Antitrust Limits on Pre-Closing Conduct in Mergers and Acquisitions

The clarity of these rules has, on occasion, been missed in the context of merger integration planning. For example, upon signing an acquisition agreement, the acquiring firm may believe that it needs to protect its investment and ought to be allowed to have some say in how the acquired entity runs its business between signing and closing. The two firms also may want to begin rationalizing production facilities, streamlining the collective distribution channels, and otherwise realizing the envisioned efficiencies that make the transaction attractive to the buyer. But however well-intentioned the motive, under the Sherman Act the two firms remain separate competitors until the transaction closes. As a then Deputy Director of the FTC Bureau of Competition explained, “Section 1 of the Sherman Act applies until the day a merger is consummated and companies should take care to act accordingly.” Moreover, the limits on pre-closing integration and gun jumping apply even when there is no substantive antitrust objection to the transaction.

Enforcement Actions

The enforcement actions brought by the FTC and Antitrust Division of the Department of Justice illustrate the types of conduct that constitute gun jumping. One early gun-jumping investigation involved an acquiring company that announced (pre-closing) a reorganization of the acquired company that included assigning officers from the acquired company into positions with the acquiring company. The acquiring company also had three sales employees of the acquired company move into the acquiring company's sales office. Those companies ultimately settled the gun-jumping charges by paying a $450,000 fine. In another transaction, the merging firms decided that after closing they would close a manufacturing plant of one firm, with the production then being shifted to a plant then owned by the other firm. Prior to closing, a customer who approached the to-be-closed plant to order product was re-directed to the plant owned by the other firm. While the employee directing the customer may have been well-intentioned, the act constituted a form of customer allocation. In another gun jumping matter, the acquisition agreement provided that ' between signing and closing ' the acquired firm could not price more than 20% off list price without the approval of the acquiring firm. The acquirer likely considered the contract provision a means of ensuring that the acquired firm did not pump up its backlog with unprofitable work prior to closing. To the antitrust agencies it was gun jumping.

Sherman Act Violations

The tension that exists is between undertaking that integration planning that is permissible while avoiding coordination or an exchange of information that can lead to Sherman Act violations. Merging firms have become more sensitive to the need to place limits on the types of information exchanged in due diligence but they frequently feel pressure to begin evaluating and planning the integration process so that the merger or acquisition meets the financial goals. Not surprisingly, the FTC and DOJ recognize the need for integration planning. In a 2005 speech to the Greater New York Chapter of the Association of Corporate Counsel, William Blumenthal, the General Counsel at the Federal Trade Commission, noted that merging firms have a legitimate interest in engaging in certain forms of coordination (e.g., due diligence and transition planning) that would not be expected or allowed outside the merger context. He also referenced studies suggesting that early planning for integration improves the likelihood that the intended efficiencies will in fact be achieved. The challenge for the merging firms' antitrust counsel is to prevent the firms from gun jumping while allowing them to undertake as much planning as possible so that the merged entity can bolt out of the blocks once the closing occurs.

For those business executives charged with achieving the envisioned synergies and other merger benefits, the key distinction is that the parties may plan their integration strategy but they may not implement that strategy before closing. Of course, planning cannot be undertaken in a vacuum and the integration team typically needs a considerable amount of information as they try to decide what plants, operations and employees will remain after the merger and what the new entity's distribution channels will include. The legal team advising the integration team needs to understand both the reason why the team wants the requested information and why disclosure of that information cannot wait until after closing. The legal team will likely place firewalls around the integration team so that access to information from the other company is limited to only a few individuals with a legitimate need to know. In some situations the best course may be for a third party consultant to receive the competitively sensitive data and to prepare aggregated summaries for the integration team.

Some integration planning tasks present easy calls from a gun-jumping perspective. The merged entity may want to prepare a form letter to be sent to both firms' customers immediately after closing; drafting such a letter should not raise significant concerns. IT issues also rarely raise gun-jumping concerns. If the new entity wants to launch a new Web page immediately upon closing, the IT group can design the look, feel and content of that Web site as long as it does not provide access to competitively sensitive information such as pricing or customer names. The HR and IT departments will likely be tasked with developing a means to ensure that every employee is paid on the first payday after closing. Again, provided any competitively sensitive information is shielded from the other party, developing an IT solution for the payroll process raises few if any competitive concerns.

More challenging issues arise when the integration planning involves production, sales, distribution networks or competitively sensitive information. The integration team may be charged with determining whether the merged company should keep both predecessors' products, which plants should be closed, which sales department managers and employees should be kept, what distribution channels will best serve the company, and which dealer/franchise agreements create legal impediments (e.g., exclusive territories) to the desired post-closing distribution model. For these more competitively sensitive issues, one practical approach is to have the integration team start by identifying the big picture or “30,000-foot” issues (e.g., is there sufficient capacity that would permit the combined company to close some plants). Rather than issue a broad request to see or exchange all plant production and cost information, the integration team can limit its request in this first step to that information needed to make the big picture calls. In this example, that information might be limited to the types of equipment/processes in various plants and some measures of excess capacity so that the integration team can make an initial conclusion whether plant closings are worth pursuing and which plant or plants appear to be the best candidates. After those initial decisions are made, the team can then identify the next round of decisions to be made and the specific information needed for those decisions. In the example of plant consolidation, this might mean that more detailed information is provided on two to three plants rather than on all plants. Even in this context, however, some cost information may remain so competitively sensitive that the companies should use an outside consultant to review the detailed information and report aggregated summaries and recommendations to the integration team. (Similarly, if the firms want to resolve overlaps in distribution coverage, the first step might include identifying the geographic areas where overlaps exist. The integration team likely then would not need more detailed information on the dealers that did not fall within an overlap area.)

This multi-step approach not only limits the amount of information exchanged, but also tends to have the more detailed information disclosed later in the due diligence process when the parties are more assured that the deal will proceed.

Practice Tips

Each transaction has its own issues and requires guidelines tailored for the particular circumstances. However, in considering integration efforts, some general “Do's” and “Do Not's” include the following:

DO continue to compete as vigorous competitors until the gun sounds.

DO distribute clear guidelines to members of the integration teams so they understand the limitations and concerns.

DO educate the sales teams so that they understand the rules (“Ignore the deal and compete until closing.”)

DO identify a very small group of employees who are authorized to answer questions from distributors, customers, and sales reps and provide those designated employees with bullet points or scripts of what they can say. Everyone else involved in distribution should refer all questions to that small group.

DO establish a system for tracking what information the integration team receives.

DO create firewalls around the integration team to protect against misuse of competitively sensitive information.

DO review supplier, dealer and franchise agreements for any confidentiality provisions that might limit what can be shared with the other party to the transaction.

DO NOT discuss current or future pricing or the strategy for negotiations with current customers.

DO NOT discuss particular discounts that are being provided to dealers to address competitive issues in the market or demands from customers for price concessions.

DO NOT suggest that the new entity should not keep dealers that cut prices below suggested retail price.

DO NOT give either party the ability to approve or veto a price or deal offered by the other.

DO NOT place sales personnel in the other company's offices.

DO NOT suggest to a potential customer that it send some business to the other company.

DO NOT suggest to any dealer or franchisee that it should begin cooperating with other dealers or franchisees. (They will remain competitors even after the transaction closes.)

DO NOT exchange information that is not needed for integration planning.

DO NOT suggest to employees of the acquired company that their job security or opportunities in the post-merger entity will be enhanced if they provide competitively sensitive information to the acquiring party.

DO NOT discuss strategic plans or upcoming marketing plans.

DO NOT discuss whatever fallback plans either company may intend to follow if the deal does not close.

Conclusion

Finally, a few words of caution. First, closing means closing. Clearance of the Hart-Scott-Rodino Pre-Merger Notification waiting period may give substantive antitrust comfort but it does not open the floodgates for actual integration. The companies need to wait until the gun sounds at closing. Second, each request for information should be reviewed for why it is needed as part of the integration planning process and who needs to see the information. For some highly confidential information, any legitimate need to review it may be satisfied by providing aggregated data or by allowing access to only a few high ranking executives of the acquiring firm (executives who would not have use of the confidential information in their day-to-day responsibilities). Third, the more sensitive the information requested by the integration team, the later in the pre-closing process that information ought to be made available. This delay in disclosing information should reduce the risk that such information is exchanged between competitors that later cancel the transaction.

Successful and speedy integration requires good planning. By planning but not engaging in pre-closing integrating, the firms can avoid gun-jumping problems while maximizing the likelihood of achieving the pro-competitive goals of the transaction.

James T. McKeown is a partner in the Milwaukee office of Foley & Lardner LLP, where he heads the firm's national antitrust practice. His litigation practice focuses on antitrust and distribution matters. He also regularly counsels clients on antitrust issues relating to mergers, acquisitions and joint ventures, including Hart-Scott-Rodino matters.

In track, a runner “false starts” or “jumps the gun” when he or she begins running before the gun has sounded. A similar concept occurs when two competing firms that have agreed to merge begin coordinating their activities or combining their distribution networks before the merger closes. In track, the runner who gun jumps may be disqualified from the race. For a transaction, the penalties for gun-jumping include fines, injunctions and potentially prison terms. Thus, an understanding of what merging firms can and cannot do before the gun sounds is critical to the merger process.

Gun Jumping

The concept of gun jumping in the merger context arises from the general Sherman Act prohibition on contracts, combinations or conspiracies that unreasonably restrain trade. Consider, for example, two competitors who sell widgets. Anyone who has attended an antitrust compliance course knows that the two companies cannot agree on the price of their respective products and cannot allocate customers or prospects between themselves. Similarly ' at least outside the merger context ' a firm would not give its competitor's sales manager an office in its sales department, it would not give the competitor's CEO the opportunity to voice opinions about possible acquisitions and it would not direct some of its customers to a competitor's distributors.

The clarity of these rules has, on occasion, been missed in the context of merger integration planning. For example, upon signing an acquisition agreement, the acquiring firm may believe that it needs to protect its investment and ought to be allowed to have some say in how the acquired entity runs its business between signing and closing. The two firms also may want to begin rationalizing production facilities, streamlining the collective distribution channels, and otherwise realizing the envisioned efficiencies that make the transaction attractive to the buyer. But however well-intentioned the motive, under the Sherman Act the two firms remain separate competitors until the transaction closes. As a then Deputy Director of the FTC Bureau of Competition explained, “Section 1 of the Sherman Act applies until the day a merger is consummated and companies should take care to act accordingly.” Moreover, the limits on pre-closing integration and gun jumping apply even when there is no substantive antitrust objection to the transaction.

Enforcement Actions

The enforcement actions brought by the FTC and Antitrust Division of the Department of Justice illustrate the types of conduct that constitute gun jumping. One early gun-jumping investigation involved an acquiring company that announced (pre-closing) a reorganization of the acquired company that included assigning officers from the acquired company into positions with the acquiring company. The acquiring company also had three sales employees of the acquired company move into the acquiring company's sales office. Those companies ultimately settled the gun-jumping charges by paying a $450,000 fine. In another transaction, the merging firms decided that after closing they would close a manufacturing plant of one firm, with the production then being shifted to a plant then owned by the other firm. Prior to closing, a customer who approached the to-be-closed plant to order product was re-directed to the plant owned by the other firm. While the employee directing the customer may have been well-intentioned, the act constituted a form of customer allocation. In another gun jumping matter, the acquisition agreement provided that ' between signing and closing ' the acquired firm could not price more than 20% off list price without the approval of the acquiring firm. The acquirer likely considered the contract provision a means of ensuring that the acquired firm did not pump up its backlog with unprofitable work prior to closing. To the antitrust agencies it was gun jumping.

Sherman Act Violations

The tension that exists is between undertaking that integration planning that is permissible while avoiding coordination or an exchange of information that can lead to Sherman Act violations. Merging firms have become more sensitive to the need to place limits on the types of information exchanged in due diligence but they frequently feel pressure to begin evaluating and planning the integration process so that the merger or acquisition meets the financial goals. Not surprisingly, the FTC and DOJ recognize the need for integration planning. In a 2005 speech to the Greater New York Chapter of the Association of Corporate Counsel, William Blumenthal, the General Counsel at the Federal Trade Commission, noted that merging firms have a legitimate interest in engaging in certain forms of coordination (e.g., due diligence and transition planning) that would not be expected or allowed outside the merger context. He also referenced studies suggesting that early planning for integration improves the likelihood that the intended efficiencies will in fact be achieved. The challenge for the merging firms' antitrust counsel is to prevent the firms from gun jumping while allowing them to undertake as much planning as possible so that the merged entity can bolt out of the blocks once the closing occurs.

For those business executives charged with achieving the envisioned synergies and other merger benefits, the key distinction is that the parties may plan their integration strategy but they may not implement that strategy before closing. Of course, planning cannot be undertaken in a vacuum and the integration team typically needs a considerable amount of information as they try to decide what plants, operations and employees will remain after the merger and what the new entity's distribution channels will include. The legal team advising the integration team needs to understand both the reason why the team wants the requested information and why disclosure of that information cannot wait until after closing. The legal team will likely place firewalls around the integration team so that access to information from the other company is limited to only a few individuals with a legitimate need to know. In some situations the best course may be for a third party consultant to receive the competitively sensitive data and to prepare aggregated summaries for the integration team.

Some integration planning tasks present easy calls from a gun-jumping perspective. The merged entity may want to prepare a form letter to be sent to both firms' customers immediately after closing; drafting such a letter should not raise significant concerns. IT issues also rarely raise gun-jumping concerns. If the new entity wants to launch a new Web page immediately upon closing, the IT group can design the look, feel and content of that Web site as long as it does not provide access to competitively sensitive information such as pricing or customer names. The HR and IT departments will likely be tasked with developing a means to ensure that every employee is paid on the first payday after closing. Again, provided any competitively sensitive information is shielded from the other party, developing an IT solution for the payroll process raises few if any competitive concerns.

More challenging issues arise when the integration planning involves production, sales, distribution networks or competitively sensitive information. The integration team may be charged with determining whether the merged company should keep both predecessors' products, which plants should be closed, which sales department managers and employees should be kept, what distribution channels will best serve the company, and which dealer/franchise agreements create legal impediments (e.g., exclusive territories) to the desired post-closing distribution model. For these more competitively sensitive issues, one practical approach is to have the integration team start by identifying the big picture or “30,000-foot” issues (e.g., is there sufficient capacity that would permit the combined company to close some plants). Rather than issue a broad request to see or exchange all plant production and cost information, the integration team can limit its request in this first step to that information needed to make the big picture calls. In this example, that information might be limited to the types of equipment/processes in various plants and some measures of excess capacity so that the integration team can make an initial conclusion whether plant closings are worth pursuing and which plant or plants appear to be the best candidates. After those initial decisions are made, the team can then identify the next round of decisions to be made and the specific information needed for those decisions. In the example of plant consolidation, this might mean that more detailed information is provided on two to three plants rather than on all plants. Even in this context, however, some cost information may remain so competitively sensitive that the companies should use an outside consultant to review the detailed information and report aggregated summaries and recommendations to the integration team. (Similarly, if the firms want to resolve overlaps in distribution coverage, the first step might include identifying the geographic areas where overlaps exist. The integration team likely then would not need more detailed information on the dealers that did not fall within an overlap area.)

This multi-step approach not only limits the amount of information exchanged, but also tends to have the more detailed information disclosed later in the due diligence process when the parties are more assured that the deal will proceed.

Practice Tips

Each transaction has its own issues and requires guidelines tailored for the particular circumstances. However, in considering integration efforts, some general “Do's” and “Do Not's” include the following:

DO continue to compete as vigorous competitors until the gun sounds.

DO distribute clear guidelines to members of the integration teams so they understand the limitations and concerns.

DO educate the sales teams so that they understand the rules (“Ignore the deal and compete until closing.”)

DO identify a very small group of employees who are authorized to answer questions from distributors, customers, and sales reps and provide those designated employees with bullet points or scripts of what they can say. Everyone else involved in distribution should refer all questions to that small group.

DO establish a system for tracking what information the integration team receives.

DO create firewalls around the integration team to protect against misuse of competitively sensitive information.

DO review supplier, dealer and franchise agreements for any confidentiality provisions that might limit what can be shared with the other party to the transaction.

DO NOT discuss current or future pricing or the strategy for negotiations with current customers.

DO NOT discuss particular discounts that are being provided to dealers to address competitive issues in the market or demands from customers for price concessions.

DO NOT suggest that the new entity should not keep dealers that cut prices below suggested retail price.

DO NOT give either party the ability to approve or veto a price or deal offered by the other.

DO NOT place sales personnel in the other company's offices.

DO NOT suggest to a potential customer that it send some business to the other company.

DO NOT suggest to any dealer or franchisee that it should begin cooperating with other dealers or franchisees. (They will remain competitors even after the transaction closes.)

DO NOT exchange information that is not needed for integration planning.

DO NOT suggest to employees of the acquired company that their job security or opportunities in the post-merger entity will be enhanced if they provide competitively sensitive information to the acquiring party.

DO NOT discuss strategic plans or upcoming marketing plans.

DO NOT discuss whatever fallback plans either company may intend to follow if the deal does not close.

Conclusion

Finally, a few words of caution. First, closing means closing. Clearance of the Hart-Scott-Rodino Pre-Merger Notification waiting period may give substantive antitrust comfort but it does not open the floodgates for actual integration. The companies need to wait until the gun sounds at closing. Second, each request for information should be reviewed for why it is needed as part of the integration planning process and who needs to see the information. For some highly confidential information, any legitimate need to review it may be satisfied by providing aggregated data or by allowing access to only a few high ranking executives of the acquiring firm (executives who would not have use of the confidential information in their day-to-day responsibilities). Third, the more sensitive the information requested by the integration team, the later in the pre-closing process that information ought to be made available. This delay in disclosing information should reduce the risk that such information is exchanged between competitors that later cancel the transaction.

Successful and speedy integration requires good planning. By planning but not engaging in pre-closing integrating, the firms can avoid gun-jumping problems while maximizing the likelihood of achieving the pro-competitive goals of the transaction.

James T. McKeown is a partner in the Milwaukee office of Foley & Lardner LLP, where he heads the firm's national antitrust practice. His litigation practice focuses on antitrust and distribution matters. He also regularly counsels clients on antitrust issues relating to mergers, acquisitions and joint ventures, including Hart-Scott-Rodino matters.