Buyer Beware—Don’t Buy an Antitrust Liability

When acquiring a company or merging, are you conducting due diligence on the target’s compliance with competition laws? If not, you may be making a big mistake.

Companies routinely conduct due diligence on environmental, anticorruption, tax and litigation matters, but very few buyers conduct due diligence for potential antitrust problems of a target. Conducting due diligence of a target’s antitrust compliance efforts could save a company millions of dollars down the road.

A few recent cases highlight the problem of buying antitrust liabilities.

Argos, a large cement company, encountered problems when it acquired a small concrete company in Savannah, Georgia. Unbeknownst to Argos, the Savannah company had been agreeing with competitors to rig bids for road contracts in Georgia and South Carolina. As a result, once this came to light Argos entered into a non-prosecution agreement with the Justice Department and paid a $20 million fine to resolve the charges.

In Europe, the risks are even higher with the European Commission aggressively going after owners of businesses for the wrongdoing of acquired businesses. In September 2021, the Commission upheld a fine against NEC Corporation for the period it owned Tokin, which participated in a cartel to fix the price of capacitors. While the cartel lasted from 1998 through 2012, NEC Corporation owned Tokin starting in 2009. The Commission fined NEC as an owner of Tokin, even though NEC claimed it had no knowledge of the cartel activity of its subsidiary and even though the companies maintained corporate formalities.

Indeed, there is a growing line of cases in Europe of private equity funds and parent companies being held liable for the sins of companies they own or partially own. While the standard is evolving in Europe, we are moving to a rebuttable presumption where the owner will be on the hook for fines if the owner owns the capital or controls the voting rights of a subsidiary committing antitrust wrongs.

Argos and NEC are just a couple examples of new owners being surprised by the antitrust recklessness of acquired companies. The Argos and NEC cases are not isolated ones; there are many other examples of this problem.

Compounding the problem is that we now have a much more aggressive Department of Justice and Federal Trade Commission, both of which are looking to increase antitrust enforcement across the board.

Unfortunately, the law even in the United States does not provide much of a shield to buyers. Liability to a successor entity in antitrust cases is very hard to avoid. Civil liability can possibly be allocated to the seller in deal agreements, but criminal conduct is almost impossible to avoid. And, as demonstrated by the European cases, lack of awareness of the target’s illegal conduct is not a defense.

In light of this, we recommend to our clients to add antitrust due diligence as a key component of the due diligence of a target company. We recommend it even where the underlying deal itself raises no antitrust concerns. For example, a private equity fund buying a company in a market in which no portfolio companies competes is unlikely to raise any issues in terms of the substantive merger review, but the target company could still be an antitrust risk to its new owners. The same can also be true for an acquisition by a SPAC. Earlier this year, ION, a SPAC, announced a merger with Taboola, an Israeli company competing in the digital advertising industry. After the merger was announced but before the merger closed, Taboola announced that it was under criminal investigation by the Department of Justice for its hiring practices.

At Vinson & Elkins, our due diligence focuses primarily on the Sherman Act Section 1 risks of the target. Section 1 prohibits anticompetitive agreements among competitors, such as price fixing and bid rigging. These are the types of cases that are prosecuted criminally.

Today in our due diligence, we ask whether the target has risk factors for future antitrust investigations. We are focusing particular interest in industries where there have been major antitrust investigations in the past, such as chemicals, public contracting, foods, automotive and semiconductors, as well as other highly concentrated industries.

As part of that process we look to detect potential antitrust criminal risks as well as reviewing the processes that should be in place in order to catch them before they happen. In particular, we are inquiring whether the target has adequate antitrust procedures and compliance controls. We are asking whether anyone has alerted the company of potential violations through hotlines. And we are working with companies to draft indemnities and warranties that protect the buyer.

As an essential part of our due diligence review, we are asking targets about their contacts with competitors. We are reviewing key agreements with competitors, and we are looking at past antitrust activity in the industry. We are reviewing information about pricing patterns of the target and the industry in general, among other things.

In sum, it is much better for buyers to try to mitigate the risk of buying an antitrust problem through effective due diligence of the target. Even if the buyer decides to go forward with a risky deal, the buyer can understand the problem and implement positive changes to improve the antitrust compliance of the acquired company as a result of the due diligence.

Reprinted with permission from the “DECEMBER 7, 2021″ edition of “LAW.COM”© 2021 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.