M&A Review in the Age of Trump: Divestment and Enhanced Consent Decree Enforcement

Last month, leaders of the DOJ Antitrust Division announced key points of emphasis in curtailing anti-competitive mergers and acquisitions. President Trump’s recently appointed Antitrust Division chief, Makan Delrahim, said at the end of January that the DOJ favors structural remedies—that is, divestment of assets or businesses—over behavioral remedies. The DOJ also will include new consent decree provisions that enhance enforcement in the event of future noncompliance. These changes are guided by the overarching principle that “antitrust enforcement is law enforcement, not regulation.” Companies should take note of the DOJ’s renewed emphasis on divestment and new efforts to enforce ongoing compliance with its consent decrees.

The DOJ and Consent Decrees

The DOJ Antitrust Division routinely investigates and in some cases sues to prevent potentially anti-competitive mergers and acquisitions. The pace of enforcement has not slowed in the new administration. If the DOJ’s investigation confirms that the potential transaction—or in some cases, an already consummated transaction—would violate the antitrust laws, the DOJ may resolve the matter through consent decrees. A consent decree is a settlement agreement that operates as a contract and a court order. Unlike private contracts, however, consent decrees are public record, and they provide key guidance on the DOJ’s priorities. The DOJ will settle a case by consent decree if it believes it is sufficient to “(1) stop the illegal practices alleged in the complaint, (2) prevent their renewal and (3) restore competition to the state that would have existed had the violation not occurred.”

Structural Remedies to Horizontal and Vertical Merger Enforcement

The DOJ’s stated preference for “structural remedies” over “behavioral remedies” marks a notable point of emphasis in horizontal and vertical merger enforcement following the 2016 election. During the Obama Administration, the DOJ published the 2011 revisions to the “Antitrust Division Policy Guide to Merger Remedies.” That revision discussed the use of structural remedies but also emphasized behavioral, or what it called “conduct” remedies, particularly for vertical mergers. Common types of behavioral remedies include firewall provisions, non-discriminatory provisions, mandatory licensing provisions, transparency provisions, anti-retaliation provisions and prohibitions on certain types of contracts. Scholars noted that these revisions were a departure from the Bush administration’s preference for structural remedies, namely, divestiture of assets, business entities, or certain intangible assets. The prior 2004 revision to the Merger Remedies had stated expressly “[s]tructural remedies are preferred to conduct remedies in merger cases because they are relatively clean and certain, and generally avoid costly government entanglement in the market.” The 2011 revisions dropped this language.

Delrahim and Principal Deputy Assistant Attorney General Andrew Finch recently made remarks that echo the 2004 revisions to the Merger Remedies. Finch, speaking on January 23, 2018, as a panelist at the Heritage Foundation’s conference, “Trump Antitrust Policy after One Year,” stated “the Division will continue to favor structural relief rather than behavioral relief. Behavioral relief can be at odds with the purpose and design of the Sherman Act because behavioral conditions are fundamentally regulatory, imposing ongoing government oversight on what should preferably be a free market.” Two days later Delrahim stated essentially the same thing in remarks to the New York Bar Association.

Delrahim’s remarks also touted three merger settlements, all announced within the same week at the end of December, as illustrations of the DOJ’s renewed emphasis on structural remedies:

• Parker-Hannifin Corporation Settlement: On December 18, 2017, the DOJ announced a settlement with Parker-Hannifin following its February 28, 2017 acquisition of one of its competitors, CLARCOR. Before the acquisition, both companies were the only manufacturers of aviation fuel filtration systems and elements sold in the United States that were qualified by the Energy Institute—a professional association in the energy industry. The DOJ filed suit in September 2017, asserting that the already-consummated acquisition created a monopoly and would eliminate competition resulting in increased prices, decreased services and product innovation, and slower delivery for these types of products. The proposed settlement requires Parker-Hannifin to divest its Facet filtration business.
• TransDigm Group, Inc. Settlement: On December 21, 2017, the DOJ announced a settlement with TransDigm Group following its February 22, 2017 acquisition of two SCHROTH entities from Takata Corporation. Before the acquisition, TransDigm’s subsidiary, AmSafe, was SCHROTH’s main competitor in the supply of restraint systems used on commercial airplanes. The DOJ filed suit simultaneously with its announced settlement, alleging the loss of competition resulting from the already-consummated acquisition would result in higher prices and reduced innovation. The proposed settlement requires TransDigm to divest all of the SCHROTH entities.
• Vulcan Materials Company Settlement: On December 22, 2017, the DOJ announced a settlement with Vulcan Materials following its proposed $900 million acquisition of Aggregates USA from SPO Partners. Both Vulcan and Aggregates USA produce and sell coarse aggregate. The DOJ filed suit, alleging that the loss of competition would result in increased prices and poorer customer services in certain geographic areas. The proposed settlement requires Vulcan Materials to divest all of Aggregates USA’s active quarries, yards, and plants in certain geographic areas.

Notably, the Parker-Hannifin and the TransDigm suits were filed months after the transactions closed. And the original TransDigm Group transaction was not reportable under the Hart-Scott-Rodino Act.

Changes to Consent Decree Enforcement

In these same remarks, both Delrahim and Finch announced the DOJ’s efforts to enhance ongoing enforcement of finalized consent decrees. Each of the proposed consent decrees filed with the settlements summarized above contained the following new provisions:

• Extension/termination provisions: The DOJ may apply for an extension of the term of a consent decree if a court finds that decree has been violated. But the DOJ also may terminate the decree upon notice to the court and the defendants. Delrahim explained that terminating decrees is the DOJ’s way of recognizing “that market circumstances can change in ways that obviate the need for a consent decree or even make its continuation counterproductive.”
• Burden of proof: The burden of proof for establishing violations of the consent decree will be “preponderance of the evidence” instead of the more rigorous and more difficult to prove “clear and convincing evidence” standard. In support, Finch stated, “we believe [this] will reduce costs and increase the effectiveness of consent decree enforcement.”
• Fee-shifting provisions: Defendants must reimburse the United States for attorneys’ fees, expert fees, and any costs incurred as a result of a successful consent decree enforcement effort. As Delrahim explained, “[t]he goal of fee shifting is to encourage speedy resolution of decree violation investigations, and to compensate taxpayers for the costs associated with investigation and enforcement necessitated by the violation.”

Implications

As these recent settlements indicate, merger enforcement during the Trump administration is not likely to diminish. Parties that wish to consummate a potentially anti-competitive merger or acquisition — at either the horizontal or vertical level — should consider the risk that the DOJ may insist on divestment of key assets, business entities, or intangible assets. They should also not assume that their risk is non-existent merely because the transaction is already consummated. As the DOJ’s recent settlements illustrate, the agency has discretion to investigate and potentially require divestment months after the transaction is completed. Parties additionally should be aware that any consent decree governing the transaction likely will give the DOJ greater ammunition to penalize any party that violates the decree.

Companies interested in merging with, acquiring, or being acquired by a competitor or another entity within the supply chain—or companies that recently have completed a merger or acquisition—should consult with legal counsel to fully appreciate their antitrust risk even if an HSR filing is not required.