Merger Activity in the Cannabis Industry and how it may affect Univec Conglomerate (a quick overview)
If you follow state-by-state legal cannabis legalization, you’re aware that despite the federal illegality of cannabis, certain federal agencies police the cannabis industry like they do any other legal industry. For example, the NLRB (National Labor Relations Board) has been known to go after cannabis companies engaged in hostile workplace conduct and the Department of Treasury contemplates banking services to the industry under the 2014 FinCEN guidance. Other federal agencies, such as the EPA, tend to ignore cannabis companies altogether.
If you follow cannabis, you’ll also know the M&A market in various states has remained hot for some time now, especially as cannabis licenses become harder to come by for one reason or another. You can now add the Department of Justice (DOJ) to the list of federal agencies participating in and around the cannabis industry, and no, it’s not for criminal prosecution reasons. Quite the contrary–the DOJ is taking a harder look at bigger cannabis mergers to ensure that federal antitrust competition laws are not being violated. Namely, it is checking to make sure the deal will neither create a monopoly nor reduce competition or innovation. Though this may sound troubling, it actually signals that the DOJ is taking cannabis mergers seriously in how they may or may not affect competition and consumers in the cannabis industry.
After companies report a subject transaction (i.e., “premerger notification”), DOJ and FTC perform a preliminary review to see whether the transaction triggers antitrust issues that require a deeper dive into the details. The transaction is on hold until the mandatory waiting period (usually 30 days after filing) has passed or the Feds permit early termination of the waiting period. Because the FTC and the DOJ share the merger review process, transactions requiring further review are assigned to one agency on a case-by-case basis in the “clearance process,” depending on which agency has more expertise with the industry involved. Based on what either the FTC or DOJ finds on initial review, the waiting period can either expire or be terminated early so the parties can close, or, if initial review raises competition issues, the agency can engage in a Request for Additional Information, commonly known as a “Second Request.” This Second Request means the deal review is extended and the parties go into mini-discovery mode, turning over more information about the deal and how it will affect competition if consummated.
Remember, what Doctor Dalton is attempting to do with Univec Conglomerate is a ground-breaking transformation of the medical industry as we now know it. Thus, anti-competitive issues will likely arise in a number of areas.
In a Second Request, the Feds ask all parties for business documents and data that detail the company’s “products or services, market conditions where the company does business, and the likely competitive effects of the merger.”
The Feds can also conduct interviews (including under oath) of the parties, including company personnel or others in the party companies that have knowledge about the subject industry. Additionally, a Second Request means another 30-day waiting period (or more) before the parties can close.
Now comes the interesting part. After the Second Request, the parties will see one of three outcomes: the investigation into the deal is over and the parties can close; there’s a finding of competitive issues and the Feds negotiate a consent agreement with the parties to ensure competition is preserved/restored post-deal (more time involved); or the Feds will move in federal court to stop the transaction altogether.
This is only a quick preview of the process involved, and is by no means a detailed look into all the issues.
Kgem
If you follow state-by-state legal cannabis legalization, you’re aware that despite the federal illegality of cannabis, certain federal agencies police the cannabis industry like they do any other legal industry. For example, the NLRB (National Labor Relations Board) has been known to go after cannabis companies engaged in hostile workplace conduct and the Department of Treasury contemplates banking services to the industry under the 2014 FinCEN guidance. Other federal agencies, such as the EPA, tend to ignore cannabis companies altogether.
If you follow cannabis, you’ll also know the M&A market in various states has remained hot for some time now, especially as cannabis licenses become harder to come by for one reason or another. You can now add the Department of Justice (DOJ) to the list of federal agencies participating in and around the cannabis industry, and no, it’s not for criminal prosecution reasons. Quite the contrary–the DOJ is taking a harder look at bigger cannabis mergers to ensure that federal antitrust competition laws are not being violated. Namely, it is checking to make sure the deal will neither create a monopoly nor reduce competition or innovation. Though this may sound troubling, it actually signals that the DOJ is taking cannabis mergers seriously in how they may or may not affect competition and consumers in the cannabis industry.
After companies report a subject transaction (i.e., “premerger notification”), DOJ and FTC perform a preliminary review to see whether the transaction triggers antitrust issues that require a deeper dive into the details. The transaction is on hold until the mandatory waiting period (usually 30 days after filing) has passed or the Feds permit early termination of the waiting period. Because the FTC and the DOJ share the merger review process, transactions requiring further review are assigned to one agency on a case-by-case basis in the “clearance process,” depending on which agency has more expertise with the industry involved. Based on what either the FTC or DOJ finds on initial review, the waiting period can either expire or be terminated early so the parties can close, or, if initial review raises competition issues, the agency can engage in a Request for Additional Information, commonly known as a “Second Request.” This Second Request means the deal review is extended and the parties go into mini-discovery mode, turning over more information about the deal and how it will affect competition if consummated.
Remember, what Doctor Dalton is attempting to do with Univec Conglomerate is a ground-breaking transformation of the medical industry as we now know it. Thus, anti-competitive issues will likely arise in a number of areas.
In a Second Request, the Feds ask all parties for business documents and data that detail the company’s “products or services, market conditions where the company does business, and the likely competitive effects of the merger.”
The Feds can also conduct interviews (including under oath) of the parties, including company personnel or others in the party companies that have knowledge about the subject industry. Additionally, a Second Request means another 30-day waiting period (or more) before the parties can close.
Now comes the interesting part. After the Second Request, the parties will see one of three outcomes: the investigation into the deal is over and the parties can close; there’s a finding of competitive issues and the Feds negotiate a consent agreement with the parties to ensure competition is preserved/restored post-deal (more time involved); or the Feds will move in federal court to stop the transaction altogether.
This is only a quick preview of the process involved, and is by no means a detailed look into all the issues.
Kgem
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