Wednesday, July 11, 2007
Posted by Jeff Lipshaw (and cross-posted at PrawfsBlawg)
Gordon Smith has some commentary over at Conglomerate on the FTC's decision to challenge the Whole Foods-Wild Oats merger, and, trust me, the entire M&A antitrust bar has to be silently grinning with a soupcon of schadenfreude. I should note this also raises the issue into which I waded several weeks ago at MoneyLaw and LPB - does the New York Times test mean don't write what you don't want published, or does it mean don't do what you don't want published.
The critical question is the definition of the relevant product market. If it's all grocery stores and supermarkets, the deal goes through without much of a flurry. But if the market is "organic and natural foods supermarkets and groceries" maybe it is concentrated enough to merit challenge under the FTC's Merger Guidelines. The guidelines themselves (at least last time I looked) took a hypothetical market and tested whether a player could hold a non-transitory five percent price increase. If it could not, then the market definition needed to be expanded.
I used to tell clients that their image of FTC lawyers as impartial regulators interested in nothing more than truth and justice, but eager and ambitious litigator/prosecutors looking to put notches on their holsters. These notches would lead to advancement in the agency or to lateral partnerships at Wall Street firms. Some of my best friends advanced this way. So that when you gilded the lily by overstating or misstating the reasons for an acquisition in some ill-chosen memorandum (usually written by the investment bankers), you were creating good old-fashioned understandable evidence.
In this case, the Whole Foods CEO sent an e-mail to the board listing as the top two reasons for the acquisition: "Elimination of an acquisition opportunity for a conventional supermarket" and "Elimination of a rival." Two reactions: (1) Damn! You can do all the training and prophylactic work you want with your business people, but CEOs still write these damn e-mails (which constitute 4(c) documents) without showing them to you, the general counsel; and (2) I could re-write the two reasons to say almost the same thing without the incendiary effect: "Enhance our ability to compete against the more powerful and resource-laden supermarket chains who are bound, in view of the low barriers to entry, to provide the kinds of natural and organic products we do" and "Achieve cost, marketing, and sales synergies through rationalization of locations, more efficient advertising budgets, and other efficiency moves."
General Counseling 101: If the CEO had sent the draft e-mail to me, we would have had the following conversation:
Lipshaw: "The e-mail is fine if that's what you really mean, but I think you are using loose language and it comes out contrary to your intent."
Lipshaw: "You have made it sound like you are trying to eliminate competition, when in fact you know that Kroger, Safeway, Meijer, and Winn-Dixie could crush us tomorrow in one fell swoop. Marsh in Indianapolis is already taking share from us with their organic and natural section. So "eliminating" Wild Oats wouldn't do a damn thing."
CEO: "That's true."
Lipshaw: "So why write it that way? It's red meat to the FTC carnivore! You don't need this puffing to persuade the board it's a good deal."
CEO: "How would you do it?"
Lipshaw: "Doesn't this sound more like why we are REALLY doing this deal?" [Reads bullet points from above].
CEO: "Yeah! That's good. Read again to me slowly so I can get it down."
Lipshaw: "I will e-mail it to you. And, by the way, thanks for originally sending me your draft labeled 'Subject to attorney-client privilege. Review draft for legal review before distribution" just like I taught it to you."
CEO: "Well, you've just earned your outrageous stock compensation for this year."
As I said, this story is the poster child for getting good legal counsel.