Antitrust Law

Concept of Monopoly

use of unfair practices to shut out competition and dominate market —> control of prices + access

common practice in late 18th + early 19th century

Original State Antitrust Law

prevented companies from owning stock in one another

Rockefeller Standard Oil Example

1872: Cleveland Massacre: absorbed 22/26 refineries in a matter of weeks

expanded to railcars, secured railroad rebates

controlled storage + distribution networks using bribery

until finally controlled 90% of oil industry

Rockefeller Standard Oil Example: Solution to Getting Around State Laws Barring Centralization of Power

trust: shareholders from 40 companies sold stock to trust in exchange for trust certificate —> trust run by trustees who could vote for all companies

Why Standard Oil Trust Mattered

served as model for other trusts (ex. sugar, tobacco, whiskey)

became central target of early antitrust reform because 90% ownership scared Congress

Original Purpose of Early Antitrust Reform

protection for consumers

Ruthless Measures Standard Oil Used to Obtain 90% Share of Market

• selling well below cost to drive out competition —> raising price once competition eliminated

• preventing others from building pipelines by flooding local builders with work orders

• refusing to allow his oil to flow through other pipelines

• political bribery

• created secret deal with railroads —> made it impossible for others to compete

Sherman Antitrust Act of 1890

first federal law designed to regulate competition + prohibit certain restraints of trade + monopolies

Sherman Antitrust Act of 1890: Section 1

prohibits contracts, combinations or conspiracies in restraint of trade

Sherman Antitrust Act of 1890: Section 1: Requirements

1. agreement between 2+ separate entities

2. that unreasonably restraints competition

3. and effects interstate commerce

Sherman Antitrust Act of 1890: Section 1: USSC’s Definition of Single Entity

could be a parent company + wholly owned subsidiary, certain joint ventures (when 2 companies combine resources + decision making within a new integrated entity)

Why Sherman Antitrust of 1890 was Created

because of ruthless measures Standard Oil used to obtain 90% market share

broke up Standard Oil in 1911

Sherman Antitrust Act of 1890: Section 2

prohibits monopolization (note: does not define monopoly)

Sherman Antitrust Act of 1890: Section 2: Requirements

1. Possession of monopoly power in properly defined, relevant market

2. willful acquisition or maintenance of that power (must be more than that company has superior product)

Sherman Antitrust Act of 1890: Section 1 vs Section 2

Section 1: multiple companies

Section 2: single company

Sherman Antitrust Act of 1890: Types of Section 1 Violations

Per Se Violations and Rule of Reason Violations

Sherman Antitrust Act of 1890: Section 1: Per Se Violations

business practices that law deems so inherently harmful to competition that they are automatically unlawful

business practices that courts have found have no legitimate competitive purpose and only serve to destroy competition

Sherman Antitrust Act of 1890: Section 1: Examples of Per Se Violations

horizontal price fixing, bid rigging, geographic market allocation, group boycotts

Horizontal Price Fixing

competitors on the same plane set prices

per se violation under Section 1 of Sherman Antitrust Act of 1890

Bid Rigging

fraudulent scheme where one firm is preselected to win contract and competitors submit fake or inflated bids to create appearance of competition

per se violation under Section 1 of Sherman Antitrust Act of 1890

Geographic Market Allocation

agreement where competing firms agree not to compete in each other's territories

per se violation under Section 1 of Sherman Antitrust Act of 1890

Group Boycotts

certain concerted refusals to deal when directed by horizontal competition to exclude rival

per se violation under Section 1 of Sherman Antitrust Act of 1890

Sherman Antitrust Act of 1890: Section 1: Rule of Reason Violations

court weighs agreement’s anticompetitive harms against its procompetitive benefits —> same practice can be legal or illegal depending on market power + competitive effects

Sherman Antitrust Act of 1890: Section 1: Rule of Reason Violations: Factors Court Considers

• facts peculiar to industry/business

• history + context of restraint

• reasons/justifications for imposing restraints

Sherman Antitrust Act of 1890: Section 1: Types of Agreements Considered Under Rule of Reason

horizontal agreements, vertical price agreements, exclusive dealing, tying without market power

Horizontal Agreements

ex. sharing price info, following marketing moves

considered under Rule of Reason

Vertical Price Agreements

agreement between companies at different levels of supply chain that dictate or influence price product is resold

considered under Rule of Reason: ex. Nike dictating that retailers sell shoes for particular price likely okay, insulin supplier doing the same likely not

Exclusive Dealing

agreement where buyer agrees to only purchase from one supplier

considered under Rule of Reason

Tying Without Market Power

requiring a buyer to purchase a second product to get the first

considered under Rule of Reason

Why Congress Passed the Clayton Act of 1914

1. merger loophole: 1845-1904: Great Merger Movement: companies merely merged instead of buying each others stock

2. no early remedy: hard to unmerge a company once it happens —> act was preventative

Clayton Act of 1914: Key Provisions

section 2: price discrimination

section 3: exclusive dealing and tying arrangements involving goods

section 4: private lawsuits for treble damages

section 6: exemptions for labor unions and agricultural organizations

section 7: mergers and acquisitions

section 7A: premerger notification

section 8: interlocking directorates

section 16: private suits for injunctions, including to block mergers

Why Companies Merge

• growth: buying revenue/customers faster than building them

• economies of scale: spreading fixed costs over larger business

• new markets: entering new region, product line or customer group

• technology + talent: acquiring know-how instead of developing it

• vertical integration: controlling more of supply chain

• eliminating a competitor: reason that most concerns regulators

Types of Mergers

horizontal, vertical or conglomerate

Horizontal Mergers

merger between direct competitors

Horizontal Merger Example

Staples + Office Depot

Horizontal Mergers: Antitrust Risk

Highest

Vertical Mergers

merger where company acquires supplier (upstream) or customer (downstream)

Vertical Merger Example

retailer buying paper manufacturer

Vertical Mergers: Antitrust Risk

Moderate

Conglomerate Mergers

merger between companies in different markets, including a product extension into a related market

Conglomerate Merger Example

Proctor & Gamble + Clorox

Conglomerate Mergers: Antitrust Risk

generally lower but not zero

Horizontal Mergers: Key Factors Regulators Consider

• market share + merged firm’s competitive position (definition of market important —> determines risk/percentage of share)

• affects on prices, quality + innovation

• barriers to entry for new firms

• number + strength of remaining competitors

• characteristics + history of merging firms

• market demand conditions

• extent of price competition in industry

Staples + Office Depot

each held about 2% of office supply market but merger BLOCKED because of affect on price

HR Block + Tax Act

viewed market as DIY tax preparation companies: only 3 companies in market and merger would result in only 2 so BLOCKED

When Vertical Mergers are Challenged

when combined firm could foreclose rivals’ access to an essential supplier or customer or raise barriers to entry

Proctor & Gamble + Clorox

4 major bleach producers made up 80% of the market

merger was BLOCKED because Proctor & Gamble had an enormous ad budget which would put competition at a disadvantage + eliminated Proctor & Gamble as likely future competition

Types of Deal Structures

statutory mergers, stock purchases, asset purchases

Statutory Mergers

two companies combine under state law —> one survives and other disappears

Who Carries Target’s Liabilities in Statutory Mergers

surviving company takes on all assets + liabilities automatically

Approvals Required for Statutory Merger

both boards + usually both sets of shareholders

dissenting shareholders may have appraisal rights

Appraisal Rights

legal protections that allow dissenting shareholders to demand a court-supervised, independent valuation of their shares in cash if they disagree with a merger or acquisition and feel the offered price is too low —> if court decides fair value is higher than deal price, acquiring company must pay dissenting shareholders that higher value

Stock Purchase

buyer purchases target’s shares directly from its owners

Who Carries the Target’s Liabilities in a Stock Purchase

target keeps all liabilities + becomes buyer’s subsidiary

Approvals Required for Stock Purchase

each selling shareholder decides whether to sell

Asset Purchase

buyer purchases only specific assets it chooses

Who Carries the Target’s Liabilities in Asset Purchase

generally stays with seller unless exception applies

Approvals Required for Asset Purchase

seller’s board + (if substantially all assets are sold) its shareholders

Exceptions to Asset Purchase Rule (Successor Liability)

buyer may still be liable for seller’s debts when it

• expressly/implicitly agrees to take them on

• engages in a transaction that amounts to a de facto merger

• is a mere continuation of the seller, with the same owners and management

• enters the deal fraudulently to escape the seller’s debts

Four Stages of the Deal Process

1. Letter of Intent

2. Non-Disclosure Agreement + Due Diligence

3. Definitive Agreement

4. Approvals + Closing

Letter of Intent

includes proposed price, structure + key terms of merger

mostly non-binding except confidentiality exclusivity provision (“no shop”) which is binding

Confidentiality Exclusivity (“No Shop”) Provision

binding provision in letter of intent which bars the seller from negotiating with other for a set period of time

protects buyer from wasting resources because due diligence is expensive

Non-Disclosure Agreement + Due Diligence

NDA alone not enough to protect company —> seller may want to use a clean team during due diligence

Due diligence: looking into finances, litigation, intellectual property, employees, regulatory compliance, data practices, etc

Propel Fuels v Phillips 66

Phillips found liable for willful misappropriation of trade secrets because did not use a “clean team” —> major punitive damages

Clean Team

small, walled off group that reviews a target’s most sensitive information during due diligence

Who Is On a Clean Team

often outside advisors (such as lawyers or consultants) but can include select internal employees

Strict Rules for Clean Team Members

cannot share sensitive data with the rest of the company, instead only high level conclusions needed to value the deal

Clean Team Documentation

document in writing who saw what + when

What Happens to Information Clean Team Sees After Deal

if deal does not go forward must return or destroy all sensitive information