New guidance from the Federal Trade Commission's ("FTC") staff describes the FTC's views on "post-order" divestitures and highlights the difficulties in persuading the FTC to abandon its preference for upfront buyers in merger cases that require a divestiture.
The overwhelming majority of mergers challenged by the federal antitrust agencies are settled via agreements to divest assets. There are two primary paths to closing with such a settlement: (1) divestiture to an upfront buyer vetted by the FTC before the parties close their primary transaction or (2) a post-order divestiture allowing the parties to close their primary transaction before finding a buyer and completing the divestiture pursuant to an FTC order.
According to the FTC's 2017 merger remedy study, the FTC required upfront buyers in 73 percent of merger settlements between 2006 and 2012. During the Trump Administration, the FTC has approved just three post-order divestitures (less than 14 percent of all settlements). The FTC believes upfront buyers reduce the risk of a divestiture failing (losing competitiveness, value, employees, customers, or business opportunities).
In "limited circumstances," the FTC will agree to a post-order divestiture, but warns that parties face an "uphill" (and potentially lengthy) battle obtaining such relief. Post-order divestitures are largely limited to transactions where:
- the divested assets constitute an existing, standalone business unit;
- there is low risk of lost customers or business deterioration during the transition period;
- the divested business operates largely independent of the merged firm; and
- multiple strong buyers have expressed interest in buying the divested business.
To protect the divested business during the transition, the FTC likely will require a hold separate order and may appoint a monitor, at the parties' expense, to oversee the business. Failure to make a timely divestiture can result in fines or the appointment of a trustee to force the divestiture. It also reduces the FTC's willingness to approve future post-order divestitures involving repeat parties or industries.
Conclusion
- Transacting parties should assume deals requiring a divestiture also require an upfront buyer.
- Parties seeking a post-order divestiture should prepare to show that the divested business and industry competition will not deteriorate.
- Parties should plan for the divestiture process when constructing the deal timeline.
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