Frequently Asked Questions
About Merger Consent Order Provisions
These materials reflect the views of the staff, and not of the Commission or of any Commissioner.
Table of Contents
The Setting: A firm (the acquiring firm) proposes to acquire a second firm (the acquired firm), but recognizes that it may compete with the second firm in a relevant antitrust market. The FTC staff is investigating the transaction, the Commission has issued second requests or subpoenas, and the firms are assembling their response. At some point, lawyers for the acquiring (or acquired) firm approach the FTC staff about settling the matter. The acquiring firm might be willing to agree to a divestiture, but it wants to minimize the extent of the divestiture as much as possible. The Commission might be willing to accept a settlement, but it wants to minimize as much as possible the risk to consumers from the anticompetitive effects of an otherwise unlawful acquisition. The staff, thus, needs confidence that any consent order that it recommends to the Commission will result in effective relief. The firms are anxious to wrap up the negotiations and settle the matter as quickly as possible. The following are some questions that have arisen in the past.(1)
Overview
Q. 1. What provisions does the Commission generally expect to see in a consent order?
A: Every order in a
merger case has the same goal: to preserve fully the existing competition in
the relevant market or markets. Although there is no "magic formula"
to achieve that goal and developing appropriate merger remedies is a very
fact-specific inquiry, many provisions have been developed over the years that
appear in almost every merger order. For example, most orders relating to a
horizontal merger will require a divestiture; the divestiture will have to be
"absolute"; the order will state the purpose of the divestiture; the
Commission will be authorized to appoint a divestiture trustee if the assets
aren't divested on time; the divestiture trustee may have authority to divest a
larger package of assets; the assets to be divested will have to be maintained
pending divestiture; the parties must represent that they can accomplish the
remedy; certain reporting obligations will be imposed; and the staff's access
to documents and employees will have to be assured. This general listing is not
exhaustive; past orders have frequently included other provisions, such as
certain transitional obligations, employee non-solicitation and incentive
provisions and information firewalls. Finally, the Commission's Rules of
Practice require a number of waivers and other recitations that will appear in
every consent agreement. See Rule 2.32 of the Commission's Rules of
Practice, 16 C.F.R. § 2.32.
We do, however,
supplement our learning and review what we learn on a continuous basis. Some
provisions and requirements may change as we learn more.
Q. 2. Where would I look to see what type of provisions the Commission has recently required?
A. Past orders, including
the related complaints, decisions, and other public statements (e.g.,
the "analysis to aid public comment"), provide information regarding
what the Commission has required in particular cases in the past. The
Commission's more recent orders (from 1996 to the present) are available on the
Commission's web site, listed alphabetically. See http://www.ftc.gov/bc/caselist/index.htm.
One can also scroll through the Commission's cases month by month, starting in
March of 1996. See http://www.ftc.gov/os/index.htm.
The Bureau's Study of the Commission's Divestiture Process, accessible
on the Commission's web site at http://www.ftc.gov/bc/pubs_antitrust.htm,
describes provisions that the Commission has required in recent orders.
Q. 3. What happens if a company with continuing obligations under the Commission's order is acquired by another company?
A. If a respondent to a
Commission order is acquired in its entirety by a second company, that second
company will likely become a "successor" to the respondent and, as
such, obligated to comply with the Commission's order. Other acquisitions of
significant portions of a respondent's business or a line of respondent's
business, which comprise less than the entirety of the respondent, will likely
also create successor entities. The analysis is fact-specific and is not
precisely the same analysis undertaken under corporate successorship law, but
is conducted with an eye towards how the FTC's consent order and remedy
provisions will be effected.
Q. 4. What reporting obligations are generally imposed on respondents?
A: In cases in which
respondents have a post-order divestiture obligation, they are generally
required to keep the Commission and the Compliance Division staff informed of
their divestiture efforts. In the consent agreement itself, respondents
generally agree to submit an "Initial Compliance Report" either at
the time that the Commission considers whether to accept the consent order for
placement on the public record, or within a short time thereafter. Subsequent
reports on the divestiture effort are required either monthly or bi-monthly. To
the extent there are obligations in the order beyond the divestiture
obligation, respondents are usually required to submit annual reports to the
Commission on their continued compliance with those obligations. Compliance
Division staff is always available to speak with respondents on their
compliance efforts, and the Compliance Division encourages representatives of
respondents to maintain communication with the staff.
Specific Topics
Buyers
Q. 5. Does the Commission have a preferred type of buyer?
A. The Commission's sole
requirement is that the buyer be ready, willing, and able to operate the assets
in a manner that maintains or restores competition in the relevant market to
effectuate the remedial objectives of the order. The Commission has approved different
types of buyers in different cases. For example, parties who do not operate in
the market, but who have a track record of operating similar assets
successfully have been found to be acceptable purchasers. Additionally, parties
who have operated other businesses successfully and have brought together a
management team experienced in the relevant market have been found to be
acceptable buyers. Firms operating in different geographic markets but within
the same product market have been found to be acceptable buyers. Firms who
operate in related product markets, either in the relevant geographic market or
outside the relevant geographic market, have been found to be acceptable
buyers. Smaller firms, sometimes identified as fringe firms or mavericks, operating
within the same geographic and product markets have been found to be acceptable
buyers. In every case, the respondent must show that the proposed divestiture
will satisfy the remedial objectives of the Commission's order.
Q. 6. What criteria does the Commission use to determine that divestiture to a proposed buyer will satisfy those remedial objectives?
A: The staff evaluates
both the proposed buyer and the proposed agreement. The staff evaluates whether
the buyer has the financial resources to consummate the proposed divestiture
and to remain a vigorous competitor in the market. The staff examines the
proposed buyer's commitment to remain in the market by analyzing its past
operations and business plans as well as its future business plans for the divested
assets. The staff evaluates the proposed buyer's experience and expertise to
operate effectively in the market. The staff examines both the proposed buyer's
historical financial documents and its future business plans for the proposed
divestiture. The staff will likely talk with industry members familiar with the
proposed buyer such as competitors, suppliers, and customers. The staff may
also talk with lenders and other creditors of the proposed buyer, particularly
those involved in possible financing of the proposed deal. The staff also
examines the proposed buyer's current position in the relevant market to
determine whether a divestiture to the proposed buyer will adequately address
concerns about anticompetitive effects arising from the original transaction.
Proposals to divest to an incumbent may raise concerns about likely
anticompetitive effects; on the other hand, divestiture to an incumbent may
assure that an experienced operator with expertise in the market acquires the
divested assets, a crucial factor in some divestitures.
Buyer Up Front
Q. 7. What is a "buyer up front"?
A: When the Commission
requires a "buyer up front" (or up front buyer), it requires that the
respondent find an acceptable buyer for the package of assets it proposes to divest
and that it execute an acceptable agreement - and all necessary ancillary
agreements - with the buyer (and third parties, if required) before the
Commission accepts the proposed consent order for public comment. It is
important to involve FTC staff in this process as early as possible, to make
sure that any negotiated agreement includes all the assets and contains all the
provisions that staff believes are necessary to resolve the competitive
concerns. In addition, the FTC staff will want to discuss with the buyer its
business plans and whether it believes the assets being acquired are sufficient
to maintain or restore competition. The Commission will then evaluate the buyer
and the agreements at the time it determines whether to accept the proposed order
for public comment. If the Commission accepts it for public comment, in most
cases it will require that the up front divestiture be consummated within a
very short period of time.
Q. 8. Are buyers up front required in all Commission consent orders?
A: No. The
facts of each case are particularly important to this topic. In those cases in
which the Commission is concerned about the adequacy of the asset package or
the possible lack of an acceptable buyer, the Commission will, by requiring a
buyer up front, attempt to minimize the risk that the remedy will be
ineffective. Buyers up front also reduce the risk of interim harm to
competition by speeding up accomplishment of the remedy. Buyers up front have,
thus, been used primarily (but not exclusively) when there was concern about
whether the proposed asset package was adequate to maintain or restore
competition or whether the asset package was sufficient to attract an
acceptable buyer or buyers, when the pool of acceptable buyers was thought to
be very limited because of specialized needs, or when there were concerns about
deterioration of the assets (including human capital, good will and other
intangible assets) pending divestiture. Up front buyers are more likely to be
required when the respondent has urged that only selected assets be divested.
When the assets to be
divested have been operated as a stand-alone business in the past, the
Commission has frequently not required a buyer up front. In all cases, however,
the Commission must be confident that an acceptable buyer exists and that the
package of assets to be divested is, when operated by the buyer, sufficient to
maintain or restore competition in the relevant market. When the respondent has
shown that a good buyer will emerge, that the asset package is an ongoing,
stand-alone business and will maintain or restore competition in the market at
issue, and that interim competition and the viability of the assets will be
preserved pending divestiture, post-order divestitures have been accepted. See,
e.g., Diageo/Vivendi, Dkt. No. C-4032; Valero/UDS, Dkt.
No. 4031; Lafarge, SA, Dkt. No. 4014 (in which the Commission required
a buyer up front and a post-order divestiture in different markets); El
Paso/Coastal, Dkt. No. C-3996; BPAmoco/Arco, Dkt. No. C-3938 (in
which the Commission required a buyer up front and a post-order divestiture in
different markets); Duke Energy, Dkt. No. C-3932; FNF/CT,
Dkt. No. C-3929; El Paso/Sonat, Dkt. No. C-3915; Exxon/Mobil,
Dkt. No. C-3907; Precision Castparts, Dkt. No. C-3904 (in which the
Commission required a buyer up front and a post-order divestiture in different
markets).
Q. 9. Are there any industries in which the Commission has been more likely to require a buyer up front?
A: Whether a buyer up
front will be required is dependent upon the circumstances of each individual
case, and not (generally) on the particular industry in which the merging firms
operate. Buyers up front have been required in such varied markets as medical
devices, pharmaceutical products, mirror coatings, mining equipment, industrial
gases, general aviation fuel, and many others. However, supermarkets and other
retail operations (e.g., retail pharmacies) are particularly vulnerable to
having their assets deteriorate during the search for a post order buyer; this
affects the ability of the assets to be operated in a manner that maintains or
restores competition in the relevant market. Accordingly, the Commission has
now more uniformly required up front buyers in such divestitures. See,
e.g., Ahold/Bruno's, Dkt. No. C-4027; Albertson's, Inc./American,
Dkt. No. C-3986; Shaw's/Star, Dkt. No. C-3934 (divestiture in one
market was post-order requirement); Kroger/Fred Meyer, Dkt. No.
C-3917; Kroger/Groub, Dkt. No. C-3905; Ahold, Dkt. No.
C-3861; CVS/Revco, Dkt. No. C-3762.
Q. 10. The buyer up front divestiture typically occurs before the Commission makes the order final. What happens if the Commission, in deciding whether to make the order final, decides the buyer or the agreement is unacceptable after the divestiture has already occurred?
A: To preserve the
Commission's ability to reject the up front buyer following the public comment
period, the Commission's orders require that the respondent include an
"unwind" (rescission) provision in any divestiture contracts in which
closing on the divestiture will occur before final Commission approval of the
order. The parties themselves may include contract provisions in divestiture
contracts to handle the orderly implementation of an unwind provision if the
Commission rejects the up front buyer. Invoking rescission should be very rare.
See Q.11.
Q. 11. Has the Commission ever ordered rescission?
A: As of March 13, 2002,
the Commission has not ordered rescission of an up front divestiture.
Q. 12. Are there cases in which the package of assets to be divested comprises an ongoing business, but the Commission has nonetheless required an buyer up front?
A. The Commission may
require a buyer up front for an ongoing business if, for example, the business
is so specialized that the Commission is concerned that there are very few
acceptable buyers. The Commission may also require a buyer up front for an
ongoing business if it concludes that even a hold separate agreement will not
effectively minimize the interim competitive harm pending a post-order
divestiture. See, e.g., Siemens/Vodafone, Dkt. No. 4011. See Q.19.
Q. 13. What concerns does the Commission have that result from delay in divestiture?
A. Concerns regarding
diminished viability, interim competitive harm and the eventual competitive
significance of the assets to be divested arise whether there is a buyer up
front or a post-order divestiture. Wasting or deterioration of the assets of
the business during the Commission's investigation of the transaction or the
acceptability of the remedy package may affect the scope of the package of
assets necessary to be divested, or whether an acceptable divestiture is
possible. For example, there may be an adverse impact on the morale of
employees of the business to be divested, leading them to leave the company;
alternatively, long standing, important relationships among suppliers or
customers of the acquired firm may deteriorate because of uncertainty regarding
the acquired business.
Q. 14. What can be done by the parties to reduce the time it takes to identify acceptable up front divestiture candidates?
A. The parties, working
with FTC staff, should consider taking steps to minimize the time it takes to
define an asset package likely to be acceptable to the Commission and to
finding an acceptable buyer. The parties should consider implementing or
maintaining incentives for managers and key employees to stay on through the
remedy process, and take or continue steps to prevent the wasting of the assets
likely to be divested and the deterioration of customer and supplier
relationships.
The Assets To Be Divested
Q. 15. What is an acceptable divestiture package?
A: An acceptable divestiture
package is one that maintains or restores competition in the relevant market.
The divestiture of an entire business (that is, an on-going, stand-alone,
autonomous business, and which may include assets relating to operations in
other markets) of either the acquired or acquiring firm relating to the markets
in which there is a concern about anticompetitive effects, is most likely to
maintain or restore competition in the relevant market, and thus will usually
be an acceptable divestiture package. The divestiture of an intact, on-going
business generally assures that the buyer of such a package will be able to
operate and compete in the relevant market immediately, thereby remedying the
likely anticompetitive effects of the proposed acquisition and minimizing the
Commission's risk that it will be unable to obtain effective relief. See Q.18.
There have been instances
in which the divestiture of one firm's entire business in a relevant market was
not sufficient to maintain or restore competition in that relevant market and
thus was not an acceptable divestiture package. To assure effective relief, the
Commission may thus order the inclusion of additional assets beyond those
operating in the relevant market. For example, in Guinness/Grand Met,
Dkt. No. C-3801, the Commission required divestiture of foreign assets even
though the relevant geographic market was limited to the United States. On the
other hand, there have been occasions when the respondent demonstrated with
compelling evidence that it was not necessary or not efficient (from the
eventual buyer's perspective) to require it to divest an entire business.
See Q.16. In
all cases, the objective is to effectuate a divestiture most likely to maintain
or restore competition in the relevant market.
Q. 16. Can you explain those cases in which the Commission has not required the divestiture of an entire business?
A: The Commission has
issued orders that require a divestiture of less than the entire business
operating in, or producing for, the relevant market. In those cases the
Commission has concluded that the assets to be divested are sufficient to allow
the buyer of the assets to begin to compete in the market immediately, thereby
remedying the likely or actual anticompetitive effects of the challenged
acquisition. For example, interested buyers of divested assets may have their
own assets (or have secured access to such assets) that are good substitutes
for some of those of the stand alone business, and the inclusion of such
additional assets is unnecessary or potentially inefficient. Similarly, certain
assets controlled by the seller may only be minimally used in the production or
distribution of the relevant product, and it may be significantly more
efficient and competition enhancing for the parties to enter into a supply or
lease contract for such assets. See, e.g., INA/FAG, Dkt. No. C-4033; Rohm
& Haas, Dkt. No.C-3883.
At all times, the burden
is on the parties to provide concrete and convincing evidence indicating that
the asset package is sufficient to allow the proposed buyer to operate in a
manner that maintains or restores competition in the relevant market.
Q. 17. To remedy competitive concerns resulting from horizontal mergers, does the Commission insist that respondents divest sufficient assets to result in a zero concentration, or HHI, change?
A: No. The focus of the
inquiry is whether the proposed divestiture is sufficient to maintain or
restore competition in the relevant market.
Q. 18. How does the FTC determine whether the assets to be divested are viable and will restore competition?
A: This is the most
critical question in crafting effective relief. A divestiture of the entire
overlapping business (one that is operating effectively now), provides some
comfort that those assets are viable and would restore competition. Such a
divestiture reduces the risk to the Commission that it will be unable to obtain
effective relief. However, with any divestiture proposal, we must examine the
proposed divestiture and buyer to determine whether it will maintain or restore
competition in the relevant market. See Q.6. for the
criteria examined relating to a proposed buyer. Our inquiry is directed at
current and future competitive issues, and respondents have the burden of
showing that their proposal will have the likely effect of maintaining or
restoring competition.
One way we consider whether a divestiture package is sufficient to restore
competition is to look at how the companies currently conduct their businesses.
We also look to others operating in the industry and related fields, including
suppliers and customers, to get their assessment of what is required.
Discussions with prospective buyers can also help determine if the assets to be
divested are sufficient to maintain or restore competition. Because we
recognize that prospective buyers of the divested assets may have imperfect or
insufficient information regarding the assets to be acquired and the relevant
market, or that they may have different incentives from the Commission, we
carefully question prospective buyers about their requirements, operating plans
and business plans regarding the to be acquired assets.
Q. 19. If the parties propose to divest all of one firm's assets used in the production, distribution and sale of the relevant product, doesn't that end the inquiry?
A. No. Although the
competitive analysis focuses on specific product markets, remedy analysis
focuses on what a business needs to be an effective competitor in the relevant
market. Different businesses will likely have different existing production,
distribution and selling facilities; assuring that a buyer can operate the
assets to be acquired and maintain or restore competition in the relevant
market may require the reconfiguration of, or increase in, the buyer's existing
assets or the acquisition of complementary assets from the seller. Because the
operations of the buyer and seller may be of a different scale and/or scope,
something more than just the assets used in the production, distribution and/or
sale of the relevant product may be required. (For similar reasons, something
less than the assets used in the production, distribution and sale of the
relevant product may be a sufficient remedy if there is convincing evidence
that divestiture of less will effectively maintain or restore competition.)
Q. 20. In cases in which the Commission required that certain contract rights be divested or assigned, how have firms handled the problem of a third party with some rights in these contracts?
A: In some cases,
third-party consents were required before the respondent could assign contract
rights. These consents must usually be obtained before the settlement is
accepted, so that the divestiture proceeds without contingencies or incident.
One advantage of an up front buyer is that all issues relating to third-party
rights will tend to be raised before the specific divestiture proposal
is executed, so that alternatives and substitutes are possible if third-party
rights make the original proposal unworkable or too complex.
Respondents often have
two sets of assets they can divest: their own and the overlapping assets of the
firm being acquired. Respondents are thus responsible for knowing what legal
issues or other impediments to their divestiture proposal will arise and for
either dealing with them or delivering a fully-acceptable alternative. If
third-party rights might make it impossible for respondents to divest to an
acceptable acquirer, then respondents must deal with that issue, perhaps by
divesting different assets. The Commission may insist that respondents do
whatever it takes to make the agreed-to divestiture occur. See, e.g., West
Texas Transmission, L.P. v. Enron Corp., 1989-1 Trade Cases (CCH) ¶ 68,424
(W.D. Texas 1988), aff'd, 907 F.2d 1554 (5th Cir. 1990) (the FTC is
not required to approve divestiture of a pipeline interest to a buyer with a
contract right of first refusal if it would raise competitive problems).
Q. 21. Under what circumstances can an acceptable package of assets be created by including some of the acquiring firm's assets and some of the acquired firm's assets in the package?
A: As with any divestiture
of less than a stand-alone business, an asset package of this type, frequently
referred to as "mix and match," may provide a sufficient competitive
remedy. However, because these assets have never been operated by the same
owner and will likely require some reconfiguration by the buyer, it is more
difficult to determine whether the selected assets are appropriate and whether
they can be operated together effectively. Therefore, there are no easily
identifiable circumstances when a mix and match divestiture may be adequate. In
such instances when it is proposed, the parties must present sufficient
evidence to convince the Commission that the asset package is viable and that
it will enable the acquirer of these assets to compete effectively.
Q. 22. Can parties create such a package if an up front buyer is offered?
A: One concern, that a
"mix and match" package of assets would not be attractive to a
potential buyer, is eliminated by the presence of an up front buyer. However,
simply finding an entity that is willing (even excited) to acquire a "mix
and match" package of assets does not necessarily resolve the question
whether competition in the relevant market will be maintained or restored.
Staff and the Commission will still have to carefully review the buyer's
intentions and ability to operate the assets in a manner that maintains or
restores competition in the relevant market(s). The burden remains on the
parties and the buyer to convince staff and the Commission that the proposed
divestiture will address any concerns about likely anticompetitive effects in
the relevant market.
Q. 23. Under what circumstances does the Commission require that an entire package of assets be divested to a single acquirer only?
A: This is both an issue
of viability and competition. Operations of a certain scale and/or scope may be
necessary for the buyer of the assets to operate them efficiently or to have
the incentive or means to operate them for anything but a short term. In
certain industries, such as retail operations, it may be necessary to maintain
or restore competition for the buyer of the divested assets to have a
substantial "footprint" within the relevant geographic markets; this
presence may make the buyer more likely to seek to increase or maintain "brand
awareness" through advertising, or make it more likely that the buyer can
obtain significant internal distribution efficiencies or cost savings. This
requirement has been imposed in general in cases in which there were concerns
that dividing up the assets to be divested among several buyers would not fully
restore the competition that existed before the merger.
Crown Jewels
Q. 24. What is a "crown jewel" provision?
A: A "crown
jewel" provision requires divestiture of a different package of assets
from what a respondent was originally required to divest, and is typically to
be divested by a trustee appointed by the Commission if the respondent fails to
divest the original asset package on time or does so in a manner or condition
that does not comply with the order (there may be other circumstances that can
trigger possible trustee appointment in a given case). A crown jewel should be
a more marketable package for the trustee to sell, in light of the respondent's
inability to find an acceptable buyer for the original package of assets. The
crown jewel may be a package of assets that includes more than the original
package of assets to be divested, such as total domestic assets when only a
subset of the domestic assets were included in the original package. Or the crown
jewel may be a different package of assets, such as the respondent's assets
instead of the acquired firm's assets.
The crown jewel
provisions of an order are not included as a penalty clause or as punishment
for failure to comply with the order. Failure to divest on time, or in a manner
consistent with an order, constitutes an order violation and subjects the
respondent to civil penalties and other relief under section 5(l) of
the FTC Act, 15 U.S.C. § 45(l). These civil penalties are in addition
to any additional provisions in the consent order that may be triggered by the
failure to comply with the provisions of the order.
Q. 25. Has the Commission ever required divestiture of the "crown jewels"?
A: Yes; as of March 13,
2002, once. In Aventis, Dkt. No. C-3919, the Commission required
divestiture of the alternate assets, and appointed a trustee to accomplish that
divestiture when respondent failed to divest the original assets on time.
Q. 26. When does the Commission require a crown jewel provision?
A: A crown jewel is
appropriate where there is a risk that, if the respondent fails to divest the
original divestiture package on time (including to an up front buyer) or if the
original divestiture falls through for some reason, a divestiture trustee may
need an expanded or alternative package of assets to accomplish the divestiture
remedy. This may be because another buyer may need a bigger (or different)
package of assets to make the divestiture viable and competitive, or because it
will likely be faster and easier for the trustee to sell a bigger, more
complete package of assets later on.
Q. 27. Is a crown jewel required in cases in which there is an up front buyer?
A: We assess the need for
an up front buyer and for a crown jewel separately and on a case-by-case basis.
An up front buyer does not necessarily eliminate the need for a crown jewel
provision. Agreements with up front buyers occasionally fall through. In such a
case, the original asset package may be unattractive to any other buyer, so there
may be a need to alter or expand the original divestiture package to accomplish
relief if the "up front" deal falls through. See, e.g., AHP/Solvay,
Dkt. No. C-3740; Chevron/Texaco, Dkt. No. C-4023.
Divestiture Period
Q. 28. If there is no up front buyer, how much time will the parties get to divest?
A: In recent cases, the
Commission has required that all divestitures be completed within 3 to 6 months
from the date the parties sign the Agreement Containing Consent Order. This
means the respondent must find a buyer, negotiate a contract, submit that deal
to the Commission for its approval, and complete the divestiture within that
time. Respondent must submit its application early enough to allow for the
30-day public comment period (required by the Rules) and review by the
Commission. If there is a buyer up front, the divestiture is required almost
immediately upon consummation of the subject merger.
Q. 29. Is six months the maximum?
A: There have been
exceptions but there needs to be a very good reason why the divestiture cannot
be done in that time frame and why it is not likely there would be harm from a
longer period.
Q. 30. The FTC used to give firms a year to divest. Why has the FTC reduced the divestiture period to six months?
A: It was taking too long
for the divestitures to occur because respondents tended to wait until the end
of the period, and there were examples of the assets deteriorating in the
interim. Delay in implementation of a divestiture order increases the period in
which competition in the relevant market may be affected because the acquiring
company may have little incentive to maintain the assets (because they will be
operated by a competitor in the future) or to operate them in a manner that
maintains competition during the interim period. It may be more profitable, for
example, for the acquiring firm to keep the acquired production capacity off
the market. (These are some of the reasons that a "monitor" trustee
is used; see Q.36.) Our experience confirms
that firms can, with some rare exceptions, complete divestitures in less than
six months.
Q. 31. When is a divestiture completed?
A: To satisfy its
obligation to divest by the date required in the order, a respondent has to
actually consummate the sale by that date. Executing an agreement or filing an
application for the Commission's approval by that date does NOT satisfy the
obligation to divest by that date. For a respondent to make sure it has enough
time to get the necessary approvals and still close in time, it must file its
application with the Commission early enough to allow for the thirty day period
for public comment, the staff's review and investigation including responses to
any comments that were filed, and the Commission's consideration of the matter.
Filing only a month before the deadline will not be sufficient and will delay
the transaction, potentially subjecting the respondent to civil penalties. If
there is a timing concern submit a letter to the Commission including all the
reasons why expedited treatment is necessary, and include materials documenting
the problem(s). The general considerations that apply to all transactions, such
as anxious customers, deteriorating employee morale, may not be persuasive. Of
course, all else equal, the Commission has an interest in speedy relief.
Q. 32. Past orders have required that a divestiture be absolute; what does this mean?
A: What this means is
that the respondent shall have no continuing ties to the divested business or assets,
no continuing relationship with the buyer, and no financial stake in the
buyer's success. Encouraging the establishment or further development of a
competitor with incentives to compete vigorously is thought to preclude, in
most, if not all, cases, a continuing interest in the divested assets or in the
buyer's success in operating those assets. Thus, divestiture proposals in which
the buyer intends to rely on the respondent to finance the divestiture, or
where the proposal includes performance payments by the buyer have been
rejected. Financial arrangements that rely on performance-based payments are
always troubling to the extent they may skew either parties' incentives to
compete vigorously.
Q. 33. Are any types of continuing relationships ever acceptable?
A. Some cases have
provided for continuing relationships post-divestiture (e.g., supply
contracts, technical assistance requirements) to ensure the competitiveness and
viability of the buyer as it begins to compete. These have been required on a case-by-case
basis, and in such cases the Commission has recently required the use of a
monitor trustee to review and help assure respondent's compliance with these
obligations.
Q. 34. If there are questions about a divestiture that arise before or after it has been approved, how should interested parties proceed?
A: The staff of the
Compliance Division maintains communication with the respondents and with the
proposed buyer. If there is additional information that you think the
Commission and its staff need to know, you should not hesitate to contact the
Compliance Division staff handling the matter. In addition, if a buyer of
divested assets has any concerns about the respondent's compliance with the
Commission's order, the buyer should raise those concerns with the staff of the
Compliance Division as soon as possible. To the extent that any disputes
between the respondent and the buyer implicate terms of the Commission's order,
the Commission and its staff need to hear about them to attempt to resolve them.
The Commission takes an active interest in making sure its orders are adhered
to, and will take steps to insure that the provisions of its orders are
complied with.
(For procedures involving
applications for approval of post-order divestitures generally, see
the Commission's Rules of Practice, § 2.41(f), 16 C.F.R. §2.41(f).)
Q. 35. What happens if the parties have not divested within the time period required?
A: The failure to
effectuate a required divestiture by the deadline in the order violates the
order and subjects the parties to civil penalties of up to $11,000 per day per
violation, in addition to other relief, pursuant to Section 5(l) of
the FTC Act, 15 U.S.C. § 45(l). At the expiration of the divestiture
period, in addition to considering whether to seek civil penalties and other
relief, the Commission may appoint a trustee to accomplish the divestiture,
including divestiture of crown jewels pursuant to specific order provisions;
alternatively, it may hold off on doing so and still require the parties to
continue their efforts to divest. The Commission's options are not mutually
exclusive.
Trustee Provision
Q. 36. What is a "monitor trustee"?
A: A monitor trustee is
an independent third party appointed by the Commission to oversee certain terms
of the consent order. The Commission has required a monitor trustee, sometimes
called an auditor trustee or an interim trustee, in cases in which the order
imposes obligations on the respondent of a specialized nature that may result
in a temporary relationship between the respondent and the buyer of divested
assets. See, e.g., Dow/Union Carbide, Dkt. No. C-3999; El
Paso/Coastal, Dkt. No. C-3996; Boeing Company, Dkt. No. C-3992; Glaxo/SmithKline
Beecham, Dkt. No. C-3990; AOL/TW, Dkt. No. C-3989; Ceridian,
Dkt. No. C-3933. The Commission has also required a monitor in connection with
respondent's obligations in a hold separate order or an order to maintain
assets. See, e.g., Valero/UDS, Dkt. No. 4031; Exxon/Mobil, Dkt.
No. C-3907.
Q. 37. What is a divestiture trustee?
A: A divestiture trustee
is an independent third party appointed by the Commission to divest assets in
those cases in which the respondent has failed to divest assets as required by
the Commission's order. Virtually every merger order issued by the Commission
includes a provision authorizing the Commission to appoint a divestiture
trustee.
Q. 38. How often in recent years has the FTC actually appointed a divestiture trustee to divest assets?
A: As of March 13, 2002,
the Commission has appointed a trustee to divest assets in the following cases:
Louisiana Pacific, Dkt. No. C-2956 (where the court appointed a
trustee to effectuate the required divestiture); Flowers Industries Inc.,
Dkt. No. 9148; Promodes S.A., Dkt. No. 9228; Red Apple Companies,
Inc., et al., Dkt. No. 9266; Panhandle Eastern Corp.,
Dkt. No. 3260; Cooper Industries Inc., Dkt. No. C-3469; Revco Inc.,
Dkt. No. C-3540; Rite-Aid Corporation, Dkt. No. C-3546; Schwegmann
Giant Super Markets, Dkt. No. C-3584; Columbia/HCA Healthcare Corporation,
Dkt. No. C-3619; Softsearch Holdings, Inc., Dkt. No. C-3759; Hoechst
AG and Rhone-Poulenc S.A. (Aventis S.A.), Dkt. No. C-3919.
Q. 39. How does the Commission select a divestiture trustee?
A: Typically, Commission
staff uses its sources in the industry, as well as the respondents, to provide
names of trustee candidates. The staff assures that the candidates have no
conflict, or appearance of conflict, of interest. Then it interviews
candidates, speaks with references, and makes a determination whether a
particular candidate should be recommended to the Commission. Staff is looking
for someone who - in addition to having no conflict - may have experience
divesting assets in the affected industry or under these type of circumstances.
Staff's experience with both divestiture trustees and monitor trustees has been
very positive to date.
Hold Separate Orders
Q. 40. What is a hold separate order, and what is its purpose?
A: A hold separate order
keeps the "eggs unscrambled" pending divestiture by requiring the
divestiture assets to be operated separately from and independently of
respondent's business. It preserves the assets to be divested and maintains
interim competition (as well as the Commission's remedial options if it changes
its views on the scope of assets to be divested after the public comment
period) by preventing commingling with the respondent's business. It prevents
the transfer of competitively sensitive information. The purpose is to prevent
interim competitive harm and to preserve the viability and competitiveness of
the assets pending divestiture. By taking the assets out of the hands of the
respondent, they should be better protected from intentional or unintentional
physical or intangible deterioration that would impact their ability to be
operated in a manner that maintains or restores competition. Further, the
respondent should be unable to exercise any market power it might have gained
from the merger. As an alternative to (and sometimes in conjunction with)
taking control of the assets from the respondent, a monitor trustee may be used
to oversee the operations and maintenance of the assets. See Q.36.
Q. 41. Are hold separates required?
A: Generally, yes, if
there is no up front buyer. (A recent change in Commission practice provides
that the Commission may issue an order to hold separate when it accepts the
consent for public comment, thus dispensing with the previous use of
"Agreements to Hold Separate" that then became part of the order when
it became final.)
The hold separate order
has usually covered the assets to be divested rather than the assets to be
retained by respondents. A monitor trustee has usually been appointed to
monitor compliance and oversee the business. The held-separate business is an
independent, autonomous operating business unit. See, e.g., BPAmoco/Arco,
Dkt. No. C-3938; Exxon/Mobil, Dkt. No. C-3907; Precision Castparts,
Dkt. No. C-3904; Dominion, Dkt. No. C-3901; and VNU, Dkt. No.
C-3900.
In some cases, the
Commission has issued an order to maintain assets to preserve the assets to be
divested without requiring that they be operated separately. The Commission has
also appointed a monitor trustee in some of those cases. See, e.g.,
Dow/Union Carbide, Dkt. No. C-3999; El Paso/Coastal, Dkt. No.
C-3996; CSC/Mynd, Dkt. No. C-3991; Glaxo/SmithKline Beecham,
Dkt. No. C-3990 (monitor appointed); Philip Morris/Nabisco, Dkt. No.
C-3987; Novartis, A.G./AstraZeneca, Dkt. No. C-3979 (monitor
appointed); Delhaize/Hannaford, Dkt. No. C-3962; Pfizer
Inc./Warner-Lambert, Dkt. No. C-3957; FMC Corp./ Solutia Inc. and
Astaris, Dkt. No. C-3935 (monitor appointed); Duke Energy,
Dkt. No. C-3932; Rhodia, Dkt. No. C-3930.
Q. 42. How broad will the hold separate entity have to be to satisfy the FTC?
A: It depends on the
facts of the individual case and on what business units as a practical matter
can be held separate. If the assets to be divested are part of a larger
operating unit, the whole unit will generally be held separate.
Q. 43. Do up front buyers eliminate the need for hold separates?
A: Not necessarily. To
the extent that the buyers are going to take over the divested assets
immediately, this might eliminate the need for a hold separate. However, where
the buyer of the divested assets may not take immediate, or almost immediate,
possession of the assets, the mere presence of an up front buyer does not
eliminate the need for a hold separate order. All assets, some more quickly
than others, are subject to wasting or deterioration; potentially reducing both
interim and long term competition. A hold separate order is intended, in part,
to eliminate the respondent's ability to influence that pace of wasting or
deterioration, and to eliminate the ability of the respondent to manipulate the
use of those assets to obtain or maintain short term market power. Although the
buyer of the divested assets could insert general and specific clauses,
including penalties, into the purchase agreement to address the possibility of
the wasting and deterioration of assets to be acquired, enforcement of such
clauses, if required, will take time, and competition in the interim may be
reduced.
Prior Notice/Approval
Q. 44. When are prior notice provisions required?
A: It depends on the
nature of the complaint market. See Statement of Federal Trade
Commission Concerning Prior Approval and Prior Notice Provisions (Policy
Statement), issued June 21, 1995, 60 Fed. Reg. 39,745-47 (Aug. 3, 1995); 4
Trade Reg. Rep. (CCH) ¶ 13,241. The Commission stated there that a prior
notice requirement may be used in a merger order if the Commission determines
there is a "credible risk" that the respondent might "engage in
an otherwise unreportable [under the HSR Act] anticompetitive merger." The
Policy Statement explains that the need for a prior notice requirement will
depend on circumstances such as the structural characteristics of the relevant
markets, the size and characteristics of the market participants, and other
relevant factors. The test is, thus, whether there are firms in the market in
question, the acquisition of which would not likely be reportable, and whether
market conditions suggest that a non-reportable transaction might have likely
anticompetitive effects. Recent increases in the Hart-Scott-Rodino filing
thresholds may make use of the prior notice provision more common. See,
e.g., In the Matter of Deutsche Gelatine-Fabriken Stoess AG and Goodman Fielder
Limited, File No. 011 0117, which requires Goodman Fielder (the acquired
firm) to notify the Commission if it intends to complete certain described
transactions, some of which might otherwise not be reportable.
Q. 45. When are prior approval provisions required?
A: The Policy Statement
also stated that the Commission may include a narrow prior approval
provision in a merger order "where there is a credible risk that a
company that engaged or attempted to engage in an anticompetitive merger would,
but for the provision, attempt the same or approximately the same merger."
See, e.g. In the Matter of Deutsche Gelatine-Fabriken Stoess AG and Goodman
Fielder Limited, File No. 011 0117, which prohibits DGF from acquiring any
of the assets Goodman Fielder retained (which would approximate the same
anticompetitive merger) without the prior approval of the Commission. Generally
the required divestiture would not be covered because it is not the "same
merger."
The Commission has
recently issued an order imposing a prior approval requirement on a buyer of
divested assets in Nestle, Dkt. No. C-4028. As stated in the
Commission's Analysis Of Proposed Consent Order To Aid Public Comment in
connection with that matter, the Commission does not routinely require
acquirers of divested assets to obtain approval before subsequent sales. In
this case, however, the Commission concluded that such a provision was
appropriate because there was a high probability that the acquirer would resell
the assets, possibly within the next two to five years.
Endnote:
1. It is clear that the Commission has wide discretion in its ability to order effective relief. See, e.g., Olin Corp., 113 F.T.C. 400 (1990), aff'd, Olin Corp. v. FTC, 986 F.2d 1295 (9th Cir. 1993); Ekco Products Company v. F.T.C., 347 F.2d 745 (7th Cir. 1965). Thus, these "frequently asked questions" do not include questions as to whether the Commission has the authority to order a specific type of relief; instead they have been compiled from many years of negotiations between the FTC's staff and the parties and relate to the questions that have arisen most often as to the specific requirements the Commission has determined are necessary to achieve effective relief in horizontal merger cases. They are being published in order both to give guidance as to past practice and to elicit comment and further dialogue from interested parties with an eye towards future practice. The answers are drawn from prior cases, as well as positions that have been set out by the staff in speeches, articles, and elsewhere. The discussion here is only about horizontal merger cases; however, the principle - that any divestiture or remedial provision must be considered sufficient to maintain or restore competition - applies to vertical mergers and non-merger joint ventures as well.