Despite widespread skepticism that antitrust enforcement would be a Trump administration priority, activity has not lessened. In fact, there has been a substantial increase in challenges to mergers and acquisitions that already closed. These are transactions that fell below Hart-Scott-Rodino Act (HSR) reporting thresholds or were not otherwise HSR reportable, or (in one case) about which competitive concerns became known to the government only after the deal had cleared HSR review and closed.

For example, in December 2017, the U.S. Department of Justice announced a settlement with TransDigm Group, which was required to divest a business it had acquired earlier that year from Takata Corporation. Through a non-reportable deal, TransDigm acquired its only competitor in the market for certain commercial airline passenger restraint systems (a "merger to monopoly"). Enforcement action followed multiple customer complaints.

Post-closing investigations and lawsuits are lengthy, costly and—because they usually reflect strong customer complaints about the deal—almost invariably result in a government victory. Corporate buyers, who typically bear the economic burden of post-closing enforcement, need to protect themselves.

Negotiating Without HSR Certainty

HSR-reportable transactions (deals valued at $84.4 million or more) require the parties to notify the antitrust enforcement agencies of the proposed deal and wait 30 days. The HSR Act is a notification statute, not a substantive prohibition against anticompetitive mergers. The act provides the government an opportunity to determine whether a transaction is likely to violate the Clayton Act, the federal law that prohibits mergers and acquisitions that are substantially likely to lessen competition or tend to create a monopoly.

Parties to HSR-reportable deals typically allocate in the purchase agreement risks attendant to antitrust intervention. For example, a buyer could agree to assume "hell or high water" obligations to divest whatever assets may be necessary to resolve any government concerns. At the other extreme, a buyer could demand from the seller unconditional "walk away rights" in the event of government intervention, or, alternatively, agree to pay the seller a reverse breakup fee as a condition of walking away. The approach ultimately agreed to by the parties reflects their relative bargaining strengths.

Clayton Act Challenges Can Come at Any Time

Because the Clayton Act has no statute of limitations, the government may challenge a transaction at any time, before or after closing. The legal standards that federal courts apply in determining whether a transaction violates the Clayton Act do not distinguish between pre- and post-closing challenges. If the court finds the deal unlawful, it may rescind the purchase agreement, or otherwise order the parties to unwind the transaction. More typically, the court will order the buyer to divest the acquired business to a third party even at fire sale prices, if necessary. Absent evidence that the seller had conspired with the buyer to evade HSR-reporting obligations, the seller will get to keep the full purchase price.

How Does a Buyer Mitigate Risk?

Consider several options.

First, carefully evaluate antitrust risk before signing the purchase agreement. On risk, the parties may have very different views.

Second, provide in the purchase agreement for a series of payments to the seller over time. If the government challenges the transaction during the payment period, additional payments are frozen until the challenge is resolved.

Third, consider bringing a non-reportable deal to the government's attention before closing to evaluate the likelihood of enforcement action. A potential downside of this approach is that the parties may bring to the government's attention a deal about which the agencies might never otherwise have become aware. On the plus side, however, consultation with the government may provide the buyer important information about the risks attendant to closing the deal.

Fourth, for a reasonable period of time following closing, maintain the acquired business in a form that can easily be divested in the event of a government challenge.

Finally, and most importantly, cultivate positive relationships with the acquired firm’s key customers. Post-closing investigations are typically a response to customer complaints. Because non-reportable deals are often signed and closed simultaneously, customers learn about them only after closing. Their response is the single most important factor in whether the government opens an investigation. To prevail in a post-closing challenge, the government need not prove the buyer increased its prices after closing. Nevertheless, if a buyer increases those prices, it increases the likelihood of customer complaints and materially strengthens the government's case if it decides to challenge the deal. Buyers should think long and hard before they do anything likely to turn long-standing customers into government informants.

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