United States: FTC Decision Indicates Agency’s Willingness To Undo Consummated Mergers

After a five-year dispute, the U.S. Federal Trade Commission ("FTC") will unwind Polypore International Inc.'s ("Polypore") $76 million acquisition of Microporous Products L.P. ("Microporous").  This divestiture serves as a reminder that the risk of antitrust enforcement action does not end once a deal is consummated.  Upon announcing the divestiture, the Director of the FTC Bureau of Competition commented that "The Commission can and will investigate consummated mergers, and when appropriate will require divestitures to remedy the effects of a transaction that substantially lessens competition."  This risk is most significant for transactions that do not require premerger notification under the Hart-Scott-Rodino Act ("HSR").

Background

Battery separators are membranes placed between the positive and negatively-charged plates in batteries to prevent electrical short circuits.  In February 2008, Polypore acquired rival battery separator manufacturer Microporous in a transaction too small to be reported to the federal antitrust agencies under the HSR Act.  In September 2008, the FTC filed an administrative complaint challenging the deal, alleging that it had substantially lessened competition and led to higher prices in four North American markets for battery separators.  In February 2010, following an administrative trial, an administrative law judge found that Polypore's acquisition was illegal and determined that complete divestiture of the acquired assets was needed to restore competition in the affected markets.

In November 2010, the FTC unanimously upheld the administrative law judge's order requiring Polypore to sell Microporous to an FTC-approved buyer within six months after the divestiture provisions of the order became final.  Polypore appealed the FTC's decision to the U.S. Court of Appeals for the Eleventh Circuit, which affirmed the FTC's final decision and order in July 2012.  Polypore then petitioned the U.S. Supreme Court for a writ of certiorari, which the Court denied.

Following a public comment period, the FTC approved Polypore's application for divestiture on December 17, 2013.  In the divestiture transaction, Polypore will sell Microporous to a private equity firm for $120 million.  While some commenters objected, the FTC was not concerned that the divestiture would result in a profit for Polypore.

Implications

This is not the first time that federal antitrust enforcers have challenged a consummated merger, particularly in recent years.  This case highlights that antitrust law enforcement agencies may challenge consummated mergers even when the size of the transaction is relatively small.  Thus, merger counsel should always consider the antitrust implications of a transaction, regardless of whether it falls below HSR thresholds.  Parties should be careful not to assume that, just because an HSR filing is not required, consideration of antitrust issues is also unnecessary.

Transactions that fall below HSR thresholds are especially at risk for a post-consummation challenge for two reasons.  First, because the government has not been notified of the deal before closing, the antitrust agencies generally will not have had a chance to investigate the deal until after closing.  Second, post-consummation challenges allow the government to use the evidence the company has created following the merger – such as evidence of higher prices or reduced quality or service and incriminating documents – that antitrust enforcers will use to argue that the transaction has reduced competition.

The risk of loss is increased with challenges to consummated transactions, as the parties are likely to have made significant investments of time, money, and other resources in the merged entity.  As the Polypore transaction illustrates, these antitrust disputes can drag on long after the deal has closed and the parties have integrated their operations.  By this point, parties like Polypore have incurred significant integration costs and substantial expense in defending their transaction both at the administrative and federal court levels.

The potential risks are further heightened by the enforcement agencies' broad discretion in formulating remedies.  In this case, the FTC's divestiture order required Polypore to divest all of Microporous' assets, including a European plant outside the identified U.S. market, to ensure that the buyer of the divested assets could effectively compete in the U.S. market.

A separate issue considered by the Eleventh Circuit on appeal was whether the FTC erred in treating Microporous as an actual competitor rather than a potential competitor in the market for a particular type of battery separator, given that Microporous had yet to sell that type of battery separator at the time the merger was consummated.  The court determined that Microporous was an actual competitor because, while it had not begun selling the separator, it had begun the manufacturing and marketing process.  Importantly, the court found that Polypore "clearly viewed Microporous as a serious threat."  As the court stated, "the Clayton Act is about probabilities and not certainties."  Thus, the Polypore case highlights the complexity of distinguishing between potential and actual competitors and evaluating the competitive effects of mergers involving potential entrants.

Documents from the FTC proceedings can be found here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Kenneth W. Field
J. Bruce McDonald
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