June 15, 2020 - With much of the world focused on the immediacy of the COVID-19 pandemic, including its heavy human and economic toll, we have cast our eyes optimistically on the (near, we hope) future when companies regain sufficient confidence to re-enter the public M&A market in large numbers. Although...
Compliance Alert: The Importance of Managing Document Creation – Update on the Bazaarvoice/PowerReviews Transaction
Prejudicial documents contributed to Court finding that merger violated U.S. antitrust laws.
Last January, we circulated a Compliance Alert suggesting that the lawsuit by the U.S. Department of Justice (U.S. DOJ) challenging the completed acquisition of PowerReviews by Bazaarvoice served as a useful reminder for business persons and their advisors to take care in the creation of documents to avoid prejudicing business transactions that could be subject to review by the Canadian Competition Bureau or other competition law or antitrust authorities.
Bazaarvoice and PowerReviews were the two leading providers of online ratings and review platforms for retailers and manufacturers. The acquisition, which was below the relevant merger notification thresholds in the United States, closed in June 2012. The U.S. DOJ started an investigation two days later and filed its court challenge in January 2013. Earlier this month, a California District Court ruled in favour of the U.S. DOJ, finding that the merger violated U.S. antitrust laws. The Court made this finding even though no customers testified that they believed they would be harmed by the merger, and neither Bazaarvoice nor PowerReviews were profitable.
In accepting the U.S. DOJ’s position that the acquisition would significantly diminish price competition for online ratings and review platforms, the Court made extensive reference and gave considerable weight to, among other things, Bazaarvoice’s internal e-mails, strategy documents and board presentations, public SEC filings, and investor presentations that, for example, listed only PowerReviews as a significant competitor, referenced numerous “barriers to entry”, and predicted price rises as a result of the merger. It was effectively too late at trial, or after the government had started proceedings, for Bazaarvoice to start identifying more competitors or describing as “competitive strengths” points that had previously been described as “barriers to entry”. The lack of supporting pre-acquisition documents clearly undermined Bazaarvoice’s defence.
The Court accepted that Bazaarvoice’s ultimate goal of its purchase of PowerReviews may have been to compete more effectively in a broader “big data” or social commerce tools market, but that did not overcome the anti-competitive effects found by the Court to be likely in the distinct market for ratings and review platforms. The Court noted that “[t]he lack of pre-acquisition documentary evidence supporting Bazaarvoice’s argument at trial that the elimination of its primary competitor had nothing to do with anticompetitive intent and likely effect, particularly compared with the substantial evidence of anticompetitive intent and likely effect to the contrary, was striking. The anticompetitive rationale for the acquisition remained constant in board presentations throughout the negotiation process, and it underlies many of the documents and much of the testimony that Bazaarvoice relied on at trial”.
The “Bad” Documents:
While they were not in themselves determinative, and the Court also considered economic evidence and data, examples of the numerous documents cited by the Court include:
- one of Bazaarvoice’s co-founders wrote that the PowerReviews transaction would enable the combined company to “avoid margin erosion” caused by “tactical ‘knife-fighting’ over competitive deals”;
- another co-founder and former CEO saw the transaction as an opportunity to “tak[e] out [Bazaarvoice’s] only competitor, who…suppress[ed] [Bazaarvoice] price points…by as much as 15%...”;
- a former CEO of PowerReviews wrote that the benefits of the transaction included “margin expansion”, “the possibility of reducing the discounting that we have seen in the marketplace”, and the fact that it would “[e]liminat[e] competitive risk and an acquisition of PowerReviews by a larger player…”; and
- Bazaarvoice’s current CEO wrote that Bazaarvoice had “[l]iterally, no other competitors” beyond PowerReviews.
The Bazaarvoice/PowerReviews case is the latest in a long line of cases where competition authorities have used statements found in internal company documents, including e-mails, as a basis for opposing mergers and acquisitions.
We have had the same experience in Canada. A recent example saw the Competition Bureau initiate a successful challenge to a merger in the hazardous waste industry based, in part, on internal company documents. That merger was also below the relevant notification thresholds.)
- Managing the document creation process should be one of the foremost considerations for Canadian businesses and their advisors both in the general conduct of their business and, in particular, when contemplating a merger or acquisition (even small transactions that are not subject to formal notification requirements).
- Guidelines should be included in general competition law compliance policies and, in the context of a proposed transaction, circulated to the deal team as soon as possible. (We have precedent templates.)
- Steps should also be taken to ensure that competition counsel review key documents early in the drafting process. These guidelines should apply not only to internal company documents, such as management or board presentations, but also to materials prepared by third-party advisors, such as investment bankers. (All such documents may have to be produced to the Competition Bureau or other competition law authorities, either as part of mandatory pre-merger notification or in response to information requests or orders.)
- Proponents of a business strategy or proposed transaction may have an understandable tendency to try to “sell” their proposals. Unfortunately, this objective can sometimes lead to the use of unhelpful and overly aggressive language that can imply anti-competitive effects or intent.
- Don’t make the mistake of handing the Bureau the evidentiary rope with which to hang you; remember that words count in competition law enforcement, and none more so than one’s own self-authored – and self-incriminating – statements.
The decision of the District Court is available at: Memorandum Opinion (Public Redacted Version).
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