Allocating Antitrust Risk in M&A Agreements
Wayne Dale Collins, Lisl Dunlop, Apr 29, 2013
The allocation of antitrust risk has become an important feature of modern M&A agreements. In many strategic deals, where an antitrust challenge by one or more reviewing agencies is a meaningful possibility, the allocation of antitrust risk can be as important to each of the merging parties as the price. The failure to negotiate mutually acceptable antitrust-related provisions in a sale and acquisition agreement can mean the end of the deal even before the antitrust review begins.
In the typical negotiation where the sellers are selling for cash and will have no interest in the combined company, the buyer wants optionality, that is, the ability to terminate the acquisition agreement and walk away from the deal if the concessions necessary to obtain antitrust clearance are no longer consistent with its economic interest. Sellers, on the other hand, want deal certainty, that is, the assurance that the deal will close regardless of the concessions that might be required to obtain antitrust clearance.
The conditions precedent and the affirmative covenants in an acquisition agreement will determine the balance between the opposing interests of the buyer and seller. In addition, the "drop-dead date" in the termination provision (that is, the date before which the parties cannot escape their obligations under the contract) will determine how long the buyer has to defend the deal and satisfy its affirmative contractual obligations.
Finally, the willingness of a party to accept antitrust risk is a function of the consideration to be paid for the deal. Although it is obvious, it is worth noting that as a general rule buyers are willing to accept more risk the lower the price and sellers willing to accept more risk the higher the price. A little less obviously, consideration may be paid ex post in the purchase price, which is paid only if the deal closes, but also ex ante in a price that is paid regardless of whether the deal closes.
All of these provisions-conditions precedent, affirmative covenants, termination, and consideration-work together in allocating antitrust risk. Before turning to these provisions, however, it is helpful to step back and think about antitrust risk.