On April 6, 2016, U.S. Attorney General Loretta Lynch's comments regarding the U.S. Department of Justice's ("DOJ") decision to file a lawsuit to block the $35 billion Halliburton/Baker Hughes merger highlighted the agency's views towards divestitures generally:
[Halliburton's proposed divestiture fell] well short of the preservation of open economic competition that our nation's antitrust laws require. . . . What we will not accept is the idea that the mere act of divestiture is enough; that if companies simply spin off a few assets, we will withdraw our objections and the merger can proceed. That simply isn't true. The Department of Justice is not interested in settling for the sake of settling; we are willing to settle only when we have a high degree of confidence that an agreement will preserve competition and protect consumers in every market that a merger affects. The more complex the deal – and the more markets it potentially endangers – the greater our skepticism that divestiture will safeguard competition. And if we believe that no good solution exists, then we will prosecute our suits to the very end.1
However, the DOJ's complaint here was not that Halliburton proposed spinning off a few assets; Halliburton had at the outset committed to divest assets representing up to $7.5 billion in sales–and apparently had lived up to that promise. Rather, Assistant Attorney General Bill Baer characterized the package as "the most complicated array of piecemeal divestitures and entanglements that I have ever seen involv[ing] selling a grab bag of assets in certain product lines. We in the Antitrust Division do in appropriate circumstances negotiate solutions to otherwise anticompetitive mergers. But those settlements typically involve limited discrete and clean divestitures. Customers and competition should not have to bear the risks of a failed or inadequate remedy."2
The Halliburton/Baker Hughes transaction marked just the latest in a litany of recent high-profile mergers in which the Obama Administration antitrust leadership rejected an extensive divestiture package, and instead challenged the deal in court. The DOJ reportedly had also rejected offers to resolve concerns in the Electrolux AB/GE Appliances and Tokyo Electron/Applied Materials transactions. All three of these DOJ-reviewed deals were abandoned due to antitrust challenges. The FTC also reportedly rejected broad settlement offers in both Staples/Office Depot and Sysco/US Foods–ultimately winning a preliminary injunction in court in both of these matters.3
Not all deals are challenged, though. In many of those transactions that raise concerns, those concerns can still be resolved through divestiture commitments.4 Both agencies have almost exclusively required that the parties identify an acceptable "upfront buyer" before accepting divestiture packages. The "upfront buyer" requirement is justified by the agencies as being necessary to ensure that the divestiture will be effective in maintaining competition at the same level as pre-transaction. The transaction parties, however, can face substantial delay from the process: the need to identify a divestiture buyer, negotiate a divestiture agreement, and have that buyer and the package vetted by the agencies before the main transaction is permitted to proceed can literally add months to the review process. Also, recent precedent includes the agencies imposing a variety of behavioral conditions to support a structural divestiture. For instance, transition services arrangements and supply arrangements have been more routinely included, beyond the pharmaceutical industry where they were the norm.5
There have also been situations recently in which the agencies have required divestitures to include out-of-market assets (takes a divestiture package that goes beyond the assets in the relevant market).6 In Community Health Systems/Health Management Associates,7 the Federal Trade Commission ("FTC") required that Community include in the divestiture package the hospital facilities and all outpatient services and operations that were affiliated with the hospital, regardless of whether those services were provided at the hospital. The FTC viewed the outpatient business as necessary for the buyer of each hospital to be as effective of a competitor as HMA had been prior to the transaction. In Sun Pharmaceutical/Ranbaxy,8 the FTC broadened the remedy beyond the three strengths of generic minocycline tablets used to treat a variety of infections to include assets related to three dosages of generic minocycline capsules. The FTC's rationale for including the capsules was that it would allow the upfront buyer to use a shorter FDA regulatory process because it would control both products and use the same ingredient (API) supplier. In Holcim/Lafarge,9 the FTC conditioned clearance on the divestiture of several plants and terminals, including a terminal in Alberta, Canada and a cement plant in Ontario, Canada. Canadian assets that are named in the FTC consent decree were included by the FTC as necessary to remedy competitive concerns in northern U.S. markets. Finally, in ZF Friedrichshafen AG/TRW Automotive Holdings Corp.,10 the FTC conditioned approval on the divestiture of TRW's linkage and suspension business in North America and Europe, even though only suppliers that have production facilities in the United States, Canada, and Mexico were deemed capable of competing for U.S. business.
The agencies have also taken a more expansive stance, particularly in transactions involving innovation and future generations of products. For instance, in Tokyo Electron/Applied Materials, the DOJ reportedly rejected the offer to divest the entire overlapping etching and depositing business line of Tokyo Electron because the package did not adequately address the future impact of the deal on innovation in future generations of semiconductor equipment. Similarly, in the Nielsen/Arbitron transaction, the FTC focused on protecting a future market for syndicated audience cross-platform measurement services. The consent conditioned that transaction's approval on Nielsen's obligation to: (1) continue its cross-platform project with ESPN Inc. and comScore, Inc.; and (2) license Arbitron's people meter and related data, as well as software and technology being used in the ESPN project, to an FTC-approved third party for up to eight years.11
For transaction parties with overlapping products/services that are likely to raise antitrust concerns, the focus on remedy packages by the agencies raises the possibility that consent negotiations will be protracted. In addition, in complex markets, transaction parties may find that the divestiture package required to satisfy the agency may exceed the U.S. operations or currently sold products/services, or that the agency determines that the concerns are not addressable through remedies. To minimize delay, parties may consider approaching potential divestiture buyers that are likely to be supportive of the package that will be offered to the reviewing agency to address their concerns while the investigation is still ongoing. Absent such planning and initiative, the transaction's consummation will, at best, be delayed, and could even potentially fail on antitrust grounds.
- Mrs. Gotts is a partner in the New York law firm of Wachtell, Lipton, Rosen & Katz. The views expressed in this article are those of the author and are not to be attributed to her firm or its clients.
- Press Release, ABA, Halliburton-Baker Hughes merger 'a bad deal' says AG Lynch during ABA Meeting (Apr. 6, 2016), available at http://www.americanbar.org/news/abanews/aba-news-archives/2016/04/halliburton-bakerhu.html.
- Press Release, U.S. Dep't of Justice, Assistant Attorney General Bill Baer Delivers Remarks at Press Call Announcing that the Justice Department Seeks to Block Halliburton's Acquisition of Baker Hughes (Apr. 6, 2016), available at https://www.justice.gov/opa/speech/assistant-attorney-general-bill-baer-delivers-remarks-press-call-announcing-justice.
- Memorandum Opinion, FTC v. Staples, Civ. No. 1:15-cv-02115-EGS (D.D.C. May 17, 2016), available at https://www.ftc.gov/system/files/documents/cases/051016staplesopinion.pdf; FTC v. Sysco Corp., 113 F. Supp. 3d 1 (D.D.C. 2015).
- In a few recent cases, the agencies have accepted remedy packages during the litigation.
- See, e.g., Press Release, U.S. Dep't of Justice, Justice Department Requires Cox Automotive to Divest Inventory Management Solution in Order to Complete Acquisition of Dealertrack (Sept. 29, 2015), available at https://www.justice.gov/opa/pr/justice-department-requires-cox-automotive-divest-inventory-management-solution-order (required to continue providing data and content to the divestiture buyer); Press Release, U.S. Dep't of Justice, Justice Department Reaches Settlement with Anheuser-Busch InBev and Grupo Modelo in Beer Case (Apr. 19, 2013), available at https://www.justice.gov/opa/pr/justice-department-reaches-settlement-anheuser-busch-inbev-and-grupo-modelo-beer-case.
- For a discussion of remedies, including out-of-market assets, from the FTC's perspective, see Dan Ducore, Divestitures may include assets outside the market (Apr. 24, 2015), available at https://www.ftc.gov/news-events/blogs/competition-matters/2015/04/divestitures-may-include-assets-outside-market.
- Press Release, Fed. Trade Comm'n, FTC Requires Community Health Systems, Inc. to Divest Two Hospitals as a Condition of Acquiring Rival Hospital Operator (Jan. 22, 2014), available at http://www.ftc.gov/news-events/press-releases/2014/01/ftc-requires-community-health-systems-inc-divest-two-hospitals.
- Press Release, Fed. Trade Comm'n, FTC Puts Conditions on Sun Pharmaceutical's Proposed Acquisition of Ranbaxy (Jan. 30, 2015), available at https://www.ftc.gov/news-events/press-releases/2015/01/ftc-puts-conditions-sun-pharmaceuticals-proposed-acquisition.
- Press Release, Fed. Trade Comm'n, FTC Requires Cement Manufacturers Holcim and Lafarge to Divest Assets as a Condition to Merger (May 4, 2015), available at http://www.ftc.gov/news-events/press-releases/2015/05/ftc-requires-cement-manufacturers-holcim-lafarge-divest-assets.
- Press Release, Fed. Trade Comm'n, FTC Puts Conditions on Merger of Auto Parts Suppliers ZF Friedrichshafen and TRW Automotive Holdings Corp. (May 5, 2015), available at https://www.ftc.gov/news-events/press-releases/2015/05/ftc-puts-conditions-merger-auto-parts-supplier-zf.
- Press Release, Fed. Trade Comm'n, FTC Puts Conditions on Nielsen's Proposed $126 Billion Acquisition of Arbitron (Sept. 20, 2013), available at http://www.ftc.gov/opa/2013/09/nielsen.shtm. Commissioner Wright dissented from the decision on the basis that the future market theory should be subject to a higher evidentiary standard. See Dissenting Statement of Commissioner Joshua D. Wright, In the Matter of Nielsen Holdings N.V. and Arbitron Inc., FTC No. 131-0058 (Sept. 20, 2013), available at http://www.ftc.gov/os/caselist/1310058/130920nielsenarbitron-jdwstmt.pdf.