Evaluating Antitrust Exposure When Purchasing A Competitor’s Assets In Bankruptcy: 'Caveat Emptor'!

1. Introduction

   Assets sales in bankruptcy proceedings are accomplished pursuant to Section 363 of the Bankruptcy Code.1 The vast majority of bankruptcy sale orders go unchallenged, largely because sale orders are "final orders" for res judicata2 purposes and the buyer receives good and marketable title "against the world." The Bankruptcy Code offers protection to the reasonable expectations of good faith third-party purchasers by insulating Section 363 orders from appellate review, absent a stay pending appeal, thereby safeguarding the finality of the sale.3 The buyer of bankruptcy assets understandably achieves an elevated sense that the buyer's ownership rights are legally protected.

   Notwithstanding the protections provided in Section 363 bankruptcy sales, an asset purchaser may nevertheless be subject to antitrust liability and, in certain circumstances, a divesture order. While Section 363 orders shield against challenges to the buyer's right to ownership of the bankruptcy assets, antitrust liability may arise from the bankruptcy sale's impact on competition. Bankruptcy courts have not historically addressed antitrust liability in ruling on Section 363 sales. Two Bankruptcy cases in particular, Gulf States and Christ Church, bring into sharp focus the potential for antitrust liability arising from Section 363 sales. These cases show that buyers of bankrupt assets are not insulated from antitrust claims simply by virtue of asset sale approval procedures of Section 363 of the Bankruptcy Code.

   Similarly, two recent antitrust actions brought by the federal government under Section 7 of the Clayton Act challenging consummated transactions outside of the bankruptcy arena give further reason to pause and evaluate the potential antitrust exposure associated with Section 363 sale orders. In both St. Luke's and Bazzarvoice,4 the federal government successfully brought suit under Section 7 of the Clayton Act to enjoin and unwind deals between competitors because of the likelihood that the transactions would substantially lessened competition in a relevant market. Put another way, the consummation of the transaction itself violated the antitrust laws because it resulted in an impermissible increase in market concentration that could foreseeably lead to a substantial lessening of competition in the relevant market.

   St. Luke's and Bazzarvoice underscore an often overlooked relationship between the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (Section 7A of the Clayton Act) ("HSR")5 and Section 7 of the Clayton Act.6 HSR requires parties to report certain mergers and acquisitions to the government to permit review of the potential concentration problems before a transaction closes. If the transaction does not pose a competitive problem, it closes. If the transaction does pose a competitive problem, it may not. Pre-merger review spares the parties to a merger or acquisition the expenses attributable to divestiture in the event the transaction is not permitted to close. Section 7 of the Clayton Act, by contrast, applies to mergers and acquisitions of stock or assets the effect of which "may be substantially to lessen competition, or to tend to create a monopoly" irrespective of whether the merger or acquisition was reportable under HSR. St. Luke's and Bazzarvoice illustrate that transactions falling below HSR reporting thresholds are not shielded from antitrust scrutiny and may be subject to a forced unwinding when the assets are acquired by a competitor.

   Similar issues also play out in the bankruptcy context. Orders entered by bankruptcy courts approving the sale of assets that were not reportable under HSR were long thought to immunize a Section 363 purchaser from adverse claims, particularly if the sale is "free and clear" of any interests in the property and the order includes an express finding that the purchase was in "good faith." However, recent attempts to impose antitrust liability on purchasers of assets in bankruptcy sales - that were otherwise not reportable under HSR - have called that perception into question. This Article examines the interplay of Sections 7 and 7A of the Clayton Act and Section 363 of the Bankruptcy Code.

2. The Relevant Statutory Provisions

   1. Sections 7 and 7A of the Clayton Act

      Section 7 of the Clayton Act,7 as amended, prohibits, with certain exceptions, mergers and acquisitions of stock or assets in interstate commerce the effect of which "may be substantially to lessen competition, or to tend to create a monopoly." The salient, forward-looking question is whether a merger or acquisition will likely create or enhance impermissible levels of market power after closing. Horizontal mergers, those between direct competitive rivals, raise the highest concern under Section 7. Civil suits objecting to the harmful effects of a merger or acquisition may be brought by the Antitrust Division of the Department of Justice ("DOJ"), the Federal Trade Commission ("FTC"), or even a private party. There are no minimum transaction values applicable to a Section 7 civil suit.

      Section 7A of the Clayton Act, (the Hart-Scott-Rodino Antitrust Improvements Act of 1976), as amended, requires the parties to large mergers or acquisitions of stock or assets to file a premerger notification forms with the DOJ and the FTC to permit the agencies time to review the transaction and evaluate potential anti-competitive effects. Generally, a premerger notification is required when the transaction meets or exceeds a minimum dollar value between parties of a certain size (referred to as "thresholds"). If a transaction is reportable, the parties to the transaction are required to strictly observe a waiting period before consummating the transaction. Each year the FTC announces new thresholds to account for changes in the gross national product.8 While both the DOJ and FTC are notified of the transaction, only one agency will review it.9 If the governments' review does not reveal competitive concerns, the transaction is permitted to close. If, on the other hand, the government's review believes the transaction will lead to an impermissible level of concentration - which may substantially lessen competition or tend to create a monopoly - the government will take steps to prevent the transaction from closing, including filing an enforcement action to enjoin the transaction.

   2. Section 363 of the Bankruptcy Code

      Section 363(b) of the Bankruptcy Code10 authorizes a trustee or debtor in possession, after notice and a hearing, to sell the assets of the estate. If certain conditions are met, the sale may be made "free and clear of any interest in such property".11 Further, if the bankruptcy court finds that the buyer purchased the property in good faith, reversal or modification of the sale order on appeal does not affect the validity of the sale, unless the sale order was stayed pending appeal.12

      The Bankruptcy Code expressly anticipated the application of the reporting requirements of HSR, specifically requiring premerger notification to the government. If the sale transaction exceeds the HSR reporting thresholds, Section 363 (b)(2) requires the trustee or debtor in possession to give the required premerger notification to the government. Bankruptcy court approval of the sale must await the expiration of the 15-day waiting period, or longer if extended.13

   3. The question posed: Does a sale of assets under Section 363 of the Bankruptcy Code that was not reportable under Section 7A of the Clayton Act expose the buyer to antitrust scrutiny under Section 7 of the Clayton Act?

      This statutory...