Tax

Reducing Anti-Trust Risks in M&A Transactions

04.20.2022

Emptech's founder, Jeff Aleixo

Author

Jeffrey Aleixo

Anti-trust risks in M&A, M&A compliance

Companies considering mergers and acquisitions usually have a legitimate need to access detailed information about the other party’s business in order to negotiate the deal and implement the merger. However, some information of interest may be sensitive, such as current and future price information, strategic plans, and costs, especially if the companies compete with one another. 

Still, when it comes to prospective transactions involving competitors, special care should be taken to minimize anti-trust risks in M&A during pre-merger negotiation and due diligence process, as well as throughout the integration planning process. Failure to identify and analyze anti-trust risks in M&A can have a number of consequences. Therefore, it is important to establish anti-trust counsel to navigate anti-trust law requirements and minimize any involvement or investigation by the Department of Justice or Federal Trade Commission (FTC).

Section 7 of the Clayton Act

The competitive effects of mergers and acquisitions are governed by Section 7 of the Clayton Act. It prohibits transactions when in any line of commerce or in any activity affecting commerce in any section of the country, the effect of an acquisition may be to substantially lessen competition or to tend to create a monopoly. 

Whether a merger meets Section 7 requirements depends on different circumstances that are unique to each industry and situation. In this case, the most important factor is a market definition as well as analyzing whether there is a substantial lessening of competition within that market. In addition to this, it is important to identify the market participants, the relative concentration of the market, and the place taken by the acquiring and acquired firms within that market. 

While most anti-trust risks in M&A arise under the Clayton Act, it is important to pay attention to several other federal anti-trust laws, including Section 1 or 2 of the Sherman Act, which prohibits restraints of trade and monopolization attempts, or Section 5 of the Federal Trade Commission Act, which prohibits unfair competition.

Learn about the key differences between a merger and an acquisition, different phases of M&A transactions, and what measures to take in order to ensure efficient and compliant M&A deals.

Managing Anti-trust Risks in M&A

Sharing too much information during the pre-merger period of M&A could violate anti-trust laws, so it is important to monitor and control the flow of information to outside parties. To achieve this, anti-trust counsel can undertake several steps to help prevent problematic information sharing. 

To begin with, during pre-merger negotiations and due diligence, it is extremely important to design, maintain, and audit effective protocols to prevent anti-competitive information sharing. If competitively sensitive information must be exchanged for diligence and integration planning purposes, parties should employ third-party consultants or other safeguards that limit the dissemination and use of that information within the parties’ businesses. 

In addition to this, anti-trust counsel should ensure that merging parties follow whatever protocols they establish and closely monitor merging parties’ adherence to established protocols to identify potentially problematic information sharing. 

Also, if an anti-trust counsel discovers any problematic document sharing, they should instruct the parties to stop the activity, or document exchange immediately. If any problematic documentary information exchange was uncovered, anti-trust counsel should determine whether and how the information was used as well as the extent of the information exchanged, and inform FTC staff about this before they discover the documents in the merger investigation. 

If FTC staff uncover documents indicating a problematic exchange occurred in their merger review, or that the parties have not fully met the protocols they established to protect confidential information, this may result in FTC staff pursuing a separate investigation, potentially requiring additional time and resources.

Find out why post-merger integration is a critical aspect of M&A and what approach to take in order to ensure the success of the deal while minimizing risk.

Recent Enforcement Activities Aimed at Assessing Anti-trust Risks in M&A

Given the different DOJ and FTC enforcement activities, preventing anti-trust risks in M&A should be a significant consideration for any company contemplating strategic transactions. In that light, to establish an assessment of risk and mitigation strategies, companies should:

  • Consider deal certainty carefully,
  • Ensure that the acquisition agreement protects the company’s interests,
  • Plan for a prolonged review and anticipate reviews that last three months or longer than in previous administrations,
  • Be aware that the FTC may conduct a post-close review. Given the volume of M&A activity, a deal can receive clearance from the agencies, close, and still be subject to remedies or eventual FTC challenges.

Establishing Proper Anti-trust Protocols

To avoid anti-trust risks in M&A transactions, companies should take into consideration the sensitivity of the information offered to or requested by a counter-party and how the exchange of the information could affect competition. Based on this, both parties should establish proper protocols and ensure they are followed

Also, once the bidding process is complete, individuals who received confidential information must comply with all document destruction requirements. Such policy requiring bidders to destroy any independent internal analysis based on confidential data and documents reduces the risk of future misuse of competitively sensitive information. 

Furthermore, one way of ensuring compliance and minimizing risks is outsourcing M&A management. Thus, businesses gain access to a seamless service from initial structuring, through each step of the project, to completion and integration. In addition to this, experts with in-depth knowledge of legal and regulatory requirements are on hand to provide effective advice tailored to each specific organization.

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