Department of Justice Issues Latest Merger Remedies Manual, Focusing on Preference for Structural Remedies
On September 3, 2020, the Antitrust Division of the U.S. Department of Justice (the “Division”) issued an updated version of its Merger Remedies Manual (“Manual”). Foremost among the changes to the newly issued Manual is the Division’s emphasis on structural remedies as opposed to behavioral remedies. Consistent with the Division’s recent statements and practice, the Manual makes clear that structural remedies are preferred in both horizontal and vertical mergers because “they are clean and certain, effective, and avoid ongoing government entanglement in the market.” Notable is the application of structural remedies to vertical mergers, where conduct remedies have often been the norm.
The Manual sets forth the framework for how the Division may remedy a proposed merger’s competitive harms and is periodically updated to reflect the Agency’s current practices and preferences. In addition to cementing the Division’s preference for structural remedies, the Manual addresses several new topics:
- A description of “red flag” characteristics that “increase the risk a remedy will not preserve competition”
- The Division’s approach to remedies for mergers that have already been consummated
- The Division’s efforts to collaborate with international and state antitrust enforcement agencies
- A description of the duties of the newly formed “Office of Decree Enforcement and Compliance” (the “Office”)
- A description of certain “standard provisions” that should appear in all consent decrees
Each of these topics, discussed in more detail below, provides insight into how the Division addresses anticompetitive aspects of proposed (and consummated) mergers. As such, the new Manual is an important tool for any business involved in a merger that may be scrutinized by the Division or potential divestiture buyer.
The 2020 Merger Remedies Manual Updates
- Affirmation of the Division’s commitment to structural remedies. The Manual states that structural remedies are preferred in both horizontal and vertical merger cases. Structural remedies usually require one of the merging firms to divest part of its business to a third-party buyer. The Division prefers that the parties divest a “standalone” business (i.e., an entire company or collection of assets) rather than portions of a business. Such an approach ensures that the divested business can hit the ground running, so to speak, and sustain pre-merger levels of market competition. The policy also requires that any consent decree precisely list the assets to be divested, in order to avoid potential ambiguities that may delay the divestiture process or fail to resolve the Division’s competitive concerns.
The Manual does allow for the use of pure conduct remedies, but only in very limited circumstances, where the parties can show that (1) a transaction generates significant efficiencies that cannot be achieved without the merger; (2) a structural remedy is not possible; (3) the conduct remedy will completely cure the anticompetitive harm; and (4) the remedy can be enforced effectively. Narrowing the scope of conduct remedies, and possibly raising the burden on the parties to show their appropriateness, is aimed to reduce the Division’s resources spent monitoring corporate behavior and “avoid ongoing government entanglement in the market.”
- “Red flag” warnings that a proposed remedy will not sufficiently preserve competition. The Manual sets forth several “red flag” characteristics of proposed remedies that, when present, suggest that the proposed remedy is unlikely to be acceptable:
- Divestiture of less than a standalone business;
- Mixing and matching assets of both firms in the divestiture;
- Allowing the merged firm to retain rights to critical intangible assets that have been divested;
- Ongoing entanglements between the merged firm and its divested assets; and
- Substantial (non-antitrust) regulatory or logistical hurdles.
The general idea behind all of these red flags is to ensure that a structural remedy cleanly separates divested assets from the merged entity, and does so in such a way as to immediately restore competition to the market.
- Guidance for consummated transactions. For the first time, the Manual addresses the Division’s approach to remedies for “consummated transactions” (i.e., mergers that have already been completed). Again, the Division prefers divestiture as the means to restore competition; whether this requires divesting more than, less than, or exactly the acquired assets will be decided on a case-by-case basis. The Manual also states that “unwinding the transaction” may sometimes be necessary to effectively restore competition to the relevant market. Although post-transaction challenges are uncommon and present unique difficulties, federal merger enforcement agencies will litigate where appropriate, and may implement both divestiture and unwinding remedies.1
- Collaboration with international and state antitrust agencies. The Manual also describes the Division’s efforts to collaborate across jurisdictions when crafting remedies. Although the Manual only briefly touches on this topic, it reflects the modern reality that many companies face antitrust enforcement actions not only by federal enforcers but also by states and other countries. The Division seeks to collaborate with other jurisdictions to craft a harmonious set of remedies in order to reduce the risk of conflict. However, the Manual expressly states that the Division will not seek a remedy that would not be available to it under federal law.
- The duties of the Office of Decree Enforcement and Compliance. The Division established the Office in August 2020 to evaluate and oversee the Division’s remedy agreements. The Manual explains that the Office’s role is to establish remedy expertise through the consolidation of remedy enforcement in a singular body rather than leave the task to individual sections within the Division.
- Standard consent decree terms. Finally, the Manual includes a series of key “standard terms” that the Division requires in every consent decree to allow for effective enforcement:
- In any decree enforcement action, the Division may establish a violation of the decree by a preponderance of the evidence;
- The Division may petition the courts for an extension of a decree’s term if one of the parties is found to have violated the decree;
- The Division may terminate a decree when it believes that the remedy is complete;
- Courts may enforce any part of a decree that is “stated specifically and in reasonable detail”; and
- The parties must reimburse the Division for any costs it incurs in connection with its enforcement effort.
These provisions are designed to solidify the Division’s authority over consent decree enforcement and oversight, provide appropriate recourse where necessary, and minimize Division resources spent on enforcement (which is particularly acute for conduct remedies).
The 2020 Merger Remedies Manual provides a valuable resource for companies and counsel considering how to address antitrust risk in the M&A space and for potential divestiture buyers. Although much of what is contained in the guidelines is already standard practice, the guidelines provide the clearest roadmap yet for how to tackle these issues.
1 For instance, in 2017 the Division sued to partially unwind a merger between Parker-Hannifin Corporation and CLARCOR Inc. after discovering that the parties competed to supply aviation fuel filtration systems. The parties ultimately reached a settlement with the Division requiring them to divest certain fuel filtration assets to a third-party buyer.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.