Alert January 08, 2018

When Closing is Just the Beginning: Antitrust Authorities Unwinding Closed Transactions

Summary

In the last several months the United States’ federal antitrust enforcement authorities, the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice (DOJ), have challenged and sought to unwind three consummated mergers in whole or in part. These challenges serve as a stark reminder that the antitrust authorities will seek to unwind consummated mergers that, in their view, have reduced competition or have created a monopoly. In fact, many are unaware that antitrust authorities may challenge closed transactions even if the transactions were not required to be reported first under the Hart-Scott-Rodino Act pre-merger notification regime.[1] Thus, even when a proposed transaction does not meet the filing requirements, parties to a transaction should nevertheless seek experienced antitrust counsel that can assess the potential for substantive antitrust risk.[2] Failing to do so can result in inadvertent entanglement with lengthy investigations and, indeed, even litigation. In most instances, buyers will assume full responsibility to defend the investigations and/or litigation. In the event the parties are required to unwind part or the whole transaction, the additional burdens are heavy.

Three Recent Challenges to Consummated Transactions

  • In December 2017, the FTC filed an administrative complaint seeking to unwind the merger between two manufacturers and suppliers of microprocessor prosthetic knees, Otto Bock HealthCare North America, Inc., (“Otto Bock”) and FIH Group Holdings, LLC (“FIH”). In September 2017, the parties simultaneously signed a merger agreement and consummated the merger. According to the FTC complaint, the merger eliminated direct and substantial competition between Otto Bock and its most significant and disruptive competitor, FIH. Specifically, the FTC alleged that the intense competition between Otto Bock and FIH resulted in substantially lower prices and improved features and functions, all to the benefit of consumers. Thus, this transaction acted to entrench further Otto Bock’s position as the dominant supplier of microprocessor prosthetic knees.  In light of the FTC action, the parties have agreed to cease the integration of the two businesses as the case awaits trial before an FTC administrative law judge.

  • Also in December 2017, the DOJ announced a settlement with TransDigm Group Inc. (“TransDigm”) that required it to divest certain airline passenger restraint businesses that it had acquired from Takata Corp. earlier in the year for $90 million. Despite being over the current $80.8m Hart-Scott-Rodino Act transaction value reporting threshold, due to the transaction’s structure, it was not required to be reported. Nevertheless, the DOJ investigated the transaction and found that it had eliminated the only competitor to TransDigm in the market for commercial airplane restraint systems, including traditional two-point lap belts, three-point shoulder belts, technical restraints, and more advanced inflatable restraint systems such as airbags. According to the DOJ, competition between the two companies had led to lower prices and more innovation in the industry. As such, the DOJ required the divestiture of the commercial airline restraint assets to an already approved consortium, or an alternate acquirer to be approved by the United States.

  • In September 2017, the DOJ challenged Parker-Hannifin’s consummated acquisition of CLARCOR Inc. alleging that it had eliminated head-to-head competition between the only two domestic manufacturers of fuel filtration systems and filter elements. These products are important because they remove particulate contaminants and water droplets before such fuel is delivered into commercial or military aircrafts. In an unusual twist, the DOJ challenged this transaction after it had allowed the initial waiting period under the Hart-Scott-Rodino Act to expire in mid-January 2017. Reports suggest that the DOJ was not aware of certain key evidence that would have affected its initial decision to clear the transaction to proceed. In December 2017, the DOJ announced a settlement with Parker-Hannafin that required the divestiture of the fuel filtration assets to a to-be-determined acquirer acceptable to the DOJ, in its sole discretion.  

Conclusion:  These examples provide a reminder that parties to proposed transactions should seek the advice of experienced antitrust counsel at the deal formation stage to assess and address potential antitrust risk, even when the transaction is not reportable under the Hart-Scott-Rodino Act. In the event there is any substantive antitrust exposure and the attendant potential for a post-closing investigation by the antitrust authorities, understanding the scope of the risk before proceeding with consummation of the transaction is essential. Without such an appreciation, parties may be confronted with unanticipated, lengthy and costly investigations and litigation, and ultimately may even be required to unwind a transaction.

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[1] Generally, transactions valued above $80.8 million must be reported to the federal antitrust authorities and the parties must observe a mandatory waiting period of 30 days before closing. The transaction value is adjusted annually and the waiting period may ultimately be fewer than 30 days if the federal antitrust authorities grant early termination. The waiting period for a cash tender offer is 15 days.

[2] The antitrust authorities’ recent challenges are reminiscent of the DOJ’s 2014 lawsuit against Bazaarvoice’s acquisition of PowerReviews, which it had acquired in 2012. Although the transaction was not reportable under the Hart-Scott-Rodino Act, the DOJ launched an investigation soon after the parties consummated the deal. After a lengthy investigation, the DOJ filed suit to unwind the transaction and it prevailed after a three week trial. The court required Bazaarvoice to unwind the transaction and sell the previously acquired PowerReviews assets.