United States: Don’t Jump the Gun with Your Merger or Joint Venture Partners

In the life of any company, the days immediately following the announcement of a merger or joint venture agreement are among the busiest imaginable. From the moment the deal is made public, the pressure is on to start realizing all of the synergies that have been touted to the marketplace. Operations and infrastructure must be integrated. Key employees must be reassured about their roles in the new business. Customers must be convinced about the positive impact that the deal will have on them.

All of these efforts require some level of coordination between the merging companies or between the partners in a newly-formed joint venture. Indeed, surveys by consulting firms suggest that the most successful mergers are those where the parties move fast to integrate assets, systems, and personnel.

However, even after a deal is announced, U.S. antitrust laws restrict the extent to which merging companies or potential joint venturers can share information and coordinate their businesses during the period between public announcement and closing. Even if the transaction does not involve direct competitors, the antitrust laws prohibit some types of integration before the deal formally closes. And the federal antitrust enforcers do not hesitate to take action against companies that "jump the gun" and violate these restrictions.

The Sherman Antitrust Act prohibits certain types of collective action between competitors in restraint of trade. In general, competitors cannot coordinate their behavior in ways that affects prices, restricts output, allocates customers, or otherwise inhibits vigorous competition. Until the time when a deal closes, companies that have announced a merger or joint venture are still treated as independent parties who are capable of conspiring under the Sherman Act. This is true because deals sometimes fall through, whether for commercial or regulatory reasons, and the exchange of competitively sensitive information during the pre-closing period could diminish the future level of competition between the parties after a deal is dead. Accordingly, competitors who announce a merger or joint venture must be particularly careful about the extent to which they exchange information and plan for the integration of their operations.

Even if a deal does not involve direct competitors, the antitrust laws often restrict their ability to integrate their business before closing. Under the Hart-Scott-Rodino ("HSR") Act, companies are required to file an advance notification of many mergers, acquisitions, and joint ventures with the Department of Justice and the Federal Trade Commission. The notification requirement applies to most deals where the dollar value exceeds a certain threshold (currently about $56 million, depending on the size of the parties to the deal). After filing their notification, parties must observe a statutory waiting period (usually 30 days) before closing, in order to allow the DOJ or FTC to investigate the transaction.

During the HSR waiting period, the parties cannot transfer "beneficial ownership" of a company or assets from one entity to the other. As a result, the acquiring company in a merger must take care not to exercise control over the acquired company’s marketing, capital investment, or other strategic decisionmaking before the waiting period has expired. This "beneficial ownership" rule applies to any transaction that meets the HSR reporting thresholds, even if the acquiring and acquired companies are not competitors in the same industry.

To avoid violating the "gun-jumping" rules under the antitrust laws, parties to a transaction should limit the types of information they exchange with each other during the pre-closing period. If the parties are direct competitors, current pricing information generally should not be shared. This includes customer-specific pricing data, pricing plans, analyses of price trends, or the formulas used to determine prices. Likewise, most information concerning current or future marketing plans, the introduction of new products, or strategic expansions and contractions should not be shared with a competitor before closing. Typically, it is safer to share only aggregated or lagged information that is not as competitively sensitive.

Although general R&D plans and the identities of customers can be discussed if necessary to plan for the transition, such information generally should not be shared with the sales or marketing staff of the other company. It is a good practice for merging parties to create transition teams that are walled-off from each firm’s active marketing personnel. The sales departments of each company should continue to compete as aggressively as they did before the deal was announced.

Even in transactions that don’t involve direct competitors, the acquiring firm should avoid stationing employees at the office of the acquired company, and the two firms should not jointly negotiate new contracts until after the closing has occurred. The day-to-day management teams of each company should remain separate. In short, the parties should avoid acting as if the merger were already complete or the joint venture already formed.

Although gun-jumping charges are relatively rare, the federal antitrust enforcers do not hesitate to challenge clear violations, often extracting substantial fines. Since 1995, the DOJ and FTC have brought six gun-jumping cases.

Most recently, in 2003, the DOJ accused TV Guide and Gemstar of using protracted joint venture negotiations as a cover to fix prices and divide up customers in the market for on-screen television programming guides. Among other things, while they were still negotiating their joint venture, the two companies each agreed to "slow roll" on-going contract talks with various cable providers, thereby suppressing active competition between TV Guide and Gemstar before closing. Notably, although the DOJ decided not to challenge the transaction on substantive grounds, TV Guide and Gemstar agreed to pay a civil penalty of $5.6 million to resolve gun-jumping charges. The fine represented a statutory penalty of $11,000 per company per day for each day that they violated the HSR waiting period by coordinating their businesses prematurely.

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.