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For a deal that General Electric Co.’s Chairman and CEO Jack Welch said would have no antitrust problems, GE took special measures to protect itself from liability if competition authorities rejected the Honeywell International Inc. acquisition. GE included in the agreement a cap on the value of assets it would have to divest to win antitrust approval. Though the company was free to make divestitures above the cap, the language is likely to preclude any chance that Morristown, N.J.-based Honeywell could successfully sue Fairfield, Conn.-based GE for failing to make the $4 billion in asset sales demanded by the European Commission in exchange for approving the $41 billion deal, mergers and acquisition lawyers said. Such detailed antitrust clauses, though not new, are getting more attention as the legal and regulatory environment becomes more challenging for merging companies. To limit their liability, companies increasingly are trying to specify how much risk each party must incur for deals to get done. “These conditions are becoming critically important,” said David Balto, a partner at law firm White & Case in Washington, D.C. “You will see a lot more attention to the language in the contracts.” One New York M&A lawyer said the GE-Honeywell merger should be the “alarm bell” for merging companies. It demonstrates the importance of specifying the steps companies must take to win regulatory approval, he said. “People are not paying enough attention to these clauses,” the lawyer said. “Too often you draft these merger agreements without stopping to think about what these clauses mean.” Companies are forced to spend more time on these provisions both because of the threat from U.S. antitrust regulators and the growing perception that the European Commission is tightly policing mergers between large U.S. corporations, lawyers said. Businesses also fear being caught without protection if deals collapse. Several attorneys said the recent Tyson Foods Inc.-IBP Inc. court battle shows that the drafting of a merger agreement can cost a company and shareholders billions of dollars. That case did not involve a dispute over antitrust provisions, but rather was a fight over how the warranties were written. A judge ruled in IBP’s favor, saying Tyson must honor the merger agreement. “Sophisticated counsel have understood that these issues existed,” a second lawyer said. “Will there be heightened sensitivity now? Yes.” A review of merger agreements between GE-Honeywell, American Online Inc.-Time Warner Inc., Chevron Corp.-Texaco Inc., Nestl� SA-Ralston Purina Co. and UAL Corp.-US Airways Group Inc. shows that companies generally either leave the antitrust obligations ambiguous, specify what must be sold or place a cap on divestitures. A New York M&A lawyer said companies make a tactical decision about whether the antitrust provision should be specific or general. “It is better for people to define what it means,” the lawyer said. “But if you leave it ambiguous, then there may be more incentive to make concessions to get the deal done.” That is because the acquirer typically is unsure if it has done enough to satisfy its obligation to try to win antitrust approval, the lawyer said. To avoid costly litigation by its merger partner, the acquirer might make greater divestitures than it would otherwise, he said. The AOL-Time Warner deal illustrates how such issues are handled in many deals. The contract required AOL and Time Warner to use their “reasonable best efforts” to win regulatory approval. That is modified by other language saying neither AOL nor Time Warner should be required to make any divestiture or other action that would result in a “material adverse effect” on the combined companies. The MAE clause, as it is called, is defined in the AOL-Time Warner deal as any event, change or circumstance likely to be materially adverse to the business, financial condition or results of operation of the entity and its subsidiaries. Yet precisely what that means likely would have been resolved by a judge if the deal fell apart. In United-US Airways, the companies specified a large sale of assets for what would later be called D.C. Air. But they were almost silent on additional obligations of United to secure government approval. The companies agreed to take “all reasonable efforts” to win antitrust clearance, but they never defined what this phrase signified or limited it with an MAE clause. Nestl� SA agreed to use its “reasonable best efforts” to gain approval to buy Ralston. But it modified this commitment by saying it could not be required to make a divestiture that would be “material in relation to the continuing operations of the combined U.S. pet food businesses.” Nestl� then specifically agreed to sell Meow Mix cat food if necessary to win approval. It also said it would pay Ralston $150 million if the deal dies because it refused to divest other business demanded by the government. Nestl� exempted from this provision the sale of other cat food products. It also said that provision would be void if the government demanded the sale of all of Ralston’s pet food products. Chevron and Texaco agreed to use “best efforts,” including the sale of business units, to surmount antitrust impediments. But that was modified by an MAE clause in the agreement that said Chevron did not have to do anything that could be “reasonably expected” to result in a material adverse effect to the company. The energy companies go further in defining what constitutes a material adverse effect. They specify that the required sale of refining, marketing or transportation of petroleum products in the western United States would amount to a material adverse effect. Nearly as detailed as the GE-Honeywell deal was the agreement between PepsiCo and Quaker Oats Co. The companies agreed to use their reasonable best efforts to secure antitrust approval. But instead of limiting that with an MAE clause, they said that Pepsi is exempt from having to “dispose, hold separate or restrict its ownership” in any of its existing businesses, with the exception of its All Sport beverage, which it agreed to sell. GE and Honeywell took a slightly different approach. Like the other deals, GE agreed to use reasonable best efforts to get antitrust clearance. It then limited this obligation with an MAE clause, but triggered only by the required sale of assets worth more than $500 million. This was the only deal to use a dollar trigger. Some lawyers warn against getting too detailed in the merger agreements because antitrust regulators could later use the provisions against the companies by demanding the maximum divestiture permitted under a deal. “You don’t want to tell the regulators up front by putting it in a contract what you would be willing to divest, or they always would ask for it,” a Wall Street lawyer said. But a former regulator now in private practice said that concern is overblown. Although a merger agreement may require a company to sell assets to secure antitrust clearance, the agencies often do not demand completion of those divestitures, the former regulator said. Copyright (c)2001 TDD, LLC. All rights reserved.

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