Merging companies whose deals fall below the Hart-Scott-Rodino
(HSR) merger filing threshold may think that once they have
completed their merger and integration is finished, there is no
longer any threat that the federal antitrust law enforcers, the FTC
or DOJ, will challenge their deal. Consequently, these
companies make substantial investments of time, money and other
valuable resources in the merged entity that are at risk.
Why? Because even consummated mergers can be challenged by
the U.S. antitrust law enforcers.
This risk was underscored by a recent decision from the Eleventh
Circuit Court of Appeals. In July, the Eleventh Circuit
affirmed the Federal Trade Commission's decision in
Polypore, finding that the consummated merger of two
battery separator manufacturers would substantially lessen
competition in violation of Section 7 of the Clayton Act, and
ordering extensive divestitures.1 In addition to
demonstrating the risks that companies take when they consummate
deals that have substantive antitrust problems, this decision
illustrates the broad discretion the agencies enjoy in formulating
remedies.
In 2010, the Commission challenged Polypore's 2008 acquisition
of Microporous. After a lengthy administrative trial, the ALJ
determined that Polypore's acquisition of Microporous was
anticompetitive in four North American battery separator
markets. Battery separators are electronic insulators placed
between the charged lead plates in batteries to prevent electrical
short circuits while allowing current to flow between the
plates. The FTC affirmed the ALJ's finding of liability
in three of the four markets, and ordered Polypore to divest the
acquired company to an FTC-approved buyer within six months.
One notable aspect of the Commission's decision is that the
ordered divestiture included a plant located outside of the
relevant U.S. market: the Commission required Polypore to include
the European plant it acquired from Microporous in the
divestiture. That part of the divestiture was especially
problematic for Polypore as it had closed one of its plants in
Europe in anticipation of using the divested plant. The
Commission's justification, which was accepted by the Eleventh
Circuit, was that when Microporous produced separators for its
European customers at its facilities in the United States, capacity
constraints limited its ability to compete for additional business
in the United States. However, if Microporous was able to use
the plant in Europe to satisfy European demand, Microporous would
be able to use its production facilities in the United States to
supply U.S.-based customers.
For the agencies, consummated mergers can be low-hanging
fruit. After a merger is consummated, the merged company may
create incriminating evidence of anticompetitive conduct, such as
rapid increases in prices or decreases in output. The 2010
Merger Guidelines state that the agencies give substantial weight
to evidence of "post-merger price increases or other changes
adverse to customers," and such evidence may even be
dispositive. As such, if there is direct evidence of
post-merger anticompetitive behavior or a clear monopoly resulting
from the merger, as in Polypore, the agencies often have little
trouble proving that a deal has had an anticompetitive
effect.
Antitrust challenges to consummated mergers have increased
significantly over the last several years. For example, since
FTC Chairman Leibowitz's term began in 2009, the FTC has
challenged nine consummated mergers, making up about one-fifth of
the FTC's total merger challenges during that time, and the DOJ
has gotten in on the act as well.2
The following summarizes some key post-consummation challenges,
and the associated remedies:
- Election Systems & Software, Inc – In 2010, the DOJ filed a complaint challenging Election Systems and Software, Inc.'s 2009 acquisition of Premier Election Solutions, Inc. The complaint alleged that the acquisition eliminated Premier as Election Systems' chief competition for voting equipment and was, therefore, anticompetitive. The parties agreed to settle the complaint and entered into a proposed judgment requiring divesture of intellectual property rights and other intangible assets relating to voting equipment, as well as assets relating to the production, assembly and maintenance of those products, and inventory and spare parts.
- Evanston Northwestern Healthcare Corporation – In 2004, the FTC issued an administrative complaint challenging Evanston's 2000 acquisition of Highland Park Hospital. By the time the FTC challenged the deal, the merging hospitals were fully integrated. Key evidence in the case included substantial evidence of significant price increases and documents which emphasized that the merger created an opportunity for the hospitals to join forces and grow together rather than compete with each other. The ALJ found that the transaction violated Section 7 of the Clayton Act by substantially reducing competition for acute inpatient hospital services and ordered Evanston to divest Highland Park. The FTC upheld the ALJ's findings but deemed divestiture too drastic due to costs and disruption to patient services. Instead, the FTC ordered Evanston to institute separate and independent negotiating teams with firewalls for each hospital to compete for selling their health care services to payers. The FTC also required that Evanston submit to additional binding arbitration if the payers and Evanston cannot agree on rates.
- Chicago Bridge & Iron – Notably, the February 2011 Chicago Bridge & Iron merger was subject to HSR pre-merger notification filing requirements. Despite being notified of the transaction, the Commission, in October 2001, issued an administrative complaint against Chicago Bridge for its acquisition of the Water Division and Engineered Construction Division of Pitt-Des Moines. Four years later, in a decision that was later affirmed by the Fifth Circuit, the Commission found that the transaction violated Section 7 by combining the two dominant domestic suppliers of certain types of industrial and water storage tanks. The Commission required Chicago Bridge to create and then divest a new stand-alone division capable of competing in the relevant markets within six months.
These cases are only a handful of the challenges brought by the
FTC and DOJ against consummated mergers. When considering a
deal that falls below the HSR filing thresholds but still increases
concentration significantly, the merging companies should consider
whether the deal is worth the risk of a potential post-consummation
challenge. If the deal allows the merged company to eliminate
a competitor and increase prices, it raises significant antitrust
issues and the companies should consult antitrust counsel before
consummating the deal.
Footnotes
1. Polypore Int'l, Inc. v. Fed. Trade
Comm'n, No. 11-10375, 2012 U.S. App. LEXIS
14195 (11th Cir. July 11, 2012).
2. J. Thomas Rosch, Commissioner, Fed. Trade
Comm'n, Consummated Merger Challenges—The Past is
Never Dead, Remarks at ABA Section of Antitrust Law Spring Meeting
(Mar. 29, 2012), available at
www.ftc.gov/speeches/rosch/120329springmeetingspeech.pdf
.
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