10 key themes
Prepare for a more litigious environment
In 2021, evolving market conditions, including regulatory intervention, technological innovation, a new US presidential administration and the continuing impact of COVID-19, will likely shift deal dynamics and contribute to a higher volume of threatened deal disputes, both with authorities and between merging parties.
Against this backdrop, it is vital for companies to adopt effective strategies to identify and mitigate transaction risks, while remaining live to opportunities of deal-making in this environment.
Practically, this means sellers and buyers should equip themselves with the right transaction toolkit, including support and advice from both transactional and litigation teams.
Shifting deal dynamics
In 2020, the COVID-19 crisis brought with it the threat of merger litigation, including a dispute between LVMH and Tiffany & Co regarding LVMH’s efforts to obtain antitrust approvals and a dispute between EssilorLuxottica and GrandVision regarding GrandVision’s management of its business in light of the pandemic. Although many of these types of dispute settled in the latter half of 2020, there has nonetheless been a growing trend towards more threatened deal disputes.
In light of increased deal uncertainty and risk, 2021 is likely to see more transacting parties reverting to, or at least threatening, litigation to challenge the scope of provisions in their transaction agreements.
It is increasingly important for agency-facing and litigation teams to work together closely throughout the life cycle of a transaction, with agency-facing, deal-party and shareholder disputes arising with greater frequency at different stages of a transaction, covering everything from disputes regarding compliance with Sale and Purchase Agreement terms and conditions, through to completion statement and warranty claims, and regulatory reviews.
Avoiding disputes – deploying the right transaction toolkit
Whether you are a seller looking for speed and deal certainty, or a buyer seeking transactional flexibility in evolving regulatory and market conditions, integrating disputes experts into your antitrust and corporate teams will help you better prepare for the merger control hurdles and disputes that may arise.
- Breaking up
In an environment in which the outcome of merger control review is becoming increasingly uncertain, merging parties may want to consider negotiating reverse termination fees that become due in the event of failure to receive the requisite regulatory clearances. The triggering events and exceptions to these fees can be nuanced and can make a difference for a well-advised party.
- Protecting yourself
Companies may consider incorporating extensive obligations to close the deal swiftly, including through contractual obligations to obtain promptly all necessary regulatory clearances, potentially subject to remedies required by the agencies. The negotiation of such clauses will involve a thorough analysis of potential antitrust risks.
- Long-stop dates
Long-stop dates can be valuable in uncertain economic markets to ensure a purchaser’s prompt compliance with its regulatory obligations. Long-stop dates should be balanced against the need for time to comply with increasingly lengthy merger control timetables internationally and also to take account of the interplay between those investigations and any subsequent remedies process.
- Being specific
Specificity is key with respect to contractual provisions which address regulatory approval obligations. Companies should ensure that deal documentation properly outlines the types of actions required to satisfy merger control processes and that documentation reflects negotiated terms specific to the jurisdictions where regulatory approval is required. This may not only prevent future litigation but will provide greater deal certainty for buyers and sellers alike.
- Consistent communications
In light of the extensive document disclosure obligations in many merger control processes internationally, communications – both internal and external and with investors and other stakeholders – must be clear, unambiguous and consistent.
We saw a number of significant substantive agency challenges in 2020. In the EU, the General Court upheld the appeal brought by CK Hutchison against the EC’s prohibition of its proposed acquisition of rival company O2 UK – the first review of the ‘significant impediment to effective competition’ test that was introduced by the EU in 2004. Meanwhile, thyssenkrupp’s appeal against the EC’s decision prohibiting the proposed joint venture with Tata Steel is pending before the General Court and covers a broad range of issues.
In the UK, the Competition Appeal Tribunal (CAT) has (in a rare move) remitted the CMA’s phase 2 prohibition decision back to the CMA for reconsideration as a whole in the JD Sports/Footasylum completed merger.
In the US, the DOJ has shown an openness to using non-traditional tools for challenging transactions it deems problematic, using arbitration to resolve a dispute over market definition in Novelis/Aleris – a first for the DOJ – and has indicated its intent to keep arbitration in its repository of tools. The DOJ’s recent challenge to Visa’s acquisition of Plaid is an example of authorities viewing acquisitions of nascent or potential competitors in high-tech markets with more scepticism.
In the US in particular, the agency lawyers investigating the deal often pivot to a litigation mindset much earlier than merging parties may realise. It’s important to be aware of this fact and ensure that party executives are delivering a clear, consistent and persuasive narrative about the deal’s pro-competitive benefits from day one.
Procedural disputes are also becoming more commonplace. The recent, failed attempt by the CMA to fine JD Sports for its alleged failure to comply with a hold separate order (issuing the joint largest fine to date for such a breach) illustrates the heightened interventionism of the UK authority and highlights the need for parties to ensure they are ready to respond to agency challenges as necessary. Meanwhile, in the US, the DOJ has filed its first enforcement action in decades relating to a third party’s failure to comply with a request for information.
As the decisional practice of agencies evolves, it is strategically advantageous for parties to be aware of the ways in which the execution of transactions may be hindered or even thwarted. Ensuring involvement of litigation teams in transactions from the outset will help lay the foundation for substantive or procedural disputes that may arise later.
Strategic investors looking for regulatory approvals in cross-border transactions should take the time and make an effort early on to prepare a consistent line of argument and evidence to support their multi-jurisdictional filings, including increasingly important Foreign Investment Control filings. 'Rushing the regulators' no longer works for larger deals. Closing dates need to be set with sufficient lead times to provide headroom to resolve the unexpected before running into default situations and disputes.
Looking ahead in 2021:
- Wherever you are in the world, mitigating against litigation risk to create greater deal certainty will be paramount in 2021.
- As approaches continue to evolve in the US, Europe and the UK, expert knowledge of the governmental and regulatory landscape will be key to implementing successful commercial strategies. Given the expected increase in international co-operation during the year to come, international co-ordination will be critical to maximising the prospects of transaction success.
- An integrated antitrust, litigation and corporate team is critical throughout the process, regardless of whether the transaction is ever litigated in court, to guard against potential deal disputes and to manage effective affirmative messaging about pro-competitive deal rationale and merger defences.
We have seen a marked uptick in merger litigation challenging agency decisions blocking transactions, for example:
- in the US, we represented Evonik in its landmark victory in February 2020 in litigation brought by the FTC to block its acquisition of PeroxyChem (the first time the FTC had been defeated at trial since 2015);
- at EU level, we led the only two successful appeals of EC merger prohibitions in the last 18 years. We represented CK Hutchison in overturning the EC’s 2016 prohibition of its proposed merger with O2 UK, with the EU’s General Court ruling in May 2020. We represented UPS in the annulment of the EC’s 2013 prohibition of its proposed merger with TNT, first by the General Court in 2017 and subsequently on appeal by the EC in the Court of Justice of the EU (CJEU); and
- in the UK, we represented JD Sports in the CAT, which resulted in the remittal back to the CMA for full reconsideration of the proposed JD Sports/Footasylum merger, which the CMA blocked in May 2020 (only the second time that the CAT has remitted a merger decision back to the CMA).