M&A Monitor focuses on legal issues of interest to M&A practitioners for private and closely held companies, providing explanation, analysis and practical application on timely topics.
In the view of the federal agencies charged with enforcement of the antitrust laws — the Antitrust Division of the Department of Justice (DOJ) and the Federal Trade Commission (FTC) — competitors engaged in a business combination transaction must continue to conduct business as competitors until their merger is consummated. Limitations and restrictions imposed under federal antitrust laws, including prohibitions on the exchange of competitively sensitive information and coordinated operational activity, continue to apply through the time the combination is completed. The expiration or early termination of the waiting period under the Hart-Scott-Rodino Act does not alter the level or extent of these constraints on merging competitors.
... competitors engaged in a business combination must continue to conduct business as competitors until their merger is consummated.
Information sharing among competitors does not fall into the category of per se illegality. Rather, it is analyzed under a rule of reason, in which anticompetitive and pro-competitive considerations are explored and weighted. This provides merging parties with some flexibility, though this flexibility must be exercised sparingly and with caution.
Antitrust restrictions on information sharing quite obviously impact the freedom of the acquiring party, or both parties in a merger-of-equals transaction, in the conduct of pre-signing diligence, and also limit the parties’ ability to freely arrange pre-closing for the integration of their operations immediately following consummation of the transaction. The damper on preparation for the post-closing life of the combined entity is twofold. First, information needed to plan for the integration may not reach the personnel who are in the best position to direct the integration. And second, the parties may be unable to take the pre-merger operational steps that they believe will facilitate an up-and-running combined entity following consummation. This is in contrast to business combinations between noncompetitors, where information sharing is almost never a problem, and once the Hart-Scott-Rodino waiting period concludes — if one is required — the acquirer is permitted to assume full control of its target even in advance of the actual closing of the combination. (While permitted under the antitrust laws, it is often not the practice to do so for other reasons.)
Failure to observe restrictions on information sharing between competitors in the pre-merger period can lead to government enforcement, even where the transaction itself is not challenged on antitrust grounds.
This article addresses the practicalities of information exchanges between competitors that are parties to a proposed business combination, in both the pre-signing diligence phase and the post-signing, pre-merger integration planning stage. The dos and don’ts of pre-merger conduct will be addressed separately in a future issue of M&A Monitor.
What kinds of information present antitrust issues?
- Customer information. Prices (current and proposed) and sales to individual customers almost always present a problem, and exchange of this kind of disaggregated information can rarely be justified on a need-to-know basis. Aggregating sales and similar operational data is the recommended way to share this kind of information. Anonymizing individual data might also work, provided that it truly masks customer identity. Similarly, sharing information on the duration or remaining term of customer contracts can be both an important component to pricing a deal and of serious competitive concern. Here too, aggregation and/or anonymization may be an effective approach to addressing the antitrust issues.
- Cost information. Detailed cost inputs for particular products also present antitrust concerns. Aggregated cost information should suffice, absent a compelling, need-to-know rationale for diligence disclosure which cannot be met using consultants.
- Confidential product designs. Proprietary product designs and formulas would not ordinarily be shared by competitors. At least at the preliminary stages of negotiation, the information should be vetted though third-party consultants or members of the acquirer’s M&A team that are not engaged in operations and are careful not to share the information with operational personnel.
- Plans and strategies. The antitrust agencies also view the strategic plans of competitors, including future product offerings and expansion plans, as having antitrust sensitivity, and their disclosure should therefore be guarded. Products that are actually in the pipeline present a different issue. It would be preferable for disclosure of the details of products in development to be limited to the buyer’s M&A team, but a case can be made for review by operational personnel, subject to the constraints on disclosure of proprietary design suggested above.
- Salaries and other terms of employment. The exchange of salaries and other employment terms between competitors has been identified by the agencies as being of antitrust concern, including in the pre-merger context. Indiscriminate disclosure of salaries and other benefits on an employee-by-employee basis is discouraged. Nonetheless, a nuanced approach to these constraints would seem appropriate. Clearly, the employment arrangements with the most senior management need to be disclosed, if they will remain with the target post-merger. At the other end of the spectrum, the compensation arrangements for low-level employees, for whom there is likely to be an ample pool of available talent, should not be of antitrust concern. Otherwise, individual salary and benefit information for employees should ordinarily not be shared.
Does timing of disclosure make a difference?
The need for information exchange grows as the transation approaches consummation ....
Timing can play a role in disclosure of competitively sensitive information.
At a certain point prior to the execution of a merger agreement, operational personnel may need to access information that is competitively sensitive in order to make a go/no-go decision on the transaction. As an example, if a substantial portion of the purchase price is allocable to the target’s innovative intellectual property, the buyer itself will want to get under the hood before it commits to the transaction. If so, access should be given as close as practical to signing, and thoughtful attention should be paid to the manner of disclosure. Oral presentations may be preferable to the exchange of documentation; where documents need to be delivered their circulation should be restricted and retrieved so that they do not remain with the acquirer personnel; and the quantum of delivery should be calibrated to the minimum information necessary to achieve the objective.
The need for information exchange also grows as the transaction approaches consummation, and the acquirer seeks a seamless launch of the combined enterprise at closing. The acquirer will want to integrate customer, pricing and HR data into its IT systems, and will necessarily have a greater and more compelling interest in the status of the target’s strategic planning. IT integration may be accomplished with personnel that have no operational responsibilities, thereby avoiding problematic information exchange. Beyond that, parties may be justified in adopting a pragmatic approach to the buyer’s access to the target’s competitively sensitive data, on a need-to-know basis. Specifically, the prohibition on the pre-merger exchange of competitively sensitive information is in significant measure intended to assure that the parties will continue to compete should the transaction fail to materialize. Where all material conditions to closing, particularly regulatory approvals, have been satisfied and there are no impediments to closing, and the closing is imminent, there is room to relax the restrictions on information exchange for bona fide integration purposes. Of course, until the transaction actually closes, the parties must continue to conduct their businesses as independent competitors, and there is no license even at this stage for anticompetitive conduct such as price coordination or customer allocation.
What role do procedures play?
The use of documented procedures can deflect government charges of, and possible sanctions for, anti-competitive information exchanges during the pre-merger process.
The agencies have emphasized the importance of procedures designed to prevent the exchange of antitrust-sensitive information between competitors in the merger process. These procedures may take the form of:
- Internal procedures intended to inform and guide the parties’ respective personnel on exchange of information. On the sell side, the procedures should regulate the type of information that may be shared, the manner of presentation and the method of delivery. For example, the procedures might specify that only aggregated customer data may be posted to the data room but that, in consultation with counsel, the seller may furnish disaggregated data to the buyer’s independent consultant under appropriately documented access restrictions. On the buy side, the procedures should regulate access to competitively sensitive information furnished by the seller, including by restricting certain information to non-operational personnel such as members of the buyer’s M&A team or its independent consultants.
- Protocols between the parties governing information exchange. These protocols, for example, may designate categories of competitively sensitive information that should not be exchanged (e.g., future development plans); information that should be provided only to specified individuals (e.g., a subset of buyer personnel or clean team members); information that should be provided only in specified time frames (e.g., incident to the pre-closing period); or information that should be provided in a specified manner (e.g., without delivery of documentation).
- A clean team agreement, which regulates delivery of competitively sensitive information to consultants and other persons without operational involvement in the business of the acquirer. A clean team agreement typically specifies the competitively sensitive information subject to restricted access; identifies the acquirer personnel or consultants with permitted access to this information; contains provisions governing destruction or return of the information; and presribes reports and other permitted disclosure to the acquirer’s operational personnel, typically in an aggregated and/or anonymized format.
The use of documented procedures can deflect government charges of, and possible sanctions for, anti-competitive information exchanges during the pre-merger process but the parties must be scrupulous in observing their procedures. Procedures honored in the breach will provide little protection.
What other practices should the parties be observing?
There are a number of other practices that competitors engaged in a business combination transaction would do well to observe.
- Parties should be candid about need-to-know exchange of competitive information between operational personnel (e.g., in arriving at the decision whether to proceed with the merger), and should be asking whether any non-antitrust-sensitive alternatives exist that could achieve the same result.
- Where there is a bona fide need to know that cannot be addressed by non-antitrust-sensitive alternatives, access should be limited to the minimum kind and quanta of data necessary to achieve the stated objective.
- If there is no alternative to an exchange of competitively sensitive information, the need for the exchange and the absence of viable alternatives should be documented.
- The target should vet its data room to assure that competitively sensitive information is not inadvertently posted to an area of general access, where it can be viewed by operational personnel of the acquirer.
- Each of the parties should designate supervisory personnel to oversee delivery and access to competitively sensitive information and to address questions regarding any uncertainties.
- The acquirer should maintain a written log of its personnel who have permitted access to competitively sensitive information of the target (e.g., members of the M&A team or personnel in the IT department).
- Acquirer personnel with permitted access to competitively sensitive information of the target should be trained to assure that the information is not shared with the acquirer’s operational personnel (other than in the case of a documented need-to-know, where no viable alternative exists, as discussed above).
- Competitively sensitive information of the target received by the acquirer should be stored in a place and in a manner that it cannot be accessed by operational personnel.
The pre-merger process among competitors presents special challenges to assure compliance with relevant antitrust laws. These laws, as interpreted by the antitrust agencies, prohibit information exchanges among competitors that could lead to anticompetitive conduct, although such exchanges are not per se prohibited, allowing for some flexibility on a bona fide, need-to-know basis. With appropriate safeguards and considered procedures, competitors that are parties to a merger transaction should be able to achieve their reasonable informational objectives, while adhering to applicable law and avoiding possible enforcement action by the antitrust agencies.
Corporate associate Jeruska Lugo Sánchez assisted in the preparation of this article.
 Holly Vedova, Keitha Clopper and Clarke Edwards, Federal Trade Commission Bureau of Competition, Avoiding Antitrust Pitfalls During Pre-merger Negotiations and Due Diligence (March 2018) (“FTC Avoiding Antitrust Pitfalls”), available at https://www.ftc.gov/news-events/blogs/competition-matters/2018/03/avoiding-antitrust-pitfalls-during-pre-merger (“Right up until consummation, the merger parties are still independent businesses and they must continue to operate independently including safeguarding their competitively sensitive information—to ensure competitive vigor in the short term and also in the event that the merger does not happen”).
 ABA Section of Antitrust Law, Premerger Coordination: The Emerging Law of Gun Jumping and Information Exchange (William R. Vigdor, ed., 2006) (“ABA Emerging Law of Gun Jumping”) at 289.
 Kevin J. Arquit, General Counsel, Federal Trade Commission, Remarks before the ABA Antitrust Section Federal Trade Commission Subcommittee, 37th Annual Spring Meeting at 8-13 (Apr. 7, 1989) (“[A]bsent any explicit agreement to fix prices or divide markets, information exchanges most likely will be judged by the Rule of Reason…”). See also Antitrust Guidelines for Collaborations Among Competitors, issued by the Federal Trade Commission and the U.S. Department of Justice (April 2000), available at https://www.ftc.gov/sites/default/files/documents/public_events/joint-venture-hearings-antitrust-guidelines-collaboration-among-competitors/ftcdojguidelines-2.pdf; M. Naughton, Gun-Jumping and Premerger Information Exchange: Counseling the Harder Questions, Antitrust, Summer 2006 (“Gun-Jumping and Antitrust Counseling”) at 67; M. H. Morse, Mergers and Acquisitions: Antitrust Limitations on Conduct Before Closing, The Business Lawyer, Vol. 57, No. 4, August 2002 (“Antitrust Limitations on Conduct Before Closing”) at 1481.
 See Gun-Jumping and Antitrust Counseling at 67 (“[E]xchange of information does not typically implicate beneficial ownership or operational control, and thus, without more, does not raise Section 7A [HSR] concerns”; but noting that “[i]t may, however, be the case that information exchanges could facilitate a transfer of operational control under Section 7A,” citing to Complaint, United States v. Gemstar-TV Guide Int’l, Inc. (“Gemstar”), available at http://www.usdoj.gov/atr/cases/f200700/200737.htm, and Complaint, United States v. Computer Assocs. Int’l, Inc. (“Computer Associates”), available at http://www.usdoj.gov/atr/cases/f9200/9246.htm).
 For example, the FTC settled allegations that a hair transplant services company violated the FTC Act after discovering during the FTC’s review of a proposed merger that the merging firms’ CEOs exchanged company-specific information about future product offerings, price floors, discounting practices, expansion plans, and operations and performance. The FTC concluded that the exchange facilitated coordination and endangered competition, including by reducing each firm’s uncertainty about its rival’s specific product offerings, prices and plans. The FTC did not challenge the merger. In re: Bosley, Inc. et al., Dkt. No. C-4404 (FTC June 5, 2013), available at https://www.ftc.gov/enforcement/casesproceedings/1210184/bosley-inc-aderans-america-holdings-inc-aderans-co-ltd.
 United States Dep’t of Justice, Competitive Impact Statement (Mar. 19, 2003) https://www.justice.gov/atr/case-document/competitive-impact-statement-108 (“As a general rule, competitors should not obtain prospective customer-specific price information prior to the consummation of the transaction. Access to such information raises significant antitrust risks, as it could be used to enter into an illegal agreement that would be harmful to competition if the transaction is subsequently abandoned.”). But see Omnicare, Inc. v. UnitedHealth Group, Inc., 629 F.3d 697, 710 (7th Cir. 2011) (“Looking at the pricing information that was exchanged, however, we cannot see how a reasonable jury could conclude that it is more consistent with action on the conspiratorial side of the line than with action on the innocuous due diligence side. PacifiCare answered the ‘Part D Questions’ in general terms, and sometimes disclosed less information than was requested because that was ‘what the attorneys permitted’”).
 Michael Bloom, Bureau of Competition, Information exchange: Be reasonable (Dec. 11, 2004), available at https://www.ftc.gov/news-events/blogs/competition-matters/2014/12/information-exchange-be-reasonable (“And the sharing of company-specific data is more likely to raise concerns than the sharing of aggregated data of multiple firms that does not permit identification of information by company.”). See also ABA Emerging Law of Gun Jumping at 194 (“[I]t is advisable to collect aggregated data at first and obtain detailed information when necessary . . . ”).
 Second Firm Agrees to Settle FTC Charges of Collusion in the Market for Pipe Fittings Used by Municipal Water Systems (Mar. 20, 2012), https://www.ftc.gov/news-events/press-releases/2012/03/second-firm-agrees-settle-ftc-charges-collusion-market-pipe (“Under the proposed order, the prohibitions on Star’s communication of competitively sensitive information with competitors contains one exception . . . the industry statistics being exchanged are sufficiently aggregated or anonymous so that no competitor receiving such statistics can, directly or indirectly, identify the data submitted by any other competitor . . . ”).
 FTC Avoiding Antitrust Pitfalls (“Exchanging information about . . . crucial data such as prices and costs can facilitate coordination between firms . . . ”).
 See Antitrust Limitations on Conduct Before Closing at 1485 (advising against exchange of “proprietary technologies, pending or planned research and development (R&D) or product development efforts . . .”).
 FTC Avoiding Antitrust Pitfalls (“Establish clean teams and employ third-party consultants for competitively sensitive information that must be exchanged”).
 See, e.g., Complaint ¶¶ 9, 18, Insilco Corp., 125 F.T.C. 293 (1998), available at http://www.ftc.gov/os/1998/01/insilcocmp.pdf (alleging violation of Section 5, where seller provided buyer with current and future pricing plans, and competitive strategies which could have harmed competition if the transaction had been abandoned), see also In the Matter of Insilco Corporation, Agreement Containing Consent Order, available at https://www.ftc.gov/sites/default/files/documents/cases/1997/08/insilco.pdf (finding the disclosure of “customer-specific price information, current and future pricing plans, competition strategies, price formulas, and price strategies” to be harmful to competition); see also FTC Avoiding Antitrust Pitfalls (“Exchanging information about competitive plans, strategies . . . can facilitate coordination between firms . . .”).
 See, by analogy, United States Dep’t of Justice, Competitive Impact Statement (Apr. 23, 2002) (“DOJ 2002 Competitive Impact Statement”), https://www.justice.gov/atr/case-document/competitive-impact-statement-76 (“[D]uring the due diligence process a party may need information regarding pending contracts in the pipeline to properly value the business or to assess the future growth of the business”).
 Antitrust Guidance for Human Resource Professionals: Department of Justice Antitrust Division and Federal Trade Commission (Oct. 2016), available at https://www.ftc.gov/public-statements/2016/10/antitrust-guidance-human-resource-professionals-department-justice.
 ABA Emerging Law of Gun Jumping at 223 (“[I]t is customary for transacting parties wishing to retain the services of senior management to negotiate a postclosing employment agreement. . . . If such negotiations require the exchange of current salary levels, such an exchange is unlikely to violate the antitrust laws”).
 ABA Emerging Law of Gun Jumping at 193 (“Another protection includes limiting access to the exchanged information to only those with a need to know, and not allowing the exchanged information to be copied or removed from a secured location. For hard copy documents kept in a secure location, persons accessing information may be required to sign in and out”).
 FTC Avoiding Antitrust Pitfalls (“Share the least amount of information needed for effective due diligence.”).
 ABA Emerging Law of Gun Jumping at 270 (“For situations involving the integration of computer systems that process competitively sensitive information, the companies could . . . (2) limit the exchange to technical persons that will be responsible for integrating the systems and have no role in making competitive decisions . . . ”).
 See U.S. Dep’t of Justice & Federal Trade Commission, Commentary on the Horizontal Merger Guidelines 59 (2006), available at http://www.ftc.gov/ os/2006/03/CommentaryontheHorizontalMergerGuidelinesMarch2006.pdf (“The agencies are mindful of the parties’ need to provide sensitive efficiencies-related information and, in that vein, the Agencies note that the antitrust laws are flexible enough to allow the parties to adopt reasonable means to achieve that end lawfully”).
 See, e.g., ABA Emerging Law of Gun Jumping at 224 (“Later in the process the justification for exchanging additional or highly sensitive information becomes stronger and the risk associated with that exchange should decline.”). A somewhat contrary view is expressed in Gun-Jumping and Antitrust Counseling at 69 (“[T]he extent of information exchange that is allowable pre-signing during the due diligence process may be greater than that allowed in connection with post-signing integration planning. . . . [I]n due diligence the business justification for sharing competitively sensitive information is often greater than in connection with integration planning because such information is often critical to a proper valuation. And the likely anticompetitive harm is often less during due diligence because fewer individuals, often with less involvement in daily commercial activities, tend to be involved as compared to integration planning.”). As a practical matter, though, the need for information is likely to substantially increase in the run-up to closing.
 ABA Emerging Law of Gun Jumping at 78 (quoting DOJ 2002 Competitive Impact Statement (“The pendency of a proposed merger does not excuse the merging parties of their obligations to compete independently.”)).
 FTC Avoiding Antitrust Pitfalls (“Ensure all employees with access to confidential information understand the terms of all confidentiality and non-disclosure agreements, including clean team agreements”).
 FTC Avoiding Antitrust Pitfalls (“[I]t’s important to have a plan in place to monitor and control the flow of information to outside parties”).
 See ABA Emerging Law of Gun Jumping at 82-83 (quoting the order in Gemstar which “prohibits disclosure of any such information to any employee of the person receiving the information who is directly responsible for the marketing, pricing, or sales of the [c]ompeting [p]roducts”).
 See U.S. Dep’t of Justice & Fed Trade Comm’n, Statements of Antitrust Enforcement Policy in Health Care, at 47-48 (Aug. 1996), https://www.justice.gov/atr/page/file/1197731/download (“[T]he adoption of mechanisms to assure that information is not disseminated or used in a manner that facilitates unlawful agreements or coordinated conduct by the providers, likely would reduce antitrust concerns”).
 ABA Emerging Law of Gun Jumping at 193 (“The [confidentiality] agreement may also identify various categories of persons that are given access to limited types of information”).
 FTC Avoiding Antitrust Pitfalls (“Clean teams should have separate protocols that establish how competitively sensitive information should be treated and with whom it can be shared (e.g., inside the clean team and with outside consultants, but not with any business personnel not on the clean team)”).
 FTC Avoiding Antitrust Pitfalls (“Clean team agreements limit access to competitively sensitive information in data rooms to select individuals (clean team members) who require access to evaluate the assets”).
 FTC Avoiding Antitrust Pitfalls (“[I]ndividuals who received confidential information must comply with all document destruction requirements in the confidentiality/non-disclosure/clean team agreements”).
 FTC Avoiding Antitrust Pitfalls (“If reports from consultants and the clean team must be provided to other business personnel, those reports should contain blinded, aggregated versions of the competitively sensitive information and be subject to review by counsel before dissemination”).
 FTC Avoiding Antitrust Pitfalls (“Staff’s recent experience indicates that companies could avoid both the appearance of and the actual misuse of competitively sensitive information by more consistently adhering to procedural safeguards designed to prevent misuse of competitively sensitive information”).
 ABA Emerging Law of Gun Jumping at 260 (“Thus, the parties should be prepared to show why delaying integration planning until after closing would hinder the parties from making the postclosing business operational quickly, how the exchange is reasonably related and narrowly tailored to resolve the identified issue, and the efficacy of the safeguards used to prevent the information from being used commercially”).