FTC Official Cautions Bar About Preclosing Activities
Joseph G. Krauss, the head of the Premerger Notification Office and an Assistant Director of the Federal Trade Commission's Bureau of Competition, recently spoke to the Antitrust and Trade Regulation and Corporate Counsel Sections of the Connecticut Bar Association. Mr. Krauss was invited to speak by Bill Millman of Wiggin & Dana, current Chair of the Connecticut Bar Association's Antitrust and Trade Regulation Section. The main focus of Mr. Krauss' comments concerned the legality of coordinated activity between parties to a proposed M&A transaction prior to the consummation of the transaction. Mr. Krauss reiterated the view, previously stated by other FTC officials, that the Commission will carefully scrutinize the pre-consummation activities of merging parties in order to protect against anti-competitive behavior in violation of federal law.
A certain degree of coordinated activity between the parties to a transaction is necessary and appropriate. For example, the Commission recognizes the necessity of due diligence with regard to valuing the transaction and the need for coordinated planning to achieve the pro-competitive goal of an efficient, cost effective post-closing integration of the business and assets of the parties. Even so, the business manager must be careful not to stretch such justifiable activities to a level that will catch the eye of the Commission. The following list of dos and don'ts should help the business manager understand which pre-consummation activities will be deemed acceptable by the Commission and which may trigger careful scrutiny, or possibly, even the initiation of enforcement proceedings, by the Commission:
The Commission will likely not question the propriety of the standard due-diligence process where there is a one-way provision of information from the target entity to the acquiring entity in order to assist the acquiring entity in valuing the transaction. The Commission will take a more careful look if:
(i) the process involves a mutual exchange of information;
(ii) the information provided includes information such as specific pricing or market information or plans for the future; or
(iii) the information is provided after the transaction has already been valued.
The Commission will generally not interfere with communications between merging parties regarding planning for post-closing operations provided that:
(i) such plans are not actually implemented until after consummation;
(ii) there are no agreements in place to coordinate activities; and
(iii) the parties to the transaction remain separate, competitive entities until closing.
Merging parties should avoid any activity, agreements or arrangements that will result in a transfer of beneficial ownership prior to closing. While the term "beneficial ownership" eludes clear definition, the Commission will be particularly interested in transfers of:
(i)risk of loss or right to benefit;
(ii) control over the day-to-day operation of the business and assets of the target entity;
(iii) the right to vote or to determine who may vote the stock of the target entity; and
(iv) control over investment discretion, including the right to dispose of stock.
Notwithstanding any of the above, the Commission will not generally challenge standard provisions to definitive agreements of the type that seek to preserve the status quo of the target entity's business and assets (such as consent to material change provisions) and which require the cooperation of the parties with a view to protecting the transaction.
These guidelines provide only a general idea of the types of preclosing activity that the FTC may find troublesome.