Antitrust and Trade Regulation Alert
January 2009
Authors:
Brian K. McCalmon
brian.mccalmon@klgates.com
202.661.6230
Stephen P. Roberts
steve.roberts@klgates.com
202.778.9357
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New Guidance for Merging Companies:
Illinois District Court Issues Gun-Jumping Ruling
Companies in merger negotiations have long faced uncertainty about how much and
what kinds of information they can share with each other during negotiations and the
due diligence process. Most negotiating teams understand that sharing pricing plans with
respect to specific customers is a bad idea; less clear is the extent to which general price
information, business plans, and other competitively sensitive information can be shared
between companies that presently intend to merge but may instead remain locked in fierce
competition.
This has been an area long on speculation and short on precedent from the courts and
antitrust agencies. The Federal Trade Commission has been diligent in policing violations
of the Hart-Scott-Rodino (“HSR”) Act based on the exercise by the acquiring party of
influence over the acquired party prior to the expiration of the Act’s waiting period (the
classic “gun-jumping” scenario). Despite constant admonitions in enforcement activities
by both the FTC and Department of Justice’s Antitrust Division that competitors who
share too much information in pre-merger discussions may violate Section 1 of the
Sherman Act (which prohibits unreasonable restraints of trade), however, courts have
only rarely addressed the issue squarely, and the antitrust enforcement agencies have yet
to press a gun-jumping case for a Sherman Act Section 1 violation predicated entirely on
information exchanges that occurred during the due diligence process in the absence of
an accompanying HSR Act violation.
A private litigant recently brought such a case in the Northern District of Illinois, and
that court just issued a lengthy opinion that discusses pre-merger information sharing
in refreshing detail and carves out a few handholds for companies negotiating the cliff
face of antitrust while they try to strike a deal. In Omnicare, Inc. v. UnitedHealth Group,
Inc., et al., No. 06-C-6235, slip op. (N.D. Ill. Jan. 16, 2009), the plaintiff pharmaceutical
supplier accused two merging health insurance companies of conspiring to combine
their purchase contracts to drive down the plaintiff’s prices during negotiations by one to
acquire the other. As evidence of the conspiracy, Omnicare relied chiefly on disclosures
and communications that occurred between the merging companies in the due diligence
process. The court dismissed the complaint on summary judgment.
The court’s opinion, though limited in its application as controlling authority, nonetheless
provides several benefits for companies seeking a safe path to a consummated deal. The
first relates to the analytical framework courts use to evaluate the reliability and relevance
of information exchanges as evidence of illegal collusion, and serves as both warning and
reassurance. The warning is for those who believe that the exchange of information cannot
be evidence of a per se illegal agreement if it occurs within the context of due diligence,
simply because the exchange takes place within the context of a legitimate merger.1 The
court did not go that far and in fact evaluated whether a per se illegal agreement was
reached during that process. The reassurance is that the court applied the standard set forth
in Monsanto2 and Matsushita3 to determine whether the specified instances in the complaint
were as consistent with lawful conduct as they were with unlawful conduct, including
whether they were reasonably necessary to achieve the legitimate aims of due diligence.
Antitrust and Trade Regulation Alert
The second benefit for the business community is
the court’s application of this analysis to specific
information exchanges that many merging parties
undertake (or would like to):
• The parties exchanged strategic information about the
average price of contracted services at due diligence
meetings between CEOs, CFOs, and other senior
executives; the court held that the exchanges were
necessary for the acquiring party to evaluate the deal
and that the exchange of average pricing did not
support an inference of conspiracy because it was not
inconsistent with the belief that the two entities were
still acting independently. The court was careful to
distinguish the exchange of average prices from the
exchange of specific prices to customers, which the
court noted would be more troublesome;
• Although the parties had instituted a firewall around
the due diligence teams, they consulted with other
members outside the firewall; the court held this was
a reasonable measure designed to add context to the
shared information;
• The parties shared a generic form contract that was
ultimately used between the acquisition target’s
subsidiary and the plaintiff; the court held that this
was insignificant because nothing in the document
communicated specific pricing information;
• The acquired party disclosed its expected average
discounts on products it purchased; the court found this
consistent with necessary due diligence because the
acquiring company requested information regarding
only discount “averages and ranges,” requested the
information late in the merger process, and was
“appropriately circumspect” in its request; and
• The acquiring party disclosed the average brand
discount on drugs it received; the court noted that
this information sharing was more problematic
than pricing data of the acquired company as the
acquiring company typically has more reason to
receive information than to disclose it, but ruled that
because it was shared cautiously, in a sealed envelope
via a disqualified negotiator, and was shared merely
in order to prove the company was well run and
has a strong strategic vision, the disclosure was not
evidence of an illegal agreement.
Third, merging parties can draw some guidance from
what the court specifically noted that the parties did
not do. For example, the court noted the absence of
extensive discussions between the merging entities
about the plaintiff’s contract. In addition, recognizing
that merging parties’ need for information often
decreases once a merger agreement is executed, the
court noted favorably that the parties shared no pricing
or strategic information, general or specific, after they
signed an agreement to merge.
The district court provided an outline of the framework
under which future courts may evaluate pre-merger
information sharing. Those looking for a unified theory
of pre-merger gun-jumping, however, must continue
to search. This is only one district court’s opinion
and other courts may disagree. More importantly, the
court’s ruling was highly dependent on the facts of
the case before it—as most (if not all) collusion cases
must be. For example, the court evaluated the proffered
evidence within the context of a consummated merger
by the defendants, eliminating any possibility that the
parties were engaged in due diligence to cover an intent
to collude. Effectively, the court was asked to decide
whether pre-merger information sharing could be
evidence of intent to eliminate competition that existed
in the time between the information exchanges and
the closing of the merger itself (after which the parties
were incapable of conspiring). Viewed in that light, it
is little wonder that in the absence of ironclad evidence
of price collusion, the court dismissed the complaint
and gave the back of its hand to the plaintiff’s theories.
Companies that have not yet closed should therefore
take the court’s opinion with a grain of salt when
determining whether to apply the same rationale to
decisions regarding their own conduct. Nevertheless,
one more court’s extensive discussion of pre-merger
information sharing helps to clarify an area of law
where there has been scant guidance.
January 2009 | 2
Antitrust and Trade Regulation Alert
Endnote
1
The merger had occurred before the case was filed, so there was
never any allegation that the discussions were merely a cover for
illegal collusion.
2
Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752 (1984).
3
Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574
(1986).
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January 2009 | 3