Preserving Competition Through Independent Monitors

Friday, December 1, 2006 - 00:00

The past decade has witnessed a marked increase in the number of cases in which federal regulators reviewing proposed mergers have appointed independent Monitors to preserve competition.

Named by the Federal Trade Commission (FTC) and/or the Antitrust Division of the Department of Justice (DOJ), these independent Monitors are given varying mandates, depending on the facts and circumstances of the proposed merger. Most often, the role of the Monitor will be to ensure compliance with FTC or DOJ orders to divest assets, to enforce hold separate agreements, to maintain the viability and marketability of the divested product or service or business unit, to enforce confidentiality agreements, and in some instances, to implement firewalls.

In all cases, the corporate counsel must be able to work effectively with the independent Monitor. To do so, the counsel needs to understand the various types of Monitors and their functions. The following describes the roles typically assigned to independent monitors and offers suggestions on building a proactive strategy to ensure a successful completion of the transaction.

Types Of Monitors

Depending on the nature of the proposed merger, the government may appoint a Divestiture Trustee, a Hold Separate and Maintain Assets Monitor or an Interim Monitor.The primary function of each is to oversee the divestiture, but the responsibilities differ.

Divestiture Trustee. A Divestiture Trustee is a person with experience and expertise in acquisitions and divestitures. This person is empowered by the regulators or the court, in the case of a court-ordered divestiture, to exercise all rights and powers necessary to divest the respondent's assets.The transfer of such rights and powers is affected through a trust agreement, which is also subject to regulatory or judicial approval. In order to accomplish the divestiture, the Divestiture Trustee has full and complete access to the personnel, books, records, facilities and other information related to the assets to be divested. The Divestiture Trustee is obligated to use commercially reasonable best efforts to negotiate the most favorable price and terms, and acts in a fiduciary capacity for the benefit of the regulator.

Hold Separate and Maintain Assets Monitor.A Hold Separate Monitor may be appointed to hold the business to be divested - a/k/a the 'Held Separate Business' - separate, apart and independent from the business of the Respondent. The purpose is to preserve the Held Separate Business as a viable, competitive, ongoing business, to assure that no material confidential information is exchanged between the Respondent and the Held Separate Business, to prevent harm to competition pending the relevant divestiture, and in certain cases, to remedy any anti-competitive effects of the proposed acquisition. The role of the Monitor is to ensure that the Respondent does not exercise direct or indirect discretion or control over the Held Separate Business, except as necessary to maintain the viability and marketability of the business and to prevent the destruction, removal, wasting, deterioration or impairment of the assets until such time as the business is divested.

Interim Monitor. Regulators may appoint an Interim Monitor to assure that the Respondent complies with all of its obligations and performs all of its responsibilities as required by the Divestiture Order and any related remedial agreements, such as supply agreements or transition service agreements. Like the Divestiture Trustee and Hold Separate Monitor, the Interim Monitor also serves in a fiduciary capacity for the benefit of the regulators.

Functions Of Monitors

Most Divestiture Orders require the Respondent to file a Compliance Report attesting to its compliance with the terms of the Order. The Monitor evaluates the Compliance Report and files a written report to the regulators on the Respondent's performance of its obligations under the Order.

Report on Compliance. The Respondent's Compliance Report will generally track the Divestiture Order, and will set forth a detailed statement of how the Respondent intends to comply, is complying and has complied with the Order. The Compliance Report is ordinarily filed the month after the divestiture Order becomes final and every 60 days thereafter, until such time as all relevant assets have been divested.

Viability and Marketability. One of the most critical paragraphs of the Divestiture Order relates to the continued viability and marketability of the business. To assess viability and marketability, the Monitor will request sales, cost and other data for the product or business line. The Monitor will also want to know how the Respondent intends to continue the business, to integrate sales and marketing personnel, to develop training programs, and to implement measures to maintain the business and thereby preserve competition in the market.

Hold Separate and 'Ring-Fencing' Agreements. Hold Separate and Ring-Fencing agreements occur when the Divestiture Order instructs the Respondent to separate a segment of a business or an entire business from the combined entity. This step is usually taken when there is to be a disposition but a buyer has not yet been identified or approved by the regulator and the regulator believes it to be in the best interest of the consumer to separate the business so as to not give an unfair competitive advantage to the newly combined entity.

When ring fencing occurs, consideration must be given to physical separation, reporting lines, employees and any overlapping responsibilities, management reporting, technology needs and accounting. It is the Monitor's responsibility to determine that the company has taken the necessary steps to completely and effectively ring fence the business.

Confidential Information. The Divestiture Order will normally require the Respondent to take measures to protect Confidential Information. Such measures may include the execution of Confidentiality Agreements by employees and the construction of firewalls to separate business lines and employees.

Strategies For Working With A Monitor

The following strategies will assist counsel in developing a constructive working relationship with a Monitor.

Designate a point person to lead the divesture. A key to a successful working relationship with the Monitor is the designation of a point person with authority to reach into all appropriate segments of the business, communicate directly with all levels of the organization, and monitor progress on a regular basis.

Additionally, the point person should have a supporting team to meet the requirements of the Order and to address the Monitor's needs. Members of the team should include business, legal, marketing, product, information technology and accounting.

Create a Steering Committee to Coordinate Ring Fencing Efforts. When ring fencing is required, the company should create a steering committee with the responsibility and authority to direct compliance with the Order. The Committee should develop a detailed implementation plan and maintain open communication with the Monitor to fully vet significant issues.

Assign individuals from the Accounting, Sales and Marketing Functions to Respond to Inquiries concerning Viability and Marketability. These individuals should also be authorized to provide sales, cost and marketing data directly to the Monitor in order to expedite the Monitor's review of viability and marketability.

Considerations when a Clean Sweep is Necessary. Although clean sweeps have common characteristics, they are at the same time very individualistic to the company. The myriad of considerations include physical locations of hard copy documents, international locations, application of in-country laws in such areas as privacy laws, joint venture agreements, such as production, sales, marketing, technology, data storage policies, outsourcing practices and ongoing governmental reporting responsibilities, such as financial and tax reporting.

Employee Interviews. To meet the requirements of the Order it is often necessary to conduct interviews of personnel located at the home office and in remote locations.The purpose of the interviews is to learn about document retention practices, including storage locations, back up storage, and other matters. The Respondent can facilitate the process by identifying at an early stage in the process those individuals with the most knowledge and arranging for them to be available to the Monitor.

Hold Regular Status Meetings. The divesting company should have periodic team meetings to discuss progress in meeting the requirements of the Order and any actual or potential obstacles that may impede completion. Often there are tight schedules requiring much to be accomplished in a short period of time. Assigning priorities and individual responsibility for discrete action steps is the most effective way to move forward.

Communicate with the Monitor. Perhaps most important, foster an environment of cooperation and open communication with the Monitor. This means keeping the Monitor informed of material developments on a timely basis, communicating any problems or obstacles as they arise, and sharing proposed resolutions and results. It is also helpful to establish a regular schedule for discussions with the Monitor. This provides a forum for reporting open issues and for identifying any areas of potential non-compliance with the Order. It may also provide an opportunity to explore alternate methods for meeting the spirit if not the literal requirements of the Order.

While all divestitures present unique challenges, these strategies will help to maximize efficiencies in the divestiture process, minimize the cost of data collection, and facilitate the regulatory approval process.

Charles A. Riepenhoff, Jr. is a Managing Director; Pamela J. Parizek and Kenneth C. Koch are Directors. All provide client services for KPMG LLP's Forensic practice. KPMG LLP, the audit, tax, and advisory firm (, is the U.S. member firm of KPMG International. KPMG International's member firms have 104,000 professionals, including 6,700 partners, in 144 countries. The views and opinions expressed herein are those of the authors and do not necessarily represent the views and opinions of KPMG LLP. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity.

Leveraging Forensic Technology

Monitors often use forensic technology to accomplish the requirements of the Divestiture Order, particularly where the Order requires the identification and segregation of electronically stored information (ESI).

Identification. ESI can exist in numerous locations including employee workstations, electronic mail servers, file servers, backup tapes, and many more. To gain a thorough understanding of the location of relevant documents and files, it is important to review records retention policies and interview key employees, including Records Management and Information Technology (IT) personnel. Additionally, computer and data storage systems can be searched using key terms identified through employee interviews. Terms used in the search should be sufficiently broad to identify documents related to the matter but focused enough to prevent a high level of false positives. When developing the search term list, consideration should also be given to informal words or phrases used to reference the asset to be divested.

Preservation.Employees should be notified and instructed to prevent destruction of relevant documents to avoid perceptions of wrong doing and possible sanctions. Instructions should contain detailed descriptions identifying what relevant documents are, the various formats in which they may be stored, as well as possible storage locations (i.e. laptop hard drive, Blackberry, CD, Thumb drive, etc).

Review. The review of ESI may include on-line classification and electronic or manual segregation of dual-content documents. Dual-content documents, which contain both relevant and non-relevant proprietary information, will likely require redaction and segregation to satisfy the requirements of the Order and to protect any proprietary information.

Disposition. Based on results of the review, document disposition should be performed in accordance with the Order or agreement among the parties to the proposed transaction. This may include removal of information from computer and data storage systems. Backup tapes can be especially challenging to address in this regard. Typically, backup tapes contain data duplicative of that on active company servers and are created for disaster recovery purposes. Monitors can assume custody of backup tapes to ensure access to confidential information is controlled.