NEW YORK (TheDeal) -- Merging parties, particularly target companies, frequently insist on merger-agreement covenants aimed at ensuring that the other side of a deal will remain committed to the transaction in the face of intervention from antitrust authorities.
Those provisions include reverse breakup fees entitling the target to some percentage of the deal's value if the transaction fails to win regulatory approval, commitments from the buyer to accept regulators' demands to accept a certain level of divestitures or even carve-outs requiring specific assets be spun off if government officials demand it.
Company executives, however, are often ambivalent about including such covenants because they worry that the provisions will signal to regulators that the parties believe the proposed deal harms competition in a specific way and the agreements provide a road map for blocking the deal or imposing divestitures.
But current and former regulators told a gathering of deal lawyers this week that it's a myth that regulators rely on covenants allocating antitrust risk to guide merger investigations. They said the agreements play virtually no role in the government's analysis of whether a transaction poses a threat to competition.
"We look at them but ... at the end of the day we know we still have to do the substantive analysis," said William Stallings, chief of the Department of Justice's antitrust division's transportation, energy and and agriculture section, which is currently reviewing Halliburton Co.'s (HAL - Get Report) pending $35 billion acquisition of oil-services rival Baker Hughes (BHI).
The companies' merger agreement includes a large $3.5 billion reverse termination fee that Halliburton must pay Baker Hughes if the DOJ fails to approve the transaction, as well a commitment from Halliburton to divest businesses that generate as much as $7.5 billion in annual revenue if so required by regulators.
Stallings, who was speaking on a panel as part of the American Bar Association's annual antitrust spring meeting, did not address the Baker Hughes transaction.
Michael Moiseyev, who heads the Federal Trade Commission's Mergers I shop, agreed. Antitrust covenants provide regulators no more than a "feel" for where the merging companies expect the merger-review talks to begin, he told the ABA audience.
"We look at them, but they don't have a big bearing on the outcomes and they can be off point from the more detailed discussions we need to have" with the merging parties, Moiseyev said. The Mergers I shop is charged with handling FTC investigations of pharmaceutical and other health care-related mergers.
Moiseyev's team will likely review Pfizer's (PFE - Get Report) $17 billion plan to acquire Hospira (HSP) that was announced Feb. 5. The companies' merger agreement requires Pfizer to accept antitrust-ordered divestitures of assets generating as much as $450 million in annual revenue. Like Stallings, Moiseyev did not mention the Hospira transaction or any other specific deal.
"I'm sure there are far more [merger] contracts that have those provisions than will ever see enforcement actions," Moiseyev said. "So I don't think there is much evidence that those provisions provide much of a road map where we're just going through them for an easy fishing process."
Stallings added he is often amused by the antitrust provisions because they can appear deliberately difficult to follow. "Whenever there is a complex deal, this issue of 'What does the merger agreement provide in terms of walkaways and things like that?' -- it is always the most convoluted, hard-to-understand section of the merger agreement," he observed.
"You can have five different lawyers trying to construe it and each one comes up with a different interpretation, which was probably the point," Stallings said, prompting laughs from the crowd.
Deborah Garza, co-chair of Covington & Burling LLP's antitrust practice and a former acting head of the DOJ's antitrust division, said antitrust provisions provide important protections for merging parties and should not be left out of merger agreements out of an unwarranted fear they will provide clues that will help antitrust enforcers block a deal or demand divestitures.
"My belief is that parties are better off allocating those risks and ironing these things out in the agreement," Garza said. "You are not going hide anything from the government by not having something that allocates risk."
During her last stint at DOJ, Garza recalled, she once asked staff attorneys what the risk allocation provisions were in a particular merger agreement. They looked at her "like I was evil," she said. "'Why would you want to know that?'" the staff attorneys asked, according to Garza.
"'What difference does that make? We want to get to the right answer,'" she remembered staff attorneys as saying. "So I never asked again," Garza said.
Based on that experience, when she returned to private practice she strongly urged clients not to worry about signaling to regulators whether a deal might pose antitrust complications, Garza said.
"So now when counseling clients and I see a reason why they need to protect themselves with these provisions I try my best to convince them that the road map 'problem' is not a real problem," Garza said.