The risk is not purely theoretical as was illustrated by the American case of Omnicare v United Health Group (Civ. No. 09 C 6235 (N.D III Jan. 16.2009)), in which the US District Court was asked to consider precisely whether certain information exchanges between the merging parties infringed American competition law. Exchanging competitively sensitive information is generally considered to alter a firm’s incentive to compete by rendering a market artificially transparent, thereby negating the essence of the competitive process.

Characterisation of how information exchanges contravene section 4 of the Competition Act (the prohibition on cartel conduct) has not yet been tested. The greatest risk for firms disclosing information in the context of a proposed merger or acquisition is a subsequent allegation that the exchange facilitated cartel conduct. If, for example, the exchange of information between parties to a proposed merger is deemed to result “directly” or “indirectly” in the parties “fixing a purchase or selling price or any other trading condition”, the parties will be in contravention of section 4(1)(b) of the Competition Act and liable to penalties of up to 10% of their annual turnover even for a first time offence. Alternatively, the information that is exchanged could be shown to have the “effect of substantially preventing, or lessening, competition in the market”, in contravention of section 4(1)(a), unless the parties can prove that the information exchange resulted in technological, efficiency or other pro-competitive gains that outweigh any anti-competitive effect.

There is no definitive list of what constitutes “competitively sensitive” information; however it is accepted that it includes strategic information, which is not publically available, relating to recent prices and quantities, customer lists, information about costs and demand, and capacities. It is incumbent on firms contemplating a merger or acquisition to put measures in place during the due diligence and negotiations to ensure that they do not risk contravening the Competition Act and potentially opening themselves up to substantial financial penalties. Even if a firm can prove that it did not contravene section 4, it is obviously desirable to avoid having to do so. Defence proceedings can cause reputational harm, waste management time and are inevitably expensive – especially given that as a general rule one cannot be granted a costs order against the Competition Commission.

Drawing on decisions and guidelines from various jurisdictions, it is generally considered best practice, if not prudent, to put in place the following precautionary measures when conducting a due diligence on a competitor.

Non-disclosure undertakings: to show that steps have been taken to prevent the flow of information both internally and externally, all individuals involved in the proposed transaction should sign non-disclosure undertakings, which stipulate that the information received will be used only for the purposes of evaluating the proposed transaction or fulfilling specified legal requirements.

Due diligence teams or “clean teams”: access to competitively sensitive information should be limited to a specific group of people within the company, on a need-to-know basis, who have signed non-disclosure undertakings. These individuals should not be in a position to use the information received to affect competitive decision making. Further, the more competitively sensitive the information, the smaller the number of people that should have access to it. To the extent possible, information should only be disclosed as deal finality strengthens, such as on the eve of the merger agreement. Consideration should be given to ring-fencing senior employees, such as high level executives, who would then review the more sensitive information. As far as possible, the “clean team” should not consist of persons directly involved in pricing and marketing of the relevant product.

External review: if possible a third party should be hired to review information that is highly sensitive i.e. current pricing (e.g. accountant, lawyer, financial advisor, etc). The information can then be presented to the board or relevant employees in a “bottom line” framework.

Aggregated and historic data: the information that is shared should be aggregated. For example, information regarding sales should be given at a national level across all products rather than at the level of regional segmentation or for specific products.

Necessity of disclosing particular information: parties must only share information that is absolutely necessary for the purposes of evaluating the proposed transaction and complying with any specified legal requirements. It is unnecessary, and thus inadvisable, for example, for information to flow from the acquiring firm to the target firm in the context of an acquisition.

Ideally merging parties should not share any competitively sensitive information during the due diligence and negotiations process, especially with regard to products, services and relevant pricing in the area of competitive overlap. However, this ignores the practicalities of business. Parties to a transaction should therefore spend time considering and consulting on precautionary measures that can be implemented, in order to avoid ending up on the wrong side of competition law.