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By: Michael B. Bernstein, Matthew A. Tabas, and Matthew H. Fine, Arnold & Porter
Even in the very earliest stages of planning a merger or an acquisition, it is never too soon to begin considering the antitrust issues. In fact, it is critical to provide parties with guidance about ensuring compliance with the antitrust laws during due diligence, including guidance on avoiding inappropriate information sharing (i.e., complying with Section 1 of the Sherman Act), creating documents related to the transaction and the potential impact of those documents in a government investigation, and joint defense/common interest privilege arrangements. This article addresses these issues.
Section 1 of the Sherman Act and Information Sharing
Transactions among competitors–or potential competitors–raise antitrust concerns regarding the type of information that can and should be shared to evaluate the transaction. To properly evaluate a transaction, the parties to the transaction typically need to share sensitive information–potentially nonpublic and competitively sensitive information. When sharing such information, the parties need to be careful not to violate the antitrust laws, as discussed below
Sherman Act Elements
It is critical to ensure that competitively sensitive information is not improperly shared during due diligence. Section 1 of the Sherman Act, 15 U.S.C. § 1 et seq., prohibits “[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce.” The basic elements of a Section 1 violation are:
If an improper information exchange is discovered during a government antitrust review of a proposed transaction, the government may challenge the conduct. Moreover, a private plaintiff may also attempt to use such improper information sharing as evidence in alleging a conspiracy.
Information Exchange under the Rule of Reason
Because there is some other legitimate business purpose for the conduct–negotiating the transaction–improper information exchange typically is evaluated under the rule of reason. That is, the government must show that the improper information exchange harmed competition.
Because the rule of reason is a balancing test, not every exchange of sensitive information is inherently unlawful. However, certain types of information are more likely to have such an impact and may be found to constitute a violation of Section 1 of the Sherman Act. Also, the ability to establish a harm to competition can be easier in more highly concentrated industries involving fewer competitors, as price changes by any one competitor can have a greater impact on the overall market.
Since a violation of Section 1 of the Sherman Act is subject to treble damages, your client should take special care to avoid sharing such sensitive information with a competitor in the context of a transaction. Moreover, if the antitrust authority reviews documents during its investigation and has concerns that improper information sharing has occurred, the reviewing authority may become distracted from the transaction’s substance and ultimately delay clearance of the transaction.
Caution: There does not need to be a prolonged or systematic exchange for potential liability to attach. Rather, a single improper exchange of information could potentially result in a violation.
Limitations on Sharing Competitively Sensitive Information (CSI)
Individuals involved in the due diligence process need to understand that shared information must be limited to information that is required to evaluate the transaction and that they must take care when sharing what is commonly referred to as competitively sensitive information (CSI).
What Is Considered CSI?
You will need to consider what is considered CSI in your client’s particular situation, as CSI can take many forms depending on the nature of the parties to the transaction, the industry, and nature of competition between the parties, if any. The types of information often considered CSI include:
Mitigating Antitrust Risk of Sharing CSI
When it is necessary to share CSI, your client should consider ways to mitigate the associated antitrust risk.
Exchange Historical Rather Than Current Data
Generally, parties should avoid exchanging information that would help competitors coordinate current and future pricing, output, and business operations. One way to prevent this is to exchange only historical data, rather than current, specific data. Exchanging historical data that is at least a few months old helps to decrease the likelihood that such an exchange will be seen as a means to anticompetitive collusion, particularly if the CSI is the type of information that frequently fluctuates. Historical information that is less meaningful in the current marketplace is less likely to be viewed as helpful to a competitor than current or future information, potentially reducing the risk. There is no set time period for when information becomes dated. Parties will need to evaluate that for themselves, based on the competitive dynamics of the relevant industries and the potential that information might be competitively sensitive, including when information becomes sufficiently stale. As one example, the antitrust agencies have issued a formal enforcement policy for health care in which they deemed exchanges of information in third-party surveys sufficiently stale when the surveys are based on data that is over three months old. These guidelines also require information to be anonymized; however, this does not ordinarily occur in a due diligence setting.
Use Aggregated Data Rather Than Specific Data
Similarly, using aggregated data (such as total sales or purchases or combined figures across products or businesses, rather than sales to individual customers or purchases from individual suppliers) enables a party to provide information relevant to due diligence while masking specifics that could be utilized for unlawful coordination. For instance, if your client has different prices or contract terms or arrangements with various customers or suppliers, cost and pricing information can be aggregated to obscure the details of the individual arrangements.
Assemble a Clean Team to Handle CSI
Another method to reduce antitrust risk during the due diligence process is to utilize what is commonly referred to as a clean team, consisting of individuals whose normal job functions do not include responsibilities relating to competitive decision-making for a competing business. Limiting CSI to a clean team helps ensure that the individuals privy to the CSI will not be in a position to utilize or take advantage of it. An agreement to utilize a clean team should set out the contours of clean team composition and procedure and be signed by both parties. When drafting a clean team agreement, some items parties should consider are:
While clean teams can assist in ensuring compliance with the antitrust laws, successful implementation depends on proper training and safeguards. Clean team members should receive training regarding the clean team restrictions and their individual compliance obligations.
As part of a clean team process, it can be useful to take additional steps to prevent the inadvertent disclosure of CSI during the due diligence process. The additional preventive steps include enlisting antitrust counsel review of any information in advance of it being shared, creating a segregated portion of an online data room limited to the access to exchanged CSI (or otherwise identifying, separating, and labeling sensitive materials), and establishing a process to carefully vet additional members of the clean team that may be proposed after a team is initially established. To the extent that there are ever questions regarding whether improper information was exchanged during due diligence, having a clearly documented process may help to assuage any concerns.
Parties to a potential transaction should be aware at the outset of the substantive antitrust considerations when creating documents. The antitrust authorities typically receive certain documents and/or request all contemporaneous business documents related to even the earlier stages of a transaction. The government can request these documents either formally pursuant to the Hart-Scott-Rodino Antitrust Improvements (HSR) Act, 15 U.S.C. § 1311, or through an informal voluntary document request. The government will be interested in internal contemporaneous documents analyzing the potential transaction, as well as those that speak to competitive dynamics within a relevant market–and how the transaction may impact those competitive dynamics–which may be pivotal to a government investigation or challenge. These document creation considerations start at the early stages of transaction evaluation and become even more critical as a potential transaction moves forward.
Businesses today create a multitude of documents and other written information discussing and analyzing any potential transaction–often before one side even approaches the other, including:
While many of these documents are intended to be confidential or contain preliminary thoughts, it is important to remember that the antitrust authorities will not necessarily know the context in which the documents were created and may require the parties to provide explanations about the documents. The government typically defines documents broadly and requires the production of formal written documents, as well as emails, messaging chats, handwritten notes, and informal written documents.
To further shape its understanding, the reviewing authority may rely on documents created in the ordinary course of business as another source of information regarding existing levels of competition, identities of competitors, and the transaction’s impact on that competition and the competitive landscape. To the extent the Department of Justice (DOJ) and/ or Federal Trade Commission (FTC) decide to challenge a transaction in court as a violation of Section 7 of the Clayton Act, 15 U.S.C. § 12, which prohibits combinations whose effect may be to substantially “lessen competition, or to tend to create a monopoly,” the DOJ and FTC will likely rely on ordinary course documents in building their case.
Government Requests for Documents
There are several opportunities during a potential transaction for the competition authorities to receive documents from the parties. For instance, if the transaction is reportable under the HSR Act, the parties will be required to produce certain materials pursuant to Items 4(c) and (d) of the premerger notification form. Item 4 documents are certain documents provided to officers or directors evaluating the transaction with respect to competition and synergies. Specifically, Item 4(c) of the form requests all studies, surveys, analyses, and reports which were prepared by or for any officer or director of the company or any entity controlled by the company involved in the transaction, if those documents analyze or evaluate the transaction with respect to market shares, competition, competitors, markets, potential for sales growth, or expansion into product or geographic markets. Item 4(d) of the form requests such documents as confidential information memoranda, certain documents prepared by outside advisers, and transaction synergies analyses. It is important to remember that the government’s definition of documents for the purposes of Items 4(c) and (d) is broad, including everything from handwritten notes to formal presentations and board minutes.
Even if the transaction is not reportable under the HSR Act, the DOJ, FTC, or a state attorney general may investigate a proposed transaction’s impact on competition. If the proposed transaction is reviewed, it is almost certain that some documents will be requested by the reviewing authority. In cases where the request is voluntary, it is typically advisable for your client to comply with the request to the extent possible, in hopes of resolving any concerns quickly.
The scope of this voluntary request typically is focused on developing a better understanding of the impact of the transaction on competition. Therefore, these voluntary requests include requests for business and strategic planning materials, marketing materials, and other documents that analyze competition in the ordinary course of the parties’ business.
In the event the government has concerns that it cannot resolve during its preliminary investigation, it will issue a “Request for Additional Information & Documentary Material” (known as a Second Request). The Second Request is typically a significant request for data, documents, and narrative responses. To substantially comply with a Second Request, a party often must produce documents going back several years on a wide variety of subjects related to the acquisition, competition, its business and strategic planning, the products where the parties compete, and its dealings with customers, suppliers, and competitors.
Mitigating the Antitrust Risks of Document Creation
Given the likelihood that the parties will produce a significant number of written materials relating to the transaction to the reviewing authority, parties should consider the steps they can take to protect any particularly sensitive materials from disclosure and, at the same time, limit the creation of written materials that may be harmful to their strategy. It is important that the documents created in the ordinary course of business are consistent with the parties’ strategy for explaining to the antitrust authorities why the deal does not create competitive concerns. In particular, it is common for certain selling documents, such as a confidential information memorandum, to include language minimizing competitive threats to the target. Investment bankers, consultants, and the business should work with counsel to ensure that these documents do not create antitrust issues. To do so, it is often useful to involve antitrust counsel in the drafting of the most sensitive materials. For example, the flow chart below describes a common process for preparing potentially sensitive documents.
There are several common types of language that may be more likely to attract the government’s attention. You and your client should consider the following practical steps to mitigate risk and how to communicate this to your employees:
Once the parties begin transaction negotiations, it sometimes is helpful to begin discussions regarding potential legal strategies to achieve antitrust clearance. For a transaction that raises substantive antitrust concerns, parties typically face strategic and legal challenges, from the evaluation of a potential transaction to the review of that transaction by the government and, potentially, a court. These communications commonly include decisions about strategy with respect to engaging with the antitrust authorities, including what arguments and submissions to make to the government or court, how to structure a transaction to limit antitrust risk, or what remedies to consider in the event the government has concerns about the transaction’s impact on competition.
Because these are critical strategy documents, the parties typically do not want to divulge these types of documents to the reviewing authority. Each party’s communications regarding strategy with its respective attorneys is ordinarily subject to the attorney-client privilege and/or attorney workproduct protection. The attorney-client privilege protects communications from disclosure when they involve a confidential request for, or conveyance of, legal advice between an attorney and a client. Attorney work-product protections are implicated when documents and other materials are prepared by an attorney, or at the attorney’s direction, in anticipation of litigation. These protections, however, may be waived when documents and communications are no longer confidential and are shared with third parties, in this case the other party to a transaction or its counsel.
But, in a transactions context, there is a common law joint defense exception to such a waiver. This exception was developed to maintain the attorney-client and attorney workproduct privileges where parties’ interests are aligned in order to facilitate legal representation. This joint defense exception may also be referred to as a common interest, community of interest, or allied litigant exception, among others. In certain jurisdictions, these various titles implicate differing legal standards and are applicable in different circumstances, while other courts use the terms interchangeably.
The applicability of the common interest or joint defense doctrine can vary by state. Notably, some jurisdictions now recognize that this exception to waiver extends outside of the litigation context, while others require that litigation at least be anticipated for the privilege to be maintained. In the more permissive jurisdictions, the parties only must have a common interest in the matter under discussion, such as a potential merger. Most jurisdictions, however, require that the common interest be of a legal nature and that the communications be in furtherance of that interest. For instance, while communications discussing antitrust implications or other legal compliance may be considered to be in furtherance of a common legal interest, most jurisdictions will not confer the privilege to more general communications about merger details. Similarly, as communications are typically required to be in furtherance of the common interest, any situation where the parties have adverse interests may result in there being a waiver of privilege. For instance, even if two parties share the goal of consummating a successful merger, their negotiations with each other would likely not be covered under the common interest doctrine, even in the most permissive jurisdictions. (Tip: Entering into a formal joint defense agreement in writing can help clarify the existence and extent of common interest.)
While the applicability of the common interest doctrine to a specific transaction will depend on the specific circumstances, the parties should consider potential actions to increase the likelihood that a common interest will be recognized in the event of a subsequent challenge. In particular, a written joint defense agreement is likely the best evidence of an express intention to jointly pursue a common purpose. Similarly, explicitly laying out, within the agreement and communications, the legal purpose of communications can make for an effective, unambiguous indication. Although this is especially important for parties that actually enter into a transaction agreement with one another, to the extent such joint defense materials are shared with counsel or a firm itself that is not ultimately part of the transaction, a joint defense agreement can help to preserve that privilege in the face of a challenge.
Finally, it is important to note that the common interest doctrine does not create an independent privilege, but rather can merely prevent waiver of documents or communications that are already privileged. Thus, even if the parties share a common interest, discussions between businesspeople will likely not be protected, unless they are conveying legal advice pursuant to independently privileged conversations. If your client wishes to demonstrate a common legal purpose, it would generally be prudent to involve legal counsel in the relevant communications.
Michael B. Bernstein, a partner at Arnold & Porter and a Chambers USA ranked practitioner, has served as lead antitrust counsel in numerous high-profile matters for companies such as GE, BP, Kroger, Boston Scientific, and AMC Entertainment, among others. He has extensive experience obtaining antitrust clearance for mergers, acquisitions, and other business combinations from federal, state, and foreign competition authorities. He also represents clients in government investigations and civil litigation and counsels clients on the antitrust implications of business practices. Matthew A. Tabas is an associate at Arnold & Porter. His practice focuses on federal and state government reviews of mergers and acquisitions, civil antitrust litigation, civil and criminal government investigations, and antitrust counseling. He has represented clients in a number of industries in all phases of merger clearance, including pre-merger business counseling, before the U.S. Department of Justice, Antitrust Division, the Federal Trade Commission, and state antitrust enforcement authorities, as well as before federal courts in litigated challenges by the government. Matthew H. Fine is an associate at Arnold & Porter. His practice focuses on assisting clients in complex civil antitrust litigation, government review of mergers and acquisitions, filing obligations under the HartScott-Rodino Act, and counseling on a variety of antitrust issues. Mr. Fine has represented clients in a broad range of industries, including publishing, pharmaceuticals, medical devices, and foodservice.
To find this article in Lexis Practice Advisor, follow this research path:
RESEARCH PATH: Antitrust > Mergers & Acquisitions > Pre-signing and Integration Planning > Practice Notes
For a list of guidelines to distribute to employees involved in due diligence for a potential transaction, see
> INFORMATION SHARING GUIDELINES
RESEARCH PATH: Antitrust > Mergers and Acquisitions > Pre-signing and Integration Planning > Forms
For an example of a Clean Team Agreement, see
> CLEAN TEAM AGREEMENT
For guidance on how to fashion a joint defense agreement, see
> JOINT DEFENSE AGREEMENT
For best practices for identifying and collecting documents required under the Hart-Scott-Rodino (HSR) Act, see
> ITEM 4(C) AND 4(D) DOCUMENTS FOR THE HARTSCOTT-RODINO (HSR) ACT FILING
RESEARCH PATH: Antitrust > Mergers and Acquisitions > Premerger Notification > Practice Notes
For a discussion of how to determine whether a merger or acquisition must be reported to the antitrust authorities, see
> REPORTABILITY OF A MERGER OR ACQUISITION UNDER THE HART-SCOTT-RODINO (HSR) ACT
To learn about preparing and submitting an HSR filing, see
> HART-SCOTT-RODINO (HSR) ACT FILINGS
For a review of federal merger investigation methods, see
> DOJ/FTC MERGER INVESTIGATION PROCESS
RESEARCH PATH: Antitrust > Mergers and Acquisitions > Antitrust Investigations (US) > Practice Notes