Due diligence is an integral part of most business transactions. The process involves the exchange of information between the parties, which is often both confidential and competitively sensitive. When a transaction is between competitors, the requirements for how the process should be organized to ensure that the parties comply with competition law become more stringent.
A potential buyer of a business has a natural need to thoroughly investigate a company's affairs prior to a purchase. These investigations (called due diligence) will usually include legal, financial and tax matters.
Through a structured due diligence of the company's conditions, the buyer gets a special insight into the company's commercial conditions. Overall, the investigations form the necessary basis for the buyer's decision on whether the buyer wants to complete the transaction and, if so, on what terms the transaction should be completed.
Read moreCompetition law and clean team
Competition law imposes strict requirements on competitors' behavior if it may lead to a restriction of free competition. Therefore, as a general rule, competitors are not allowed to exchange competitively sensitive information if the exchange could restrict competition between them.
Conducting due diligence between competitors therefore requires special attention and care to ensure that the buyer gains the necessary insight into the company while ensuring that the parties comply with competition law rules.
Transactions between competitors present a number of challenges. This is especially true when it comes to how competitively sensitive information is exchanged and handled. Competitively sensitive information requires a high degree of confidentiality and places stricter requirements on structure and access control during due diligence. If the information is exchanged inappropriately, it can lead to distortion of competition by the parties gaining insight into each other's prices, discount agreements, customer and supplier relationships, production capacity, strategies or customer data, which can affect their incentive to compete in the future.
To ensure that the exchange of information is done properly and in accordance with competition law, it is often necessary to use a so-called "clean team method".
Clean team method
The clean team approach serves as an important safeguard to ensure that the due diligence process is not misused to exchange competitively sensitive information between competitors in violation of Article 101 of the Treaty on the Functioning of the European Union ("TFEU").
The exchange of information often begins during the initial discussions and negotiations, often before the actual due diligence process is formally initiated. Therefore, it is crucial that competition law considerations are addressed early in the process.
According to the European Commission Guidelines on Horizontal Cooperation (2023/C 259/01), the exchange of competitively sensitive information between competitors may constitute an infringement of Article 101 TFEU unless the exchange is necessary and proportionate.
Violating competition law rules can lead to significant penalties, including fines of up to 10% of the company's global turnover in the previous financial year.
The clean team approach enables only a limited and controlled group of people from the buyer side to have access to sensitive information about the target company.
The clean team typically consists of external advisors, usually legal and financial, and possibly a limited number of the buyer's employees, who must not have an operational role in the buyer's company.
If deemed necessary and proportionate, the clean team may disclose aggregated or anonymized information to decision makers in the buyer's company outside the clean team.
In all other cases, the team is committed to maintaining full confidentiality.
To avoid any doubt about what information the buyer organization has been privy to, careful consideration should be given to whether operational staff should be included as part of the clean team at all.
In practice, it is often most appropriate to use purely external clean teams, also known as "black boxes" or "counsel to counsel".
In this way, it can be continuously assessed which information may be suitable to be shared in a revised form with the buyer's employees who can actually make decisions about the buyer's commercial behavior in the future.
Clean team agreement
In transactions between competitors, a clean team agreement is drawn up. A clean team agreement builds on the principles of a confidentiality agreement, but contains more detailed regulation.
A clean team agreement should clearly define who can be part of the clean team, what types of information they can access, and how data may be shared, typically only in anonymized or aggregated form and only to the extent necessary to complete the transaction.
The purpose is to ensure that competitively sensitive information, such as prices, customer lists, margins and business strategies, is not disclosed to persons in the buyer's organization who could potentially exploit this information commercially and thereby gain a competitive advantage.
If there is a special and direct competition between the parties in a potential business transaction, it may be considered whether the seller or the seller's advisors must continuously approve the reporting that the buyer's advisors or other clean team members make to the buyer's organization.
The use of virtual data rooms
As part of a secure and controlled due diligence process, parties can benefit from using one of the many technical solutions available for establishing data rooms. They are generally characterized by the fact that information can be easily structured and thematized to facilitate the buyer's review, while also allowing easy access to restrict access to certain parts of the data room.
By dividing the data room into a generic part and a particularly sensitive part (clean team), the seller can ensure from the start that information in the data room is shared responsibly and within the framework of competition law. At the same time, most solutions allow you to extract the entire data room - and any questions and answers exchanged between the parties during the due diligence process - to a physical drive that both parties keep for the purpose of documenting the process afterwards.
To achieve the optimal result, we always recommend that the seller seeks advice early in the process so that the data room can be structured correctly from the start. It is often seen that the parties are far into the process before the actual work of structuring the data room is initiated, by which time information may have already been exchanged in violation of the rules.
When does the transaction require a clean team?
Whether a clean team is necessary depends on the nature of the transaction and the parties involved. The competitive risk is typically highest in horizontal mergers, i.e. two companies operating in the same market and at the same level of sales.
In such cases, establishing a clean team will be an effective and necessary tool to ensure proportionality in the exchange of information and compliance with competition law. However, the risk is also present even if the parties only have a vertical relationship, as there will also be competition law restrictions associated with unlimited exchange of information in certain situations.
A well-functioning clean team setup supported by a clear clean team agreement and technical measures in the form of a clean room are thus essential to complete the transaction properly and in compliance with competition law. With the right structure and clear agreements, even complex transactions between competitors can be completed safely and efficiently.
At CLEMENS, we assist in all phases of the transaction, both in connection with the preparation of clean team agreements and in setting up clean rooms and data rooms.
If you have questions about an upcoming transaction or need sparring, you are very welcome to contact CLEMENS' specialists in M&A and competition law.
