Remedies and Cooperation: What Have we Learned – R. Damtoft USFTC – 2017 Latin American and Caribbean Competition Forum

Remedies and Cooperation: What Have we Learned

The views expressed herein are solely those of the author and do no necessarily represent the views of the Federal Trade Commission or any individual Commissioner.

Russell Damtoft Office of International Affairs

United States Federal Trade Commission Latin America and Caribbean Competition Forum

Managua, Nicaragua

What’s New

• 2017: FTC retrospective study on the effectiveness of merger remedies. – What works, what doesn’t.

• 2017: FTC/DOJ revised guidelines on international enforcement and cooperation. – Added major section on cooperation.

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Remedies: Block, Permit, or Negotiate • Formally, U.S. agencies have two

choices following merger review: – Challenge it in court – Allow it to proceed

• Most merger problems are limited in scope – Remedies can fix the problem. – Remedies usually negotiated with

parties as an alternate to a challenge – Generally not imposed by the

agencies unilaterally 3

Types of Merger Remedies

• Structural remedies: – Maintain, restore, or increase the pre-merger

competitive situation – Rely primarily on market forces to maintain or

restore competition • Behavioral remedies:

– Prohibit or require conduct – Requires agency supervision

• Some orders use both 4

Structural Remedies: Divestitures

• Divestitures are the most common structural remedy – Create viable competitors – Buyers are able to enter business – Assets/businesses remain “in” the market, for

some meaningful time • Structural remedies can also include

removal of barriers to entry

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Principles of Merger Remedies

• Any remedy should . . . – Address the competitive threat that would be

created by the acquisition – Fit the facts of the case, the theory of harm, and

the characteristics of the relevant market – Be easy to administer and enforce

• A good remedy should be tested with suppliers, customers, competitors

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Historical Experience with Remedies

• Structural remedies work better – Create or strengthen a competitor to replace

that lost by the merger – Eliminate barriers to entry or expansion

• Behavioral remedies less desirable – Required conduct may not align with market

incentives – Ongoing monitoring required – But sometimes it’s the only option – Often used short-term to facilitate divestiture 7

1999 Merger Remedies Study • Examined divestitures from 1990-1994 • Led to changes in FTC merger practice

– Required buyer up front in more cases – Shorter divestiture period required – Increased use of monitors

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2017 Study • Examined 89 merger remedies

– Case study for 50 mergers – Questionnaires for 15 in cases where markets are

local – 24 involved pharmaceuticals – special expertise

• What we learned – 100% of remedies involving the sale of an ongoing

business succeeded – 70% of remedies involving sale of assets that are

less than an ongoing business succeeded – Success is defined as restoring or maintaining

competition in the affected market

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A Somewhat Intuitive Conclusion

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Which package of assets is more likely to work?

Study Shows that Details Matter

• Divestitures of something less than an ongoing business requires more scrutiny – Source of funding – Time for due diligence for buyer – Buyer access to key employees and facilities

• Back office functions – details matter – Integration of systems into buyer’s business

may be complicated – E.g., IT, human resources, finance, legal

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Applying Lessons Learned

• Assets to be divested depend on: – the theory of harm – what is necessary to ensure full and viable

relief • What is to be divested

– Complete divestiture of a stand-alone business entity preferred

– Partial divestiture of limited assets possible but more scrutiny required

• Key question: what would prevent harm from the merger?

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The On-Going Business Unit • Presents least risk • Ensures remedy will immediately eliminate

competitive problems • The business unit should include

– Manufacturing facilities – Access to key inputs – Research and development capabilities – Intellectual property, technology, know-how – Key personnel – Access to capital

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“Up Front” Buyers • Requires parties to find acceptable buyer for

divested assets before final order is made • More likely required when it’s less than an

ongoing business unit • Helps resolve concerns about:

– Whether divested assets were sufficient – Whether a good buyer will be found – Whether necessary third-party approvals will be

obtained – Risk that competition will be lost during the search

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Terms of Relief

• No minimum price – “Fire sale” prices are common – Incentive for firms to divest overlapping assets

before merger announced • Buyer must be acceptable to the agency

– Cannot be anticompetitive – Buyer must be capable of using assets

successfully – Beware of asset shoppers – Agency actively participates 15

Remedies in Cross-Border Cases • Remedies are designed to protect domestic

commerce and consumers – Seek to avoid remedies that conflict with those of

foreign agencies – Remedies involving foreign assets or conduct sought

only to extent needed to protect competition in the US • Negotiated remedies may address concerns of

multiple jurisdictions • Sometimes a remedy in another jurisdiction will

solve the problem. 16

International Coordination

• The growth of cross-border commerce has led to a growth in cross-border mergers

• While mergers can affect many jurisdictions, competition problems are not always the same. – Market structure – Timing – Remedial powers

• Cooperation is no longer optional! 17

U.S. International Guidelines

• January 2017: US FTC and US DOJ issue updated guidelines for international enforcement and cooperation

• New Section on International Cooperation – Investigative tools – Confidentiality – Legal basis for cooperation – Information exchange and waivers – Remedies

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Cooperation and confidentiality • Effective cooperation involves exchanging

information on: – Markets affected – Theories of harm – Anticompetitive effects – Possible remedies – Timing

• Information exchanges are subject to: – National confidentiality legislation – Internal regulations and practices

• The challenge: cooperating while protecting confidentiality

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Protecting Confidences Matters • Confidential commercial information and

trade secrets • Effective cooperation often depends on

merging firms – Firms more likely to cooperate if they are

confident about confidential treatment – Maintaining a reputation for protecting

confidential information is critical to success

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Confidentiality and Waivers • Legal confidentiality protections usually belong to

the party supplying business information – The party supplying the information may waive that

protection • But confidentiality protections of the agency’s

own information usually belong to the agency – The agency may choose to share that information when

it is convinced that confidentiality will be maintained • In many cases, parties waive confidentiality to

facilitate cooperation • Especially useful for coordinating remedies

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Classification of Shareable Information 1. Publicly available information

– General knowledge about markets – Published information

2. Information normally kept confidential, but not protected by law (“Agency Confidential”)

– Can often be shared under assurances of confidentiality – E.g., timing, theories about markets and competitive effects

3. Information protected by law (“Party Confidential”) – Can only be shared if party waives protection – E.g., merger filings, third party data, proposed remedies

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1. Public Information

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Do you know if anyone has tried to enter this market?

Yes, Alpha Corporation built a new factory here last year.

Were they able to compete successfully?

Yes, I think so. I will send you a link to their annual report where they report it has done well.

2. Agency Confidential Information

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We think the market includes small cars but not minivans.

Why do you think that?

Sorry, but I can’t say without revealing protected data.

OK, I understand. Anyway, our market sources are telling us the same thing.

3. Model Waivers

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Agreements Reinforce Cooperation • Formal cooperation agreements:

– Articulate an existing relationship of trust, – Share a commitment to cooperation, and – Include confidentiality commitments.

• Most agreements do not: – Supersede confidentiality laws, – Provide powers not already allowed under law.

• United States or agencies: – Thirteen bilateral cooperation arrangements – Party to multilateral arrangements: OECD, ICN

framework

Putting Cooperation into Practice • Learning of the transaction and the reviewing agencies

– Media, securities filings, website, parties – Initiating early contact

• Initial discussion(s) – Determining/coordinating review timetables – Initial thoughts on markets, potential competitive effects, possible

common interests – Possible waivers

• Continuing Dialog – Regular calls over course of investigation – Refine views on competitive effects and their scope – Discussion of remedies

Conclusion

• “Getting to know each other” matters

• The most important instruments of cooperation are the telephone and e-mail!

• Thank you for your attention! – [email protected]