The General Director of the Israel Antitrust Authority (the “IAA” and the “General Director“, respectively) recently published a draft opinion concerning the disclosure of information in due diligence examinations prior to transactions among competitors (the “Draft“). Negotiations leading to a transaction are commonly accompanied, inter alia, by economic, financial, accounting and legal due diligence examinations. A due diligence examination with respect to a transaction among competitors raises significant legal and commercial challenges.
From a commercial perspective, in the absence of certainty that the transaction will be consummated, disclosure of a company’s commercial information to a competitor raises major business issues. A primary concern is that if the transaction is not consummated, the party disclosing the information will be left “exposed” vis-à-vis its competitor.
From a legal perspective, the matter raises significant antitrust questions. According to the IAA, exchange of information among competitors may, under certain circumstances, constitute a restrictive arrangement, which would be illegal absent an applicable exception. Until issuance of the Draft, however, the IAA had not addressed the issue of disclosure of information to a competitor during a due diligence examination.
The Draft recognizes that appropriate guidelines for disclosure of information among competitors must take into account the particular circumstances of each transaction. The Draft includes general guidelines and “rules of thumb”, rather than detailed instructions, in order to afford a measure of flexibility in addressing the significant differences between transactions and the particular circumstances of each case.
In this regard, for instance, transactions among competitors can differ substantially with respect to the relevant market structure and its characteristics, the number of competitors in the market, their market shares, the existence of barriers to entry and barriers to transfer, the potential effect these factors may have on competition, and other parameters. In addition, the type of information intended to be disclosed should also be analyzed. Core information, such as data regarding pricing, profitability, customers and strategic plans, is usually more sensitive than information relating to property, such as balance sheets or asset valuations.
The Draft makes reference to various mechanisms for carrying out due diligence examinations in transactions among competitors, including the disclosure of aggregated information instead of specific data; appointing an external examiner, such as an accountant or an attorney, who would provide the parties with “bottom line” information; designating employees who are not involved in pricing, marketing or sales or using a “Clean Team” to conduct the due diligence examination; placing an emphasis on documenting the due diligence process; and ensuring that an appropriate non-disclosure agreement or confidentiality agreement is in place.
The timing of the publication of the Draft is notable in light of the May 2012 amendment to the Israeli Restrictive Trade Practices Law, 5748-1988 (the “Law“). The amendment authorizes the General Director to impose a maximum monetary sanction of NIS 24 million (approximately USD 6.8 million), in instances where the Law is breached. The publication of the Draft brings the General Director’s new policy to the attention of the public, guides the business community, and may be a harbinger of possible future enforcement actions in connection with due diligence examinations among competitors.
The publication of the Draft is commendable. It will assist in establishing appropriate boundaries for due diligence examinations in transactions among competitors. We are hopeful that the interpretation of the Draft that develops over time will facilitate a reasonable balance between avoiding restrictive arrangements while enabling appropriate due diligence examinations to take place, on the one hand, and reducing the risk of unnecessary obstacles preventing the execution of such transactions, on the other hand.
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