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Demand in your industry has been declining for years, the decline is projected to continue for the foreseeable future, and you are one of the few cost-effective manufacturers around. You just inked a deal to buy a competing manufacturer, and you are working hard to get your deal cleared through the merger review process. But with the continued decline in demand causing inefficient manufacturers to close or idle plants and your own order book being down, continuing to run one of your plants that has been unprofitable for a number of years and is unlikely to become profitable in the future looks like a losing proposition. What do you do? What if you are the seller instead? These are not just hypotheticals, but real-world scenarios.

On January 3, 2014, for example, Verso Paper Corporation agreed to acquire NewPage Holdings Inc. for approximately $1.4 billion. At that time, Verso and NewPage were two of the largest producers of coated paper in North America. Verso operated two mills, and NewPage operated eight mills. In October 2014, during the Department of Justice review of the transaction, Verso announced it would close its mill in Bucksport, Maine. In the press release announcing the closure, Verso’s CEO said that the mill had been unprofitable for a number of years and likely would continue to be unprofitable in the future. In December, Verso announced it had reached an agreement to sell the soon-to-be-shuttered mill to a company that demolishes and recycles old mills.

Weeks after Verso’s announcement, a union representing workers at the Bucksport mill filed an antitrust lawsuit seeking to enjoin the sale of the mill and force a sale to someone willing to put it back online. The union alleged, among other things, that Verso and NewPage reached an agreement to shut down the Bucksport mill in violation of Section 1 of the Sherman Act. The union argued, in part, that Verso could not shut down the Bucksport mill without NewPage’s written consent under the parties’ merger agreement. In the meantime, the DOJ agreed to allow the transaction to close, provided that two of NewPage’s mills and associated assets were divested. (NewPage agreed to sell these mills and assets to Canada’s Catalyst Paper.) In paving the way for the transaction to close, the DOJ noted that Verso contemplated closing the mill before deciding to merge with NewPage, and the DOJ did not view the closing of the Bucksport mill to be a result of the merger.

In denying the union’s effort to stop the sale of the Bucksport mill, the federal district court rejected the union’s claim that the Verso/NewPage merger agreement obligating each to obtain written consent from the other before selling any assets to gain DOJ approval showed that Verso needed the written consent of NewPage to close its Bucksport mill. Instead, the court found that Verso neither sought nor received the written consent of Newpage for closing the Bucksport mill. The court also found that the DOJ’s view that the closing of the mill was not a result of the merger suggested written consent was “unnecessary, unlike the two mills that NewPage sold to comply with DOJ requirements.”

In contrast, a recent example involving a $5 million “gun jumping” <a href="http://www.justice.gov/atr/public/press_releases/2014/309786.htm">settlement</a> highlights how a provision in a transactional agreement can prematurely transfer operational control from the buyer to the seller without preserving the value of what is being bought. During negotiations of that deal, the buyer expressed its desire to shut down a mill after closing, but wanted the seller to manage the shutdown because it was concerned its reputation might take a hit if it announced the closure. (The seller wanted to continue operating the mill if the deal did not happen as planned but knew that its employees and customers would start leaving as soon as news of the planned closure hit the street.) What did the parties do? They wrote into the asset purchase agreement a requirement that the seller “take such actions as are reasonably necessary to shut down and close all business operation at its [mill] five (5) days prior to the Closing” and that “in no event shall [the seller] be required to be shut down or close its business operations at its [mill]” until “[a]ny required waiting periods and approvals…under applicable Antitrust Law shall have expired or been terminated.”

Things did not go as planned. Within days of the announcement of the deal, a labor issue arose at the mill that the seller believed required it to publicly disclose its plan to shutter the mill after closing. The seller asked the buyer to waive the provision in the asset purchase agreement requiring the disclosure. Doing so would have averted the need during the merger review waiting period to announce the seller’s intention to close the mill. The buyer refused that request, and the seller announced the closure. Within weeks the mill closed, and the buyer and seller worked together to transfer the buyer’s customers to the seller. In the wake of opposition from the DOJ regarding the competitive merits of the underlying deal, the parties eventually abandoned their proposed transaction. By then, the mill was gone.

So, what does all this mean for you? It depends on what your transactional agreement says, and whether you are a buyer or seller. A former Federal Trade Commission official offered the following guidance in relation to a seller’s decision to proceed with a significant capital project before closing, which is applicable here. Among the questions he suggests asking are:
<ul>
	<li>What is the magnitude of the efficiencies that would be realized from deferral of the project?</li>
	<li>How reversible is the decision not to proceed if the merger ultimately does not close?</li>
	<li>To what degree would the seller’s competitiveness be harmed by the deferral (or abandonment) of the project if the merger ultimately does not close?</li>
	<li>To what degree would the overall level of market competition be harmed if the seller’s competitiveness were harmed?</li>
	<li>To what extent would the project represent a material change in the operations of the seller?</li>
</ul>
In the end, you need to consider whether the provision is necessary to preserve the value of what is being bought during the period between signing and closing. If it is not, think twice before contractually committing yourself to the will of the buyer. And if you are the buyer, you need to ask how requiring consent preserves value.

*<i>Allentown</i> by Billy Joel

“And they’re closing all the factories down”* — Going Dark During a Merger Review