Safeguarding Your M&A Deal from Private Antitrust Challenges
Imagine that your company has agreed to a multibillion-dollar acquisition of a competitor. After spending millions in fees and successfully navigating the antitrust process, you are on the verge of closing. Then, at the eleventh hour, a group of customers sues to block the deal and asks the court to stop the closing.
This scenario is not fiction. It has occurred at least 12 times since 2007, including in Pfizer Inc.s $68 billion acquisition of Wyeth, InBevs $52 billion acquisition of Anheuser-Busch, Siriuss $13 billion merger with XM Radio, United Air Lines Inc.s $3.2 billion acquisition of Continental Airlines Inc., and Southwest Airlines Co.s $1.4 billion acquisition of AirTran Airways Inc. So far, no court has ordered an injunction, but one case, Blessing v. Sirius XM Radio (2011), resulted in a settlement with consumers in which the combined Sirius XM Radio agreed not to raise prices.
When planning any large transaction, counsel needs to evaluate the likelihood of a private challengeand consider the steps to take to reduce the chances of a suit and how to be best positioned if it occurs.
Who is likely to sue?
Private antitrust suits brought under Section 7 of the Clayton Act can come from competitors, distributors, suppliers, or even targets, but recent suits have generally come from parties customers. Consumers pose the greatest threat to a deal. Because they are the group that the antitrust laws are designed to protect, they face the fewest impediments. In particular, consumers can easily establish antitrust standinginjury caused by a loss of competitionbecause they suffer harm when a transaction has anticompetitive effects, such as higher prices.
Which deals are most susceptible to private challenges?
Recent private suits by consumers share three elements:
- Large transactions (often multibillion-dollar deals).
- Consumer products or services (such as pharmaceuticals, airline travel, beer, or satellite radio).
- The potential to affect a large number of consumers.
When are plaintiffs most likely to sue?
Challenges can occur and have occurred after a deal announcement, but before the end of the government antitrust review (Anheuser-Busch/InBev); after the government review process, but before closing (Pfizer/Wyeth); and after closing (Sirius/XM Radio).
Plaintiffs who sue before closing can only obtain injunctive relief based on speculative harm, since they cannot suffer actual damages, such as higher prices, until after closing. Yet, when they seek to delay or prevent closing, these plaintiffs put substantial pressure on merging parties.
Courts treat preliminary relief as an extraordinary remedy with an appropriately stringent standard. A consumer seeking to block a closing must show that damages will be insufficient and that the case is likely to succeed on the merits. Those can be high hurdles. An ongoing government investigation poses an additional obstacle for a lawsuit filed before a deal closesit is difficult to convince a court to block the closing when by law the parties cannot close during the waiting period required by the Hart-Scott-Rodino Act (HSR).
Nonetheless, a well-pleaded emergency injunction motion could create a legitimate risk of a delayed closing. Even if the merits of the case are dubious, judges and juries can be unpredictable, as most have little or no experience analyzing mergers.
Plaintiffs who sue after closing lack the leverage of a pre-closing suit, but they can (and must) prove anticompetitive harm caused by the merger, such as higher prices, and can win monetary damages or behavioral remedies. Consumers challenging the Sirius/XM Radio merger, for example, negotiated a settlement valued at $180 million that prohibited future price increases for five months.
Consumers face an uphill battle in convincing a court to unwind a consummated merger, because it is very difficult for plaintiffs to show that monetary damages are inadequate. In Taleff v. Southwest Airlines (2011), the Ninth Circuit sanctioned plaintiffs attorneys for seeking to enjoin the Southwest/AirTran merger after they failed to establish the need for such an extreme remedy. Courts are also wary of taking on the responsibility of overseeing a divestiture or an unwinding.
How can parties minimize the risk of a private lawsuit?
The Purchase Agreement
Parties should consider using the contract to limit the risk of private merger litigation. A seller might propose an indemnity if a deal is blocked or delayed, or a requirement that the buyer seek an early settlement with a private plaintiff. A buyer might propose that the seller be required to assist in and contribute resources to the defense of a suit. Of course, some obligations could give plaintiffs leverage by imposing unreasonable contractual restrictions, such as requiring settlement of all outstanding claims by a certain date.
Documents and Public Statements
Antitrust lawyers constantly warn clients not to create harmful documents or make damaging statements that suggest that a deal could reduce competition. This concern is even greater when a private suit is possible because juries or judges have less experience evaluating mergers, and could place great weight on a statement that a seasoned antitrust enforcement agency would disregard as puffery or uninformed. Parties should be particularly wary of any documents that project prices post-closing.
Even after closing, parties should remember that their statements and actions can still serve as evidence in a Section 7 suit to block or unwind a merger or acquisition. In particular, buyers in especially vulnerable transactions should be very careful with price increases after closing. A poorly timed or poorly described price increase could bolster a private merger challenge.
Parties exposed to the threat of a private merger challenge should prepare a strategy to defend against an emergency injunction motion before a complaint is ever filed. Although much of that work will overlap with the defense of the transaction before governmental agencies, there should be a particular focus on ensuring that emergency injunctive relief is unnecessary and preparing witnesses to testify regarding the relevant markets and competition.
What strategic determinations would your company face if a challenge were to occur?
For an HSR-reportable deal, the government is likely to consider any legitimate competitive concerns raised in a private consumer lawsuit. Accordingly, private merger challenges are unlikely to affect substantive product overlap analysis or strategy with the governmental agencies. Most importantly, settlement with the government can make a private suit much more difficult or impossible. A government investigation can affect a private plaintiffs ability to obtain preliminary reliefor permanent relief or damages if the government considered an issue and decided not to challenge the deal.
Parties must first consider whether they should move to dismiss a complaint. The complaint filed in the Pfizer/Wyeth case, for example, was ultimately dismissed with prejudice. The decision on a motion to dismiss will be affected by the status of the transaction, whether there is a realistic threat of preliminary relief, and the quality of the compliant.
Some defendants have found it advantageous to settle with plaintiffs quickly. Such a move has clear benefits of removing uncertainty and avoiding the cost of potentially very burdensome discovery, but this can also have costs because it creates the risk of encouraging challenges to future deals. After Delta Air Lines Inc. and Northwest Airlines Inc. paid $5 milliona small fraction of the $3.1 billion transactionto settle a challenge by air travelers, every subsequent major airline merger faced a similar lawsuit.
Indeed, the same plaintiffs and lawyers have been involved in each case. Unlike Delta, Southwest refused to settle its lawsuit and successfully pursued sanctions against the plaintiffs attorneys, which should dissuade plaintiffs from bringing similar challenges against future Southwest mergers. Parties should strongly consider fighting lawsuits by consumers, especially strike-related suits, like Southwest did, if they expect to make acquisitions in the future.
What are the key lessons for a company merging with a competitor?
Although they rarely succeed, private merger antitrust challenges have been on the rise, and they pose real risks for merging parties. Not only can they be expensive to defend, but they can threaten to delay or wreck a deal.
Before signing a deal with the characteristics most likely to attract a suit, companies should think through how they can mitigate their risks through provisions in the purchase agreement, by carefully monitoring their words and actions, and by being ready to litigate and defend against an emergency injunction motion.
Scott A. Stempel is the leader of Morgan Lewiss antitrust practice. Jonathan M. Rich is a partner in the firms antitrust practice, and Daniel A. Schiffer is an associate. All are resident in the firms Washington, D.C., office.