Article Kirkland & Ellis LLP

Mergers, Acquisitions, Joint Ventures, and Strategic Alliances: Antitrust Compliance Guide

The Purpose of this Guide
This Guide is intended to assist you in understanding the antitrust implications of potential acquisitions, mergers, joint ventures, and strategic alliances between the Company and other companies. It is designed to acquaint you with the general nature and overall scope of the antitrust laws applying to such transactions. This Guide is not a substitute for consultation with the Legal Department. It is intended to emphasize the importance of involving the Legal Department whenever you realize that antitrust issues are raised. Consultation with the Legal Department is essential to maximize the likelihood of expeditious, cost-efficient consummation of deals and to make sure that the Company's policy of full compliance with the letter and spirit of the antitrust laws is implemented at all levels, and in all circumstances.

After briefly reviewing the applicable antitrust laws, this Guide explains the various antitrust issues raised at each stage of a potential transaction with another company -- from the identification of a candidate, through due diligence, and ending in consummation.

The guidelines discussed apply to all kinds of potential transactions, including: (a) mergers; (b) acquisitions of the stock or assets of another company; (c) sales of the stock or assets of the Company or sales of stock or assets of a subsidiary to another company; and (d) joint ventures or strategic alliances between the Company and other companies. For convenience, all of these types of transactions will be referred to in this Guide as "mergers" or "transactions." The most sensitive from an antitrust perspective are horizontal transactions, i.e., those involving assets or businesses that compete directly with the Company in a given product category.

The Applicable Antitrust Laws
The antitrust laws of the United States, the European Union and its member states, and other industrial nations, including Canada, Mexico, Brazil and Japan, are broad and far-reaching. They affect nearly all of our Company's business activities and transactions, including mergers and other transactions.

The fundamental purpose of these antitrust laws is to promote free enterprise by prohibiting business activities that unreasonably restrain or suppress competition. The antitrust laws benefit the public because vigorous competition provides consumers with a greater supply of higher quality, more innovative products and services at lower prices. Companies such as ours benefit from the antitrust laws as well, due to the stimulus to excellence provided by competition, and by protection from the actions of others, that unreasonably would hinder the Company's ability to compete freely in an open market.

One portion of the U.S. antitrust laws, Section 7 of the Clayton Act, specifically prohibits transactions that may tend to lessen competition substantially. The principal concern is with transactions that will allow the acquiring company, or the joint venture entity, to control sufficient output of the goods or services (including research and development) involved to be able to increase prices to consumers by restricting its own output, or by agreeing with other competitors to restrict their output, so as to increase prices.

The European Union and other industrial nations have laws reflecting similar concerns over transactions that create a "monopolist" or "dominant" firm (i.e., one capable of unilaterally affecting price by restricting its own output) or increase the likelihood of "collusion" (i.e., an "agreement" with another (or other) competitor(s) to fix prices, restrict output, or allocate customers). A specific additional concern over joint ventures is that they may facilitate agreements between the companies involved that relate to matters beyond the legitimate intended purposes of the joint venture.

This Guide obviously cannot recap all the antitrust laws from every nation in which the Company does business. There are countless variations in the provisions of such laws and their application. Employees should exercise the same degree of caution in conducting business in foreign nations as they exercise in the United States. The Legal Department should be asked for specific antitrust counseling about foreign antitrust requirements, particularly in regard to any communications or other relationships with competitors.

Communications With Competitors
The watchword for antitrust compliance is "independence." Our Company acts independently in all its business activities: when it sets the prices at which it buys or sells, when it decides on the other terms and conditions of its sales and purchases, when it decides the quantities and locations of its sales and purchases, and when it selects its customers and suppliers. When the Company enters into legitimate business transactions for the purchase or sale of a product with an actual or potential competitor (e.g. , a supplier or customer who could also become a competitor), the Company will do so only for its own independent business reasons and only with prior Legal Department approval. When the Company enters into joint ventures, it will make no agreements with its joint venture partner(s) that limit the Company's freedom of action on any matters outside the joint venture, such as limiting the Company's ability to compete with the joint venture, without the approval of the Legal Department.


The antitrust laws require particular caution regarding any discussions with a competitor relating to:

  • prices, pricing, and terms of sale;
  • allowances for promotions, advertising, or sales and marketing programs;
  • costs, cost structures, and profit levels;
  • output planning;
  • customer or market allocations;
  • agreements to refuse to deal with other firms; or
  • any other matter where an agreement with a competitor would be inconsistent with the Company's freedom to act independently in the conduct of its business.

There is NO EXCEPTION in the antitrust laws for discussions with a competitor in the context of a potential merger or other transaction. A company remains a competitor until the closing has taken place, even if there is a signed, definitive agreement to purchase the company and the closing is scheduled for a date certain.

No "Price Fixing"
"Price fixing" agreements are the most frequently and vigorously prosecuted type of antitrust violation. The prohibition against "price fixing" applies broadly to any understanding or "agreement" with respect to prices, credit terms, promotional programs (e.g., whether to advertise), or other terms and conditions of sale (e.g., F.O.B. or freight terms). "Price fixing" can occur even if there is no agreement on specific prices; it only requires an understanding, by two or more competitors, to raise, lower, peg, or even just stabilize (or stop lowering) the prices at which they sell or the prices that they will pay for raw materials. An employee and the Company can be found guilty of "price fixing" even if the understanding does not work (and experience teaches that such agreements rarely work for any sustained period of time).

Example: Representatives of two competitors are in a discussion about a possible joint venture when someone says, "These falling prices are killing us. I don't know about anyone else, but we are going to hold the line." Within a month, prices of both competitors begin to firm. That would be "circumstantial" evidence of an agreement to fix prices.

No "Invitations to Collude" or "Price Signaling"
Even an attempt at fixing prices will be aggressively prosecuted by the government as well. Thus, even if the competitor in the foregoing example does not also "hold the line," the company making that statement can be prosecuted for an "invitation to collude." Indeed, the competitor can turn in the person making the "hold the line" statement to the antitrust authorities for prosecution. That happened to the chairman of American Airlines when he made a statement to the Chairman of Braniff suggesting that both of them raise prices. The Braniff CEO tape recorded the conversation, and then gave the tape to the Department of Justice's Antitrust Division.

Similarly, beware of announcements of planned price increases. Future prices only should be communicated to those people with a legitimate business need to know, and no further in advance of the effective date than is reasonably necessary for legitimate business planning purposes. The antitrust authorities carefully monitor advance price announcements to see if companies are engaged in "price signaling" as a way of achieving an agreement to raise or stabilize prices.

With the exception of mass, direct-to-consumer goods, it is unlikely there will ever be legitimate business reasons for a press release about future price increases. However, announcements may be necessary to financial analysts of a publicly held company, where a planned price increase may be material to future earnings projections. Nonetheless, future prices are the most antitrust sensitive topic. Therefore, any discussion about future prices with competitors, the press, or the public should only occur after consultation with the Legal Department and in a manner, and at a time, approved by the Legal Department.

No Allocations of Supply or Markets
Agreements among competitors (or potential competitors) concerning the quantities of goods that are to be purchased, produced, or marketed; the geographic areas into which they will sell; or the customers to whom they will sell, are considered by the antitrust laws to be just as serious as price fixing.

Example: Because of a concern that supply and demand might be out of balance in a particular market area, in the course of merger negotiations, one competitor discusses with another competitor how much they intend to supply to that market area. That can be used as evidence of an agreement to allocate markets.

(Agreements relating to product quality also may be illegal, but some joint actions, such as those involving public standard setting, joint research and development, or production may be permitted. However, no such joint actions should be discussed with a competitor without advance Legal Department approval.)

No Supplier Restrictions
Agreements with suppliers who are actual or potential competitors concerning the quantities or prices of their sales to other purchasers, or their sales areas or customers, also could have the effect of illegally allocating supply or markets.

Example: In the course of possible joint venture discussions with a supplier believed to be considering a move into a new sales area as a direct competitor, the customer/competitor discusses with the supplier a desire to prevent the supplier from competing against it. When the supplier begins to compete, the customer/competitor threatens to stop purchasing from him as a condition for entering the joint venture. If the supplier stops competing, that could be found to be an agreement with the supplier to allocate markets between them. If more than one customer/ competitor is involved, such conduct could be used as evidence of an illegal group boycott agreement.

(Some exclusive supply arrangements may be legal. No such arrangements should be made without prior approval by the Legal Department.)

In short, no employee should make any agreement or have any discussion with any representative of a competitor or a potential competitor about a potential acquisition or joint venture without prior Legal Department approval.

What Is An "Agreement"?
In antitrust law, many terms are used to refer to an "agreement" among competitors, including "contract," "combination," "conspiracy," "understanding," "meeting of the minds," and "common scheme." An "agreement" need not be expressly stated or in writing: it may be silent or "tacit," and have no formal offer or acceptance.

An "agreement" may be proven entirely by indirect or "circumstantial" evidence. Communications among competitors that do not themselves involve any agreement often are used as "circumstantial" evidence of the existence of an "agreement" that goes well beyond the scope of the communication itself. Meetings to discuss potential acquisitions or joint ventures, as well as trade association meetings, social contacts, telephone calls, casual remarks -- indeed any communication with a competitor's employees -- can be used as "circumstantial" evidence of an agreement.

Remember: There are no such things as "off the record" conversations or "gentleman's agreements" with competitors. Anything an employee says to, or writes about, a competitor can be used as evidence of an agreement in violation of the antitrust laws. Any government investigation of a proposed acquisition or joint venture will focus on possible "off the record " discussions.

Certain types of agreements are illegal, regardless of any claimed business justification. Below are some examples.

Warning: If a competitor, in connection with an acquisition or joint venture discussion, or at a trade association meeting or elsewhere, initiates a discussion of any of these subjects (i.e., future, rather than past, price, supply or market allocation, or supplier restriction), immediately discontinue the discussion, and firmly announce your objection and unwillingness to participate in such discussions by stating "it is legally improper to discuss such matters." If the person persists, leave the meeting. Report the matter immediately to the Legal Department.

Antitrust Penalties
Section 7 of the Clayton Act is a civil, not a criminal, statute (i.e., the government will seek to enjoin or unwind transactions, not seek criminal penalties or jail time). However, the penalties for price fixing and the other antitrust prohibitions discussed above are severe. They can result in court orders that restrict the Company's ability to make future acquisitions, or restrict the way the Company does business. Violations will result in substantial fines. In the U.S., the government seeks prison sentences (up to 3 years for each offense) in every criminal prosecution for "price fixing"; the Company can be fined up to $10 million for each violation or double the amount of any overcharge, whichever is greater. In a recent case involving Hoffman La Roche, the fine was $500 million. Most likely, time-consuming and costly private litigation will follow, with claims for three times the amount of actual damages ("treble damages"), plus what typically prove to be substantial attorneys' fees.

You, your Company, and your fellow employees all are put at grave risk by violations of the antitrust laws. The mere allegation of individual or Company criminal wrongdoing can seriously damage your and the Company's reputation. Acquittals rarely receive as much publicity as indictments. The Company is determined not to let its employees or itself be exposed to such grave risks. Our beliefs in the free enterprise system and the rule of law are buttressed by our certainty that no imagined gain is worth the risk of violating the antitrust laws.

Identification of Candidates
Potential candidates for mergers, acquisitions, or joint ventures are brought to the Company's attention from a variety of sources. Before proceeding to any in-depth analysis of a potential candidate, public sources should be reviewed to determine whether the target company or any of the assets involved are in the same (or a related) line of business as the Company. The law looks at competitive overlaps in "any line of commerce," not just the principal line of business of the candidate. Therefore, inquiry must be made into all of the product lines of the target company or any of its assets proposed to be included in the transaction. If there is an overlap, the Legal Department should be consulted immediately to determine the degree of antitrust sensitivity.

Most mergers, acquisitions, and joint ventures are lawful. They result in demonstrable and desirable "efficiencies," or cost-savings, through greater output of goods at lower per unit cost, and through more effective and innovative research and development, production, marketing, distribution, and management. However, the more directly the candidate is a competitor of the Company and the more successful the candidate is in a line of business involved in the transaction, the more closely a proposed transaction will be scrutinized for its likely competitive effects, even if that line of business represents only a small percentage of the value of the total transaction.

You should not reject any desired merger or other transaction because of perceived antitrust sensitivity without first consulting the Legal Department. There are many factors that influence the likely competitive effects of a transaction which should be taken into account; e.g., the identity of the other present or likely competitors; how difficult it would be for them to expand supply if prices increase; the characteristics and practices of the buyers and sellers of the products or services involved; the history of prices and profits in the industry; possible changing market conditions relating to technological innovations and the like; and the possible ability to spin off any potentially offending assets to another buyer.

In short, you should not do your own antitrust analysis of a proposed acquisition or joint venture. This is the responsibility of the Legal Department.

Analysis of a Proposed Transation
You should keep in mind that all documents not prepared for or by the Company's attorneys relating to a proposed acquisition or joint venture are subject to inspection by government antitrust agencies in connection with the government's review of a transaction.

Written Communications With Or About Competitors

Note: The documents subject to production are "business related" documents and not just "company forms" or "corporate files." This may require the production of "personal" files, computer diskettes and backup, "E-mail" memory files, handwritten notes, calendars, diaries, appointment books, and other written or computerized materials maintained in connection with your work.

Therefore, business analyses of a potential acquisition or joint venture should not contain assessments of the antitrust implications of the transaction. References to "product" or "geographic markets" (e.g., the West Coast "market") should be avoided. Rather, documents should refer to "product categories" or "areas of current operation."

Avoid power characterizations, e.g., "dominant firm," "price leader," "aggressive" or "passive" competitor. Comments about other competitors, or the state of competition in the line of business involved, should be included only to the extent necessary to the business analysis of the desirability of a proposed acquisition or joint venture. Most lines of business are vigorously competitive. That is good from an antitrust perspective.

The following specific guidelines should be kept in mind in preparing documents for any purpose, including those prepared in connection with acquisitions or joint ventures:

  • Do not use words suggestive of illegal or surreptitious behavior, such as "please destroy after reading.
  • Do not overstate the significance of our competitive position or of our production or marketing strategy, e.g. "dominant position," "this will cripple the competition," or "price leader."
  • Do not speculate on the ability of the Company to raise prices after the acquisition.
  • Do not speculate or comment on the legality or potential illegality of any particular business conduct.
  • Do not describe as undesirable or objectionable the competitive activities of competitors or customers. Customers are lost, not "stolen"; price cutting is not "unethical"; and persons who charge lower prices than the Company are not "irresponsible." The acquisition target is not an aggressive competitor who is destroying margins.
  • Do not use language that suggests "collusive" conduct, e.g., "industry agreement" or "industry policy."
  • Do not use "code" names for projects that suggest market power, e.g., "Project Overlord" or "Bold Stroke."

Interoffice memoranda often are written about competitive matters. Sometimes, ambiguity or even exaggeration in these memoranda may convey the erroneous impression that there has been contact with competitors regarding prices or other matters of antitrust sensitivity. All such memoranda should be written clearly and carefully to avoid misinterpretation. Documents that contain careless and inappropriate language may make conduct that is perfectly legal look suspicious or collusive. "Facetious" or "ironic" comments may seem funny and be understood by other "insiders" -- at the time -- but invariably can be misinterpreted -- after the fact -- by a government agency or court. In short, don't joke around!

Every written communication with or about a competitor should have a clear, lawful purpose and must be drafted carefully. The purpose should be apparent on the face of the document, and ambiguous language must be avoided. There should be absolutely no mention of discussions with a competitor regarding prices, supply, or competitive bids, except where the Company is a supplier or a customer of the competitor. In those cases, any exchange of prices, supply information, or bids must be limited to the specific transaction at issue, and to only the information necessary to complete the transaction.

Even internal communications about a competitor's pricing, supply, or marketing decisions may present antitrust risks unless the document states a proper source of information, such as a customer or government report. A poorly worded document could be misconstrued and used as evidence of collusion.

Caution: Handwritten notes and "marginalia" must be produced along with the underlying documents. Also, "E-mail" systems keep memory copies of materials that you may believe you have deleted. These "marginalia" and "E-mail" comments can be fatal to a transaction.

In short, the time spent in writing clearly and following these instructions is an important part of our antitrust compliance efforts. The Legal Department is prepared to assist you in this regard.

Discussion of Proposed Transactions With Candidates
Where competitors are involved, it should be clear from the outset that the sole purpose of any discussion is to negotiate a possible acquisition or joint venture. Participation should be limited to those persons necessary to that stage of the discussion. The subject matter should not include discussion of competitors, customers, current or future pricing plans or terms of sale, costs or profits unless (and only to the extent) absolutely necessary to the finalization of a proposed transaction. Whenever practicable, a representative of the Legal Department should be present.

Reminder: All documents (not prepared by or for the Legal Department) relating to any discussions with a competitor are subject to inspection by the government's antitrust agencies in connection with any review of the transaction. (Just copying the Legal Department on a document does not make it "privileged.") Distribution of documents relating to discussions with candidates should be limited, to the same extent as that for any non-public information obtained from others.

"Due Diligence" and Other Requests for Information
Non-public information and documents shouldnot be requested from (or provided to) a competitor, as part of "due diligence" or otherwise, without prior clearance from the Legal Department. Non-public information and documents relating to future plans, current and projected prices, costs, and profits only should be sought to the extent directly necessary to a business analysis of a proposed acquisition or joint venture, and only after the Company management and the Legal Department have determined that there is serious interest in the proposed acquisition or joint venture.

Non-public Company materials of this type only should be provided to a competitor upon a convincing demonstration of need and with the recognition that, if a transaction is not consummated, the materials will be of significant competitive advantage to the recipient. When the Company is the buyer, there should be a presumption against agreeing to a request from the seller for such sensitive non-public information.

To mitigate the risk of improper use by a competitor of non-public information and documents, such materialsonly should be provided pursuant to a written undertaking restricting their use and disclosure. Such letters are available for your use from the Legal Department.

Use of non-public material obtained from others should be limited to those analyses necessary to assess the wisdom of the proposed transaction. Disclosure should be limited to those persons directly participating in the analysis of whether to pursue the transaction (and only to the extent necessary for the individual's participation).

Non-public information obtained from others should be kept in separate files. Records should be kept of those persons to whom the materials are distributed. If a decision is made not to pursue a transaction, all copies of any non-public materials, and other documents relating to the analysis of the non-public information, should be collected and either returned to the providing party or destroyed. The Company should secure the return or destruction of all copies of any non-public materials it has provided to others, as well as other documents relating to the analysis of the non-public information.

Where initial due diligence has proceeded to the stage where the transactions appears desirable -- and likely, consideration must be given to retaining one or more independent consultants to do the more detailed due diligence work on present and future profitability and the potential for future cost-savings that typically is required for the Company to make a "go/no go" decision. Such due diligence inquiries necessarily will require an understanding of current prices, customers, marketing plans, etc., which (as explained above) cannot be exchanged amongst competitors.

Caution: Such an independent consultant must be subject to a confidentiality pledge not to disclose any of the information received in the course of its due diligence work. Only generalized, qualitative judgments can be provided which:

  • Do not disclose specific current prices or future pricing plans;
  • Do not disclose non-public customer relationships or future marketing plans;
  • Do not disclose specific current costs or future cost saving plans;
  • Do not disclose current output levels or future capacity utilization, expansion plans, or plans to idle production; and
  • Do not disclose any other information that could be of use to the recipient in planning its own pricing or output decisions.

Any report received from an independent due diligence consultant should be used solely for purposes of the "go/no go" analysis, and distribution should be limited to those people necessary to that decision. If the transaction is not pursued, any such reports should be destroyed, absent prior approval from the Legal Department for some limited retention.

The hiring of any such independent due diligence consultant should be coordinated through the Legal Department. Whenever practicable, a representative of the Legal Department should be at any meetings where reports are being made by the consultant and should review a draft of any written report, before it is distributed.

Government Clearance of Proposed Transactions
Various laws in the U.S., the E.U., and in certain other countries require that the government be provided with advance notice of most proposed mergers and other transactions. This is designed to allow the U.S. government and foreign governments to review the competitive effects before transactions are consummated. In the U.S., the government can seek a court order to stop a proposed transaction before it is consummated. Elsewhere, government approval may be required.

In connection with a review, the U.S., the E.U., or other foreign governments may ask for additional information and documents, and request to interview Company personnel. They also are likely to seek to interview customers, suppliers, and competitors about their views on the future competitive effects of a proposed transaction, even where the proposed transaction has not been publicly announced. Thus, it is often difficult to keep secret the fact of a proposed merger or other transaction prior to obtaining government clearance for consummation.

An acquisition or joint venture often cannot be consummated until after a government's request for information and documents has been satisfied. As a consequence, the Legal Department may be required to seek your assistance, on an expedited basis, to provide substantial volumes of documents, information and overall assistance, in order to assure that the Company is in the best position to close a proposed transaction as rapidly as practicable.

In light of the considerable expense, risk of delay and, therefore, damage to the business from a prolonged review by the U.S., E.U., or some other government, it may be preferable to mitigate any concerns the government may reasonably express. For example, governments have cleared a number of substantial transactions between horizontal competitors, operating in the same or related lines of business, after the acquiring company has agreed to certain limitations on the use of the assets involved, the spin-off of certain assets, or the licensing of technology or trade names. Certain joint ventures among competitors have been approved on the basis of agreements to limit the scope or duration of the joint venture, or the agreement to certain procedural safeguards relating to communications between the partners.

To the extent the U.S. government expresses concerns that are deemed unwarranted or that cannot feasibly be resolved (and there remains a desire to pursue the transaction), the Legal Department will work with you to try to secure court approval for the consummation of the proposed transaction. The recent trend of the law has been favorable to allowing mergers and other transactions to close despite government objections. However, remember that acquisition litigation can be expensive, require commitment of substantial management time, and result in significant delay.

Note: If an individual representing any U.S., E.U., or foreign government agency (or any actual or potential private litigant) contacts you, such individual should be treated with courtesy, but no information or documents should be disclosed at that time. The Legal Department should be contacted immediately for advice.

Call the Legal Department
Compliance with the antitrust laws is your responsibility. The Legal Department is dedicated to working with you to protect you and the Company by helping you to comply with the law. The Legal Department can be helpful only if it is allowed to be involved. Thus, if you have any questions, especially when contacts with competitors are involved, call the Legal Department and indicate that you have an antitrust compliance question.

It is imperative in seeking advice from the Legal Department that all facts be disclosed fully and promptly. The Legal Department then will be able to make recommendations that are designed to further our legitimate business needs, while minimizing potential antitrust risks. 

Tefft W. Smith is a senior partner in Kirkland & Ellis' Washington, D.C. office.

Copyright c 2001 TEFFT W. SMITH, KIRKLAND & ELLIS.
All rights reserved.