The Guide To Merger Remedies: Giving Effect To The Remedy

Author:Mr David Higbee, Djordje Petkoski, Geert Goeteyn, Jessica K. Delbaum, Özlem Fidanboylu, Aleksandra Petkovic and Caroline Préel
Profession:Shearman & Sterling LLP
 
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Introduction

Remedies are an important aspect of merger control because a large proportion of mergers where competition concerns are identified are cleared with remedies. For example, in the past year, the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice (DOJ) (together, 'the US agencies') resolved 23 of the 39 merger challenges using negotiated settlements. Similarly, in the EU, half of the Phase II cases in the past year were cleared with remedies.

An effective remedy is one that fixes the competition concern caused by the transaction, while at the same time preserving the efficiencies generated by the deal. There are two main categories of risk that can undermine the ability of a remedy to achieve this goal: composition risk and implementation risk. Composition risk refers to the risk that a remedy is not designed in a way that is appropriate or broad enough in scope to address the likely competitive harm that has been identified, or to attract a suitable purchaser that can operate as an effective competitor in the market. Implementation risk relates to the potential failure to effectively and efficiently implement the remedy.

In October 2005, the European Commission (EC) provided a mixed view on the effectiveness of remedies and identified a series of 'serious design and implementation issues affecting the effectiveness of remedies'.2 The EC identified composition risk in terms of the divestment business being inadequate in scope as the most common issue. Since then, the EC has developed a remedies policy that is designed to minimise both composition and implementation risks. Any remedy package will be tested against these two concerns. The US agencies' approach to remedies as developed over the years is very similar to that of the EC.

Crafting an effective remedy can be challenging and often depends on the competition concerns that need to be addressed, as well as timing (i.e., whether the parties have the time to fight the case on the merits or prefer to give a broader remedy early on in order to secure a quick clearance).

This chapter focuses on designing an effective remedy and then identifies guide posts for dealing with composition risk and implementation risk in the United States and the European Union.

Designing an effective remedy

US

The US agencies' view is that horizontal mergers will typically require a structural remedy to resolve any anticompetitive concerns.3 This often takes the form of divestitures of existing business entities.4

The US agencies can also employ non-structural conduct (or behavioural) remedies. These often take the form of binding commitments designed to constrain the future conduct of the merged firm. While behavioural relief may sometimes supplement a required divestiture to fully achieve the remedial purpose, the US agencies generally consider behavioural remedies to be far inferior because of the difficulty and costs associated with constructing, implementing, monitoring and enforcing such remedies.5 Under the current administration, the DOJ and FTC have both stressed a strong preference for structural remedies relative to behavioural remedies.6

The US agencies' preference for structural remedies can extend to vertical mergers as well,7 although behavioural remedies can often effectively address the anticompetitive issues raised by vertical mergers. Indeed, Live Nation/Ticketmaster, Comcast/NBC Universal and Google/ITA Software were all vertical mergers that the DOJ cleared, subject to behavioural commitments designed to address competitive concerns.8 However, the US agencies appear less willing to accept behavioural remedies unless there is certainty that the anticompetitive conduct will be remedied.9 In November 2017, the DOJ filed suit against the AT&T/Time Warner transaction, a vertical merger.10 In its complaint, the DOJ argued that were the merger to go through, AT&T would likely raise prices for other pay-TV distributors that pay for rights to Time Warner movies and shows.11 Although AT&T was reportedly willing to accept a behavioural consent decree with restrictions similar to those the DOJ had previously accepted in Comcast/NBC Universal - analytically an almost identical transaction - the DOJ nonetheless found the relief inadequate to ensure the competitive landscape remained intact post-merger.12 In June 2018, following a six-week long bench trial, the court rejected the DOJ's challenge and ruled that the transaction did not violate the antitrust laws.13 It remains to be seen whether the DOJ will become more willing to accept behavioural consent decrees consistent with past practice.

Restoring competition is the 'key to the whole question of an antitrust remedy'.14 Thus, the US agencies will refuse to accept a divestiture buyer or proposed divestiture package where they have determined that the proposed remedies are insufficient to replace the lost competition or quell competitive concerns. For instance, in April 2016, the DOJ filed a suit seeking to block Halliburton Company's proposed acquisition of Baker Hughes Inc.15 Before the lawsuit was filed, Halliburton had offered to divest up to US$7.5 billion in certain assets in an effort to address the department's competitive concerns. According to the DOJ's complaint, the proposal was inadequate because it did not include full business units, withheld many critical assets, involved a number of ongoing entanglements between the merged company and the proposed divestiture buyer, and overall failed to replicate the existing (pre-merger) competition.16

Similarly, the FTC found that the proposal by Staples Inc and Office Depot Inc to divest more than US$1.25 billion in large corporate customer contracts to the wholesaler Essendant was insufficient to remedy the significant competitive concerns caused by the transaction.17 The FTC indicated that: (1) many of the contracts Staples proposed to transfer to Essendant were short-term, allowing customers the option to return to Staples/Office Depot when the contracts expired; (2) the proposed divestiture buyer did not currently serve any business-to-business (B2B) customers; and (3) wholesalers like Essendant were historically unsuccessful competitors for B2B business. Given these inadequacies, the FTC concluded that Essendant would be unable to compete with the combined Staples/Office Depot on day one, thus rejecting the proposed divestiture remedy.

EU

In the 2005 Remedies Study, the EC identified that too much weight had been given to market shares rather than the ability of the divested business to restore effective competition. The EC has since made significant efforts to refocus this approach stressing that 'the basic aim of commitments is to ensure competitive market structures.'18 This is why commitments that are structural in nature, such as selling a business unit, are preferred; they provide a clear-cut, immediate and permanent way to restore effective competition and are therefore more suited to deal with remedy composition risks. Like the US, the EC considers that divestiture commitments are the best way to eliminate competition concerns resulting from horizontal overlaps. Additionally, empirically speaking, remedies involving divestitures are considered to be more effective, as it is estimated that such remedies can cut in half the average price increase resulting from mergers.19

For structural remedies to effectively deal with composition (as well as remedy implementation) risk, the parties need to ensure that the divested assets can operate a stand-alone viable business on a long-term basis. For example, in Dow/DuPont, the parties offered remedies that would ensure that the purchaser had the capabilities to preserve the viability and competitiveness of the divested products throughout their life cycles.20

The EC accepts that other structural remedies (such as granting access to key infrastructure or inputs on non-discriminatory terms) or, in some cases, behavioural commitments may be considered suitable. However, divestitures are used as the benchmark to measure the effectiveness and efficiency of other remedies. For example, in Huntsman/Rockwood, a know-how divestiture (including the production process and the brand) was considered to be sufficient because it would have the same effect as a structural remedy.21

In horizontal mergers, structural remedies can also be combined with behavioural remedies.22 However, behavioural remedies on their own will rarely be considered suitable in horizontal cases. They will be satisfactory only if the workability is fully ensured by effective implementation and if they do not risk leading to distorting effects on competition. Conversely, the EC is open to non-structural remedies in non-horizontal cases. For example, in vertical mergers the EC is more...

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