On September 3, 2020, the DOJ’s Antitrust Division released its Merger Remedies Manual. The manual provides important guidance on what DOJ considers to be adequate solutions to addressing competitive issues in M&A deals challenged by DOJ. Several key points are identified below.
- Most mergers are not problematic, and remedies should be narrowly tailored to preserve competition. DOJ’s manual notes that “most mergers are not anticompetitive and may benefit consumers.” Remedies should “be no more intrusive than necessary to cure the competitive harm.” “[T]he purpose of a remedy is not to enhance premerger competition but to preserve it.”
- DOJ wants divestitures. If a merger is anticompetitive and a fix is required, the DOJ “strongly” prefers “structural” remedies that involve divesting businesses or assets to a third party buyer in order to preserve competition, as opposed to “behavioral” remedies that involve a promise to behave a certain way in the future. As DOJ explains: “Structural remedies are strongly preferred in horizontal and vertical merger cases because they are clean and certain, effective, and avoid ongoing government entanglement in the market.” In contrast, behavioral remedies require DOJ to substitute “central decision making for the free market,” may restrain a company’s ability to respond to changing market conditions, and are difficult to craft and enforce in an effective way. DOJ will not consider a standalone behavioral remedy unless a divestiture is impossible. The preference for structural remedies has been a DOJ and FTC trend for many years leading up to this. In 2018, DOJ withdrew its 2011 Policy Guide to Merger Remedies, which had endorsed conduct remedies in some cases.
- Characteristics of a divestiture that DOJ prefers. DOJ’s manual describes certain key characteristics of divestitures that are more likely or less likely to be accepted, some of which are listed below.
- A standalone business. DOJ prefers a divestiture of a standalone business, as opposed to a collection of assets that “may not result in a viable entity that will effectively preserve competition.” Similarly, a divestiture that mixes and matches assets from the buyer and seller is not preferred. However, divesting assets in addition to a standalone business may be required in some circumstances if it is necessary for the business to compete effectively (examples given include the possibility that the divested business would need additional assets to produce a full line of products, or access to non-US assets in order to effectively compete in the US).
- Intangible assets. If there are intangible assets such as intellectual property that the divested business needs in order to be an effective, long-term competitor, those must be divested as well. Permitting the merged firm to retain access to such assets increases competitive risks, but DOJ acknowledges that this may be required in some situations.
- No ongoing entanglements. DOJ prefers a divestiture that does not involve ongoing entanglements between the divested business and the merged firm. It does not want competitors relying on each other and does not want to facilitate collusion.
- No regulatory or logistical hurdles. DOJ prefers a divestiture that involves as few regulatory or logistical hurdles as possible.
- Acceptable divestiture buyer. In most cases, an acceptable divestiture buyer must be identified before DOJ will enter into a consent decree. DOJ will consider 3 factors when evaluating a potential buyer: (1) divestiture to the proposed purchaser must not cause competitive harm; (2) the proposed purchaser must have the incentive to compete in the relevant market at issue (as opposed to redeploying the divested assets elsewhere); and (3) the proposed purchaser must demonstrate its fitness (“sufficient acumen, experience, and financial capability”) to compete effectively in the relevant market over the long term.
- Private equity buyers. DOJ specifically noted that private equity firms would be held to the “same criteria” as other potential purchasers. Not only will they not be held to a different or higher standard, but DOJ also noted that “in some cases a private equity purchaser may be preferred” citing private equity firms’ flexibility in investment strategy, commitment to the divested business, willingness to increase the investment, and willingness to partner with individuals or entities with relevant experience. This stands in stark contrast to certain recent anti-private equity comments from FTC Commissioners Chopra and Slaughter.