Last month, the FTC and DOJ issued a set of antitrust guidelines addressing certain employment and compensation practices that are most likely to occur in the high-tech and healthcare industries where highly-skilled employees are in demand. Specifically, the guidelines clarify that an agreement among competing employers to limit or fix the wages or other terms of employment for potential hires or to refrain from “poaching” employees at other firms may violate the antitrust laws. The guidelines note that the DOJ recently prosecuted several key technology companies that had “no-poaching” agreements in place and that the prosecutions resulted in consent judgments. The guidelines also emphasize that employee wage and benefit information can be competitively sensitive, and that the exchange of such information between companies competing for the same talent pool may be unlawful unless appropriate precautions are taken.
In M&A, the exchange of employee compensation information is often necessary in order for a buyer to conduct adequate due diligence on a target before agreeing to an acquisition. In particular, non-solicitation provisions and the exchange of information during due diligence may raise antitrust concerns. However, as long as the non-solicit provision is included for a legitimate purpose and reasonably necessary to the deal, and the information exchange is carefully administered so that “appropriate precautions” are taken, it should not pose antitrust concerns.
Non-solicits
A target frequently requires potential buyers to agree to a non-solicit provision before the target will permit access to the company’s confidential employment information. The guidelines do not specifically address the validity of non-solicitation provisions in confidentiality agreements related to a potential acquisition. However, the guidelines do state that while “naked” no-poaching agreements are per se invalid, no-poaching agreements that are entered into as part of a larger transaction and that are “reasonably necessary” to that transaction are not. Indeed, some of the cases cited in the guidelines acknowledge that these types of agreements may be necessary for the parties to conduct due diligence, and are therefore not per se invalid. See the Proposed Final Judgment for US v. Lucasfilm at 5.A.II. Thus, as long as the non-solicitation provision is reasonably necessary (e.g. in scope and term), it should not pose a significant antitrust risk. However, given the likely increased focus on non-solicitation agreements, M&A practitioners should make sure that these provisions do not extend beyond what is reasonably necessary, and that the inclusion of these provisions can be justified.
Due Diligence
During due diligence, the parties may exchange salary and other compensation information in data rooms or otherwise. The guidelines acknowledge that a buyer in an M&A deal may need to obtain access to limited competitively sensitive information during the course of the negotiations but state that “appropriate precautions” should be taken. The guidelines do not, however, specify what those precautions should be. For practical purposes, it is appropriate to treat compensation information of highly-trained or specialized employees in a competitively-sensitive deal in the same way one would treat a trade secret or pricing. For example, the data room can restrict access to only those who really need to view the information. Also, creating a “clean team” to view the data, as you would for intellectual property or any other competitively sensitive information, can protect against allegations of an inappropriate information exchange. The clean team can be made up of employees who are fully removed from the buyer’s hiring or strategy decisions, or of retired employees who are familiar with the business. It may also be prudent for the buyer to use an outside compensation consultant to conduct due diligence on highly trained and specialized employees, if there is significant competition among the parties for the individual(s).
See a copy of the guidelines and our memo describing the guidelines in more detail.
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