FTC Approves Corpus Christi Polymers Joint Venture with Conduct Remedies

The FTC's December 21, 2018 conditional approval of the acquisition of a partly constructed resin plant out of bankruptcy by a consortia of three competitors imposed a number of conduct conditions on the acquirers, including mandatory output requirements, informational firewalls and other compliance and monitoring obligations. This settlement illustrates that despite a preference for structural remedies, the FTC is still willing to craft settlements that rely primarily on conduct commitments under certain circumstances—namely, when the agency is comfortable the remedies are strong enough and enforceable enough to successfully ameliorate alleged harms in the long term.

I. Acquisition Background

In 2013, M&G Chemicals SA began construction of a resin plant in Corpus Christi, Texas, to produce polyethylene terephthalate resin (PET), a plastic polymer used in many consumer product packages, including soda bottles,¹ and purified terphthalic acid (PTA), the primary input for the production of PET.²

However, M&G Chemicals entered bankruptcy in October 2017 before the plant could be completed,³ and the plant was put up for auction in March 2018.⁴ Three bids were submitted initially: one bid from the plant's largest lienholder, one bid from a PET producer, Far Eastern New Century Corporation (FENC), and one joint bid from two PET producers, Alfa SAB de C.V. (DAK), and Indorama Ventures Plc (Indorama). M&G Chemicals had concerns that the FENC bid and the joint DAK/Indorama bid did not comply with the bankruptcy court's requirements. Therefore, M&G gave permission for the three parties to re-bid together.⁵

Accordingly, DAK, Indorama and FENC formed a joint venture called Corpus Christi Polymers LLC (Corpus Christi JV) and submitted a new trilateral bid. The Corpus Christi JV noted that it intended to complete construction and use the plant as a tolling manufacturer—each member procuring its own inputs and marketing the processed output independently.⁶ On March 29, 2018, the bankruptcy court approved the Corpus Christi JV as the winning bid.⁷

II. FTC Analysis & Conditions

The FTC analyzed the Corpus Christi JV's proposed acquisition of the resin plant,⁸ with particular focus on the parent companies' (DAK, Indorama and FENC) positions as active producers of PET resins. The FTC determined that DAK, Indorama and FENC were three of only four PET producers in North America, controlling a combined 90 percent of PET production capacity on the continent.⁹

The FTC expressed concern that the acquisition could adversely affect competition in three primary ways:¹⁰First, cooperation among the joint venture and the joint venture owners—each a competitor in the PET market—in running the Corpus Christi plant might facilitate anticompetitive collusion among the companies (such as manipulating PET output or fixing PET prices).¹¹Second, the joint venture could allow the joint venture owners to exercise market power in PET production—especially given the FTC's allegation that the joint venture owners controlled 90 percent of the existing PET market, and the Corpus Christi plan was projected to constitute 20 percent of North American PET output once operational.¹²Finally, the FTC noted that in operating the Corpus Christi plant, the three joint venture owners would need to share some competitively sensitive information with the joint venture. The FTC expressed concern that without adequate protections, the joint venture could potentially serve as a conduit between the parent companies to share information such as volume information or even customer and price information "beyond the minimum degree reasonably necessary to accomplish [the joint venture's] legitimate purposes."¹³

To resolve these concerns, the FTC imposed a number of conditions on the acquisition, announced December 21, 2018.¹⁴ To limit the risk that any one of the joint venture owners could leverage control over the joint venture (and the PET capacity), the consent decree required that no member own more than one-third of the controlling interest in the Corpus Christi JV and no more than one-third of the tolling capacity at the plant.¹⁵ Notably, the FTC also imposed a number of substantial conduct remedies on the operation of the joint venture, including:

• Mandatory Use of Capacity. To ensure that neither the joint venture nor the owners can artificially reduce output, the Corpus Christi JV must offer slack capacity to other owners if an owner does not use its full tolling capacity. ¹⁶If capacity is still available, the Corpus Christi JV then must market that slack capacity to third parties.¹⁷
• To protect against the exchange of competitively sensitive information, the consent imposed various safeguards:
  • Firewalls. Confidential joint venture information must not be visible to the joint venture owners, except for limited reporting obligations and operational necessities.¹⁸
  • Reporting Communications. Joint venture owners must report to the FTC periodically to account for all communications with any other joint venture owner related to the Corpus Christi JV.¹⁹
  • Limited Member Influence of JV Board. Joint venture owners are prohibited from influencing Corpus Christi JV board members, with limited specific exceptions.²⁰
  • Hiring Restrictions. Joint venture owners are limited in their ability to hire former independent board members of the joint venture. Joint venture owners are prohibited from soliciting or recruiting Corpus Christi JV employees generally. Further, joint venture owners are prohibited from hiring former Corpus Christi JV employees for positions involving PET or PTA sales, marketing or production in North America for one year.²¹
• Compliance Monitor & Reporting. The FTC appointed Jeffrey Brennan of McDermott Will & Emery as a compliance monitor.²² The parties must provide detailed compliance reports, including all instances where a party did not use their full share of plant capacity, requested a change in grade of PET produced or requested an expansion of capacity.²³
• Notification Requirements. The parties must seek FTC approval to make substantive governance or operating changes to the Corpus Christi JV agreement. The parties must also notify the FTC of any future acquisition of any interest in a North American PET or PTA production facility.²⁴

Importantly, these conditions are set to last for 20 years, twice as long as the standard 10-year period for merger consent orders and consistent with the typical 20-year period for remedies in nonmerger cases. The FTC has imposed a 20-year time frame in other merger cases where the remedies are primarily conduct based, including recently in the Northrop Grumman/Orbital ATK consent order.²⁵

III. Takeaways

The FTC's conditional approval of the Corpus Christi joint venture with primarily conduct remedies is notable. Although the FTC and DOJ have both expressed a long-standing preference for structural remedies,²⁶ historically the authorities have been willing to utilize conduct remedies, or accept a mix of conduct and structural remedies, in certain circumstances. Certainly, the Corpus Christi settlement could be characterized as a partly structural remedy (the joint venture owners agreed to cap each of their ownership rights in the Corpus Christi JV at one-third). Nonetheless, it shows the FTC is willing to use conduct remedies to ameliorate competitive concerns related to otherwise pro-competitive transactions and joint ventures.²⁷ Accordingly, the Corpus Christi settlement offers several important lessons to parties considering a merger or joint venture.

A. Pro-Competitive Benefits May Persuade the FTC to Consider Conduct Remedies

The FTC has previously noted that it will consider conduct remedies in order to preserve pro-competitive benefits offered by a transaction under review. As Bruce Hoffman, then Acting Director of FTC Bureau of Competition noted in early 2018: "[A] behavioral or conduct remedy can prevent competitive harm while allowing the benefits" of a transaction.²⁸ DOJ has expressed a similar willingness to consider conduct remedies to preserve significant efficiencies, at least in vertical mergers.²⁹ Here, the FTC noted that "[c]ompletion of this more efficient facility will significantly expand PET and PTA capacity and output in North America, benefiting consumers."³⁰In fact, Bruce Hoffman, now Director of the Bureau of Competition, characterized the future Corpus Christi facility as "the country's lowest-cost PET plant."³¹

Parties presenting mergers or joint ventures with significant pro-competitive benefits to the antitrust agencies should take care to quantify, verify and document those benefits. Where appropriate, those positive effects should be incorporated into the deal rationale and justification. Concrete efficiencies or other pro-competitive effects should feature prominently in a deal strategy before the antitrust authorities.

B. The FTC May Take Into Account a Target's Financial Difficulties in Assessing the Transaction's Impact on Competition

The FTC may have been more willing to craft a primarily conduct-based settlement in the Corpus Christi matter because the plant was purchased out of bankruptcy. In the past, the FTC and DOJ have noted that some transactions that raise antitrust concerns may be allowed to proceed if the merging parties can show that the target company is failing and would likely exit the market without the transaction.³² In practice, this "failing firm defense" is often a high bar for merging parties to meet.³³ However, financial difficulties may still influence the FTC's analysis of competitive effects and remedies even when the facts do not meet the "stringent failing firm criteria."³⁴ Indeed, in this case, the FTC did not formally invoke the failing firm defense in its analysis. But, the FTC no doubt considered that the plant was purchased as part of a bankruptcy auction. In fact, the FTC specifically noted that the joint venture's bid was accepted only after the seller concluded that three alternative bids did not comply with the bankruptcy court's parameters.³⁵ Bureau Director Hoffman noted that the FTC's approval of the transaction "ensures necessary support and funding for timely completion of [. . . the] PET plant"³⁶ Given the financial circumstances, the FTC may well have surmised that this transaction was the only viable path forward to bring the plant online.

This case illustrates that even if merging parties cannot meet the stringent requirements for a failing firm defense, parties should be open with the antitrust authorities as to potential financial difficulties and should gather evidence early to explain financial difficulties to the regulators. Even if a target does not technically qualify as a "failing firm," the authorities may take a target's financial difficulties into account when assessing the transaction's impact on competition. And, the seller should carefully consider any available alternative bids (especially those that might present less significant antitrust issues) and document why the bids are unacceptable.

C. Conduct Remedies May Place Significant Compliance Obligations on the Merging Parties and May Be in Force for a Substantial Period of Time

The FTC and DOJ have both expressed concerns regarding the enforceability of conduct remedies in the merger control process.³⁷ Here, several concessions in the Corpus Christi settlement may have mitigated the FTC's concerns with decree enforceability, encouraging the FTC to approve the transaction with primarily conduct restrictions. For example, the parties accepted a monitor and substantial reporting requirements, which may create significant on-going expense and complexity. Similarly, the parties accepted conditions to help enforce the informational firewalls, such as restrictions on employee hiring and restrictions on influencing joint venture board members. Most importantly perhaps, the parties agreed that these conditions would persist for 20 years, twice as long as standard merger consent orders. Again, this extended termination date also appears in other merger consents that include conduct remedies, such as Northrop Grumman/Orbital ATK.

Accordingly, parties considering conduct remedies in a proposed transaction should think carefully about the long-term, going-forward impact of any potential conduct commitments on the business. Not only did the parties here have to accept significant conduct concessions and complex enforcement mechanisms, but those commitments will last for 20 years regardless of how the parties' businesses change over the course of two decades.

IV. Conclusion

The federal antitrust authorities strongly favor structural remedies. But, as the FTC's review of this transaction demonstrates, the authorities remain open to resolving concerns primarily with conduct remedies when that is the only way to preserve significant pro-competitive effects. In this case, the FTC may have concluded that the proposed joint venture was the only way to increase output in the North American PET market. In order to permit the joint venture while protecting competition, the FTC accepted primarily conduct remedies, despite the often-reiterated aversion to conduct consents.

Parties should recognize that this case likely represents a narrow precedent, in which a partly finished project promised to increase output substantially in a concentrated market, but a bankruptcy prevented that project from being completed with no other feasible alternative available. That said, the case still offers important lessons for working with agencies to gain deal clearance. Merging parties should seek antitrust counsel to ensure that they are crafting strong arguments about the pro-competitive benefits of their potential transactions. Similarly, explaining financial difficulties may also help convince regulators that clearance, perhaps with conduct concessions, is necessary to achieve an efficiency- or output-enhancing transaction. Finally, parties should think carefully about the short- and long-term impact of any conduct remedies, especially as conduct remedies can come with enforcement responsibilities and other restrictions that may be in place for a long time—perhaps up to 20 years.

© Arnold & Porter Kaye Scholer LLP 2019 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.