How is the risk of merger clearance normally dealt with where a financial sponsor is the acquirer?
Private Equity (2nd edition)
During the deal negotiations stage and as a crucial step to the whole deal assessment, the financial sponsor requires a priori from the target (and the seller) all information that will enable it to determine if a merger clearance is required, as well as, to identify any issues related thereto. In parallel, clear provisions are included in the legal documentation in respect of the content of merger clearance (i.e. unqualified clearance vs clearance under conditions) which will trigger fulfilment of conditions precedent and closing of the deal. This may be proven of paramount importance for the acquirer if any merger clearance conditions have material adverse impact on any other entities the financial sponsor already participates in. Also, the respective legal documentation customarily provides for the seller’s obligation to render any assistance to the buyer and to procure receipt by the acquirer of detailed data from the target (and any other entities participating in the merger) in order to prepare and submit the necessary filing for the purposes of merger clearance.
Luxembourg has chosen not to put in place any merger control on a national level.
The Luxembourg competition authority does however retain the power to intervene after completion of a transaction should it consider there to be anti-competitive practices or an abuse of a dominant position as a result of the relevant acquisition.
Transactions may also of course require merger clearance from competition authorities in other jurisdictions.
Typically merger clearance is a condition precedent to completion with transactions in which merger clearance is required being structured with a split signing / completion.
As is the case with all aspects of a transaction, the ultimate allocation of risk between the parties is on a case by case basis depending on the relative bargaining power of the parties involved.
If merger clearance is required, it is standard practice to include this as a condition precedent to the closing of the transaction in the acquisition agreement.
Depending on the parties bargaining powers, we see several practices for the allocation of the risk of merger clearance between the parties, ranging from a hell or high water-clause to the benefit of the sellers to a walk away right for the buyer. Normally, the buyer bears the risk of any divestments, although it is not uncommon for risks to be capped in one way or another (e.g. the buyer is not obliged to offer divestments to the competent competition authorities that are disproportionate to the contemplated transaction or which would have a material adverse effect to the business of the buyer group (including target).
The handling of merger clearance risk where a financial sponsor is the acquirer is a common negotiation point in share purchase agreements in the Norwegian market. While financial sponsors certainly prefer to include a closing condition upon which they can withdraw from the transaction without liability if the required merger clearance is not obtained on satisfactory terms, they may from time to time need to concede to more burdensome "hell or high-water" obligations, especially in controlled auction processed where there is a competitive environment. Such "hell or high-water" clauses would typically impose an obligation on the financial sponsor to divest parts of the target business and/or litigate any competition challenges if required to obtain clearance. It would on the other hand not extend to divesting any existing portfolio companies of the financial sponsor.
Polish antitrust law establishes uniform rules – i.e. regardless of the industry or type of transaction participants – in relation to the turnover thresholds determining the obligation to notify the intention of concentration as well as for the antitrust assessment of the notified concentration. Therefore, potential risks should be considered in the context of the “specifics” of the operation of financial sponsors.
The basic risk results from the fact that entities in the financial sponsor's portfolio will be treated as "controlled" under antitrust law, and thus they will create a "capital group" together with the sponsor.
On the one hand, this may affect the assessment of the fulfilment of the notification thresholds and the requirement to notify the transaction – due to the need to take into account the turnover of the entire capital group for calculating the thresholds.
On the other hand, this may affect the antitrust evaluation of the transaction – depending on the branches or industries in which the companies operate in the sponsor’s portfolio as well as the entity for acquisition, horizontal or vertical (as well as conglomerate) effects may occur (the "concentration" of entities operating in the same market or related markets). In the case of a significant impact on the effective competition on a given relevant market(s), there is a risk of refusal of consent by the antitrust authority or the risk of issuing a commitment decision (e.g. the obligation to sell out a part of the entities from the sponsor’s portfolio to satisfy the antitrust authority). However, these issues rarely arise in practice.
The risk of merger clearance is normally dealt with (i) by making it a closing condition and (ii) by stipulating the buyer’s obligation to cooperate. Buyer’s obligation can range from use of reasonable efforts to use of best efforts, or even reverse break-up fee provisions, but it rarely rises to the level of “hell-or-high water” provision whereby the buyer undertakes to divest its other businesses/assets to obtain merger clearance.
It is fairly common, regardless of the parties involved, that it is the buyer who will be required to assume the merger clearance risk. It is often less difficult for a financial sponsor to agree to this (if the fund does not already own competing businesses). However, often an industrial buyer acquires a competitor to create synergies in one aspect or another and the issue of who should bear the merger clearance risk then often becomes more complicated.
Sellers usually conduct their own merger control assessment with respect to the different bidders. The outcome of such assessment and its impact on the timing of the transaction and transaction certainty may be an important criteria to move forward with a specific bidder. In the current sellers' market we often see "hell or high water"-clauses included in the merger clearance closing condition.
If merger clearance is required, it is standard practice to include this as a condition precedent to the closing of the transaction in the acquisition agreement. Merger clearances involving financial sponsors usually do not trigger competition issues, unless the financial sponsor has portfolio companies which overlap with the business of the target.
Depending on the parties’ bargaining power, we see several practices for the allocation of the risk of merger clearance between the parties. Usually the buyer bears the risk of any required divestments, although it is not uncommon for these risks to be capped in one way or another (e.g. no obligation for the buyer to offer divestments that are disproportionate to the contemplated transaction). However, in the context of transactions organized as competitive auctions, the acquisition agreement exceptionally includes a “hell or high water” clause, whereby the buyer is obligated to take all steps to satisfy the completion authorities (including any amount of divestitures).
The Competition Act prescribes a “transaction-size” threshold and a “party-size” threshold for acquisitions in Canada. If both thresholds are exceeded, a transaction is considered “notifiable” and it triggers a pre-merger notification filing. The “transaction-size” threshold is subject to annual adjustment. The 2019 transaction-size threshold requires that the book value of assets in Canada of the target, (or in the case of an asset purchase, the book value of assets in Canada being acquired), or the gross revenues from sales in or from Canada generated by those assets exceeds Cdn$96 million. The “party-size” threshold remains unchanged from 2018, requiring that the parties to a transaction, together with their affiliates, have assets in Canada or annual gross revenues from sales in, from or into Canada, exceeding Cdn$400 million.
Transactions exceeding such thresholds cannot close until notice has been provided and the statutory waiting period has expired or has been terminated or waived. As such, it goes without saying that any required clearance under the Competition Act is a condition to closing. A “hell or high water” undertaking is sometimes accepted in where there is a regulatory condition; this provision is negotiated and ultimately depends on the nature and regulatory sensitivity of the deal.
Acquisition of a minority stake in a target by financial sponsors may still trigger the acquiring party’s obligation of declaring to SAMR for merger clearance review, if the acquiring party gains control over the target through the transaction and any statutory threshold is satisfied. According to the relevant guiding opinions from SAMR, the test for “control” should take into account various legal and factual factors, including, among others, voting mechanism of shareholders’ or board meetings. Thus, if a financial sponsor who acquired minority interest is granted under the shareholders’ agreement and/or articles of associations of the target a right to veto on certain significant operational matters of the target (e.g., business plan, budget, appointment and removal of CEO and CFO, branch/subsidiary setup and closedown), whether at the shareholder level or board level, it may be viewed as acquiring de facto control over the target, alone or in concert with others. To manage the risk of triggering merger clearance, the acquiring party should think carefully to narrow down the scope of “veto” matters so as to avoid being regarded as taking control of the target’s daily operation. Where substantial risk of failure to obtain merger clearance exists with a particular transaction, an acquiring party may consider: (i) making the receipt of merger clearance a condition precedent for it to close the deal and asking for a breakup fee from the selling party/target, and (ii) requiring the selling party/target to redeem the purchased shares of the acquiring party with agreed annual return if the transaction is invalidated or unwound by order of SAMR after the closing.
In all medium or large sized transaction, the closing will be subject to the issuance of merger clearances by the relevant competition authorities. It is common for sellers to require financial sponsors to agree to a “hell or high-water obligation” pursuant to which the purchaser will carry out any action that is required by competition authorities to obtain the merger clearance.
However, given their fiduciary duties vis-à-vis their investors, financial sponsors will generally refuse any provisions pursuant to which they may be under the obligation to impose undertaking to portfolio company.
Antitrust risks are often shifted to the buyer due to strict hell or high water clauses regarding merger control conditions or a corresponding contractual penalty (fixed amount or contractual damages) if the merger clearance is not obtained.
Under Mexican law, specifically under the Federal Antitrust Law (Ley Federal de Competencia Económica), merger clearance is only required to the extent the transaction meets certain thresholds (deal value, participant size, and concentration of assets). Merger clearance is almost always jointly requested by both parties and is typically structured as a condition to closing. The foregoing, in the understanding that “hell or high water” mechanisms are not common in Mexico.
Sellers normally require that each bidder submits details of any required merger clearance at the bid stage and each bidder’s risk profile with respect to merger clearance will form part of the seller’s assessment of a bid.
Sellers are likely to request a ‘hell or high water’ obligation (i.e. a divestiture obligation in respect of both the PE sponsor’s portfolio and the target group) from buyers in the purchase agreement, as well as provisions to allow the seller to closely monitor the merger clearance process.
In Vietnam, recent changes have been made to competition law, including in the respect of merger control clearance. Under the (previous) 2004 Law on Competition, where the parties’ combined market shares are between 30%-50% of the relevant market, a notification to the competition authority is required. The statutory timelines for clearance review will start to run from the date the parties have submitted a complete notification that has been accepted by the authority, and the transaction may proceed only after a supportive written response is received from the competition authority. Under the (new) 2018 Law on Competition, the notification triggers have been expanded to also include combined assets, combined revenue, and the value of the transaction. Although the precise values or thresholds of these notification triggers are yet to be determined, it is undoubtful that the new law calls for a significant shift in merger control rules in Vietnam.
The risk associated with this is usually dealt with by making the transaction subject to a condition precedent that merger clearance under the 2004 Law on Competition is obtained and to place a primary obligation on the Vietnamese seller to procure such approval, which may include that specific reports are compiled. Given the limited number of notifications received by the competition authority to date, the use of a termination fee where the parties cannot close the transaction as a result of a failure to obtain merger clearance from the competition authority is not common. While it is expected that the number of notifications will increase as a result of the introduction of new criteria thresholds under the 2018 Law on Competition, it remains to be seen how the risk of merger control is dealt with between the parties to the transaction.
In India, an acquisition which breaches certain prescribed asset or turnover thresholds (Combination) is required to be notified to the Competition Commission of India (Commission) for its approval, prior to taking any steps towards completion of the proposed transaction. The Commission may either approve the combination unconditionally or in the event the Commission concludes that the Combination could potentially have an appreciable adverse effect on competition (AAEC), it may either refuse to provide merger clearance or impose obligations on the parties which could be behavioral in nature or may require disinvestment from particular business lines in order to eliminate the AAEC.
An exemption from the notification requirement has been provided for acquisitions made pursuant to investment agreements by public financial institutions, banks, SEBI registered foreign institutional investors, or SEBI registered venture capital funds.
The Indian law on merger control also identifies certain categories of Combinations which are ordinarily not likely to cause an appreciable adverse effect on competition. Accordingly, a notice to the Commission is normally not required to be filed for such Combinations. However, this is a self-assessment test and if upon a preliminary analysis, it is perceived that such a Combination may cause an appreciable adverse effect on competition, the Commission may be notified to seek an approval. Of particular importance to financial sponsors/investors (who are not registered financial institutions as above) are the following categories:
(i) an acquisition of shares or voting rights solely as a non-controlling investment (i.e. without strategic intent or special rights that confer policy influence such as board seats, veto etc), where the total shares or voting rights acquired do not exceed 25%(twenty five percent) or more of total shares or voting rights of the company; and
(ii) acquisition of additional shares or voting rights, where the acquirer already holds more than 25% (twenty five percent) but less than 50% (fifty percent) of the shares or voting rights of the enterprise, except in the cases where the transaction results in transfer from joint control to sole control.
In August 2019, the Commission has notified a ‘green channel’ whereby deemed prior approval is granted to those Combinations in which there is no vertical, horizontal or complementary overlap in the target and acquirer groups, which can include downstream portfolios companies in India as well. This is of particular importance to financial investors who acquire minority positions and have no operational activity in their ‘group’.
From a document risk and security perspective, it is customary for acquirers in India to make unconditional approval by the Commission, a condition precedent to closing and require the target to provide full cooperation and complete information (especially in unlisted companies) in order to enable the competition law analysis and successful statutory filings. An acquirer may ask for, but does not typically get indemnity protection for an unsuccessful merger clearance, depending on complexity of analysis. Further, it is unusual for the seller to have ‘break-fee’ rights in such an eventuality either.
In Ireland, competition clearances are, where applicable, a condition precedent to completion, leading to a split signing and completion pending approval from the Competition and Consumer Protection Commission. The risks of competition clearance are typically passed on to the purchaser by the use of a “strict hell or high water” clause, which may include an obligation on the purchaser to make any required divestments or litigate in the event the transaction is challenged from a competition perspective .
Hannes Snellman: In Finnish sale and purchase agreements, the liability for obtaining competition authority approvals is typically allocated to the buyer whereas the seller customarily provides the buyer information required for the merger clearance process. In cases of no apparent overlaps, the buyer often bears the risk of authority requirements. If there are any overlaps (e.g. portfolio companies of the buyer operating in the same sector), the risk allocation is negotiated on case-by-case basis. Financial sponsors acquiring businesses in Finland sometimes accept hell-or-high-water clauses but seem to be less prepared to accept break fees.
The risk will be always higher when we will have large transaction that will need to observe the following rules of our antitrust authority: (a) meet the double revenues’ threshold, (b) is defined as an “act of concentration”; and (c) takes place or produces or may produce effects in Brazil.
The risk of merger clearance is usually borne by both parties. While it is common also for financial sponsor purchasers to agree on covenants with regard to prompt filings, reporting and consulting, they find it even more difficult than institutional investors to agree on hell or high water clauses. Likewise, financial investors are very reluctant to accept break fees.
In the US, the Hart-Scott-Rodino (HSR) antitrust review process is mandatory for most acquisitions whose value exceeds a statutory threshold (currently $90.0 million and adjusted annually). However, where a newly formed fund or other entity is used to complete a transaction, an HSR notification may not be required. Other exemptions from the HSR filing requirements may also apply and, as a result, a careful analysis should be conducted to determine whether a filing is necessary. Outside the US, foreign antitrust agencies often take a broad approach regarding which portfolio companies are under common “control” and therefore relevant when determining whether a transaction satisfies relevant revenue or asset notification thresholds. Note that for those transactions that do require a notification to be filed with the US antitrust agencies (the Department of Justice and the Federal Trade Commission) or a foreign regulator, inevitably expiration of the HSR waiting period or receipt of clearance from a foreign competition regulator will be a closing condition.
The antitrust clearance risk is usually passed to the buyer by relying on some form of a “strict hell or high water” clause for the merger clearance, a reasonable best efforts clause or an obligation to pay a reverse break-up fee if the clearance cannot be obtained. It is not unusual for a financial buyer to accept a “hell or high water” provision where the risk is believed to be very low; the clause protects the seller against an undisclosed competitive overlap within the buyer’s portfolio. Where the financial buyer’s portfolio contains companies that overlap with the target, and this overlap is known or disclosed, the risk tends to be shared, with the allocation often being an important part of the deal negotiations.
Usually, buyers manage the risk by setting forth merger clearance as a condition precedent to either party’s obligations in the transaction documents.
Sellers mitigate the risk through a cooperation provision obligating the sellers and buyers to use their best or reasonable efforts to obtain antitrust approval. Japanese transactions often do not include some provisions that are more commonly used in other jurisdictions by sellers to allocate the risk of merger clearance to buyers, such as “hell or high water” provisions, provisions providing for buyers’ obligations to undertake certain divestures or to litigate, and reverse break-up fee provisions.