For the first time in nearly a decade, the Department of Justice Antitrust Division ("Department") issued new guidance regarding merger remedies. The DOJ's revised Merger Remedies Manual ("Manual"), issued on September 3, 2020,1 addresses the conditions under which merging parties may resolve anticompetitive concerns by offering what are colloquially called "remedies" whereby the parties agree to modify their planned merger.
The new Remedies Manual advances three significant "new" policies. First, the Manual once again declares a strong preference for structural relief over conduct relief and further limits conduct relief to two narrow circumstances. Second, the Manual establishes the role of the DOJ's newly formed Office of Decree Enforcement and Compliance, emphasizing the DOJ's monitoring and enforcement efforts. Third, the Manual highlights the positive role and potential effectiveness of private equity divestiture buyers. The Manual further elaborates on existing policies, adding details regarding "upfront" divestiture buyers and listing red flag situations for unsuccessful remedy proposals.
Background on Merger Remedies
When the DOJ determines a merger will likely substantially lessen competition, there are multiple ways the agency can "remedy" the problem. One option, and the most severe option, is for the Department to seek an injunction preventing the merger entirely, by filing suit in federal court.2 Before ever getting to that point, however, the Department most often seeks to negotiate a settlement that allows the merger to proceed with modifications that restore or preserve competition.
The newly issued merger remedy guidelines outline the DOJ's intended approach to these merger settlements. The guidelines are not binding law, but rather are a statement of current agency policy, which could be ignored or revoked without explanation at any point in the future. In fact, one such revocation took place in September 2018, when Assistant Attorney General Makan Delrahim officially withdrew the agency's 2011 Antitrust Division Policy Guide to Merger Remedies.3 At the time, Delrahim announced that new guidance on merger remedies was in the works, and in the interim, the DOJ would revert to its 2004 Antitrust Division Policy Guide to Merger Remedies, which have been in effect for the last two years.
Two Types of Remedies: Structural vs. Conduct Remedies
Remedies to antitrust agencies' competition concerns are typically construed as either "structural remedies" or "conduct remedies." Structural remedies involve a one-time sale of assets to a third-party purchaser that will continue using the assets to compete with the merging parties (referred to as divestitures). Conduct remedies involve promises by the merged firm as to future business conduct, to be monitored for compliance after closing. A merger settlement may contain a combination of both structural and conduct remedies.
Structural relief is historically the more common merger remedy, and is favored by both the DOJ and FTC alike. Divestitures can result in a clean separation of assets that is relatively easy for an antitrust enforcer to administer.4 A conduct remedy, on the other hand, entails ongoing monitoring of complex business practices. Conduct remedies are often more cumbersome and costly to administer, and easier than a structural remedy for merging parties to circumvent.5
The DOJ declared a general preference for structural remedies in its 2004 guidance, but interestingly, the withdrawn 2011 guidance removed the preference. Thus, when AAG Delrahim withdrew the 2011 guidance and returned to the 2004 guidance, the DOJ's back-and-forth policy created an air of uncertainty.
What's New with the 2020 Merger Remedies Manual?
Renewed Commitment to Structural Relief
The revised Manual reaffirmed the DOJ's commitment to structural remedies, adding that the preference for structural remedies applies to both horizontal and vertical merger cases. The Manual details several general deficiencies of conduct remedies before declaring conduct remedies inappropriate except in two narrow circumstances: 6
- To facilitate structural relief:
- The Manual contemplates temporary supply agreements, temporary limits on the merged firm's ability to re-hire employees, and firewall provisions to prevent the spread of anticompetitive information.
- Restricting the merged firm's right to compete against the divestiture buyer is disfavored, even as a transitional remedy.
- Relief should be narrowly tailored to facilitate an effective divestiture.
- Standalone conduct relief is
appropriate only if the merging parties prove:
- The transaction generates significant merger-specific efficiencies;
- A structural remedy is not possible;
- The conduct remedy will completely cure the anticompetitive harm, AND
- The conduct remedy can be enforced effectively.
Consent Decree Enforcement
The new Remedies Manual highlights the role of the newly created Office of Decree Enforcement and Compliance. The new ODEC was announced in late August 2020, and is designed to oversee consent decree compliance efforts and post-merger remedy review.7 For the first time, this concentrates agency remedy expertise within one office, rather than having such expertise diffused throughout the agency's six civil sections.
The Manual notes that ODEC will take a leading role in both acceptance and monitoring of both structural and conduct remedies. For structural remedies, the DOJ must approve all divestiture purchasers. Approval is conditioned on the purchaser passing three fundamental tests that question:8
- Whether the proposed buyer will itself cause anticompetitive harm;
- Whether the proposed buyer is certain to use the divestiture assets to compete in the relevant market; AND
- Whether the proposed buyer is sufficiently capable or "fit" to effectively preserve competition.
These areas of review have been used by antitrust agencies for quite some time, and it will be interesting to see whether ODEC's role in remedy review will lead to even closer scrutiny of a divestiture buyer.
As with past guidance, the Manual highlights the DOJ's authority under 18 U.S.C. § 401(3) to pursue criminal charges for non-compliance of a court order. To the extent the parties are not holding up their end of the bargain (most typically in the area of conduct remedies) and are violating the terms of a settlement agreement with the agency, the DOJ will prosecute such violations. Criminal contempt, which can be punished by imprisonment, may be found when a clear and definite order was knowingly and willfully disobeyed.
A Focus on Private Equity
In the past, some have questioned whether private equity firms are held to a different standard from other investors. The Remedies Manual states clearly that private equity divestiture purchasers will be evaluated by the same criteria as other buyers. The Manual notes that private equity purchasers may be preferred in some divestitures due to their potential flexibility of investment strategy and willingness to invest greater sums of money when necessary.9 On the other hand, the Manual contemplates that a private equity buyer's lack of flexible financing options may contribute to an unsuccessful divestiture.
Remedy "Red Flags"
The Manual also includes a new section describing five circumstances tending to increase the risk that a proposed remedy will be ineffective. "Proposed remedies that feature one or more of these characteristics are at greater risk of being found by the Division to be unacceptable."10
- Divestiture of less than an existing
- The DOJ prefers divestitures of an existing standalone business - a business that possesses all of the physical and intangible assets needed for production of the relevant product.
- Mixing and matching assets of both
- The DOJ prefers to avoid divestitures that combine assets or personnel that have never operated together.
- Allowing the merged firm to retain
rights to critical intangible assets
- The DOJ prefers divestitures that do not permit the merged firm to retain access to divested intangible assets.
- Ongoing entanglements
- The DOJ prefers to avoid divestitures where the merged parties and the buyer have close and persistent ties such that the buyer relies on the merged parties to compete.
- Substantial regulatory or logistical
- The DOJ prefers to avoid divestitures where the purchaser is unable to deploy the divested assets fully and independently due to regulatory approvals.
The revised Merger Remedies Manual helpfully summarizes six key principles, which apply to remedy considerations in all merger cases:11
- Remedies must preserve competition.
- Remedies should not create ongoing government regulation of the market.
- Temporary relief should not be used to remedy persistent competitive harm.
- The remedy should preserve competition, not protect competitors.
- The risk of a failed remedy should fall on the merging parties, not on consumers.
- The remedy must be enforceable.
Overall, the new guidelines do not represent a sea change. However, both the articulation of the situations where despite its preference for structural remedies, conduct remedies would be appropriate, and the discussion of private equity are helpful and noteworthy. The articulation of remedy "red flags" is helpful in preparing to negotiate with the DOJ. Conduct remedies, when they occur, will be vigorously monitored and enforced by the DOJ's new Office of Decree Enforcement and Compliance. In the post-COVID-19 world, we see no signs that mergers are slowing down, nor does it appear the DOJ has any intent of providing any lesser scrutiny to the mergers before it.
Finally, it should be noted that this document only applies to the DOJ, not the FTC. Our experience, however, is that the FTC's approach to remedies is, in many ways, similar.
1. See Dep't. of Justice, Justice Department Issues Modernized Merger Remedies Manual (Sept. 3, 2020), https://www.justice.gov/opa/pr/justice-department-issues-modernized-merger-remedies-manual.
2. FTC merger challenges most often involve simultaneous filings of an administrative complaint as well as a suit for preliminary injunction in federal court.
3. See Makan Delrahim, U.S. Dep't. of Justice, Antitrust Div., It Takes Two: Modernizing the Merger Review Process, Remarks as Prepared for the 2018 Global Antitrust Enforcement Symposium, at 11- 12 (Sept. 25, 2018), https://www.justice.gov/opa/speech/file/1096326/download.
4. See generally, California v. American Stores Co., 495 U.S. 271, 280-81 (1990) ("[I]n Government actions divestiture is the preferred remedy for an illegal merger or acquisition.")
5. See Dep't. of Justice, Antitrust Division Policy Guide to Merger Remedies (October 2004), at 7, https://www.justice.gov/atr/page/file/1175136/download.
6. See 2020 Merger Remedies Manual, at 13-16, https://www.justice.gov/atr/page/file/1312416/download.
7. See 2020 Merger Remedies Manual, at 33, https://www.justice.gov/atr/page/file/1312416/download.
8. See id. at 23.
9. See id. at 24-25.
10. See id. at 20.
11. See 2020 Merger Remedies Manual, Section II, at 3.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.