United States: Recent Enforcement Trends In Divestiture Packages

The Federal Trade Commission (FTC) and US Department of Justice's (DOJ) Antitrust Division have been actively challenging mergers and acquisitions (M&A) across a variety of industries where there is not a viable or acceptable remedy to mitigate the agencies' competitive concerns. Parties to M&A transactions that the FTC or the DOJ believe are likely to harm competition may remedy those concerns by divesting certain businesses or assets. The parties may divest the business or assets that raise anticompetitive concerns and proceed with the remainder of the transaction. Divestitures in horizontal mergers (i.e., transactions between competitors) aim to maintain or replace the competition in the relevant market that might otherwise be lost as a result of the transaction.

Proposed divestitures are evaluated on the particular facts of the case and must be robust enough to present a viable competitor. Recent transactions demonstrate that the FTC and DOJ will reject divestiture proposals that the agency finds insufficient, putting the entire deal at risk for merging parties. Before proposing a remedy to the FTC or DOJ, parties should keep the following in mind: (1) in today's enforcement environment, the agencies are more demanding in seeking effective remedies; (2) the agencies are more likely to require a buyer up front, particularly if the parties seek to divest assets that are less than an entire on-going, stand-alone business, or the to-be-divested assets are at risk of deterioration pending divestiture; and (3) a buyer must be competitively and financially viable.

Proposing an Effective Divestiture Package

The DOJ and FTC are most likely to accept a divestiture package when it includes an autonomous, on-going business unit that comprises at least one party's entire business in the relevant market. As noted in the FTC's guide on Negotiating Merger Remedies, "The parties should be prepared to show that the business unit contains all components necessary to operate autonomously, that it has operated autonomously, that it is separable from the parent, and that the unit's buyer will be able to maintain or restore competition almost immediately."

If the proposed divestiture package is something less than a complete, autonomous and operable business unit, the parties must show that their proposed package will enable the buyer to maintain or restore competition in the market. Parties have been criticized by the agencies for proposing divestiture packages that would split complementary business lines, facilities, and other dependent assets. For example, in US v. Halliburton / Baker Hughes, the DOJ's complaint criticized the parties' proposed divestiture package because it "would separate business lines and divide facilities, intellectual property, research and development, workforces, contracts, software, data, and other assets across the world between the merged company and the buyer of the divested assets." The DOJ further explained that the proposed divestiture package lacked assets in important segments of the business that each of the major competitors in the industry possessed today and failed to include many of the assets that would be used to perform services. The DOJ rejected the parties' divestiture offer, concluding that the assets in the proposed remedy would not "replicate the competition provided by Defendants' businesses from which they would be extracted." The parties abandoned the transaction after the DOJ sued to block the deal.

Most, but Not All Transactions, Require a Buyer up Front

The agencies typically prefer and require a "buyer up front"; in other words, the parties must find an acceptable buyer for the proposed divestiture package and execute an acceptable agreement (and all necessary ancillary agreements with the buyer and third parties, if required) before the agencies accept the proposed consent order. Buyers up front have been required in many industries, including medical devices, pharmaceutical products, mirror coatings, mining equipment, industrial gases, general aviation fuel, supermarkets and other retail operations. In determining whether to require a buyer up front, the agencies evaluate the following:

  • Is there a concern about whether the proposed asset package is adequate to maintain or restore competition;
  • Is the asset package sufficient to attract an acceptable buyer or buyers;
  • Is the pool of acceptable buyers limited because of specialized needs; and
  • Is there a concern about deterioration of the assets (including human capital, good will and other intangible assets) pending divestiture?

In industries where the agencies have significant experience, and where the ownership interest is a high-value, low-risk asset that is likely to generate substantial interest from more than one potentially acceptable buyer, the agencies will not require a buyer up front. In "post-closing divestitures," the parties may enter into an agreement with the agency regarding the complete set of assets to be divested without agreeing on a particular buyer. The parties will hold separate and maintain the to-be-divested assets, but may close the part of the transaction not subject to the consent order. The order will require the parties to divest certain assets within a period of time and the potential buyer must ultimately be approved by the agencies. Recently, the FTC entered into a consent order with Energy Transfer Equity L.P. (ETE) and The Williams Company. The consent order did not require an upfront buyer and ordered ETE to divest to a Commission-approved buyer Williams' ownership interest in Gulfstream Natural Gas System, LLC, an interstate natural gas pipeline. The FTC has a variety of experience with natural gas pipeline transactions and determined that the to-be-divested asset was high-value and low-risk and would generate multiple acceptable buyers.

Buyers Must Be Competitively and Financially Viable

The agencies will look closely at any proposed buyer, and will discuss relevant issues with the potential buyer regarding the assets to be divested and the financial viability of the potential buyer. An acceptable buyer will be competitively and financially viable and have the financial capability and incentives to maintain or restore competition in the relevant market after acquiring the divested assets. A potential buyer must also have the industry know-how to operate the divested business or assets. The FTC has seen several divestitures fail when the buyer was unable to operate the business profitably. For example, when a buyer in the rental car market did not have the industry knowledge and financial capability to manage the business in a concentrated market, the divested business went bankrupt less than one year after the divestiture was complete. Additionally, a regional supermarket chain filed for bankruptcy less than one year after acquiring divested grocery stores from a large transaction that raised competitive concerns in certain states. After these divestiture-buyer failures, the agencies even more carefully scrutinize the ability of the potential buyer to successfully and competitively operate the to-be-divested assets.

Conclusion

In today's enforcement environment, and after recent experiences where buyers of divested assets faced bankruptcy shortly after acquiring the divested assets, the agencies continue to demand robust divestiture proposals. Parties should consider carefully any proposed divestiture they wish to present to the agencies, vetting potential buyers—paying particular attention to the buyer's competence and financial viability—and to the completeness of the divestiture package and its ability to independently compete in the marketplace. Merging parties should carefully evaluate the potential antitrust risk and likelihood that any competitive issues can be remedied with a divestiture before proceeding with a transaction. This analysis at the outset will inform contract negotiations and may avoid the pain of abandoning an untenable transaction.

Recent Enforcement Trends In Divestiture Packages

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.