Antitrust Risks of Exchanging Information Before the Deal Is Done

The Federal Trade Commission (FTC) recently issued guidance explaining how parties to a merger or acquisition can reduce antitrust risk when exchanging competitively sensitive information prior to closing.¹ The exchange of competitively sensitive information can violate both the Hart-Scott-Rodino (HSR) Act and the Sherman Antitrust Act. Below is a summary of the FTC guidance and several key takeaways for merging parties.

Antitrust Risk Under the HSR Act and the Sherman Act

Under the HSR Act, a buyer may not exercise beneficial ownership² over the target before expiration of the mandatory HSR waiting period, even where the parties do not compete. The improper exchange of competitively sensitive information during the HSR waiting period may result in a buyer effectively gaining beneficial ownership over a target during the HSR waiting period. The fine for such "gun jumping" violations is $41,484 for each day the parties are in violation of the HSR Act. Gun jumping investigations can be costly and burdensome, so it is important that parties avoid even the appearance of pre-closing coordination.

Additionally, Section 1 of the Sherman Act prohibits competitors (including potential competitors) from entering into information exchanges when the effect of the exchange may be to lessen competition. The risk of Section 1 liability continues until closing when the parties become a single entity; HSR clearance does not create a safe harbor.

FTC Guidance

The FTC set forth the following guidelines to help parties reduce antitrust risk under the HSR Act and Section 1 during the pre-closing period:

• Companies and their antitrust counsel should design, maintain, and audit effective protocols to govern the content and timing of the disclosure of competitively sensitive information, especially current and future prices, strategic plans and costs.
• Companies should institute a "clean team" that does not include any personnel responsible for competitive planning, pricing, or strategy, to review competitively sensitive data, particularly where competitively sensitive information must be shared for effective negotiation or diligence, and should employ third-party consultants where necessary.
• Companies should only exchange current price or cost information when absolutely necessary and use historical price and cost data where possible. Price, cost and customer data should be aggregated before sharing.
• When multiple bidders are involved early in the diligence process, the availability of competitively sensitive information should be kept to a minimum; once a single potential buyer has been identified, competitively sensitive information should be disclosed as late in the process as possible.
• Where external or internal counsel uncovers improper information exchanges between parties, counsel would be "well advised" to proactively inform FTC staff about the information exchange before FTC Staff discovers evidence of such exchange.

Lessons from the Past

The FTC also highlights past examples of improper information exchanges. In 2013, the FTC found Bosley, Inc. liable for allegedly exchanging company-specific information concerning future product offerings, price floors, discounting practices, expansion plans, and operations and performance with a direct competitor for several years. While the reported information exchange did not occur in the context of a merger or acquisition, the FTC discovered the alleged misconduct during their review of a proposed merger between the two competitors.³ The U.S. Department of Justice's (DOJ's) 2002 challenge in United States v. Computer Assocs. Int'l, Inc. provides an example of how an improper information exchange can facilitate a gun jumping. In Computer Assocs., the parties' merger agreement required the buyer to pre-approve seller discounts of greater than 20 percent. The DOJ acknowledged that while most merger agreements contain "interim covenants" limiting the target's operations pre-close, the restrictions and the prospective buyer's exercise of operational control went far beyond ordinary and reasonable, constituting a violation of the HSR Act.⁴

The FTC's blog post is not the first time that the U.S. antitrust agencies have weighed in on this important topic. More than a decade ago, William Blumenthal, then-general counsel of the FTC, cautioned that excessive premerger coordination or improper information exchange can lead to the exercise of beneficial ownership giving rise to a gun jumping violation. Blumenthal recognized that information exchange is necessary in both due diligence and integration planning, and described this as "unobjectionable," as long as it is carried out "within appropriate limits."⁵ More recently, in 2014, the FTC urged companies to "let reason be [their] guide" when sharing information with their competitors, and noted that companies can manage antitrust risk by ensuring that information exchanges with competitors are not likely to harm competition, and by asking whether the purpose or likely effect of the exchange is to promote or rather to hinder competition, and whether adequate safeguards have been put in place to avoid even the inadvertent "chilling" of competition. Most recently, in 2016, the FTC and the DOJ published the HR Guidelines, which specifically note that parties to a proposed merger or acquisition should incorporate appropriate safeguards when sharing information about terms and conditions of employment (e.g., employee salaries).

Takeaways

The FTC's recent blog post is a stark reminder that the FTC and DOJ take very seriously potential violations of the antitrust laws through the exchange of competitively sensitive information during the pre-merger due diligence, planning, and investigation process. The actual or perceived exchange of competitively sensitive information during this time period, without the implantation of proper protocols, may subject the parties to material antitrust risk. Prior to engaging in diligence or integration planning, parties to a merger or acquisition should consult counsel to develop guidelines and processes for the exchange of sensitive company information.

For more information on the FTC's latest guidance, or the risks inherent in information exchange in general, please contact Scott Sher (202-973-8822), Jamillia Ferris (202-973-8843), Joshua Soven (202-973-8827), or another member of the antitrust practice at Wilson Sonsini Goodrich & Rosati.