Antitrust Alert: DOJ Imposes Divestiture and Conduct Remedy in Small, Consummated Merger of Makers of Steel Sensors
Another in a string of challenges to already-consummated mergers, the U.S. Department of Justice ("DOJ") has announced that it will require Heraeus Electro-Nite to divest certain assets of Midwest Instrument Company, Inc. ("Minco"), which Heraeus acquired last year. Both companies make instrumentation that measures the temperature and chemical composition of molten steel during steel manufacturing. This case provides a reminder that U.S. antitrust enforcers can challenge acquisitions that already have closed, even relatively small acquisitions that do not require premerger notification, and it reflects the flexibility enforcers can have to tailor a remedy to the competitive situation in the particular case.
In September 2012, Heraeus acquired the assets of Minco, its closest competitor, for $42 million. This low value did not trigger the filing thresholds of the Hart-Scott-Rodino ("HSR") Act, and therefore the transaction was not required to be reported to the DOJ and Federal Trade Commission. Nevertheless, shortly after the closing, having received complaints from the companies' customers, DOJ began investigating the acquisition. According to DOJ, the acquisition reduced competition in the market for single use sensors and instruments used to measure and monitor the temperature and chemical composition of molten steel. DOJ determined that Heraeus had a 60 percent share of this "S&I market" in the United States and Minco 35 percent.
Heraeus agreed to divest certain assets to address DOJ's concerns. Under the proposed settlement, Heraeus must divest to a specified buyer all remaining assets that were acquired from Minco in the United States and Mexico, including all of the Minco manufacturing plants. The buyer of the divested assets will be Keystone Sensors, which was founded in early 2013 for the purpose of entering the S&I market in the U.S. According to DOJ, the Minco assets will give Keystone the specific assets needed to more quickly become a more effective competitor.
In addition to the straightforward divestiture of assets, the settlement also requires Heraeus to comply with the following "conduct" obligations:
(1) Provide training and technical support to Keystone, under DOJ supervision, to ensure that this new competitor is prepared to compete against Heraeus.
(2) Waive the noncompete provisions it had imposed on terminated Minco sales and service employees. DOJ believes the noncompetes were overbroad and could impede competitors' entry and expansion.
(3) Allow customers to use Heraeus products to test or qualify competitors' products, to facilitate competitor entry.
(4) Provide the DOJ with advance notice of future acquisitions in the S&I market.
The noncompete provision additional conduct obligations last for ten years.
This case underscores that the antitrust enforcement agencies will not hesitate to challenge a consummated merger, even where the transaction is relatively small and non-reportable. Such transactions are especially at risk for post-consummation scrutiny, because the agencies typically will not have had the chance to investigate them before closing.
A challenge to a consummated transaction brings unique risks for companies involved. The government can use evidence that has been created since the merger, such as higher prices or incriminating documents, to show the combination has reduced competition. The monetary risk also is greater in a post-transaction challenge. The parties may have invested time, money, and other resources in the merged entity. And a post-transaction government investigation may motivate customers or other private litigants to bring lawsuits for damages suffered since the transaction was completed. Given these risks, and the agencies' willingness to challenge consummated mergers, parties should always consider the antitrust implications of a transaction, even if no HSR filing will be required.
This case also highlights how the antitrust agencies can impose a divestiture obligation even where the merging companies already have merged their businesses – "scrambled the eggs." Immediately after the merger, Heraeus had integrated the Minco assets, terminating some supply contracts and closing Minco foreign production facilities. This made it infeasible to divest Minco as a standalone business and therefore prevented the DOJ from requiring divestiture of a complete business, as it prefers to do. Instead, DOJ required Heraeus to divest the package of former Minco assets to a specified buyer and comply with the set of conduct obligations. Some of these additional obligations likely would not have been part of the remedy if the full Minco business had been available for divestiture. And the designation of the buyer up front will reduce the amount of time required to bring in new competition to restore the competition DOJ determined was lost because of the Heraeus/Minco merger.
It is worth observing that there are two sides to the agencies' flexibility to add conduct obligations on top of a simple divestiture. This sometimes works in the government's favor. For example, in Heraeus/Minco DOJ imposed the conduct obligations because it believed the divestiture of assets alone was insufficient to restore competition. Some of the obligations – assist Keystone, allow testing to facilitate competitor entry – were needed in DOJ's view because divestiture of Minco as a complete business was not possible. On the other hand, this flexibility also can work in the merging parties' favor. For example, a remedy that includes behavioral obligations may make it possible for the agency to settle and allow the deal through rather than blocking it completely, on balance generally a more attractive option for the merging parties. We anticipate that, as the current DOJ continues to take an aggressive stance on merger enforcement, it will also rely on conduct obligations like this in addition to the traditional remedy of divestitures.
The DOJ's January 2, 2014, complaint, competitive impact statement, and proposed settlement can be found here.
For more information, please contact your principal Jones Day representative or either of the lawyers listed below.
J. Bruce McDonald
Houston / Washington
+1.832.239.3822 / +1.202.879.5570
Michael H. Knight
David P. Wales
Keira M. Campbell, an associate in the New York Office, and Thomas J. Forr, an associate in Washington Office, assisted in the preparation of this Alert.
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