Top Five Considerations for Drafting Antitrust Risk-shifting Provisions | Practical Law

Top Five Considerations for Drafting Antitrust Risk-shifting Provisions | Practical Law

A discussion of the top five considerations for counsel drafting risk-shifting provisions in a purchase agreement in a transaction with antitrust risk.

Top Five Considerations for Drafting Antitrust Risk-shifting Provisions

Practical Law Legal Update 0-607-5485 (Approx. 4 pages)

Top Five Considerations for Drafting Antitrust Risk-shifting Provisions

by Practical Law Antitrust
Published on 07 Apr 2015 • USA (National/Federal)
A discussion of the top five considerations for counsel drafting risk-shifting provisions in a purchase agreement in a transaction with antitrust risk.
In a merger or transaction with antitrust risk, parties often include provisions in the purchase agreement allocating the risk of obtaining antitrust approval between themselves. These provisions, known as antitrust risk-shifting provisions, are typically used in a transaction between competitors that is subject to review by the Federal Trade Commission (FTC) and the Department of Justice (DOJ) under the Hart-Scott-Rodino (HSR) Act and by foreign antitrust enforcers. Transacting parties generally make antitrust risk-shifting provisions a negotiating priority in a transaction with a risk of substantial antitrust scrutiny and regulatory disapproval. If the antitrust authorities find a transaction has anticompetitive effects, they may:
  • Sue to block a transaction.
  • Commence an informal or formal investigation, including a Second Request.
  • Negotiate a resolution to antitrust concerns, including a settlement that requires the buyer, the seller or the surviving business to divest assets.
Typical risk-shifting provisions may include, among other things:
Counsel should consider the following when negotiating risk-shifting provisions:
  • The extent to which the parties intend to cooperate in obtaining antitrust approval. The parties should consider how they intend to cooperate in obtaining antitrust approval, including how to communicate with and attend meetings with governmental officials, which party controls decisions relating to antitrust strategy and how the parties intend to cooperate in gathering information needed for antitrust agency filings and submissions. For example:
    • the seller may want to have a representative present at all meetings with the staff or officials of the antitrust authorities or only at material meetings; or
    • the buyer may want to specify that it has the sole right to control and direct antitrust strategy in connection with review of the transaction.
    (See Standard Clause, Purchase Agreement: Antitrust Cooperation Provision and Standard Clause, Purchase Agreement: Antitrust Strategy Control Provision).
  • The divestitures the parties are willing to make to obtain antitrust approval. Counsel should consider what divestitures the parties are willing to undertake to obtain antitrust clearance for the transaction. Sellers typically want buyers to undertake an unrestricted divestiture obligation to get the deal done quickly. However, buyers seek to limit their obligation to divest assets to remedy an antitrust enforcement action through provisions that:
    • identify specific assets to be divested, such as a certain plant or facility;
    • cap divestitures, such as by dollar value or revenues generated in the previous year; or
    • specify that only non-material assets will be divested.
    (See Standard Clause, Purchase Agreement: Limits on Potential Divestitures).
  • The divestiture obligations parties have negotiated in similar transactions to obtain antitrust approval. Our What's Market Antitrust Risk-shifting database makes it easy for counsel to find and compare risk-shifting provisions used in both private and public transactions. Counsel can narrow search results by industry, type of risk shifting provision and other facets as well as compare risk-shifting provisions across various deals. Our detailed summaries provide links to the relevant section number in the underlying agreement so that counsel can find risk-shifting language in seconds. Counsel should consider what types of divestiture limitations parties have negotiated in similar transactions, including in the same industry. To do this, counsel should run a comparison of the parties' negotiated obligation to divest in a given industry.
  • The extent to which the parties intend to litigate to obtain antitrust approval. Counsel should consider each party's willingness to litigate if there is an antitrust challenge to the transaction. A buyer may not want to engage in protracted litigation over an antitrust challenge where it has already agreed that it will make certain divestitures to remedy an antitrust concern. A seller may agree to limitations on a buyer's obligation to litigate where it is confident that the buyer's divestiture obligation is likely to remedy the antitrust agencies' concerns. However, a seller may negotiate for an unconditional obligation to litigate an antitrust challenge where it is less confident that the buyer's proposed divestiture limitations will remedy an antitrust concern.
  • Whether to include an antitrust-related reverse break-up fee. Counsel for the seller may want to negotiate for the inclusion of a reverse break-up fee for antitrust failure. This is a termination fee that the buyer agrees to pay the seller if it is unable to close an acquisition because of its failure to obtain the required approvals for the deal under the HSR Act and other antitrust laws. In particular, a seller may seek this added protection where it does not think the buyer's proposed divestiture limitation will remedy the antitrust agencies' concerns. That way, the seller will receive a fee from the buyer even if the agreement is terminated for failure to obtain antitrust approval. (See Standard Clause, Purchase Agreement: Reverse Break-up Fee for Antitrust Failure).