Managing Regulatory Compliance Risks in M&A

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The go by following M and A Science. I'm your host, Kisan Patel, CEO and Founder of M and A Science. Joining me today is Chuck Webb, Lead antitrust counsel at FedEx. FedEx is an American multinational company focused on transportation, e commerce and business services based in Memphis, Tennessee, traded on NYSE under fdx. Today we're going to talk about managing regulatory compliance risks in M and A hey Charles, before we get in the.

Conversation, I know we're going to touch on legalese related topics. Can we put a little disclaimer? Just that folks at home don't take this as any kind of legal advice, investment advice, anything they do dangerous.

Yep. No. Certainly not giving legal advice here. And I should say that my statements today, these views are my own views, not the view of any client that I currently or formerly have represented.

Thanks for taking a break from working on deals to have this conversation. Can we kick things off a little bit about your background?

Sure. Why did you say I'm currently lead counsel responsible for antitrust for FedEx? In terms of background, I'm originally from Boston, still a four sport Boston fan. So very happy about the Celtics recent championship. Got my education largely in Washington D.C. first my undergraduate degree at American University, Law School at George Washington University. I got my law degree in 1998, spent the first six years of my career in kind of big firm DC in the antitrust practice groups, first with Sherman and Sterling and then with how Reese, Simon, Arnold and white. And in 2005 kind of took an interesting career move. I moved my family and myself to Jersey. This is not the Bruce Springsteen, Jon Bon Jovi version of Jersey. This is actually the island of Jersey, technically the bailiwick of Jersey, the offshore banking jurisdiction, Jersey in the Channel Islands, where I was first the legal advisor and then executive director of an organization called the Jersey Competition Reprieve Authority, which is the island of Jersey's competition law enforcer and also telecoms and postal regulator. And the reason I moved out there was I helped implement the jurisdiction's first competition law which came into effect in 2005. And under that we did the first enforcement actions, the first merger reviews. So that's my government experience. Moved back to the States in 2010, rejoined my old law firm, Lowry as a partner in late 2010. Unfortunately, the firm collapsed soon after that. Not for my joining, it just was a tough time in the economy. Went with a majority of my practice group to Baker Bots, where I was for about three years as a partner in the antitrust practice group and then end of 2013 switched to in house, first at Walmart where I was for almost five years, most of that based in Bentonville, Arkansas, but actually 20 months of that back over in the UK where I was the chief ethics and compliance officer for Asda, which was at that time Walmart's UK subsidiary and then finally switched over to FedEx September 2018, where I currently am now. My current job responsibilities is I basically have global responsibility for antitrust or competition law compliance for FedEx. And I also support, as you referenced, our M and A teams both in terms of antitrust or competition law aspects of M and A. And also coordinating compliance due diligence across my team, which is the Corporate Integrity and Compliance Group, which sits within legal to finish. I also taught for three years as an adjunct professor, taught antitrust law at the University of Memphis Law School. Been doing this for a while. The antitrust gig. I've seen it now as a law firm partner, as a government enforcer, as a in house counsel and a little bit in academia. So I've seen it from all sides. Absolutely love the subject matter and this is great.

I wanted an expert on antitrust and I got one really excited. This conversation can we get into because.

I always say I'm really deep on antitrust history and baseball. Other than that, basically useless. So very happy to talk to you about that.

A similar thing. Not exactly those areas, but let's just give a high level. What are the different types of regulatory compliance risks when it comes into M and A?

And let's keep it at a high level for now. I think we're going to delve in these topics a bit more detail as we go forward. But let me put regulatory compliance risk in kind of three buckets, if you will, substantive risk, procedural risk and other kind of three distinct buckets. But as we'll talk about, they're all related. So first, the substantive risk I've had in my career. Let's say you have the boardroom of company A and it wants to acquire company B. Either the firm's general counsel or the board of directors, they come to an antitrust counsel and they say can we even do this with respect to the regulatory risks it may arise? So in answering that question, an antitrust lawyer is going to look at what are the substantive antitrust issues arising from the transaction? First and foremost, are there any horizontal issues related to the transaction? Are company A and company B, are they actual competitors in a current market now, or are they potential competitors? Do they take customers? Do they take business from each other? And if so, how concentrated is the market? How many other competitors are there, et cetera? So that's horizontal. Are they direct competitors? If not, another question you'll want to ask is are there any potential vertical issues? So for instance, let's say company B is not a competitor of company A, but what if it's a key distributor or what if it's a key supplier? And if acquiring that key distributor or key supplier and bringing it in house to company A, is that going to have a danger of forcing or foreclosing or freezing out or discriminating against company A's competitors? If they can't get that distributor, they can't get that supplier. So horizontal risks, vertical risks, and there's other potential risks as well. You're ultimately in merger review or the regulatory merger side. The ultimate substantive question is will the combination of company A and company B put the combined company in, let's say, a monopoly or dominant position in a market where it can increase prices, or will the combination of company A and company B facilitate collusion or coordination among the remaining competitors in the market? So that's the ultimate substantive antitrust risk. Oh, and I should mention also primarily and traditionally, you're looking at the substantive risk in what we call downstream markets where company A and company B sell their products or sell their services. But increasingly in antitrust, you also need to consider the competitive effects of the merger in upstream markets where company A and company B are purchasing their goods or services, particularly in the United States with respect to the merger's potential effect on labor market. That's something I'll talk about today. So that's the substantive bucket, and then you have the closely related procedural bucket. So where in the world does the combination of company A and company B, where does that require regulatory clearance, particularly a regulatory filing, and then waiting for the agencies to review the transaction? So, for instance, in the United States, we have a statute called the Hart Scott Rodino or HSR Act. That's a statute for transactions and merging parties reaching certain financial thresholds. It requires the parties to file their merger via an HSR form with the Department of Justice and the Federal Trade Commission, the two federal agencies designated to enforce the antitrust laws in the United States. So it requires you to file the forms and then wait a certain number of days, what's called waiting periods, to allow the agencies to review the deal. And you cannot close the deal until the agencies finish that review process. And the agencies either say, okay, we have no further questions, they let the time period run out, or you reach some sort of agreement with the agencies. And so the HSR framework is what governs that in the United States. But there is antitrust laws enforced in well over 100 countries worldwide. Many of them have their own merger filing regimes with similar filing and waiting period requirements. So you have the European merger Control regime, Brussels, the DG Comp, European Union level. If your merger has a community or union dimension, you May have to file in Brussels and again file, have the waiting periods before you can close. And if you don't satisfy the Brussels thresholds, there could be filing obligations at member state level, say with the Buddhist Kartelant in Germany, the French competition agency, Spanish Competition Agency, etc. Then there's also filing regimes in Canada, Australia, Brazil, India, South Africa, again depending on where the companies do business. China, you may have filing obligations. And those filing obligations, it's very much tied to the substantive risk. It'll drive the deal's timing of when you can expect to close. So substantive risk, procedural risk, and then there's other risks. And I'm gonna put three subcategories in here. First is gun jumping. So gun jumping is the parties, company A and company B, they cannot effectively close their transactions. So company A cannot effectively take control of company B prior to closing and prior to getting regulatory clearance in the jurisdictions where it's required. And if they do take premature control, they can face substantial fines for that. Also, it prohibits company A and company B from sharing commercially sensitive information prior to closing, which could reduce competition in either the pre merger period or if the deal falls apart, reduce competition going forward. So there's gun jumping risks you'll need to do compliance due diligence, including antitrust due diligence. So let's say your company A will need to kick the tires of company B to see, okay, what am I actually buying? Is company B involved in a cartel? What am I stepping into here? Because if it's a full merger, you're likely going to inherit the liabilities of the company you acquire, especially for share acquisition. And finally, the last thing I'll say is you're going to need to then plan for integration. How are you going to integrate? In my example, how is company A going to integrate company B into its corporate compliance program, including its antitrust compliance program? Now, again, because of the gun jumping risks, you can't integrate prior to closing. But you will need, especially as you get closer to closing, you will need to have a written plan to say, okay, day one, this is going to happen in compliance. Six months out, we want this happened, by a year out, we want that happened. And you'll need to have that plan usually as part of the overall integration plan for the company, but you'll need to have a specific plan for compliance, including antitrust compliance. So as long as you got those three buckets sorted out, you are fine.

So let me make sure I got this right, Chuck.

We got substantive risks that would include.

Two big Buckets, direct competition, which would be famous horizontal, horizontal, like key suppliers, which is more vertical. But this is the core that hey, you have some competitive risks here and then you have procedural risks. And this is more around the regulatory.

Filings that you would need to complete in the US HSR is a big one.

But then wherever this business is doing business, you need to be aware that there's going to be other bodies with local governments that may have bodies of anti competitiveness that you have to follow their rules.

And then the other category, we have.

Gun jumping, compliance, due diligence, actually doing diligence on how they're keeping up with compliance. And then the third integration of compliance. How are you actually going to integrate this company and the compliance program into yours?

Yep, exactly.

Can we like walk through an example of like a deal And a couple.

Of questions that pop into mind.

One is, is it all companies of all shapes and sizes that need to be aware and follow through? Is it just public companies? And then maybe we could just like make up an example. And what does the timeline look like of when you start reporting to DOJ and ftc?

Sure. Is it all companies? There's public companies. The framework that I just described is potentially applicable to all companies, whether public or private. So being public or private, the rules, at least for antitrust don't change with respect to acquisitions. Now your risk profile will change depending on the nature of your company. If the target company is just doing business in the United States, you probably don't need to worry about foreign filings as part of, let's say a FedEx M&A. When something is first brought to my attention, one of the first questions I ask is, okay, are they just us? Are they selling outside the United States? Because that really kind of start to frame the analysis and then, you know, how big is the transaction, the HSR filing? The key threshold there is the size of the transaction, which currently I think the filing threshold for HSR is it's about 119 million, give or take and it's indexed for inflation each year. So if your deal is below that, you don't have HSR obligations. If it's above that, you do. But if you don't have HSR obligations, you don't have the filing obligations, but you still have potentially gun jumping risks, you still have your compliance, due diligence, you still need to factor in integration. In terms of planning, it really depends on the nature of the deal. If it's a major international deal that's going to present again substantive antitrust risk Especially horizontal risks in multiple jurisdictions. You'll need to file in the United States, Canada, Europe, Brazil, China. And you're expecting a lot of these agencies, Europe for example, United States, for example, they have in that kind of regulatory framework, they'll have what's called like a phase one and phase two process where through the phase one, like in the United States, the agencies have 30 days to conduct their initial investigation. If after 30 days they want to go on to a second stage in the United States, they'll issue what's called a second request, which is a big document production. Europe has a similar procedure. China has a similar procedure. So back to your question. If it's a major international deal with multiple filings in multiple jurisdictions, A, you'll want to go to the agencies upfront on that one. In Europe, you're required to go into the agency prior even to filing what's called a form co there, which is the European filing. I would also recommend going and talking to the FTC or DOJ even before the transaction hits the newspapers. If it's a major international deal, you don't want the agencies finding out about that in the Wall Street Journal. You want to go in there and you want to go in there proactively to start saying here is why this deal does not raise competitive concerns. Oh, and here's why it's even pro competitive. You'll want to get in front of that narrative. You want to construct that narrative. You don't want that narrative constructed for you. You'll need to take it all into account in the terms of timing. Again, for major international deal where you're expecting, let's say a second request. United States, you're expecting a second phase investigation. In Europe, you will want to have a long time between signing the deal and your expected closing and that's going to have impacts on the corporate document, your target closing date. I would say you at least have a 12 month period. If you're expecting a major international review, it can even be longer for significant deals. Let's say in China, where the reviews tend to take a little longer. On the other hand, if the mergers are constrained the United States, there's not a lot of foreign income or foreign sales. You maybe you only have an HSR filing, your review can take roughly a month and you can have a month between filing and closing and you can plan accordingly. Those are two hypothetical examples. I hope that's helpful.

Yes, it sounds like a bigger deal. You're going to need to really get ahead of it and probably give like a Just a heads up to regulatory bodies beforehand.

And if it's not as big of.

A deal, you may just go straightforward through the process.

Yeah, again, I think if it's a bigger deal, what you're expecting kind of challenge, high profile deal, you're going to want to get that narrative to the agencies beforehand and you're going to want to go in beforehand saying, look, this is coming down the pipe. This is why the deal does not harm competition. Frankly, you'll want to say this is why the deal is good for competition. Whereas if it's a smaller deal, you don't need to do that. You'll probably just file where you need to file and see if the phone rings, see if the agencies pick it up and if they have any concerns. But that ties back to that substantive analysis. As I was saying before, again, are there a lot of horizontal overlaps here? Are the parties competitors? That substantive analysis will drive that strategy. Again, for a higher profile deal, raising some substantive concerns, you'll want to get control of that narrative very early in the process and bring that narrative to the agencies. If there are no substantive concerns or the substantive concerns aren't that great, you may just say you'll file and you'll reply to any agency questions you get. But you're not going to take that proactive approach.

Got it. And the main filing is hsr. You make this filing. Basically, no news is good news.

Yes. In general, now you can get in the weeds a little bit. There's something in the United States called early termination, where if you file, you can request early termination. The agencies under the statute, either the FTC or doj, and again they split jurisdiction over who reviews what. They can take 30 days to review the deal. If you request early termination, your phone will ring and to say you have received early termination and that generally is within 15 days within the waiting period. That news can be slightly good news. Although under the Biden administration, the examples, well, they had suspended early termination for a bit. I think it's getting rarer and rarer that you get that. And then other jurisdictions like Europe or some of the European member states, the agency actually needs to close the investigation for you to receive clearance. In the US you don't get early termination. The waiting periods just expire and you can then close. So yes, in that instance, no news is good news. But you'll generally get some sort of either early termination or outside United States, you'll get like a closing statement of the investigation. Then you can consummate the acquisition.

How does this affect the timeline of.

A deal in general.

If I did a sub $100 million deal, didn't you do anything with HSR filing at all versus if I did do HSR filing? And what I'm particularly curious about is this period between sign and close, is that mainly an area specifically for the timeline to not get a response on HSR filing or is this filing done earlier, like as soon as we sign loi?

So in the United States, you can file your HSR form on an LOI or an mou, and that preliminary agreement just needs to show the good faith intent of the parties to go forward the transaction, but it certainly does not need to be the final agreement. It can also be non binding so long as it shows a good faith intention to go forward the transaction. You can file on a preliminary agreement like a letter of intent, memorandum of understanding, and then as you're developing your definitive agreement, whether it be a stock purchase agreement, asset purchase agreement, joint venture, whatever. Now, depending on the regulatory risk profile, let's say you're above HSR and you're expecting based on substantive risk profile, you're expecting agency questions on a horizontal issue or vertical issue. You will want to put that into your timing. Not gonna be able to close this within two months because we're expecting a second request in the United States or expecting a phase two investigation in Europe. So again, you may wanna put that closing date out six months, maybe even a year. There'll be other factors beyond antitrust driving your period between signing and closing. For instance, you need to satisfy conditions, precedents. You need to give notice as required by third party contracts to suppliers to change the control notices, et cetera. Antitrust is not the only consideration, but in my experience it is one of the driving factors of your expected timeline. The longer the period between signing and closing, the more focus you will need to have on those gun jumping risks. In terms of, okay, we cannot take premature control of the target prior to closing. We need to be careful about our information flows. We need to have a structure of how we're going to structure the information flows during due diligence and during integration planning. And the longer that timeframe is between signing and closing, probably the more focus you'll need to have on that.

What's the HSR form itself look like? What kind of fields are in there? Is it like a big essay form or is it a bunch of checkboxes?

That's an interesting question. As we speak right now in late July 2024. It is a relatively simple form. It's actually Been quite some time since I've actually filled out an HSR form. But from my recollection, you need to give revenue figures of you and the target by I believe it's North American industry code. You need to give kind of corporate information. Probably the most interesting thing is you'll need to Give what's called 4C documents. The 4C documents are documents created by or for the board of directors, which talks about the deals, potential effects on markets, competition, market concentration, et cetera. Those documents often are the most interesting part of an HSR form. You need information about prior transactions, et cetera. Now, that's the requirements today. Now, about a year ago, the FTC and DOJ issued a consultation, a request for comment, that they were going to expand the HSR form dramatically. They were going to require narratives about the deal's impacts on competition. They were going to require a lot of information on potentially overlapping directors between the merging companies, a lot more kind of documents in terms of deal docs brought to the deal team. It would make the HSR form a lot closer to what's called a form co in Europe, which is the merger filing in Europe, which requires much more narrative explanations of how do we define the relevant markets, what are the concentration levels in the markets, et cetera. More kind of that substantive story of the transaction. Currently, that's not required in the United States. It is required in Europe. It is required in places like India or South Africa or Brazil. The US May be moving towards that, but the FTC and DOJ have not come out with their final rulemaking. They received, I believe, multiple, I think, over a few thousand comments during the consultation period on the revised form, and they have not come out with the final form yet. So right now things are relatively simple in the United States, but we'll have to see if the agencies move more towards a more extensive filing under Hart.

Scott, can you teach me how to land the narrative?

You meet up a deal of a.

Merger just to kind of put to rest attention around and, you know, get our story right just so we can float through approval here.

Antitrust is a very factual, specific jurisprudence profession. If you read the antitrust laws, I'll stick with the United States just to make it simple. The primary statute that the agencies are enforcing is section 7 of the Clayton act, which was passed in the early 20th century. It fills not even one page. Basically says mergers that substantially lessen competition in any line of commerce in the United States are prohibited. I'm paraphrasing there, but the key is merger that substantially Lessen competition in any line of commerce. So that's rather a simple test. But where antitrust gets complicated is actually applying that to the businesses of the merging party. So when I have a merger again, that substantive question of is this deal even possible? I'm going to want to talk to the business people, the vice presidents, the managing directors of the business lines of that maybe company A and company B have competing products. Are we the next best substitutes? How closely do we compete? Do we compete on price? Do we compete on service? Do we compete on other factors? What's the rate of innovation in these markets? Have we seen a lot of new competitors entering? Have we seen a lot of competitors exiting? What would be our post merger market share? What are the market shares of the other companies? Are companies capacity constrained? How much excess capacity is there? Are there foreign competitors that could come in? There's a thousand questions you'll want to ask to get to the details of the transaction. I would do that. That's even pre narrative to understand the facts. Once you understand the facts, then you can go to okay, why is this merger not going to harm competition? It's not going to put the company, the combined company, in a position to increase prices after the merger, either on its own or in coordination with the other competitors. And in fact, this merger is actually good for competition because it's going to increase the speed of innovation. Let's say company A and company B are both have products in the pipeline that are good for consumers. Combine get together will actually bring those products to market faster than they otherwise would. Or the combination of goods and services, company A combined with company B will be a better package for your customers. And that's the key thing. You want to show this in terms of downstream markets. This is in the customer's interest. So that's how you create that narrative. You got to have a detailed understanding of the facts first to then go on and say, okay, this merger will not harm competition. And in fact it's actually good for competition and good for consumers. And you want that message consistent to the agencies, you want it consistent to customers, you want it consistent to your vendors, and you want it consistent to your employees because you want that consistent message. A pitfall is you tell one constituent one thing, another constituency another thing, and it conflicts. You darn sure better be consistent with, let's say what you're telling DG Comp in Europe and the Department of Justice in the United States, because guess what, they're talking as well. And they're talking about what are you Hearing from emerging parties, they may be sharing information. So you gotta have a consistent approach among the agencies, among customers, suppliers, employees, et cetera.

Start with the facts and have a clear, consistent story.

It's not rocket science.

Hey, can we do a little history on some of these anti competitive laws? It goes back like well over 100 years. Oh sure, I just know the Sherman act and then there's Clayton Act. But I don't know. You know this stuff better than I do. If you want to maybe tap into a high level of like why we have these laws to begin with.

The Sherman act in the United States, Senator John Sherman was the leading sponsor Republican from Ohio, who by the way is the younger brother of General Tecumseh Sherman from the Civil War. It was enacted in 1890 in the kind of the midst of the Gilded Age. And by the way, like American football, antitrust in North America. It's actually Canadian first, because Canada implemented their first competition law in 1889, the year before the Sherman Act. Kind of like Canadians played American football before we did kind of similar there. So the Sherman act was enacted 1890, you know, the Gilded Age when there was a. And it's called antitrust because back then you, I think was corporate law. You couldn't have corporations spanning multiple states, I believe. So what there was a lot of concern about these trusts. It basically mergers. John D. Rockefeller and Standard Oil is an early example of kind of bringing in under common ownership railways, oil production, mines and bring that kind of common ownership. But it was interesting at the time too because at the time it was both a concern of economic power and companies having monopolies and being able to increase prices or decrease innovation to the detriment of their customers. But also there very much also was a fear of political power, that economic power would become political power. Our democracy away. Fast forward 1972. The late great Justice Thurgood Marshall said that the antitrust laws are the, quote, magna carta of free enterprise. And they are as important to protect our economic liberties as the Bill of Rights is to protect our civil liberties. Fast forward 1914, you have the Federal Trade Commission act, the creation of the Federal Trade Commission. Sherman act outlaws cartels and monopolies. The Federal Trade Commission act outlaws unfair methods of competition, which includes cartels and monopolies, but also includes other things. What's called the penumbra of the Federal Trade Commission Act. We're still defining what that is. And then you have the Clayton act, which also is right around the time of the FTC act, which applies again outlaws mergers that substantially lessen competition. Again, that was early 20th century. And then beyond that, you've had amendments, those laws in the 1950s and 60s, the penalties for Sherman act violations were substantially increased. And then finally the Hart Scott Rodino act that we talked about that was passed in the 1970s. Be interesting to see this doctrine of law that was founded in the 1890s, the late 19th century, which, by the way, had antecedents back to English common law even prior to that. But this doctrine of law that's developed over the past, oh, was it 130 years now? Current debate we're having, is it still fit for purpose to regulate markets today and to police markets into the 21st century and frankly into the 22nd century? And that's the ongoing debate that we're having today, both with the cases that are brought and academically. But I'll tell you, it's a fascinating and frankly fun debate to be in.

Interesting. I appreciate the quick history lesson because it tees up of why these things even exist to begin with. And then it sounds like it really stepped up during the Clayton act, and that's around Roosevelt, period, a little bit later than that.

But you had a. There was a perception, I think, and I think it was actually during the Wilson administration when the FTC act came in, the Clayton act came in, that the Sherman act hadn't done enough to prevent market concentration. The debate that they had in the 1890s about we need to break up monopolies and monopolies, economic power turning to political power. It's not like we've solved that question in 130 years since we're still having those debates today. What was Standard Oil at the time? Maybe some people see as some of the big tech companies today, but the questions we had back in 1890, we're still basically asking the same questions today. Don't get me wrong. We've had a voluminous amount of jurisprudence in that time to define how do we show a substantial lesson in competition, how do we define markets and antitrust? It's both law and economics. So we've had a substantial amount of jurisprudence which is answered questions. We've had a substantial amount of economic analysis which give us economic frameworks to kind of again, see what competitive conditions are going to be when a merger happens. But the fundamental questions of is this an effective way to police economic power impacting political power? The fundamental question still remains today that's.

True whether we have great American success or monopoly.

I should mention also it'd be remiss of me. I've been very us in my comments. We now have about 120 countries around the world that enforce some form of antitrust laws and that has exploded recently. So Post World War II you had the a Marshall Plan and reconstruction. You had Europe enacting its first competition laws, antitrust moving to important economies like Japan, South Korea. And then you had in the past, say 20, 25 years, you've had South Africa, China, India, Brazil, other big important developing economies all adopt antitrust or competition law. So and when it's expanded globally to Today it's over 120 countries and territories. And that's why it's so important to a company like FedEx, because we operate globally and antitrust operates global.

I want to get back to our deal example. So we just saw our form. You helped me nail the narrative down. We got it filled in.

Now we're in this waiting period. Can we talk through what are the.

Risks during the waiting period for I guess both sides of the table.

So during this waiting period, let's just take a hypothetical deal. You'll be having engagement with the agencies and let's just say for fun, our deals are portable in the United States, in Europe, at the European Union level, China and Australia, just for fun. So you'll be talking to each of those agencies. Again, you'll want a consistent message. Let's say they're two US Companies with international operations. As an in house counsel, I'm going to want to have my external counsel on the team, both in the United States. Also it's key to have local counsel in our example in China, in Europe and Australia to help you with those agencies who have their own analysis to do. You'll be having your proactive, it's proactive and reactive with the agency. So you're going to want to submit stuff to the agencies. You'll probably have an economist on board as well to help explain the economics of the deal. And then you're reactive because the agencies will send you in like the United States. They'll send you a second request which is a huge discovery request, if you will, requiring data and documents. You probably also want to get a, like a third party document production group to help you with that. The agencies may want to talk with some of your executives and depositions or interviews. So you'll have to, you have to shepherd those through. There's the agency engagement part of this. The other risk you'll need to control for is gun jumping so you can concurrent to this, you'll be conducting due Diligence on the target. In the old days, I'm old enough to remember when due diligence, when you actually had the data room, you'd walk in and there'd be boxes of documents all over the place. You couldn't photocopy the documents, or maybe you could, or you couldn't. You certainly couldn't take them outside the room. Nowadays it's all virtual. It's called a VDR or virtual data room. You'll have due diligence constructed through what's called the VDR or virtual data room. But to avoid the gun jumping risks, let's say sensitive information, let's say customer lists or prices or salaries, you probably don't want to have that fully available to everybody via the vdr. So you'll want to set up what's called a clean team, a subset of people who are working on the deal who aren't involved in like the competitive aspects of where the companies compete to review more sensitive documents like that, to again avoid the gun jumping risks of exchanging commercially sensitive information. Because let's not forget, you cannot get regulatory compliance and the deal falls apart. Or there's a thousand reasons why the deal can fall apart and the merger collapses, your financing collapses, valuation changes, et cetera, et cetera, et cetera. Or frankly, corporate exec doesn't like his or her role in the new company and it falls apart because of that. Some personal reasons. I've seen it happen. And again, so you'll want to set up this kind of BDR to have this structured framework to control the information flows between the company to avoid gun jumping risk. And you also can't have company A take premature control of company B that even starts in your stock purchase agreement or your asset purchase agreement, depending on the deal structure. So for instance, there's something called a material adverse effect where if this happens, the deal falls apart. You don't want to set those thresholds too low because you don't want to constrict company B's ordinary course of business. And where companies have gotten in trouble is, let's say material adverse effect threshold is too low. Or you're going to require company B to have company A's permission for ordinary course of business transactions prior to closing. And that's getting into the premature control aspect of gun jumping. Sure, you may want to say you don't want company B to like sell off its huge factory or the key asset you're acquiring. But when it comes to like signing up customers or firing employees, in the ordinary course of Business, you can be very careful about what you're taking control of. Yeah, there may be key employees you'll want to have in the target post acquisition, but you don't want to get involved in the target's ordinary course of business decisions for the gun jumping risk. And finally, one thing I probably should have mentioned before, but I'll mention it now and probably correct myself, is in addition to or as part of controlling the narrative in terms of why the deal is good for competition and why it doesn't raise competitive concerns, as in house counsel and also external counsel, you are going to want to get on top of both the ordinary course of business documents of you and the acquired party and the deal docs. What is your company saying about the deal? What are your bankers saying about the deal? What is the target saying about the deal? I mentioned earlier in the United States, under the HSR form, you're going to need to turn over what's called the four C documents, documents that have been presented to an officer or director of the company that talk about the deal's impacts on markets, competition, et cetera. And then in a second request, you're going to need to turn over a lot of your ordinary course of business documents about places where you compete. So what are those documents saying about the deal saying about competition? Is it consistent with your narrative? And you don't want it to be inconsistent, believe me. And some of the pitfalls I've seen in deals, both deals that I've worked on not for FedEx, but deals I've worked on in the past or ones I've read about is let's say you're saying that this deal is not going to create a monopoly, but your bankers, let's say your third party bankers who are trying to sell the deal are saying, oh, the target has a market position of they have the capacity to increase prices and wouldn't that be. And if you combine it with company A, you guys have the chance to leverage your market strength. So banker documents about what they're saying about your deal or the target. Let's say the target's a privately held company and they're looking to be bought out and cash in. They may play up. Oh yeah, we have market power. Yeah, yeah, yeah. And you really can't avoid that. But you need to know if those things exist. It's not fun, let's say, to be in a deposition or an investigation and see either deal docs or ordinary course of business documents that you didn't know about that the agency brings to Your attention. That's not a fun place to be.

So don't gun jump. Probably like a big fundamental there. Yeah, it sounds like things are pretty smooth if you don't get that second request.

Yeah, it is. That's true. The second request or a phase two in Europe or the equivalence in again, China, India, etc. You may need to answer questions within the first 30 day period or the first period you may have document submissions. But if you could wrap it up before then. Yeah, if you can avoid the phase two part of the merger review, that's great. And there's ways to do that. There's effective advocacy. Let's say Company A and Company B. Company A is on the west coast primarily. Company B is on the east coast primarily. Again talking about a domestic deal. But let's say you have competition in let's say Kansas City. Simple example, as part of the deal you present to the agencies, you say, look, we know there's an overlap here in Kansas City. We've already identified Company C, which is another competitor which is going to buy this part. It's going to take. We, it's called fix it first. We have a prearranged fire and as part of our transaction we're going to divest this specific part of the deal to avoid the antitrust problems. And that may also be a way to get around an extended investigation, kind of identify the problem up front and fix it first. That's potentially another way to short circuit an agency's investigation. But yeah, to your point, a second request, more often than not it is very intrusive, it is very expensive. It will lengthen the time period for again that pre closing time period.

Yes, because you got to give them a lot more information, sort of documentation and data docs.

Yeah. Et cetera.

They're going to review and really be all up in your business.

And then often the second request, the reason they're doing that is to build the evidence of the case they're working on, but also to prep themselves for likely the next stage, which would be depositions of your corporate executives based on the documents they see. I submitted via the second request.

When they see my Slack message that I sent to my colleague of we're going to kill this competitor, something along those lines, then that's going to be held against us.

It's interesting you mentioned Slack because the agencies recently put out revised guidance that companies have an obligation to preserve potential evidence on platforms like Slack, like teams. Fifteen years ago, lawyers thought that email was going to be the death of legal Privilege email is now tame. It's like, what are people saying on Slack Teams? What are people saying on WhatsApp? That's the next frontier, if you will, which the agencies clearly it's not even the next frontier. It's here now. It's the way people communicate and agencies know that. And they're going to want to see that stuff too.

But that'd be a best practice if I was going to go do a deal under review to tell my team, hey, don't put anything stupid in writing. If you got something to specifically talk about the nature of this deal, pick up the phone. Is that like a fair thing? I know I'm not asking for legal advice on this, but I wouldn't put it that way.

The way I would counsel is be careful the way you describe. I would never by say, pick up the phone instead of putting documentation, obviously major corporations, you need documentation. But the way I would counsel it is just be careful the way you characterize things. For instance, terms like market share or market power, those have meanings in antitrust. Again, meanings that have been developed via case law, via economic analysis in the hundred and something years that the United States has been enforcing the antitrust laws, which the meaning of that may be different from the business meaning of it. For instance, market shares. Oh yeah, we have a great market share. Have you properly defined the relevant market in the way that antitrust has taught us to define the relevant market? And there have been some recent examples where the agencies actually, both in the merger context and outside the merger context where the agencies have the FTC or DOJ have said, oh, you received some careful coaching on what to say, or you were told to use the in house corporate chat function and avoid email. I wouldn't go down that route. Just be cognizant. The business terms that you use may have different meanings in antitrust. And your documents will be seen. You may think things are seen in context. An agency reviewer will be reviewing page by page, something that could stand out in an email which is part of a broader conversation. They're going to say, ah, look at that. The general thing of don't put something in writing that you wouldn't want to see on the front page of the Wall Street Journal, for instance.

Great tips. Is there a way to tell in advance of a deal if you're going to get reviewed or are you just going blind into this process?

You're very rarely going blind. It goes back to what we were talking about earlier. Are there subsid concerns? So horizontal overlaps? Are there Vertical issues, like vertical foreclosure issues. And a lot of it's going to depend, as we were just talking about, on what are your ordinary course of business documents say. What do your deal documents say? The deal documents are the first thing the agencies are going to look at. And if they're saying that the combination of company A and company B are going to create a company with large market share, or let's say you're going down from three competitors in a market to two competitors or four competitors to three competitors, those kind of very high level views of market concentration are a huge flag of, yes, this deal likely will raise concerns. So you're really going out completely blind. Also, you rarely have perfect information right up front. And it's something that as you go further in the deal, you dig into the ordinary course of business documents, you may find evidence, both good and bad, that either support your theory about why the deal will harm competition or may not support it. You'll want to find out about that and not have it brought to your attention by the agencies, largely with the kind of the analysis we talked about in terms of horizontal overlaps or vertical issues. You'll have a sense of kind of what the agencies will be interested in. And don't forget, especially the United States. So many of the antitrust lawyers like, so I had my agency experience in Jersey and then went to the private sector. There are people who go to the private sector and then go to the agencies and backs call it the United States. They call it the revolving door. So you largely know the questions they'll be asking. And actually the FTC and DOJ on their substantive analysis, they have issued merger guidelines, just been updated about a year ago, which goes through the questions the agencies asked. So the framework is fairly transparent. You should be able to know again, you won't be going in blind. You should have kind of a sense of where the issues are, how much risk is there. Recognizing, however, that you will not have perfect information, especially early on in the process.

All right, let's say we go through this and then the deal ultimately gets rejected. What happens now? Can we appeal this?

That depends where you are in the U.S. again, the federal Trade Commission and the Department of Justice, ultimately, they cannot stop a deal under the Hart Scott Bernardino Act. If the FTC or DOJ wants to actually stop a deal, what they formally need to do is seek an injunction in federal district court to actually enjoin the deal. How it generally works is they will file for a preliminary injunction, which the court will grant or not now it's just a preliminary injunction. There's a legal test of likelihood and the merits about whether the court will likely find it in favor that the deal is anti competitive. But if the agencies get a preliminary injunction, often in the United States, that has the effect of killing a deal because it will often then push the deal beyond kind of the target closing date, your financing for the deal often will dry up. So preliminary injunction in the US will often have the effect of killing a deal. But in the United States you can advise a client to say to prohibit the merger, the FTC or the doj, the reviewing agency will need to take you to court. You will have your day in court. Now obviously you can short circuit that. Let's say I mentioned how earlier you get the fix it first remedy. If through the investigation the agencies say hey, we're going to take you to court unless you agree to divest the assets in this geographic market. And okay, you know what we'll do that you enter into what's called a consent decree which is filed in court, but it's not, it's no longer an adversarial process, basically a settlement. But in the US to only block a deal, the FTC or the DOJ will need to take you to court and get a plenary injunction. I should also mention, by the way, the United States, in addition to the FTC and doj, state attorneys general and private plaintiffs, including class action plaintiffs, can also SUE under Section 7 to stop a deal. Now there's no pre merger obligations with respect to state AGs or private plaintiffs, but they also could potentially get out there to try to seek an injunction. So that's in the United States. When you get to places like Europe, it's a totally different in Europe, don't forget the DG Comp, DG Competition, which is the European competition law enforcer and the European Union's legal system that's based on a civil law system as compared to a common law system in the United States. So under their civil law approach in Europe, DG Comp, the European Competition enforcer itself, along with some of the national enforcers like the Bundeskitellerant in Germany, the French competition agency, they can say that this deal violates European competition law and it is prohibited, final and the deal cannot close. Now the parties can seek judicial review on that. But absent extraordinary circumstances, the deal is basically dead. Before my time joining FedEx, there was a company in Europe called TNT which was a Dutch Express courier, UPS, actually this is all public information. I mean UPS tried to acquire them back in 2015. That deal was rejected by DG Comp, which killed that deal. The deal died. FedEx came in. FedEx then acquired, filed at DG Comp, got clearance at DG Comp, and then ultimately acquired TNT in 2016. Concurrently, UPS appealed the initial rejection decision. They actually won in the European Courts of Justice. The European courts, called the ecj, found that DG Comp didn't follow procedurally all the requirements that they had to during the merger investigation. But it's, in a way, it's somewhat of a Pyrrhic victory by that point because the UPS deal had already died because the agency said no and FedEx came in to acquire it. So they ultimately won in court, but it's arguably somewhat of a Pyrrhic victory. So in the US you'll have your day in court. In Europe, the administrative agency decides, subject to judicial review. And then there's variances of that in other jurisdictions. You know, India, Australia, Brazil, et cetera.

They've been getting a lot more aggressive lately. Why is it.

Oh, yeah, no, I'd say it's. Particularly in the United States under the Biden administration, there's been much more second requests. I mentioned how early terminations under HSR were suspended for a bit. You kind of blame that on Covid. It's kind of relaxed. Not totally relaxed, but they've been issuing a lot more second requests in the US and looking abroad again, Europe, Canada, India, South Africa, China, Brazil. I would say very, very aggressive regulators, but I wouldn't say aggressive in a bad way. They are just doing their statutory jobs to protect markets and competition in their jurisdiction. And they do a very good job at it. And they drive full engagement with emerging parties.

You think they're in coots?

Well, look, I mean, there's agencies. Well, yeah, no, agencies will. There's been some criticism recently. There was a deal, I think, Illumina Grail, that I was not involved in, where there was, I think, some criticism of how much information that the European Union and FTC were exchanging. I don't really know the details of that. But look, as I said before, the agencies, when they're reviewing a common deal, they cooperate even beyond M and A in terms of cartel enforcement. That's largely a positive thing. Busting up international cartels. You will need to assume an international deal that where you file, the agencies will be talking. They may not be able to exchange information, but they at least will be talking. And again, that's back to. That's why that consistency of message across Agencies is very important Gun jumping.

Have you seen companies actually get in trouble for gun jumping?

Knock on wood, not for a client that I've represented. Thankfully today, just in 2024. I did a quick look recently so there's been gun jumping fines or investigations in China, India, Mexico and Spain. The United States, both the FTC and DOJ have been very active in this space. When I mentioned the Illumina Grail case in July 2023 they received a 430 million euros fine for gun jumping, which I believe is one of the highest ever for closing their deal prior to getting clearance by DG computer that's currently under appeal at the European courts. Clear recent examples When I mentioned I was in Jersey, we brought a few gun jumping cases when I was at the JCRA as Executive director. For instance, we actually find Lufthansa. I forgot what the amount was, but we find Lufthansa £2,000 for closing their acquisition of an airline called CityJet, which was one of the airlines serving Jersey. They were legally required to file that in Jersey. They didn't. So we find them for gun jumping. I've had some personal experience of that as a regulator, but thankfully not on the defendant side.

How do you balance it with like integration planning? I do a bunch of these podcasts, big advocates of planning integration early so you can have success post close, but then you throw in all this junk gumping stuff in there, then it's maybe you shouldn't be requesting so much information and plan integration.

It's very hard. And I'll even throw another complicating thing into the good example you've raised in terms of integration planning. But what if you also have even prior to the acquisition you already do business with the acquired party? You have ordinary course of business dealings with the acquired parties get massively complex in that. Okay, your ordinary course of business with the acquired party, you'll want to keep that separate from the potential deal. But that can get complicated. So let's say it's a long term supply relationship which is coming up to renew. Let's say they're a supplier and it's coming up to renew that long term supply relationship. Do you go forward with that in light of the deal? What if the deal falls apart? So that can get complicated. And also in terms of premature control, that kind of stuff. If you're already dealing with the company at a commercial level, that can get complex. So on a high level you already have those preexisting commercial relationship with the acquired company. I'd like to Keep that separate. And there's an expression within companies of bringing people under the tent or tenting. I don't want people on the commercial side to be tented if we're already doing business with the target. So you got that complication. But also integration kind of the black letter law, if you will, is you can plan for integration, but you can't implement those plans. But you just need to be very careful. You can do detailed planning, you can't get into some of the information you may want to see or you may want to make sure, let's say salaries, you'll want to put that in a clean room, not have that available for everybody. So only a subsection of people get to see that information in terms of integration planning. But there's only so much you can do pre closing. And this goes beyond antitrust. So back to the question of are they participating in a cartel? So typically in due diligence, you'll ask the target, are you involved in any government investigations in terms of antitrust or otherwise anti corruption privacy? What decisions have you had in the past, let's say five years? Have you received any subpoenas, any notices of violations, et cetera, et cetera? Any allegations that you're acting anti competitively? You generally ask for those kinds of things in due diligence. A thing you would like to do for instance is do a forensic email search of the acquired parties, sales teams to see what kind of emails are they sending out about the competition. You clearly cannot do that during due diligence. But that's some things that let's say with integration, once you close, you may want to do that as part of if you will post closing due diligence to seek you to really look under the hood. And actually the DOJ has just announced pretty recently that they're going to give companies a six month window post acquisition for not just antitrust, for like FCPA as well, where if you find evidence of illegal conduct post acquisition within six months, you can come into the agencies and give full disclosure, cooperate and you can avoid or reduce fines in those scenarios. But you're right, it is a very much a balancing act. In my experience there are certain stages. Let's say as you get closer to your closing date, you filed hsr, you filed in Europe and you get clearance in both Europe and the United States. Europe, they close the investigation, United States, the agencies wait for it run out. The gun jumping concerns don't go away after the agencies, after you receive clearance, they're still there. But the focus on it isn't as acute. And as you get closer and closer to closing, because look, at the end of the day, day one, there are very practical considerations. Will employees ID badges still let you in the building? Will people get paid on day one in the target company? Will their health insurance still work? There's practical things like that that once you get agency clearance and as you get closer to closing, the gun jumping risk is still there. But it's a sliding scale. Okay, there's legal risks, but you also want to make sure people get paid on day one and their health insurance still works. So it covers a sliding scale. And once you get closer to closing, yes, you're still in the planning. But now, and I've involved, let's say for instance, IT service still works, may want to have the IT people, okay, they're going to do what's called a sandbox, okay, combined their platform and our platform and in a kind of a hypothetical kind of test environment, does it still work? And you can do that prior to closing, but not combine the IT systems. That stuff you can do as you get closer. But yeah, it's something that you need to be on top of.

As antitrust lawyers dancing the fine line, exactly what is the best way to prepare for regulatory compliance?

You got to know the facts, you got to know your clients and what they do. You got to be all over the business documents. Key is early engagement. With FedEx, we have a world class legal team. In my role as antitrust lawyer, I support both our specific kind of M and A lawyers and our corporate development teams. And I'm often brought in very early on deals both from kind of an antitrust perspective and a compliance perspective. And I find that useful again to help get the detailed knowledge of the facts beforehand, help construct that narrative about where you need to file and why this deal is beneficial for the companies, beneficial for competition. So I think just that early engagement is key. And frankly I would say that early engagement because a lot we're talking about here goes broader into compliance. M and A compliance is only one subsegment of corporate compliance, corporate legal compliance. And I'd say having that kind of business engagement, being a business partner, knowing the details of your business and having that engagement up front, early and ongoing, is key to the entire thing.

Great way to summarize this. I got to ask you the most important question.

What's that?

What's the craziest thing you see in M and A?

It goes back to what we've been talking about, goes beyond M and A. Just Antitrust is antitrust can be complicated. Defining relevant markets, thinking what is the cross elasticity of demand between company A's products, company B's products? These can be very complex and prior to economists and et cetera. But when things get really simple is let's say you have a corporate document which has gone to the board of directors saying, hey, if company A and company B merge, they're going to have a monopoly or they'll be able to increase prices by 10%. You can have these complex economic arguments. You can hire the best economists in the world. But if your documents are going to sink you, that's going to be on page one of the complaints. You don't want to be there. There have been well published cases of mergers where just the documents were horrible. Either the ordinary course of business documents or the deal documents were horrible. And they sank the most sophisticated economic or legal arguments you could. The document says the merger will harm customers. That's a very steep hole to dig out of. And often you can't. It doesn't matter what the most brilliant lawyers and economists you hire, if your own documents are going to sink your deal or contradict what you're saying, that's not a fun day.

Don't forget the fundamentals.

Exactly.

Charles, this has been a great conversation.

Well, thank you. It's been fun. I've been checking out your stuff on LinkedIn to really have you take a whole approach to mergers. It's a great subject. M and A Science does just fantastic work there. I appreciate the opportunity to contribute to what you guys do, but it's obviously to give the exposure you guys do to the entire M and A spectrum, not just the antitrust part, but giving kind of the antitrust part of that has been an absolute honor and privilege to me. So thank you for this interview and thank you for the great work that M and A Science does.

Pleasure is all mine. You've contributed a lot to our rising community of M and A scientists today helped me become a better M and A scientist. And those of you still listening, thank you. Love to hear from you. Reach out to me on LinkedIn. Any ideas, topics, suggestions, feedback, open to it Till next time. Here's to the deal.

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If you need help standing up an M and A function or optimizing one that you already have, we're here to help, and if we can't help you, we probably know someone that can. You can reach out to me by email Kisan K I S o n a science.com or you can text me directly at 312-857-3711. If you just want to keep learning at your own pace, visit mascience.com for a lot more content and resources. That's where you can also subscribe to our newsletter. Again, that's mascience.com here's to the deal. Views and opinions expressed on M and A Science reflect only those individuals and do not reflect the views of any company or entity mentioned or affiliated with any individual. This podcast is purely educational and is not intended to serve as a basis for any investment or financial decisions.