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Mergers

Hot Documents and Antitrust Enforcement: How to Avoid Digging Your Own Grave

Timothy Hirsch and Irina C. Rodríguez, ABA International Antitrust Bulletin, July 2013, Vol. 2.

See Timothy Hirsch 's resume See Irina C. Rodriguez's resume

Recent merger enforcement actions such as the agency actions against H&R Block’s acquisition of small rival TaxAct, product rating firm Bazaarvoice’s consummated acquisition of competitor PowerReviews and Anheuser-Busch InBev’s proposed acquisition of Grupo Modelo, demonstrate, yet again, the importance of constant internal vigilance in connection with the creation of corporate documents. Both the Federal Trade Commission (“FTC”) and the Antitrust Division of the Department of Justice (“DOJ”) have increasingly relied on so-called “hot documents” as the plainest and most direct evidence of potential anticompetitive effects in horizontal merger cases. To underscore the point, the recently released FTC Horizontal Merger Investigation Data report [1] shows that in the fifteen years 1996-2011, the FTC brought enforcement actions in 90 percent of the cases where “hot” documents were identified. Indeed, between 2007 and 2011 alone, all FTC horizontal merger investigations where hot documents were identified led to enforcement action.

Companies should therefore anticipate vigorous agency action when potentially damaging documents come to light and, accordingly, take the appropriate steps
not just during the merger planning stages, but at all times to prevent the creation of documents that will reduce the future strategic options available to the company.

A Brief History of Hot Documents in Agency Complaints

In 2007, the FTC began an investigation into Whole Foods’ proposed acquisition of Wild Oats. [2] Following its initial investigation, the FTC filed a complaint to enjoin the acquisition, alleging that it would substantially lessen competition for premium natural and organic supermarkets in 21 markets. The complaint heavily relied on hot documents to demonstrate close competition:

  • By buying [Wild Oats] we will . . . avoid nasty price wars . . . which will harm [Whole Foods’] gross margins and profitability.
  • By buying [Wild Oats] . . . we eliminate forever the possibility of Kroger, Super Value, or Safeway using their brand equity to launch a competing national natural/organic food chain rival to us. . . .
  • [Wild Oats] may not be able to defeat us but they can still hurt us . . .
  • [Wild Oats] is the only existing company that has the brand and number of stores to be a meaningful springboard for another player to get into this space. Eliminating them means eliminating this threat forever, or almost forever.

The way the Whole Foods cases was presented to the court was, in hindsight, the beginning of a significant trend in the way the agencies have chosen to think about
investigations and subsequent challenges.

Agencies Will Use Hot Documents to Challenge Non-HSR Reportable Transactions

Recent history shows that neither consummated transactions nor transactions of relatively low value will escape agency scrutiny. For example, earlier this year, the
DOJ challenged Bazaarvoice’s completed acquisition of competitor PowerReviews, Inc. Because the transaction was not HSR reportable under the size-of-person test, the
parties closed the transaction without pre-merger review. The DOJ’s complaint alleged that the transaction substantially lessened competition in the “ratings and reviews
platform industry” in the United States, with the effect of raising prices and reducing innovation. [3] In making its case, the DOJ relied on very explicit statements from Bazaarvoice’s co-founder, who, when outlining the benefits of acquiring rival PowerReviews, stated that the acquisition would “[e]liminat[e] Bazaarvoice’s primary competitor” and provide “relief from []price erosion.” He also discussed the absence of competitive alternatives for customers, concluding that Bazaarvoice would “retain an extremely high percentage of [Power Reviews] customers,” because available alternatives for disgruntled customers were “scarce” and “low-quality.” These statements were echoed by Bazaarvoice’s CEO who wrote in an email that the acquisition of PowerReviews was an opportunity to “take out Bazaarvoice’s only competitor, who . . . suppressed Bazaarvoice price points by as much as 15%. . . .” and would “eliminate Bazaarvoice’s primary competitor” and “reduce comparative pricing pressure.”

The case is scheduled for trial in September 2013.

Managing Document Creation is a Serious Issue

Managing document creation is becoming more and more critical in the M&A process, and, of course, is pertinent to the broader area of corporate antitrust compliance generally. As the agencies continue to rely on internal documents to develop the very theory of their cases, companies should consider the risk associated with a failure to
monitor documents they create.

Management, especially in sales and marketing, as well as in the C-Suite, should be mindful that all manner of communications – e-mails, but also social media, instant
messages, and even digital voice mails – can and often do end up in front of agency staff or opposing counsel. A single employee’s casual remark or characterization of
rivals can have a material impact on the perception that agencies or courts may come to have about the functioning of a market.

Effective management requires that regular measures are taken within the company to ensure that communications accurately reflect the company’s view of the competition
and the markets it operates in and that wrongheaded or ill-thought out communications are avoided by those who are in a position to speak in some way for the company. This should not be just a one-off “pre-deal” issue, but a “life of the company” habit. Indeed, legacy acquisitions can have effects long after they are completed, as their documents and history become part of the new structure. In those cases, although prevention cannot
cure the damage done, information is key, and advanced knowledge of discoverable harmful documents can assist management and antitrust counsel to formulate strategies
for avoiding or dealing with potential legal problems.

Some Basic Approaches to Avoiding or Minimizing the Problem

When a transaction is investigated, internal corporate documents are collected from across multiple echelons of a business, including those generated by employees that
have no decision-making authority. These documents will normally be taken by agency reviewers at face value.

There are, however, ways to minimize the creation of bad documents, and to limit their potential for expensive and extensive damage.

Corporate Best Practices

  • Antitrust Best Practices Training. Particularly for acquisitive companies, annual antitrust compliance or best practices training for employees may help eliminate various traps on the road to compliance. A discussion led by antitrust counsel about the nuances of antitrust and recent developments could help alleviate antitrust risk down the line not only on the civil side but also on the criminal side of antitrust.
  • Antitrust Audits. These can be brief or extensive. An audit can reach broadly and deeply into a company, or survey just a small but crucial slice, perhaps key officers from the C-Suite plus others on sale or marketing, where important documents are most likely to be found.

Pre-Deal Routines

  • Retain Antitrust Counsel Early in the Process. The importance of antitrust counsel involvement in the early stages of planning a merger cannot be overstated. Many employees are unaware of the far-reaching implications a single e-mail can have on the life of a deal. Bringing in antitrust counsel to explain the impact these documents can have to the various departments early on can only help to diminish the creation of bad documents.
  • Obtain Sample Communications from Executive Files. Companies should provide antitrust counsel with a discrete sample of internal data (e.g., e-mails, strategic plans) that reflect how employees view the target for a preliminary assessment of the transaction. These are precisely the types of documents the agencies will review eventually. While cost concerns are always valid, where hundreds of millions, if not billions, of dollars are at stake, early intervention by antitrust counsel can only add value.

Footnotes

[1Fed. Trade Comm’n Horizontal Merger Investigation Data: Fiscal Years 1996-2011, available at www.ftc.gov/os/2013/01/130104horizontalmergerreport.pdf.

[2FTC v. Whole Foods Market, Inc., No. 07-1021 (D.D.C. June 6,
2007), available at www.ftc.gov/os/caselist/0710114/070605complaint.pdf.

[3United States v. Bazaarvoice Inc., No. C-13-0133 JSC (N.D. Cal.
filed Jan. 10, 2013), available at 2013 WL 228471.

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