Mitigating Antitrust Risks in Due Diligence between Competitors

In the realm of mergers & acquisitions (“M&A”) transactions, corporations almost always undergo due diligence, wherein the buyer conducts a thorough investigation and evaluation of the target company before entering into a transaction. In the context of due diligence operations, antitrust challenges may arise in specific situations, such as when the involved parties are direct competitors. The purpose of this post is to illustrate the instances when antitrust risks emerge during due diligence concerning M&A operations between competitors and to propose suggestions mitigating these risks.

The exchange of information between competitors pertaining to the due diligence might – under circumstances – be prohibited by Article 101 TFEU. Nonetheless, due diligence is vital for risk mitigation, issue identification, and informed decision-making in a M&A operation. The challenge lies in determining under what circumstances and conditions competitors can conduct effective due diligence without breaching article 101 TFEU. This post will focus on this topic and also evaluate the new Guidelines introduced by the European Commission (“Commission”) on the exchange of information in relation to Article 101 TFEU.

This post delves into this important topic in the following structure: firstly, the fundamentals of due diligence will be explored. After that, the issue of exchange of information will be discussed. Lastly, suggestions will be presented to mitigate the risk of antitrust violations when competitors are conducting due diligence for a potential acquisition and some (final) words will be said on the enforcement of these suggestions.

Fundamentals of due diligence

Prior to delving into the antitrust risks posed by a merger or acquisition between competitors, it is essential for this post’s context to first explore the fundamentals of due diligence. This initial phase marks the emergence of antitrust concerns and sets the foundation for our discussion. Due diligence typically involves using a digital data room where the seller places the requested information for the buyer. The process results in a due diligence report, with the information shared and the duration varying by acquisition. However, there are four main subjects that are (almost) always part of the due diligence. These are commercial, financial, fiscal and legal. Fiscal due diligence will not be discussed in this post because sharing such information with competitors does not pose any antitrust risks due to the nature of the information being non-commercially sensitive. However, commercial, financial, and legal due diligence often contain commercially sensitive information, which should be shared with caution.

Exchange of information

Article 101 TFEU
The main question that arises when assessing the exchange of information under Article 101 TFEU is whether the exchange results in a restriction of competition by effect. This occurs if the exchange reduces or removes uncertainty between undertakings. The Commission states that it ‘depends on both the economic conditions on the relevant markets and the characteristics of the information exchanged’. However, an infringement under Article 101(1) TFEU might still be lawful if it meets the criteria of Article 101(3) TFEU. These provisions need to be read in conjunction with the Commission’s guidelines.

Due diligence in the Commission guidelines
In its guidelines, the Commission underlined several elements that impact the exchange of information in due diligence. To begin with, historical information exchange is likely ineffective in the realm of due diligence. Since the purpose of this exchange is to enable the buyer to make an informed decision about the acquisition, it necessitates current data to assess the worthiness of the endeavor. However, information about future conduct could be useful for the acquisition but will be more sensitive since this could enable the buyer to predict the competitor’s future conduct. In addition, frequent exchanges of information are typically unnecessary, as major changes in information are unlikely.

The connection between due diligence and the other elements of commercially sensitive information hinges on the underlying motives driving the acquisition. There are many possible reasons for the acquisition of a competitor. Each motive necessitates distinct information at different stages of the process, posing challenges in determining whether information can be – for example – aggregated or limited to publicly available data. For instance, if the aim of the M&A transaction  is to expand market share, detailed insights into the target’s market position are likely crucial for the buyer early on in due diligence process. Conversely, if the goal is synergy or efficiency, in-depth data on production processes is imperative at the outset.

Mitigating antitrust risks

The Commission suggests using a ‘clean team’ to mitigate antitrust risks. This team, composed of individuals not involved in the undertaking’s commercial operations, handles and processes sensitive information. Additionally, it is recommended to carefully review the agenda and purpose of meetings or calls to prevent the exchange of sensitive information. Also, such meetings should be held in the presence of lawyers specialized in competition law. Lastly, it is crucial to verify that the information exchange serves a legitimate purpose and to aggregate information as much as possible.

Given the focus on information exchange between competitors, I believe more measures are necessary beyond those recommended by the Commission. Instead of merely verifying, splitting the information exchange into phases and creating an ‘antitrust protocol’ can further reduce infringement risks. Starting with less sensitive and aggregated information and gradually sharing more as negotiations progress is a prudent approach. Additionally, involving a representative from the Commission or another regulatory body from the outset is advisable.

In the antitrust protocol, the following principles should be applied: pricing and quantity details are highly sensitive and should be disclosed only towards the negotiation’s end when the transaction is likely. The same applies to information about cost and demand. Sharing individualized and detailed information, along with details on future conduct, should be limited and performed only when necessary. However, the specific transaction might make it hard to get to an agreement if certain information is not shared at an earlier stage in the negotiations or is too aggregated, hindering the buyer’s ability to make informed decisions. In such instances, the exchange of information should be compensated. The specific method of compensation is firstly at the discretion of the involved parties. Examples of compensation could include providing sensitive information earlier in the process, but anonymizing and aggregating it as much as possible. Alternatively, if certain information requires greater individualization because of the objective of the acquisition, compensation could involve delaying the exchange of different, more sensitive information. For example, if the objective of the acquisition is to access new customers, more individualized information on the customers of the target might be desirable. The exchange of sensitive financial and legal information might therefore be delayed to a later stage.

Enforcement

Mandating the creation of an “antitrust protocol” for parties intending to acquire a competitor is advisable. This protocol should detail the acquisition process stages and the information shared at each phase, along with the rationale behind these choices. This approach prompts the buyer to consider the necessary information at specific times, reducing the risk of information fishing and potential violations of article 101(1) TFEU. Additionally, mandating the involvement of a Commission or regulatory body representative after drafting the antitrust protocol but before any information exchange could further prevent violations. This representative could review the proposed phases and rationale, intervening if early information exchange lacks justification, thus preventing potential breaches. The necessity for involving a representative could vary based on market conditions and the parties’ market share, factors that determine the sensitivity of information as outlined by the Commission, etc. If involving a representative is impractical, the use of AI could be beneficial. AI can identify potential breaches, thereby reducing the number of cases that representatives need to review.

Conclusion

In conclusion, navigating the exchange of information within M&A transactions, particularly among competitors, requires a delicate balance between the need for due diligence and compliance with article 101 TFEU. While such information exchange is essential for informed decision-making and risk mitigation, it must be conducted cautiously to avoid anti-competitive behavior. The Commission’s guidelines provide valuable insights into determining the permissibility of information exchange based on market conditions and the nature of the shared information. However, I believe the Commission’s measures are insufficient when the exchange is between competitors. Mandating the creation of an antitrust protocol and involving a representative could further mitigate antitrust risks. Additionally, AI could assist with the practical implementation of these measures by identifying potential breaches, thereby reducing the workload on representatives.