Chapter VI. Legal Analysis of Formation of the Joint Venture

• Pages: 81-102

81

CHAPTER VI

LEGAL ANALYSIS OF FORMATION OF THE JOINT

VENTURE

A. Risks of Pre-Formation Information Exchanges

At the pre-formation stage, the joint-venture entities must evaluate

the business benefits and legal risks to determine acceptable parameters

for collaboration. An evaluation of legal risks should include considera-

tion of the antitrust risk of sharing information during the negotiation of

the joint venture.

The Department of Justice (DOJ) and Federal Trade Commission

(FTC) expressed concern in their Antitrust Guidelines for Collaborations

Among Competitors (Competitor Collaboration Guidelines)

1

about joint-

venture entities sharing information.

2

The chief concern is that exchang-

ing competitively sensitive information could facilitate collusion.

3

For

1

. FED. TRADE COMM’N& U.S. DEP’T OF JUSTICE, ANTITRUST GUIDELINES

FOR COLLABORATIONS AMONG COMPETITORS (2000), reprinted in 4

Trade Reg. Rep. (CCH) ¶ 13,161 Preamble, available a t

http://www.ftc.gov/os/2000/04/ftcdojguidelines.pdf [hereinafter Competi-

tor Collabor ation Guidelines]. The issue of pre-formation information

exchange is treated extensively i n the handbook, ABA SECTION OF

ANTITRUST LAW, PREMERGER COORDINATION: THE EMERGING LAW OF

GUN JUMPING AND INFORMATION EXCHANGE (2006).

2

. Competitor Collabo ration Guidelines §§ 2.2, 3.31(B).

3

. See, e.g., Todd v. Exxon Corp., 275 F.3d 191, 195 (2d Cir. 2001) (hold-

ing plaintiff adequately alleged a § 1 Sherman Act violation for unlawful

information exchange regarding compensation paid to managerial, pro-

fessional, and technical employees); Sigma Corp., 2012 W L 91364 (FTC

2012) (alleging the exchange of competitively sensitive information re-

82 Joint Ventures

example, negotiations concerning a joint venture could merely be a sham

designed to hide anticompetitive conduct.

4

The Competitor Collabora-

tion Guidelines recognize, however, that entities considering a joint ven-

ture must exchange some information so they can conduct appropriate

due diligence and make informed decisions about the venture’s benefits.

5

Courts recognize the need “to walk a fine line” when evaluating

claims arising from pre-formation due diligence information exchanges:

On the one hand, courts should not allow plaintiffs to pursue Sherman

Act claims merely because conversations concerning business took

place between competitors during merger talks; such a standard could

chill business activity by companies that would merge but for a concern

over potential litigation. On the other hand, the mere possibility of a

merger cannot permit business rivals to freely exchange competitively

sensitive information. This standard could lead to “sham” merger nego-

tiations, or at least allow for periods of cartel behavior when, as here,

there is a substantial period of time between the signing of the merger

agreement and the closing of the deal.

6

garding prices of municipal water system component parts was achieved

under the auspices of a joint venture); Competitive Impact Stmt., United

States v. Gemstar -TV Guide Int’l, Inc., No. 03 CV 000198 (D.D.C. Mar.

19, 2003) (proposing consent decree that imposed maximum p ermissible

fine under §7A of the Clayton Act for, among other things, exchanging

draft contracts and other customer information while they were negotiat-

ing a merger and awaiting regulatory approval); Competitive Impact

Stmt., United States v. Computer Assocs. Int’l, Inc., No. 01 -02062

(D.D.C. Apr. 23, 2002) (setting forth consent agreement resulti ng in civil

penalty arising from merging parties coor dinating contract negotiations

with customers prior to closing and sharing information relating to nego-

tiations with those customers). .

4

. See William Blumenthal, The Scope of Permissible Coordination Be-

tween Merging Entities Prior to Consummation, 63 ANTITRUST L.J. 1

(1994) [hereinafter Blumenthal]; Joseph F. Brodley, J oint Ventures a nd

Antitrust P olicy, 95 HARV. L. REV. 1521, 1530 (1982); see Competitor

Collabora tion Guidelines § 3.31(b).

5

. See Competitor Collabora tion Guidelines § 3.31(b); Omnicare, Inc. v.

UnitedHealth Gr oup, 629 F.3d 697, 709-10 (2011) (cataloguing types of

due diligence materials exchanged).

6

. Omnicare, Inc., 629 F.3d at 709-10.