Crafting Divestiture Agreements in the Context of Merger Investigations
Antitrust scrutiny of M&A remained high during 2021, and merging parties continued to make follow-on divestitures designed to obtain antitrust clearance for their main transaction. While a divestiture for antitrust reasons is necessary in only a small number of deals, it can be critical to achieving timely regulatory approval for a major transaction.
Antitrust enforcers continue to require that merging parties identify both the asset package and proposed buyer(s) as early as possible to maximize agency vetting. To obtain swift approval, a strong proposal must include all the assets, tangible and intangible, that the enforcer thinks the buyer needs to replace competition purportedly lost by the original transaction. Enforcers may even want to include assets outside the market in which they allege harm.
Otherwise common transactional terms can slow (or sink) an attractive proposal if they create entanglements or undermine the divestiture buyer's incentive to compete. Parties should:
Avoid circumstances where the seller has an ongoing financial stake in the divested assets or the buyer. For example, enforcers may argue:
- A large milestone payment may make aggressive competition less rewarding for either seller or buyer, or
- A seller-financed buyer may be reluctant to jeopardize its funding by competing vigorously against its lender or place the seller in line to reacquire the assets if the buyer fails.
Maximize buyer's future independence. Enforcers will expect the divestiture seller to provide transition services, but shared assets or transition services should be limited in time and scope to avoid creating longer-term entanglements. Enforcers want the divestiture buyer to stand on its own and view such relationships as potential avenues for collusion. For example, an enforcer may require that:
- Shared IP be transferred to the buyer and licensed back as needed;
- Communal physical assets be subdivided; or
- Transition service agreements be short and services provided at cost.
Jones Day publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our “Contact Us” form, which can be found on our website at www.jonesday.com. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.