Frequently Asked Questions
About Merger Consent Order Provisions
These materials reflect the views of the staff, and
not of the Commission or of any Commissioner.
- Table of Contents
- Overview
- Specific
Topics
- Buyers
- Buyer
Up Front
- The
Assets To Be Divested
- Crown
Jewels
- Divestiture
Period
- Trustee
Provision
- Hold
Separate Orders
- Prior
Notice/Approval
The Setting: A firm (the acquiring firm)
proposes to acquire a second firm (the acquired firm), but
recognizes that it may compete with the second firm in a
relevant antitrust market. The FTC staff is investigating
the transaction, the Commission has issued second requests
or subpoenas, and the firms are assembling their response.
At some point, lawyers for the acquiring (or acquired) firm
approach the FTC staff about settling the matter. The acquiring
firm might be willing to agree to a divestiture, but it wants
to minimize the extent of the divestiture as much as possible.
The Commission might be willing to accept a settlement, but
it wants to minimize as much as possible the risk to consumers
from the anticompetitive effects of an otherwise unlawful
acquisition. The staff, thus, needs confidence that any consent
order that it recommends to the Commission will result in
effective relief. The firms are anxious to wrap up the negotiations
and settle the matter as quickly as possible. The following
are some questions that have arisen in the past.(1)
Overview
Q. 1. What provisions does the Commission generally
expect to see in a consent order?
- A: Every order in a merger case
has the same goal: to preserve fully the existing competition
in the relevant market or
markets. Although there is no "magic formula" to
achieve that goal and developing appropriate merger remedies
is a very fact-specific inquiry, many provisions have been
developed over the years that appear in almost every merger
order. For example, most orders relating to a horizontal
merger will require a divestiture; the divestiture will have
to be "absolute"; the order will state the purpose
of the divestiture; the Commission will be authorized to
appoint a divestiture trustee if the assets aren't divested
on time; the divestiture trustee may have authority to divest
a larger package of assets; the assets to be divested will
have to be maintained pending divestiture; the parties must
represent that they can accomplish the remedy; certain reporting
obligations will be imposed; and the staff's access to documents
and employees will have to be assured. This general listing
is not exhaustive; past orders have frequently included other
provisions, such as certain transitional obligations, employee
non-solicitation and incentive provisions and information
firewalls. Finally, the Commission's Rules of Practice require
a number of waivers and other recitations that will appear
in every consent agreement. See Rule 2.32 of the
Commission's Rules of Practice, 16 C.F.R. § 2.32.
-
- We do, however, supplement our learning and review what
we learn on a continuous basis. Some provisions and requirements
may change as we learn more.
Q. 2. Where would I look to see what type of provisions
the Commission has recently required?
- A. Past orders, including the related complaints, decisions,
and other public statements (e.g., the "analysis
to aid public comment"), provide information regarding
what the Commission has required in particular cases in the
past. The Commission's more recent orders (from 1996 to the
present) are available on the Commission's web site, listed
alphabetically. See http://www.ftc.gov/bc/caselist/index.htm.
One can also scroll through the Commission's cases month
by month, starting in March of 1996. See http://www.ftc.gov/os/index.htm.
The Bureau's Study of the Commission's Divestiture Process,
accessible on the Commission's web site at http://www.ftc.gov/bc/pubs_antitrust.htm,
describes provisions that the Commission has required in
recent orders.
Q. 3. What happens if a company with continuing obligations
under the Commission's order is acquired by another company?
- A. If a respondent to a Commission
order is acquired in its entirety by a second company,
that second company will
likely become a "successor" to the respondent and,
as such, obligated to comply with the Commission's order.
Other acquisitions of significant portions of a respondent's
business or a line of respondent's business, which comprise
less than the entirety of the respondent, will likely also
create successor entities. The analysis is fact-specific
and is not precisely the same analysis undertaken under corporate
successorship law, but is conducted with an eye towards how
the FTC's consent order and remedy provisions will be effected.
Q. 4. What reporting obligations are generally imposed
on respondents?
- A: In cases in which respondents
have a post-order divestiture obligation, they are generally
required to keep the Commission
and the Compliance Division staff informed of their divestiture
efforts. In the consent agreement itself, respondents generally
agree to submit an "Initial Compliance Report" either
at the time that the Commission considers whether to accept
the consent order for placement on the public record, or
within a short time thereafter. Subsequent reports on the
divestiture effort are required either monthly or bi-monthly.
To the extent there are obligations in the order beyond the
divestiture obligation, respondents are usually required
to submit annual reports to the Commission on their continued
compliance with those obligations. Compliance Division staff
is always available to speak with respondents on their compliance
efforts, and the Compliance Division encourages representatives
of respondents to maintain communication with the staff.
Specific Topics
Buyers
Q. 5. Does the Commission have a preferred type of
buyer?
- A. The Commission's sole requirement is that the buyer
be ready, willing, and able to operate the assets in a manner
that maintains or restores competition in the relevant market
to effectuate the remedial objectives of the order. The Commission
has approved different types of buyers in different cases.
For example, parties who do not operate in the market, but
who have a track record of operating similar assets successfully
have been found to be acceptable purchasers. Additionally,
parties who have operated other businesses successfully and
have brought together a management team experienced in the
relevant market have been found to be acceptable buyers.
Firms operating in different geographic markets but within
the same product market have been found to be acceptable
buyers. Firms who operate in related product markets, either
in the relevant geographic market or outside the relevant
geographic market, have been found to be acceptable buyers.
Smaller firms, sometimes identified as fringe firms or mavericks,
operating within the same geographic and product markets
have been found to be acceptable buyers. In every case, the
respondent must show that the proposed divestiture will satisfy
the remedial objectives of the Commission's order.
Q. 6. What criteria does the Commission
use to determine that divestiture to a proposed buyer will
satisfy those remedial objectives?
- A: The staff evaluates both the proposed buyer and the
proposed agreement. The staff evaluates whether the buyer
has the financial resources to consummate the proposed divestiture
and to remain a vigorous competitor in the market. The staff
examines the proposed buyer's commitment to remain in the
market by analyzing its past operations and business plans
as well as its future business plans for the divested assets.
The staff evaluates the proposed buyer's experience and expertise
to operate effectively in the market. The staff examines
both the proposed buyer's historical financial documents
and its future business plans for the proposed divestiture.
The staff will likely talk with industry members familiar
with the proposed buyer such as competitors, suppliers, and
customers. The staff may also talk with lenders and other
creditors of the proposed buyer, particularly those involved
in possible financing of the proposed deal. The staff also
examines the proposed buyer's current position in the relevant
market to determine whether a divestiture to the proposed
buyer will adequately address concerns about anticompetitive
effects arising from the original transaction. Proposals
to divest to an incumbent may raise concerns about likely
anticompetitive effects; on the other hand, divestiture to
an incumbent may assure that an experienced operator with
expertise in the market acquires the divested assets, a crucial
factor in some divestitures.
Buyer
Up Front
Q. 7. What is a "buyer up front"?
- A: When the Commission requires
a "buyer up front" (or
up front buyer), it requires that the respondent find an
acceptable buyer for the package of assets it proposes to
divest and that it execute an acceptable agreement - and
all necessary ancillary agreements - with the buyer (and
third parties, if required) before the Commission accepts
the proposed consent order for public comment. It is important
to involve FTC staff in this process as early as possible,
to make sure that any negotiated agreement includes all the
assets and contains all the provisions that staff believes
are necessary to resolve the competitive concerns. In addition,
the FTC staff will want to discuss with the buyer its business
plans and whether it believes the assets being acquired are
sufficient to maintain or restore competition. The Commission
will then evaluate the buyer and the agreements at the time
it determines whether to accept the proposed order for public
comment. If the Commission accepts it for public comment,
in most cases it will require that the up front divestiture
be consummated within a very short period of time.
Q. 8. Are buyers up front required in all Commission
consent orders?
- A: No. The facts of each case are particularly
important to this topic. In those cases in which the Commission
is concerned about the adequacy of the asset package or the
possible lack of an acceptable buyer, the Commission will,
by requiring a buyer up front, attempt to minimize the risk
that the remedy will be ineffective. Buyers up front also
reduce the risk of interim harm to competition by speeding
up accomplishment of the remedy. Buyers up front have, thus,
been used primarily (but not exclusively) when there was
concern about whether the proposed asset package was adequate
to maintain or restore competition or whether the asset package
was sufficient to attract an acceptable buyer or buyers,
when the pool of acceptable buyers was thought to be very
limited because of specialized needs, or when there were
concerns about deterioration of the assets (including human
capital, good will and other intangible assets) pending divestiture.
Up front buyers are more likely to be required when the respondent
has urged that only selected assets be divested.
-
- When the assets to be divested have been operated as a
stand-alone business in the past, the Commission has frequently
not required a buyer up front. In all cases, however, the
Commission must be confident that an acceptable buyer exists
and that the package of assets to be divested is, when operated
by the buyer, sufficient to maintain or restore competition
in the relevant market. When the respondent has shown that
a good buyer will emerge, that the asset package is an ongoing,
stand-alone business and will maintain or restore competition
in the market at issue, and that interim competition and
the viability of the assets will be preserved pending divestiture,
post-order divestitures have been accepted. See, e.g., Diageo/Vivendi,
Dkt. No. C-4032; Valero/UDS, Dkt. No. 4031; Lafarge,
SA, Dkt. No. 4014 (in which the Commission required
a buyer up front and a post-order divestiture in different
markets); El Paso/Coastal, Dkt. No. C-3996; BPAmoco/Arco,
Dkt. No. C-3938 (in which the Commission required a buyer
up front and a post-order divestiture in different markets); Duke
Energy, Dkt. No. C-3932; FNF/CT, Dkt. No. C-3929; El
Paso/Sonat, Dkt. No. C-3915; Exxon/Mobil, Dkt.
No. C-3907; Precision Castparts, Dkt. No. C-3904
(in which the Commission required a buyer up front and a
post-order divestiture in different markets).
Q. 9. Are there any industries in which the Commission
has been more likely to require a buyer up front?
- A: Whether a buyer up front will be required is dependent
upon the circumstances of each individual case, and not (generally)
on the particular industry in which the merging firms operate.
Buyers up front have been required in such varied markets
as medical devices, pharmaceutical products, mirror coatings,
mining equipment, industrial gases, general aviation fuel,
and many others. However, supermarkets and other retail operations
(e.g., retail pharmacies) are particularly vulnerable to
having their assets deteriorate during the search for a post
order buyer; this affects the ability of the assets to be
operated in a manner that maintains or restores competition
in the relevant market. Accordingly, the Commission has now
more uniformly required up front buyers in such divestitures. See,
e.g., Ahold/Bruno's, Dkt. No. C-4027; Albertson's,
Inc./American, Dkt. No. C-3986; Shaw's/Star,
Dkt. No. C-3934 (divestiture in one market was post-order
requirement); Kroger/Fred Meyer, Dkt. No. C-3917; Kroger/Groub,
Dkt. No. C-3905; Ahold, Dkt. No. C-3861; CVS/Revco,
Dkt. No. C-3762.
Q. 10. The buyer up front divestiture typically occurs
before the Commission makes the order final. What happens
if the Commission, in deciding whether to make the order
final, decides the buyer or the agreement is unacceptable
after the divestiture has already occurred?
- A: To preserve the Commission's
ability to reject the up front buyer following the public
comment period, the Commission's
orders require that the respondent include an "unwind" (rescission)
provision in any divestiture contracts in which closing on
the divestiture will occur before final Commission approval
of the order. The parties themselves may include contract
provisions in divestiture contracts to handle the orderly
implementation of an unwind provision if the Commission rejects
the up front buyer. Invoking rescission should be very rare. See Q.11.
Q. 11. Has the Commission ever
ordered rescission?
- A: As of March 13, 2002, the Commission has not ordered
rescission of an up front divestiture.
Q. 12. Are there cases in which the package of assets
to be divested comprises an ongoing business, but the Commission
has nonetheless required an buyer up front?
- A. The Commission may require a buyer up front for an ongoing
business if, for example, the business is so specialized
that the Commission is concerned that there are very few
acceptable buyers. The Commission may also require a buyer
up front for an ongoing business if it concludes that even
a hold separate agreement will not effectively minimize the
interim competitive harm pending a post-order divestiture. See,
e.g., Siemens/Vodafone, Dkt. No. 4011. See Q.19.
Q. 13. What concerns does the Commission have that
result from delay in divestiture?
- A. Concerns regarding diminished viability, interim competitive
harm and the eventual competitive significance of the assets
to be divested arise whether there is a buyer up front or
a post-order divestiture. Wasting or deterioration of the
assets of the business during the Commission's investigation
of the transaction or the acceptability of the remedy package
may affect the scope of the package of assets necessary to
be divested, or whether an acceptable divestiture is possible.
For example, there may be an adverse impact on the morale
of employees of the business to be divested, leading them
to leave the company; alternatively, long standing, important
relationships among suppliers or customers of the acquired
firm may deteriorate because of uncertainty regarding the
acquired business.
Q. 14. What can be done by the parties to reduce the
time it takes to identify acceptable up front divestiture
candidates?
- A. The parties, working with FTC staff, should consider
taking steps to minimize the time it takes to define an asset
package likely to be acceptable to the Commission and to
finding an acceptable buyer. The parties should consider
implementing or maintaining incentives for managers and key
employees to stay on through the remedy process, and take
or continue steps to prevent the wasting of the assets likely
to be divested and the deterioration of customer and supplier
relationships.
The
Assets To Be Divested
Q. 15. What is an acceptable divestiture package?
- A: An acceptable divestiture package is one that maintains
or restores competition in the relevant market. The divestiture
of an entire business (that is, an on-going, stand-alone,
autonomous business, and which may include assets relating
to operations in other markets) of either the acquired or
acquiring firm relating to the markets in which there is
a concern about anticompetitive effects, is most likely to
maintain or restore competition in the relevant market, and
thus will usually be an acceptable divestiture package. The
divestiture of an intact, on-going business generally assures
that the buyer of such a package will be able to operate
and compete in the relevant market immediately, thereby remedying
the likely anticompetitive effects of the proposed acquisition
and minimizing the Commission's risk that it will be unable
to obtain effective relief. See Q.18.
-
- There have been instances in which the divestiture of one
firm's entire business in a relevant market was not sufficient
to maintain or restore competition in that relevant market
and thus was not an acceptable divestiture package. To assure
effective relief, the Commission may thus order the inclusion
of additional assets beyond those operating in the relevant
market. For example, in Guinness/Grand Met, Dkt.
No. C-3801, the Commission required divestiture of foreign
assets even though the relevant geographic market was limited
to the United States. On the other hand, there have been
occasions when the respondent demonstrated with compelling
evidence that it was not necessary or not efficient (from
the eventual buyer's perspective) to require it to divest
an entire business. See Q.16.
In all cases, the objective is to effectuate a divestiture
most likely to maintain or restore competition in the relevant
market.
Q. 16. Can you explain those cases
in which the Commission has not required the divestiture
of an entire business?
- A: The Commission has issued orders that require a divestiture
of less than the entire business operating in, or producing
for, the relevant market. In those cases the Commission has
concluded that the assets to be divested are sufficient to
allow the buyer of the assets to begin to compete in the
market immediately, thereby remedying the likely or actual
anticompetitive effects of the challenged acquisition. For
example, interested buyers of divested assets may have their
own assets (or have secured access to such assets) that are
good substitutes for some of those of the stand alone business,
and the inclusion of such additional assets is unnecessary
or potentially inefficient. Similarly, certain assets controlled
by the seller may only be minimally used in the production
or distribution of the relevant product, and it may be significantly
more efficient and competition enhancing for the parties
to enter into a supply or lease contract for such assets. See,
e.g., INA/FAG, Dkt. No. C-4033; Rohm & Haas,
Dkt. No.C-3883.
-
- At all times, the burden is on the parties to provide concrete
and convincing evidence indicating that the asset package
is sufficient to allow the proposed buyer to operate in a
manner that maintains or restores competition in the relevant
market.
Q. 17. To remedy competitive concerns resulting from
horizontal mergers, does the Commission insist that respondents
divest sufficient assets to result in a zero concentration,
or HHI, change?
- A: No. The focus of the inquiry is whether the proposed
divestiture is sufficient to maintain or restore competition
in the relevant market.
Q. 18. How does the FTC determine
whether the assets to be divested are viable and will restore
competition?
- A: This is the most critical question in crafting effective
relief. A divestiture of the entire overlapping business
(one that is operating effectively now), provides some comfort
that those assets are viable and would restore competition.
Such a divestiture reduces the risk to the Commission that
it will be unable to obtain effective relief. However, with
any divestiture proposal, we must examine the proposed divestiture
and buyer to determine whether it will maintain or restore
competition in the relevant market. See Q.6.
for the criteria examined relating to a proposed buyer. Our
inquiry is directed at current and future competitive issues,
and respondents have the burden of showing that their proposal
will have the likely effect of maintaining or restoring competition.
One way we consider whether a divestiture package is sufficient to restore
competition is to look at how the companies currently conduct their businesses.
We also look to others operating in the industry and related fields, including
suppliers and customers, to get their assessment of what is required. Discussions
with prospective buyers can also help determine if the assets to be divested
are sufficient to maintain or restore competition. Because we recognize
that prospective buyers of the divested assets may have imperfect or insufficient
information regarding the assets to be acquired and the relevant market,
or that they may have different incentives from the Commission, we carefully
question prospective buyers about their requirements, operating plans and
business plans regarding the to be acquired assets.
Q. 19. If the parties propose
to divest all of one firm's assets used in the production,
distribution and sale of the relevant product, doesn't that
end the inquiry?
- A. No. Although the competitive analysis focuses on specific
product markets, remedy analysis focuses on what a business
needs to be an effective competitor in the relevant market.
Different businesses will likely have different existing
production, distribution and selling facilities; assuring
that a buyer can operate the assets to be acquired and maintain
or restore competition in the relevant market may require
the reconfiguration of, or increase in, the buyer's existing
assets or the acquisition of complementary assets from the
seller. Because the operations of the buyer and seller may
be of a different scale and/or scope, something more than
just the assets used in the production, distribution and/or
sale of the relevant product may be required. (For similar
reasons, something less than the assets used in the production,
distribution and sale of the relevant product may be a sufficient
remedy if there is convincing evidence that divestiture of
less will effectively maintain or restore competition.)
Q. 20. In cases in which the Commission required that
certain contract rights be divested or assigned, how have
firms handled the problem of a third party with some rights
in these contracts?
- A: In some cases, third-party consents were required before
the respondent could assign contract rights. These consents
must usually be obtained before the settlement is accepted,
so that the divestiture proceeds without contingencies or
incident. One advantage of an up front buyer is that all
issues relating to third-party rights will tend to be raised before the
specific divestiture proposal is executed, so that alternatives
and substitutes are possible if third-party rights make the
original proposal unworkable or too complex.
-
- Respondents often have two sets of assets they can divest:
their own and the overlapping assets of the firm being acquired.
Respondents are thus responsible for knowing what legal issues
or other impediments to their divestiture proposal will arise
and for either dealing with them or delivering a fully-acceptable
alternative. If third-party rights might make it impossible
for respondents to divest to an acceptable acquirer, then
respondents must deal with that issue, perhaps by divesting
different assets. The Commission may insist that respondents
do whatever it takes to make the agreed-to divestiture occur. See,
e.g., West Texas Transmission, L.P. v. Enron Corp.,
1989-1 Trade Cases (CCH) ¶ 68,424 (W.D. Texas 1988), aff'd,
907 F.2d 1554 (5th Cir. 1990) (the FTC is not required to
approve divestiture of a pipeline interest to a buyer with
a contract right of first refusal if it would raise competitive
problems).
Q. 21. Under what circumstances can an acceptable
package of assets be created by including some of the acquiring
firm's assets and some of the acquired firm's assets in the
package?
- A: As with any divestiture of less
than a stand-alone business, an asset package of this type,
frequently referred to as "mix
and match," may provide a sufficient competitive remedy.
However, because these assets have never been operated by
the same owner and will likely require some reconfiguration
by the buyer, it is more difficult to determine whether the
selected assets are appropriate and whether they can be operated
together effectively. Therefore, there are no easily identifiable
circumstances when a mix and match divestiture may be adequate.
In such instances when it is proposed, the parties must present
sufficient evidence to convince the Commission that the asset
package is viable and that it will enable the acquirer of
these assets to compete effectively.
Q. 22. Can parties create such a package if an up
front buyer is offered?
- A: One concern, that a "mix and match" package
of assets would not be attractive to a potential buyer, is
eliminated by the presence of an up front buyer. However,
simply finding an entity that is willing (even excited) to
acquire a "mix and match" package of assets does
not necessarily resolve the question whether competition
in the relevant market will be maintained or restored. Staff
and the Commission will still have to carefully review the
buyer's intentions and ability to operate the assets in a
manner that maintains or restores competition in the relevant
market(s). The burden remains on the parties and the buyer
to convince staff and the Commission that the proposed divestiture
will address any concerns about likely anticompetitive effects
in the relevant market.
Q. 23. Under what circumstances does the Commission
require that an entire package of assets be divested to a
single acquirer only?
- A: This is both an issue of viability
and competition. Operations of a certain scale and/or scope
may be necessary
for the buyer of the assets to operate them efficiently or
to have the incentive or means to operate them for anything
but a short term. In certain industries, such as retail operations,
it may be necessary to maintain or restore competition for
the buyer of the divested assets to have a substantial "footprint" within
the relevant geographic markets; this presence may make the
buyer more likely to seek to increase or maintain "brand
awareness" through advertising, or make it more likely
that the buyer can obtain significant internal distribution
efficiencies or cost savings. This requirement has been imposed
in general in cases in which there were concerns that dividing
up the assets to be divested among several buyers would not
fully restore the competition that existed before the merger.
Crown Jewels
Q. 24. What is a "crown jewel" provision?
- A: A "crown jewel" provision
requires divestiture of a different package of assets from
what a respondent was
originally required to divest, and is typically to be divested
by a trustee appointed by the Commission if the respondent
fails to divest the original asset package on time or does
so in a manner or condition that does not comply with the
order (there may be other circumstances that can trigger
possible trustee appointment in a given case). A crown jewel
should be a more marketable package for the trustee to sell,
in light of the respondent's inability to find an acceptable
buyer for the original package of assets. The crown jewel
may be a package of assets that includes more than the original
package of assets to be divested, such as total domestic
assets when only a subset of the domestic assets were included
in the original package. Or the crown jewel may be a different
package of assets, such as the respondent's assets instead
of the acquired firm's assets.
-
- The crown jewel provisions of an order are not included
as a penalty clause or as punishment for failure to comply
with the order. Failure to divest on time, or in a manner
consistent with an order, constitutes an order violation
and subjects the respondent to civil penalties and other
relief under section 5(l) of the FTC Act, 15 U.S.C. § 45(l).
These civil penalties are in addition to any additional provisions
in the consent order that may be triggered by the failure
to comply with the provisions of the order.
Q. 25. Has the Commission ever
required divestiture of the "crown jewels"?
- A: Yes; as of March 13, 2002, once. In Aventis,
Dkt. No. C-3919, the Commission required divestiture of the
alternate assets, and appointed a trustee to accomplish that
divestiture when respondent failed to divest the original
assets on time.
Q. 26. When does the Commission require a crown jewel
provision?
- A: A crown jewel is appropriate where there is a risk that,
if the respondent fails to divest the original divestiture
package on time (including to an up front buyer) or if the
original divestiture falls through for some reason, a divestiture
trustee may need an expanded or alternative package of assets
to accomplish the divestiture remedy. This may be because
another buyer may need a bigger (or different) package of
assets to make the divestiture viable and competitive, or
because it will likely be faster and easier for the trustee
to sell a bigger, more complete package of assets later on.
Q. 27. Is a crown jewel required in cases in which
there is an up front buyer?
- A: We assess the need for an up
front buyer and for a crown jewel separately and on a case-by-case
basis. An up front
buyer does not necessarily eliminate the need for a crown
jewel provision. Agreements with up front buyers occasionally
fall through. In such a case, the original asset package
may be unattractive to any other buyer, so there may be a
need to alter or expand the original divestiture package
to accomplish relief if the "up front" deal falls
through. See, e.g., AHP/Solvay, Dkt. No.
C-3740; Chevron/Texaco, Dkt. No. C-4023.
Divestiture
Period
Q. 28. If there is no up front buyer, how much time
will the parties get to divest?
- A: In recent cases, the Commission has required that all
divestitures be completed within 3 to 6 months from the date
the parties sign the Agreement Containing Consent Order.
This means the respondent must find a buyer, negotiate a
contract, submit that deal to the Commission for its approval,
and complete the divestiture within that time. Respondent
must submit its application early enough to allow for the
30-day public comment period (required by the Rules) and
review by the Commission. If there is a buyer up front, the
divestiture is required almost immediately upon consummation
of the subject merger.
Q. 29. Is six months the maximum?
- A: There have been exceptions but there needs to be a very
good reason why the divestiture cannot be done in that time
frame and why it is not likely there would be harm from a
longer period.
Q. 30. The FTC used to give firms a year to divest.
Why has the FTC reduced the divestiture period to six months?
- A: It was taking too long for the
divestitures to occur because respondents tended to wait
until the end of the period,
and there were examples of the assets deteriorating in the
interim. Delay in implementation of a divestiture order increases
the period in which competition in the relevant market may
be affected because the acquiring company may have little
incentive to maintain the assets (because they will be operated
by a competitor in the future) or to operate them in a manner
that maintains competition during the interim period. It
may be more profitable, for example, for the acquiring firm
to keep the acquired production capacity off the market.
(These are some of the reasons that a "monitor" trustee
is used; see Q.36.)
Our experience confirms that firms can, with some rare exceptions,
complete divestitures in less than six months.
Q. 31. When is a divestiture completed?
- A: To satisfy its obligation to divest by the date required
in the order, a respondent has to actually consummate the
sale by that date. Executing an agreement or filing an application
for the Commission's approval by that date does NOT satisfy
the obligation to divest by that date. For a respondent to
make sure it has enough time to get the necessary approvals
and still close in time, it must file its application with
the Commission early enough to allow for the thirty day period
for public comment, the staff's review and investigation
including responses to any comments that were filed, and
the Commission's consideration of the matter. Filing only
a month before the deadline will not be sufficient and will
delay the transaction, potentially subjecting the respondent
to civil penalties. If there is a timing concern submit a
letter to the Commission including all the reasons why expedited
treatment is necessary, and include materials documenting
the problem(s). The general considerations that apply to
all transactions, such as anxious customers, deteriorating
employee morale, may not be persuasive. Of course, all else
equal, the Commission has an interest in speedy relief.
Q. 32. Past orders have required that a divestiture
be absolute; what does this mean?
- A: What this means is that the respondent shall have no
continuing ties to the divested business or assets, no continuing
relationship with the buyer, and no financial stake in the
buyer's success. Encouraging the establishment or further
development of a competitor with incentives to compete vigorously
is thought to preclude, in most, if not all, cases, a continuing
interest in the divested assets or in the buyer's success
in operating those assets. Thus, divestiture proposals in
which the buyer intends to rely on the respondent to finance
the divestiture, or where the proposal includes performance
payments by the buyer have been rejected. Financial arrangements
that rely on performance-based payments are always troubling
to the extent they may skew either parties' incentives to
compete vigorously.
Q. 33. Are any types of continuing relationships ever
acceptable?
- A. Some cases have provided for continuing relationships
post-divestiture (e.g., supply contracts, technical
assistance requirements) to ensure the competitiveness and
viability of the buyer as it begins to compete. These have
been required on a case-by-case basis, and in such cases
the Commission has recently required the use of a monitor
trustee to review and help assure respondent's compliance
with these obligations.
Q. 34. If there are questions about a divestiture
that arise before or after it has been approved, how should
interested parties proceed?
- A: The staff of the Compliance Division maintains communication
with the respondents and with the proposed buyer. If there
is additional information that you think the Commission and
its staff need to know, you should not hesitate to contact
the Compliance Division staff handling the matter. In addition,
if a buyer of divested assets has any concerns about the
respondent's compliance with the Commission's order, the
buyer should raise those concerns with the staff of the Compliance
Division as soon as possible. To the extent that any disputes
between the respondent and the buyer implicate terms of the
Commission's order, the Commission and its staff need to
hear about them to attempt to resolve them. The Commission
takes an active interest in making sure its orders are adhered
to, and will take steps to insure that the provisions of
its orders are complied with.
-
- (For procedures involving applications for approval of
post-order divestitures generally, see the Commission's
Rules of Practice, § 2.41(f), 16 C.F.R. §2.41(f).)
Q. 35. What happens if the parties have not divested
within the time period required?
- A: The failure to effectuate a required divestiture by
the deadline in the order violates the order and subjects
the parties to civil penalties of up to $11,000 per day per
violation, in addition to other relief, pursuant to Section
5(l) of the FTC Act, 15 U.S.C. § 45(l).
At the expiration of the divestiture period, in addition
to considering whether to seek civil penalties and other
relief, the Commission may appoint a trustee to accomplish
the divestiture, including divestiture of crown jewels pursuant
to specific order provisions; alternatively, it may hold
off on doing so and still require the parties to continue
their efforts to divest. The Commission's options are not
mutually exclusive.
Trustee
Provision
Q. 36.
What is a "monitor
trustee"?
- A: A monitor trustee is an independent third party appointed
by the Commission to oversee certain terms of the consent
order. The Commission has required a monitor trustee, sometimes
called an auditor trustee or an interim trustee, in cases
in which the order imposes obligations on the respondent
of a specialized nature that may result in a temporary relationship
between the respondent and the buyer of divested assets. See,
e.g., Dow/Union Carbide, Dkt. No. C-3999; El Paso/Coastal,
Dkt. No. C-3996; Boeing Company, Dkt. No. C-3992; Glaxo/SmithKline
Beecham, Dkt. No. C-3990; AOL/TW, Dkt. No.
C-3989; Ceridian, Dkt. No. C-3933. The Commission
has also required a monitor in connection with respondent's
obligations in a hold separate order or an order to maintain
assets. See, e.g., Valero/UDS, Dkt. No. 4031; Exxon/Mobil, Dkt.
No. C-3907.
Q. 37. What is a divestiture trustee?
- A: A divestiture trustee is an independent third party
appointed by the Commission to divest assets in those cases
in which the respondent has failed to divest assets as required
by the Commission's order. Virtually every merger order issued
by the Commission includes a provision authorizing the Commission
to appoint a divestiture trustee.
Q. 38. How often in recent years has the FTC actually
appointed a divestiture trustee to divest assets?
- A: As of March 13, 2002, the Commission has appointed a
trustee to divest assets in the following cases: Louisiana
Pacific, Dkt. No. C-2956 (where the court appointed
a trustee to effectuate the required divestiture); Flowers
Industries Inc., Dkt. No. 9148; Promodes S.A.,
Dkt. No. 9228; Red Apple Companies, Inc., et
al., Dkt. No. 9266; Panhandle Eastern Corp.,
Dkt. No. 3260; Cooper Industries Inc., Dkt. No.
C-3469; Revco Inc., Dkt. No. C-3540; Rite-Aid
Corporation, Dkt. No. C-3546; Schwegmann Giant Super
Markets, Dkt. No. C-3584; Columbia/HCA Healthcare
Corporation, Dkt. No. C-3619; Softsearch Holdings,
Inc., Dkt. No. C-3759; Hoechst AG and Rhone-Poulenc
S.A. (Aventis S.A.), Dkt. No. C-3919.
Q. 39. How does the Commission select a divestiture
trustee?
- A: Typically, Commission staff uses its sources in the
industry, as well as the respondents, to provide names of
trustee candidates. The staff assures that the candidates
have no conflict, or appearance of conflict, of interest.
Then it interviews candidates, speaks with references, and
makes a determination whether a particular candidate should
be recommended to the Commission. Staff is looking for someone
who - in addition to having no conflict - may have experience
divesting assets in the affected industry or under these
type of circumstances. Staff's experience with both divestiture
trustees and monitor trustees has been very positive to date.
Hold
Separate Orders
Q. 40. What is a hold separate order, and what is
its purpose?
- A: A hold separate order keeps the "eggs unscrambled" pending
divestiture by requiring the divestiture assets to be operated
separately from and independently of respondent's business.
It preserves the assets to be divested and maintains interim
competition (as well as the Commission's remedial options
if it changes its views on the scope of assets to be divested
after the public comment period) by preventing commingling
with the respondent's business. It prevents the transfer
of competitively sensitive information. The purpose is to
prevent interim competitive harm and to preserve the viability
and competitiveness of the assets pending divestiture. By
taking the assets out of the hands of the respondent, they
should be better protected from intentional or unintentional
physical or intangible deterioration that would impact their
ability to be operated in a manner that maintains or restores
competition. Further, the respondent should be unable to
exercise any market power it might have gained from the merger.
As an alternative to (and sometimes in conjunction with)
taking control of the assets from the respondent, a monitor
trustee may be used to oversee the operations and maintenance
of the assets. See Q.36.
Q. 41. Are hold separates required?
- A: Generally, yes, if there is no
up front buyer. (A recent change in Commission practice
provides that the Commission
may issue an order to hold separate when it accepts the consent
for public comment, thus dispensing with the previous use
of "Agreements to Hold Separate" that then became
part of the order when it became final.)
-
- The hold separate order has usually covered the assets
to be divested rather than the assets to be retained by respondents.
A monitor trustee has usually been appointed to monitor compliance
and oversee the business. The held-separate business is an
independent, autonomous operating business unit. See,
e.g., BPAmoco/Arco, Dkt. No. C-3938; Exxon/Mobil,
Dkt. No. C-3907; Precision Castparts, Dkt. No. C-3904; Dominion,
Dkt. No. C-3901; and VNU, Dkt. No. C-3900.
-
- In some cases, the Commission has issued an order to maintain
assets to preserve the assets to be divested without requiring
that they be operated separately. The Commission has also
appointed a monitor trustee in some of those cases. See,
e.g., Dow/Union Carbide, Dkt. No. C-3999; El Paso/Coastal,
Dkt. No. C-3996; CSC/Mynd, Dkt. No. C-3991; Glaxo/SmithKline
Beecham, Dkt. No. C-3990 (monitor appointed); Philip
Morris/Nabisco, Dkt. No. C-3987; Novartis, A.G./AstraZeneca,
Dkt. No. C-3979 (monitor appointed); Delhaize/Hannaford,
Dkt. No. C-3962; Pfizer Inc./Warner-Lambert, Dkt.
No. C-3957; FMC Corp./ Solutia Inc. and Astaris,
Dkt. No. C-3935 (monitor appointed); Duke Energy,
Dkt. No. C-3932; Rhodia, Dkt. No. C-3930.
Q. 42. How broad will the hold separate entity have
to be to satisfy the FTC?
- A: It depends on the facts of the individual case and on
what business units as a practical matter can be held separate.
If the assets to be divested are part of a larger operating
unit, the whole unit will generally be held separate.
Q. 43. Do up front buyers eliminate the need for hold
separates?
- A: Not necessarily. To the extent that the buyers are going
to take over the divested assets immediately, this might
eliminate the need for a hold separate. However, where the
buyer of the divested assets may not take immediate, or almost
immediate, possession of the assets, the mere presence of
an up front buyer does not eliminate the need for a hold
separate order. All assets, some more quickly than others,
are subject to wasting or deterioration; potentially reducing
both interim and long term competition. A hold separate order
is intended, in part, to eliminate the respondent's ability
to influence that pace of wasting or deterioration, and to
eliminate the ability of the respondent to manipulate the
use of those assets to obtain or maintain short term market
power. Although the buyer of the divested assets could insert
general and specific clauses, including penalties, into the
purchase agreement to address the possibility of the wasting
and deterioration of assets to be acquired, enforcement of
such clauses, if required, will take time, and competition
in the interim may be reduced.
Prior
Notice/Approval
Q. 44. When are prior notice provisions required?
- A: It depends on the nature of the complaint market. See Statement
of Federal Trade Commission Concerning Prior Approval and
Prior Notice Provisions (Policy Statement), issued June 21,
1995, 60 Fed. Reg. 39,745-47 (Aug. 3, 1995); 4 Trade Reg.
Rep. (CCH) ¶ 13,241. The Commission stated there that
a prior notice requirement may be used in a merger order
if the Commission determines there is a "credible risk" that
the respondent might "engage in an otherwise unreportable
[under the HSR Act] anticompetitive merger." The Policy
Statement explains that the need for a prior notice requirement
will depend on circumstances such as the structural characteristics
of the relevant markets, the size and characteristics of
the market participants, and other relevant factors. The
test is, thus, whether there are firms in the market in question,
the acquisition of which would not likely be reportable,
and whether market conditions suggest that a non-reportable
transaction might have likely anticompetitive effects. Recent
increases in the Hart-Scott-Rodino filing thresholds may
make use of the prior notice provision more common. See,
e.g., In the Matter of Deutsche Gelatine-Fabriken Stoess
AG and Goodman Fielder Limited, File No. 011 0117, which
requires Goodman Fielder (the acquired firm) to notify the
Commission if it intends to complete certain described transactions,
some of which might otherwise not be reportable.
Q. 45. When are prior approval provisions required?
- A: The Policy Statement also stated that the Commission
may include a narrow prior approval provision in
a merger order "where there is a credible risk that
a company that engaged or attempted to engage in an anticompetitive
merger would, but for the provision, attempt the same or
approximately the same merger." See, e.g. In the
Matter of Deutsche Gelatine-Fabriken Stoess AG and Goodman
Fielder Limited, File No. 011 0117, which prohibits
DGF from acquiring any of the assets Goodman Fielder retained
(which would approximate the same anticompetitive merger)
without the prior approval of the Commission. Generally the
required divestiture would not be covered because it is not
the "same merger."
-
- The Commission has recently issued an order imposing a
prior approval requirement on a buyer of divested
assets in Nestle, Dkt. No. C-4028. As stated in
the Commission's Analysis Of Proposed Consent Order To Aid
Public Comment in connection with that matter, the Commission
does not routinely require acquirers of divested assets to
obtain approval before subsequent sales. In this case, however,
the Commission concluded that such a provision was appropriate
because there was a high probability that the acquirer would
resell the assets, possibly within the next two to five years.
Endnote:
1. It is clear
that the Commission has wide discretion in its ability to
order effective relief. See, e.g., Olin Corp., 113
F.T.C. 400 (1990), aff'd, Olin Corp. v. FTC,
986 F.2d 1295 (9th Cir. 1993); Ekco Products Company
v. F.T.C., 347 F.2d 745 (7th Cir. 1965).
Thus, these "frequently asked questions" do not
include questions as to whether the Commission has the authority
to order a specific type of relief; instead they have been
compiled from many years of negotiations between the FTC's
staff and the parties and relate to the questions that have
arisen most often as to the specific requirements the Commission
has determined are necessary to achieve effective relief
in horizontal merger cases. They are being published in order
both to give guidance as to past practice and to elicit comment
and further dialogue from interested parties with an eye
towards future practice. The answers are drawn from prior
cases, as well as positions that have been set out by the
staff in speeches, articles, and elsewhere. The discussion
here is only about horizontal merger cases; however, the
principle - that any divestiture or remedial provision must
be considered sufficient to maintain or restore competition
- applies to vertical mergers and non-merger joint ventures
as well.
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