Whether a jurisdiction will investigate a consummated deal that did not require pre-close notification varies widely by country. The US and China provide examples to highlight the range of approaches to merger control where no notification is required.
Many jurisdictions retain authority over below- threshold transactions and can either unwind or impose conditions on deals that have been consummated. Because these transactions do not affect closing conditions, the practical effect is to shift the antitrust risk onto the purchaser.
When considering a merger or acquisition, companies must pay attention to the risks of doing a deal that does not trigger preclose notification. That's because enforcement agencies possess regulatory authority to investigate and prosecute a wider range of transactions than those for which advance notice is required by law.
In the US antitrust agencies actively investigate transactions that fall below filing thresholds and take action against those transactions deemed harmful to competition. China's merger control authority, by contrast, has yet to take any action unwinding a deal that did not require prior notification.
No safe harbour for non-reportable deals
Falling below notification thresholds does not provide a safe harbour from antitrust scrutiny. The risk to a closed transaction, however, varies. While the US and China are similar in requiring parties to clear their respective pre-close notification procedures for reportable transactions, the jurisdictions represent different approaches to non-reportable deals. Recent developments suggest those differences are narrowing, however.
Falling below notification thresholds does not provide a safe harbour from antitrust scrutiny
Under US law, the outer bounds of the Federal Trade Commission's (FTC) and Department of Justice's (DOJ) enforcement powers extend to mergers and acquisitions where "the effect of such acquisition may be substantially to lessen competition, or tend to create a monopoly" This authority is not bound by the formal merger notification procedures set out in US law under the Hart- Scott-Rodino Act, but can extend to challenging and unwinding deals that did not require pre-close notification. Likewise, China's Anti-Monopoly Law contains a broad prohibition on concentrations of undertakings that lead, or may lead, to elimination or restriction of competition. Even when filing is not required, both US and Chinese authorities may legitimately collect information from a variety of sources, including whistleblowers, media, government agencies and even competitors, in order to determine if sufficient evidence exists that the concentration has or may have the effect of eliminating or reducing competition. The agencies each have investigation procedures for the below-threshold transaction that parrallel the procedures applicable to reportable transactions.
Legislation may be invoked to impose severe sanctions in an attempt to restore the market to pre-merger competitive levels. This can include disgorgement of profits, divestitures, compulsory licensing of intellectual property and other equitable remedies deemed necessary to restore competition. For example, the DOJ recently announced a settlement with a joint venture between two New York City bus tour operators that requires both asset diversities and the disgorgement of US$75 million in profits.
Recent enforcement of non-reportable deals
In recent years, the FTC and DOJ have actively pursued non-reportable transactions. In the last four-year period, the two US agencies initiated 73 preliminary enquiries. This represents nearly one-fourth of all substantial merger investigations. Notable recent challenges to non-reportable deals Include Bazaarvolce Inc.'s US$168 million acquisition of PowerReviews Inc., Heraeus Electro-Nite Co. LLC's US$42 million acquisition of Midwest Instrument Co. Inc., and the US$26 million deal between New West Health Services Inc. and Blue Cross and Blue Shield of Montana Inc. Even deals in the single-digit million dollar range can draw antitrust scrutiny, as illustrated by recent challenges to deals between Solera Holdings, Inc./Actual Systems of America, Inc. (US$8.7 million deal), Tyson's/George's Food LLC (US$5 million deal), and Election Systems and Software, Inc./Premier Election Solutions, Inc. (US$3 million deal).
While US antitrust authorities regularly investigate and challenge non-reportable deals, China's Ministry of Commerce (MOFCOM) has not.
Since China enacted its AntiMonopoly Law in 2008, MOFCOM has challenged only a handful of the 1,000 transactions it has reviewed, and blocked just two. None of its reported enforcement actions have involved a challenge to or sanctions against a deal that did not require prior notification.
preliminary enquiries initiated by FTC and DOJ in non-reportable transactions between 2009 - 2013
Source: Department of Justice
MOFCOM has announced 52 investigations of deals that were not reported to MOFCOM by the parties and imposed penalties in 15 of those cases that have been closed to date. These cases however, involved failure-to-file sanctions where notification was found to be required, including a US$50,000 fine against Tsinghua Unigroup in 2014. So, while MOFCOM is certainly not restricting its merger review to submitted filings, the review of deals that do not require notification remains uncertain.
MOFCOM's rules regarding non-reportable transactions remain in draft since they were published for comment in 2009. To date, MOFCOM has provided little authority as to the circumstances in which MOFCOM will intervene and seek sanctions for a closed deal that did not require notification. Article 16 of the Measures on Declaration of Concentration of Undertakings references the possibility of a review of non-reportable deals and of a party's potential responsibility for any consequences, but unlike the US, in China there is no record of guidance and precedent to consider.
Key considerations in assessing antitrust exposure
Customer complaints are perhaps one of the most significant red flags that can attract unwanted regulatory attention, particularly in the US where recent FTC data showed that, over a 15-year period, the FTC took enforcement action in 97 percent of mergers associated with vocal customer complaints. When compared with the 43 percent rate of FTC enforcement actions for mergers executed without provoking strong customer complaints, this suggests companies can reduce the likelihood of regulatory interference by adopting an outreach strategy designed to "sell" the merger to the existing customer base.
Even with the best customer outreach efforts, a buyer should anticipate strategic complaints to regulators from a competitor or an industry association. Complaints could also come from a supplier that has been terminated in the course of integration. Not only do competitors and frustrated suppliers have an incentive to tell the agencies about non-reportable deals in their markets, they can provide significant market information and direction on issues for greater focus.
Competitor complaints can carry significant weight in China, where domestic competitors will often have close ties to the government. An industry association may even be an arm of the government. Both can exercise significant influence over the investigative process.
With the focus of a post-close investigation on actual anticompetitive effects, integration planning should give careful attention to product and pricing plans. For example, it is prudent to avoid rapid and sudden price increases in the first year after closing, particularly if they are not tied to cost increases.
Anticipating which market dimensions could plausibly be framed as insulating the parties from competition, particularly in highly concentrated industries, is crucial to comprehensive analysis of a potential transaction. Thus, understanding how courts evaluate entry and sophisticated-buyer arguments is an essential component of limiting future exposure. In light of the deferential standard that governs courts' review of FTC orders, it is especially important to consider such factors throughout the lifespan of the transaction.
Parties to a non-reportable transaction should be aware that an investigation and challenge may occur years after closing and long after the assets and operations of the merging parties have been fully integrated. This not only creates business risk, but can further complicate the ability of the purchaser to comply with regulator's demands.
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