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ARNOLD PORTER LLP
CLIENT ADVISORY
Antitrust Division Releases Guide to Merger DECEMBER 2004
Remedies
Washington, DC
202.942.5000
Negotiation of a merger settlement with U.S. antitrust authorities can be a
New York
burdensome, complicated, and vexing process. In an effort to provide both internal 212.715.1000
and external guidance when negotiating remedies for anticompetitive mergers, the
London
United States Department of Justice Antitrust Division recently released a Guide +44 (0)20 7786 6100
to Merger Remedies (“Division Guide” or “Guide”). The Guide is available on the
Brussels
Antitrust Division’s website at www.usdoj.gov/atr/public/guidelines/205108.htm.
+32 (0)2 517 6600
The Division Guide does not represent a significant departure from previous DOJ
Los Angeles
practice. The Guide does, however, reflect DOJ’s evolving enforcement strategies, 213.243.4000
and incorporates the Division’s recent emphasis on clearly articulated theories
Northern Virginia
of competitive harm (unilateral v. coordinated), intellectual property licensing, 703.720.7000
and efficiencies.
Denver
303.863.1000
The Division Guide follows the Federal Trade Commission’s April 2, 2003
release of its comparable Statement on Negotiating Merger Remedies (“FTC
Statement”). (The FTC Statement is available at www.ftc.gov/bc/bestpractices/
bestpractices030401.htm.) While the Division Guide and the FTC Statement are
largely consistent with each other, there are some important areas of difference,
including divergent approaches to up-front buyers and crown jewel provisions.
Chairman Majorus recently stated that the differences in approach by the agencies
are “largely overblown,” see Remarks by Deborah Platt Majoras before the
ABA Antitrust Section Fall Forum (November 18, 2004) (available at www.ftc.
gov/speeches/majoras/041118abafallforum.pdf). She is no doubt substantially
correct. But, in our experience, some real differences—with real consequences
for clients—do exist.
There are also some noticeable differences between the Division Guide This summary is intended to be a general
summary of various laws and regulations,
and the European Commission’s Notice on Remedies (“EU Notice”). (The
and does not constitute legal advice. You
EU Notice is available at europa.eu.int/eur-lex/pri/en/oj/dat/2001/c_068/c_ should consult with competent counsel to
06820010302en00030011.pdf.) determine applicable legal requirements
in a specific fact situation.
arnoldporter.com
ARNOLD PORTER LLP
SIGNIFICANT NEXUS Guide emphasizes that any remedy STRUCTURAL REMEDIES
BETWEEN COMPETITIVE must maintain or restore premerger PREFERRED
HARM AND REMEDY competition; focusing narrowly on The Division Guide affirms the DOJ’s
REQUIRED returning to pre-merger HHI levels preference for structural remedies—
The Division Guide reaffirms the is not sufficient. Rather, staff must for example, divestiture of a plant
DOJ’s position that there must be assess the competitive strength of the or a business unit—over conduct
a “significant nexus between the firm purchasing the divested assets, remedies, such as a commitment by
proposed transaction, the nature as well as the incentives that firm will the acquirer to offer equal prices to
of the competitive harm, and the have to compete vigorously in the
all purchasers. The Division Guide
proposed remedial provisions.” Guide relevant market.
expresses a strong preference for
§ I. In emphasizing this principle,
The Guide places new emphasis on structural remedies “because they
the Guide states that the Antitrust
ensuring that “the remedy fits the are relatively clean and certain, and
Division will not accept a remedy
violation and flows from the theory generally avoid costly government
unless there is a “sound basis for
of competitive harm,” whether it be post-acquisition entanglement in the
believing that a violation will occur.”
unilateral or coordinated effects. Guide market. A carefully crafted divestiture
Guide § II. Thus, even if a party
§ II. Unilateral effects occur when a decree is comparatively simple,
should offer a settlement early during
merged firm is able profitably to raise relatively easy to administer, and
an investigation, the Guide prohibits
prices without regard to the reaction sure to preserve competition.” Guide
Division staff from accepting the
of the rest of the market, usually § III.A. Although conduct remedies
settlement unless the evidence shows
because the merging parties were are disfavored by both agencies
that a violation will otherwise occur.
uniquely close competitors to each
This latter point is in contrast with (and indeed by the European
the EU process, where remedies in other. Coordinated effects occur when
Commission), they are sometimes
the earlier stages of the investigation a merger makes it more likely that
used. For example, the consent
(known as “Phase I”) are common and post-merger competitors will be able
decrees in Northrop Grumman-
indeed encouraged, even though the to coordinate pricing. This part of the
TRW and AOL-Time Warner both
staff has only reached a preliminary Guide reflects the Division’s recent
contain nondiscrimination provisions
conclusion that the transaction raises efforts to articulate more clearly which
to address concerns of possible
serious doubts and warrants a more of the two theories of harm underlies a
vertical foreclosure.
in-depth investigation. particular enforcement action. Whether
a challenge is based on unilateral Furthermore, the Division prefers that
Furthermore, the Guide makes clear
or coordinated effects may have any divestiture involve a pre-existing
that the purpose of a remedy is
consequences for the remedy. For business entity rather than a divestiture
to restore premerger competition,
example, if staff is concerned that the of assets “cobbled together” in an
not to enhance it. Guide § II. For
example, the Guide instructs staff merger will lead to coordinated effects effort to remedy competitive concerns.
to maintain neutrality in choosing among post-merger competitors, staff The Guide requires the divestiture of all
between two potential purchasers may insist that the divested assets go assets necessary for the purchaser to
of the divested assets where both to a firm that is outside of the market. be an effective long-term competitor.
would adequately restore pre-merger If the merger is challenged on a Guide § III.C.
competition even if one buyer is likely unilateral effects theory, the staff likely
to enhance competition more than will be open to a buyer who is already
the other. Id. On the other hand, the in the market.
Antitrust Division Releases 2
Guide to Merger Remedies
ARNOLD PORTER LLP
EFFICIENCIES in the decree the appropriate set CROWN JEWELS
Our recent experience is that DOJ of assets to be divested quickly Another difference between FTC and
is increasingly willing to factor rather than on the identification of an DOJ practice involves crown jewel
merger-specific efficiencies into its acceptable buyer (“up front buyer”) provisions. A “crown jewel” provision
competitive analysis, and the Guide before entering into a consent decree.” requires the merging parties to sell a
reflects this trend. The Guide calls Guide § IV.D n.42. In fact, in recent larger or more attractive set of assets
for fact intensive inquiry into whether years DOJ has not required up-front if they are unable to find a buyer for
remedies “preserve the efficiencies buyers. See William Baer, Deborah the original divestiture package within
created by a merger, to the extent Feinstein, and Randal Shaheen, a specified period of time. While crown
possible, without compromising the Taking Stock: Recent Trends in U.S. jewel provisions provide a powerful
benefits that result from maintaining Merger Enforcement, Antitrust 15 incentive for the merging parties to
competitive markets.” Guide § II. (Spring 2004). 1
find an acceptable buyer, they often
DIVESTITURE OF complicate settlement negotiations
This area marks a significant difference
INTANGIBLES in approach from FTC practice. and sometimes risk seriously diluting
The Division Guide emphasizes the The FTC Statement expresses a the value of the transaction. The FTC
importance of transferring intangible preference for up-front buyers in Statement allows for the use of crown
assets, such as intellectual property certain circumstances, including when jewel provisions; on the other hand,
rights, in order to ensure that the the “parties seek to divest a package the Division Guide strongly disfavors
purchaser of the divested assets of assets comprising less than an crown jewel provisions suggesting
effectively replaces competition lost autonomous, on-going business.” that they “represent acceptance of
as a result of the merger. At the Furthermore, our experience is that either less than effective relief at the
same time the Guide recognizes that for certain industries, including the outset or more than is necessary to
retention of non-exclusive rights to pharmaceutical and grocery industries, remedy the competitive problem”
intangibles may help the merging the FTC essentially requires up-front and that they allow for manipulation
firms recognize the pro-competitive buyer solutions. Although in recent by purchasers who “may intentionally
efficiencies resulting from the merger. years the FTC has required fewer delay negotiating for the agreed-upon
Guide § III.D. Although the Guide up-front buyer divestitures, see id., divestiture assets so that they may
recognizes, for example, the potential the up-front buyer requirement is still later purchase the crown jewels at
pro-competitive effects if the merged a vital part of FTC practice. an attractive price.” Guide § IV.H.
entity retains non-exclusive rights to Despite the apparent policy difference,
In our experience, the European
practice certain patents, it notes that however, in our experience the FTC
Commission uses up-front buyer
retention of a non-exclusive right to has used crown jewel provisions
requirements more sparingly than
“final product patents, copyrights, or infrequently in recent years. Similarly,
the FTC. The EU Notice, however,
trademarks” could prevent a purchaser the European Commission’s Notice
explicitly provides for the possibility,
from “distinguish[ing] its products from permits the use of crown jewel
where the viability of the divestiture
incumbent products.” Id. provisions, but they are rarely used.
package depends to a large extent on
UP-FRONT BUYERS the identity of the purchaser.
The Division Guide expresses a weak
1
acceptance of up-front buyers, stating The article is available online at www.
arnoldporter.com/pubs/files/Article-
that the “Division focuses on specifying Taking_Stock(4-04).pdf
Antitrust Division Releases 3
Guide to Merger Remedies
ARNOLD PORTER LLP
SPEEDY DIVESTITURE IS DIVISION IS TYPICALLY a consent decree. One possible
FAVORED UNCONCERNED IF ASSETS reason for DOJ’s greater willingness
In our recent experience, DOJ has ARE SOLD AT A FIRE SALE to accept fix-it-first remedies may
become increasingly stringent in setting PRICE be that DOJ must comply with more
timetables for divestiture. Once again, The Guide clearly articulates a long- elaborate procedures for consent
the Guide reflects this trend. Speedy held DOJ belief: the Division’s “interest decree approval, including Tunney
divestitures are preferred because they lies in preservation of competition, Act review.
mitigate the potential for dissipation not with whether the divesting firm
THE ROLE OF TRUSTEES IN
of the value of the divestiture assets, or the proposed purchaser is getting
DIVESTITURES
and restore pre-merger competition the better of the deal.” Guide § IV.E.
The Division may appoint trustees to
as soon as possible. The Guide states Accordingly, Division staff will typically
divest assets should the parties fail to
that, depending on the complexity of ignore complaints that the parties
do so (divestiture trustee), to oversee
the divestiture, the merging parties will will be forced to divest assets at “fire
the operation of the business to be
normally be given between 60 to 90 sale” prices. The Guide does state an
divested (operating trustee), or to
days to locate a purchaser before the important caveat: if the purchase price
monitor compliance with the consent
assets are handed over to a trustee for is “too low,” this may evidence intent
decree (monitor trustee). While it is
sale. Guide § IV.C. In Europe, parties by the buyer to liquidate the divested
standard practice for DOJ to include a
tend to be given slightly longer (up to six assets rather than compete with them
divestiture trustee provision in consent
months) before the trustee takes over. in the market. “Too low” is defined
decrees, operating and monitor trustee
as a price below liquidation value of
Timing of divestitures c an be provisions are less common. Guide
the assets, where such value can be
complicated when a merger is subject § IV. The FTC, on the other hand,
reasonably ascertained. Id.
to enforcement in multiple jurisdictions. strongly favors the appointment of a
For example, in a recent medical FIX-IT-FIRST REMEDIES CAN monitor trustee to ensure compliance
equipment merger, DOJ and the EU AVOID A CONSENT DECREE with the decree and seamless (to the
both required divestiture of the same The Division Guide expressly says extent possible) transition of divested
assets, but set two different divestiture that “fix-it-first” remedies (i.e. when assets from the parties to the buyer.
deadlines. Failure of enforcement the divested assets are sold without Recent experience has shown that the
agencies to coordinate divestiture entry of a consent decree) are not FTC favors appointment of trustees
timelines at the onset can lead to disfavored. Guide § IV. Similarly, in especially in complex industries, such
complications later, as one agency a number of the EU cases that we as the pharmaceutical industry.
may be forced to alter their timeline have been involved in, the European
EU undertakings as a matter of course
in order to prevent the merging Commission has been prepared
require the appointment of both a
parties from running afoul of another to remove one or more remedies
divestiture trustee and an operating/
jurisdiction’s timeline. from its draft undertaking once an
monitor trustee (referred to as the
agreement had been concluded
“hold-separate” trustee) to oversee
with a buyer (e.g. following an up-
compliance with the Undertaking and
front buyer arrangement in the US
divest the assets if the parties fail to
involving the same assets). The FTC
do so within the time allowed.
disfavors fix-it-first remedies and is
less likely to accept them without
Antitrust Division Releases 4
Guide to Merger Remedies
ARNOLD PORTER LLP
THE ANTITRUST DIVISION We hope that you find this brief summary
WILL MONITOR AND helpful. More than 60 lawyers practice
ENFORCE CONSENT in Arnold & Porter’s top-ranked antitrust
DECREES groups in the US and Europe. If you would
The Division Guide affirms that like more information, please feel free to
the DOJ will vigorously monitor contact your Arnold & Porter attorney or:
compliance with consent decrees, William Baer
202.942.5936
and where necessary, seek civil and William_Baer@aporter.com
criminal penalties for violation of a
Deborah Feinstein
decree. Guide § V. 202.942.5015
Deborah_Feinstein@aporter.com
CONCLUSION
While the Division Guide does not Marleen Van Kerckhove
32 2(0) 517 6317
represent a significant shift in Division Marleen_VanKerckhove@aporter.com
practice regarding the fashioning of
merger remedies, the Guide does Ian Plant
202.942.5490
represent an important effort to Ian_Plant@aporter.com
provide greater predictability and
transparency into the process.
Antitrust Division Releases 4
Guide to Merger Remedies
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