Information exchanges and integration planning are a vital component of the due diligence process when companies are considering acquisitions, mergers, joint ventures, or any other business decision involving another party. However, when a prospective opportunity involves companies who compete with one another or may become competitors in the near future, additional care must be taken to minimize the antitrust risks during each phase of the pre-close process including diligence and integration planning.
While the antitrust agencies understand the legitimate need to access detailed information about the other company’s business in order to negotiate the deal and effectuate the transaction, if the exchange of information serves no legitimate business purpose the antitrust agencies may find the antitrust laws have been violated and subject the parties to an investigation and, ultimately, enforcement actions. By following the guidance listed below, parties can reduce the risk of running afoul of antitrust laws while conduct due diligence and integration planning.
Take Precautions When Sharing Competitively Sensitive Information
The antitrust laws strictly regulate the exchange of competitively sensitive information (CSI) between competitors. CSI is any nonpublic information that, if shared among competitors, could affect their competitive decision-making. For example, sharing future pricing information with a competitor could result in a competitor offering less competitive pricing and therefore higher prices for customers. Determining whether information is CSI depends on the facts and can vary by industry. However, caselaw and guidance from the antitrust agencies indicate that the following are often characteristics of CSI:
- Sensitivity: The information pertains to a parameter of competition, such as customers, price, cost, margins, output, or future competitive plans.
- Timeliness: The information is recent or forward looking.
- Detail: The information includes details on specific facilities, suppliers, or customers, or is otherwise not aggregated or anonymized.
- Asymmetry: The information is not publicly available, and/or is not made available to others in the industry.
The table below provides examples of the type of information that has a high risk versus a low risk of being considered competitively sensitive:
While sharing CSI as part of due diligence is often unavoidable, there are certain best practices that parties can utilize to mitigate antitrust risk. Common mitigation tactics include:
- Limit Dissemination of CSI to a Clean Team.
- A clean team is a group of individuals permitted access to CSI who are not involved in competitively sensitive activities. For example, in a potential transaction between two companies engaged in sales for competing products, permitted clean team members would be individuals who are not involved in the sales activities of the potential acquirer for the competitive product. The clean team, in short, is comprised of individuals that lack decision making authority with respect to competitive areas. Clean teams are often comprised of deal team members and third-party consultants, such as bankers or lawyers. In many cases, clean team agreements allow for clean team members to provide reports of clean team information that do not disclose any specifics of the source materials.
- Rely on Outside Counsel and Third-Party Firms to Sanitize Information.
- Alternatively, CSI may be shared exclusively with third parties such as bankers and consulting firms who will evaluate the CSI and prepare high-level assessments of the information without disclosing any specifics of the underlying materials. In this scenario, no one at the company would directly receive CSI.
Avoid Gun-Jumping
Even after a deal is signed, antitrust concerns do not evaporate. Prior to close, merging parties must continue to operate as separate, independent entities. This means that, if the parties are competitors, they must continue to compete fiercely. More importantly, until close, the acquirer may not begin to direct the operations of the target—for example, by requiring that the target seek approval for ordinary course business operations such as customer discounts or proposals.
If the transaction is subject to the reporting requirements of the HSR Act, the parties must also be careful not to “jump the gun” and begin acting as a combined entity until antitrust regulators have approved the deal or the statutory waiting period has expired. Acting as if the deal closed before the HSR waiting period has expired can result in delays to receiving regulatory clearance for the proposed transaction or significant civil penalties. For example, the U.S. Department of Justice (DOJ) recently imposed a $3.5 million civil penalty against Legends Hospitality Parent Holdings, LLC for violating the HSR Act by coordinating bidding activities with a company it proposed to acquire prior to the expiration of the HSR waiting period. According to the DOJ’s complaint, the two companies engaged in unlawful gun-jumping by jointly deciding which bids each would pursue and having one company take over operational activities for a contract that the other company previously won.
In order to avoid accusations of gun-jumping during transition planning, each company should avoid the following behaviors, which could raise antitrust scrutiny:
- Influencing Business Decisions.
- Neither party may exercise control over the other’s business, such as influencing which contracts to bid for or whether to bid.
- Agreeing on Pricing, Discount, Customer Strategies and Other Competitive Activities.
- Parties would not enter into these kinds of agreements with a competitor in the ordinary course and should not do so in the post-signing context either.
- Conducting Joint Customer Calls That Suggest the Parties Are One Company Prior to Close.
- Neither customers, suppliers, nor employees should be given the impression that the two companies are one and public-facing materials should make clear that, until the transaction closes, the companies will remain independent.
Tips for Successful Integration Planning
While parties must be careful to avoid gun-jumping, antitrust regulators have long appreciated the need for parties to begin integration planning to ensure a successful post-close period. Throughout the integration planning process, the parties should continue to exchange CSI through a clean team or a transition planning team whose members are not involved in competitive decision-making to ensure CSI remains protected. It is important to note that where the parties’ operations do not overlap, there is more flexibility to conduct broader information exchanges outside of the limited clean team or transition team members.
When considering integration planning, the general rule is that parties can conduct integration planning but should not implement plans for the combined entity until after closing. A desire for cost efficiencies is not a justification to engage in premature integration. As noted previously, it is important that the parties continue to operate as separate entities. However, certain actions may be taken without antitrust risk, such as:
- Prohibiting the Target from Taking Actions Outside the Ordinary Course of Its Business Operations Prior to Closing.
- For example, it may be permissible for the acquirer to approve or deny certain expenditures that are significantly above what the company would spend in the ordinary course in order to preserve the acquirer’s bargain.
- Discussing Organizational and Operational Changes Post-Close.
- General operational and organizational details are fine to share such as information related to IT system or employee headcount for departments.
- Conducting Meetings Between Business Principles About Post-Close Efficiencies.
- Integration planning meetings that help align operations, systems, and cultures should remain high-level to avoid sharing information that is too granular to share with a competitor, except for conversations between clean team personnel that can be more granular.
Key Takeaways
Merging parties may share competitively sensitive information, so long as the parties have a legitimate business purpose for doing so (e.g., integration planning or due diligence), and take precautions to limit the dissemination of the sensitive information in a manner that could lead to anticompetitive conduct. Parties also have wide latitude to engage in integration planning but must continue to compete independently and not transfer operational control until after the transaction has closed.
Limiting the potential for anticompetitive conduct mitigates the risk of any antitrust scrutiny by regulators and helps protect deal timing.
