Experienced dealmakers know that there are limits on how far merger parties can go in exchanging information and coordinating business activities before a merger closes, but there has been little established law. Most of the “law” in this area comes from Justice Department and Federal Trade Commission consent decrees and speeches from agency officials. The Seventh Circuit’s January 10, 2011 decision in Omnicare v. UnitedHealth Group, Inc. provides practitioners and parties the first real appellate court guidance to the law of premerger coordination and information exchanges.
In early 2005 UnitedHealth Group (UHG) and PacifiCare Health Systems (PacifiCare) began merger discussions and signed a merger agreement in July of that year. The Justice Department investigated the transaction for several months, and on December 20 Justice filed suit to block the transaction and simultaneously filed a proposed consent decree resolving the matter (by requiring certain divestures). The transaction closed on December 21, 2005.
A supplier to both companies, Omnicare Inc., brought suit alleging that, before the deal closed, UHG and PacifiCare had coordinated their negotiations with Omnicare to avoid certain supplier-friendly terms and to depress the prices paid to the supplier. Omnicare claimed that this was “buyer cartel” behavior, an agreement in restraint of trade, and illegal per se.
The Seventh Circuit affirmed the district court’s grant of summary judgment for UHG and PacifiCare. Both the appellate court and the lower court reviewed the facts and evidence intensively, and ultimately both courts found insufficient evidence of an agreement to coordinate negotiations. Omnicare was unable to produce evidence sufficient to permit a reasonable jury to exclude the possibility of independent action – that UHG and PacifiCare each made independent decisions in their own respective best interests.
Omnicare’s complaint did not allege that the parties’ information exchange was illegal in and of itself (although Omnicare later tried to insinuate such a claim into the case). Nevertheless, the appeals court offered some general guidance on this topic, quoting approvingly the basic balancing test that the lower court had offered:
- On the one hand, courts should not allow plaintiffs to pursue Sherman Act claims merely because conversations concerning business took place between competitors during merger talks; such a standard could chill business activity by companies that would merge but for a concern over potential litigation. On the other hand, the mere possibility of a merger cannot permit business rivals to freely exchange competitively sensitive information. This standard could lead to “sham” merger negotiations, or at least allow for periods of cartel behavior when, as here, there is a substantial period of time between the signing of the merger agreement and the closing of the deal.
Several lessons can be drawn from Omnicare, and none will surprise seasoned counsel:
- The most sensitive area remains any outward-facing area in which the parties are competitors. Typically this will involve sales and marketing, rather than suppliers and inputs, but Omnicare confirms that caution is warranted wherever the parties compete.
- Access to the other party’s competitively sensitive information should be limited. In particular, individuals with decision-making roles in areas where the parties compete should not have access to competitively sensitive information.
- Competitively sensitive information should be provided at no greater a level of specificity than is necessary for evaluating the target business.
- Parties should continue to document the purpose of integration-planning meetings. Written agendas and meeting notes can impose discipline on the process (and provide probative evidence in the event of a challenge).
Omnicare did not explore the outer boundaries of merger agreement clauses that require the buyer’s consent to certain material contracts (e.g., contracts that would impose obligations on a seller in excess of a specified amount). The merger agreement here had such a provision, but it expressly carved out the kind of agreements whose negotiation UHG and PacifiCare were accused of coordinating.
Nor did Omnicare involve government allegations that the parties had “jumped the gun” on the HSR waiting period. Merger parties should continue to use particular caution before the HSR waiting period expires. A violation of the HSR waiting-period rules – that is, taking beneficial ownership of the target company by making decisions – does not require any showing of anticompetitive effects or proof of actual damages. Parties are exposed to civil penalties of up to $16,000 per day even in transactions that present no competitive issues.