Merger Remedies By Kenneth L. Danger Presented at the OECD-Korea Regional Centre for Competition

Outline Guiding Principles Fashioning a Remedy  Asset remedies  Conduct remedies Implementing a Remedy  Fix it first  Consent decrees Compliance and Enforcement

Guiding Principles Competition authorities should accept a remedy only if a violation of the law will likely occur  To do otherwise may lead to inefficient outcomes Remedies must be based on sound legal and economic principles that are clearly understood  Tailor remedies to theory of violation  Try to preserve efficiencies if possible Remedies should be fashioned to allay concerns about illegal conduct  Don’t try to increase pre-merger competition but simply restore it – Focus on lost competition not on HHI index. Remedies should promote competition, not competitors  Don’t pick winners and losers Remedies must be enforceable  Monitor compliance  Draft clearly

Types of Merger Remedies Structural  Sell existing assets  Open up intellectual property to licensing Conduct  Essentially involves managing or regulating a firm’s post merger business conduct Structural remedies are preferred as they avoid costly long running government entanglement in the market. Firm may try to evade the spirit of conduct remedy (e.g., quality adjust price increases) and conduct remedies may deter certain types of welfare improving sales (price discrimination).

More On Asset Remedies Divestitures must allow a competitor to be an effective long run competitor  Intellectual property access  Distribution system broad enough  Brand issues resolved  Everyday work flow aspects (e.g., customer lists, software, production issues)  Existing business entities are preferred – they are already competing  Less than whole business are ok divestments as long as there are strong reasons to believe that the divestment will alleviate the problem. E.g., a distribution system may not be necessary for some buyers.

More On Conduct Remedies Conduct remedies are appropriate when the facilitate a structural remedy or when the efficiencies are huge and structural relief cannot be used. E.g., Short term supply agreements, key personnel hiring restrictions, restrictions on sales of assets to certain persons (Capper Volstead Act), firewalls, fair dealing provisions, transparency provisions, etc.  Firewalls, fair dealing and transparency are more commonly employed in vertical matters Restrictions on output competition should not be used

Implementing Remedies Fix-it-first  Implemented before the parties consummate the merger Can be an important form of remedy when, for example, contracts are negotiated at one time in the year and that time is rapidly approaching Allows assets sales to be tailored to potential buyers Fix-it-first doesn’t work when conduct provisions are important such as supply agreements Consent Decrees  Hold separate agreements are necessary until decree is satisfied in order to ensure the assets are economically viable and competition is preserved as much as possible

Implement Remedy Quickly Assets deteriorate Investments may not be made Restore competition quickly US recommends days to locate purchasers – short extensions possible with good faith efforts  Firm need time to shop assets  Purchasers need time for due diligence Once a purchaser is chosen US authorities grant 30 additional days for competition authority to review purchaser and process of selection

Approve Purchasers Remedy cannot itself cause harm to consumers but rather must restore competition Competition authority must be certain that assets will be used to compete and restore competition  Seller has an incentive to chose purchaser that competes less effectively  Most effective competitor is irrelevant, restoring competition is the key Competition authority must be certain that purchaser has the managerial, financial, technical and financial ability to compete effectively Include a clause in the consent decree that allows the authority to use a trustee if seller is unable to find a buyer in a specified period

Compliance and Enforcement The authority must follow through we terms or isn’t credible – signals are important Remedies can give the authority the right to request documents, inspect books, copy reports, interview relevant people, etc. Authorities must assign someone to monitor implementation and compliance If a decree is violated, pursue criminal, civil or both actions  Civil - Injunctive relief and fines  Criminal – Fine, imprisonment or both