On Sharing and Managing Competitively Sensitive Information in M&A Transactions
Federal agencies that enforce antitrust laws, such as the Antitrust Division of the Department of Justice (DOJ) and the Federal Trade Commission (FTC), require that competitors engaged in a business combination transaction remain and act as competitors until their merger is consummated. These so-called “gun-jumping limitations” have two important components. First, the buyer cannot prematurely direct the affairs of the seller or act as if they are one entity. Second, since the transaction has not — and may never — close, the antitrust authorities are concerned that competitively sensitive information not be freely passed to or within the buyers’ organization. Often the seller will have similar motivations not to prematurely hand over commercially sensitive information, particularly to a strategic buyer. The Department of Justice has litigated and obtained fines, sometimes as much as several million dollars, for parties that violate these limitations.
It is important to underscore that these gun-jumping limitations apply whether or not the transaction is of a size that requires an antitrust Hart-Scott filing. The antitrust agencies consider a violation of these limitations both a violation of the Sherman Act as well as, when applicable, the Hart- Scott statute. As a consequence, these limitations continue to be relevant through the time the combination is completed. Expiration of the Hart-Scott process does not make the issue moot.
On the other hand, the antitrust enforcement agencies do recognize a buyer’s need to conduct appropriate due diligence, as well as a buyer’s need often to do pre-closure business planning so that plans are made prior to consummation.
This piece is focused on the information-sharing component of antitrust gun jumping. It sets out general guidance that should be useful to both buyers and sellers.
Antitrust regulators do not view information sharing between competitors as illegal per se in most contexts, including in connection with a pending transaction. Instead, it is analyzed holistically, balancing the scope of the information being exchanged, the purpose of the exchange, and the protections being put in place to ensure that the seller does not misuse the competitive information prior to the transaction closing — or if the transaction is abandoned. Under this analysis, merging parties have some flexibility. However, this flexibility must be exercised with caution.
What kinds of information present antitrust issues?
The following categories are not comprehensive, but represent (and are indicative) of those areas that raise potential antitrust concerns:
- Customer Information – Providing price and sale information about individual customers usually triggers major antitrust concerns, particularly where the customer is identified. An exchange of this kind of disaggregated information can rarely be justified, even on a need-to-know basis. Aggregation and anonymization can be effective in minimizing antitrust concerns when sharing information; as discussed below, limiting this information to the seller’s executives and others who do not have sales or pricing responsibilities is another important safeguard.
- Cost Information – Cost information, like detailed cost inputs, raises antitrust concerns. Aggregating this cost information should suffice, absent a compelling, need-to-know rationale for diligence disclosure that cannot be met using consultants.
- Confidential Product Designs – Proprietary product designs and formulas, while not ordinarily shared by competitors, should be vetted through third-party consultants or members of the acquirer’s M&A team who are not engaged in operations and who are careful not to share the information with operational personnel.
- Plans and Strategies – The antitrust agencies also view the strategic plans of competitors, including future product offerings and expansion plans, as having antitrust sensitivity, and therefore any disclosure should therefore be guarded. Products that are actually in the pipeline present a different issue. It is preferable for the disclosure of the details of products in development to be limited to the buyer’s M&A team, or with a third-party consultant who can provide the seller with conclusions and information that does not provide unnecessary or inappropriate insight into a buyer’s forward-looking strategies.
- Salaries and Other Terms of Employment – Indiscriminate benefits disclosure on an employee-by-employee basis is discouraged. Moreover, the antitrust agencies are currently looking more closely at the effect of transactions on labor issues in their merger reviews, so this is now an area where consultation with antitrust advisors is particularly warranted.
How to mitigate the risk of sharing competitively sensitive information.
Be mindful of the stage of transaction negotiations. In the early stages, many firms may bid for the target. In these cases, sellers should consider sharing only general information on the target and reserving more detailed or competitively sensitive information for later in the process. Parties can wait until later-stage negotiations or an auction to assemble “clean teams” or utilize third-party consultants to undertake a “black box” analysis. Quite often, potential bidders/buyers have a very detailed information “wish list”; that list should be reviewed carefully with the seller’s antitrust counsel before responding or before anything is made available in a clean room.
Operational personnel may need to access information that is competitively sensitive to make important decisions on the transaction. As an example, if a substantial portion of the purchase price is allocable to the target’s innovative intellectual property, the buyer itself will want to get under the hood before it commits to the transaction. If so, access should be given as close as practical to signing, and thoughtful attention should be paid to the manner of disclosure. Presenters of this information should limit records and documentation as much as possible to insure that it is only the minimum information necessary to complete the objective. Again, the use of a third-party consultant is often appropriate here to stay on a solid antitrust footing.
The acquirer should consider where certain objectives can be met through personnel with no operations responsibility when seeking information to integrate customer information, pricing, and HR data into its IT systems — thereby avoiding problematic information exchange, such as in an IT integration. Aside from this, parties may be justified in adopting a pragmatic approach to the buyer’s access to the target’s competitively sensitive data on a need-to-know basis. Parties cannot afford to relax on the restriction on information exchange even while the closing is imminent. They must continue to conduct their businesses as independent competitors until the transaction actually closes. There is no license at this stage for anticompetitive conduct such as price coordination or customer allocation.
NDAs govern the confidentiality of the material, the destruction or return of the material if no transaction occurs, and penalties for noncompliance. The antitrust agencies would expect an NDA to be in place in connection with most transactions.
Procedures can be used as proactive measures to avoid scrutiny by antitrust regulators. Internal procedures for sellers should regulate the type of information that may be shared, the manner of presentation, and the method of delivery. Protocols between parties can designate categories or different levels of competitively sensitive information; information that may only be provided to designated personnel; time-limited information; or information that can only be provided by specific means.
Remember to treat privileged or potentially privileged information separately. Do not allow parties to share privileged information, especially related to antitrust, in the normal diligence process. Create a separate protocol for this information to bolster the claim of privilege over any documents or information shared pursuant to the parties’ common interest in building the antitrust defense. Often the buyer’s and the seller’s antitrust counsel will enter into a joint defense agreement so that they can assess and discuss competitively sensitive information from both parties in order to make an antitrust evaluation.
III. Clean Teams
Clean teams consist of employees of the buyer and the seller who are not involved in competitive decision-making. Exclude members from sales or marketing teams. Parties may include business development or legal personnel as well as outside agents, counsel, bankers, accountants, and other consultants on clean teams. For merging parties, a clean team can exchange competitively sensitive information and set limits on the exchanged information that can be shared with “non-clean” members. Disclosing parties should allow the receiving party to share clean team information outside of the clean team only after information has been aggregated or redacted and reviewed for antitrust purposes. Parties generally memorialize the clean team procedure and protocol in a clean team agreement.
Clean team agreements regulate the delivery of competitively sensitive information to outside personnel. These agreements specify competitively sensitive information subject to restricted access; identify the acquirer personnel who are authorized to access this information; and prescribe reports and other permitted disclosure to the acquirer’s operational personnel, typically in a format that is aggregated, anonymized, or both.
Parties must be sure to adhere fully to their procedures in order to avoid enforcement from antitrust regulators.
Parties should carefully evaluate the need-to-know exchange of competitive information between operational personnel and should constantly make sure there are no non-antitrust-sensitive alternatives that could achieve the same result.
IV. Additional Considerations
Where there is a bona fide need to know that cannot be addressed by non-antitrust-sensitive alternatives, access should be limited to the minimum kind and quanta of data necessary to achieve the stated objective.
If there is no alternative to an exchange of competitively sensitive information, the need for the exchange and the absence of viable alternatives should be documented.
The target should vet its data room to ensure that competitively sensitive information is not inadvertently posted to an area of general access, where it can be viewed by operational personnel of the acquirer.
Each of the parties should designate supervisory personnel to oversee delivery and access to competitively sensitive information and to address questions regarding any uncertainties.
The acquirer should maintain a written log of its personnel who have permitted access to competitively sensitive information of the target.
Acquirer personnel with permitted access to competitively sensitive information of the target should be trained to ensure that the information is not shared with the acquirer’s operational personnel.
Avoid undue antitrust risk. Willing sellers should create protocols to share information with the buyer. Unwilling sellers usually have concerns unrelated to antitrust risk. Seller’s counsel may have to come up with legal reasons why information cannot be shared when the client is unwilling to share information for business reasons. Buyer’s counsel should be aware of overprotective sellers. Principals have to solve impasses like these. Counsel should explain the risks of sharing or not sharing information, outline the potential choices, and let the client decide. It may be helpful to explain what other similarly situated parties have done.
Be aware of overlaps in sharing information. When representing the seller, front-load a review of the transaction’s substantive antitrust risk; use publicly available information to determine areas of overlap between bidders and your client and restrict information in that broad area. For bidders in different industries, there may be little risk of sharing competitively sensitive information.
Still, parties should share only information necessary for effective due diligence. This information should be narrowly tailored to a specific due diligence need. Parties should avoid sharing information outside the scope of the transaction. For instance, buyers rarely need to share their own competitively sensitive information for valuation or diligence purposes, unless the seller will be offered stock in the buyer. Broad and unnecessary information exchanges may arouse the suspicion of the antitrust agencies.
Antitrust counsel should review every piece of information before allowing their client to exchange it. Others may explain the risk to the client for exchanges and let the client share certain categories of information without review. For example, IT information or aggregated HR information. Also, review other sensitive information like strategic plans.
In order to assist in briefing others in the organization on these guidelines, attached as an appendix is a one-page set of useful dos and don’ts prepared by Mintz’s antitrust group.
The Antitrust Laws Prohibit “Jumping the Gun” During HSR Review
The federal antitrust laws prohibit two independent companies that are planning to merge from acting as one, and from sharing certain competitively sensitive information with each other, prior to closing their deal. Failing to maintain competitive independence prior to closing, and failing to wall off certain competitively sensitive information between buyer and seller prior to closing, is called “gun jumping” and is a very serious violation of the law that the federal antitrust regulators investigate aggressively. Prior to closing a transaction, the parties must maintain their separate identities and act in a competitive manner. The following list of Antitrust Pre-Closing “Dos” and “Don’ts”is intended to provide guidance regarding prohibited pre-acquisition activity.
Antitrust Pre-Closing “Dos” and “Don’ts”
- Do not cede operational or decision-making control of the target company to the buyer before closing. This includes not permitting the buyer to restrict the target company’s ability to enter into, or to freely set prices and terms for, normal course contracts.
- Do not coordinate with the buyer on pricing, allocate customers between the parties, or agree on sales or bidding strategies prior to closing.
- Do not share among the parties customer-specific information regarding current or anticipated prices, discounts, or terms.
- Do not share with the buyer the specifics of the target company’s pricing policies and pricing mechanisms prior to closing.
- Do not coordinate with the buyer on marketing for competitive products prior to closing.
- Do ask yourself: Would I want the buyer to have this information (or vice versa) if the acquisition was abandoned? If you wouldn’t, then don’t share it.
- Do use the “clean room” to restrict the dissemination of the target company’s competitively sensitive information to the clean team per the clean team agreement.
- Do have counsel present at all meetings between the parties where any competitively sensitive information may be discussed. If counsel isn’t present, then don’t have the discussion.