Managing Regulatory Compliance Risks in M&A

Different types of regulatory compliance risks in M&A

Let’s keep this at a high level for now, as we will delve into these topics in more detail later. Regulatory compliance risk can be divided into three main buckets: substantive risk, procedural risk, and other risks. While these are distinct categories, they are all related.

Substantive risk involves assessing the antitrust issues that arise from a transaction. For example, when a company’s boardroom considers acquiring another company, the general counsel or board directors might ask an antitrust counsel, "Is this deal even possible?" 

The antitrust lawyer would then evaluate the substantive antitrust issues, focusing first on whether there are any horizontal issues—whether the two companies are actual competitors in the current market or potential competitors. If they are, how concentrated is the market? How many other competitors are there?

Another aspect to consider is vertical issues. For instance, if Company B is not a competitor of Company A but is a key distributor or supplier, acquiring it could potentially harm competitors of Company A by foreclosing or discriminating against them.

Ultimately, the substantive antitrust risk boils down to whether the merger would place the combined company in a monopolistic or dominant position that could raise prices, or whether it could facilitate collusion among remaining competitors. 

Traditionally, substantive risks focus on downstream markets where the companies sell their products or services, but increasingly, antitrust also considers the competitive effects in upstream markets, including labor markets.

The procedural risk pertains to the regulatory filings required for the merger. In the U.S., the Hart-Scott-Rodino (HSR) Act mandates that transactions meeting certain financial thresholds must be reported to the Department of Justice and the Federal Trade Commission for review. The parties must then wait for a statutory period before closing the deal.

This process is not limited to the U.S. Many countries worldwide, including those in the European Union, Canada, Australia, Brazil, India, South Africa, and China, have their own merger filing regimes with similar filing and waiting period requirements. The procedural risk is closely tied to the substantive risk, as it affects the timing of when the deal can close.

Other risks include gun jumping, which occurs when parties to a merger effectively close the transaction before receiving regulatory clearance. This can lead to substantial fines. Additionally, companies cannot share commercially sensitive information before closing, as this could reduce competition during the pre-merger period or if the deal falls apart.

Compliance due diligence is also critical. For example, Company A needs to thoroughly investigate Company B to ensure it isn’t involved in any illegal activities, such as a cartel, that could pose risks post-merger.

Finally, planning for integration is essential. Company A must develop a plan for integrating Company B into its corporate compliance program, including antitrust compliance. 

While you cannot integrate prior to closing due to gun jumping risks, a detailed integration plan should be in place as you approach closing. This plan should outline actions for day one, six months out, and a year out, ensuring that compliance issues are addressed as part of the overall integration strategy. As long as you got those three buckets figured out, you are fine.

Applicability of antitrust framework to companies

The framework I described earlier applies to all companies, whether public or private. The rules don’t change based on this status. However, the risk profile might change depending on the nature of the company. For example, if the target company only operates within the United States, you may not need to worry about foreign filings.

When an M&A deal is first brought to my attention, one of the first questions I ask is whether the company operates solely in the U.S. or also outside. This helps frame the analysis. Another key factor is the size of the transaction. 

The current filing threshold for the Hart-Scott-Rodino (HSR) Act is about $119 million, and it’s indexed for inflation each year. If your deal is below that threshold, you don’t have HSR obligations. However, you still need to consider gun jumping risks, compliance due diligence, and integration planning.

The nature of the deal significantly impacts the planning process. For a major international deal that presents substantive antitrust risks, especially horizontal risks in multiple jurisdictions, you may need to file in the U.S., Canada, Europe, Brazil, China, and other countries. 

In these cases, it’s common for agencies to follow a phase one or phase two process. In the U.S., for example, agencies have 30 days to conduct their initial investigation. If they want to continue, they issue a second request, which involves extensive document production. Europe and China have similar procedures.

If you're dealing with a major international deal involving multiple filings, it’s crucial to engage with regulatory agencies early on. In Europe, you’re required to approach the agency before even filing the necessary forms. I recommend talking to the FTC or DOJ before the transaction becomes public. You don’t want the agencies to learn about the deal from the Wall Street Journal. 

Instead, you should proactively present your case, explaining why the deal doesn’t raise competitive concerns and might even be pro-competitive. It’s important to construct this narrative yourself rather than letting others do it for you.

For major international deals where you expect a second request in the U.S. or a second-phase investigation in Europe, you'll need a long lead time between signing the deal and the expected closing. This timeline will affect your corporate documents, including the target closing date. 

Typically, you should plan for at least 12 months for a significant international review, and it could be even longer, particularly in jurisdictions like China, where reviews tend to take more time.

On the other hand, if the merger is primarily within the United States with limited foreign sales, you might only need an HSR filing. In such cases, the review can take about a month, allowing for a shorter period between filing and closing. These examples should provide a clearer understanding of how the process varies depending on the nature of the deal.

For high-profile or larger deals where you expect challenges, you’ll want to present your narrative to the agencies early on. You should approach them beforehand, explaining why the deal doesn’t harm competition and, ideally, why it’s good for competition. 

In these cases, controlling the narrative is crucial to ensure that the agencies view the deal in a favorable light.

On the other hand, for smaller deals, you may not need to take such a proactive approach. You’ll simply file where required and see if the agencies raise any concerns. This is closely tied to the substantive analysis—if the parties have significant horizontal overlaps or other competitive concerns, you'll need to act accordingly. 

For smaller deals with fewer substantive concerns, you can afford to file and wait to respond to any agency inquiries without being as proactive.

No news is good news. Yes, the main filing in the U.S. is under the Hart-Scott-Rodino (HSR) Act. Typically, if you file and hear nothing, that’s considered good news.

However, to get into more detail, there’s a process called early termination in the U.S., where after you file, you can request the FTC or DOJ to terminate the waiting period early. The agencies have 30 days to review the deal, but if they grant early termination, they generally provide clearance within 15 days, and your phone will ring to notify you. 

That’s good news, though under the Biden administration, early termination has been suspended for a while and is becoming rarer.

In other jurisdictions, like Europe or its member states, the agencies must close their investigation before granting clearance. In the U.S., if you don’t receive early termination, the waiting period simply expires, and you can proceed with the deal. 

In these cases, no news is good news, but you may still receive a closing statement from the agencies, confirming that the investigation has concluded and you can move forward with the acquisition.

Impact of HSR filing on the deal timeline

In the U.S. and other jurisdictions, you can file your HSR form based on a preliminary agreement like a Letter of Intent (LOI) or a Memorandum of Understanding (MOU). The filing doesn't require a final agreement, just a good faith intent from the parties to move forward with the transaction. These preliminary agreements can even be non-binding, as long as they demonstrate intent.

When dealing with higher-risk transactions that exceed HSR thresholds, especially if you anticipate questions about horizontal or vertical issues, you’ll want to factor potential delays into your timeline. For example, if you're expecting a second request in the U.S. or a phase two investigation in Europe, you might extend the closing date to six months or even a year.

While antitrust is a significant factor in determining the timeline, there are other considerations, like satisfying conditions precedent or notifying third parties such as suppliers or partners about changes in control. These factors can also influence the period between signing and closing.

The longer the period between signing and closing, the more focus you'll need on managing gun jumping risks. This involves being careful about not taking premature control of the target and structuring information flows carefully during due diligence and integration planning. The longer the timeline, the more attention you'll need to give to these compliance aspects.

What does the HSR form look like?

As of late July 2024, the HSR form is relatively simple. You need to provide revenue figures for both your company and the target company, categorized by North American Industry Classification System (NAICS) codes. You’ll also need to include general corporate information.

One of the most important parts of the HSR form is the inclusion of what's called the "4C" and "4D" documents. The 4C documents are created by or for the board of directors and discuss the deal's potential effects on markets, competition, and market concentration. 

These documents are often the most interesting part of the HSR form. Additionally, you need to provide information on any prior transactions.

About a year ago, the FTC and DOJ issued a consultation suggesting dramatic changes to the HSR form. These proposed changes would require more detailed narratives about the deal's competitive impact, information about overlapping directors between the merging companies, and additional deal documentation. 

If these changes are implemented, the HSR form would become more like the European Union's form CO, which requires detailed explanations of relevant markets and market concentration.

For now, the HSR form in the U.S. remains relatively simple compared to filings in places like Europe, India, South Africa, and Brazil, where more detailed information is required. However, the FTC and DOJ received thousands of comments during the consultation period on the proposed revisions, and the final rulemaking has not yet been issued. 

We’ll have to wait and see if the agencies move towards a more extensive filing process under the Hart-Scott-Rodino Act.

How to land the narrative in a merger

From an antitrust lawyer’s perspective, antitrust law is very fact-specific. In the U.S., for example, the primary statute is Section 7 of the Clayton Act. It’s simple on the surface, stating that mergers that substantially lessen competition in any line of commerce are prohibited. 

However, the complexity comes when you apply this to the specifics of the businesses involved in the merger.

When evaluating a merger, it’s critical to gather detailed facts. You need to speak with the business leaders from both companies to understand their products, how they compete, and whether they are the next best substitutes for each other. 

Are they competing on price, service, or other factors? What’s the rate of innovation in their markets? Are new competitors entering, or are others exiting? What would the post-merger market share look like?

You also need to consider the capacity of the companies and whether foreign competitors could enter the market. These are just a few of the questions that help build a factual foundation.

Once you have a clear understanding of the facts, you can begin crafting the narrative. The key is to demonstrate that the merger will not harm competition but instead benefit it. You need to show that the combined company won’t be able to raise prices post-merger, either on its own or through coordination with other competitors. 

Additionally, highlight how the merger can drive innovation or bring products to market faster, benefiting consumers. You want to frame the merger as being in the customer’s interest, whether through better pricing, faster innovation, or improved product offerings.

It’s crucial to maintain a consistent message across all stakeholders—agencies, customers, vendors, and employees. One common pitfall is telling different groups conflicting stories, which can lead to confusion. 

You need to ensure that what you tell one agency, such as the Department of Justice in the U.S., is consistent with what you tell other agencies, like DG Comp in Europe. These agencies are in communication with each other, and conflicting narratives can create problems.

At the end of the day, landing the narrative isn’t rocket science. It starts with understanding the facts and then ensuring that your story is consistent, clear, and focused on how the merger will benefit competition and consumers.

A brief history of antitrust laws

The origins of the Sherman Act

The Sherman Act in the United States was enacted in 1890 during the Gilded Age. Senator John Sherman, the younger brother of Civil War General Tecumseh Sherman, led the sponsorship of the law. 

Interestingly, antitrust legislation in North America actually started in Canada a year earlier, in 1889, before the U.S. introduced the Sherman Act.

The term "antitrust" comes from the concern at the time about trusts, such as John D. Rockefeller's Standard Oil, which brought various industries like railroads, oil production, and mining under common ownership. 

The concern was not only economic—fearing monopolies could raise prices or stifle innovation—but also political, with a fear that economic power could translate into political power, threatening democracy.

The Magna Carta of Free Enterprise

In 1972, Justice Thurgood Marshall referred to antitrust laws as the "Magna Carta of free enterprise," emphasizing their importance in protecting economic liberty, much like the Bill of Rights safeguards civil liberties.

The creation of the Federal Trade Commission and the Clayton Act

In 1914, the Federal Trade Commission (FTC) was established with the Federal Trade Commission Act. While the Sherman Act outlaws cartels and monopolies, the FTC Act expanded on that by prohibiting unfair methods of competition, which included cartels, monopolies, and other practices.

The Clayton Act, enacted around the same time, targets mergers that substantially lessen competition, further strengthening antitrust enforcement.

Amendments and the Hart-Scott-Rodino Act

In the 1950s and 1960s, the penalties for violating the Sherman Act were significantly increased. Then, in the 1970s, the Hart-Scott-Rodino (HSR) Act was passed, which introduced the pre-merger notification process we've discussed.

Are antitrust laws still fit for purpose? There’s an ongoing debate about whether antitrust laws, founded in the late 19th century, are still effective for regulating and policing markets in the 21st century and beyond. This debate is happening both in court cases and academic circles, and it's a fascinating discussion to be a part of.

The evolution of antitrust laws

The Clayton Act actually came a bit later, during the Wilson administration, not Roosevelt. At that time, there was a perception that the Sherman Act hadn’t done enough to prevent market concentration. The FTC Act and Clayton Act were introduced to address those gaps. 

What’s fascinating is that the debates from the 1890s—about breaking up monopolies and preventing economic power from turning into political power—are still ongoing. We haven't fully resolved those questions in the 130 years since. 

What Standard Oil represented back then might be seen in today's big tech companies, according to some perspectives. We’re still grappling with those fundamental issues.

While we’ve developed a significant body of jurisprudence to define what constitutes a "substantial lessening of competition" and how to define markets, the core debate about economic power’s impact on political power remains. 

Antitrust law is both a legal and economic field, and we’ve built extensive frameworks to understand competitive conditions during mergers. However, the question of whether this is the most effective way to police economic power is still very much alive.

I should clarify that my previous comments have been very U.S.-focused. Antitrust law has become a global phenomenon over the course of my career, which spans over 25 years. Today, around 120 countries enforce some form of antitrust law, and this expansion has accelerated recently.

After World War II, with the Marshall Plan and post-war reconstruction, Europe began enacting its own competition laws. Antitrust laws then spread to key economies like Japan and South Korea. In the past 20 to 25 years, major developing economies such as South Africa, China, India, and Brazil have also adopted competition laws.

While my earlier comments focused on U.S. history, antitrust enforcement has clearly become a global issue. This is especially important for companies like FedEx, which operate worldwide. Antitrust regulations now span over 120 countries and territories, making it a critical consideration for any global business.

Risks during the waiting period

During the waiting period, you’ll be engaging with regulatory agencies. Let’s say for our hypothetical deal, we have filings in the U.S., Europe, China, and Australia. You’ll need to ensure your messaging is consistent across all these jurisdictions. 

As in-house counsel, it's crucial to have external counsel both in the U.S. and in local jurisdictions like China, Europe, and Australia to navigate their specific regulations.

You'll also want to have an economist on board to help explain the economic aspects of the deal. This engagement with agencies will be both proactive (submitting documentation) and reactive (responding to requests for additional information, such as second requests in the U.S., which can involve extensive discovery).

Simultaneously, you'll be conducting due diligence, which introduces the risk of gun jumping—taking premature control of the target company before the deal closes. Due diligence is now conducted through virtual data rooms (VDRs), but sensitive information like customer lists, prices, or salaries should not be widely accessible. 

You'll need a "clean team" of individuals who aren't involved in competitive decision-making to review this sensitive information, helping to mitigate gun jumping risks.

It's important to remember that even if the deal falls apart due to financing issues, valuation changes, or personal reasons, gun jumping violations can still create problems.

Another major risk is prematurely exercising control over the target company, which can start with how your agreements are structured. For example, in your stock purchase or asset purchase agreement, you'll want to be cautious with material adverse effect clauses. 

If the thresholds are too low, you could end up controlling day-to-day operations of the target company, which violates antitrust regulations.

You can’t get involved in ordinary course decisions, such as hiring or signing up customers, before closing the deal. However, if there are key employees you want to retain post-acquisition, you can plan for that while avoiding interference in daily operations.

In addition to controlling the narrative, it’s essential to ensure that your internal documents, deal documents, and what’s being said by both the acquirer and the target are aligned. In the U.S., the HSR form requires the submission of "4C" documents, which include presentations to officers or directors discussing the deal’s impact on markets and competition.

Agencies may also request ordinary courses of business documents. If any of these documents contradict your narrative, it could cause issues. For example, while you might claim the merger won’t lead to monopolistic power, your bankers may position the deal as a way to increase market leverage, which agencies could use against you.

One common pitfall is when deal documents or ordinary business documents are inconsistent with the narrative. 

For instance, if the target company is playing up its market power to secure a buyout, and those claims appear in documents, they could come back to haunt you during an investigation. It’s crucial to be aware of these documents before agencies do, so you're not caught off guard in depositions or regulatory reviews.

The importance of avoiding Gun Jumping

Avoiding gun jumping is a big fundamental point. As long as you avoid a second request, things generally go pretty smoothly. If you don’t get a second request or a Phase 2 in Europe, or their equivalents in China, India, etc., the process can move more quickly. 

You may have to answer questions or submit documents within the initial 30-day period, but avoiding Phase 2 is ideal. There are ways to do this, such as effective advocacy.

For example, if Company A operates primarily on the West Coast and Company B on the East Coast, but they compete in Kansas City, you could present a solution to the agencies. 

You could identify a third competitor, Company C, which is ready to buy the overlapping business, resolving the issue before it escalates—this is called a "fix it first" approach. By addressing the problem upfront, you can potentially avoid a longer investigation.

A second request is often very intrusive, expensive, and extends the pre-closing period significantly. When you receive one, you're required to provide a lot more documentation and data for the agency to review. It becomes a much deeper investigation.

The second request allows the agencies to gather evidence and prepare for the next stage, which may include depositions of your corporate executives. They’ll base their questions on the documents you submitted. If they find something damaging, like a Slack message saying, "We’re going to kill this competitor," it will certainly be held against you.

It’s interesting you mention Slack because agencies recently updated their guidance, stating that companies have an obligation to preserve potential evidence on platforms like Slack, Teams, and WhatsApp. 

In the past, lawyers worried that email was the death of legal privilege. Now, the focus has shifted to these modern communication tools. Agencies are fully aware of how people communicate today, and they’ll want access to that information too.

Best practices for internal communication during a deal

I wouldn’t recommend advising your team to avoid documentation entirely or to use the phone instead. Major corporations need documentation for accountability. Instead, I would advise being mindful of how you characterize things in writing.

For example, terms like "market share" or "market power" have specific meanings in antitrust law, meanings shaped by over a century of case law and economic analysis. The way a business might use these terms may differ from their legal interpretation in an antitrust context.

There have been instances where the DOJ or FTC have pointed out that companies received guidance on how to communicate, or were told to avoid using email in favor of internal chat systems. I wouldn’t recommend that. Instead, simply be careful. Business documents are scrutinized, often out of context, page by page.

Ultimately, it’s about being cautious. Don’t put anything in writing that you wouldn’t want to see on the front page of the Wall Street Journal. That’s a good rule of thumb for any sensitive business dealings.

Understanding deal review risk in advance

No, you're rarely going into a deal completely blind. As we discussed earlier, the main concerns often involve horizontal overlaps or vertical foreclosure issues. The first thing agencies will examine are your deal documents. 

If these documents suggest the merger would result in a large market share or reduce the number of competitors, it's likely to raise red flags for the agencies.

While you won't have perfect information at the outset, your ordinary course of business documents will reveal more as the deal progresses. This evidence, whether good or bad, will help shape your theory of why the deal won't harm competition. It's better to uncover these insights yourself rather than having them brought up by the agencies.

In the U.S., the framework is fairly transparent. The DOJ and FTC have issued merger guidelines outlining the substantive questions they’ll ask, and many antitrust lawyers, including those with agency experience, are familiar with the process. 

So, while you may not know everything upfront, you should have a strong sense of where the risks lie and how much scrutiny to expect.

What happens if a deal is rejected?

You can appeal, but it depends on where you are. In the U.S., under the Hart-Scott-Rodino (HSR) Act, the Federal Trade Commission (FTC) or the Department of Justice (DOJ) cannot stop a deal outright. 

If they want to block a deal, they need to seek an injunction in federal district court to stop the merger. Typically, they would file for a preliminary injunction. If granted, this often has the effect of killing the deal, since it may push the transaction beyond its closing date, drying up the financing.

In the U.S., you would get your day in court if the agency wants to block the deal. However, you might also agree to remedies such as divesting certain assets to avoid litigation and enter into a consent decree, which is essentially a settlement.

State attorneys general and private plaintiffs, including class action plaintiffs, can also sue under Section 7 to block a deal, even though they don’t have any pre-merger filing obligations.

In Europe, it’s a different story. The European Commission’s DG Competition can prohibit a deal outright, and once they say it violates competition law, the deal is dead unless judicial review overturns the decision. 

However, winning an appeal can be a pyrrhic victory. For instance, UPS tried to acquire Dutch courier company TNT in 2015, but DG Comp rejected the deal, effectively killing it. FedEx later acquired TNT, and even though UPS won its appeal in court, the deal had already fallen apart.

In other jurisdictions like India, Australia, and Brazil, the process varies, but the general principles are similar.

Increased aggressiveness of antitrust regulators

Antitrust regulators have been getting a lot more aggressive lately, especially in the U.S. under the Biden administration. There have been a lot more second requests from agencies, and early terminations under the HSR Act were suspended for a while, partially due to COVID. While it has somewhat relaxed, the scrutiny is still higher than before.

Internationally, regulators in Europe, Canada, India, South Africa, China, and Brazil have also been very active. I wouldn’t call it "aggressive" in a negative sense—they’re just doing their job to protect competition in their jurisdictions. They engage fully with merging parties and cooperate with other agencies, even across borders.

For example, there was some criticism around how much information was exchanged between the European Union and the FTC in the Illumina-Grail deal. While I don’t know the details, it’s a good reminder that agencies do communicate. 

This cooperation is common, especially in cartel enforcement. For international deals, you should assume agencies are talking, which is why a consistent message across jurisdictions is crucial.

Real consequences for gun jumping

I've seen companies actually get in trouble for gun jumping. Thankfully, not for any client I’ve represented, but just in 2024, I saw cases of gun jumping fines or investigations in China, India, Mexico, and Spain. In the U.S., both the FTC and DOJ have been very active as well.

For example, in the Illumina-Grail case in July 2023, they received a €430 million fine for closing the deal before getting clearance from DG Comp. That’s one of the highest fines ever for gun jumping, and it’s currently under appeal in the European courts.

During my time as executive director at the Jersey Competition Regulatory Authority (JCRA), we bought a few gun jumping cases. We fined a company for closing its acquisition of CityJet without the required filing in Jersey. So, I’ve seen it firsthand as a regulator, though fortunately not from the defendant's side.

Balancing integration planning with gun jumping risks

It’s definitely challenging. To make things more complicated, what if you already have an existing business relationship with the company you're acquiring? This can get tricky when it comes to renewing long-term supply relationships, for example. 

You’ll need to keep pre-existing business relationships separate from the deal to avoid premature control, which can be complex.

When it comes to integration planning, the key legal principle is you can plan for integration, but you can’t implement those plans before closing. 

For example, if you need access to sensitive information like salaries, set up a clean room where only a subset of people can review the data, keeping the rest of the team uninvolved until after the deal closes.

There's also due diligence, which goes beyond antitrust—like asking if the target is involved in any government investigations, anti-corruption issues, or antitrust violations. You can't do something invasive like a forensic email search during due diligence, but post-close, you can dig deeper. 

The DOJ even offers a six-month window post-acquisition to self-report any illegal activity you discover and potentially reduce fines.

As you get closer to closing, especially once you’ve received clearance from agencies like the FTC or the European Commission, the focus on gun jumping becomes less acute. There are also practical issues, like ensuring employees can still access buildings with their ID badges and that they get paid on day one. 

While gun jumping concerns remain, practical considerations often take precedence as the deal closes. It's all about balancing legal risks with the need to ensure the business can function smoothly post-close. 

You can start testing systems, like IT platforms, before the deal is finalized in a hypothetical environment, but you can't combine them until after closing. As antitrust lawyers, we need to stay vigilant and guide the process carefully.

The key to preparing for regulatory compliance

The best way to prepare for regulatory compliance is to fully understand the facts and the business itself. You need to be all over the business documents and deeply familiar with what your client does.

Early engagement is critical. In my experience at FedEx, we have a world-class legal team, and I'm often brought into deals very early, both from an antitrust and compliance perspective. 

This early involvement allows me to gain detailed knowledge of the facts and help shape the narrative for regulatory filings—demonstrating why the deal is good for the company and competition.

Early and ongoing engagement is essential, not just for M&A compliance but for corporate legal compliance as a whole. Being a proactive business partner and knowing the intricacies of your business ensures smooth regulatory processes.

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