the threshold - Magalhães e Dias

THE THRESHOLD
Volume XIII
Number 1
Newsletter Of
The Mergers &
Acquisitions Committee
Fall 2012
CONTENTS
Joint Bidding for Corporate Control: The
Antitrust Framework
by Scott Sher
and Creighton Macy
3
Crime and Punishment: New Era of
Heightened Enforcement in HSR Merger
Review or Foreshadowed Policy
Evolution?
by Jacqueline I. Grise
and Tanisha A. James
18
Some Challenges in the Antitrust Analysis
of Patent Acquisitions
by Russell Steinthal
30
Does it Matter Which Agency—FTC or
DOJ—Reviews a Merger? Recent
Statistical Evidence
by Paul B. Hewitt and Diana L. Gillis
44
Merger Review in Brazil: News,
Expectations, and Challenges
by Gabrial Dias, Francisco Niclós Negrão,
Thais Guerra and Raquel Cândido
57
Remedies Under the PRC Merger Control
Regime
by Michael Han
96
FROM THE CHAIR
To All Committee Members:
We extend our sympathies to members of
the antitrust community in the greater New York
area still affected by the destruction of Hurricane
Sandy and hope everyone’s lives, homes, and
power are restored to good working order quickly.
Our Fall edition of The Threshold has seven
interesting and timely articles probably not best
read by candlelight.
Scott Sher and Creighton Macy discuss
theories of illegality and the scope of current
litigation regarding so-called “club bidding” by
prominent equity funds and others involved in
M&A takeover activity. In an article with the
ominous words “Crime and Punishment” in the
Negotiating Merger Remedies at the FTC
and DOJ: Summary of ABA
Teleconference Program
by Rani Habash
114
title, Jacqueline Grise and Tanisha James discuss
About the Mergers and
Acquisitions Committee
HSR-related
121
the growing tendency of the FTC and DOJ to hold
individuals, not just companies, responsible for
violations.
Russell
Steinthal
discusses the difficult antitrust issues presented by
About the Threshold
122
acquisitions of patent portfolios, focusing upon
1
three recent such acquisitions involving thousands of patents valued in the billions of dollars.
Another article takes a deep look at the published HSR statistics for the last five years and
discusses FTC/DOJ disparities in the rate of issuing second requests and taking enforcement
action. Francisco Niclós Negrão and several of his colleagues address the very recent radical
restructuring of the Brazilian merger control regime and discuss whether the new rules truly
resolve the difficulties many have had with merger filing and review in Brazil. Michael Han
explores the antitrust merger remedy practices in the PRC, a country that is now a required-filing
jurisdiction for a large number of joint venture and M&A transactions around the world. Finally,
we have a very helpful summary of a Brown Bag program on negotiating merger remedies at the
FTC and DOJ.
The committee continues to be hard at work, not only on this issue of The Threshold, but
also on a new edition of the Premerger Notification Practice Manual and two chapters—Joint
Ventures and Mergers and Acquisitions—for the 2012 Annual Review of Antitrust Law
Developments. The next Threshold will be out in the Spring. We would be delighted to publish
letters to the editor commenting on any past articles, and we would be doubly delighted to hear
from you about any articles you would like to write yourself.
Enjoy the newsletter!
--Paul B. Hewitt
2
JOINT BIDDING FOR CORPORATE CONTROL:
FRAMEWORK
THE ANTITRUST
Scott Sher and Creighton Macy1
Four years ago, in Pennsylvania Avenue Funds v. Borey, Judge Jones of
the United States District Court for the District of Western Washington dismissed
claims that two private equity firms violated Section 1 of the Sherman Act by
engaging in a bid rigging conspiracy when they coordinated their bids in
connection with a corporate acquisition.2 Judge Jones concluded, as a matter of
law, that the complaint did not state a cause of action.3 At issue was the firms’
agreement to split equally the voting securities of the target company,
WatchGuard Technologies (“WatchGuard”), after initially competing with each
other to acquire the firm during an auction process. Plaintiffs contended in that
case that the two firms (Vector Capital (“Vector”) and Francisco Partners (“FP”))
conspired to not bid against each other to raise the price to acquire WatchGuard.
The claim was that they agreed instead to split the acquisition price between them,
which was lower than it otherwise would have been had the parties continued to
compete to drive up the price of the firm. Judge Jones held that, even assuming
the allegations to be true, there was no antitrust violation as a matter of law.4
Four years after the Borey decision, several prominent private equity firms
find themselves embroiled in civil lawsuits for behavior relating to acquisitions
that took place over six years ago.5
In late 2006, reports surfaced that the
Department of Justice’s Antitrust Division (“DOJ”) had opened investigations of
1
Scott Sher is a partner and Creighton Macy an associate in the Washington D.C. office of Wilson
Sonsini Goodrich & Rosati . Wilson Sonsini represented Vector Capital in the Borey decision.
The authors would like to thank Jonathan Jacobson for his valuable insights and comments.
2
Penn. Ave. Funds v. Edward J. Borey, et. al., 569 F. Supp. 2d 1126 (W.D.Wash. 2008)
3
Id. at 1335.
4
Id.
5
See Dennis K. Berman and Henry Sender, “Private-Equity Firms Face Anticompetitive Probe,”
The Wall Street Journal (October 10, 2006), available at
http://online.wsj.com/article/SB116045130991787820.html.
3
arrangements between private equity firms with respect to bidding at company
sale auctions (“club bidding”).6 As a response to those investigations, civil suits
were promptly filed against 13 private equity firms, including many of the
industry’s largest.7 These club bidding deals have received significant media
attention of late, in response to several discovery rulings that allowed documents
to be released for public consumption.8 For instance, a recent New York Times
DealBook article, “E-Mails Cited to Back Lawsuit’s Claim That Equity Firms
Colluded on Big Deals,” included an excerpt from an email from Blackstone
President Hamilton James to K.K.R. co-founder George Roberts, noting that
“[w]e would much rather work with you guys than against you . . . [t]ogether we
can be unstoppable but in opposition we can cost each other a lot of money.”9 It
also included text from an email by Jonathan Coslet, a TPG executive, who wrote:
“[a]ll we can do is do [u]nto others as we want them to do unto us. . . . It will pay
off in the long run even though it feels bad in the short run.”10 Currently, a
consolidated class action, first filed in December 2007, continues in the U.S.
District Court for the District of Massachusetts.11 Recently, Senior Judge Edward
Harrington set hearings for motions for summary judgment on November 7.12
6
Id.
7
See Murphy v. Kohlberg Kravis Roberts, 1:2006cv 13210 (S.D.N.Y. Nov. 15, 2006).
8
See Peter Lattman, “Judge Widens Antitrust Suit Against Private Equity Firms,” The New York
Times Dealbook (September 8, 2011), available at
http://dealbook.nytimes.com/2011/09/08/judge-widens-antitrust-suit-against-private-equity-firms/.
9
Peter Lattman and Eric Lichtblau, “E-Mails Cited to Back Lawsuit’s Claim that Equity Firms
Colluded on Big Deals,” The New York Times DealBook (October 10, 2012), available at
http://dealbook.nytimes.com/2012/10/10/e-mails-back-lawsuits-claim-that-equity-firms-colludedon-big-deals/.
10
Id.
11
Klein v. Bain Capital Partners, 1:08cv10254 (Mass. December 28, 2007). This action was filed
in the U.S. District Court for the District of Massachusetts in 2007 following an ultimately
abandoned DOJ probe into the practice of private equity firms partnering to purchase companies
(so-called club deals). The suit alleges that private equity firms conspired to drive down the
acquisition price in at least nine multi-billion dollar deals. The court rejected the defendants'
argument that their conduct was insulated from antitrust review due to SEC regulation and
allowed the case to proceed. Fact discovery was concluded in the spring of 2012, and in July the
defendants moved for summary judgment; the court has not yet ruled on their motions.
12
Id.
4
This article examines the various legal bases upon which such bid rigging
claims have been analyzed over the past several decades and then provides
modest advice on how to counsel clients in light of these decisions.
I.
The Legal Framework for Analyzing So-Called Club Bids
There are a number of theories upon which courts have analyzed “bid
rigging” or “joint bidding,” including within the context of bidding for corporate
control. As noted above, the Borey court dismissed the plaintiffs’ claims for
failure to establish market power in a relevant market using a rule of reason
standard.13 Judge Jones declined to decide whether the securities laws preempted
the application of antitrust laws.14 Other courts have ultimately reached the same
conclusion as Judge Jones in similar cases, though relying on different theories.
Some have held that the claims were not actionable under the antitrust laws
because of implied immunity.
Others have held that joint bidding is not
actionable as an antitrust claim because it does not involve “trade or commerce,”
as required by the Sherman Act. We discuss each of these approaches.
A.
The Borey Approach: Joint Bidding Is Not Per Se Illegal and
Can Be Efficiency Enhancing
Of note in Judge Jones’ opinion15 was, first, that the per se standard could
not be applied to Vector’s and FP’s joint conduct.16 In fact, Judge Jones noted
that “no court ha[d] applied the rule to a price-fixing agreement in a contest for
corporate control,” a principle that still stands today. 17 Because no precedent
mandated a per se analysis, the court looked at the “economic effects” of the
defendants’ behavior, specifically noting that: “So long as there are plausible
13
Borey, 569 F. Supp. 2d at 1133-34.
14
Id. at 1130.
15
Plaintiffs’ securities related claims were also dismissed in their entirety. See Penn. Avenue
Funds v. Edward J. Borey, et. al., 2008 WL 426509 (W.D.Wash. Feb. 13, 2008).
16
Borey, 569 F. Supp. 2d at 1133.
17
Id.
5
arguments that a practice enhances overall efficiency and makes markets more
competitive,” application of the per se rule is not appropriate.18 In holding that
“price fixing among rival bidders in a contest for corporate control is not, in
general, anticompetitive,” the court noted that “it is apparent that bidders who join
forces can promote rather than suppress competition.”19
Further, several
examples of why joining forces “can promote rather than suppress competition”
were offered by the Borey court, including how joining forces allows risk to be
spread among more than one bidder.20
Second, and equally important, Judge Jones ruled that the plaintiffs’
allegations could not withstand a rule of reason analysis. The plaintiffs could not
prevail—in the view of the court—because they could not establish that Vector
and FP had any degree of market power in a relevant market. As Judge Jones
noted, the plaintiffs’ description of the alleged relevant market as “‘the market for
corporate control of WatchGuard and other technology companies,’” was fatal to
its Sherman Act claim. There is no allegation from which the court could
reasonably infer that Vector and FP have power in this market.” 21 The court
concluded that Vector and FP could not depress the price of acquisition for
WatchGuard because if they attempted to, other entities could simply step in and
offer more money to acquire the company (“[a]ny acquirer who believed that
WatchGuard was worth more than FP’s bid could have made a topping bid”22),
and even if that did not happen, the shareholders would simply refuse to accept
less money for their securities, and not tender them until an offer was made that
represented fair value for the company.23 As such, the court could not “infer that
Vector and FP had market power even in the contest for control of WatchGuard.
18
Id. at 1133-34 (quoting Paladin Assocs., Inc. v. Mont. Power Co., 328 F.3d 1145, 1155 (9th Cir.
2003)).
19
Id.
20
Id.
21
Id. at 1134.
22
Id.
23
Id.
6
The illusion of market power arose not from Defendants’ anticompetitive
conduct, but from the lack of market interest in WatchGuard.”24
(1)
The Differences Between “Bid Rigging” and “Joint
Bidding”
The per se rule usually applies only to cases that encompass agreements
among direct competitors relating to (i) raising prices, (ii) restricting output, or
(iii) dividing territories.25 The DOJ continues to pursue bid-rigging cases and has
secured many guilty pleas stemming from this behavior. For instance, the DOJ
has sustained its investigation of bid-rigging and fraud at real estate auctions
throughout the country, securing guilty pleas from investors in several states,
including California, Alabama, and North Carolina. In those cases, the DOJ
alleged that real estate speculators had coordinated to keep prices at public
foreclosure auctions artificially low by, among other things, paying each other to
refrain from bidding.26 At least 38 individuals and one company have pled guilty
to misconduct at foreclosure auctions.27 Similarly, the DOJ’s investigation of bid
rigging at municipal tax lien auctions has resulted in, as of October 2012, ten
guilty pleas, including two companies.28
24
Id.
25
See FTC v. Superior Court Trial Lawyers Ass’n, 493 U.S. 411, 435-36 (1990). Over the past
half century, the Supreme Court has limited the context in which the per se rule applies. See
United States v. General Motors Corp., 384 U.S. 127, 145 (1966); Silver v. N.Y. Stock Exch., 373
U.S. 34, 365-66 (1963).
26
See DOJ Criminal Program Division Update (2012), available at
http://www.justice.gov/atr/public/division-update/2012/criminal-program.html. Several other
individuals in California and Alabama have pled guilty since February 2012.
27
Id.
28
See DOJ Press Release, Pennsylvania Corporation Pleads Guilty to Bid Rigging at Municipal
Tax Lien Auctions in New Jersey (Sept. 26, 2012), available at
http://www.justice.gov/atr/public/press_releases/2012/287435.htm.; see also DOJ Press Release,
New Jersey Financial Investor and his Company Plead Guilty to Bid Rigging at Municipal Tax
Lien Auctions (Apr. 23, 2012), available at
http://www.justice.gov/atr/public/press_releases/2012/282510.htm.
7
There are significant differences between joint bidding and bid rigging.29
In particular, the conduct in per se bid rigging cases has no efficiency
justifications, while, as noted below, conduct involving joint bidding can have
several.30 Further, joint bidding (i) is not ordinarily orchestrated through covert
means, as the party accepting bids typically is aware that multiple bidders are
working together, and (ii) if the joint bidders are successful, they share in the risk
of owning the asset.31 Thus, unlike bid rigging, a joint bid is not per se illegal
because it does not require subterfuge and the parties often realize important
efficiencies.32
Further, as the Supreme Court noted long ago—and modern
authority currently recognizes—agreements to bid jointly often enhance, rather
than inhibit, competition.33
(2)
Joint Bidding Can Have Significant Procompetitive
Potential (and Should be Evaluated Under the Rule of Reason
Standard)
Joint bidding can have significant procompetitive potential. As leading
antitrust scholar Herbert Hovenkamp notes, “[c]learly, joint bidding can be procompetitive. It encourages people to submit bids who might otherwise not bid at
all for assets that are too costly or too large for them, or where they want only a
portion of the asset themselves.”34 Examples of procompetitive justifications for
joint bidding include:
29
See Love v. Basque Cartel, 873 F. Supp. 563, 577-78 (D. Wyo. 1995).
30
See 11 PHILLIP AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW ¶ 1907(c) (2d ed. 2005).
31
Id.
32
See Love, 873 F. Supp. at 577-78.
33
Kearney v. Taylor, 56 U.S. (15 How.) 494, 520-21 (1854) (noting that “[a] doctrine which
would prohibit associations of individuals to bid . . . as preventing competition . . . is too narrow
and limited for the practical business life, and would often times lead inevitably to the evil
consequences it was intended to avoid.”); See Hyer v. Richmond Traction Co., 168 U.S. 471, 47879 (1897); see also AREEDA & HOVENKAMP, supra note 30, ¶ 1907(c).
34
Herbert Hovemkamp, Antitrust Violations in Securities Markets, 28 J. CORP. L. 607, 691 (2003).
8
(i)
making it possible for a bidder who may otherwise not
be able to bid, to participate in the process;
(ii)
joint ownership can increase the value of an asset
because of increased efficiency that could not be
achieved if the asset were owned independently;
(iii)
increasing the value of bids through joint bidding
spreads risk among multiple players that, individually,
may not be inclined to bid at all or would otherwise
make a lower bid; and
(iv)
joint bidding may increase information available to joint
bidders, providing them with intelligence that can result
in the price of their bid increasing or in them remaining
in the bidding process.35
Therefore, joint bidding agreements, even if they were to be actionable
under the antitrust laws, should be evaluated under a rule-of-reason standard.36
(3)
Defining the Relevant Market is Not Easy and Showing
Market Power is Even Harder
As demonstrated in Borey, the relevant market is crucial to any rule of
reason analysis and thus should be an important part of any initial evaluation.37
35
See id.; see also Kearney, 56 U.S. (15 How.) at 494; Hyer, 168, U.S. 471 at 478-79; see also
Borey, 569 F. Supp. 2d 1126 (W.D. Wash. 2008); Northwest Wholesale Stationers v. Pacific
Stationary & Printing Co., 472 U.S. 284, 294 (1985). Economics literature supports this
proposition, noting that information sharing can increase the bidder’s information about the value
of the object, among other things. See George A. Akerlof, The Market for “Lemons”: Quality
Uncertainty and the Market Mechanism, 84 Q.J. ECON 488 (1970); Paul R. Milgrom & Robert J.
Weber, A Theory of Auctions and Competitive Bidding, 50 ECONOMETRICS 1089 (1982).
36
See Nat’l Soc’y of Prof’l Eng’rs v. United States, 435 U.S. 679, 692 (1978); see also, e.g.,
Hovenkamp, supra note 34at 691.
37
569 F. Supp. 2d at 1134. Should a judge or investigating agency base their analysis on the
relevant market, practitioners should be armed with arguments as to why their clients do not
possess market power in the relevant market, if possible.
9
Defining a relevant market in the context of joint bidding for corporate control—
let alone showing market power within that market—can prove extremely
difficult. As noted above, the Borey court held that plaintiffs’ failure to define a
relevant market (or that market power was present in even the narrowest of
markets) was fatal to their claim: “Assuming for the sake of argument that such a
narrow definition of a relevant market is appropriate . . . Plaintiff still has failed to
show that FP and Vector have market power.”38
When alleging a Section 1 violation under the rule of reason, a plaintiff
must allege that the “restraint” is likely to produce an adverse effect on
competition in a properly defined relevant market.39 Thus, plaintiffs are tasked
with (i) establishing a relevant market, and (ii) that the defendant has market
power within that relevant market. In Borey, the court noted that “the plaintiff
must show that the defendants control enough of the market that their
anticompetitive conduct injures competitors or consumers.”40 Should a court or
investigating agency base their analysis on the proper contours of the relevant
market, practitioners should be armed with arguments, such as those mentioned
below, as to why their clients do not possess market power in that market (or why
it is not a proper market, in any event).
Any plaintiff alleging a violation of Section 1 from joint bidding related
conduct will face a high hurdle in its attempt to establish a relevant market that is
not too broad. For instance, in Borey, the court noted that the plaintiffs’ alleged
relevant market—“the market for corporate control of WatchGuard and other
technology companies”—was part of a massive industry that saw “nearly $159
billion . . . poured into private equity funds . . . in 2006 alone.”41 Of course, the
38
Id.
39
See id.; see also State Oil Co. v. Khan, 522 U.S. 3, 10 (1997); Tanaka v. University of S. Cal.,
252 F.3d 1059, 1063 (9th Cir. 2001).
40
Borey, 569 F. Supp. 2d at 1134 (citing Rebel Oil Co. v. Atlantic Richfield Co., 51 F.3d 1421,
1434 (9th Cir. 1995)).
41
Id.
10
combined share Vector and FP, or any two private equity funds for that matter, in
that market is insignificant and certainly would not reach the level generally
necessary to infer market power.42
Moreover, it is almost certain that the relevant market must be broader
than just the shares of the joint bidders’ target.43 As leading antitrust scholar
Herbert Hovenkamp explained: “As a general proposition, all stocks are in the
same relevant market insofar as antitrust is concerned, and there are smaller
relevant markets for such groupings as (a) individual stocks; (b) specific market
sectors, such as technology; or (c) specific classes or types of stock.” 44 Thus,
according to Professor Hovenkamp, there is nothing different between shares of
any public company, including Microsoft or Starbucks (since a voting security
itself is just a cash equivalent and all should be interchangeable). 45 If a court were
to conclude that the relevant market included all publicly traded voting securities,
for example, it would be virtually impossible to conclude that any set of
defendants had market power.
Finally, as the Borey court explains, even in the narrowest of relevant
markets, plaintiffs still face the obstacle of establishing an adverse effect on
competition. While Borey evaluated a market—for purposes of the motion to
dismiss, in the light most favorable to the plaintiff—of “corporate control of
WatchGuard,” there were “dozens of other suitors who expressed interest in
WatchGuard and refused to make bids.”46
Further, the court noted that
WatchGuard shareholders could have rejected the merger agreement should they
felt the bid was too low. These factors led the court to conclude that “the illusion
42
Id.
43
See Green Country Food Mkt., Inc. v. Bottling Group, LLC, 371 F.3d 1275, 1282 (10th Cir.
2004); Grappone, Inc. v. Subaru of New England, Inc., 858 F.2d 792, 797 (1st Cir. 1988).
44
See Hovenkamp, supra note 34, at 612.
45
Id. Professor Hovenkamp also notes that “there is no relevant market for the stock of any one
company, which is bought and sold by traders from large to small.” Id. at 611-612.
46
Borey, 569 F. Supp. 2d at 1134.
11
of market power arose not from Defendants’ anticompetitive conduct, but from
the lack of market interest in WatchGuard.”47
B.
The Finnegan Approach: Implied Immunity
There are several cases where courts have held that joint bidding is not
actionable under the antitrust laws because such actions are precluded by implied
immunity. Specifically, in Finnegan v. Campeau Corp., the Second Circuit found
that a significant conflict between the securities and antitrust laws arose because
of a joint purchase.48 As the Second Circuit noted, “[t]hrough its power to prohibit
fraudulent activity, the SEC has supervisory authority over the submission of joint
bids or other agreements in the corporate auction context.” 49 The court further
held that the SEC’s power to regulate “bidders agreements” and the fact that the
SEC had “implicitly authorized them by requiring their disclosure” meant that the
joint bidding activity fell within the purview of the SEC. 50 Indeed, that appears to
be the approach of the Supreme Court when it stated that the SEC’s authority to
allow joint agreements cannot be “reconcile[d] . . . with the competing mandate of
the antitrust laws.”51
47
Id.
48
915 F.2d 824, 829 (2d. Cir. 1990). The Finnegan Court evaluated claims by a target against two
rival bidders, who agreed to cooperate in the target’s acquisition and thus ceased competing
individually for the target. The Second Circuit specifically noted the Williams Act’s relation to
joint bidding: “The disclosure requirements of Schedule 14D-1 and the language of the Williams
Act contemplate agreements between bidders.” Id. The Second Circuit held that implied repeal
was essential to make the securities regulation work because the antitrust laws were inconsistent
with the Williams Act. The court noted that it was clear, based on the language of the Williams
Act and subsequent SEC oversight and enforcement, that Congress has chosen the securities laws
as the most significant means to protect consumers and capital markets. Id. The court stated that
“[a]llowing antitrust suits to rule out agreements between rival bidders would give target
shareholders undue advantage in the takeover context and discourage such activity.” Id. at 832.
This case, as well as the others noted above, stands for the strong proposition that joint bidding is
not actionable under the antitrust laws.
49
Id. at 831.
50
Id.
51
Gordon v. New York Stock Exchange, 422 U.S. 659, 722 (1975); Strobl v. N.Y. Merc. Exch.,
768 F.2d 22, 27 (2d Cir. 1985) (“[A]ntitrust laws may not apply when such law would prohibit an
action that a regulatory scheme might allow.”).
12
Why have courts so held? It is true that, in general, implied repeal of the
antitrust laws is “strongly disfavored”: the Supreme Court, in Silver v. New York
Stock Exchange, held that “[r]epeal is to be regarded as implied only if necessary
to make the [regulatory statute] work, and even then only to the minimum extent
necessary.”52 However, the Silver Court further noted that the doctrine of implied
immunity must be applied where there is a “plain repugnancy between the antirust
and regulatory provisions.”53 Following Silver, in Gordon v. New York Stock
Exchange, the Supreme Court found that liability under the antitrust laws does not
arise from actions that are congruous with the securities laws.54 As the Court
noted: “[i]mplied repeal of the antitrust laws is, in fact, necessary to make the
Exchange Act work as it was intended; failure to imply repeal would render
nugatory the legislative provision for regulatory agency supervision and exchange
commission rates.”55
These cases were an important backdrop for the Supreme Court’s more
recent decision in Credit Suisse Securities, LLC v. Billing.56 While not directly
related to joint bidding, Billing—like Silver and Gordon—is instructive.
In
Billing, the Court concluded that there was “serious conflict between, on the one
hand, application of the antitrust laws, and on the other, proper enforcement of
securities law.” 57 Ultimately, the Court concluded that “substantial risk of injury
to the securities markets” could occur if, in the securities context, antitrust
52
373 U.S. 341, 357 (1963).
53
Id.
54
Gordon, 422 U.S. at 683.
55
Id.
56
551 U.S. 264 (2007). Significantly, the Supreme Court in Billing held that conduct is immune
from the antitrust laws if it meets each of the four following requirements: (1) “the existence of
regulatory authority under the securities law to supervise the activities in question”; (2) “evidence
that the responsible regulatory entities exercise that authority”; (3) “a resulting risk that the
securities and antitrust laws, if both applicable, would produce conflicting guidance, requirements,
duties, privileges, or standards of conduct”; and (4) whether “the possible conflict affect[s]
practices that lie squarely within an area of financial market activity that the securities law seeks to
regulate.” Id. at 275-76.
57
Id. At 284
13
lawsuits were permitted to proceed.58 This concern was based on the possibility
that different results could be reached from similar, if not the same, evidence, in
addition to “the fine securities-related lines separating the permissible from the
impermissible [and] the need for securities-related experience (particularly to
determine whether an SEC rule is likely permanent).”59
C.
The Kalmanovitz Approach: No Trade Or Commerce
Joint bidding may not be actionable under the antitrust laws in some cases
because the sale and acquisition of voting securities falls outside “trade or
commerce” of the Sherman Act.60 As the Supreme Court noted in Apex Hosiery
Co. v. Leader, “trade or commerce” means “commercial competition in the
marketing of goods or services.”61 The Apex Hosiery Court set the framework for
a decision forty five years later that held the Sherman Act did not apply to a
tender offer because auctions of that type did not involve “trade or commerce.”62
In Kalmanovitz v. G. Heileman Brewing Co., the plaintiff—whose bid
ultimately did not succeed – sued, alleging that defendants illegally eliminated
competitive bidding to fix the price of the Pabst company’s stock in violation of
Sherman Section 1. To determine whether the bidding agreements challenged in
Kalmanovitz encompassed “trade or commerce,” as defined in Apex Hosiery, the
Third Circuit asked whether they “affect[ed] the purchases or consumers of
commerce.”63 Further, the Third Circuit noted that the proposition that “trade or
commerce” means “commercial competition in the marketing of goods or
services,” and that the challenged agreements by the plaintiff did not “affect[] the
58
Id.
59
Id. at 282.
60
See Kalmanovitz v. G. Heileman Brewing Co., 769 F.2d 152, 156 (3d Cir. 1985).
61
310 U.S. 469, 495 (1940); see also Bucher v. Schumway, 452 F. Supp. 1288 (S.D.N.Y. 1978).
62
310 U.S. at 495; See Kalmanovitz, 769 F.2d at 156.
63
Kalmanovitz, 769 F.2d at 156.
14
purchasers or consumers of goods or services.”64 The Court thus held a seller of
shares in a specific company is not “engaged in the business of selling shares as
an ongoing trade or business.”65
II.
Advising the Client
The differences between bid rigging and joint bidding, as described above,
provide a key practice point when advising clients who are evaluating whether to
approach or are approached by others to jointly bid on an asset. Of course, a firm
should never form an agreement with a competing bidder to, for instance, keep
prices low by suppressing bidding competition. At the same time, the case law
makes clear that it would be inappropriate to advise a client that non-covert
agreements to jointly bid and share the risk of acquisition of an asset are unlawful,
without analyzing further the particular facts of the acquisition, agreement and the
market. The caselaw provides additional guidance as to how to advise clients to
best avoid heightened antitrust scrutiny when considering whether to enter into a
joint bidding relationship:
(1) Watch Your Documents: As noted above, emails can create significant
problems for a client and can serve to, among other things, heighten the intensity
of a DOJ or FTC investigation and/or cause significant hurdles to overcome in
litigation. Even if the author’s intent was harmless, documents can be interpreted
very differently by the DOJ, FTC, or opposing parties. For instance, and as noted
earlier, Hamilton James’ email to colleagues about his conversation with Henry
Kravis, which noted, “Henry Kravis just called to say congratulations and that
they were standing down because he had told me before they would not jump a
signed deal of ours,”66 will catch the eye of any regulator, regardless of what Mr.
James meant and regardless of the effect of any decision not to bid.
64
Id.
65
Id. at 157.
66
Peter Lattman and Eric Lichtblau, supra note 9.
15
(2) Know the Benefits: It is imperative that any benefits of a decision to
bid jointly are contemplated before moving forward.
Where practical, the
potential procompetitive benefits of a joint bid should be articulated and
memorialized.
For instance, establishing that your client can only bid on a
specific target if that client teams with another firm to share the risk and/or
acquisition price, or that the teaming is necessary/desirable because your client’s
potential bidding partner has specific industry experience that will maximize
operating efficiencies after the target is acquired are important.
(3) Joint Bidding is Not “Standing Down”: In many auction processes,
bidders unilaterally decide to “stand down” or exit the process. As Judge Jones
observed in Borey, “dozens of other suitors who expressed interest in
WatchGuard refused to make bids.” When bidders decide to exit the auction
process, it should be clear that such a decision was unilateral and justified as an
independent economic decision, not one based on an agreement with another
bidder. There is a clear difference between parties unilaterally deciding to exit an
auction process, or form a joint bidding relationship, and the behavior of the real
estate speculators who have plead guilty for rigging real estate auctions—by,
among other things, paying each other to refrain from bidding. 67 Further, there
are differences between a public tender, where actions are documented in
securities filings, and private decisions regarding whether or not to stand down.
As explained by the courts following the Supreme Court’s guidance in Billing,
where a decision to jointly bid is documented in securities filings, and the
securities laws provide a framework under which such joint bids are evaluated, it
is likely that the antitrust laws—in particular, antitrust laws governing joint
conduct—have been impliedly repealed.
(4) More Firms, More Potential Problems: Finally, if there are a large
number of firms consistently dropping out of an auction, this may signal that
bidders have reached an agreement to stand down rather than unilaterally exit the
67
See DOJ Criminal Program Division Update (2012), supra note 26.
16
process. Regulators will look for consistency and repetition of bidders’ conduct
to discern whether more than joint bidding is taking place. Thus, it is important to
educate clients about the difference between unilaterally exiting an auction and
the proper steps to follow should they be approached by another bidder trying to
rig the auction.
Although a firm could successfully defend against a claim of illegal
conduct (even with bad documents), the costs could be significant if the claim
survives a motion to dismiss. Indeed, in the club bidding lawsuits and
investigations currently being litigated, the parties have suggested that they have
expended more than $100 million in fees to date.68 Following this modest advice
could mitigate costs, and substantially shorten the length of any government
investigation and follow-on litigation.
68
See Peter Lattman and Eric Lichtblau, supra note 9.
17
CRIME AND PUNISHMENT: NEW ERA OF HEIGHTENED ENFORCEMENT
IN HSR MERGER REVIEW OR FORESHADOWED POLICY EVOLUTION?
Jacqueline I. Grise and Tanisha A. James1
Introduction
In 1999, the United States brought its first enforcement action imposing
civil penalties against an individual corporate executive2 for an alleged violation
of the Hart-Scott-Rodino Act of 1976 (“HSR Act”).3 The U.S. Department of
Justice (“DOJ”) alleged in that case that a corporate executive of Blackstone had
violated the HSR Act by failing to produce a critical (and the only) Item 4(c)
document, which he knew or should have known about. Thirteen years later, the
antitrust authorities have upped the ante for would-be offenders by moving the
enforcement needle into the zone of personal criminal liability. On May 3, 2012,
in an unprecedented action, the DOJ filed felony obstruction of justice charges
against a South Korean executive, Mr. Kyoungwon Pyo, for corruptly altering
documents submitted in connection with a merger investigation, and
simultaneously announced that he had agreed to plead guilty to those charges,
including agreeing to serve time in a U.S. prison.4
According to the plea agreement in United States v. Kyoungwon Pyo, Mr.
Pyo pled guilty to falsifying pre-existing strategic plans and certain other mergerrelated documents (and directing others to do the same) with the intention of
misrepresenting and minimizing the appearance of the potential competitive
1
Jacqueline I. Grise is a partner and Tanisha A. James is an associate in the Washington, DC
office of Cooley LLP. The views expressed herein do not purport to represent the views of the
Firm or any of its clients.
2
See United States v. Blackstone Capital Partners II Merchant Banking Fund, No. 99-cv-0795,
1999 WL 34814751, at *1 (D.D.C. Mar. 31, 1999).
3
15 U.S.C. § 18a.
4
Press Release, “Hyosung Corporation Executive Agrees to Plead Guilty to Obstruction of Justice
for Submitting False Documents in an ATM Merger Investigation” (May 3, 2012), available at
http://www.justice.gov/opa/pr/2012/May/12-at-572.html.
18
effects of the proposed transaction.5 Most notable in this case is that the DOJ
could have sought civil penalties against Mr. Pyo and his employer under the
HSR Act (as it did in the Blackstone case), but decidedly choose to reach deeper
into its arsenal to seek, and ultimately obtain, criminal sanctions. DOJ exercised
its prosecutorial discretion in favor of bringing charges under criminal obstruction
of justice statutes, instead of pursuing civil penalties under the HSR Act,
culminating in plea agreements involving both an individual and his employer. 6
As antitrust counsel are well aware, stiff criminal penalties like those
imposed in the case of Mr. Pyo may be anticipated in cartel enforcement matters,
but thus far have been unheard of in the context of merger review. In exercising
its unfettered prosecutorial discretion, DOJ’s decision to pursue criminal charges
in this case sends a clear message to the corporate and antirust communities about
the level of seriousness that both the DOJ and the Federal Trade Commission
(“FTC”) place on intentional attempts to distort the agencies’ ability to conduct
merger review and investigation. That message was delivered resoundingly by
the Acting Assistant Attorney General Joseph Wayland, who stated in the U.S. v.
Kyoungwon Pyo press release that “Maintaining the integrity of the merger review
and investigation process is one of our highest priorities.
Senior corporate
executives should understand that anyone who attempts to corrupt the process by
falsifying materials submitted to the U.S. government will be held accountable for
their actions.”7
Perhaps one of the more interesting questions raised by the criminal
charges filed by the DOJ against Mr. Pyo, is whether this case is indicative of a
new era of HSR compliance enforcement or consistent with a natural evolution in
the antitrust agencies’ stepped up HSR/merger enforcement policy. The evolution
of the agencies’ HSR enforcement actions over the last decade arguably could
5
Pyo Plea Agreement, United States v. Kyoungwon Pyo, No. 12-cr-00118-RLW (D.D.C. July 2,
2012) (D.I. 10).
6
18 U.S.C. § 1512(c)(1).
7
May 3, 2012 Press Release, supra note 3.
19
have foreshadowed this eventual criminal action for a sufficiently egregious
violation of the HSR merger review process. Indeed, the antitrust authorities have
consistently increased efforts to crack down on such violations since 1995, and
arguably before that in 1991,8 imposing heftier and heftier fines against
corporations and individuals alike. This article explores the specifics of Mr.
Pyo’s case, the evolution of personal liability under the HSR Act, and provides
practical tips for corporate and antitrust counsel in this ever-evolving enforcement
environment.
United States v. Kyoungwon Pyo
On August 7, 2008 and August 29, 2008, Nautilus-Hyosung, Inc. (“NHI”),
an affiliate of Hyosung Corporation, submitted an HSR filing in connection with
its proposed acquisition of Triton Systems of Delaware, Inc. (“Triton”).9 NHI and
Triton are competitors in the sale of automated teller machines (ATMs). Mr.
Kyoungwon Pyo, a senior vice president in charge of corporate strategy at
Hyosung, participated in and directed the review and collection of documents and
information in connection with the company’s HSR filing. According to Count I
of the DOJ’s Information, Mr. Pyo himself did, and instructed other employees to,
destroy, alter or conceal documents relevant to the HSR Form Item 4(c). This
item of the HSR Form requires submission of certain deal documents related to
market shares, competition, competitors, markets, potential for sales growth or
expansion into production or geographic markets.10
According to the
8
In July 1991, the DOJ and the FTC entered into a Memorandum of Agreement, under 28 U.S.C.
§§ 515, 543, to prosecute civil penalty cases on behalf of the United States for violations of the
HSR Act’s premerger notification and waiting period requirements. Therefore, since 1991, agency
attorneys, acting as Special Attorneys for the United States have regularly filed HSR violation
cases on behalf of the United States. See U.S. Federal Trade Commission, “FTC 1991 Annual
Report,” p. 4 (referencing Memorandum of Agreement “entered in July 1991 between the
Department of Justice and the Federal Trade Commission with respect to civil penalty action
under the premerger notification provisions of the HSR Act.”).
9
Pyo Information, United States v. Kyoungwon Pyo, No. 12-cr-00118-RLW (D.D.C. May 3,
2012) (D.I. 1), ¶ 5.
10
Antitrust Improvements Act Notification and Report Form for Certain Mergers and Acquisitions
– Instructions (August 18, 2011), available at http://www.ftc.gov/bc/hsr/hsrforminstructions1_0_0.pdf.
20
Information, the intended result of the alterations was to “impair the objects’
integrity and availability for use” in evaluating NHI’s proposed acquisition of
Triton.11
In August 2008, as part of its preliminary HSR inquiry into NHI’s
proposed acquisition of Triton, the DOJ requested certain additional documents
from NHI.12 According to Count II of the Information, during the collection and
review of those documents, Mr. Pyo and other employees acting under his
instruction concealed and altered pre-existing business and strategic plans for
2006, 2007 and 2008 related to the sale of ATMs.13 By doing so, Mr. Pyo and his
directives were able to misrepresent NHI’s ordinary course of business analyses
of competition among ATM vendors. Months later, during the course of the
DOJ’s investigation, NHI voluntarily disclosed to the DOJ that it had materially
altered documents and submitted them to the agency. 14 NHI then cooperated with
the DOJ’s criminal investigation of the circumstances and scope of the incident.
As part of its cooperation, NHI agreed to plead guilty to criminal charges
and pay a criminal fine of $200,000.15 The plea agreement excluded Mr. Pyo,
who was left to defend his individual actions.16 On May 3, 2012, the DOJ filed
criminal felony charges against Mr. Pyo, and on July 2, 2012, a plea agreement
was entered, whereby he agreed to pay a criminal fine of $3,000 and serve five
months in a U.S. prison.17 This marked the first time that obstruction of justice
charges were filed against an individual in connection with the submission of
falsified documents during a civil merger investigation under the HSR Act.
11
Pyo Information, supra note 8, ¶¶ 7, 13.
12
Pyo Information, supra note 8, ¶ 10.
13
Pyo Information, supra note 8, ¶ 13.
14
Nautilus Plea Agreement, United States v. Nautilus Hyosung Holdings, Inc. No. 11-cr-00255RLW (D.D.C. Aug. 15, 2011) (D.I. 1-1), ¶ 4(g).
15
Id. ¶ 8.
16
Id. ¶ 15(a).
17
Pyo Plea Agreement, supra note 4, ¶ 8.
21
Retrospective on Personal Liability Under the HSR Act
While the 1990s are often cited as a period when the antitrust agencies
became serious about cracking down and consistently punishing violations of the
HSR Act, the civil penalty portion of the Act was no more new then than it is
now.
Civil liability for failure to comply with any portion of the Act was
contemplated by the Clayton Act drafters and is expressly provided for in the
statute.18 Specifically, Section 7A provides that any entity or individual who
violates the HSR Act may be subject to maximum civil penalties of up to $16,000
a day for each violation after February 9, 2009 and $11,000 for any violation prior
to February 9, 2009.19
The Agencies’ First HSR Enforcement Action Against an Individual
While the HSR Act has always provided the antitrust agencies with a
mechanism to impose personality liability, the first enforcement action against a
corporation and one of its executives did not occur until 1999 in the case of
United States v. Blackstone Capital Partners II Merchant Banking Fund.20 In
June 1996, Blackstone Capital Partners (“Blackstone”) filed its HSR Notification
and Report Form for its acquisition (together with The Loewen Group
(“Loewen”)) of Prime Succession, Inc. Blackstone did not submit any Item 4(c)
documents with its HSR filing.
The agencies granted early termination of the
HSR waiting period in May 1997, and the transaction closed. In October 1996,
Loewen notified another transaction.
Included in Loewen’s filing of that
transaction was a copy of a document addressed to Blackstone that arguably
should have been included as part of Blackstone’s Item 4(c) submission in the
Prime transaction.
18
Statement of Basis and Purpose – Federal Trade Commission (43 F.R. 33450), July 31, 1978,
available at http://ftc.gov/bc/hsr/sbp.htm.
19
15 U.S.C. § 18a(g)(1); 16 C.F.R. § 1.98; 74 Fed. Reg. 857.
20
U.S. v. Blackstone Capital Partners, supra note 1.
22
As a result, in March 1999, the DOJ (at the request of the FTC) filed a
complaint alleging that Blackstone’s failure to provide the document was a
violation of the HSR Act.21 Final judgment was subsequently entered against
Blackstone whereby the company agreed to pay a civil penalty of $2.785 million,
the maximum civil penalty allowable.
Notably, at the time, DOJ also filed
charges against Howard Lipson, the general partner of Blackstone who authored
the excluded document and who also certified completeness of the HSR filing.
Mr. Lipson ultimately agreed to pay a civil penalty of $50,000. In its press
release, the FTC stated that Mr. Lipson “knew or should have known” that the
filing was incomplete.22
The fact that he was the author of the excluded
document, had a copy of it in his own files and likely knew that it contained
competitive information aggravated the nature of his offense.
According to
DOJ’s complaint, because of the failure to produce the document in question, the
agencies were unaware that the proposed transaction effectively combined two
competitors.23
Blackstone thereby avoided a Second Request.24
When
Blackstone later filed a supplemental HSR form for the same transaction (after the
FTC had inquired why Blackstone failed to produce the document), the FTC did
issue a Second Request.25
Due to what the agencies concluded was “at a
minimum reckless disregard for his obligations under the HSR Act,” DOJ for the
first time exercised its prosecutorial discretion to seek civil penalties against an
individual, in this case Mr. Lipson.26
Policy Evolution Towards Imposing Individual Civil Liability for HSR
Violations
21
Complaint, U.S. v. Blackstone Capital Partners II Merchant Banking Fund, No. 99-cv-00795
(D.D.C. Mar. 30, 1999).
22
Press Release, “Merchant Banking Firm, Partner Settle FTC Charges for Incomplete Pre-Merger
Report” (Mar. 30, 1999), available at http://www.ftc.gov/opa/1999/03/blackst.shtm.
23
United States v. Blackstone Complaint, supra note 20, ¶ 30.
24
Id. ¶¶ 31-33.
25
Id. ¶ 37.
26
Mar. 30 1999 Press Release, supra note 21.
23
At the time, the civil penalties imposed against Mr. Lipson may have
served as a “wake up call” for corporate America and the antitrust bar, reminding
us all that the HSR Act itself sanctions the government to impose penalties
against individuals. But just a few years prior, the agencies’ enforcement actions
and own words seemed to signal that such a penalty was not as distant on the
horizon as some may have thought. In a March 28, 1996 speech, George S. Cary,
then Deputy Director of the Bureau of Competition, stated that, “compliance with
the Hart-Scott-Rodino Act is vital to effective merger enforcement at the
Commission.”27 He went on to remark that the HSR Act “was designed strictly
for antitrust enforcement purposes and we treat that mandate seriously… We
expect corporate America to treat its obligations under the Act equally
seriously.”28
In that speech, Mr. Cary described the case of United States v. Sara Lee
Corporation,29 a recent victory at the time for the agency where it obtained $3.1
million in civil penalties, the largest amount ever paid under the HSR Act at that
time.30 The record penalty resulted from Sara Lee’s acquisition of Reckitt &
Colman, a British and American shoe care company, without making an HSR
filing. Evidence suggested that Sara Lee knew the value of Reckitt’s American
assets exceeded the HSR filing threshold, yet it failed to perform a fair market
27
George S. Cary, “Failure to Comply with the Hart-Scott-Rodino Act: Braveheart or Dead Man
Walking?”, 44th Annual Spring Meeting American Bar Association (Mar. 28, 1996), available at
http://www.ftc.gov/speeches/other/cary328.shtm.
28
Id.
29
United States v. Sara Lee Corporation, No. 96CV00196, 1996 WL 120857 (D.D.C. Feb. 8,
1996).
30
Notably, the HSR enforcement action to generate the largest fine was United States v. Hearst.
There the agency alleged that Hearst Trust acquired a monopoly by illegally omitting several high
level corporate documents from its HSR filing. Given the aggravating circumstances, the
government required Hearst to divest an acquired business, pay $19 million to disgorge profits
earned from operating the combined business and pay a $4 million fine. See United States v. The
Hearst Trust Corp., 2001-2 Trade Cas. (CCH) ¶ 73, 451 (D.D.C. 2001); see also FTC Press
Release, “Hearst Corp. to Disgorge $19 Million and Divest Business to Facts and Comparisons to
Settle FTC Complaint” (December 14, 2001), available at
http://www.ftc.gov/opa/2001/12/hearst.shtm.
24
value determination and conditioned its offer of acquisition on the transaction not
being reported.
In his speech, the Deputy Director noted that the Sara Lee case provided
an opportunity to express the agency’s viewpoint that it does “not see the absence
of an antitrust violation as a mitigating factor.”31 Rather, the DOJ “consider[s]
the attempt to avoid the filing obligation because of an expectation of antitrust
opposition to be an aggravating factor that requires higher penalties.”32 As a
result, the DOJ made it a particular point that Sara Lee agreed to pay a fine that
exceeded the maximum fine permitted under the statute. When extrapolating the
then $10,000 a day fine for HSR violations,33 Sara Lee faced a maximum penalty
of $2.93 million. Instead, the company found itself in the crosshairs of an agency
determined to punish what the agency believed was a blatant disregard for the
HSR laws and was forced to “compromise” at $3.1 million.34
Foreshadowing of Criminal Sanctions for Egregious HSR Violations
In the years following the Blackstone case, the agencies have continued to
rely on intent as a key factor in determining culpability and level of punishment in
prosecuting personal liability cases under the HSR Act. As a result, inadvertent
violations by individuals sometimes were given a pass. More often, however, the
violations were punished to a lesser extent because the individuals lacked the
aggravating circumstances or intent to violate the Act. For example, in 2001, Bill
Gates acquired shares of Republic Services, Inc, and failed to file an HSR form,
believing that the transaction fell within an exemption for reporting. Though the
agency determined the exemption did not apply, Mr. Gates’ lack of intent and the
31
Cary, supra note 26.
32
Id.
33
15 U.S.C. § 18a(g)(1).
34
Cary, supra note 26.
25
agency’s “one free bite” policy allowed Mr. Gates to avoid prosecution.35
However, in 2004, when Mr. Gates again failed to report his acquisition of ICOS
Corporation, he agreed to pay a fine of $800,000.36 Though the fine could have
been higher under the statute, the agency concluded that Mr. Gates’ violation was
not intentional.
Similarly, in United States v. James D. Dondero, the agency alleged that
Mr. Dondero, a Texas hedge fund manager, failed to comply with the notification
and waiting period requirements of the HSR Act prior to exercising options to
acquire stock of Motient Corp. Less than a year before the allegations in the
agency’s complaint, Mr. Dondero made a corrective HSR filing relating to a
similar failure to file the acquisition of stock in another company. Under the
consent decree entered in the case on May 22, 2007, Mr. Dondero agreed to pay
$250,000 in civil penalties to settle the charges.37
In 2010, John C. Malone, Chief Executive Officer and Chairman of
Discovery Holding Company, agreed to pay a $1.4 million civil penalty to settle
the Federal Trade Commission’s charges that he violated the HSR Act as a result
of Discovery Holding Shares he acquired in 2005 and 2008.38 The agency alleged
that Mr. Malone failed to make the necessary HSR filing in 2005, after first
purchasing Discovery voting securities, and then purchased additional securities
in the company in 2008 before the expiration of the HSR waiting period.
Interestingly, Mr. Malone’s case was the first HSR enforcement action in which a
party claimed its failure to file was based on its reliance on advice contained in an
35
Press Release, “Federal Trade Commission Obtains Civil Penalty Against William H. Gates III
for Violation of Hart-Scott-Rodino Act” (May 3, 2004) available at
http://www.ftc.gov/opa/2004/05/gates.shtm.
36
United States v. Gates, No. 04 0721 (D.D.C. May 4, 2004).
37
United States v. Dondero, No. 07-cv-00931-ESH (D.D.C. May 22, 2007).
38
United States v. Malone, No. 09-cv-01147 (D.D.C. June 25, 2009).
26
informal interpretation from the FTC’s Premerger Notification Office (“PNO”).39
However, he, too, was not subjected to the maximum permitted under the statute.
Most recently, Brian Roberts, CEO and Chairman of Comcast
Corporation, agreed to pay $500,000 in connection with his acquisition of
Comcast stock between 2007 and 2009.40 According to the FTC, Mr. Roberts
failed to file the required HSR notifications before acquiring shares in the
company.
In 2002, as a result of a merger agreement between Comcast and
AT&T Corp., Mr. Roberts was permitted to acquire additional voting securities of
Comcast until September 2007. Mr. Roberts acquired the stock that year but
failed to make an HSR filing regarding the acquisition.
He then continued
acquiring securities through April 2009 without notifying the authorities. In
August 2009, Mr. Roberts made a corrective filing and admitted to prior
inadvertent violations of the HSR Act in 1999 and 2000. These admissions,
without evidence of further intent, apparently mitigated the circumstances and
resulted in the imposition of fines far less than the maximum allowed fine, which
could have amounted to $8 million.
A New Era of Criminal Enforcement for Infringers of the HSR Process?
Probably not. After all, the conduct at issue in the case of Mr. Pyo is
pretty rare in the context of a merger review, and the DOJ’s criminal prosecution
in that case was not apparently meant as a signal that less egregious intentional
violations would now be met with criminal charges. But just as Sara Lee may
have signaled impending agency action against Mr. Lipson in Blackstone, the
agency’s focus on level of intent as a key aggravating factor in determining the
severity of enforcement against an individual may have foreshadowed criminal
39
In the enforcement action against Mr. Malone, and despite reliance on an informal PNO
interpretation, his counsel reportedly failed to realize that the particular informal interpretation
relied upon had been disavowed by the PNO six months prior in another informal interpretation
that was published on the FTC’s website.
40
Press Release, “FTC Obtains $50,000 Penalty for Pre-Merger Reporting Act Violations”
(December 16, 2011), available at http://www.ftc.gov/opa/2011/12/brianroberts.shtm.
27
prosecution of Mr. Pyo’s knowing and intentional actions in falsifying documents.
As the agency has noted again and again with Mr. Gates, Mr. Roberts and others,
inadvertent or technical violations of the Act, though not a defense, may mitigate
circumstances such that an offender need not pay the maximum fine under the
statute.
Conversely, corporate America is now on notice that blatant and
intentional actions taken in a specific attempt to corrupt the HSR process may be
met by a full arsenal of enforcement weapons, including criminal prosecution
under statutes other than the HSR Act (and not necessarily limited to the
obstruction of justice statute under which DOJ chose to prosecute Mr. Pyo).
A key takeaway in this matter is that in enforcement actions involving the
impeding of an HSR review process, punishment sought will fit the deed at issue.
And if the deed amounts to an intentional crime, the agency will not hesitate to
prosecute it as one.
Lessons Learned and Practical Tips
Beyond the obvious admonishment against engaging in intentional actions
in an attempt to distort the agencies’ ability to conduct a merger review process,
Mr. Pyo’s case, along with the myriad of civil agency enforcement actions against
individuals under the HSR Act over the years, offer additional guidance that
antitrust and corporate counsel should heed.

Counsel must work closely with business people to make certain that all
understand their legal obligations in complying with an HSR investigation.
Even if HSR violations do not rise to the level of intentional concealment or
alteration of documents, a failure to file, the submission of an incomplete
filing or the failure to observe the required waiting periods can still result in
substantial fines to corporations and individuals alike.

If violations do occur, whether intentional or not, counsel should notify the
antitrust agencies and cooperate fully with any resulting investigation.
28

Agencies rely heavily upon the documents provided with a company’s HSR
filing, typically as part of Item 4(c), and failure to provide the requisite
documents may cause substantial prejudice to the agency’s evaluation of the
transaction.

When conducting searches for documents to be submitted with an HSR filing,
individual officers and directors should only make decisions about what does
and does not qualify if they fully understand what information is required.

An agency investigation of a failure to produce a complete set of documents
with the HSR filing has the potential of seriously delaying or even derailing
what could otherwise be a very doable deal.

For acquisitive clients, who are “repeat customers” at the agencies, a failure to
file or submit a complete set of Item 4(c) and 4(d) documents can seriously
hurt your client’s credibility with the agencies and may make the agencies
suspicious of every future filing your client makes, as well as your client’s
future non-reported transactions.

It is advisable to always check your client’s Item 4(c) and 4(d) documents
against the Item 4(c) and 4(d) documents of the other party to the transaction.
That way you can detect omissions (and even inappropriate alterations of the
documents) in your HSR submission.
29
SOME CHALLENGES IN THE ANTITRUST ANALYSIS OF PATENT
ACQUISITIONS
Russell Steinthal1
In February 2012, the Antitrust Division issued an unusual closing
statement simultaneously closing three different investigations: Google’s
acquisition of Motorola Mobility (“Motorola”), the acquisition of a large portfolio
of patents from Nortel by Rockstar Bidco (a consortium led by Apple, Microsoft
and RIM, among others) and the separate acquisition by Apple of certain patents
originally owned by Novell Inc.2 The Antitrust Division thereby ended (at least
for the time being) a more than year-long extended inquiry into patent
acquisitions, by far its most intensive recent examination of such transactions.
Those investigations suggest a few key lessons about how the Agencies should
evaluate patent acquisitions and some of the limits on their analysis.
Perhaps the most important takeaway from DOJ’s recent focus on patent
acquisitions is that they can and should be analyzed under the same principles that
govern any other asset acquisition, which violate Section 7 when they create or
enhance market power in a properly-defined relevant market.3
In particular,
patent acquisitions may have such an effect where the acquirer has a greater
incentive or ability to assert the patents against rivals. For example, if a patent is
transferred from a company that does not compete in the relevant market in which
the patent is used (i.e. they do not practice the patent themselves) to a firm that
1
Russell Steinthal is counsel in Axinn, Veltrop & Harkrider LLP’s New York office. Axinn,
Veltrop & Harkrider represented Google Inc. in its acquisition of Motorola Mobility, Inc. The
views expressed herein are the author’s own and do not represent those of the Firm or the Firm’s
clients.
2
U.S. Dep’t of Justice, Statement of the Department of Justice’s Antitrust Division on Its Decision
to Close Its Investigations of Google Inc.’s Acquisition of Motorola Mobility Holdings Inc. and
the Acquisitions of Certain Patents by Apple Inc., Microsoft Corp. and Research in Motion Ltd.
(Feb. 13, 2012), available at http://www.justice.gov/atr/public/press_releases/2012/280190.htm.
3
U.S. Dep’t of Justice & Fed’l Trade Comm’n, Horizontal Merger Guidelines (Aug. 19, 2010)
available at http://www.justice.gov/atr/public/guidelines/hmg-2010.html (“The unifying theme of
these Guidelines is that mergers should not be permitted to create, enhance, or entrench market
power or to facilitate its exercise.”)
30
does compete in the market, the acquirer may have a greater incentive to assert
the patent against its rivals, rather than licensing it broadly.
Of course, an
increased incentive to assert, like an increase in concentration in a typical merger
review, does not by itself establish a Section 7 violation. Other competitive
factors like the degree of concentration in the market and the presence or absence
of barriers to entry are also critical.
Yet there are also some aspects of applying the Clayton Act to patent
acquisitions that create unique problems. For example, because patents inherently
give their owners the power to exclude, it is critical to distinguish between
merger-specific and non-merger-specific effects.
Merely transferring the
statutory right to exclude from one firm to another is unlikely to violate Section 7
unless something about the transaction changes the likelihood that or the
circumstances in which the patents would be asserted.
Finally, investigations of patent acquisitions also pose significant
problems of proof that may limit the Agencies’ ability to bring cases even where
they may theoretically be warranted. Witnesses, for example, may be unwilling
or unable to testify about a patent’s validity or competitive significance due to the
attorney-client privilege or the risk of acknowledging “willful infringement,”
which can lead to treble damages.4
Nonetheless, as assembling patent portfolios becomes an increasingly
important part of competition in certain industries, the Agencies will have to
continue to confront these questions, despite the difficulty that they may pose.
I.
The CPTN/Novell Transaction
In late 2010, CPTN Holdings, LLC, a company owned jointly by
Microsoft, Apple, Oracle and EMC, agreed to pay $450 million to purchase 882
patents from Novell. Novell, which was one of the early pioneers of corporate
networking (through its Netware operating system), had more recently become a
major Linux vendor. In a related transaction, the remainder of Novell’s business
4
See 35 U.S.C. § 284; In re Seagate Tech., 497 F.3d 1360 (Fed. Cir. 2007) (en banc).
31
was to be acquired by Attachmate, which would receive a royalty-free license to
the patents being sold. The patents were thus being separated from the operating
businesses that they had once supported.
Both the Antitrust Division and the German Federal Cartel Office
(“FCO”) opened investigations seeking to understand the effects of the
transaction.
In particular, the reviews focused on the likely effects that the
transaction would have on developers and distributors of open source software,
which is a significant competitive threat to each of the CPTN members in their
respective markets.
Whereas Novell was significantly constrained in its ability and incentive
to assert the patents against open source software by its need to preserve its
reputation and credibility in that community, Microsoft, Apple, Oracle and EMC
had no such constraints. Each of those companies had market power in a relevant
market, yet faced significant competition from open source alternatives.
Microsoft in particular had a long history of using patents as a weapon against
open source software such as Linux, which Microsoft’s CEO famously called a
“cancer.”5 Moreover, Microsoft has been accused in the press of trying to spread
fear, uncertainty and doubt (“FUD”) about the possibility of patent infringement
by open source software.6 Adding the Novell patents to its portfolio would have
increased its ability to target its open source competition, while also allowing
Apple, Oracle and EMC to do the same.
5
Joe Wilcox et al., Why Microsoft is wary of open source, CNET (Jun 18, 2001) available at
http://news.cnet.com/2100-1001-268520.html.
6
See Jun Auza, Infamous Microsoft FUD Campaigns Against Linux, TechSource (Jul. 18, 2011)
available at http://www.junauza.com/2011/07/microsoft-fud-campaigns-against-linux.html; Mary
Jo Foley, Ballmer: Novell deal proves open source needs to ‘respect IP rights,’ZDNet (Feb. 16,
2007) available at http://www.zdnet.com/blog/microsoft/ballmer-novell-deal-proves-open-sourceneeds-to-respect-ip-rights/265 (“Open Source is not free and Open Source will have to respect
intellectual property rights of others just as any other competitor will”); Eric Lai, Ballmer: Linux
Users Owe Microsoft, Computer World (Nov. 16, 2006) available at
http://www.computerworld.com/s/article/9005171/Ballmer_Linux_users_owe_Microsoft (“Novell
pays us some money for the right to tell customers that anybody who uses SUSE Linux is
appropriately covered . . . [this] is important to us, because [otherwise] we believe every Linux
customer basically has an undisclosed balance-sheet liability.”).
32
As the investigation continued, the parties withdrew and refiled their
premerger notifications in an effort to assuage the DOJ’s and the FCO’s concerns
and then appear to have entered into a timing agreement. In April 2011, however,
the Antitrust Division announced that CPTN and its members had agreed to a
number of “fix-it-first” solutions to resolve DOJ’s concerns.
As the DOJ
statement explained, “as originally proposed, the deal would jeopardize the ability
of open source software, such as Linux, to continue to innovate and compete in
the development and distribution of server, desktop, and mobile operating
systems, middleware, and virtualization products.”7
The agreed-upon remedies appeared to be an attempt to limit at least the
most obvious ways in which the patent transfer would have increased the
likelihood that the patents would be asserted against open source software.
Specifically, Microsoft agreed not to acquire any of the Novell patents and was
instead limited to acquiring a non-exclusive license (which would not allow it to
assert the patents against others). EMC, meanwhile, agreed not to acquire certain
patents related to virtualization, a market in which EMC had significant market
power through its control over VMware, the leading vendor of virtualization
software. Finally, Oracle, Apple and EMC agreed to acquire the patents subject
to certain conditions, including most importantly that they would acquire them
subject to the license that Novell had earlier given to the Open Invention Network
(OIN), which allows all of OIN’s members and licensees to use Novell’s patents
(along with those of all of the organization’s other licensees) in Linux systems
(subject to certain limitations).8
7
U.S. Dep’t of Justice, CPTN Holdings LLC and Novell Inc. Change Deal in Order to Address
Department of Justice’s Open source Concerns (Apr. 20, 2012), available at
http://www.justice.gov/opa/pr/2011/April/11-at-491.html.
8
See Open Invention Network LLC, License Agreement, available at
http://www.openinventionnetwork.com/pat_license.php. DOJ’s statement also stated that the
CPTN members had agreed to acquire the patents “subject to the GNU General Public License,
Version 2, a widely adopted open-source license.” While the GPL is, in fact, an important license
for open source software, it is a software license. DOJ’s intent in saying that the parties would
acquire the patents “subject to” such a license remains unclear.
33
Somewhat unusually, the Antitrust Division essentially allowed the
transaction to close while it continued its investigation: CPTN closed its
acquisition of the patents from Novell shortly after DOJ issued its April 2011
statement, but the parties apparently agreed not to distribute the patents to the
CPTN members until a later date to allow DOJ to continue to investigate whether
the acquisition of particular patents by Oracle, Apple or EMC would also raise
Section 7 issues. The Department ultimately took no further action, however,
clearing Oracle and EMC to acquire their share of the patents in the fall of 2011,
although Apple’s portion of the investigation remained open until it was
ultimately closed in DOJ’s “global resolution” in February 2012.9
II.
The Rockstar/Nortel Acquisition
Just as DOJ was resolving at least the first phase of its CPTN
investigation, Google announced that it had agreed to make a stalking-horse bid
of $900 million for Nortel’s substantial portfolio of patents. In its announcement,
Google explained that its primary goal was to reduce the risk of patent litigation
in the smartphone industry by reducing the significant imbalance in patent
portfolios between Microsoft, Apple and Google, the three principal smartphone
“platform” competitors. As Google’s general counsel wrote:
But as things stand today, one of a company’s
best defenses against this kind of litigation is
(ironically) to have a formidable patent portfolio, as
this helps maintain your freedom to develop new
products and services. Google is a relatively young
company, and although we have a growing number of
patents, many of our competitors have larger portfolios
given their longer histories.
So after a lot of thought, we’ve decided to bid
for Nortel’s patent portfolio in the company’s
bankruptcy auction. Today, Nortel selected our bid as
9
Although the exact date of DOJ’s approval of the Oracle/EMC second-stage transactions is not
public, U.S. Patent and Trademark Office records reflect that CPTN Holdings’ various patent
assignments to Oracle and EMC were executed on September 9, 2011 and recorded on various
dates in October. Apple’s assignment, meanwhile, was not executed until June 14, 2012 and
recorded August 27, 2012.
34
the “stalking-horse bid," which is the starting point
against which others will bid prior to the auction. If
successful, we hope this portfolio will not only create a
disincentive for others to sue Google, but also help us,
our partners and the open source community—which
is integrally involved in projects like Android and
Chrome—continue to innovate. In the absence of
meaningful reform, we believe it's the best long-term
solution for Google, our users and our partners.10
Applying the CPTN formula, Google would have had neither a greater
incentive nor ability than Nortel to assert the patents against its rivals, who could
credibly threaten retaliation (indeed, they were already suing Google’s partners,
accusing Android of patent infringement). While DOJ investigated, it ultimately
allowed the HSR waiting period to expire, effectively approving Google’s
acquisition of the patents.
Yet in the ensuing bankruptcy auction, Microsoft and Apple teamed up
with others, including Research in Motion and (once again) EMC to outbid
Google for the patent portfolio, with an ultimate winning bid of $4.5 billion, one
of the highest amounts ever paid for a patent portfolio.11 Remarkably, Microsoft
led the effort despite already having a paid-up, perpetual license to the entire
Nortel portfolio, insulating it from any risk that the patents would be used against
it.12 DOJ once again opened an investigation under the “CPTN” rationale, namely
whether the transaction would increase the ability or incentive to assert the
patents.
10
Kent Walker, Patents and innovation, Google Official Blog, available at
http://googleblog.blogspot.com/2011/04/patents-and-innovation.html.
11
Dave Goodboy, Rockstar wins $4.5b Nortel Patent Buyout, Beacon Equity Research (Jul. 12,
2011) available at http://www.beaconequity.com/rockstar-wins-4-5b-nortel-patent-buyout-201107-12/ (“In fact, the price paid was record breaking in terms of amount paid and scope of the
patents.”).
12
Reuters, Microsoft objects to Nortel patent sale terms, Reuters.com (Jun. 13, 2011) available at
http://www.reuters.com/article/2011/06/13/us-nortel-idUSTRE75C5WT20110613 (“Microsoft ...
claims a ‘worldwide, perpetual, royalty-free license to all of Nortel's patents’”).
35
III.
The Google/Motorola Mobility Merger
Google continued its efforts to acquire a defensive portfolio by agreeing
to buy Motorola Mobility, Inc. (“MMI”) in July 2012. In addition to being a
significant manufacturer of Android smartphones and tablets, MMI owned a
portfolio of over 17,000 patents covering a range of areas, including audio and
video encoding, batteries, antennae, and cellular radio technology, to name only a
few. MMI had also been involved in patent litigation with both Apple and
Microsoft since October 2010, raising the possibility that Google could use a
settlement of those claims as the basis for a broader “patent peace” agreement that
would reduce the amount of patent aggression by firms like Apple and Microsoft
aimed at the Android platform as whole.
DOJ issued a Second Request to investigate not just whether the
combination of Google with a major Android OEM would foreclose other OEMs
from access to Android, but also whether the acquisition of MMI’s patents would
tend to reduce competition. Notably, unlike the Novell and Nortel transactions,
MMI was being acquired in its entirety, including both its patents and its related
operating businesses. Nonetheless, DOJ relatively rapidly concluded that the nonpatent aspects of the transaction did not pose competitive concerns—in large part
because Android’s open source licensing would prevent Google from foreclosing
access to Android, even apart from the strong business incentives Google would
have to maintain Android as an open platform. The investigation thus began to
parallel the Rockstar/Nortel investigation, with DOJ suggesting to the parties that
it was looking for a resolution that would apply to both cases, an approach that
ultimately led DOJ to the unusual joint closing statement referenced above.
IV.
The Limits of the Agencies’ Approach
While it is relatively easy to state the relevant Section 7 rule—an
acquisition is unlawful if it increases the patent holder’s ability or incentive to
assert the patent, and thus creates or enhances the holder’s market power—
actually performing the required analysis can present significant challenges for
36
the Agencies, as became clear in DOJ’s investigations of the Nortel and MMI
transactions.
First, because each patent is unique and must be individually analyzed,
Section 7 analyses will only rarely be a simple quantitative exercise. Rather, a
patent’s competitive significance depends on a range of factors, including the
likelihood that it will be held valid, the scope of its claims, whether competitors’
products practice the patent, the existence of patented or unpatented alternatives
and any licenses that encumber the patent. When that analysis is aggregated over
hundreds or even thousands of patents (as was the case in DOJ’s recent patent
investigations), the problem can rapidly become intractable, particularly on the
timeline of a standard HSR investigation.
That problem is compounded by the fact that patent law creates an
incentive structure that is at odds with that of antitrust law. Whereas “[t]he
conclusions of well-informed and sophisticated customers on the likely impact of
the merger”13 are usually an important, if not essential, element of the Agencies’
merger analysis, patent law discourages the frank testimony that is critical to
identifying and preventing truly anticompetitive transactions.
Specifically,
potential witnesses have a strong disincentive to testify that they would be
concerned about the sale of a particular patent, since a declaration or testimony
that they are aware that they might be infringing a valid patent could be used as
evidence of “willful infringement,” which can lead to the award of treble
damages.14 While the Federal Circuit has recently been attempting to narrow the
doctrine,15 current law makes it extremely risky for the parties with the most
direct knowledge to cooperate with an Agency patent investigation “on the
record.”
13
14
U.S. Dep’t of Justice & Fed’l Trade Comm’n, Horizontal Merger Guidelines § 2.2.2.
See 35 U.S.C. § 284; In re Seagate Tech., 497 F.3d 1360, 1370-72 (Fed. Cir. 2007) (en banc).
15
See, e.g., Bard Peripheral Vascular, Inc. v. W.L. Gore & Assocs., Inc., 682 F.3d 1003 (Fed. Cir.
2012) (en banc) (clarifying that the objective recklessness element of willful infringement should
be determined by the judge and subject to de novo review on appeal).
37
DOJ’s relative success with the CPTN/Novell investigation, therefore,
may have been the exception that proves the rule: the contrast between Novell’s
incentives, as a major open source contributor, and those of Microsoft—perhaps
one of the most open opponents, or at least skeptics, of the open source
movement—was just so stark that it trumped the need for a patent-by-patent
analysis. Similarly, EMC’s willingness to acknowledge that certain patents in the
portfolio related to virtualization (an area in which it had market power) eased the
way for an agreement that it would not acquire those patents. Yet that only
highlights the difficulty. Given its time and resource constraints, it is unlikely
that DOJ had any independent way to determine whether other patents that were
not on EMC’s list might also have impacted the virtualization market or the
ability to fully assess the somewhat more mixed incentives of a firm like Apple
that both supports and competes with open source software.
Faced with those constraints on its ability to examine individual patents
on the necessary scale to resolve the Nortel and MMI acquisitions, DOJ
seemingly turned to a superficially attractive shortcut by focusing on “standard
essential patents” (“SEPs”). Since, by definition, standard essential patents are
those that are necessarily infringed by products that implement the relevant
standards, the theory was that there wasn’t any need for DOJ to “prove” the
competitive significance of such patents—instead, it could focus on proving the
significance of the relevant cellular and other standards.
The reality, however, is that it is impossible to identify truly “essential”
patents ex ante. The best an Agency can do is to look at patents that the patent
holder has declared or claims to be essential to particular standards, but that
approach is both underinclusive and overinclusive. First, many standard setting
organizations do not require the disclosure of specific essential patents if the
patentee is willing to generally commit that it will license any SEPs it happens to
own on fair, reasonable and non-discriminatory terms. For example, the Letter of
Assurance Form used by the Institute of Electrical and Electronics Engineers’ (the
IEEE) provides that “[t]he Submitter may, but is not required to, identify one or
more of its Patent Claims that it believes might be or become Essential Patent
38
Claims.” The Submitter may then either limit the assurance to those patents that
are listed (or a subset thereof) or indicate that it is a “Blanket Letter of Assurance”
that applies to “all Essential Patent Claims that the Submitter may currently or in
the future have the ability to license”16
The European Telecommunications
Standards Institute (ETSI) is, in this sense, an outlier in that its rules now require
that each potentially essential patent, or at least patent family, be specifically
disclosed in an annex to a licensing assurance.17
At the same time, there are multiple reasons why a patent that was
declared to an SSO might not, in fact, be essential. Most obviously, the rules of
SSOs like ETSI and the IEEE are explicitly intended to require the disclosure of
even potentially essential patents as early as possible in the standardization
process.18 As the draft standard evolves, such a patent might not end up being
essential to the final standard; conversely, if a patent application is declared as
potentially essential (which is, generally speaking, the type of procompetitive
disclosure that the Agencies and SSOs encourage), the patent that ultimately
issues from the PTO may include limitations that render it non-essential even if
the standard did not change. Similarly, SSO rules generally provide that a patent
is considered “essential” if there is any portion of the standard that cannot be
implemented without infringing the patent, even if that portion of the standard is
only optional. Beyond those ways in which SSO disclosure policies affect the set
16
IEEE Letter of Assurance for Essential Patent Claims, available at
https://development.standards.ieee.org/myproject/Public//mytools/mob/loa.pdf.
17
See IPR Information Statement Annex, ETSI IPR POLICY, available at
http://www.etsi.org/WebSite/document/Legal/ETSI%20IPR%20Policy%20November%202011.pd
f.
18
See e.g., ETSI IPR POLICY § 4.1, available at
http://www.etsi.org/WebSite/document/Legal/ETSI%20IPR%20Policy%20November%202011.pd
f (“In particular, a MEMBER submitting a technical proposal for a STANDARD or TECHNICAL
SPECIFICATION shall, on a bona fide basis, draw the attention of ETSI to any of that
MEMBER's IPR which might be ESSENTIAL if that proposal is adopted..”) (emphasis added);
IEEE-SA Standards Board Bylaws, available at
http://standards.ieee.org/develop/policies/bylaws/sect6-7.html (“The Submitter of the Letter of
Assurance may, after Reasonable and Good Faith Inquiry, indicate it is not aware of any Patent
Claims that the Submitter may own, control, or have the ability to license that might be or become
Essential Patent Claims. If the patent holder or patent applicant provides an assurance, it should do
so as soon as reasonably feasible in the standards development process once the PAR is approved
by the IEEE-SA Standards Board.”) (emphasis added).
39
of “declared SEPs,” courts and the International Trade Commission routinely hold
even declared SEPs to be invalid or not infringed (and thus non-essential) when
such supposed SEPs are litigated, just as other “non-SEPs” are.19 In short, the
assumption that SEPs are somehow more significant or more “powerful” because
of the ease with which patentees can demonstrate infringement—or the parallel
assumption that the Agencies do not need to evaluate their competitive
significance as part of a merger investigation—is ultimately flawed.
Indeed, the fact that SSO rules generally require patentees to agree to
license their SEPs on reasonable and non-discriminatory (“RAND”) (or similar)
terms is a factor that can reduce the competitive risk posed by such patents, since
such commitments limit the patentee’s ability to refuse to license the patent to its
rivals (even if it would have the incentive to do so). Such a license commitment
can be analogized to a long-term contract that protects customers against a postmerger price increase, a factor that is routinely included in the Agencies’ merger
analyses. Similarly, the “non-discriminatory” component of RAND most likely
means that—even where there is ambiguity about what licensing terms would be
“reasonable”—a patentee will, at least in principle, be unable to charge its rivals
more than non-rivals to license the SEP, creating a familiar situation in which
marginal consumers can protect inframarginal consumers from price increases in
the absence of price discrimination. Of course, actual licenses also constrain an
acquirer’s ability to assert any patent, including an SEP, against rivals.
There are undoubtedly aspects of the FRAND licensing regime that are
still unresolved, including how courts will deal with parties that implement
standards but are unwilling or unable to agree on license terms with the relevant
SEP holders. The most important question for a merger analysis under Section 7
of the Clayton Act, however, is whether the acquisition itself changes the patent
19
Qualcomm Inc. v. Broadcom Corp., 539 F.Supp.2d 1214 (S.D. Cal)(holding Qualcomm’s SEPs
unenforceable due to inequitable conduct following a jury verdict finding that the SEPs were not
infringed by Broadcom); In re Certain Electronic Devices, Including Wireless Communication
Devices, Portable Music and Data Processing Devices, and Tablet Computers, Inv. No. 337-TA794, Initial Determination ad Recommended Determination on Remedy and Bond (U.S. Int’l
Trade Comm’n, Oct. 3, 2012)(finding that Apple had not infringed Samsung’s SEPs).
40
holder’s incentives or ability to assert the patents, including in theory whether it
gives the buyer, in DOJ’s words, “the incentive and ability to exploit ambiguities
in the SSOs’ F/RAND licensing commitments to hold up rivals, thus preventing
or inhibiting innovation and competition.”20 But that must be a greater incentive
or ability than existed before the transaction. Agency concern over the inherent
ambiguity of “reasonable” royalty rates, or a generalized concern about whether a
party would have the ability to seek injunctive relief against the infringement of
its patents (including its SEPs), does not create a Section 7 issue if the seller
would have had the same ability. DOJ ultimately reached that conclusion in the
Google/MMI merger, concluding that the merger “would not substantially alter
current market dynamics,”21 and in the case of Apple’s acquisition of Novell
patents from CPTN, which DOJ concluded would not permit Apple to avoid
Novell’s earlier commitments and seek royalties from Linux users.
A final lesson arises from a postscript, of sorts, to the recent patent
reviews: when the Agencies do obtain relief, even in the form of a “fix-it-first” or
other voluntary commitment, they must be careful that such relief will actually be
effective.
For example, in its decision to close its investigation of CPTN’s
acquisition of Novell’s patents, DOJ took comfort in the fact that the patents were
being acquired subject to the OIN license. Yet Oracle may have effectively
avoided that by exercising its pre-existing right to prospectively withdraw from
OIN, 22 raising the question of whether consumers could have been better off if
the patents had been retained by Novell, which was a founding member of OIN
and had much less incentive to withdraw. Meanwhile, some commentators have
criticized Rockstar (the company formed by Microsoft and Apple to acquire the
20
U.S. Dep’t of Justice, Statement of the Department of Justice’s Antitrust Division on Its
Decision to Close Its Investigations of Google Inc.’s Acquisition of Motorola Mobility Holdings
Inc. and the Acquisitions of Certain Patents by Apple Inc., Microsoft Corp. and Research in
Motion Ltd. (Feb. 13, 2012), available at
http://www.justice.gov/atr/public/press_releases/2012/280190.htm.
21
Id.
22
Open Invention Network, OIN Community of Licensees, Note(1) available at,
http://www.openinventionnetwork.com/licensees.php (“Oracle exercised a Limitation Election
under section 2.2 of the License Agreement on March 29, 2012.”)
41
Nortel patents) for purportedly trying to extract the maximum royalties possible
from licensees—but not, of course, its parents.23 Rockstar’s CEO has publicly
claimed that it is not subject to the commitments DOJ relied on in allowing its
parents to acquire the Nortel patents, saying that “We are separate. . . That does
not apply to us.”24 Whatever one thinks about whether DOJ obtained sufficient
relief in the Novell, Nortel or MMI transactions, parties should not be allowed to
effectively renege on their commitments, if the merger review process is to work
effectively.
V.
Moving Forward
If focusing on SEPs is not a real solution to the complexity of patent
acquisition analysis, however, what can the Agencies do?
The increasing
significance of intellectual property in today’s economy and the real harm to
consumers that can flow from the anticompetitive assertion of patents means that
the Agencies cannot afford to simply ignore the issue. That is true whether the
patents are being acquired by an operating company that might have an incentive
to assert the patents against rivals in the same market (as DOJ’s theory posited in
the transactions discussed earlier), by a dominant firm that might have the
incentive to use the patents to maintain its monopoly position or expand it into an
adjacent market or even the increasingly significant risk posed by “patent trolls”
that exist just to assert their patents and extract royalties from consumers.
Indeed, because a Section 7 challenge to the acquisition of a patent is
often the only way to prevent such harm, since the mere assertion of a reasonable
claim on a validly issued patent is typically protected by the Noerr-Pennington
doctrine,25 Agency scrutiny of patent acquisitions is critical. Yet as discussed
23
Robert McMillan, How Apple and Microsoft armed 4000 patents, Wired (May 21, 2012),
available at http://www.wired.com/wiredenterprise/2012/05/rockstar/.
24
Id.
25
See E. R.R. Presidents’ Conference v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961); United
Mine Workers of America v. Pennington, 381U.S. 657 (1965); Bill
Johnson’s Restaurants, Inc. v. NLRB, 461 U.S. 731 (1983).
42
above, it is nearly impossible for the Agencies to appropriately examine the
nuances of each patent on the typical timeframe for a merger investigation.
Ultimately, therefore, the Agencies may need to resort to more post-acquisition
investigations, including potentially their authority to challenge acquisitions at
“any time when the acquisition threatens to ripen into a prohibited effect,”26 after
it becomes clear which of the acquired patents are actually being used to harm
competition. Even that, however, will not change the fact that the Agency will
have the burden of demonstrating that the acquisition changed the competitive
effects of the litigation, as opposed to simply being an outgrowth of
Congressional policy choices in creating the patent system.
VI.
Conclusion
DOJ’s recent scrutiny of patent acquisitions is an important example of
the Antitrust Division tailoring its enforcement agenda to fit changing competitive
conditions. Yet at the same time, protecting competition and consumers means
recognizing that not all patent acquisitions are the same, because not all acquirers
have the same ability or incentives. Indeed, under the current system, acquiring
additional patents to create patent balance—and thus a state of mutual
deterrence—may frequently be a reasonable, market-based approach to reducing
the risk of patent litigation. Conversely, the sale of patents to “patent trolls” may
increase the risk of litigation by reducing the deterrent effect of potential countersuits that can limit operating companies from suing even their closest rivals. The
application of those principles must still be developed, but Section 7 and modern
merger analysis are flexible enough to take into the account the unique
circumstances of each acquisition.
And unless there is a major shift in the
economics of patent litigation, the antitrust community is likely to be dealing with
these issues for years to come.
26
United States v. E.I. duPont de Nemours & Co., 353 U.S. 586, 597 (1957).
43
DOES IT MATTER WHICH AGENCY — FTC OR DOJ — REVIEWS A
MERGER? RECENT STATISTICAL EVIDENCE
Paul B. Hewitt and Diana L. Gillis1
Two federal agencies—the Federal Trade Commission (FTC) and the
Department of Justice Antitrust Division (DOJ)—share merger enforcement
responsibilities. Both have essentially the same authority under Section 7 of the
Clayton Act, 15 U.S.C. § 18, they operate under the same timetable and rules
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, 15
U.S.C. § 18a, (HSR Act), and they prepare and issue merger guidelines jointly. 2
However, the agencies’ personnel, institutional structure, and procedures are not
the same. Are the differences material to the merger review process? Can merger
review at one agency as opposed to the other result in higher costs (time and
money) and different outcomes?
As noted in the 2007 report of the Antitrust
Modernization Commission, “[a]ny such differences – real or perceived – can
undermine the public’s confidence that the antitrust agencies are reviewing
mergers efficiently and fairly and that it does not matter which agency reviews a
given merger.”3
One obvious procedural difference between the agencies is that in litigated
merger challenges the FTC can, and increasingly does, force merging parties to
fight a two-front war—in a district court preliminary injunction proceeding and
simultaneous administrative litigation.4 But actual litigation is relatively rare,
1
Paul B. Hewitt is a partner in the Antitrust and Unfair Competition practice in the Washington,
DC office of Akin Gump Strauss Hauer & Feld, LLP and Diana L. Gillis is an associate in the
practice. The views expressed herein do not purport to represent the views of the Firm or any of
its clients.
2
See, e.g., the current version of the agencies’ Horizontal Merger Guidelines issued in 2010. U.S.
Dep’t of Justice & Fed. Trade Comm’n, Horizontal Merger Guidelines (rev. 2010), available at
http://www.justice.gov/atr/public/guidelines/hmg-2010.pdf.
3
ANTITRUST MODERNIZATION COMMISSION, REPORT AND RECOMMENDATIONS 131 (2007).
4
See Paul B. Hewitt and David E. Altschuler, The FTC’s New Merger Litigation Strategy:
Lessons From History, IX THE THRESHOLD 12 (2009); Complaint, Fed. Trade Comm’n v. Red
Sky Holdings, LP, No. 4:08-cv-03147 (S.D. Tex. Oct. 23, 2008) and Complaint, In re Red Sky
Holdings LP, Dkt. No. 9333 (F.T.C. Oct. 23, 2008); Complaint, Fed. Trade Comm’n v. OSF
44
affecting only a tiny fraction of the mergers reviewed each year. What about all
of the other mergers? Evaluating the extent of material differences between the
agencies can be difficult. Mergers presenting potential antitrust concerns differ
factually from one another, and a controlled experiment comparing the costs and
outcomes attendant to each agency’s review of the exact same merger is
obviously not possible.5
One valuable information source is the annually-prepared Hart-ScottRodino Premerger Notification Report (“HSR Report”). This article examines
HSR Report statistical data for both the FTC and DOJ over the last five fiscal
years (FY), 2007-2011, covering more than 7,000 reported transactions. Our
review reveals that the two agencies are quite close by some measures, for
example in their tendency to issue more Second Requests with increasing
transaction size. However, they markedly diverge in other areas; for example,
DOJ issued Second Requests following a grant of clearance at more than double
the rate of the FTC. After a brief review of the Hart-Scott-Rodino process, we
discuss the five-year statistical record for the FTC and DOJ in merger clearances,
Second Requests, and challenges.
I.
Background: the HSR Premerger Process
Most mergers and acquisitions reviewed by the FTC and DOJ are subject
to the notification and waiting period process established under the HSR Act. For
transactions meeting HSR filing thresholds and not falling within an exemption
category,6 the parties must submit HSR Notification and Report Forms7 to each
Healthcare System, No. 3:11-cv-50344 (N.D. Ill. Nov. 18, 2011) and Complaint, In re OSF
Healthcare System, Dkt. No. 9349 (F.T.C. Nov. 18, 2011); Complaint, Fed. Trade Comm’n v.
Graco, Inc., No. 1:11-cv-02239-RLW (D.D.C. Dec. 15, 2011) and Complaint, In re Graco, Inc.,
Dkt. No. 9350 (F.T.C. Dec. 15, 2011).
5
While the FTC and DOJ share concurrent merger review jurisdiction and could theoretically both
review the same merger, in practice they do not. Under a clearance agreement, mergers are
allocated to one agency or the other, principally based on the extent of prior experience with the
relevant industry.
6
15 U.S.C. § 18a(c); 16 C.F.R. Part 802.
45
agency and observe a waiting period prior to closing. The usual statutory waiting
period is 30 days (15 days for cash-tender offers and certain bankruptcy-related
transactions). Following expiration or early termination of this period, the parties
can consummate their transaction, unless the waiting period is extended by a
request for additional information (“Second Request”).8
Early termination of the waiting period may be granted if both the FTC
and DOJ concur, sometimes after simply looking at the parties’ Hart-Scott filings
and readily accessible public information. If either agency determines it would
like to conduct a more significant investigation during the initial waiting period, it
may request “clearance” from the other agency.
If both agencies request
clearance, disputes are generally resolved based on which agency has the most
experience with the relevant industry. Once clearance is granted, only the cleared
agency proceeds with the investigation and any ensuing challenge.
Second Requests are issued if the reviewing agency believes the
transaction presents serious potential antitrust concerns and requires further
intensive analysis.9 The issuance of a Second Request triggers a new 30 day
waiting period (10 days in the case of cash tender offers and certain bankruptcyrelated transactions), which will only begin after the parties have substantially
complied with the Second Request.10 The Second Request process is typically
very costly both for the merging parties (who may be forced to spend millions of
dollars on compliance) and the government. In addition, transactions can be
delayed by many months, postponing any cost-saving efficiencies that might
otherwise have been implemented (but, of course, also forestalling any
competitive harm that might otherwise have occurred).
7
16 C.F.R. § 803.1. See http://ftc.gov/bc/hsr/hsr_form_ver_101.pdf for the current version.
8
15 U.S.C. §§ 18a(b), (e)(1);16 C.F.R. §§ 803.10, 803.20.
9
15 U.S.C. § 18a(e)(1);15 C.F.R. § 803.20.
10
15 U.S.C. § 18a(e)(2);15 C.F.R. § 803.20(c).
46
The Second Request process can lead to various outcomes. The reviewing
agency may terminate its investigation without taking enforcement action. Or, the
reviewing agency may decide to challenge the transaction, resulting in one of
three scenarios: the merging parties abandon the transaction, the merging parties
and the government agree on a “fix” (ordinarily through a consent agreement
requiring a divestiture), or the government files suit seeking to block the
transaction.11
Any significant differences between the agencies in their basic
decisionmaking inclinations at the various steps of the process could have
important implications for mergers that happen to be cleared to one agency or the
other.
Is one agency more likely than the other to seek and secure clearance?
Issue a Second Request after securing clearance? Ultimately challenge a
transaction following issuance of a Second Request? This article analyzes the
statistical evidence in the annual HSR Reports relating to these questions.
II.
The Annual HSR Reports
The FTC, with the concurrence of the DOJ, annually issues an HSR
Report providing certain statistics on the transactions reported in the prior fiscal
year (October 1 through September 30). The HSR Report includes data on the
number of transactions for which premerger notifications were filed, the number
of clearances secured by each agency, the number of Second Requests each
agency issued following clearance, the number of enforcement actions taken by
each agency, and general information on the industries at issue in the reported
transactions.
11
The FTC typically files suit in federal court seeking a preliminary injunction blocking the
transaction and simultaneously commences administrative litigation “on the merits” before an
FTC Administrative Law Judge (ALJ). The ALJ’s decision can be appealed to the full
Commission, whose decision, if adverse to the merging parties, can then be reviewed in a federal
appeals court. The DOJ sues only in federal court, with the preliminary and permanent injunction
hearings often consolidated. Consent settlements with either agency are subject to a public
comment and review process. DOJ settlements must be approved by the court under the Tunney
Act following a public comment period. 15 U.S.C. § 16 (b) (d). FTC settlements must be
approved by the Commission, also following a public comment period. 16 C.F.R. § 2.34(c), (e).
47
The HSR Report includes information on actions taken during the
pertinent fiscal year. Therefore, for example, a matter may be reported to the
agencies in one fiscal year, but a Second Request issued in a separate fiscal year.
To minimize inter-year statistical anomalies, we have reviewed the data over a
lengthy period, the past five fiscal years, 2007-2011.12
Number of Transactions. The number of transactions reported in FY
2011 increased 24% from 2010, and over 100% from the recession year of 2009,
when the number of reported filings bottomed-out.
FY2007-2011: Reported Transactions
2,500
2,201
2,000
1,726
1,450
1,500
1,166
1,000
716
500
0
2007
2008
2009
2010
2011
Size. On average, within the size categories contained in the HSR Report,
the agencies received the most HSR filings for transactions valued between $50
and $100 million (approximately 21% of filings over the past five years). The
majority of all filings were for transactions valued at $200 million or more (52%).
12
FEDERAL TRADE COMM’N AND DEPT. OF JUSTICE, HART-SCOTT-RODINO ANNUAL REPORT,
FISCAL YEAR 2007, available at http://www.ftc.gov/os/2008/11/hsrreportfy2007.pdf; FEDERAL
TRADE COMM’N AND DEPT. OF JUSTICE, HART-SCOTT-RODINO ANNUAL REPORT, FISCAL YEAR
2008, available at http://www.ftc.gov/os/2009/07/hsrreport.pdf; FEDERAL TRADE COMM’N AND
DEPT. OF JUSTICE, HART-SCOTT-RODINO ANNUAL REPORT, FISCAL YEAR 2009, available at
http://www.ftc.gov/os/2010/10/101001hsrreport.pdf (Illustrating the statistical anomalies that
result from looking at just one year, the 2009 data show that the FTC had a higher number of
merger challenges than Second Requests) ; FEDERAL TRADE COMM’N AND DEPT. OF JUSTICE,
HART-SCOTT-RODINO ANNUAL REPORT, FISCAL YEAR 2010, available at
http://www.ftc.gov/os/2011/02/1101hsrreport.pdf; FEDERAL TRADE COMM’N AND DEPT. OF
JUSTICE, HART-SCOTT-RODINO ANNUAL REPORT, FISCAL YEAR 2011, available at
http://www.ftc.gov/os/2012/06/2011hsrreport.pdf .
48
FY 2007-11: Number of HSR
Transactions by Transaction Size
600
500
400
2007
300
2008
200
2009
100
2010
0
2011
Early Terminations.
Each year, the vast majority of reported
transactions involved a request for early termination of the waiting period.13 The
agencies granted such requests very frequently – approximately 75% of the time
over the past five years.
FY 2007-11: Grant of Early
Termination
2,000
76%
1,500
74%
77%
1,000
74%
Number of Requests for
Early Termination
Granted
69%
500
0
2007
2008
2009
2010
2011
The HSR Reports provide no useful information for comparing the
performance of the two agencies regarding grants of early termination. One
agency or the other often takes the lead in evaluating a request for early
13
See, e.g., FEDERAL TRADE COMM’N AND DEPT. OF JUSTICE, HART-SCOTT-RODINO ANNUAL
REPORT, FISCAL YEAR 2011, at Appendix A, available at
http://www.ftc.gov/os/2012/06/2011hsrreport.pdf.
49
termination—either informally or after securing clearance.
However, early
termination still requires the concurrence of both agencies, and the HSR Report
provides no breakout showing the relative substantive involvement of each
agency in the process.
III.
At Both FTC and DOJ, Chances of a Second Request Increase with
Transaction Size
Of the 1,450 transactions reported in 2011, the FTC and DOJ could have
issued a Second Request in 1,414 (“HSR Transactions”).14 In FY 2011, the
antitrust agencies issued a combined 58 Second Requests – representing only 4%
of all HSR transactions. This is on par with the percentage of Second Requests
issued in 2010, a slight decrease from 4.5% in 2009, and up from 3% in 2007 and
2.5% in 2008.
From FY 2007 through 2011, the FTC issued 111 Second Requests, and
the DOJ 128.
Regardless of the reviewing agency, the number of Second
Requests issued was heavily weighted toward deals in excess of $300 million,
accounting for 67% of all Second Requests in the past five years. Thus, on this
measure of performance, the agencies appear very comparable.
14
Omitted are 36 transactions in which the antitrust agencies were not authorized to request
additional information, including, for example, transactions determined to be exempt or nonreportable. See FEDERAL TRADE COMM’N AND DEPT. OF JUSTICE, HART-SCOTT-RODINO ANNUAL
REPORT, FISCAL YEAR 2011, available at http://www.ftc.gov/os/2012/06/2011hsrreport.pdf., at
n.4.
50
FY 2007-11: Second Requests Issued by
Transaction Size
50
45
40
35
30
25
20
15
10
5
0
IV.
FTC
DOJ
DOJ Issued Second Requests Following Clearance at More Than
Twice the FTC’s Rate
In FY 2011, the DOJ issued 34 Second Requests, and the FTC 24. More
striking than the fact that DOJ issued a greater number of Second Requests is that
DOJ had clearance to investigate 42% fewer transactions than the FTC. For the
five year period as a whole, FY 2007-2011, the DOJ issued 128 Second Requests,
and the FTC 111. Again, most striking is the fact that during the five year period
DOJ received clearance to investigate 49% fewer transactions than the FTC (414
v. 808 transactions), meaning that the FTC issued a Second Request after
obtaining clearance only 14% of the time, and the DOJ 31%. Stated differently,
after obtaining clearance DOJ was more than twice as likely as the FTC to issue a
Second Request.
51
FY 2007-2011: Second Requests
Issued Compared to Clearance
Granted
1000
808
800
600
400
200
Clearance Granted
414
111
(14%)
Second Request Issued
128
(31%)
0
FTC
DOJ
What accounts for this marked disparity? Many questions could be asked.
For example, is the DOJ more efficient than the FTC in early evaluation of which
mergers truly present antitrust concerns worthy of detailed analysis? The HSR
Reports provide no answer. Another question is whether the change in political
administrations could explain (albeit not necessarily justify) this difference, given
that DOJ is part of the executive branch of government, whereas the FTC is an
independent agency. A comparison between FY 2007-2008, the last two full
fiscal years of the Bush administration, with FY 2010-2011, the first two full
fiscal years of the Obama administration, reveals the same pattern and very
similar percentages. DOJ was more than twice as likely as the FTC to issue a
Second Request after obtaining clearance in both two year periods.
Second Requests Issued Compared to Clearance Granted
Bush:
FY2007-2008
Obama:
FY2010-2011
All:
FY2007-2011
FTC
13%
14%
14%
DOJ
27%
36%
31%
52
V.
FTC Was 46% More Likely Than DOJ to Challenge Transactions
Following Second Requests
In FY 2011, a very active year for enforcement, the agencies challenged
37 merger transactions (DOJ 20, FTC 17).15 “Challenges” to mergers include
litigation, consent settlements (which are always accompanied by complaints),
and abandonment (or restructuring) by the parties after the agency (or agency
staff) conveys antitrust concerns. In the great majority of instances where the
agencies oppose a transaction, their concerns are resolved in a consent settlement
requiring divestiture.
Over the five year period FY 2007-2011, the FTC challenged 92 HSRreported transactions, and the DOJ 73.16
Comparing the number of these
challenges to the number of Second Requests issued by each agency shows that
the FTC challenged transactions 83% of the time after it issued a Second Request,
while the DOJ challenged 57% of the time.
FY2007-11: Second Requests Issued
Compared with HSR Challenges
140
120
100
80
60
40
20
0
128
111
92
(83%)
73
(57%)
Second Requests Issued
HSR Transactions
Challenged
FTC
DOJ
Therefore, while the DOJ is statistically much more likely to issue a
Second Request in mergers for which it obtains clearance, the FTC is much more
15
See FEDERAL TRADE COMM’N AND DEPT. OF JUSTICE, HART-SCOTT-RODINO ANNUAL REPORT,
FISCAL YEAR 2011, available at http://www.ftc.gov/os/2012/06/2011hsrreport.pdf , at 10. A
number of the 37 enforcement actions in 2011 involved challenges to consummated transactions
that were presumably not HSR-reportable. Id. at n.14. In calculating the percentage of Second
Requests that led to challenges, this article excludes challenges to non-HSR-reported transactions.
16
These numbers exclude 15 challenges of non-HSR-reported transactions (FTC 9, DOJ 6).
53
likely to challenge a transaction once a Second Request has been issued. Is the
change in political administrations a possible explanatory variable? The evidence
is mixed. The pattern remains that the FTC is more likely than DOJ to challenge
a transaction following the issuance of a Second Request. However, comparing
the different two-year periods referenced above, the disparity between rates of
challenge narrowed from FTC 83% v. DOJ 48% in the Bush two-year period, to
FTC 75% v. DOJ 60% during the Obama period. Still, during the Obama years
DOJ was 25% more likely than the FTC to challenge a transaction after issuing a
Second Request. Thus, the change in administrations could potentially explain
only about half of the disparity in this measure of performance.
HSR Challenges Compared to Second Requests Issued
Bush:
FY2007-2008
VI.
Obama:
FY2010-2011
All:
FY2007-2011
FTC
83%
75%
83%
DOJ
48%
60%
57%
Conclusion
Beyond basic FTC/DOJ differences in institutional structure and litigation
procedures, statistical evidence from the FY 2007-2011 HSR Reports suggests
that the agencies differ in their investigatory and enforcement decisionmaking.
As summarized in the following graph, over a five year period after obtaining
clearance to investigate a transaction, the DOJ was statistically more than twice as
likely to issue a Second Request as the FTC. After a Second Request issued,
however, the FTC was almost 50% more likely than DOJ to actually challenge a
transaction.
54
SUMMARY TABLE FY 2007-2011:
Clearance, Second Requests, Challenges
900
808
800
FTC Issued a Second Request
in 14% of cleared matters
700
FTC challenged a transaction
following a Second Request
83% of the time
600
500
414
400
DOJ Issued a Second Request
in 31% of cleared matters
300
200
100
111 92
128
FTC
DOJ
73
0
Clearance
Second Requests
DOJ challenged a transaction
following a Second Request
57% of the time
Challenges
The HSR Reports provide no data explaining why these differences exist.
The fact that our analysis involved a large number of transactions over a five year
period suggests that the differences between the agencies as described above
involve more than random happenstance. Change in administrations appears to be
a factor, but that explains none of the variance in rate of Second Requests
following clearance, and possibly only half of the variance in rate of challenge
following issuance of a Second Request.
Moreover, even if politics did
adequately explain the differences, it would not justify them. The agencies over
time may simply have different approaches to decisions regarding clearance,
Second Requests, and enforcement, even for what might be considered similarly
situated mergers.
On the other hand, the differences might result from the varying
characteristics of the industries in which the respective agencies hold expertise,
and therefore obtain clearance. Unfortunately, the HSR Reports are of little help
in examining this hypothesis. The statistical tables only reference numbers of
clearances and Second Requests using broad three-digit NAICS industry codes
55
that do not permit the sort of detailed analysis of decisionmaking that might be
required.17
Presumably the agencies themselves could do this analysis.
Moreover, if they were to find the decisionmaking differences to be real, they
also could, and we submit should, work on a plan for achieving greater
convergence.
17
For example, in 2011, the three digit NAICS industry code accounting for the greatest number
of Second Requests—7, including 2 from the FTC and 5 from the DOJ—bears the unhelpful title
“Merchant Wholesalers Durable Goods.” FEDERAL TRADE COMM’N AND DEPT. OF JUSTICE, HARTSCOTT-RODINO ANNUAL REPORT, FISCAL YEAR 2011, available at
http://www.ftc.gov/os/2012/06/2011hsrreport.pdf , at Table XI.
56
MERGER REVIEW
CHALLENGES
IN
BRAZIL:
NEWS,
EXPECTATIONS,
AND
Gabriel Dias, Francisco Niclós Negrão, Thais Guerra, and Raquel Cândido1
Introduction
The global antitrust community is familiar with the fact that a new
Competition Act (Law 12.529/112) came into force in Brazil on May 29, 2012,
radically altering the country’s antitrust framework. The official purpose of the
long-awaited new law was announced repeatedly: allowing the competition
regulator (the Administrative Council of Economic Defense – CADE) to focus on
tackling complex mergers and antitrust investigations (cartels and vertical
practices),3 upgrading CADE to international standards, and increasing its
headcount and teeth in the process. The instruments are well known: streamlining
agency structure by elimination of multiple bodies, optimizing and rationalizing
procedures in order to gain time and efficiency, and dramatically reducing the
time spent on irrelevant simple merger analysis.
The merger review process was particularly affected by the new
Competition Act: a suspensory regime was introduced, institutional changes
unified the previous agencies, thresholds were altered and increased, there are
new procedures and filing forms, and a rather long waiting period. The new Act
will allegedly reduce the number of irrelevant transactions – from an antitrust
perspective – filed in Brazil. Authorities thus claim that the changes will speed
up the procedure and allow government review efforts to focus only in mergers
with true potential to have any effect on competition. They have been hard at
1
The authors are from Magalhães, Nery e Dias – Advocacia in Brazil. The views expressed
herein are the authors’ own and do not represent those of the firm or any of its clients.
2
An English version of the Act is available at www.cade.gov.br.
3
This article will focus on merger review only, thus not detailing other changes that were brought
by law 12.529/11 regarding conduct investigation. Note that Brazilian Authorities have repeatedly
affirmed that the fight against cartels in a few specific sectors that are very important to Brazil’s
economy, such as infrastructure, is of the utmost priority at the present time.
57
work, introducing regulations in a very short period of time after the new law
came into effect.4
This article does not discuss in depth every new aspect that involves the
creation and implementation of the new Brazilian Competition Act. It does,
however, touch on the main normative developments from a practical standpoint.
The operationalization of the law and its new commands by the Brazilian antitrust
authority may bring situations of uncertainty to the practitioner – in those cases, a
brief analysis of CADE case law regarding specific matters is provided, in order
to shed some light and context. This piece was concluded on October 24, 2012,
and we kindly request the reader to keep this in mind regarding the case law and
tendency analyses contained herein.
The article, thus, (i) briefly discusses the setting that led to the
introduction of the new Act, (ii) details the institutional and procedural changes
related to new merger review process, discussing specific challenging issues and
guiding the reader through a step-by-step stroll through the new procedure and its
phases, (iii) comments on the main CADE decisions since the new Act came into
effect, and (iv) concludes with some critical analysis of the pros and cons brought
by the new law, highlighting some of the key challenges that are being and will be
faced by private parties and government actors.
I.
Why change the Brazilian Competition Act?
Brazil has a rather recent history of active antitrust enforcement. Even
though CADE, the antitrust regulator, has just celebrated 50 years of existence,
between 1962 and 1988 Brazil had an economy based on state intervention, which
reduced the activity and importance of antitrust enforcement. In 1988, the new
4
Regulation 1 of May 29, 2012, approves the internal regulations of the Brazilian Antitrust
Authority – RICADE. Regulation 2 of May 29, 2012, regulates the notification of concentration
acts and details the summary procedure for analysis of mergers and other matters. Regulation 3 of
May 29, 2012 provides the list of classes of company activities in order to apply Article 37 of Law
12.529/11 and provides other matters. Regulation 4 of May 29, 2012, establishes
recommendations for the form and structure of economic opinions submitted to CADE in order to
guide their presentation and provides recommendations to facilitate dialogue in the procedures.
58
Brazilian Constitution brought Brazil back to a market economy, having
competition as one of its natural pillars. Shortly later, in 1994, Law 8.884/94 was
enacted, introducing a period of blossoming antitrust enforcement in the country.
Law 8.884/94 set a merger review structure and procedure with some
peculiar characteristics: (i) merger review was to be done by three bodies – the
Secretariat of Economic Monitoring of the Ministry of Finance (SEAE), the
Secretariat of Economic Law of the Ministry of Justice (SDE), and CADE, 5
(ii) Brazil was a non-suspensory jurisdiction – parties could go ahead and close
transactions before receiving antitrust clearance (with a caveat)6, assuming the
risk of an order to divest in the future, (iii) transactions had to be filed if either
one of the participating groups had a turnover above R$ 400 million (US$ 197
million)7 or above 20% market share; (iv) the antitrust bodies had 120 days to
review mergers, but every time an information request was sent to the parties the
term would be suspended, allowing for reviews that could take more than two
years in some important complex cases.8
The enforcers at the time faced difficulties natural to newborn agencies:
5
SEAE and SDE issued non-binding opinions that would then be considered by CADE in its
decision.
6
CADE could impose (medida cautelar) or negotiate “hold-separate” agreements (Transaction
Reversibility Preservation Agreement – APRO) in order to freeze the transaction until its final
decision. It was thus a non-suspensory regime with a caveat.
7
Considering the 2,0286 reais/dollar exchange rate, PTAX sale of Oct. 23, 2012, provided by the
Central Bank of Brazil (www.bcb.gov.br). The other dollar values presented in this article are
based on the same rate.
8
Time of analysis for complex cases varied substantially. The following examples illustrate this:
Nine months – creation of AmBev (Case AC 08012.005846/1999-12, Companhia Antárctica
Paulista Indústria Brasileira/Companhia Cervejaria Brahma and others, filed on Jul. 2, 1999,
cleared by means of the signature of a behavioral agreement on Mar. 29, 2000).
Five years - acquisition by CVRD of control in Samitri (Case AC 08012.001872/2000-76,
Companhia Vale do Rio Doce – CVRD and S.A. Mineração Trindade – Samitri, filed on Jul.,
2000, cleared with restrictions on Aug. 4, 2005)
Two and a half years - acquisition by Suzano of half of the common and preferred shares directly
or indirectly held by the families that controlled Ripasa (Case AC 08012.010195/2004-19, Suzano
Bahia Sul Papel e Celulose S.A and Ripasa S/A Papel e Celulose, filed on Dec. 2, 2004, cleared by
means of the signature of a behavioral agreement on Aug. 8, 2007
59
they were severely understaffed and there was practically no merger review
culture in Brazil at the time,9 something that may explain the introduction of a
non-suspensory regime. From 1994 to 2000, as the antitrust system was being
structured in Brazil, the agencies focused on increasing awareness regarding
merger control, while, at the same time, juggling conduct investigations. Around
the year 2000, the agencies increased their cartel investigations and CADE
granted itself more power regarding merger review: it consolidated its
understanding that the R$ 400 million threshold should be considered regarding
the global (and not national) turnover of the groups involved in the transaction.
This exploded the number of merger filings: CADE cleared 226 transactions in
1999, but this number increased to 523 in 2000 and 584 in 2001.10
At the same time, in 2000, the OECD noted that less than 5% of the
mergers reviewed in Brazil were cleared with restrictions or not cleared at all.11
Albeit maybe in line with other international jurisdictions, this showed that
economic resources and effort were being used in the analysis of many merger
cases devoid of any potential negative effects. This spurred agency movement on
a direction of increasing the efficiency of the review system: SEAE and SDE
9
There was practically no antitrust culture in general, given that decades had been spent with the
economy playing to the government’s tune. On a curious note, one of the first cartels to be
convicted in Brazil resulted from a meeting called by steelmakers at SEAE, in which, loyal to the
practice that was accepted in the previous years, the companies informed the agency that they
intended to jointly increase prices. “On July 7, 1996, in a meeting requested by representatives of
the Brazilian Steel Institute - IBS, Cosipa, CSN, and Usiminas, SEAE was informed of the
mentioned companies’ intention of adjusting prices for flat steel beginning August 1st, 1996. This
fact motivated the sending of faxes by SEAE on July 31, 1996, alerting the steel mills of the
possibility of antitrust violations” (Report of the Administrative Procedure 08000.015337/94-48.
Plaintiff: SDE. Defendants: Cia Siderúrgica Nacional - CSN, Cia Siderúrgica Paulista - Cosipa,
and Usinas Siderúrgicas de Minas Gerais SA - Usiminas). In the judgment session of Dec. 27,
1999, published in the Official Gazette on Nov. 10, 1999, the defendants were convicted to pay the
minimum fine of 1% of their respective revenues in 1996.
10
CADE 2001 Annual Report , page 242-247. Retrieved from
http://www.cade.gov.br/Default.aspx?f334f43bc140c09aaa90 on Oct. 23, 2012. CADE 2002
Annual Report, pages 470 to 475. Retrieved from
http://www.cade.gov.br/Default.aspx?f334f43bc140c09aaa90 on Oct. 23, 2012.
11
Competition Policy and Regulatory Reform in Brazil: A Progress Report, published as
Competition Law and Policy Developments in Brazil, OECD Journal of Competition Law and
Policy, Oct. 2000, vol. 2, No. 3.
60
issued a fast-track procedure regulation in 2003, CADE reviewed its
interpretation regarding the turnover threshold in 2005 (limiting it to Brazil),
SEAE and SDE issued a regulation regarding joint analysis to eliminate duplicate
work in 2006, CADE implemented the practice of ‘block judgments’ in 2006,
greatly reducing the time spent by the Commissioners in reading their votes, and
in 2009 the agencies signed an instrument between themselves and the AttorneyGeneral at CADE, streamlining the fast-track procedure.
Data from the recent past, however, shows that simple transactions
continued to overload the agencies and their limited resources: in years 2010 and
2011, 1,376 mergers were reviewed by CADE, out of which only 75 (5.5%) were
cleared with some kind of restriction (including simple adequacies of noncompete clauses) and only one (0.07%) was not cleared.12 The number of fasttrack cases also illustrates the point: in 2010, 75.5% (498) of the 660 reviewed
filings were carried through under said procedure. In 2011, this number increased
to 83,8% (600 out of 716).13 A record-breaking number of cases were being filed
and analyzed: in 2010, 683 filings were made and 660 cases were reviewed; in
2011, 758 cases were filed and 716 were reviewed. This was taking place in an
agency that has approximately 90 core staff,14 a number substantially smaller than
the 790 employees of the Antitrust Division of the US Justice Department (who
handled 1,166 filings in 2010 and 1,450 in 2011).15
12
See “CADE in numbers”. Retrieved from
http://www.cade.gov.br/Default.aspx?15151719e726e6431d3e on Oct. 23, 2012. The only merger
rejected was Polimix/CimentoTupi (AC 08012.002467/2008-22), decided on Oct. 6, 2010.
13
Annual Report of 2010, page 113. Retrieved from
http://www.cade.gov.br/upload/RelatorioGestao2010_atu150811_14h25_TCU.pdf.on Oct. 23,
2012.
14
According to presentation of Dr. Vinícius Marques de Carvalho, CADE President, at the
Conference The first steps of the new law of CADE in the 120 first days of its application, held on
Oct. 1st, 2012, at Fiesp (Federation of Industries of the State of São Paulo). Retrieved from
http://www2.fiesp.com.br/indices-pesquisas-e-publicacoes/palestra-seminario-nova-lei-do-cadeum-balanco-dos-primeiros-120-dias/ on Oct. 23, 2012.
15
US Department of Justice 2011 Contingency Plan, Apr. 7, 2011, p. 7. Retrieved form
http://www.justice.gov/jmd/publications/2011-doj-contingency-plan.pdf on Oct. 23, 2012. HartScott-Rodino Annual Report of 2010, page 3. Retrieved from
61
The key problem was that the agencies also took too long to decide
complex cases. This may have been due to a combination of factors: natural
difficulties of a new agency, large amount of simple cases, the efforts that were
carried out in conduct investigations, and the fact that all cases were reviewed
thrice (in-depth analysis was carried out – sequentially – by three different
bodies). It was, however, a severe problem for the antitrust system, because even
though instruments such as “hold separate” orders were available, the delay in the
analysis of complex cases limited the system’s ability to implement effective
remedial measures16. In some sense, the rule that limited the time authorities
could spend in merger review was affected in practice by continuous suspensions,
creating practical obstacles to the enforcement of sound antitrust remedies in
some complex cases.
The new Competition Act, thus, strived to address these issues, increasing
human resources, streamlining agency structure, and reducing unnecessary filings
in order to allow more focus on the review of complex mergers and conduct
investigations.
http://www.ftc.gov/os/2011/02/1101hsrreport.pdf on Oct. 23, 2012. Hart-Scott-Rodino Annual
Report of 2011, page 2. Retrieved from http://www.ftc.gov/os/2012/06/2011hsrreport.pdf on Oct.
23, 2012.
16
CADE rejected few cases before the new law came into effect (May 29, 2012): Case AC
16/1994, Siderúrgica Laisa S.A. and Korf GmbH, filed on Mar. 25, 1994, rejected on Mar. 29,
1995; Case AC 08012.002315/99, Vale do Verdão S.A Açúcar e Álcool ,Vale do Ivaí S.A Açúcar
e Álcool, and others, filed on Mar. 22, 1999, rejected on Nov. 22, 2000; Case AC
08012.004117/1999-67, COCAL - Comércio, Indústria Canaã Açúcar e Álcool Ltda, and Bolsa
Brasileira de Álcool Ltda, filed on May 18,1999, rejected on Nov. 22, 2000; Case AC
08012.001697/2002-89, Nestlé Brasil Ltda. and Chocolates Garoto S/A, filed on Mar. 15, 2002,
rejected on Feb. 4, 2004; Case AC 08012.001885/2007-11, Compagnie de Saint-Gobain and
Owens Corning, filed on Mar. 13, 2007, rejected on Jul. 23, 2008; Case AC 08012.008853/200828, UNIMED Santa Maria - Sociedade Cooperativa de Serviços Médicos Ltda. and Hospital de
Caridade Dr. Astrogildo de Azevedo, filed on Aug. 28, 2008, rejected on Jul. 22, 2009; Case AC
08012.002467/2008-22, Polimix Concreto Ltda. and Cimento Tupi S.A, filed on Abr. 2, 2008,
rejected on Oct. 6, 2010.
62
II.
What’s new? All about Super CADE
A.
Structural Changes: One Agency
As of May 29, 2012, Brazil has only one agency in charge of antitrust
enforcement: the Administrative Council of Economic Defense (CADE),
commonly referred to as the new “Super CADE”. As established by the new
Competition Act, the new agency incorporated the roles of its three predecessor
agencies.
Today, SEAE focuses solely in competition advocacy, no longer
participating in enforcement. SDE, which was formerly in practice the chief
investigative body of anti-competitive practices, was incorporated by CADE in
the figure of the newly created CADE General Superintendence. The CADE
Tribunal continues to exist, with 7 Commissioners (including its President).17
Superintendence and Tribunal are now joined by a Department of Economic
Studies, which incorporated the previous Economic Department of the SDE.
ORGANIZATIONAL CHART
ADMINISTRATIVE COUNCIL OF ECONOMIC DEFENSE
ADMINISTRATIVE
TRIBUNAL
President
6 Commissioners
GENERAL
SUPERINTENDENCE
General Superintendent
2 Deputy Superintendents
DEPARTMENT OF
ECONOMIC STUDIES
ADMINISTRATIVE
BOARD
Chief Economist
Managing Director
SPECIALIZED
ATTORNEY
GENERAL’S OFFICE
Chief Prosecutor
Subtitles
Bond relationship
Subordination relationship
Source: http://www.cade.gov.br/upload/organograma%2014%20ago%202012.pdf
The new Competition Act creates 200 new staff positions, which will
17
The term of office of the Superintendent General is of two years, once-renewable. The term of
office of the Commissioners and the President of the Administrative Tribunal is a four-year nonrenewable period.
63
allow CADE to substantially enlarge its team (currently of 90)18 and, given that
the staff positions will be CADE-specific, reduce the historically high turnover
rate of the agency. Due to general government budget cuts and the lengthy hiring
procedure by public examination in Brazil, the staff has not yet been hired, and
will probably be hired gradually. The actual effect of such staff will probably
take some time to be felt. Even the best human resources must be trained, which
will also take at least several years.
A few months after the new Competition Act entered into force, CADE
has been particularly concerned with retaining knowledge, focusing in strategic
planning by prioritizing sectors of economy that require more attention, and
strengthening the production of market studies.19
1.
Suspensory Regime: a General Overview
Pre-Merger Review. The new law introduces a suspensory regime in Brazil.
Thus, companies can only close their transactions once they have been cleared by
CADE. CADE Regulation 1/2012, which establishes its Internal Regulations,
states that parties must maintain separate physical structures and continue to
compete independently, keeping “competition conditions” unaltered, until CADE
clears the deal. It expressly forbids any asset transfers, influence from one party
over the other, and exchange of competitively sensitive information other than
strictly necessary for the signing of the deal (Regulation 1/2012, Article 108, §2).
Gun jumping. If parties close or take any of the actions described above, they
are subject to a fine that shall range from R$ 60,000 (US$ 29,577) to
R$ 60,000,000 (US$ 29,577,000). The calculation of such fine will take into
account the size of the parties, intent, bad faith, and the anticompetitive potential
of the transaction, among other factors. In addition to such fine, the parties are
18
As of today, CADE has less than 90 staff allocated in the core sectors of the agency, according
to the presentation of Dr. Vinícius Marques de Carvalho, CADE President, cited further above.
19
Id.
64
also subject to a conduct investigation (collusion/exchange of sensitive
information) and their actions regarding the transaction may be deemed null and
void. CADE may seek judicial measures, if necessary, to annul any actions
already completed and assure that the effects of the transaction will be halted until
the Council’s final decision. If parties close and do not file, CADE may initiate a
specific procedure to verify if the transaction was subject to filing, without
prejudice to the other already-mentioned consequences.
Notification thresholds.
The previous 20% market share threshold was
eliminated and the R$ 400 million (US$197 million) turnover threshold was
substituted by the following cumulative thresholds:
•
The annual gross turnover of at least one of the economic groups
involved in the transaction exceeds R$ 750 million (US$ 370 million)
in Brazil in the previous financial year, and
•
The annual gross turnover of the other economic group involved in the
transaction exceeds R$ 75 million (US$ 37 million) in Brazil in the
previous financial year.20
The turnover thresholds are not limited solely to the acquiring company
and to the target company. Article 4 of CADE Regulation 2/2012 clarifies that the
parties of the transactions are defined as any entities directly involved in the
notified transaction and their respective economic groups. The definition of
“group” includes all company under common control and any other companies in
which above 20% equity is held. Thus, turnover from the entire groups of the
selling and buying companies are considered when calculating thresholds. The
definition of group in the context of minority interest acquisitions and transactions
involving investment funds will be explored below, in the sections that discuss
these specific topics.
The creation of a cumulative two-phase turnover test and the substantial
20
Article 88 of Law 12.529/2011 and Article 1 of Interministerial Ordinance (Ministries of Justice
and Finance) 994, May 30, 2012.
65
increase of the turnover thresholds added to the elimination of the market share
threshold should result on a significant decrease of filings of classic M&A
transactions (there are doubts regarding cooperative contracts – something that
will be discussed in the next section). On one hand, the elimination of the
market share threshold meets international standards given that it removes a
threshold that could be difficult to measure (it involves defining the relevant
market, which can be subjective). On the other hand, such change may also be
subject to criticism on the grounds that mergers that may be significant in a
regional/local level, leading to market domination, eliminating competition and
harming consumers, may not meet the turnover thresholds but would certainly
meet (some kind of) market share thresholds. One failsafe to neutralize such
danger, as designed by the new Competition Act, is that CADE may choose to
review any transactions that were not filed due to not meeting the thresholds
within one year of closing (Article 88, § 7). This failsafe, in practice, may be a
path well explored by competitors to oppose deals that do not meet the thresholds.
An interesting final note regarding thresholds: new law introduces a very
relevant and practical instrument.
It allows the notification thresholds to be
adjusted by means of a Joint Ordinance to be issued by the Ministries of Justice
and Finance (Article 88, § 1). This allows for flexibility and fine-tuning of the
filing thresholds, and was used almost immediately (two days) after the new law
came into effect. The original R$ 400 million (about US$ 197 million) and R$35
million (about US$ 17 million) turnover thresholds were altered to the ones
currently in force today and mentioned above.
This is indeed an interesting practical matter, since even the updated
threshold is lower than the original R$ 400 million threshold in real terms.
Making a precise comparison, if the government were to update the R$ 400
million threshold considering inflation (IPCA index), it would amount to about
R$ 1.5 billion today (double the R$ 750 million updated threshold). Considering,
however, not inflation, but the economic growth of the country, in 1994 the
turnover threshold represented 0.11% of Brazilian GDP; but this same ratio
66
shrunk eleven-fold to 0.0096% when considering 2011 GDP. Even the updated
R$ 750 million threshold represents 0.02% of the 2011 GDP – today’s ratio is 5
times lower than the 1994 ratio.21
Review period. Law 12.529/11 establishes a 240-day waiting period, which may
be extended for 60 days by request of the parties or for 90 days, by a substantiated
order issued by CADE. The maximum review period is thus 330 days.
Three additional relevant points regarding the review period are:

The initial term of the waiting period may be delayed: according to
Article 53, § 1 of the new Competition Act, if the General
Superintendent deems the notification incomplete, he/she may
determine – only once – the amendment of the filing, under penalty of
dismissal. The 240-day review period is initiated after the filing of the
initial notification or the amendment. Thus, if a notification must be
amended, the review period is interrupted and will only begin after the
filing of the complete documentation.

No formal reduced waiting period for simple transactions/fasttrack filings: The new law does not set specific terms for the analysis
of simpler transactions under the fast-track procedure. Before the new
law came into effect, CADE expected simple transactions to be
cleared in less than 30 days. The first merger case filed under the new
law was decided in 27 days, and recent data published by the Council
21
In 1994, Brazil's nominal GDP was R$ 349,204,679,000. In 2011, nominal GDP was R$ 4,143
trillion. Adjustment of R$ 400 million threshold was based on the IPCA index between July 1994
and December 2011 (in order to avoid polluting the data with high inflation previous to July
1994). Source of data: Brazilian Institute of Geography and Statistics (IBGE).
67
shows that in the first 100 days since the new law came into effect,
simple transactions have been cleared in an average of 18 days.22 This
is an impressive performance by the General Superintendence,
especially considering that CADE was going through several changes
(including physically moving into a new office building and
reorganizing staff).

Automatic clearance: Transactions not reviewed by CADE within
the waiting period will be cleared automatically.23
When to file. The suspensory regime has naturally inverted the incentives of the
merging parties: it is now in the firms’ best interest to provide as much
information as possible quickly in order to receive antitrust clearance and thus
authorization to close the deal. There is no specific deadline for filing. CADE
Regulation 1/2012 does state, nevertheless, that notifications must take place
“…preferentially after the signing of the formal and binding instrument, and
before any act related to the transaction is consummated” (Article 108, §1).
New filing forms. Under the new system of review, there are two types of filing
forms to be used by the applicants according to the level of complexity of the
transaction that is being submitted to CADE (complex and fast-track). Both
forms, however, require a great amount of information from the Applicants to be
submitted all at once at the moment of the filing, even if the case is very simple.
All foreign documents have to be presented with a Portuguese translation, which
– if authorized by CADE – can be filed after the original notification is submitted.
Among other data, the filing forms require extensive information
regarding the Applicants and all overlapping products, including volume of sales
22
See http://www.cade.gov.br/Default.aspx?a39667b242d72cf7024fe174cd75 on Oct. 23, 2012.
23
President Dilma Roussef vetoed the rule provided by the Competition Act, as approved by
National Congress, regarding automatic clearance, because the text could lead to an interpretation
that if CADE missed intermediary terms, the transaction could also be cleared. The Attorney
General at CADE issued an opinion after the veto ascertaining that cases not decided within the
period would be automatically cleared. CADE regulated this subject immediately after the new
Act came into effect: Article 133 of Regulation 1 states that transactions not reviewed within the
waiting period will be cleared automatically.
68
and revenue (for the previous year in case of “fast-track” cases and for the
previous 5 years in case of complex transactions); list of clients, suppliers, and
competitors; detailed information regarding distribution channels (for complex
transactions); strategy regarding prices (for complex transactions), etc. For the
complex cases, Applicants also have to present any internal documents relevant
for market analysis, business plans, and marketing reports. Additionally, and also
regarding the complex transactions, Applicants will have to inform any history of
conviction or ongoing investigations for cartel practices.
Fast-Track Procedure. In Regulation 2/2012, CADE established a fast-track
procedure applied to the review of simple mergers, with no or low potential to
harm competition. The General Superintendence is in charge of sorting cases as
fast-track, and its decision is discretionary. In cases classified as fast-track, the
General Superintendent has the competence to decide the case directly
(terminative decision), without any need of sending it to the Tribunal (CADE).
CADE has not yet defined a regulated waiting period regarding the fast-track
procedure.
Among other hypothesis, the following type of transactions are subject to
the fast-track procedure: (i) classic joint-ventures or cooperative arrangements,
(ii) control consolidation, (iii) substitution of a player (when the acquiring
company or its group had no activities in the relevant market prior to the
transaction), (iv) low market share with horizontal concentration, and (v) low
market share with vertical concentration.
Temporary authorization.
The new law states that in cases in which the
Superintendent decides to challenge the transaction to the Tribunal (if it
understands that the act must be rejected or cleared with restrictions, or if there is
no conclusive decision regarding its effects in the market), parties may seek a
temporary authorization to the Reporting Commissioner for performing the
transaction.
The Reporting Commissioner may impose conditions aiming at
preserving the reversibility of the transaction, when so recommended by the
69
conditions of the case.
Substantive test.
The new law forbids concentration acts that involve
elimination of competition in a substantial portion of the relevant market, which
could create or strengthen a dominant position or that can result in the domination
of the relevant market of goods or services. The exception to this rule, in which
CADE will allow the transaction, will take place when strictly necessary to
achieve the following results, cumulatively or alternatively: (a) increase
productivity or competitiveness; (b) improve to the quality of goods or services;
(c) encouragement to efficient and technologic or economic development and
when a significant part of the transactions benefit are transferred to consumers. It
is important to mention that the national interest exception present on the previous
regime is no longer formally included.
Territoriality. The law is applied to acts performed in Brazil or that may produce
effects in Brazil. A foreign company that performs transactions or has its branch,
agency, subsidiary, office, establishment, agent or representative in Brazil shall be
considered domiciled in national territory.
Overturning period (“failsafe”). If a transaction does not meet filing thresholds,
CADE may request its notification up to one year after it is closed.
Agreement on Concentration Control. Although the Article of Law 12.529/11
on this matter was vetoed by President Dilma Roussef, CADE’s Regulation
1/2012 states that from the filing up to 30 days after the Superintendent decides to
challenge the transaction to the Tribunal, parties may request for an Agreement on
Concentration Control, that shall be analyzed and approved by the Tribunal, even
if it was negotiated with the General Superintendence. CADE may request the
Agreement to be audited by independent consulting or auditing companies at the
parties’ expense.
2.
Suspensory Regime: Specific Issues
The previous section provided a general overview of the more
70
straightforward issues regarding merger control under the new Competition Act in
Brazil. There are other topics, however, that are less clear-cut and deserve more
attention, given that they may create uncertainty regarding the need or not to file
and the position taken by Brazilian Competition Authorities. They are discussed
in this section.
3.1.
What exactly should be filed?
Article 88 of the Competition Act states that “concentration acts” that
meet the filing thresholds must be notified to the authorities. Article 90 defines
the term “concentration act,” stating that it takes place when:
•
Two or more previously independent companies merge [Mergers]
•
One or more companies acquire, directly or indirectly, by purchase or
exchange of stocks, shares, bonds or securities convertible into stocks
or assets, whether tangible or intangible, the control or parts of one or
more companies [Acquisition of Control or of Minority Interests]
•
One or more companies incorporate one or more companies
[Incorporation]
•
Two or more companies enter into an associative contract, a
consortium, or a joint venture [Cooperative Agreements]
The new law introduces one exemption: the cooperative agreements listed
above (“associative contract, consortium, or joint venture”) shall not be
considered “concentration acts” when formed to participate in public tenders, and
thus shall not be filed.
This exemption also includes any contracts arising
therefrom. CADE Regulation 1 also introduced two other situations that do not fit
the definition of ‘concentration acts’: (i) bids regarding the cancellation of
registration of publicly-held companies and (ii) bids as a consequence of increase
in the participation of the controlling shareholder in publicly-held companies.
The new Competition Act does not establish any sector-specific exemptions
regarding mergers or anticompetitive practices.
There is little doubt regarding the need to file mergers, acquisitions, and
71
concentrative joint ventures.
The new law, however, due to the way it is
specifically drafted, generates substantial doubts regarding some of the other
subjects, such as cooperative agreements – especially in the figure of the so-called
‘associative contract’ – minority interests, and private equity funds.
3.2.
Cooperative Agreements
The new Competition Act was designed to streamline agency enforcement
and reduce the filing of irrelevant transactions (by means of increasing and
optimizing the thresholds). The broad concept of “associative contracts” (and the
other drafted forms of associations, i.e. “(cooperative) joint ventures” or
“consortium”), however, may lead to a flood in irrelevant filings of cooperative
agreements that meet the turnover thresholds, at least partially neutralizing the
expected benefits regarding the decrease in notifications regarding typical M&A
activity.
The new law seems more restrictive than the previous one. Under the
previous Act (Law 8,884/94), “…all acts that may limit or otherwise harm free
competition, or result in domination of the relevant markets of goods and
services” had to be filed before CADE (Article 54). The law then, on §3 of
Article 54, specified objectively that mergers, incorporations, acquisition of
control and other types of actions that led to any form of economic concentration
must be filed if the turnover and market share thresholds were met. The possible
harmful effects of economic concentrations (as defined in the previous law) were
thus presumed when the thresholds were met. The analysis of the obligation to
file cooperative agreements, however, fell on the caption of Article 54 and led to a
subjective examination of the potential effects of such agreements on competition.
Agreements harmful to competition that were not filed were subject to conduct
control.
The fact is that the previous law left some leeway for parties not to file if a
cooperative agreement clearly had no impact on competition. The new law,
however, is structured differently: as shown above, it states that all concentration
72
acts that meet the turnover thresholds must be filed; and that associative contracts
are a kind of concentration act. A literal interpretation thus leads to the logical
conclusion that any kind of associative contract between two parties that meets
the threshold must be filed.
There is not yet a precise definition of what an associative contract would
be. It is safe to presume, however, that the concept could include a series of
cooperative agreements, such as those involving supply, distribution, technical
and industrial cooperation, licensing, and franchising, for example.
An interesting parameter for this discussion is how CADE case law
treated these types of agreements before the new law became effective.
CADE case law referring specifically to supply agreements was being constructed
in a way in which such agreements needed not be filed if, cumulatively:
•
The agreement did not result in the transfer of rights regarding
competitively sensitive assets
•
The agreement did not contain exclusivity clauses of any kind or any
equivalent clauses
•
The volume involved in the agreement did not surpass 20% of the
volume of the relevant market affected24
The fact that CADE’s main concerns revolve around the exclusivity
clauses explains why distribution agreements notified to CADE were usually
analyzed and cleared by CADE, but not dismissed in the prejudgment phase.
The President of CADE has publically stated that the agency must enact
further regulations and guidelines in order to clarify how it will interpret the law,
24
These parameters were gradually refined over time, based on decisions on the following cases:
Case AC 08012.011058/2005-74, Reporting Commissioner Paulo Furquim, Camargo Corrêa and
Holcim, cleared on Jul. 26, 2006; Case AC 08012.000182/2010-71, Reporting Commissioner
Ricardo Ruiz, Monsanto and Ilharabras, cleared on Mar. 17, 2010; Case AC 08012.005367/201072, Reporting Commissioner Carlos Ragazzo, Dow Agrosciences Industrial Ltda. and Monsanto
do Brasil Ltda., cleared on Jun. 23, 2010.
73
and the first example mentioned was related to associative contracts.25 CADE
was expected to regulate associative contracts shortly after the new law came into
effect, but it has not yet done so. The legal community in Brazil is indeed
expectant and looking forward to this regulation.
3.3.
Minority Interests and Relevant Influence
Under the previous Act (Law 8,884/94 and CADE Precedent 2),
transactions related to the acquisition of minority interests should be filed before
CADE, except when the buyer already had majority interest and the following
cumulative circumstances were present:

The seller did not have power to (a) appoint company officers, (b)
determine company business conducts, or (c) veto any corporate
matter, and

The transaction did not include (a) non-compete clauses over 5 years
and/or applied to larger area than the one in which the company is
active, and (b) clauses that granted any kind of control power to the
parties after the transaction.
Minority interest acquisitions have always concerned CADE, especially
when involving rival companies. An illustrative case under the previous law is
one
involving
the
acquisition
telecommunications market.26
of
minority
interest
in
the
Brazilian
The case involved the acquisition of minority
25
“Another point that must be emphasized regards the effort, which may be intensified, of
reducing the regulatory deficit of the antitrust policy in Brazil. CADE’s case law cannot be the
only source of updating the Brazilian antitrust law. The regulatory design involves an immediate
regulation of some legal provisions, such as the notification of association agreements, the selling
of assets and the dosimetry of the penalties. Moreover, our agenda includes the drafting of new
guidelines, such as those of horizontal and vertical concentrations, vertical restrictions,
cooperation amongst companies, as well as the discussion regarding negotiation policies in
concentration acts and administrative procedures.” (Acceptance Speech of Dr. Vinícius Carvalho.
Retrieved from
http://www.cade.gov.br/upload/Discurso%20de%20posse%20do%20presidente%20do%20Cade%
20(vinicius).pdf on Oct. 24, 2012.)
26
AC 53500.012487/2007, Reporting Comissioner Carlos Ragazzo, Mediobanca - Banca di
Credito Finanziario S.p.A, Intensa Sanpaolo S.p.A, Sintonia S/A, Assicurazioni Generali S.p.A,
and Telefónica S.A., Cleared in Apr. 7, 2010, subject to the signing of behavioral commitments.
74
shares of Telecom Italia by Telco, in which Telefónica had 46.17% of shares.
After the purchase, Telefónica would hold approximately 10.9% of Telecom
Italia´s corporate capital.
CADE was concerned because the Telecom Italia
Group owned mobile company TIM and the Telefónica Group controlled both
mobile company Vivo and telephone company Telesp in Brazil.
CADE cleared the transaction conditionally, subject to the signature of a
behavioural agreement with the parties, in which they committed to implement
Chinese Walls and annually present to CADE reports from independent auditors
detailing market information related to Vivo and TIM.
In the analysis of this transaction, CADE reviewed relevant key concepts
to antitrust analysis in Brazil involving minority interests, especially among
rivals. CADE defined control as the situation in which a shareholder has decisive
influence over the strategic business conduct and planning of a company, holds
corporate rights that allow precedence over others on decision making, holds veto
power that may in practice prevent others from making business decisions
regarding the company, or yet, when its approval is required for a decision to be
made. Minority shareholders, individually or jointly, could have control power
over a company in specific cases.27
CADE had already defined relevant influence as “the possibility of an
economic agent to use its corporate interest or simply a contractual arrangement
to intervene in the company´s decision-making process of the target company,
affecting, therefore, its actions and corporate strategies.”28 Relevant influence
typically allows the shareholder to influence the company’s business conduct in
certain ways, and is usually related to the appointment of company officers
27
AC 53500.012487/2007, Reporting Commissioner Carlos Ragazzo, Mediobanca - Banca di
Credito Finanziario S.p.A, Intensa Sanpaolo S.p.A, Sintonia S/A, Assicurazioni Generali S.p.A,
and Telefónica S.A., cleared under the condition of behavioral commitments on Apr. 7, 2010.
28
AC 08012.009529/2010-41, Reporting Comissioner Olavo Chinaglia, Huntington Centro de
Medicina Reprodutiva Ltda., Capital Tech Inovação, and Investimentos - Fundo Mútuo de
Investimento em Empresas Emergentes e Inovadoras, cleared on Nov. 9, 2010.
75
involved in deciding the company’s strategy, and holding voting and veto rights
related to company business decisions.
One interesting point about such transaction was that CADE took its
analysis beyond relevant influence. If relevant influence was not identified (thus
configuring a situation of passive investment), CADE examined if such
investment granted access to competitively sensitive company information, with
clear concerns regarding collusive behavior. Finally, even if such access was not
granted, CADE also strived to identify if the minority interest would grant the
shareholder any possibility to alter competitiveness in the market.
In
such
transaction,
authorities
were
mainly
concerned
with
anticompetitive coordinated effects resulting from this type of acquisition, the
proximity of competitors, and the relevance that knowledge of sensitive
information may play on this equation. A very important and relevant case in
this regard was CSN’s acquisition of a minority shareholding in Usiminas, leading
to CADE ordering CSN not to exercise any rights except for receiving dividends
until the transaction was cleared.29 CADE was concerned with the exchange of
sensitive information that could lead to collusion, especially considering the
structure of the market involved.
It is also worth mentioning that, in August 2012, when analyzing two
cases filed under the previous Law30 (Amil purchase of Santa Lucia Hospital31
29
The acquisition by CSN of Usiminas public shares is an important case depicting how CADE
may see as dangerous for the competition environment cases involving minority interests with
even low influence. CSN had been slowly acquiring shares of Usiminas and did not file such
acquisitions. CADE requested CSN to formally notify the government regarding the share
acquisitions. The Council was worried that such minority interests acquired by CSN could
generate incentives for collusion considering the structure of the steel market, quickly then issued
an order suspending any CSN rights (except for receiving dividends) until CADE reached a final
decision. CADE later maintained the order but allowed CSN to deal such shares in the market (AC
08012.009198/2011-21, Reporting Commissioner Olavo Chinaglia, Usiminas and CSN, final
decision pending. Hold separate order issued on April 2012 and altered on June 2012).
30
Even though the new law was already in effect, the cases were filed before this took place, and
were thus subject to review based on the previous law.
76
and FMG Empreendimentos Hospitalares S.A purchase of Hospital Fluminense
S.A.),32 CADE challenged mergers involving the hospital services business and
health care plans due to cross minority share ownership. The cases involved two
dominant groups in this market, Amil and FMG. CADE’s concern was that the
groups were tied by shares in Medise, owned by Amil, which conferred them
access to key commercial information about rivals and that could reduce their
incentives to compete. In order to preserve market competition conditions, CADE
initially blocked the mergers, informing the parties that the mergers could go
ahead only if the divesture of the cross minority shares occurred within 60 days.
The order was complied with.
The new Brazilian Competition Act reflects a great efforts from
legislators to clarify and set objetive/quantitative criteria to this matter. The
acquisition of interest is considered a “concentration act”: “one (1) or more
companies acquire, directly or indirectly, by purchase or exchange of stocks,
shares, bonds or securities convertible into stocks or assets, whether tangible or
intangible, by contract or by any other means or way, the control or parts of one
or other companies” (art. 90, II, of the new Antitrust Act).
CADE Regulation 2, issued immediately after the new law entered into
effect, details when interest acquisitions must be filed. An analysis 33 of such
regulations shows that the scenarios for mandatory filing are the following:

[Control] Acquisition results in share control.

[Minority interest] Acquisition does not result in share control, but:
o
Grants the buyer the status of major individual investor
31
AC 08012.010094/2008-63, Reporting Comissioner Elvino de Carvalho, Casa de Saúde Santa
Lúcia S.A., Amil Assistência Médica Internacional Ltda, blocked on Aug. 29, 2012.
32
AC 08012.006653/2010-55, Reporting Comissioner Marcos Paulo Veríssimo, FMG
Empreendimentos Hospitalares S/A and Hospital Fluminense S/A, blocked on Aug. 29, 2012.
33
The bullets listed below result in an attempt to organize the situations in a more straightforward
way based on the text contained in Regulation 2.
77
o
When the target company is not a competitor or vertically related:

If the acquisition results in the buyer or its economic group34
holding directly or indirectly at least 20% of the capital or
voting capital of the target company

If the acquisition was carried through by the holder of 20% or
more of the capital or voting capital (considering the buyer
and its economic group), provided that the share directly or
indirectly acquired, from at least one individually seller, is
equal or greater than 20% of the capital or voting capital.
o
When the target company is a competitor or vertically related:

If the acquisition grants the buyer or its economic group a
direct or indirect interest of 5% or more of the capital or
voting capital.

If the acquisition is the last acquisition which, individually or
added to others, results in an increase in interest greater or
equal to 5%, in cases in which the buyer or its economic
group already holds 5% or more of the capital or voting
capital of the target company.

[Corporate restructuring] When the acquisition is carried through
by the controlling company and when the direct or indirect acquisition
34
For the purposes of verifying if a transaction falls within the requirements described here, one
must consider the activities of the acquiring company and the activities of other companies
belonging to its economic group, as defined in art. 4 of CADE Regulation 2, which states the
following: “Article 4. The parties of the transaction are the entities directly involved in the
notified transaction and their respective economic groups. Paragraph 1. For the purposes of
turnover calculations regarding art. 88 of Law 12.529/11 and for the purposes of filling Annexes I
and II contained this Resolution, “economic groups” shall be considered as, cumulatively:
I – companies which are under common control, internal or external II – companies
which any of company disposed on item I holds, directly or indirectly, at least 20% of the capital
or voting capital Paragraph 2. In case of investment funds, the following will – cumulatively – be
considered members of the same economic group:
I – funds that are under the same
management
II – the fund manager
II – the quotaholders who hold directly or indirectly
more than 20% of the quotas of at least one of the funds listed on item I, and
IV – the
companies that are part of the portfolio of the funds in in which direct or indirectly share held by
the fund is equal to or above 20% of the capital or voting capital.”
78
from at least one seller considered individually is equal or greater than
20% of the capital or voting capital.
Article 4 of CADE Regulation 2 sets that the definition of economic group
includes (i) entities under common internal or external control, and,
cumulatively, (ii) entities in which any of company under common control holds,
directly or indirectly, at least 20% of the capital or voting capital. There is a
specific definition for groups in the context of investment funds, which will be
presented in the next section.
The drafters of the new Act tried to provide objective parameters in order
to examine if a certain kind of minority transaction is filed or not. However,
CADE case law points to the concept of relevant influence as key in the analysis.
The General Superintendence at CADE has already decided some cases involving
these issues since the new law came into effect. Before discussing those cases,
however, the specific issue of investment funds under the new law will be
presented below, since those cases involved acqusition of minority interest by
funds.
3.4.
Investment funds
Unlike other jurisdictions, there is no passive investment exemption in
Brazil.
This has historically resulted in the filing of numerous transactions
involving investment funds – both transactions that were mere financial
investments and transactions that could actually raise potential antitrust concerns.
In recent history, CADE attempted to set parameters in its case law that would
signal which transactions were subject to mandatory filing.
Before the new law came into effect, CADE case law had developed
parameters regarding the obligation to file mergers involving private equity funds.
They were based on a two-step cumulative test:

Relevant influence test. An analysis of the decision-making process
of the funds and their invested companies should be carried through in
order to verify if filing was needed. This is so in order to avoid filings
79
based on mere financial investments and without any potential to harm
competition35. Thus, CADE would verify if (i) the investors had
power to influence actions and strategies of the fund managers, and,
concomitantly, (ii) if the fund managers had power to influence the
actions and strategies of the target company. If one of these conditions
was not met, filing would not be necessary even if the turnover and
market share thresholds were met.

Turnover test applied to funds. If the first test was met, a turnover
analysis applied to funds was carried through in the following way:
o
Verifying whether the fund investors and their economic groups
individually fulfilled the turnover threshold. No investor
turnovers would be added for this test.
o
Verifying whether the total (added) turnover of the target
companies (and their respective groups) met the turnover
threshold.36
In 2012 CADE signaled that such criteria could be toughened, expressing
specific concern with the exchange of sensitive information and the necessary
influence of the investors in certain private equity funds.37
35
See CADE’s decision regarding this subject: “19. Therefore, if it is proved that the fund quotaholders do not interfere in the administration and management of the fund or that the fund does
not interfere in the administration of the investment target companies, the transaction must not be
notified, regardless of the turnover of market share of the companies involved. […] 21. The
criteria to differ between these situations and those in which the investment funds are equal, for
all purposes and effects, to financial assets in a strict sense (with the sole scope of occasionally
earning profitability) is, under this perspective, the concept of relevant influence, understood, in
a simplified way, as the possibility of an economic agent use its minority stake, or even a simple
contractual relationship, to intervene in the decision process of the investments target company,
affecting, as consequence, its corporate actions and strategies.” (Reporting Commissioner Vote
on Case AC 08012.009529/2010-41, Huntington Centro de Medicina Reprodutiva Ltda. and
Capital Tech Inovação e Investimentos - Fundo Mútuo de Investimento em Empresas Emergentes
e Inovadoras, p. 5, cleared on Nov. 24, 2010).
36
Id., paragraphs 37 to 42.
37
AC 08012.009044/2011-39, Reporting Commissioner Alessandro Octaviani, SERVTEC
Investimentos e Participações Ltda. and Rio Bravo Energia I - Fundo de Investimento em
Participações, cleared on May 29, 2012.
80
Under the new law, as mentioned in the section above, CADE
immediately issued a regulation detailing in which situations the acquisition of
minority interest would trigger a filing obligation.
Specifically regarding
investment funds, CADE Regulation 2, Article 4, §2 that the following will –
cumulatively – be considered members of the same economic group:

Funds under the same management

The fund manager

The investors who hold directly or indirectly more than 20% of the
quotas of at least one of the funds

Companies that are part of the portfolio of the funds in which direct or
indirect shares held by the fund are equal to or above 20% of the
capital or voting capital
As seen above, the Brazilian legislature decided to use quantitative
criteria in order to evaluate whether it would be necessary to file mergers
involving minority interests and investment funds. This departs from the previous
position of analyzing the existence of relevant influence in the target company on
a case-by-case basis. This can be considered the main innovation of the new
regime regarding this matter. But how is it being applied to cases in which the
regulation thresholds are not met but relevant influence is present? The answer to
this is in the next section.
3.5.
Two Key Developments Regarding Minority Interests
and Private Equity Funds
The Superintendence has already analyzed cases involving minority
interest in the context of funds. Two are very worthy of noting, since the
General Superintendent, based on opinions issued by the Attorney-General at
CADE, dismissed the review of those two cases on the grounds that they did
not meet the thresholds, thus filing was not required. They are key indicators of
81
the actual application of thresholds specifically regarding minority interests, and
certainly serve as a guide for the analysis of the new Act by firms and clients.
The first one relates to acquisition of minority interest by private
equity funds. It involves the acquisition, by BNDESPar (a fund controlled by the
Brazilian National Development Bank - BNDES), of equity representing 10% of
the total capital of PraticaPar. PraticaPar is a holding company that held over
20% equity in companies active in the market for industrial kitchen equipment.38
The General Superintendent highlighted that the BNDES economic group did not
hold over 10% share in companies active in the same market as the ones held by
the PraticaPar economic group.
The parties filed the transaction because they opted to adopt a cautious
stance. They informed CADE that the case did not meet the filing thresholds
included in CADE Regulation 2: turnover thresholds were met, but this is a case
of minority interest involving companies that were not competitors or vertically
related in which the acquired equity does not exceed 20%. In this context, the
transation should be dismissed by the General Superintendence in its prejudgment
analysis. However, given that some of the rights acquired by BNDESPar in the
transaction did fit under the CADE definition of relevant influence, parties
decided to be safe and file the transaction. This was a natural move, given that, as
mentioned above, CADE case law regarding private equity funds was heavily
based on an initial relevant influence test.
The Attorney General at CADE issued an opinion that is essential to
interprete the new rules regarding obligation to file minority interest
transactions. It stated that:
38
Case AC 08700.007119/2012-70, BNDESPar and PraticaPar, filed on Aug. 31, 2012, dismissed
in the prejudgment analysis phase without merit analysis by the General Superintendence on Sep.
28, 2012.
82

The concept of relevant influence had been indeed considered as key
in recent CADE case law in order to assess if transactions involving
private equity funds should be filed.

However, the new filing regime is regulated by the new law and
Regulation CADE 2/2012, which bring objective criteria regarding
filing thresholds. These are the criteria that must be considered in the
analysis regarding the need for notifying.

In this context, the concept of relevant influence cannot be confused
with the concept of control (Regulation CADE 2/2012, Article 9, I),
which would require mandatory filing.

The concept of relevant influence that was constructed by CADE
thoroughout the years continues to be valid, but under the new
regime filing must be deemed mandatory only when the trasaction
cumulatively fulfills the objective turnover thresholds and the
minority interest thresholds provided by Article 9 et seq.

Once those thresholds are fulfilled, the concept of relevant influence
will continue to be relevant and important in the analysis of (i) the
scope of an economic group, (ii) the existence of horizontal overlap or
vertical integration between the groups involved in a transaction, and
(iii) once the transaction is filed and is reviewed in the merits, the
examination of potential antitcompetitive effects resulting from such
transaction.39
The second one involves corporate restructuring.
It involves the
acquisition, by STR Participações, of 99,99% of total Stigma Participações shares,
which indirectly resulted in the acquisition of 9% shares in STR Projetos. STR
39
Attorney-General Opinion on Case AC 08700.007119/2012-70 (BNDESPar and PraticaPar), p.
17-19. The case was filed on Aug. 31, 2012, and dismissed in the prejudgment analysis phase
without merit analysis by the General Superintendence on Sept. 28, 2012, based on such AttorneyGeneral Opinion.
83
Participações already held 91% shares in STR Projetos, and thus consolidated its
interest by means of such transaction.
The parties equally filed the transaction out of an abundance of caution,
and mentioned in the notification that the transaction indeed should be dismissed
in the prejudgment analysis phase, since the amount of interest acquired in this
consolidation was inferior to 20% (Article 11 of CADE Regulation 2/2012). The
Attorney-General at CADE concluded that indeed the transaction did not meet the
Article 11 threshold.
The opinion underlined, however, that the transaction
should be dismissed only because the only actual effect was the consolidation of
control, and detailed a disclaimer: if the transation also generated any other kind
of economic concentration (which it did not), filing would be mandatory because
the situation would not fit completely and exaustively in the hipotheses set forth
by Article 11.40 The General Superintendence agreed with the Attorney-General
and dismissed the case.
The two cited cases are indeed extremely interesting, because they
illustrate not only the application of the law by the authorities, but also provide
some guidance as to their enforcement.
CADE’s Tribunal has not yet decided cases of minority shares acquisitions
or private equity funds under the new regime, given that there have not yet been
any challenges by the Superintendence in this regard.
3.6.
Public bids
According to Article 109 of CADE Regulation 1/2012, tender offer for
shares of publicly-held companies may be filed as of the date they were published
and can be closed with CADE approval still pending. Article 109, §1, details that
the exercise of rights related to voting, vetoing, appointing officers and
40
Opinion issued by the General Superintendence in Case AC 08700.005381/2012-80, Stigma and
STR Participações, p. 3. The case was filed on Jul. 24, 2012, and dismissed in the prejudgment
analysis phase without merit analysis by the General Superintendence on Aug. 8, 2012, based on
the Attorney-General Opinion.
84
overseeing, among others (the so-called ‘political rights’ in Brazilian corporate
law) acquired along with the company’s shares are suspended until CADE clears
the transaction. If the use of such rights is absolutely necessary to preserve
investment value, CADE authorization may be requested and granted (Article
109, §2). Public bids regarding alienation of control must be presented to CADE
when the offer is notified and do not have to be presented once more when
published (Article 109, §3). Bids regarding the cancellation of registration of
publicly-held companies and as a consequence of increase in the participation of
the controlling shareholder in publicly-held companies are not considered
concentration acts (Article 109, §4). It will be interesting to see how CADE will
apply these rules in some practical situations. One of them would be the case of
convertible bonds: will companies be able to purchase them without needing to
file as long as voting rights are not exercised?
4.
Suspensory Regime: Step-by-Step Procedure
Articles 53 to 65 of Law 12,529/11 provide the procedural rules regarding
filing and review of mergers. The request for approval of concentration acts are
addressed to CADE and must contain all the data and documents listed by the
Exhibit I of Regulation 2/2012 (the filing form), which establishes the general
rules of merger filings. When presenting a filing, applicants must follow the
specific format of the filing form, justify all the answers and arguments presented,
indicate sources of their data when relevant and present any evidentiary
documents.
Additionally, applicants must pay a R$45,000 (approximately
US$22,183) fee in order to submit any merger filing to Brazilian authorities. This
fee is usually not refundable – even if CADE later dismisses the transaction in its
premerger analysis, understanding that the thresholds were not met and that the
merger did not need to be filed.
85
PHASE I
GENERAL-SUPERINTENDENCE
FILING
(ARTICLE 53)
AMENDMENT OF
PETITION
(ARTICLE 53, §1º)
PUBLICATION OF
NOTICE
(ARTICLE 53, §1º)
COMPLEMENTARY
FACT-FINDING
(ORDINARY REVIEW)
GS APPROVAL
(SUMMARY REVIEW)
(ARTICLE 54, I)
(ARTICLE 54, II)
NEW FACT-FINDING
(COMPLEX CASES)
APPEAL BY
INTERESTED PARTY OR
REGULATORY AGENCY
(ARTICLE 56)
(ARTICLE 65, I)
CALL UP BY
TRIBUNAL COMISSIONER
(ARTICLE 65, II)
PHASE II
TRIBUNAL
GS APPROVAL
GS CHALLENGE
(ARTICLE 57, I)
(ARTICLE 57, II)
APPLICANT REPLY
(ARTICLES 58 AND 65, 2º)
COMPLEMENTARY
FACT-FINDING
CLEARANCE
SUBMISSION
TO TRIAL
(ARTICLE 59, II)
CLEARANCE WITH
RESTRICTIONS
BLOCK
Phase I: General Superintendence. The flowchart above depicts each step of
the procedure. The General Superintendence is in charge of the first – and in
some cases only – stage of the review. The first step is to verify if the filing
satisfies the requirements mentioned above and if the filing form is complete. The
General Superintendence has a specific section for screening of the cases
received. If a filing has any defect or irregularity that precludes the merit decision
on the case, the General Superintendence shall determine the amendment of the
filing, under penalty of dismissal. Since the amendment is of interest of the
parties – especially considering that the time limit for CADE to review the merger
only starts once the amendment is presented – Law 12.529/11 does not provide
86
any specific term for the Applicants to amend the filing.
The order of
amendment, however, will be issued only once.
Once received the filing or amendment, the General Superintendence
publishes a notice on the Official Gazette to give public notice of the case under
review, indicating the name of parties involved, the type of transaction entered by
the parties and the affected economic sectors.
Regarding the review on the merits, the General Superintendence,
depending on the complexity of the case, can either (i) directly review the case,
rendering a final decision; or (ii) determine complementary fact-finding,
specifying what additional information must be produced.
Once this complementary fact-finding phase is concluded, according to
Article 55 of Law 12.529/11, the General Superintendence may determine it to be
redone if necessary, or consider the fact-finding phase satisfied.
If the case is classified as complex, additional fact-finding can still be
determined (Article 56). Moreover, if the case is declared complex, the General
Superintendence can even request a 90-day extension (additional to the 240-day
limit mentioned above), as provided by Article 88, § 9.
As provided by Article 57, once the additional fact-finding phase is
completed, the General Superintendence will either: (i) clear the case without any
restrictions, publishing the decision on the Official Gazette 41, or (ii) challenge the
41
According to Article 65 of the Law 12.529/2011, within fifteen (15) days of the publishing of
the decision of clearance issued by the General Superintendence, third parties or regulatory
agencies can submit an appeal of the decision to the Administrative Tribunal. During the same 15day period, the Administrative Tribunal can call up the case for its own decision by request of one
of its Commissioners and a reasoned decision. Once the appeal is received, the Reporting
Commissioner will have five (5) business days to: (i) take cognizance of the appeal and submit it
to trial; (ii) take cognizance of the appeal and determine complementary fact-finding (that can be
performed by the General Superintendence); or (iii) dismiss the appeal. Applicants can reply to the
appeal within five (5) business days of the cognizance of the appeal by the Administrative
Tribunal or once the Reporting Commissioner receives a report from the General Superintendence
regarding the complimentary fact-finding. In any event of appeal or call up of the case by the
87
transaction before the Administrative Tribunal of CADE, which occurs if General
Superintendence opinion is (a) in favor of blocking the case, (b) for clearance
with restrictions, or (c) even if no conclusive decision was reached regarding the
transaction effects over the market.
Phase II: Tribunal. In the event of the General Superintendence deciding to
challenge the transaction before the Administrative Tribunal, it shall present a
grounded opinion demonstrating the potential of harm of the transaction and the
reasons why clearance with restrictions or total block is recommended.
Once the Administrative Tribunal receives the case, the applicants have 30
(thirty) days to challenge the opinion issued by the General Superintendence
clearing the transaction subject to restrictions or blocking the transaction. The
challenge is initiated through a written petition addressed to the President of the
Tribunal (Article 58). In this document Parties should present any matter of fact
or of law that they believe supports the view that the opinion of the General
Superintendence should not be considered.
Parties can present additional
evidence, studies, or opinions supporting their requests.
Within 48 (forty-eight) hours from receiving the opinion of the General
Superintendence challenging the merger, a Reporting Commissioner will be
randomly assigned for the case (Article 58, sole paragraph).
After receiving the written petition of the Applicants, the Reporting
Commissioner may: (i) render a decision determining that the case be submitted
to trial; or (ii) determine complementary fact-finding, which can be performed by
the General Superintendence if determined by the Reporting Commissioner,
which will indicate the controversial issues related to the case and the evidences
to be produced (Article 59).
Administrative Tribunal, the closing of the merger is suspended until the Administrative Tribunal
reaches a final decision.
88
If necessary, the Reporting Commissioner can issue a preliminary and
precarious decision authorizing the closing of the merger, imposing the necessary
conditions to preserve the reversibility of the transaction.
Finished the fact-finding phase, the Reporting Commissioner can submit
the case to trial by the Administrative Tribunal. The Administrative Tribunal can
clear the case, dismiss it or impose structural or behavioral restrictions to mitigate
any negative effects, such as asset sales, spinoff of the company, transfer of
corporate control, accounting or legal division of activities, compulsory licensing
of intellectual property rights, and any other necessary measure.
CADE’s final decision is not subject to appeal and constitutes an
extrajudicial execution instrument (Article 93). Nevertheless, the Applicants may
present motions to clarify, which shall not seek to reexamine the merits of the
decision, but only to question matters of obscurity, contradiction or omission in its
wording. Furthermore, an overturn may be sought before the Judiciary branch. In
this case, should CADE’s decision involve a fine, a bond assuring the payment of
the fine must be posted (Article 98).
III.
CADE Decisions Since the New Competition Act Came Into Effect
According to official statistics presented by CADE’s President,42 between
May 29, 2012 and October 1st, 2012 194 concentrations acts were filed: 141 cases
were signed before the pre-merger rules provided by the new law came into
force43 and were subjected to post-merger review, and 53 cases were filed already
under the pre-merger review rule. From the total of cases filed between that short
period, CADE already reviewed 149 cases: 41 cases under the pre-merger review
42
“Cade publishes mergers filings”, Jun. 25, 2012. Retrieved from
http://www.cade.gov.br/Default.aspx?48fb0a1ff62cc042d462f2431636 on Oct. 24, 2012.
43
CADE Regulation 1 brought transition rules regarding merger control: transactions in which
binding documents were signed before May 29, 2012, generating mandatory filing up to June 19,
were subject to the post-merger control rules contained in the previous law.
89
rules and 108 under post-merger review44. From the pre-merger cases decided up
to that date by the General Superintendence, only one was not classified as a fasttrack procedure: the joint venture between Itaú Unibanco S/A and Banco BMG
S/A45. The case, however, had no complexity at all and was cleared by the
General Superintendence without the need of any additional diligences and
without challenging it before the Administrative Tribunal of CADE. 46 Until this
date (Oct. 24, 2012), the Administrative Tribunal did not have the chance to
decide any merger case filed under the new Competition Act, since there was no
challenging by the General Superintendence so far.
Below we provide some highlights regarding CADE decisions after the
new law came into effect.
Given that there have been no cases of great
complexity reviewed yet under the new regime, the cases below have all been
reviewed according to the previous law. They do, however, give an indication on
how CADE has been behaving since the new law came into effect, showing a
tendency toward more rigorous reviews:
Cement and concrete markets. CADE blocked two concentration acts
(Votorantim/Cimpor47 and Lafarge48) and cleared with restrictions one (Camargo
Corrêa/Cimpor49), all related to the acquisition and sale of shares of the
Portuguese cement producer Cimpor to competitors.
The three cases were
decided together, since they were all connected: (i) case Camargo Corrêa/Cimpor
was the acquisition of a controlling stake by Camargo Correa in Cimpor. This
44
Presentation by Dr. Vinícius Marques de Carvalho, cited above.
45
AC 08700.006962/2012-39, Itaú Unibanco S/A and Banco BMG S/A, cleared on Oct. 17, 2012.
46
As of the date this article was concluded, the 15-day period in which CADE may request to
analyze the merger cleared by the General Superintendence had not yet ended. The case will only
be cleared if no request is made by the Tribunal in such period.
47
Case AC 08012.001875/2010-81, Cimpor Cimentos do Brasil Ltda. and Votorantim Cimentos
S.A., blocked on Jul. 4, 2012.
48
Case AC 08012.001879/2010-60, Companhia Nacional de Cimento Portland, blocked on Jul. 4,
2012.
49
Case AC 08012.002018/2010-07, Camargo Corrêa S.A., cleared subject to the signing of a
behavioral agreement on Jul. 4, 2012.
90
case was cleared under the condition of signature of a Performance Commitment
Agreement (TCD) according to which Camargo Corrêa has to sell assets in
relevant markets where the share held by Camargo Corrêa and Cimpor together
were above a specific percentage to an independent party buyer with a lower
market share; (ii) case Votorantim/Cimpor was the acquisition by Votorantim of
Cimpor’ shares previously hold by Lafarge. This case was blocked by CADE,
since the joint participation of Camargo Correa and Votorantim in Cimpor could
lead to collusion, as both companies are competitors in the cement and concrete
markets; (iii) case Lafarge referred to the receiving of two cement plants in Brazil
as a payment for the Cimpor’ shares acquired by Votorantim.
Hospital Services and health care plans (1): CADE ‘conditionally blocked’
two mergers in the hospital services and health care plans market (Amil purchase
of Santa Lucia Hospital50 and FMG Empreendimentos Hospitalares S.A purchase
of Hospital Fluminense S.A51).
The transactions were being carried by two
dominant groups on the market, which had cross minority corporate shares. The
main concern of the Tribunal was that the minority interests could allow the
exchange of sensitive information and the development of joint commercial
strategies. CADE blocked the mergers, unless in a 60-day period the parties sold
their cross minority shares. The parties have complied with CADE´s order and
have already informed the authorities of such. Therefore, the transactions will be
considered cleared.
Human and veterinarian medications: The acquisition of Wyeth by Pfizer,52
Inc. raised antitrust concerns given high concentration in certain segments of the
animal medications market. CADE cleared the transaction conditionally, subject
to an agreement by the parties to divest veterinarian medication brands and also
50
AC 08012.010094/2008-63, Reporting Comissioner Elvino de Carvalho, Casa de Saúde Santa
Lúcia S.A., Amil Assistência Médica Internacional Ltda, blocked on Aug. 29, 2012.
51
AC 08012.006653/2010-55, Reporting Comissioner Marcos Paulo Veríssimo, FMG
Empreendimentos Hospitalares S/A and Hospital Fluminense S/A, blocked on Aug. 29, 2012.
52
AC 08012.001157/2009-71, Reporting Commissioner Elvino de Carvalho, cleared on Sep. 12,
2012, subject to the signing of a behavioral agreement..
91
determining that the parties cannot launch any other products on the segments
with high concentration.
Aviation and airline market: Reaffirming that the aviation market in Brazil is
highly concentrated, CADE cleared the merger of Gol and Webjet airlines53
subject to a behavioral agreement that bound the parties to efficiently use the slots
in the Rio de Janeiro´s Santos Dumont airport (at least 85% of usage of the slots).
If the parties to not meet such performance standards, for each slot not efficiently
used in Santos Dumont airport the airline must return the concession of two other
slots to the National Agency for Civil Aviation of Brazil (ANAC).
Hospital
Services
and health care plans (2): Rede D´Or São Luiz S.A.
acquired corporate shares of Medgrupo Participações S.A. and Hospital Santa
Lúcia S.A.54 The acquisition resulted in high market concentration in the city of
Brasília, approximately 80% of the relevant market. After hearing opinions from
the General Superintendence and CADE´s Attorney General, the Tribunal decided
to freeze the transaction signing a “hold separate” agreement with the parties
(APRO). The agreement stated that the parties are forbidden to take any actions
to implement the acquisition prior to CADE’s clearance, subject to a R$50 million
fine to Rede D´Or and R$ 5 million to its Officers in case of failure to comply
with this determination.
Hospital Services and health care plans (3): Reviewing a case involving
hospital market (Unimed Franca – Sociedade Médico Cooperativo Unimed and
Hospital Regional de Franca)55, CADE subjected the parties to signing a “hold
53
AC 08012.008378/2011-95, Reporting Commissioner Ricardo Ruiz, VRG Linhas Aéreas S.A.
and Webjet Linhas Aéreas, cleared on Oct. 10, 2012, subject to the signing of a behavioral
agreement.
54
AC 08700.004150/2012-59, Reporting Commissioner Ricardo Ruiz, Rede D´Or São Luiz S.A.,
Medgrupo Participações S.A. and Hospital Santa Lúcia S.A., Transaction Reversibility
Preservation Agreement (APRO) signed on Sep. 26, 2012.
55
AC 08700.003978/2012-90, Reporting Commissioner Elvino Carvalho, Unimed Franca –
Sociedade Cooperativa de Serviços Médicos e Hospitalares and Hospital Regional de Franca,
Transaction Reversibility Preservation Agreement (APRO) signed on Aug. 29, 2012.
92
separate” agreement (APRO) because after the acquisition Unimed Franca would
hold 79.41% of Hospital Regional de Franca, which CADE found would be
potentially very harmful to competition.
The agreement determined several
clauses including keeping totally separated structures on both parties and the
existent conditions of decision making, names, brands, hours of service, prices,
employees and also the presentation of reports to CADE every other month. The
Superintendence has just recently (Oct. 17, 2012) issued an opinion
recommending the blocking of the transaction.
Slaughterhouses and distribution of meat products: JBS S.A. acquired a
slaughterhouse and a distribution center owned by Tiroleza Alimentos Ltda. and
Rodo GS – Transportes e Logística Ltda.56 CADE signed a “hold separate”
agreement with the parties that would ensure that cold room units and two
distribution centers should be kept in full activity until CADE’s final decision
regarding the matter.
IV.
Concluding Remarks
These are exciting times indeed for antitrust in Brazil. The new law has
come into effect without the 200 new staff, but CADE has been trying to be
efficient, reviewing a very high number of transactions under the previous and
new regimes. The average waiting period for simple transactions is 18 days, and
the one non-fast track transaction that was cleared by the General
Superintendence up to this date (Oct. 24, 2012) had a reasonable waiting period of
48 days. The General Superintendent has not challenged any complex transaction
to this date, so there was not yet a chance to see the CADE Tribunal review a case
under the new Competition Act.
The new turnover thresholds may lead to a decrease in the number of
filings of classic M&A transactions. On the other hand, the elimination of the
56
AC 08700.004226/2012-46, Reporting Commissioner Ricardo Ruiz, JBS S.A., Toroleza
Alimentos Ltda and Rodo GS – Transportes e Logística Ltda., Transaction Reversibility
Preservation Agreement (APRO) signed on Aug. 29, 2012.
93
market share threshold may mean that significant local transactions do not need to
be filed, albeit being capable of market domination. It is yet to be seen if the oneyear period in which CADE reserves itself the right to review transactions that do
not meet the new thresholds will be enough to neutralize such situations.
The General Superintendence and the Attorney-General at CADE have
taken an important stance in two cases involving minority interest acquired by
investment funds, indicating that the concept of relevant influence must give way
to the quantitative criteria inserted in CADE Regulation 2/2012 in order to assess
if a transaction should be filed.
Corporate reorganization resulting from
consolidation of control will also follow Regulation 2/2012, with the caveat that
the consolidation must be the only result of the transaction (if it results in any
other kind of concentration it must be filed).
Minority interest acquisition and cross shares have been at the heart of
some of the decisions of the Tribunal, which has been very busy reviewing
transactions that are still being scrutinized under the previous law, and has done
so with a strong hand. As seen in the section above, the Council has not hesitated
to block transactions, and has been particularly active in the hospital and health
sector in this short period.
There is a general eagerness for new regulations and to observe how
CADE continues to enforce the new law. There are many financial products such
as convertible debentures that are traded for mere and temporary financial
purposes, which may meet the quantitative minority interest thresholds that have
apparently substituted the relevant influence test.
Will all of these cases
necessarily have to be filed? Will convertible debentures in tender offers need to
be filed if no political rights are exercised? In the case of private equity funds,
what percentage of shares does one fund need to have in one company in order for
it to be considered a ‘competitor’ when purchasing shares in a company that is
active in the same market? Finally, the open concept of ‘associative contract’,
which has not yet been regulated, may lead to an increase of unnecessary filings
94
of cooperative agreements. Previous CADE case law may serve as an indication
of which contracts should or should not be filed, but this is a matter that will only
be clarified by upcoming regulations or decisions.
These are some challenges and expectations that will be faced in the short
term in Brazil.
95
REMEDIES UNDER THE PRC MERGER CONTROL REGIME
Michael Han1
1.
Introduction
It has been four years since the Anti-monopoly Law (AML) of the
People’s Republic of China (PRC) came into effect. Between August 1, 2008, the
effective date of the AML, and the end of 2011, the designated regulator for the
antitrust review of mergers, the Ministry of Commerce (MOFCOM), had
reviewed 382 transactions.2 As of the date of this article, MOFCOM has imposed
restrictive conditions on 15 concentrations and has prohibited one.
This paper will examine the current legislation pertaining to remedies
under the PRC merger control regime and MOFCOM’s application of these rules.
2.
The Statutory Basis
2.1 The Anti-monopoly Law of the People’s Republic of China
The AML3 is the sole primary legislation governing antitrust merger
control in the PRC. The AML provides the framework by which notifiable
“concentrations of undertakings” are to be reviewed by MOFCOM.
Under the AML, where “a concentration has or may have the effect of
eliminating or restricting competition”, MOFCOM is authorized to prohibit the
transaction, unless the parties “can prove that the concentration will have a more
positive impact than negative impact on competition or the concentration is
1
Michael Han is a partner at Freshfields Bruckhaus Deringer LLP in the Beijing office, where he
leads the firm’s China antitrust, competition and trade practice. Michael would like to thank
Richard Hughes for his help in preparing this article.
2
MOFCOM Press Conference, January 10 2012 [(Chinese) http://www.gov.cn/jrzg/201201/10/content_2041384.htm]
3
Anti-monopoly Law of the People’s Republic of China (2008) [(Chinese)
http://www.gov.cn/flfg/2007-08/30/content_732591.htm]
96
pursuant to the public interest”.4 Alternatively, MOFCOM may decide to “impose
restrictive conditions on concentrations of undertakings to reduce their negative
effects on competition”.5
In reaching its decision to prohibit a merger or to impose conditions,
MOFCOM relies on a range of factors, such as market share and the degree of
concentration in a market. More controversially, MOFCOM may also refer to “the
influence of the concentration on the national economic development”. 6 This
clause highlights a stated policy goal of the AML -- found in Article 1 -- where, in
addition to ensuring efficiency and the protection of consumers, other aims of the
AML are stated as “safeguarding the … social public interest and promoting the
healthy development of the socialist market economy”. This implies that, in
addition to competition factors, MOFCOM may take non-competition factors into
account in the merger review process.
2.2 Secondary Legislation
MOFCOM has yet to publish comprehensive guidance on the remedy
regime relating to concentrations. However, two pieces of secondary legislation
with provisions relating to remedies have been made available:
i.
Measures on the Review of Concentrations of Undertakings
(2010)7 (the Review Measures); and
ii.
Provisional Measures on the Implementation of Divestitures of
Assets or Businesses Imposed on Concentrations of Undertakings
4
Id. Article 28
5
Id. Article 29
6
Id. Article 27(5)
7
Measures on the Review of Concentrations of Undertakings (2010) [(Chinese)
http://fldj.mofcom.gov.cn/aarticle/c/200911/20091106639145.html?2223520110=3683028003]
97
(2010)8 (the Provisional Measures on Divestitures, or the
Provisional Measures).
3.
Remedies Available to MOFCOM
Under Article 11 of the Review Measures, the parties to the concentration
may propose remedies to MOFCOM in order to “remove or reduce” the restrictive
effects of the concentration on competition. The Review Measures indicate that
remedies may fall within the following three categories:
1. structural conditions, such as the divestiture of assets or businesses;
2. behavioral conditions, such as the opening by the relevant
undertakings of infrastructures such as networks or platforms, the
licensing of key technologies (including patents, know-how and other
intellectual property rights), and the termination of exclusionary
agreements; and
3. hybrid conditions combining both structural and behavioral conditions.
The Review Measures do not provide further detail regarding the
circumstances in which these remedy types can be employed. This grants
MOFCOM broad discretion, and the parties to the concentration have a wide
range of possible options in proposing remedies.
4.
Procedures in Agreeing Remedies with MOFCOM
The Review Measures provide detail regarding the procedural aspects of
agreeing a remedy plan with MOFCOM. The key procedural requirements
include:
8
Provisional Measures on the Implementation of Divestitures of Assets or Businesses Imposed on
Concentration of Undertakings (2010) Article 2 [(Chinese)
http://fldj.mofcom.gov.cn/aarticle/c/201007/20100707012000.html?3431479662=3683028003]
98

Remedy plans should address the competition issues identified
by M MOFCOM and must be feasible;9

Remedy plans submitted by the parties should be “clear and
precise” and be submitted in writing to MOFCOM;10

Both MOFCOM and the parties may comment on, and suggest
further revisions to, the remedies proposed by the parties;11

The Review Measures reiterate that MOFCOM may impose
restrictive conditions on the parties in its decisions;12

The Review Measures provide that MOFCOM can and will
supervise the implementation of remedies and that the parties
will report to MOFCOM on progress in implementing the
remedies. MOFCOM may order the parties to rectify any noncompliance with remedies and, where parties are not in
compliance, may take measures against the parties under the
AML.13
5.
Implementation of Structural Remedies
As noted in Section 3 above, the types of remedies provided to MOFCOM
under the Review Measures include structural, behavioral and hybrid structural /
behavioral remedies. No comprehensive guidelines exist that address behavioral
remedies. However, the Provisional Measures on Divestitures provide detail on
the procedure to be followed when implementing remedies that involve a
structural aspect, such as a divestment obligation.
9
Measures on the Review of Concentrations of Undertakings (2010) Article 12
10
Ibid.
11
Id. Article 13
12
Id. Article 14
13
Id. Article 15
99
(i) Scope
Under the Provisional Measures, a divestiture is defined as “the divestiture
of part of [an undertaking’s] assets or businesses and actions in connection
therewith by an undertaking to a concentration which is under the
obligation…pursuant to the review decision.” The party subject to the divestiture
decision is referred to as the “Divestiture Obligator”.14
(ii) Purchaser
In contrast to the practice in the US, MOFCOM does not require an
upfront purchaser.15 However, the Provisional Measures set forth the following
requirements regarding the suitability of purchasers: a) the purchaser should be
independent from the parties and sufficiently well-resourced to be acceptable to
MOFCOM;16 b) the purchaser should have the intention to maintain and develop
the business;17 and c) the purchaser should be able to obtain any regulatory
approvals required to complete the purchase.18 MOFCOM reserves the right to
review the impact on competition of the proposed purchaser’s participation in the
divestment.19
(iii) Timing
MOFCOM’s review decisions specify the length of time given to the
Divestiture Obligator to find a buyer and execute the relevant divestiture
transaction documents.20 Completion of the transaction must take place within
14
Provisional Measures on the Implementation of Divestitures of Assets or Businesses Imposed
on Concentrations of Undertakings (2010) Article 2
15
Id. Article 3
16
Id. Article 9
17
Ibid.
18
Ibid.
19
Ibid.
20
Id. Article 3
100
three months of signing, although MOFCOM has discretion to extend this
deadline.21
(iv) Trustees
According to the Provisional Measures, where the Divestiture Obligator
is unable to accomplish the divestiture within the timetable imposed by
MOFCOM, it must appoint a divestiture trustee to do so on its behalf.22
Additionally, the entire divestment process, whether a divestiture by the
Obligator or a divestiture by the divestiture trustee, must be monitored by a
supervisory trustee, to be selected by the Divestment Obligator and approved by
MOFCOM in the same manner as the divestiture trustee.23 The supervisory
trustee and divestiture trustee can be the same natural person, legal person or
other organization.24
The names of the supervisory and divestiture trustees should be submitted
to MOFCOM within 15 and 30 days of its review decision, respectively. 25 Time
taken by MOFCOM to review candidates for trusteeships stops the clock with
regard to the divestiture process.26 Although both trustees are paid by the
Divestiture Obligator,27 they report to MOFCOM28 and will not take instructions
from29 nor, in the case of the divestiture trustee, share privileged information
with,30 the Divestiture Obligator, without the permission of MOFCOM.
21
Ibid.
22
Ibid.
23
Id. Article 4
24
Id. Article 5
25
Id. Article 4
26
Id. Article 11
27
Id. Article 6
28
Id. Article 5
29
Ibid.
30
Id. Article 8
101
(v) Maintaining the Value of the Divested Business
The Provisional Measures further provide
that the value of the
businesses / assets to be divested must be maintained by the Divestment
Obligator.31 The Provisional Measures set forth a list of rules that should be
observed to preserve value, including: maintaining the independence of the
divested business and managing it in such a manner that would be in the best
interests of that business and refraining from removing human or IP assets from
the business.32 A custodian should be appointed to manage the business in the
interim.33 The seller is under an obligation to handle the sale of the business in a
transparent manner and to assist the buyer in the transfer of the business.34
6.
The Cases
As of October 2012, MOFCOM has published 15 remedy decisions and
one prohibition. Of the remedy decisions to date, examples of each of the three
remedy categories specified in the Remedy Measures can be found.
6.1 The Prohibition Decision
Before exploring the remedies imposed by MOFCOM, it is worth noting
the one decision in which MOFCOM has chosen to prohibit a concentration.
In Coca-Cola / Huiyuan Juice,35 Coca-Cola agreed to acquire Hong Konglisted Huiyuan Juice, one of China’s best-known fresh fruit juice brands. In its
brief decision, MOFCOM noted that, post-concentration, Coca-Cola would: (i)
have the ability to ‘leverage’ its ‘dominant position’ in the soft drinks market into
the juice market, enhancing Coca-Cola’s market power in the juice market to the
31
Id. Article 12
32
Ibid.
33
Ibid.
34
Ibid.
35
MOFCOM Public Announcement No.22 of 2009, March 18 2009 [(Chinese)
http://fldj.mofcom.gov.cn/aarticle/ztxx/200903/20090306108494.html?3113105774=3683028003]
102
detriment of its competitors and consumers; (ii) control two well-known juice
brands post-concentration, including Minute Maid and Huiyuan; and (iii) “hinder
the sustainable and healthy development of the Chinese juice industry” by
discouraging small and medium drinks companies from competing and reducing
their ability to survive and innovate independently. MOFCOM did not publish
any data to support its three contentions, making it difficult to test its conclusions.
This, coupled with media reports that MOFCOM asked Coca-Cola to accept a
remedy whereby the deal would go through if the Huiyuan brand would stay
under Chinese ownership,36 suggests that non-competition factors may have been
a driver in this decision.
6.2 Structural Remedies
MOFCOM has imposed structural remedies in four cases, namely: Pfizer /
Wyeth;37 Panasonic / Sanyo;38 Penélope / Savio;39 and UTC / Goodrich.40 As
would be expected, in each of these cases, significant horizontal overlaps existed
that justified the divestiture order.
In Pfizer / Wyeth, the first case in which a purely structural remedy was
imposed, MOFCOM found a significant horizontal overlap between the two
parties in the swine mycoplasma pneumonia vaccine market, with a total market
share of 49.4 per cent and a post-concentration HHI of 2182. It also found high
barriers to market entry in the form of significant R&D costs. On that basis,
MOFCOM required Pfizer to divest its swine mycoplasma pneumonia vaccine
36
‘Beijing Thwarts Coke's Takeover Bid’, Wall Street Journal, March 19 2009
[http://online.wsj.com/article/SB123735859467667801.html]
37
MOFCOM Public Announcement No.77 of 2009, September 29 2009 [(Chinese)
http://fldj.mofcom.gov.cn/aarticle/ztxx/200909/20090906541443.html?630602094=3683028003]
38
MOFCOM Public Announcement No. 82 of 2009, October 30 2009 [(Chinese)
http://fldj.mofcom.gov.cn/aarticle/ztxx/200910/20091006593175.html?3096394094=3683028003]
39
MOFCOM Public Announcement No. 73 of 2011, October 31 2011 [(Chinese)
http://fldj.mofcom.gov.cn/aarticle/zcfb/201111/20111107809156.html?311310702=3683028003]
40
MOFCOM Public Announcement No. 35 of 2012, June 15 2012 [(Chinese)
http://fldj.mofcom.gov.cn/aarticle/ztxx/201206/20120608181083.html?2207136110=3683028003]
103
businesses in China, including the relevant intellectual property rights. The
remedies imposed in this case were similar to those imposed by regulators in the
US,41 Canada,42 and the EU,43 which required divestitures of parts of Pfizer’s
animal health business in their respective jurisdictions, as conditions to the
concentration’s clearance.
In Panasonic / Sanyo, MOFCOM required both the buyer and seller to
divest businesses, based in Japan, on the basis of significant overlaps in several
battery segments. MOFCOM also required Panasonic to reduce its shareholding
and to waive its voting rights and rights to appoint directors in a joint venture with
Toyota. This decision was broadly in line with those of the FTC 44 and the EU
Commission.45
UTC / Goodrich, the most recent of the purely structural remedy cases, is
notable as it is the first case in which MOFCOM has published a decision and
imposed a remedy before its counterparts in the US46 and the EU.47 In this case,
MOFCOM required the parties to divest Goodrich’s electric power systems
business and its interest in Aerolec, an electrical power generation systems
manufacturing joint venture with Thales. This case demonstrates an increase in
41
United States Federal Trade Commission, Decision and Order: In the matter of Pfizer Inc. and
Wyeth [http://www.ftc.gov/os/caselist/0910053/091014pwyethdo.pdf]
42
Competition Tribunal of Canada, Consent Agreement: The Commissioner of Competition and
Pfizer and Wyeth [http://www.ct-tc.gc.ca/CMFiles/CT-2009014_Consent%20Agreement_002_61_10-14-2009_7892.pdf]
43
EU Commission Case No COMP/M.5476 – Pfizer / Wyeth
[http://ec.europa.eu/competition/mergers/cases/decisions/m5476_20090717_20212_en.pdf]
44
United States Federal Trade Commission, Decision and Order: In the matter of Panasonic
Corporation and Sanyo Electric Corporation
[http://www.ftc.gov/os/caselist/0910050/091124panasanyodo.pdf]
45
EU Commission Case No COMP/M.5421 – Panasonic / Sanyo
[http://ec.europa.eu/competition/mergers/cases/decisions/m5421_20090929_20212_en.pdf]
46
United States v United Technologies Corporation and Goodrich Corporation, Proposed Final
Judgment and Competitive Impact Statement, July 26, 2012 Case 1:12-cv-01230-RC
[http://www.justice.gov/atr/cases/f285400/285422.pdf]
47
EU Commission press release IP/12/858, July 27, 2012 [http://europa.eu/rapid/press-release_IP12-858_en.htm]
104
MOFCOM’s appetite to make decisions autonomously. It is unclear whether
MOFCOM was involved in the international cooperation between the US, EU and
other competition authorities that led to coordinated remedies being agreed by
these jurisdictions, but it appears that this was not the case.48
6.3 Behavioral Remedies
Behavioral remedies have been required by MOFCOM in the majority of
its remedy decisions (seven of 15). Behavioral remedies have been used as a tool
by MOFCOM to address both horizontal and vertical issues.
The first category of decisions, involving behavioral remedies to address
horizontal issues, includes the decisions in the Inbev / Anheuser Busch,49 Seagate
/ Samsung HDD50 and Novartis / Alcon51 transactions. The second category,
involving vertical issues, includes the decisions in GM / Delphi;52 Uralki /
Silvinit;53 GE / Shenhua JV;54 Henkel / Tiande Chemical JV;55 and Google /
Motorola.56
48
‘Recent Developments in Merger Control: Views from the U.S. Department of Justice’s
Antitrust Division’. Remarks of Rachel Brandenburger, Special Advisor, International Antitrust
Division, US DOJ, at the International Bar Association’s 16th Annual Competition Conference,
September 14, 2012, [http://www.justice.gov/atr/public/speeches/286981.pdf]
49
MOFCOM Public Announcement No. 95 of 2008, November 18, 2008 [(Chinese)
http://fldj.mofcom.gov.cn/aarticle/ztxx/200811/20081105899216.html?1032927598=3683028003]
50
MOFCOM Public Announcement No. 90 of 2011, December 12, 2011 [(Chinese)
http://fldj.mofcom.gov.cn/aarticle/zcfb/201112/20111207874274.html?4086774126=3683028003]
51
MOFCOM Public Announcement No. 53 of 2010, August 13, 2010 [(Chinese)
http://fldj.mofcom.gov.cn/aarticle/ztxx/201008/20100807080639.html?3331406190=3683028003]
52
MOFCOM Public Announcement No. 76 of 2009, September 28, 2009 [(Chinese)
http://fldj.mofcom.gov.cn/aarticle/ztxx/200909/20090906540211.html?714094958=3683028003]
53
MOFCOM Public Announcement No. 33 of 2011, June 2, 2011 [(Chinese)
http://fldj.mofcom.gov.cn/aarticle/ztxx/201106/20110607583288.html?3533125998=3683028003]
54
MOFCOM Public Announcement No. 74 of 2011, November 10, 2011 [(Chinese)
http://fldj.mofcom.gov.cn/aarticle/ztxx/201111/20111107855595.html?3834657134=3683028003]
55
MOFCOM Public Announcement No. 6 of 2012, February 9, 2012 [(Chinese)
http://fldj.mofcom.gov.cn/aarticle/ztxx/201202/20120207960466.html?2996255086=3683028003]
56
MOFCOM Public Announcement No. 25 of 2012, May 19, 2012 [(Chinese)
http://fldj.mofcom.gov.cn/aarticle/zcfb/201205/20120508134324.html?3453106542=3683028003]
105
(i) Behavioral Remedies Addressing Horizontal Issues
Controversially, MOFCOM imposed a behavioral remedy in its first
remedy decision: that of Inbev / Anheuser Busch. Despite stating in its decision
that the concentration would not restrict competition in the Chinese beer market,
MOFCOM, on the basis that it concluded that it was necessary to reduce the
impact of the concentration on future competition in the Chinese beer market,
prohibited the merged entity from increasing its existing stakes in two large
Chinese breweries (Tsingtao and Zhujiang) and from acquiring future stakes in
Beijing Yanjing and China Resources Snow breweries, without MOFCOM’s
explicit approval. MOFCOM also required Inbev to notify it of any future change
in its controlling shareholders. This approach differed from that taken in the US57
and the UK,58 which, with the exception of a limited divestiture imposed in the
US, cleared the merger unconditionally.
In Novartis / Alcon, both the US59 and the EU60 had imposed structural
remedies on Novartis. In China, MOFCOM imposed behavioral remedies,
prohibiting the re-launch of a Novartis ophthalmic anti-inflammatory product and
forcing Novartis to terminate an exclusive supply arrangement, between Novartis
and a competitor, for contact lens products. The prohibition of the re-launch of a
product by Novartis does not seem to be consistent with the general goals of
competition laws, as it arguably would reduce consumer choice. It therefore gives
the impression that this remedy may have been influenced by non-competition
considerations.
57
United States of America v. Inbev N.V./S.A., Inbev USA LLC and Anheuser-Busch Companies,
Inc., Final judgment: CASE NO: 08-cv-1965 (JR) August 11, 2009
[http://www.justice.gov/atr/cases/f248900/248995.htm]
58
Office of Fair Trading, Decision No. ME/3826/08, Anticipated acquisition by InBev NV/SA of
Anheuser-Busch Companies, Inc, December 12, 2008
[http://oft.gov.uk/shared_oft/mergers_ea02/2008/InBev.pdf]
59
United States Federal Trade Commission, Decision and Order: In the Matter of Novartis
[http://www.ftc.gov/os/caselist/1010068/100816novartisdo.pdf]
60
European Commission Case No COMP/M.5778 – Novartis / Alcon
[http://ec.europa.eu/competition/mergers/cases/decisions/m5778_20100809_20212_1577344_EN.
pdf]
106
(ii) Behavioral Remedies Addressing Vertical Issues
In the second category of decisions, behavioral remedies have focused on
maintaining supply and preventing customer discrimination in the Chinese
market.
In GM / Delphi, where General Motors purchased assets from the bankrupt
auto parts manufacturer Delphi, MOFCOM’s concerns were focused on the
following issues: Delphi’s position as a supplier to ‘many’ Chinese car makers;
GM’s potential access to the business secrets of domestic car makers; the ability
of such customers to switch to other car parts suppliers; and potential
discrimination against Chinese companies in favor of GM on the part of Delphi.
To alleviate these concerns, the parties committed to: not discriminate against
Chinese customers; to protect customers’ intellectual property; and to not restrict
the ability of customers to switch supplier. This transaction was cleared
unconditionally in the EU61 and the US.62 The remedies imposed by MOFCOM
are not supported by a detailed analysis. They are therefore open to criticism as
potentially motivated by non-competition concerns, for example, fostering the
stable development of the Chinese automotive industry.
In Uralki / Silvinit, where two leading potassium chloride producers
merged, MOFCOM’s concerns were focused on the combined market position of
the parties, estimated by MOFCOM to account for one third of the total market,
and on China’s reliance on the parties for approximately one third of the
potassium chloride supplied to the country. MOFCOM noted that the transaction
would have an impact on China’s agricultural and other related industries. To
address these concerns, the parties committed to: continue to sell potassium
chloride to China; to maintain the purity of the potassium chloride products; to
retain the format of contractual negotiations; and to report to MOFCOM on a
61
European Commission Case No COMP/M.5617 General Motors / Delphi Corporation
[http://ec.europa.eu/competition/mergers/cases/decisions/m5617_20091002_20310_en.pdf]
62
FTC, Transactions granted early termination, September 2, 2009,
[http://www.ftc.gov/bc/earlyterm/2009/09/et090902.pdf]
107
semi-annual basis (under the supervision of a trustee) regarding their compliance
with these commitments. These remedies are designed to maintain the status quo
in pricing and quality for the supply of potassium chloride to China’s agricultural
industry.
In GE / Shenhua JV, the parties had established a JV to license water coal
slurry technology and to provide engineering services to third party industrial and
electric projects. MOFCOM’s concerns were focused on the ability of Shenhua
and GE to bundle Shenhua’s superior feed coal with GE’s technology, restricting
the ability of technological competitors to access the feed coal market. The parties
committed not to tie the use of the technology to access to the feed coal market.
Henkel / Tiande Chemical JV concerned a joint venture that allowed the
parties to produce cyanoacrylate monomer, a mid-stream chemical reliant on a
supply of ethyl cyanoacetate, a product category in which Tiande Chemical is one
of the only global suppliers. As a condition of clearance, the parties committed to
maintain supply of the upstream commodities to all downstream customers on a
non-discriminatory basis, with the commitments being monitored by a
supervisory trustee.
Behavioral remedies, while more difficult to enforce, have been used by
MOFCOM as a flexible tool to address both competition and industrial policy
concerns in both horizontal and vertical mergers, particularly where transactions
are likely to impact on the supply or pricing of raw materials into China. It is
notable that none of the concentrations in this second category, i.e. vertical
mergers, were subjected to remedies in the US and EU, which may support the
theory that industrial policy factors were present in MOFCOM’s decision-making.
108
6.4 Hybrid Remedies
MOFCOM has imposed hybrid remedies in several high-profile
transactions, namely: Mitsubishi Rayon / Lucite;63 Western Digital / Hitachi
Global Storage Technologies;64 and Walmart / Yihaodian.65
In the Mitsubishi Rayon / Lucite decision, MOFCOM found that the
concentration would give rise to both horizontal and vertical issues in the Chinese
market for MMA (methyl methacrylate). MOFCOM required Lucite to divest 50
per cent of its Chinese capacity to a third party. Beyond this structural remedy,
MOFCOM prohibited the merged entity from building any further production
capacity within China for five years following the decision.
In Western Digital / Hitachi Global Storage Technologies, Hitachi Global
Storage Technologies was required to divest its 3.5 inch hard disk drive (HDD)
business. In addition, MOFCOM imposed a 2-year hold separate remedy on
Western Digital. The divestiture aspect of the decision was in line with the
decisions in both the EU66 and the US,67 but the behavioral remedy, namely the
hold separate, is clearly much more onerous and something which has rarely been
imposed by other competition agencies.
7.
Comments
63
MOFCOM Public Announcement No. 28 of 2009, April 24, 2009 [(Chinese)
http://fldj.mofcom.gov.cn/aarticle/ztxx/200904/20090406198805.html?2425764206=3683028003]
64
MOFCOM Public Announcement No. 9 of 2012, March 2, 2012 [(Chinese)
http://fldj.mofcom.gov.cn/aarticle/ztxx/201203/20120307993758.html?2845194606=3683028003]
65
MOFCOM Public Announcement No.49 of 2012 , August 13, 2012 [(Chinese)
http://fldj.mofcom.gov.cn/aarticle/zcfb/201208/20120808284410.html?3432397166=3683028003]
66
EU Commission press release IP/11/1395, November 23, 2011 [http://europa.eu/rapid/pressrelease_IP-11-1395_en.htm]
67
United States Federal Trade Commission, Decision and Order: In the matter of Western Digital
Corporation [http://ftc.gov/os/caselist/1110122/120305westerndigitaldo.pdf]
109
7.1 We have seen that, of the cases adjudicated upon by MOFCOM so
far, the remedies imposed in some cases have differed from those
imposed abroad.
Of the 16 published decisions so far, nine have been adjudicated on by
each of the responsible regulators in China, the US and the EU. Of these nine,
three of MOFCOM’s decisions have broadly coincided in scope with those of the
competition regulators in the EU and the US, namely: Pfizer / Wyeth; Panasonic /
Sanyo; and UTC / Goodrich.
In the other six cases, Inbev / Anheuser-Busch; GM / Delphi; Novartis /
Alcon; Seagate / Samsung HDD; Western Digital / Hitachi Global Storage
Technologies; and, Google / Motorola Mobility, MOFCOM either imposed
remedies on its own, despite unconditional clearance being awarded by other
major competition agencies, or imposed additional behavioral conditions.
7.2 MOFCOM is increasingly confident in imposing remedies in cases
where other major antitrust enforcement agencies have cleared a
transaction unconditionally.
In Seagate / Samsung HDD, although the US68 and EU69 unconditionally
cleared the transaction, MOFCOM imposed a complex hold-separate remedy, on
the basis that the global hard disk drive market is highly concentrated. The
remedy requires Seagate to maintain Samsung HDD as a largely separate
business, and imposes behavioral conditions on Seagate in relation to the supply
of HDD products and the purchase of HDD heads. The decision is subject to
review in 12 months by MOFCOM, at which point, Seagate may be able to
68
United States Federal Trade Commission, Statement of the Federal Trade Commission
Concerning Western Digital Corporation/Viviti Technologies Ltd. and Seagate Technology
LLC/Hard Disk Drive Assets of Samsung Electronics Co. Ltd
[http://ftc.gov/os/caselist/1110122/120305westerndigitalstmt.pdf]
69
European Commission Case No COMP/M.6214 – Seagate / HDD Business of Samsung
[http://ec.europa.eu/competition/mergers/cases/decisions/m6214_20111019_20682_2390485_EN.
pdf]
110
integrate the Samsung HDD business into its own Seagate operations. This
decision is controversial as it effectively prevents Seagate from completing the
transaction.
Similarly, in the recent Google / Motorola Mobility transaction, although
the merger had been cleared unconditionally in Europe70 and the US,71 MOFCOM
required Google to keep Android as a free and open source, to treat OEMs in a
non-discriminatory manner, and to honor Motorola’s existing patent licensing
terms. MOFCOM’s concerns were focused on: Android’s dominance in the
Chinese smart phone OS market, where it held a 74 per cent share of the market;
the reliance of OEM terminal manufacturers and consumers on Android
remaining free and open source; and on the effect of any potential change of the
licensing of Motorola Mobility’s patents on competition. The question remains
whether the reliance of Chinese terminal manufacturers on Android in developing
their brands could have influenced the decision to require Google to keep the
software as a free and open source.
7.3 Remedies imposed by MOFCOM may reflect the different
approaches taken by MOFCOM in the review process with respect to
certain issues.
In Penélope (Alpha V) / Savio, MOFCOM addressed the issue of control
in a manner that differs from other competition agencies in the context of a
minority stake investment. In this case, Penélope, a special purpose vehicle of
Alpha V, a private equity fund, notified MOFCOM of its agreement to acquire
Savio, one of the only two manufacturers of electric clearer yarn in the world (a
70
European Commission Case No COMP/M.6381 – Google / Motorola Mobility
[http://ec.europa.eu/competition/mergers/cases/decisions/m6381_20120213_20310_2277480_EN.
pdf]
71
‘Statement of the Department of Justice’s Antitrust Division on Its Decision to Close Its
Investigations of Google Inc.’s Acquisition of Motorola Mobility Holdings Inc. and the
Acquisitions of Certain Patents by Apple Inc., Microsoft Corp. and Research in Motion Ltd,’
United States Department of Justice, February 13, 2012
[http://www.justice.gov/opa/pr/2012/February/12-at-210.html]
111
market that MOFCOM noted had high entry barriers due to the highly
concentrated nature of the market and intellectual property issues). Alpha V was
already the largest stakeholder in the only competitor of Savio, Uster, in which it
held a 27.9 per cent stake. MOFCOM’s view was that Alpha V’s control of
operational decision making at Uster could ‘not be ruled out’ and that there
therefore existed a threat to customer interests. MOFCOM required Alpha V to
divest its shares in Uster. This appears to be a very different approach from that
taken by other agencies with respect to the issue of “control”, as one would expect
that the competition agency would need to make an affirmative decision on
control before it could impose such a remedy.
7.4 MOFCOM is imposing remedies with increasing frequency.
Although the total number of interventions by MOFCOM is a relatively
low figure, the agency has become increasingly interventionist, with seven of its
15 remedy decisions published in the past 12 months.
The increasing frequency at which MOFCOM is imposing remedies
signifies a step-change in enforcement and should serve as a warning to
companies planning complex M&A that may affect competition in China.
7.5 MOFCOM has demonstrated flexibility when it comes to
accepting remedies, but this can come at a financial cost and could
potentially lead to uncertainty.
MOFCOM’s guidelines and practice demonstrate that it is more open to
imposing behavioral or hybrid remedies on concentrations than its counterparts in
the EU and the US (although the DOJ’s most recent guidance on remedies seems
to take a more favorable view of behavioral remedies).72
72
Antitrust Policy Guidelines to Merger Remedies, p.5 I.B.2 ‘Vertical Mergers’ - US Department
of Justice Antitrust Division, June 2011 [http://www.justice.gov/atr/public/guidelines/272350.pdf]
112
This approach offers more flexibility to businesses, as it allows companies
to be more creative in the kinds of remedies that they recommend to MOFCOM in
the course of merger review. It can, however, lead to relatively complex
arrangements that can generate high costs for businesses, particularly where a
business is forced to accept a hold-separate arrangement that effectively precludes
them from closing a transaction (as was the case in Seagate / Samsung and
Western Digital / Hitachi Global Storage Technologies).
It could also be said that this ‘flexibility’ on the part of MOFCOM
indicates a willingness to intervene in markets through pricing regulation and
ongoing monitoring. This reflects a greater willingness to intervene in markets on
the part of PRC regulators, as compared to their counterparts in more mature
markets. This adds an element of uncertainty for businesses undertaking activities
in the PRC and for the parties subject to MOFCOM’s antitrust merger review.
7.6 Non-competition considerations could affect review outcomes.
As discussed above, MOFCOM’s remit in reviewing a concentration
includes various non-competition considerations. This broad remit, when viewed
in
the
context
of
the
one
prohibition
decision
to
date
--
Coca-Cola / Huiyuan Juice -- and remedy decisions in cases outlined above,
including Inbev / Anheuser Busch; GM / Delphi; Novartis / Alcon; Uralki /
Silvinit, and Google / Motorola Mobility, give the impression that noncompetition factors may have influenced its decision-making in these cases and
may do so in the future. The lack of supporting data in MOFCOM’s published
decisions exacerbates this issue, as third parties are unable to test the conclusions
of MOFCOM against the full facts of the case.
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NEGOTIATING MERGER REMEDIES AT THE FTC AND DOJ: SUMMARY
OF ABA TELECONFERENCE PROGRAM
Rani Habash1
On October 12, 2012, the ABA Antitrust Section’s Mergers &
Acquisitions Committee and the Young Lawyer Division’s Antitrust Law
Committee jointly sponsored a panel discussion on the process of negotiating
settlements in Federal Trade Commission (“FTC”) and U.S. Department of
Justice (“DOJ”) merger investigations. Panelists included Paul Denis, Deputy
Chair of the Global Litigation Team of Dechert LLP, Susan Huber, an attorney in
the Compliance Division of the FTC, and Owen Kendler, Counsel to the Assistant
Attorney General of DOJ’s Antitrust Division. Michael Lovinger, an attorney in
the Mergers II Division of the FTC, moderated the program.2
I.
How and When Settlement Negotiations Begin
According to Mr. Denis, merging parties should not expect the agencies to
broach settlement issues – it is usually up to the parties to start negotiations.
Before doing so, attorneys should familiarize themselves with the agencies’
remedy guidelines. The FTC published a revised statement on Negotiating
Merger Remedies in January 2012 and withdrew its Policy Statement on
Monetary Remedies in Competition Cases in July 2012. A wealth of information
is also available on the FTC’s website from hearings held on merger remedies
back in 2002. For DOJ, the Antitrust Division Policy Guide to Merger Remedies,
which was revised in June 2011, provides helpful guidance. In addition, Mr.
Kendler and Ms. Huber added that attorneys should review the last several
consent decrees agreed to by the agencies as well as consent decrees applying to
the particular industry of the merging parties.
1
Rani Habash is an antitrust associate in Dechert LLP’s Washington, D.C. office. The analysis
and conclusions provided in this article do not necessarily represent the views of the author,
Dechert LLP, or its clients.
2
At the outset of the program, the speakers stated that any views expressed during the program
were their own and did not necessarily represent the views of their respective organizations.
114
When dealing with state attorneys general, Mr. Denis noted that states do
not have official remedy guidelines. Often, the states are more creative with the
settlements they are willing to accept. Thus, parties should not assume that a state
would reject a remedy that the federal agencies typically would view as
unacceptable. It is best to look to the precedents of the state with which you are
negotiating.
Mr. Denis suggested that parties should begin thinking about remedies as
early as the deal negotiation stage. For example, a party may be able to structure
a deal to obviate the need for a remedies discussion. Alternatively, parties could
give themselves the option in their merger agreement to resort to self help during
an investigation to unilaterally restructure their deal instead of negotiating a
formal settlement with the agencies. By waiting until after an investigation has
begun to discuss settlement options, a party may be foreclosed from other ways of
avoiding or remedying competitive concerns.
II.
Formal Consent Decrees
As part of a formal consent decree, the agencies try to create a divestiture
package that is viable, saleable, and will be likely to replicate some or all of the
competition in the market that would otherwise be lost as a result of the merger.
Ms. Huber stated that, in addition to the main assets to be divested, it is also
important to include in a divestiture package related assets, services, consents
(especially from landlords for leases), and employment contracts for key
personnel.
For example, to help a divestiture buyer compete quickly and
effectively, key employees may be required to travel with the divested assets, and
the merging parties may be required to provide certain training or transition
services.
The breadth of a divestiture package may differ based on whether there is
an upfront or post-divestiture order buyer, according to Ms. Huber. For upfront
buyers, the agencies can be more surgical in assessing what assets the buyer needs
or does not need to be an effective competitor given the divestiture buyer’s
115
current assets and expertise. By contrast, for post-order divestiture buyers, the
agencies may need to create a broader divestiture package as they do not know
what the eventual buyer will or will not need.
The panelists also discussed a few noteworthy provisions that may be used
in a consent agreement:
Prior Notification and Prior Approval. Ms. Huber stated that prior
notification provisions require a party to notify the agencies before consummating
future transactions in certain markets. A prior notification provision is usually
used where there is a reasonable likelihood that the party’s future acquisitions in
the relevant markets will not trigger a Hart-Scott-Rodino pre-merger notification
filing. Meanwhile, prior approval provisions are rarer, and require an agency to
approve future acquisitions by the party before they may be consummated. Prior
approval provisions are typically used where there is a significant risk that a party
will repeat a potentially troublesome transaction.
Crown Jewels. Ms. Huber explained that crown jewel provisions are
sometimes used in post-order divestitures to incentivize a selling party to make its
best efforts to divest its assets quickly and in a reasonable manner. When there is
a concern that an asset package as structured may not be saleable to an approvable
buyer and where that package is not sold within a certain time frame, crown jewel
provisions require a party to “sweeten” the divestiture package with other assets
so that the offering becomes more attractive to buyers and therefore more likely to
sell.
Monitor Trustees. Depending on the complexity of a transaction’s consent
agreement, Ms. Huber stated that the FTC will sometimes use monitors to oversee
compliance. Monitors are paid for by a respondent but have a fiduciary duty to
the FTC. In complex transactions that require significant technical expertise, it
can be difficult for the agencies to fully understand controversies that may occur
between the respondent and the divestiture buyer. Thus, a monitor can help staff
116
attorneys cut through key compliance issues by providing his or her expertise in
the particular industry.
III.
Informal Settlements and Other Remedial Tactics
Ms. Huber explained that formal consent decrees are strongly preferred by
the FTC as they provide a way to monitor and ensure that a remedy is fulfilled by
the parties. Companies, however, sometimes engage in more informal “fix-itfirst” or “self-help” remedies that are not subject to a formal order.
Mr. Denis reiterated that, prior to announcing a transaction, parties may
want to structure a transaction to leave out problematic assets or they may want to
partner with another purchaser to take on such assets as part of a package deal.
These strategies can help a party avoid the need for settlement discussions.
Alternatively, if a transaction has already been announced, Mr. Denis
stated that the merging parties may resort to a “fix-it-first” remedy to resolve
competitive concerns without requiring the agencies to issue a formal consent
decree or file a lawsuit. According to Mr. Denis, parties often prefer fix-it-first or
self-help remedies for three key reasons. First, these remedies help avoid the
value degradation that typically accompanies forced divestitures. Second, these
remedies help speed up the merger process by getting the process of creating a
remedy started sooner, especially when timing provisions in the primary merger
agreement are tight. Third, some parties may see a strategic benefit in avoiding
the process of agency review and approval of a buyer.
On this third
consideration, Mr. Denis stated that the law on fix-it-first remedies favors buyers.
Thus, in litigation, the agencies would have less leverage to disapprove a buyer
and would carry the burden of showing why the deal as structured with the
particular buyer is anticompetitive.
On the other hand, Ms. Huber opined that nonconsensual remedies can
sometimes be counterproductive and slow down the process due to increased
agency scrutiny, especially where the parties do not have a good buyer or a broad
117
divestiture package. Ms. Huber concurred with Mr. Kendler’s statement that selfhelp remedies are disfavored by the agencies and further stated that historically
such remedies have rarely, if ever, been acceptable to the FTC. Both Mr. Kendler
and Ms. Huber agreed that such remedies would only be accepted, if at all, where
no monitoring or continuing obligations are required after the assets change
hands. Mr. Denis agreed that because the agencies disfavor self-help remedies, it
is important for the parties to decide whether the potential timing and monetary
advantages are worth it.
IV.
Differences Between FTC and DOJ Merger Remedy Processes
Mr. Kendler stated that DOJ and FTC have organizational and legal
differences.
On the organizational side, DOJ does not have a dedicated
compliance unit. Instead, the investigative staff takes the lead in drafting consent
decree documents using the expertise it obtained from conducting the
investigation. In addition to the investigative staff, DOJ’s operations group, its
general counsel’s office, and its deputies review draft consent agreements to
ensure they are consistent with DOJ policies and procedures and will sufficiently
remedy the competitive harm.
On the legal side, under the Tunney Act, DOJ consent decrees must be
filed in federal court rather than being passed through an internal process. This
filing includes a complaint, a draft consent decree, and a competitive impact
statement describing the likely anticompetitive effects of the transaction and how
the consent decree remedies these effects. Public comments are then solicited for
60 days. DOJ reviews and responds to these comments before moving the court
to enter the final decree.
For the FTC, Ms. Huber stated that staff typically prepares three
documents that go up to the Commission: (1) an agreement containing consent
order, which contains the terms of the settlement; (2) an asset maintenance order,
which requires the respondent to properly maintain its assets and hold them
separate pending the divestiture; and (3) a final consent order. The Commission
118
then votes on whether to approve the consent decree and, if so, a 30-day period is
typically commenced for public comment.
V.
Behavioral Remedies
Mr. Kendler and Ms. Huber stated that structural remedies involving a
divestiture of assets are strongly preferred by the agencies to cure a competitive
overlap between a buyer and seller in horizontal mergers. In vertical mergers,
however, the agencies sometimes pursue primarily behavioral remedies instead.
Such remedies may require an acquiring party to enter into licensing agreements,
supply agreements, or agree to other restrictions on its conduct.
Mr. Kendler explained that there are three primary ways that DOJ
monitors behavioral remedies.
First, the consent agreement may include
provisions allowing for inspection of a facility. Second, there may be provisions
giving the government the ability to obtain documents or data relating to
compliance, and, in some cases, may also include an affirmative obligation on the
party to make periodic reports.
Third, because the settlements are public,
customers or competitors sometimes contact DOJ directly to complain that a
company is not meeting its settlement obligations. Once DOJ learns of a potential
violation, it will conduct an investigation that may be informal (e.g., by discussing
with the party ways to prevent future violations, especially where the violation
was inadvertent) or formal (e.g., issuing a civil investigative demand, taking
depositions, and possibly seeking enforcement action in court).
Mr.
Denis
explained
that
in
negotiating
multi-year
behavioral
commitments, private parties need to be extremely cognizant of future changes in
the marketplace and ways to preserve their ability to react to those changes. This
task is often difficult and requires the party to brainstorm the possible effects of
various events such as recessions, substantial increases in demand, or paradigm
shifts due to new entry or technological innovations.
119
VI.
FTC’s Withdrawal of 2003 Statement on Monetary Equitable
Remedies in Competition Cases
In July 2012, the FTC withdrew its policy statement that provided
guidance on the situations in which the Commission would seek monetary
equitable remedies in antitrust cases. Ms. Huber explained that while it was
difficult to predict the implications of withdrawing the policy statement, she did
not believe it would have the significant effects predicted by some critics.
Ms.
Huber stated that by law the FTC is prevented from seeking equitable remedies
that are punitive and that the FTC will still be required to calculate such damages
with a fair degree of precision. Thus, it was unlikely FTC practices would be
drastically different than the cases it had brought in the past.
Mr. Denis expressed concern that the FTC’s withdrawal of the policy
statement made it more likely that the FTC could seek to impose equitable
remedies, such as disgorgement, in a punitive manner. Moreover, Mr. Denis
stated that elimination of the helpful guidance in the policy statement was a step
backwards and would make it even more difficult for parties to understand their
potential liabilities for a violation. Ms. Huber suggested that the companies
should look to the FTC’s past cases for guidance. Specifically, she mentioned
that the past cases where equitable remedies were sought by the FTC involved
situations where a substantial price jump occurred after the alleged
anticompetitive conduct.
120
About the Mergers and Acquisitions Committee
The Mergers and Acquisitions
Committee focuses on issues
relating
to
mergers,
acquisitions and joint ventures.
Committee
activities
and
projects cover private litigation,
both
state
and
federal
enforcement, and international
merger enforcement activities.
Chair:
Paul B. Hewitt
Akin Gump Strauss Hauer &
Field LLP
Hewitt, Paul
[email protected]
202-887-4120
Vice-Chairs:
Norman Armstrong
Federal Trade Commission
202-326-2072
[email protected]
Rani Habash
Dechert LLP
202-261-3481
[email protected]
Ronan Harty
Davis Polk & Wardwell LLP
212-450-4870
[email protected]
Council Representative:
James W. Lowe
WilmerHale
202-663-6059
[email protected]
121
Robert L. Magielnicki
Sheppard Mullin Richter &
Hampton LLP
202-218-0002
[email protected]
Mary N. Lehner
Federal Trade Commission
202-326-3744
[email protected]
Julie Soloway
Blakes
416-863-3327
[email protected]
About The Threshold
Co-Editors-in-Chief:
The Threshold is published periodically
by the Mergers and Acquisitions
Committee of the American Bar
Association Section of Antitrust Law.
The views expressed in the Newsletter
are the authors’ only and not
necessarily those of the American Bar
Association, the Section of Antitrust
Law, or the Mergers and Acquisitions
Committee. If you wish to comment on
the contents of the Newsletter, please
write to American Bar Association,
Section of Antitrust Law, 321 North
Clark, Chicago, IL 60610.
Michael Keeley
Axinn, Veltrop & Harkrider LLP
202-721-5414
[email protected]
Gil Ohana
Cisco Systems
408-525-6400
[email protected]
John Scribner
Weil, Gotshal & Manges LLP
202-682-7096
[email protected]
122