Consent Decree Review

I'm watching with some fascination as the SBC-AT&T and VZ-MCI mergers are going through a rarely-seen kind of judicial review at the very tail end of the merger process. Up to this point, things have proceeded in what I'd call the ordinary course for big consolidating mergers: Post-signing, a Hart-Scott-Rodino review process involving lengthy discussions with DOJ, the production of millions (or tens of millions) of pages of documents, and ultimately the negotiation of a consent decree with DOJ that ends the Department's review. The consent decree obligates the merged company to undertake (or refrain from) certain actions - divesting properties, staying out of certain markets, or, in the case of these deals, keeping open to competition a limited number of fiber optic connections.

The consent decree is a settlement agreement in litigation - upon reaching agreement on the consent decree, the DOJ files a lawsuit in federal court ostensibly seeking to block the merger, and at the same time (or shortly thereafter) files the consent decree "settling" the lawsuit. As this is typically the longest lead time item in a consolidating merger, the parties usually close the deal as soon as the consent decree is filed. Later on - and, importantly, well past closing - a judge reviews the consent decree. It's fair to say that judges have typically shown a great deal of deference to DOJ's findings in approving consent decrees.

Judge Sullivan, reviewing the consent decrees here, is questioning the rationale behind the remedies agreed to by the DOJ. It's possible that he is just carefully fulfilling what he sees as a mandatory duty to review the appropriateness of consent decrees, and that the pleadings filed by the parties were too short on substance for him to do so. But the vocal opposition to these deals - and Sullivan's since-retracted call for evidentiary hearings - keep open the possibility that this may get ugly.

This new judicial toughness under the 2004 Tunney Act amendments also raises a whole new set of considerations in negotiating a consolidating deal. As a buyer, do you insist on being able to hold on closing until any consent decree is approved by a judge? As a seller, what do you need to get out of the deal in order to agree to that? Can either party afford to wait the year-plus period it takes to complete the entire process? SBC and VZ can obviously absorb a certain level of changes to the deals they cut with DOJ, but what happens when a judge imposes changes so onerous they crater the original rationale for the deal? After all, it's not like these companies can go back and recreate the status quo pre-closing without destroying a tremendous amount of value.