In what may be the first case ever, a party to an FTC administrative merger challenge has filed suit in U.S. District Court asking the court to halt the administrative proceeding and order the FTC to pursue a preliminary injunction motion in that court. The gravamen of their argument is that the outside date for the transaction is in May, and there is no way that they could conclude an administrative trial in that amount of time.  They claim further that choice to proceed only with an administrative complaint is to delay deliberately the resolution of the suit so that the outside date passes and the deal breaks.  They “deserve their day in court.”  As a matter of substantive law, the case is unsound.  The FTC is free, within the confines of the FTC Act, to choose where it wishes to pursue an action, and this has been so for more than 100 years.  As a means to recapture some negotiating leverage from the FTC and perhaps save a few bucks, it’s probably not a bad strategy.  Perhaps the chance of a loss, however remote, and the potential “embarrassment” of dragging enforcement out “needlessly” will prompt the FTC to settle on more favorable terms.  The cost, however, is Tronox’s, and Tronox’s lawyers’, reputation at the Commission and may only prompt them to dig in their heels.

Tronox Limited and its target, Cristal, both make high purity titanium dioxide (TiO2), an input for products like paint. TiO2 makes paint white.  Tronox announced its intent to acquire Cristal in February 2017.  The FTC investigated the transaction under the HSR Act and purportedly allowed the waiting period to expire on December 1, 2017.  Tronox noted this fact in a press release suggesting it was free to close under the HSR Act.  Four days after that press release, on December 5, 2017, the FTC sued the companies alleging the combination would substantially lessen competition in the market for high purity TiO2.  In their press release announcing the suit, the FTC asserted that the waiting period had in fact expired on October 7, 2017, but the parties had entered into a timing agreement whereby they would provide the Commission 10 days’ notice of their intent to consummate.  The FTC suggested that the parties had not given adequate notice under the timing agreement.  The transaction is still under review in other suspensory jurisdictions that prevent the parties from closing globally.

What makes this case interesting is that the FTC chose to file only an administrative complaint .  The FTC Act, passed in 1914, created an administrative court system within the FTC.  Section 5(b) of the FTC Act empowers the Commission to challenge commercial activities in its own administrative courts.  Section 13(b) of the FTC Act allows the FTC can to go to a federal court to seek temporary and permanent injunctions.  It must also seek the aid of a federal court to obtain civil penalties or consumer redress for violations of its cease and desist orders or rules.  In merger cases, the FTC’s normal practice is to file an administrative complaint along with a consent motion for a temporary restraining order and a motion for a preliminary injunction in a U.S. District Court.  The administrative complaint is almost immediately stayed pending the decision on the preliminary injunction.  If the FTC wins in District Court, it would then proceed with an administrative trial if the parties did not abandon the transaction.  They almost always abandon the transaction if they lose at the P/I stage.  In practice, the P/I hearing is a somewhat expedited full-blown trial on the merits.  At the P/I stage, the FTC only has to show a likelihood of success on the merits at trial, not that the transaction will substantially lessen competition by a preponderance of the evidence.  The findings of fact at the P/I stage are preliminary and very difficult to overturn on appeal.  Appeal moreover is discretionary on a P/I decision by both the District Court and the U.S. Circuit Court.  The administrative trial is a trial on the merits, which can take many more months on top of the months invested in the P/I hearing.  A decision in the administrative courts is appealable to the Commission and only then to a U.S. Circuit Court.  Administrative law judges rarely make mistakes of law in merger cases.  It’s the findings of fact that can destroy a deal.  Given the deference courts and the Commission give to triers of fact, appeals out of an administrative merger challenge do not have the best of chances.  There is nothing in the law, however, that compels the FTC to pursue an enforcement action administratively or in the courts.  The FTC pursues the P/I because, in most instances, the waiting period will have expired and the parties would otherwise be free to consummate absent a TRO.  In usual process, the parties declare substantial compliance under HSR and then the FTC has 30 days in which to decide whether to sue.  Once those thirty days are up, however, the parties are free to close under the HSR Act.  The TRO prevents the parties from consummating.  TROs are short lived, however, so the FTC typically has to get to the P/I hearing as soon as it can.

So what’s going on? Why would the FTC only pursue the case administratively?  Doing so goes against precedent.  It also takes longer.  The administrative law judge overseeing the challenge has said as much in court.  The parties have complained that the administrative proceeding is vastly prejudicial to them as they have an outside date of May 21, 2018, and it’s highly unlikely the full trial will be completed by then.

For one thing, it simply may not be necessary to rush to court to seek a preliminary injunction. The pendency of the European investigation prohibits Tronox from consummating globally.  Beginning a P/I would waste Commission resources.  And, if the deal is cleared in all of the suspensory jurisdictions, the FTC could at that point seek a P/I.  The Commission also has an advantage by being in the administrative courts.  And the FTC may not really need a P/I.  Courts generally do not like to unscramble consummated transactions.  An administrative law judge would certainly consider that in deciding whether to order a breakup.  If the FTC wins, they would have to take a divestiture order to court to enforce it.  I suspect the FTC would have to seek a permanent injunction ordering the parties comply with the administrative order to divest, which might require a whole new trial on the merits.  That would be somewhat grotesque.  The parties would probably begin integration just to make it harder to enforce a divestiture order and to start realizing some of the synergies of the deal.  On the other hand, the pendency of the administrative case would cast a pallor over their business, and the market might react negatively to the suit as well.  This uncertainty may put pressure on the parties to settle.  The procedural posture of this case appears to benefit the FTC strategically but is not without risk.

It appears that the majority of the synergies in this deal are outside the States so a divestiture of an American asset is not going to alter materially the deal thesis. So I suspect what’s happened is that the parties have offered to divest a part of an American business but not all; and the FTC, sensing a procedural and cost advantage feels it can sit back and wait for Tronox to cave.

I suspect what Tronox is doing is trying to regain some leverage with what really just amounts to a Hail Mary pass. No one has ever really challenged the FTC’s ability to pursue an administrative remedy.  Congress granted that ability by Statute more than a century ago.  And, from a policy perspective, it would be ruinous to allow a private party the ability to dictate to the FTC how the FTC pursues its law enforcement.  A decision in favor of the parties would likely mean a significant blow to if not an end of the FTC’s administrative court system.  The argument that the deal goes away in May is a bit specious.  The parties set that date by agreement, and they can amend that agreement.  It’s possible that the financing might go away on that date, and to get the deal re-financed would cost the parties significantly more, but they’ve not alleged that in their complaint.  Ultimately, the cost of the suit filed by Tronox (which will most likely be resolved as a grant of a motion to dismiss with prejudice) is at most about $1 million.  There’s a slight albeit almost non-existent chance Tronox might win, and that might drive the FTC to settle sooner than later.  Balancing that $1 million cost to the losses they might incur if they had to fire-sale an entire U.S. business and go through a full administrative trial, given that closing is delayed anyway by the EU’s investigation, the suit makes some sense.

I suspect that press release that announced the parties could consummate because the waiting period had expired was perceived as bad faith by the FTC. Timing agreements require trust on the part of the parties and the FTC.  There’s nothing stopping a party from consummating a deal once the waiting period has expired other than an equitable breach-of-contract challenge in court (not the $40,000 a day fine under the HSR Act), so the FTC trusts them not to close and violate the timing agreement.  The parties also give up their statutory right to force the FTC to decide within 30 days, so they trust the FTC to act in good faith.  If the FTC did not challenge the transaction, it would jeopardize the timing agreement regime and seed too much power to parties.

So this suit is an effort to gain some negotiating leverage. It ends in a consent with the divested assets being more than Tronox wants to divest now but less than a full business.  As a substantive legal matter, Tronox’s suit dies a swift death.  As a delaying tactic, it’s an interesting tactic.  The administrative trial may be stayed pending the decision in the District Court.  The parties can advance their defense in Europe and elsewhere, putting pressure on the FTC to put together a P/I.  It’s not a lot of pressure though.  The FTC will have to fight the suit, and will not appreciate the wasted time.  They may very well dig in their heels and insist on a full divestiture.  But that’s all Tronox has now.  So why not give it a whirl.