Remedies in Complex Mergers – The United States Michael H. Byowitz Wachtell, Lipton, Rosen & Katz ABA International Conference Buenos Aires, Argentina March 14, 2007

mikecar U.S. Remedies Overview Only Court Can Block Deals –DOJ or FTC cannot block transaction on their own –Need to convince U.S. Federal Court to issue a full-stop preliminary injunction –Ultimate remedy: Permanent injunction (FTC administrative proceeding or DOJ District Court trial on merits) Party Options –Abandon transaction –Litigate v. agency –Remedy competitive problem: Agencies generally willing to permit pro-competitive (or benign) transactions if parties eliminate anticompetitive problems Divestiture is remedy of choice

mikecar Conduct Restrictions Horizontal cases: normally not acceptable stand-alone remedy –Sometimes used as ancillary remedy E.g., Transitional services to divestiture buyer –Situations where regulatory or oversight agency Vertical cases: Standalone remedy –Fair dealing: Non-discriminatory access to facility/service in vertically related market –Firewall: Protects confidential information

mikecar Structural Relief (Divestitures) Purpose –Eliminate anti-competitive effects –Restore (not enhance) the competitive status-quo-ante Divestitures the norm: What to divest? –Clean sweep: All of one party’s overlapping assets in discrete market (easiest to sell to agencies) –Divest some but not all of one party’s market assets (more effort/time required) –Mix & Match: Combination of some assets of each party in a single market Dogs and cats issues Takes even longer Risk that not accepted Rarely pursued

mikecar Remedy Negotiations Generally, remedies must be negotiated –Federal district courts normally either enjoin deal or deny PI –Courts won't normally impose partial relief in PI cases over agency objection Fait accompli cases: –Courts enjoin ineffective fixes but deny PI where fix is effective –DOJ: Franklin Electric/Union Dominion (Submersible pumps) –FTC: Libbey, Arch Coal

mikecar After-the-fact D ivestitures Time frame given to complete divestitures has changed More than a decade ago: –After-the-fact divestitures were the norm –Parties given one or even two years In past decade: –Generally three to six months –Very complex assets: up to one year (rare)

mikecar Upfront Buyer What is up front buyer? –Divestiture buyer identified and approved, and –Divestiture completed, –Before (or shortly after) merger Used often by FTC, less by DOJ Are real downsides: –May delay closing for months –Harder to negotiate with divestiture buyer

mikecar Post-Closing Judicial Review FTC: –No judicial review of settlements –Public comments but FTC decides DOJ: 2004 revisions to the Tunney Act –Third parties may challenge proposed decrees –Politically-charged mergers most susceptible –Creates post-closing uncertainty (parties, DOJ) –Challenges to SBC/AT&T and Verizon/MCI mergers Closed late in 2005 Challenges still pending

mikecar Consent Decree Process FTC: –Settlements require decree –Don’t pursue fix it first settlements DOJ: –Consent decrees frequently used –Fix-it-first agreements play important role –If pre-merger fix preserves competition, DOJ may forego filing of consent decree –DOJ may combine fix-it-first agreement with “pocket decree” Filed only if parties fail to comply No Tunney Act hearing

mikecar Level of Divestiture Scrutiny In-depth review of business to be divested –Self-standing business generally required including all assets necessary to compete In-depth review of divestiture buyer –Parties have to present buyer –Must not cause competitive problems (overlaps) –Must have incentive to use divestiture assets to compete –Fitness test as to experience, skill, financials Approval of a proposed divestiture – formal process at FTC FTC compliance shop tends to be painstakingly methodical –Can take months to get divestiture application approved (no mandatory time period to address) –Sometimes raise issues that seem unnecessary

mikecar Prevention of Interim Harm Divestiture business to be preserved post-merger until divestment is effected FTC: –Hold separate orders and interim monitors –Even in deals with upfront buyers –Use of interim managers as well DOJ: Interim monitors rare –If concern re mismanaging divestiture, or –If special experience crucial

mikecar Crown Jewel Provisions Divestiture of additional assets (crown jewels) if parties fail to complete initial divestiture FTC: –Sometimes uses crown jewel provisions –FTC Chairman says use overstated DOJ disfavors “crown jewels” because –They are either less or more than necessary –Gaming concern: Potential buyers may delay initial purchase to get crown jewel

mikecar Background Slides

mikecar Conduct Remedies FTC in vertical mergers –Ely Lilly/PCS; Merck/Medco: Acquired pharmaceutical benefits manager may not prefer acquiring pharmaceutical company to competing pharmaceutical companies –FTC Director of Economics 2005: “…Structural cases … problematic with vertical mergers…” DOJ in vertical mergers –Competitors to acquirer to be granted equal access to acquired business that is vertically connected (e.g. AT&T/McCaw; TCI/Liberty)

mikecar 1 Year After-the-fact Divestitures Valero/Ultramar Diamond Shamrock (2002) –Divestiture assets: 1 Ultramar CA refinery plus Certain Ultramar gas stations in CA –Crown jewel provision: If divestiture is not timely, divestiture trustee authorized to enhance divestiture Add a second Ultramar CA refinery plus all Ultramar CA gas stations Phillips/Conoco (2002) –Divestiture assets (1st package): 1 Phillips UT refinery plus All Phillips gas stations in UT, WY, MT, ID; –Divestiture Assets (2 nd Package): Conoco’s CO refinery plus Certain of Phillips’ CO gas stations Yes, this was a mix-and-match solution –No crown jewel provision –Were divestitures in other markets that were given 9 months

mikecar Differences Between DOJ/FTC Upfront Buyers –FTC favors –DOJ uses less frequently Fix It First Remedies –FTC eschews –DOJ willing to use Interim Monitors –FTC thinks necessary –DOJ rarely uses Crown Jewel Provisions –FTC sees benefits –DOJ questions