Goodwin Insights January 07, 2019

Be Diligent During Diligence and Expect the Unexpected

Recent antitrust enforcer activity should remind us all that parties to transactions must be aware of the risks associated with the sharing of competitively sensitive information at the deal formation stage, as well as what happens when a merger review opens the door to learning about a party’s broad-based business practices.

Earlier this year, the FTC provided guidance for companies considering acquisitions, mergers, or joint ventures that engage in pre-merger negotiations and due diligence. While the antitrust enforcement agencies recognize that parties to transactions have legitimate needs to access detailed information about the other party’s business in order to negotiate the transaction and implement the merger, sharing some competitively sensitive information (e.g., current and future price information, strategic plans, and costs) may raise antitrust concerns, especially if the two parties are competitors.

The antitrust agencies have taken action against unreasonable information sharing during the merger process. For example, in 2013, the FTC charged a company with violating the FTC Act after the FTC discovered, during its review of the proposed merger, that the firms’ “CEOs repeatedly exchanged company-specific [competitively sensitive] information about future product offerings, price floors, discounting practices, expansion plans, and operations and performance.” The recent guidance should put parties to transactions on notice that the antitrust agencies remain vigilant and will pursue actions against parties that unlawfully exchange competitively sensitive information during deal due diligence.

Perhaps more concerning, parties should be prepared for the antitrust agencies to take actions against anticompetitive conduct discovered incidentally during the merger review process. A recent example involved a price fixing conspiracy in the canned tuna fish industry that was uncovered during the DOJ’s review of a merger between two companies. What began as an ordinary merger investigation evolved into a criminal price fixing investigation and ultimately led to guilty pleas by company executives and millions of dollars in levied fines and restitution obligations, not to mention the potential treble damages resulting from the attendant private class actions.

More recently, the DOJ brought and settled charges against multiple television broadcast stations for unlawfully exchanging competitively sensitive information. The DOJ alleged that the broadcasters exchanged revenue pacing information, which is used to inform advertising pricing. Presumably, evidence of the exchange was discovered by the DOJ during the DOJ’s and FCC’s review of the Sinclair-Tribune merger, as the DOJ’s action came on the heels of the parties abandoning the deal after they were unable to reach a settlement with regulators to cure potential competitive concerns.

These examples underscore the need for comprehensive antitrust compliance programs and document creation policies, especially by entities planning strategic transactions.