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In almost any merger or acquisition, the acquiring company insists on “conduct of business” covenants to ensure that the target company maintains the value of its assets before closing. Imagine that in the middle of negotiating an important acquisition agreement, your antitrust counsel suddenly opines that certain routine conduct-of-business covenants are no longer permissible. This is precisely what is happening as some counsel overreact to the Department of Justice’s recent gun-jumping lawsuit against Qualcomm Inc. In-house counsel need to be skeptical of such overly cautious gun-jumping advice, which can jeopardize the success of corporate transactions. JUMPING THE GUN The Hart-Scott-Rodino Act requires that transactions of a certain size be reported to the two federal antitrust authorities (the Department of Justice and the Federal Trade Commission) and that merging parties observe a pre-closing waiting period. This waiting period gives the antitrust agencies a chance to review a transaction for potential anti-competitive effects before the parties can close the transaction. Gun jumping occurs when a buyer exercises control over the to-be-acquired firm before the expiration of the Hart-Scott-Rodino waiting period. When parties are competitors, certain joint activity or information sharing before closing can also violate the Sherman Act. Whether a gun-jumping violation exists is a separate question from whether the underlying business combination violates the antitrust laws. Unfortunately, neither of the antitrust agencies has provided specific guidelines governing what is and what is not allowable during the period between signing and closing. Although guidelines were promised by then-Assistant Attorney General for Antitrust Charles James in September 2002, his successors appear to have concluded that the fact-intensive nature of this area may make such guidelines too vague to be of any use. Because of the very limited case law in this area and the lack of agency guidelines, antitrust counsel are left to interpret agency “lore” in the form of speeches, comments, case filings, informal opinions, and articles by FTC and Justice Department staff. These materials can be overly cautionary, contradictory, and subject to competing interpretations. A 1999 speech by a former director of the FTC’s Bureau of Competition, for example, made the incredible claim that “once a purchase contract is signed, the parties may not proceed further with joint activity.” Statements such as these fail to recognize merging parties’ legitimate needs for integration planning and encourage excessive caution on the part of some counsel. A November 2005 speech by William Blumenthal, general counsel for the FTC, retracted some of the more extreme agency statements in this area and signaled that some counsel were being overly cautious. He noted that the antitrust “agencies recognize that some information exchanges and pre-consummation collaboration necessarily occur in all mergers.” Although he did provide some general guidance on due diligence and integration planning, Blumenthal unfortunately did not address merger covenants in any detail. Perhaps because of the paucity of precedent, there are few more contentious areas among antitrust lawyers than the scope of allowable coordination and integration planning among merging parties before Hart-Scott-Rodino clearance or closing of the transaction. As a result, in-house counsel are left to the mercy of their (and opposing) antitrust counsel’s tolerance for risk. In-house counsel are frequently given lists of rigid “don’ts” that may conflict with the need to protect their bargain or plan for integration. The worst result is when the target’s antitrust counsel takes an overly conservative view, thus driving the pace and scope of integration planning. THE QUALCOMM COMPLAINT The Justice Department has repeatedly said bringing gun-jumping cases is a priority. In April of this year, President George W. Bush’s administration brought its third gun-jumping case, in which it sued and simultaneously settled with Qualcomm and Flarion Technologies. In the Qualcomm complaint, the Justice Department alleged that Qualcomm obtained operational control of Flarion’s business before Hart-Scott-Rodino clearance, in part through application and enforcement of various covenants in the parties’ merger agreement. The merger agreement prohibited Flarion from acquiring, selling, or licensing its intellectual property to third parties; entering into material contracts; hiring employees (except in the ordinary course of business); and making business proposals to customers without Qualcomm’s prior consent. The Justice Department also alleged that Qualcomm and Flarion’s actual behavior went well beyond the scope of the covenants and permissible conduct. The department alleged that Qualcomm exercised significant, day-to-day control over Flarion’s business, including participating in the routine hiring of employees, participating in the marketing of products and services to customers and prospective customers (which entailed approving price quotations and margin targets), discouraging Flarion from serving smaller customers, and discouraging Flarion from providing pricing information to potential customers. Through these efforts, Qualcomm appears to have attempted to bring Flarion’s policies and operations in accord with Qualcomm’s practices and its future plans for Flarion’s technology. The Qualcomm case has received attention because the gun-jumping violation was based in part on merger covenants, rather than just the parties’ conduct. This is not unprecedented, however. Several years ago, the Justice Department challenged considerably more problematic covenants in the Computer Associates case, including covenants that required the purchaser’s approval for the prices and terms the target company would offer to its customers. Although the Qualcomm complaint has been interpreted by some as expanding the range of prohibited conduct by merging parties, the case was in fact entirely consistent with previous gun-jumping cases brought by both the Justice Department and the Federal Trade Commission. The Justice Department’s complaint should not be read (as some have done) to say the merger covenants, standing alone, were sufficient to violate the Hart-Scott-Rodino Act. Except for the prohibition on making proposals to customers, the covenants are fairly common and, by themselves, not problematic. In interviews after the case, enforcement officials indicated that Qualcomm’s actual conduct, more than the merger provisions, was the basis for the lawsuit. Counsel, particularly in-house counsel, should be wary of advice suggesting that standard merger covenants are now illegal or ill-advised. In the prior two gun-jumping cases (Gemstar and Computer Associates), the Justice Department expressly permitted ordinary course covenants, material-adverse-change limitations (a common means of allocating risks between the signing and the closing of an acquisition agreement), and reasonable due diligence. The division’s censure in the Computer Associates case, for example, was directed at covenants that established prices or discounts or that gave one party the right to negotiate or approve the other’s proposed purchases or sales. Unlike other gun-jumping cases, Qualcomm and Flarion reported and corrected the alleged violation. Historically, the antitrust agencies have been willing to limit or forgo penalties when the merging parties quickly and fully report and correct gun-jumping activity. Here, the parties eliminated the covenant requiring Qualcomm’s approval to make proposals to customers — the only really problematic merger covenant — and put a stop to Qualcomm’s day-to-day control of Flarion. In return for voluntarily reporting and correcting the prohibited activity, Qualcomm obtained a favorable settlement with the Justice Department. Although Qualcomm will still pay a $1.8 million fine, this represents only half of the maximum penalty available. In addition, the final judgment does not include the onerous and embarrassing conduct prohibitions and monitoring requirements typically required. For example, the final judgments in the Gemstar and Computer Associates cases require 10 years of compliance reporting and monitoring. In addition, Qualcomm and Flarion were not charged with a Sherman Act violation, which they clearly could have been, as they had been competitors in the sale and licensing of technology for wireless networks. THE ROLE OF IN-HOUSE COUNSEL As counsel with the best understanding of their clients’ reason for doing a deal, the business opportunities to be captured, and the risk of deterioration of the target company’s assets, in-house counsel have a significant role to play in securing appropriate merger covenants. As the lawyers closest to the integration planning and activity, in-house counsel also have a critical role in preventing gun-jumping violations. They have the best opportunity to educate key people on gun-jumping issues, to monitor ongoing activity, to stop and modify conduct that is across the line, and, if appropriate, to report prohibited conduct to the government to avoid a lengthy, disruptive investigation that may delay the closing of the transaction. Although it is customary to advise deal counsel and deal clients to bring antitrust counsel in early to avoid gun-jumping activity, in-house counsel must be alert to an excessively cautious approach by outside counsel, either from their side of the table or from across the table. Such an approach can have serious implications for the success of the transaction, as the antitrust agencies have recently recognized. In-house counsel should push their outside counsel to think creatively about how to obtain the business objectives of the proposed transaction without running afoul of gun-jumping prohibitions. Good antitrust counsel should be able to advise in-house counsel how (not whether) an acquiring company can obtain needed due diligence, obtain necessary merger covenants, and engage in integration planning with the other company — even when the two companies are competitors. Although merging parties certainly can go too far in interacting with one another before closing a transaction, there is more flexibility than some antitrust lawyers advise, and the Qualcomm case in no way limits merging parties’ ability to achieve their business objectives.
Darren S. Tucker and Bilal Sayyed are counsel in the D.C. office of O’Melveny & Myers, where they specialize in antitrust law. O’Melveny & Myers represented Gemstar in the gun-jumping matter discussed here.

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