Key Takeaways
-
An
- Importantly the
FTC conducted a full-scale investigation of the transaction's potential substantive impact on direct competition between the parties and cleared the transaction. Yet theFTC obtained a settlement to resolve concerns about ongoing entanglements between the two companies. - The
FTC settlement has three key features, each of which stakes out aggressive positions that may not have held up had the merging parties litigated them in court. TheFTC settlement: (1) alleged a violation of Section 8 of the Clayton Act's prohibition against interlocking directorates that extends beyond existing precedent; (2) advanced an untested theory that Quantum—which was to receive an 11% equity stake in EQT—could, by virtue of its equity stake only, obtain competitively sensitive information from EQT and influence EQT's behavior; and (3) forced EQT and Quantum to terminate a pre-existing joint venture based on concerns that the joint venture provided another opportunity to share competitively sensitive information. - The
FTC's settlement here contributes to a growing body of evidence that the antitrust agencies intend to use the merger review process to investigate all manners of entanglements across the supply chain, regardless of whether the proposed transaction specifically creates the entanglement. - At bottom, the
FTC's action in EQT/Quantum would seem to justify virtually limitless investigation and enforcement about the potential for coordination through the exchange of competitively sensitive information in segments that are unaffected by the transaction. - Second, the
FTC alleged that Section 8 prohibits interlocks involving non-corporate entities such as limited partnerships (LPs) and limited liability companies (LLCs). The plain language of Section 8 states that the interlock must involve two "corporations," yet the interlock here involved a corporation (EQT) and a limited partnership (Quantum). Although this distinction between corporate and non-corporate entities may seem nitpicky, it is significant because no court has addressed the issue even though non-corporate entities emerged decades ago, other antitrust statutes have been updated to account for the proliferation of non-corporate entities5whereas Section 8 was not, and even the three sitting FTC Commissioners acknowledged in their statement supporting the settlement that "Section 8's specific prohibition of interlocks among competitor 'corporations' pre-dates the development of other commonly used corporate structures, such as limited liability companies."6
Summary of the EQT/Quantum Transaction
In
The FTC Consent Order
There are three key terms of the consent order: (1) it eliminated a prospective interlocking directorate, (2) it required Quantum to sell all of the shares in EQT that it was to receive as consideration for the transaction, and (3) it required EQT and Quantum to terminate a pre-existing but unrelated joint venture. As discussed further below, the
Elimination of
Post-acquisition, as the largest but minority shareholder (11% equity stake) in EQT, Quantum was to receive one seat on EQT's board. The
Importantly, the
- First, the
Quantum's Sale of its EQT Shares
As consideration for the deal, Quantum was to receive up to 55 million shares in EQT, which would have made Quantum the biggest EQT shareholder but resulted in only an 11% minority interest EQT.
The
It bears repeating that Quantum's willingness to abandon its board seat in EQT (to address the interlock) did not resolve the
Termination of a Joint Venture Between EQT and Quantum
EQT and Quantum also had an existing joint venture called
Importantly, the
The Broader Implications of EQT/Quantum on Future Deals
Traditionally, the antitrust agencies focused on examining horizontal (i.e., those involving competitors) and vertical (i.e., those involving buyers and sellers in the supply chain) transactions for their potential to harm competition. As we have seen, the current administration has taken a broader view by, for example, claiming competitive harms from conglomerate mergers (i.e., deals where there is no direct horizontal or vertical linkage between the merging firms) and transactions that may reduce the ability of workers to obtain competitive wages.
EQT/Quantum goes one step further and signals that the antitrust agencies will use the merger investigation process to assess whether the merging parties have any problematic entanglements with competitors, regardless of whether the entanglement results from the transaction or is pre-existing and regardless of whether the entanglement is between the merging parties or between one of the merging parties and another participant in the supply chain. Such entanglements may arise from minority holdings in competitors, board observers, joint ventures, or other competitor collaborations (such as benchmarking studies). Given the antitrust agencies' recent proposed changes to the Hart-Scott-Rodino (HSR) premerger notification rules, which seek information about "other types of interest holders that may exert influence" over companies, such as creditors, holders of non-voting securities such as preferred stock or options, or those with rights to nominate directors or board observers, the agencies almost certainly will scrutinize these relationships in the future (for more information about the proposed HSR rules, see our client alert here).
For its part, the
This newfound focus on competitor entanglements is important because the antitrust agencies can leverage these ancillary issues to hold up transactions and obtain concessions that they might not be able to obtain outside of the merger review context. Indeed, in both
Footnotes
1 See Complaint, In the Matter of
2 "No person shall, at the same time, serve as a director or officer in any two corporations (other than banks, banking associations, and trust companies) that are (A) engaged in whole or in part in commerce; and (B) by virtue of their business and location of operation, competitors, so that the elimination of competition by agreement between them would constitute a violation of any of the antitrust laws." 15 U.S.C. § 19. The
3 Complaint at ¶ 39.
4 See Reading Intern., Inc. v.
5See, e.g., 15 U.S.C. § 18a(a) (HSR statute using the broader "person" rather than "corporation"); 16 C.F.R. § 801.1(f)(1)(ii) (HSR rules defining "non-corporate interest" and "unincorporated entity").
6 Fed.
7 Analysis of Agreement Containing Consent Order to Aid Public Comment, In the Matter of
8 Id.
9 Complaint at ¶ 47.
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.
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