Planning M&A – do not let competition law get lost in the mix
June 2019 | SPECIAL REPORT: MERGERS & ACQUISITIONS
Financier Worldwide Magazine
June 2019 Issue
Unsurprisingly, the primary focus in any M&A transaction is creating shareholder value or profitably exiting an investment. However, it is important to conduct a competition law assessment early in the M&A process. As competition law develops and gains prominence throughout the world, obtaining competition clearance for a merger transaction is frequently the most time- and resource-consuming regulatory approval that is required in order to get the deal done. Overlooking competition law considerations can result in an unexpectedly costly and protracted regulatory review, which could delay or even jeopardise the deal. In this context, it goes without saying that early identification and careful management of competition law risks are crucial.
Below are some key competition considerations that dealmakers should keep in mind.
Is the transaction reportable to a competition regulator? Depending on the merger control regime of the relevant jurisdiction, the deal could be subject to mandatory reporting to the competition regulator (e.g., Canada has mandatory reporting thresholds). Importantly, in some jurisdictions, a transaction may be reportable even if only a minority stake is acquired. Reportable transactions frequently require the expiry of applicable waiting periods or receipt of clearance from the regulator before the parties are allowed to close the transaction. Such requirements could affect the transaction timeline, especially considering that significant preparatory work may be required before a competition filing is made with the regulator. Apart from such timing considerations, there may also be a risk that clearance cannot be obtained without a remedy (e.g., divestitures) or at all.
Are there substantive competition issues? This analysis should be done early in the process for a number of reasons. First and foremost, this is the core analysis that will drive timelines and inform whether remedies are likely to be required for reportable transactions. A careful evaluation of substantive competition issues is also critical for negotiating the allocation of competition risk in the merger agreement. In Canada (which is similar to many other jurisdictions), the test that the regulator applies in deciding whether to challenge a merger is whether it is likely to substantially prevent or lessen competition in the relevant markets. Another way of conceptualising this test is evaluating whether a merger is likely to create, maintain or enhance the ability of the merged entity to exercise market power. Competition issues are more likely to arise in horizontal mergers (i.e., mergers of competitors), but vertical mergers (i.e., mergers of suppliers and customers) can also present competition issues. Conducting this substantive assessment is usually an iterative process that involves comparing the merging parties’ products and services, identifying horizontal and vertical overlaps, assessing which overlapping products and geographies constitute a ‘market’ and estimating market shares. For deals where the parties have material overlaps, other factors are usually considered as well, such as the sufficiency of the remaining competition and barriers to entry.
Notably, in certain jurisdictions (including Canada), competition regulators have the power to challenge transactions even if they are not reportable. Therefore, for high-profile deals, deals in industries that are concentrated or that have been the focus of scrutiny by the regulator or where there is a probability that customers or other market participants may complain, it is still crucial to evaluate whether the transaction raises substantive competition issues.
Are there multijurisdictional considerations? Parties often focus on the primary jurisdiction where they do business, but, unless the parties are truly local, a global competition assessment should be done. The transaction may be reportable in multiple jurisdictions and the substantive competition analysis may vary from country to country. It is also important to ensure that one has up-to-date competition advice, because the thresholds for reportable deals can change, even annually, as they do in Canada. Moreover, there may be countries that introduce a competition merger review regime where no merger control previously existed.
Given the complexity of navigating merger reviews in multiple countries, there is often a primary law firm that sets the strategy and manages the process, including coordinating with local counsel where necessary. Parties may be focused on the regulatory timelines in major jurisdictions, but a holistic assessment is imperative to avoid finding out late in the M&A process that obtaining clearance will take the longest in a jurisdiction that was not top-of-mind.
How will competition risk be allocated? Where competition clearance is required, the M&A agreement allocates the risk between buyer and seller. Typically, there are covenants that set out the efforts that the buyer will make to secure clearance, including willingness to enter into remedies, such as divestitures or behavioural constraints. Parties may also agree to a reverse termination fee payable to the seller should the buyer fail to secure clearance. These types of provisions are important in order to avoid any ambiguity regarding the efforts that the buyer will make in order to obtain clearance. Divestitures can radically alter the economics of a deal, so buyers should consider what they are willing to commit to ahead of time. In the same vein, sellers want to avoid a deal dying because of a failure to obtain clearance, so the suitability of the buyer from a competition perspective should inform the covenants that stipulate the standard of efforts and, taking a step back, perhaps even the selection of the buyer.
Another consideration is whether the transaction documents are required to be provided to the regulator (e.g., this is the case in Canada), in which case the measures the buyer is willing to take in order to obtain clearance will be disclosed to the regulator. This may not be desirable given the possibility of remedy negotiations with the regulator. However, it may be questionable as to whether this concern can be avoided by delineating the parties’ risk allocation in a separate document that does not have to be provided to the regulator.
How will the competition review process affect timelines? Buyers and sellers are exposed between signing and closing. As such, parties frequently try to minimise the time to closing. However, it is not uncommon for competition clearance to be the long pole in the tent. Therefore, it is important to estimate realistic timelines and plan accordingly. This better enables parties to dovetail the receipt of competition clearance with financing arrangements and provide clear messaging to stakeholders to minimise employee turnover and customer churn during the M&A process. Setting an outside date in the M&A agreement is a useful way for buyers and sellers to focus on timing and align their expectations. However, given that the timing of clearance cannot be predicted with precision, it may be prudent to include extensions of the outside date in the agreement where that is compatible with the commercial realities.
What other key risks could delay or complicate the competition review process? In certain jurisdictions, internal documents that analyse the transaction must be submitted together with the merger notification filing (e.g., in Canada, ‘6.1 documents’ are required to be submitted with formal filings). Moreover, over the course of the review, the competition regulator may request additional internal documents and, in some cases, very large volumes of additional internal documents (such requests are known as ‘supplementary information requests’ in Canada). Accordingly, it is important that each party implement and follow document creation guidelines to ensure that internal documents are accurate and do not contain misleading information or exaggerations that might be misinterpreted or create a misimpression of the competition issues surrounding the transaction. Typical examples of unhelpful language include referring to the merging parties as ‘dominant’ and using military metaphors about overtaking competitors.
Competition rules also prohibit the coordination of independent competitors’ competitive behaviour. Accordingly, there may be penalties for implementing, or taking inappropriate steps to implement, a transaction before clearance is received or before closing (often referred to as ‘gun jumping’). It is especially important not to integrate any sales or marketing functions before the appropriate time. To minimise gun jumping risk, it is advisable to have information exchange protocols between the parties, so that confidential information is shared only on a need-to-know basis in furtherance of the deal with the appropriate personnel (e.g., use of ‘clean teams’) and that competitively sensitive information is appropriately protected.
The foregoing provides a quick guide to some of the fundamental, high-level competition considerations. Each transaction has its own fact-specific considerations. Therefore, engaging competition counsel early in the M&A process is essential. By considering the above and getting legal advice at the appropriate time, dealmakers can better avoid surprises, which could increase costs, lengthen the time to closing and, most critically, create execution risk.
Jonathan Bitran is an associate at McCarthy Tétrault LLP. He can be contacted on +1 (416) 601 7693 or by email: email@example.com.
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McCarthy Tétrault LLP