Antitrust and Competition: Surveying Global M&A Enforcement Trends

*Skadden's 2014 Insights - Global M&A

Frederic Depoortere Kenneth B. Schwartz Charles E. Crandall

US: Agencies Continue Aggressive Enforcement

Despite changes in leadership at the U.S. Department of Justice’s (DOJ) Antitrust Division and the Federal Trade Commission (FTC) (collectively, the Agencies) in 2013, the Obama administration’s approach to antitrust enforcement remains unchanged: As the president continues to fill top vacancies with veteran litigators and enforcement-oriented personnel — such as Assistant Attorney General Bill Baer at the DOJ and Commissioner Terrell McSweeny at the FTC — the agencies will continue their aggressive antitrust enforcement.

Most significantly, the current leadership, especially at the Antitrust Division, has shown that they are not afraid to use litigation to obtain their desired enforcement results when they believe a transaction is likely to substantially lessen competition. Demonstrating its revitalized enforcement approach, the Antitrust Division challenged multiple high-profile transactions in 2013, a marked change from past administrations. (The DOJ went five years without litigating a single merger case in the early 2000s, for example.) The Agencies also have continued to challenge nonreportable and consummated transactions, a reminder that all transactions, no matter how small, are subject to the Agencies’ watchful eyes.

Merger Challenges: HSR Reportable Transactions

American/US Airways. In August 2013, the DOJ, along with six state attorneys general, filed a suit challenging the proposed $11 billion merger between US Airways Group Inc. and American Airlines’ parent corporation, AMR Corp. The suit alleged that the merger would substantially lessen competition in two areas: scheduled air passenger service in hundreds of U.S. cities that constitute airline markets, and takeoff and landing slots at Ronald Reagan Washington National Airport (DCA). The DOJ further alleged that the merger would remove US Airways as a price “maverick” in certain markets and would otherwise facilitate coordination among the remaining network carriers — including Delta, United and the new American — leading to higher fares, higher fees and reduced service.

In a settlement resolving the litigation with the DOJ and the six states, the parties agreed to divest landing slots at DCA and New York LaGuardia International Airport and gates at five hub airports across the country. The parties also agreed, with certain exceptions, to maintain historical operations at their hubs for a period of three years and provide daily scheduled service from one or more of their hubs to airports in each of the six states involved in the case for a period of five years.

AB InBev/Modelo. In January 2013, the DOJ sued to enjoin the merger between Anheuser-Busch InBev SA/NV and Grupo Modelo S.A.B. de C.V. on the grounds that AB InBev’s $20.1 billion acquisition of the remaining interest in Modelo that it did not already own would substantially lessen competition in the U.S. beer market as a whole and in at least 26 metropolitan areas across the United States. In response, AB InBev and Modelo restructured the terms of their deal, agreeing to a perpetual license to certain Modelo brands, as well as the divestiture of Modelo’s Piedras Negras brewery and its interest in Crown Imports LLC, to Constellation Brands, Inc. The restructured transaction resolved the DOJ’s concerns and allowed the merger to move forward.

Ardagh Group/Saint-Gobain. The FTC has used a similar approach, suing to enjoin Ardagh Group S.A.’s $1.7 billion acquisition of Saint-Gobain Containers in July 2013. The FTC alleged that the merger between Ardagh Group and Saint-Gobain would reduce competition in the U.S. markets for glass containers for beer and spirits, and reducing the number of major competitors would facilitate coordination and result in supracompetitive prices that would harm consumers. Ardagh Group/Saint-Gobain is scheduled to go to an administrative trial. The parties remain in negotiations with the FTC; however, the FTC’s conduct to date in negotiations and the parallel administrative proceedings in Ardagh Group/Saint-Gobain have been consistent with the Agencies’ strategy of optimizing negotiating leverage through aggressive litigation.

Given what appears to be a new trend on the part of the Agencies to file lawsuits to increase settlement leverage, antitrust practitioners have begun to question whether this uptick in merger challenges is a change in enforcement policy and, if so, whether the approach is affecting antitrust risk assessment among potential merger partners. Regardless, in this environment, a company considering a merger must understand potential antitrust litigation risk and pragmatically and thoroughly assess the feasibility and impact of potential divestiture scenarios as early as possible. Considering the recent experiences in American/US Airways, AB InBev/Modelo and Ardagh Group/Saint-Gobain, it suffices to say that any potential merging party — especially one operating in a concentrated industry — must be prepared to litigate, even if only to maximize leverage in post-complaint settlement discussions.

Merger Challenges: Nonreportable Transactions

Further evidence of the Agencies’ continued aggressive enforcement can be found in their increasing willingness to challenge transactions that do not meet the filing thresholds of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the HSR Act) — even in cases where a transaction already has closed. Last year both Agencies issued challenges to nonreportable transactions consummated in 2012, including Bazaarvoice, Inc.’s acquisition of PowerReviews, Inc. and Heraeus Electro-Nite LLC’s acquisition of Midwest Instrument Company Inc. (Minco) (challenged by the DOJ), and Solera Holdings’ acquisition of Actual Systems of America, Inc. and St. Luke’s Health System Ltd.’s purchase of Saltzer Medical Group (challenged by the FTC).

Bazaarvoice/PowerReviews. The DOJ successfully challenged product ratings and reviews (PRR) platforms provider, Bazaarvoice’s June 2012 acquisition of competing provider PowerReviews. The DOJ relied heavily on excerpts from company documents in seeking to unwind the completed transaction, which did not meet the filing thresholds of the HSR Act. The U.S. District Court for the Northern District of California agreed with the DOJ’s claims that Bazaarvoice’s internal documents showed the intent and ability of the company to raise prices for PRR platforms and eliminate PowerReviews as a competitor through the acquisition. According to the Court, evidence from company documents that Bazaarvoice and PowerReviews expected the transaction to have anticompetitive effects was overwhelming — the parties viewed themselves as operating in a “duopoly,” and removing PowerReviews from the marketplace would eliminate Bazaarvoice’s only meaningful commercial competitor. The parties are scheduled for a conference to discuss possible remedies in January 2014. Assuming the company does not appeal, Bazaarvoice will be required to divest assets sufficient to create a separate and distinct competing business that can replace PowerReviews in the marketplace, and the DOJ has made clear that an effective remedy may require assets beyond those previously held by the acquired firm.

Heraeus/Minco. The DOJ required Heraeus to divest certain assets related to the development, production, sale and service of single-use sensors and instruments used to measure and monitor the temperature and chemical composition of molten steel in the steel manufacturing process, which it had obtained in its $42 million acquisition of Minco in September 2012. According to the DOJ’s complaint, prior to the acquisition, Heraeus and Minco had competed directly on price, service and innovation in supplying sensors and instruments to steel manufacturers. The settlement also required Heraeus to waive non-compete agreements it had with certain former employees.

Solera/Actual Systems. The FTC forced Solera to divest all of the assets it had acquired from Actual Systems more than a year earlier for $8.7 million. According to the FTC, Actual Systems and Solera were close competitors and two of the only three manufacturers in an already concentrated market for yard management systems used by automotive recycling businesses. The FTC claimed the transaction likely would have resulted in higher prices and reduced innovation for yard management systems. The Solera matter underscores that no transaction is too small to escape antitrust scrutiny if the Agencies believe the transaction may harm consumer welfare.

St. Luke’s/Saltzer. In early 2013, the FTC and Idaho’s attorney general sued St. Luke’s over its 2012 purchase of Saltzer, a 44-physician practice group that had been the state’s largest independent collective of doctors’ practices. According to the FTC, the acquisition of Satlzer created a dominant single provider of adult primary care physician services in Nampa, Idaho, with enough market power to charge higher rates for primary care services in the area. The FTC’s suit followed a private antitrust suit brought in late 2012 by St. Luke’s competitors, St. Alphonsus Health System and Treasure Valley Hospital. The FTC challenge in St. Luke’s/Saltzer serves as a reminder that the FTC continues its aggressive enforcement in health care regardless of transaction size/reportability.

New HSR Rule Regarding Pharmaceutical Patents

In November 2013, the FTC (with the concurrence of the DOJ) announced changes to the HSR Act, which are intended to clarify when companies in the pharmaceutical industry must report the transfer of an exclusive license to a patent, or part of a patent, as an asset acquisition. Under the revised rules, the transfer of rights to a patent or part of a patent in the pharmaceutical, biologics or medicine manufacturing industries will result in a potentially reportable asset acquisition under the HSR Act if “all commercially significant rights” are transferred to another entity. Further, such transfer may be reportable even when the patent holder retains limited manufacturing rights or co-rights. The FTC suggests these changes are designed to provide the FTC with a better opportunity to assess the competitive impact of exclusive pharmaceutical patent license transfers (that may not have been reportable under the prior HSR approach) and to establish a more consistent assessment of patent transfers, whether they are in the form of license rights or outright transfers of a patent or part of a patent.

This new rule affects only transfers in the pharmaceutical industry, as the FTC has not found a need to address these types of exclusive license arrangements in other industries.

EU: Competition Authorities Send Mixed Signals to Dealmakers

Despite the lingering effects of the global financial crisis, M&A activity increased in 2013, resulting in more than 200 merger notifications under the EU Merger Control (EUMR). The European Commission (Commission) continued its active merger enforcement policy under Competition Commissioner Joaquín Almunia’s leadership, opening nine Phase II investigations. The Commission blocked two cases — the acquisition of TNT Express by UPS and Ryanair’s third attempt to acquire Aer Lingus — raising the number of prohibitions during Commissioner Almunia’s office to four. On the other hand, it granted unconditional approval in two Phase II cases based on the exceptional and rarely successful “failing firm defense.”

With regard to legislative activity, in 2013 the Commission implemented a number of changes in its notification procedure and forms (which entered into effect on January 1, 2014) and launched a public consultation on a number of more substantive proposed reforms of the EUMR. It is not certain whether the Commission will be able to implement the proposed reforms before the end of Commissioner Almunia’s term in November 2014. Other developments include the appointment of Professor Massimo Motta as EU Chief Competition Economist and the accession to the EU of Croatia, which now falls within the scope of the EUMR.

Reluctance to Accept Efficiency Arguments

In UPS/TNT Express, the Commission concluded that TNT’s acquisition would have reduced competition in 15 member states of the European Economic Area (EEA) in the market for international express delivery of small packages. The Commission relied for its conclusions on the parties’ and its own price concentration analyses. During the investigation, the parties acknowledged that the transaction would lead to price increases but argued that significant efficiencies (€500 million per year) would offset any potential adverse impact. However, the Commission rejected certain cost savings (in overhead costs) as unlikely to be passed on to consumers and concluded that the remaining cost efficiencies would not have been sufficient to outweigh the projected price increases. The case illustrates the Commission’s reluctance to place weight on efficiency arguments when the economic evidence suggests significant price increases as a result of the transaction.

Acceptance of the Failing Firm Defense

In Nynas/Shell/Harburg Refinery, the Commission approved the acquisition of Shell’s Harburg (Germany) refinery assets by the Swedish company Nynas, a transaction that resulted in Nynas becoming the only naphthenic base and process oil producer, as well as the largest producer of transformer oils, in the EEA. The parties demonstrated that the Harburg refinery set-up was economically unsustainable, no alternative buyers existed and, absent the acquisition, closure of the Harburg refinery was the most likely scenario and one that would lead to significant capacity reductions and price increases.

Likewise, in Aegean Airlines/Olympic Air, the Commission cleared the combination of the two major Greek air carriers, which would result in a monopoly for the combined firm on five domestic routes. The Commission had rejected similar failing firm arguments put forward during the parties’ first attempt to merge in 2011. In its second decision, the Commission took into account the changes in market circumstances since its last decision and, in particular, the 26 percent drop in demand for domestic air transport, resulting from the ongoing Greek financial crisis. The Commission also considered Olympic’s deteriorating financial situation, evidenced by its shrinking fleet and operations and the resulting reduction of overlapping routes with Aegean. In addition, Olympic’s sole shareholder had decided to discontinue its support of the company, which would have led to its permanent shutdown in the short term.

Input Foreclosure and Customer Assurance Agreements in Lieu of Remedies

In two cases concerning the acquisition of a supplier of aviation components by an aircraft engine manufacturer, UTC/Goodrich and GE/Avio, the Commission decided that existing long-term agreements provided competitors with sufficient protection that access to important inputs would not be foreclosed. In addition, where existing contracts were not sufficient, the companies offered customer assurance agreements to competitors, allowing them to secure continuity of supply. These contractual arrangements were not offered as formal remedies, but they minimized the remedies the parties were required by the Commission to offer as conditions of approval.

In UTC/Goodrich, the Commission expressed concerns that UTC’s competitors could be shut out from access to certain components, such as fuel nozzles and engine controls, developed or supplied by Goodrich. In GE/Avio, approved in Phase I, the Commission focused on the effects of the transaction on the competitive position of Eurojet, a consortium that designs and manufactures the engine for the Eurofighter Typhoon combat aircraft, and of which Avio was a member and supplier. The Eurofighter Typhoon competes with other combat aircraft powered by GE engines. According to the Commission, the transaction would have enabled GE to obtain significant influence over Eurojet’s commercial decisions and access to its strategic information. GE offered commitments to eliminate any potential conflicts of interest and to ensure that Avio would continue to fulfill its share of the consortium’s production.

Proposed EUMR Reform

At the end of the year, the Commission implemented a number of measures relating to its procedure and notification form (Form CO), which entered into effect on January 1, 2014. For cases that do not present any substantive problems, the changes expand the scope of the Commission’s simplified procedure and reduce the information requirements in the Form CO. On the other hand, for cases where the parties’ combined share in an overlap market exceed 20 percent or where their share in a vertically affected market (actual or potential buy-sell relation between the parties) exceeds 30 percent, information — and, more importantly, document production requirements have been expanded significantly in the new Form CO.

In addition, in June 2013, the Commission launched a public consultation on a number of proposed changes to the EUMR, including (i) the expansion of the EUMR scope to acquisitions of noncontrolling minority shareholdings (structural links) and (ii) amendments to the current referral system of cases between the Commission and national competition authorities. Notably, the first proposal will significantly expand the Commission’s powers, given that the Commission’s jurisdiction under the EUMR is limited to transactions that involve a change of control. The Commission’s consultation paper considers two alternative procedural options to address structural links: (i) a “notification system,” in which all relevant minority shareholding acquisitions would be subject to ex-ante review and, possibly, a bar on closing pending the Commission’s approval; and (ii) a “selective system,” in which the Commission has discretion to investigate only selected acquisitions of minority shareholdings that could potentially raise concerns, either by relying on its own market intelligence and third-party complaints (a “self-assessment”) or through a mandatory short information notice. The working paper also explores alternative options with regard to a number of other parameters, such as the possible adoption of safe harbor thresholds. The deadline for submitting comments has expired, but the Commission has yet to publish a draft legislative proposal. It is not certain whether any new proposal can come into effect still in 2014.

Asia: China Completes Fifth Year of Enforcing Anti-Monopoly Law

In 2013, China’s Ministry of Commerce (MOFCOM) continued its vigorous merger enforcement under the Anti-Monopoly Law, often imposing far-reaching remedies and arguably applying industrial policy and national economy considerations that could be considered to exceed the traditional scope of competition law in other jurisdictions.

In Glencore/Xstrata, MOFCOM was concerned about the impact of the proposed acquisition by Glencore of global mining rival Xstrata on the Chinese markets for copper, zinc and lead concentrates, in light of China’s dependence on imports of these products and the limited influence of downstream Chinese producers as buyers. Confirming that MOFCOM does not consider its powers to impose remedies limited to China alone, it required Glencore to divest a Peruvian mine to secure regulatory approval for the deal. In Marubeni/Gavilon, the proposed merger between two global traders of agricultural commodities traders, MOFCOM voiced concerns over Marubeni’s position as an important importer of soybeans into China. While Gavilon’s activities in soybean imports in China were very limited, MOFCOM argued that Marubeni’s access to Gavilon’s U.S. assets involved in the origination/purchase of agricultural commodities would further strengthen its position. MOFCOM requested that the parties hold separate their Chinese soybean import operations for a period of at least two years. Similar hold-separate commitments were imposed in MediaTek/MStar, where the parties’ commitment proposal included specific price reductions within predetermined timeframes.

Apart from far-reaching remedies, MOFCOM’s extended review periods have become a major issue of consideration in global M&A transactions. The average review period for complex cases (involving remedies) has increased from 8.4 months in 2012 to 11.1 months in 2013. In addition, despite discussions of a simplified procedure for noncomplex cases, even those that present no antitrust issues can take three to four months to clear, which is significantly longer than in other jurisdictions.

This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.


* This article appeared in the firm's sixth annual edition of Insights on January 16, 2014.