Antitrust Considerations in M&A: How Documents Can Come Back to Haunt You

Earlier this week, the Federal Trade Commission (“FTC”) sued to block Staples’ acquisition of Office Depot, the same day that General Electric withdrew from its agreement to sell its appliance unit to Electrolux due to a challenge from the Antitrust Division of the Department of Justice (“DOJ”). While pens and cooktop ranges have little in common, both deals fell victim to aggressive antitrust enforcement predicated in large part on the parties’ own documents and characterizations about their competitors and relative market positioning.

The need to pre-screen and sanitize documents created during the deal formulation and negotiation processes has never been more critical. Virtually each one of the Hart-Scott-Rodino-related investigations Goodwin has defended before the FTC or DOJ this year was either launched or prolonged as a direct result of the agency’s review of harmful deal-related documents that were inadvisably created. These “bad” documents can cause months of delay and millions of dollars in additional attorney and economic consulting fees. Notably:

• In a recent consumer products transaction, the seller’s banker drafted a document highlighting that the transaction was beneficial because the combined entity would possess 80% or more of the relevant market post-merger. The banker later admitted that this statement was a total fabrication, but the document was required to be produced in attachments to the seller’s HSR notification, prompting a high-level and in-depth FTC investigation.
• European (non-English primary speaking) executives for a buyer drafted unclear and misleading documents in English suggesting that a pharmaceutical transaction would lessen price competition between the parties’ products. This was not what the executives intended to say but the document was required to be produced in the buyer’s HSR notification, precipitating an in-depth FTC investigation.
• In order to promote a private equity sale to specific desirable strategic buyers, a portfolio company narrowly limited the discussion of competitors in its information memorandum only to the salient strategic buyer, giving the false impression that the transaction was a 2-to-1 merger-to-monopoly combination in several markets. The FTC latched onto this misleading characterization and consequently initiated an extended investigation that only narrowly avoided a full-blown second request.
• A series of damning emails created by executives for a software company seller highlighting their belief that the combination would allow the combined entity to dominate the marketplace and disparaging the competitive significance of remaining domestic and foreign vendors in the market sparked a plenary second request investigation and ultimately doomed the transaction to failure.

The key takeaway from these experiences is that deal documents may be presumed by FTC and DOJ (and international antitrust authorities) to be accurate and complete and often can be dispositive in the HSR review process. As a result, it is excellent practice to have counsel take an active role in pre-screening and sanitizing deal-related materials.

To this end, when reviewing decks or other materials about a potential transaction, omit language such as:

• We are the market leader
• We are dominant
• We face few competitive threats
• We enjoy high barriers to entry
• Customers are captive to our products
• We could easily raise prices

On the other hand, look to include phrasing similar to:

• That the transaction will benefit customers and result in improved quality or choice, increased R&D, and innovative new features or products or services
• We are growing but we face competition and threats from many sources
• This is a vibrant market and our customers have choices
• We will fight tooth-and-nail to keep customers and be better than our competitors post-closing

Goodwin Procter M&A teams are integrated and benefit from sophisticated antitrust attorneys with extensive HSR experience. Always consider engaging counsel during the drafting of these documents as we can provide useful commentary and assistance. As recent experience makes clear, this added counsel can pay huge dividends for wishing to avoid unnecessary entanglements with antitrust enforcers.