Look Before You Leap: Cautionary Tale of a Non-Reportable Transaction

November 29, 2016

The list of non-reportable transactions challenged after the fact by the Department of Justice and the Federal Trade Commission continues to grow.  Most recently, the FTC sued Valeant Pharmaceuticals International Inc. to remedy the alleged anti-competitive effects resulting from Valeant’s acquisition of Paragon Holdings I Inc.

But before we get to that challenge and what you should consider before pulling the trigger on a transaction that might raise competitive concerns, it is important to remember that there are no free passes for non-reportable transactions under the Hart-Scott-Rodino (HSR) Act. If your transaction is under the HSR reporting threshold (currently, $78.2 million) and it raises competitive concerns, the antitrust enforcement agencies, state attorneys general and private parties can still challenge the transaction after closing under Section 7 of the Clayton Act, which prohibits transactions that “may be substantially to lessen competition, or to tend to create a monopoly.”  So, before you take the leap on a non-reportable transaction, make sure you look under the antitrust hood. 

Now on to the facts and a few suggestions on how you can minimize the risk of your non-reportable transaction coming back to haunt you.

The Facts: An Acquisition, Price Increases, FTC Investigation, a Class Action and FTC Settlement

To begin, in May 2015, just two years after acquiring B&L Holdings (Bausch + Lomb), Valeant acquired Paragon for $69.1 million, which was below the HSR reporting threshold then in effect.  At the time of the acquisition, Paragon competed with Valeant’s Bausch + Lomb subsidiary in the development, manufacturing and selling of polymer discs, or “buttons,” used to make three different types of rigid gas permeable (GP) contact lenses:  (1) orthokeratology, (2) large-diameter scleral and (3) general vision correction. 

According to the FTC, Valeant’s acquisition of Paragon resulted in: (1) a merger to monopoly in the market for orthokeratology GP buttons, (2) a post-acquisition market share of approximately 80 percent in the market for scleral GP buttons, and (3) a post-acquisition market share of approximately 70 percent in the market for general vision correction GP buttons.  Following the acquisition, Valeant increased prices in all three GP button markets.

Next, in October 2015, Valeant disclosed in an SEC filing that it had received a letter from the FTC requesting that it provide, on a voluntary basis, certain information and documentation relating to its acquisition of Paragon.  Two months later, a purchaser of orthokeratology GP buttons filed an antitrust class action lawsuit challenging the acquisition.  In its complaint, the purchaser alleged, among other things, that after the Paragon acquisition Valeant raised the prices for orthokeratology GP buttons by between 61 percent and 143 percent.  Valeant answered the complaint denying the relevant allegations.  (The case is proceeding through discovery.)

Now, just over a year since disclosing the FTC investigation, Valeant has agreed to divest Paragon.  Under the terms of its settlement agreement with the FTC, Valeant will sell Paragon in its entirety to a newly created entity, Paragon Companies LLC, headed by the former president of Paragon.  The newly created Paragon Companies also will acquire the assets of Pelican Products LLC — a contact lens packaging company that Valeant acquired after its purchase of Paragon — that is the only producer of FDA-approved vials used for shipping some GP lenses.

What You Must Know Before Completing a Non-Reportable Transaction

So, what do you need to know to avoid ending up in Valeant’s shoes?  First, don’t think just because your transaction does not require an HSR filing that the antitrust enforcement agencies aren’t going learn about it after the fact.  As noted in a speech by the DOJ Antitrust Division’s then-Deputy Assistant Attorney General for Civil Enforcement Leslie Overton, the antitrust enforcement agencies actively monitor transactions in the industries they are responsible for reviewing. 

DOJ’s preliminary investigation into Bazaarvoice’s consummated acquisition of PowerReviews, for example, was opened after a division attorney read about the deal in a trade publication. But reading about transactions in trade publications is not the only way your non-reportable transaction bubbles up to the antitrust enforcement agencies.  Your customers and suppliers (market participants) are a ready source of concerns and complaints.  That is why “price increases or output reductions” along with “other changes adverse to customers” are given “substantial weight” during a post-merger review.

Second, Overton made it clear that “caution may be warranted where, for example, the transaction involves a niche product or narrow geographic market.”  She also identified some “red flags” to keep in mind, including when “a contemplated merger is being viewed as an opportunity to end margin erosion, reduce pricing pressure, or eliminate a key competitor.”

If your deal does raise potential antitrust concerns, knowing this fact as soon as possible could help you allocate the risk in your transactional agreement.  If your deal is already inked, or you have already closed, you may bear the risk alone instead of sharing it with the seller.  In either case, if your deal gets on the antitrust enforcement agencies’ radar screen, “constructive engagement [with the government] is crucial.”  According to Overton, approaching the antitrust enforcement authorities “early” often helps “the parties to a non-reportable transaction resolve [the] competition concerns on terms and timing they find palatable.”

All of this suggests it may well be worth the time and expense of having your antitrust lawyers review certain key documents related to the transaction (for example, board presentations and other management presentations that discuss the rationale for the transaction) before the deal is inked.  Having your transactional lawyers simply ask their antitrust colleagues if an HSR filing is necessary without probing any further may prove to be “penny wise, pound foolish.”