun Recycling on the antitrust aspects of the sale of certain of its business assets to Waste Management Inc. of Florida.