Pre-merger exchanges of information can create competition risk. Companies considering mergers or acquisitions legitimately need access to detailed information about the other party's business in order to negotiate the deal, engage in due diligence and implement the transaction. While non-competitively sensitive can (subject to any commercial concerns) be freely exchanged, care needs to be exercised when exchanging competitively sensitive information, such as current and future price information, strategic plans and costs. This is especially true if the companies are competitors or potential competitors.
Competition Law Concerns
In the context of mergers, the Competition Bureau is particularly concerned with pre-closing information exchanges of competitively sensitive information among actual or potential competitors. This is because the exchange of such information can facilitate coordination between the parties in the period prior to closing or for a much longer period of time if the transaction ultimately does not close. For example, the exchange of competitively sensitive information can reduce the uncertainty around a competitor's current or future business, marketing or strategic plans.
If the exchange of competitively sensitive information is accompanied by accommodating actions, it could potentially constitute an unlawful agreement contrary to the criminal cartel provisions in the Competition Act. These provisions prohibit agreements between competitors to fix prices, allocate markets or restrict output, and provide for fines of up to $25 million and/or imprisonment of up to 14 years. As such, it is important that the parties continue to operate independently and compete against each other as they have in the past up to the date of closing, including preserving their competitively sensitive information.
In light of the above, it is important that the parties to a merger have a plan in place to monitor and control the exchange of competitively sensitive information. For example, if competitively sensitive information must be exchanged for due diligence and integration planning purposes, parties should employ third-party consultants, clean teams and other safeguards that limit the dissemination and use of that information within the parties' businesses. A helpful discussion of the various methods that can be employed to safeguard competitively sensitive information is contained in a short article published by the United States Federal Trade Commission titled "Avoiding Antitrust Pitfalls During Pre-Merger Negotiations and Due Diligence".
Do's and Don'ts
In addition to the protocols referred to above, set out below is a non-exhaustive list of do's and don'ts in respect of pre-closing information exchanges:
- Comply with all obligations relating to the exchange of competitively sensitive information set out in any relevant agreements, including confidentiality, non-disclosure and clean team agreements.
- Limit the exchange of competitively sensitive information to that which is necessary to complete regulatory filings, engage in legitimate pre-closing integration planning or otherwise proceed with the transaction.
- Restrict access to competitively sensitive information to senior management, legal counsel or those who have a "need to know".
- Limit the information exchanged to the minimum necessary, and to historical information, rather than prospective information such as strategic plans, marketing plans, product development plans, forecasts, price initiatives or capital plans.
- Include "PRIVILEGED & CONFIDENTIAL – JOINT DEFENCE MATERIALS" in the subject line when emailing competitively sensitive information. Include the same note in the header of documents.
- Keep the information shared as aggregated as possible (i.e. information that does not disclose specific prices, costs, customers or markets), thereby reducing the competitive value and sensitivity of the information.
- Maintain a record of each communication and the information provided and received and review such record regularly to ensure that the information provided has been appropriate.
- Be cautious when information is provided orally so that the conversations do not stray to sensitive or prohibited subjects.
- Seek advice from counsel if you are unsure whether information should be shared.
- Share information with personnel other than senior management, legal counsel or those with a "need to know". Sales or marketing personnel should not receive or gain access to any competitively sensitive information.
- Share information relating to any businesses unrelated to the proposed transaction.
- Agree on customer pricing, jointly negotiate purchases or otherwise act as a single entity. Both parties must strive to be as competitive as possible until the transaction closes.
- When communicating, even internally, use negative phrases such as "eliminate competition" and "dominant player". Every document created relating to the transaction should be written with the knowledge that such document may end up in the hands of the Bureau. Therefore, great care should be taken to avoid any implication that the purchaser has any intent, practice or policy to restrict competition. In respect of the transaction, it is preferable to focus on the positive efficiency-enhancing aspects, such as achieve economies of scale.
Having regard to the protocols described in the FTC's article and the do's and don'ts summarized above will minimize the risk of issues arising in the context of pre-closing information exchanges. In contrast, parties that choose to exchange competitively sensitive information in the absence of such protocols could find themselves subject to lengthy investigations, prosecution and significant penalties under the criminal cartel provisions in the Competition Act.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.