The recent drumbeat of aggressive antitrust and regulatory merger enforcement has put a spotlight on the importance of understanding the antitrust and regulatory risks raised by a potential deal, and efficiently allocating that risk in the transaction agreement. While transactions in dynamic technology, healthcare/life sciences, new media and telecom industries remain at the very top of the antitrust and regulatory enforcement agenda, the agencies will not hesitate to investigate matters in mature industries—for example, the FTC’s recent 9 month investigation of Tesoro Corporation’s $1.1 billion acquisition of petroleum assets from BP, which ultimately closed without a challenge in 2013. Several recent transactions also underscore the substantial antitrust risk that parties may face even in smaller, non-reportable matters.
There is no “one size fits all” approach, but there is often a premium on structuring the transaction to achieve the benefits of clear risk allocation and certainty that are commensurate with the amount of risk that the transaction presents, rather than relying on a broadly and generically worded “efforts” provision. In some instances where the target is being sold in a competitive process, a buyer may be compelled to take more antitrust/regulatory risk in order to win the bid, making it critical for the buyer to have confidence in its underlying antitrust/regulatory analysis. Market dynamics and regulatory landscapes also can change from deal-to-deal or even between signing and closing of a pending transaction; raising questions of how the parties should allocate the regulatory risks that are, in a contractual sense, unknowable at the time of signing. Whatever the facts may be, in transactions that present potential antitrust and regulatory risk, it is essential to establish close coordination between transaction counsel and antitrust and regulatory counsel to effectively negotiate the contractual risk shifting provisions.
The recently announced Comcast/Time Warner transaction, which is pending DOJ and FCC review, is illustrative of a trend towards efficient allocation of antitrust/regulatory risk in the negotiated transaction agreement. Industry observers generally expect this transaction will get intense DOJ and FCC review but is likely to be approved with conditions. The parties did not negotiate a reverse break-up fee or even an obligation to litigate with the agencies. Rather, the parties negotiated a customized and limited “divestiture” covenant—a sort of anticipatory “fix-it-first” approach. Specifically, Comcast agreed to (1) divest up to three million of the company’s combined subscribers, (2) accept other conditions that are consistent in scope and size to those imposed on other U.S. domestic cable system deals valued at $500 million or more within the past twelve years, and (3) implement undertakings set out on a schedule to the merger agreement (not publicly disclosed). If the DOJ and FCC do not clear the deal by the upset date or impose “burdensome conditions” (defined as divestitures or other undertakings beyond those Comcast has expressly agreed to make or take), Comcast may terminate the merger agreement without liability.
Comcast’s covenant to divest three million subscribers would hold Comcast’s total national market share under 30% of video subscribers (based on an FCC cable ownership cap that applied in previous cable deals but has since been vacated by the courts). The second commitment would encompass conditions imposed in Comcast’s acquisitions of AT&T in 2002 and Adelphia in 2006 (the 1st and 5th largest cable operators at the time) (e.g, anti-discrimination protections for rival multi-channel video distributors and independent network owners, especially regional sports networks). Finally, Comcast has already publicly announced its intention to abide by certain behavioral conditions imposed on Comcast when it acquired NBC in 2011 across the Time Warner Cable systems (e.g., this could include net neutrality conditions from the NBC deal even though the FCC needs to rewrite the rules based on a recent court ruling).
What about concerns that these types of provisions may raise, rather than mitigate regulatory risks, because such provisions provide a “roadmap” to the agencies, or even worse, provide the agencies with negotiating leverage to demand overbroad divestitures/remedies? The outcomes in numerous recent merger investigations reveal that these types of provisions do not necessarily create a path to a self-fulfilling prophecy, particularly when the contractual terms are well-crafted and the process is managed effectively. For example, in the Tesoro/BP matter, despite the fact that the acquisition agreement expressly provided for the divestiture of a specific refinery by Tesoro (as well as a reverse break-up fee and a ticking fee), the FTC closed its investigation after nine months without taking action, concluding that the transaction would not “lessen competition substantially” in the relevant market in California.
Of course, antitrust and regulatory risk allocation is not negotiated in isolation—parties bargain over many price and non-price terms. For instance, just as Comcast is not required to pay a reverse break-up fee if the parties are not able to obtain regulatory clearance, Time Warner Cable is not required to pay a break-up fee if its stockholders vote against the deal.
All M&A lawyers involved in industries or transactions with competitive, FCC or other regulatory issues should become familiar with market approaches to contractual risk-shifting and have knowledgeable and experienced antitrust and regulatory counsel on their deal teams.