District Of Columbia Releases Redacted Opinion Detailing Reasoning Behind Decision To Grant Preliminary Injunction In Tronox-Cristal Acquisition
On September 5, 2018, Judge Trevor N. McFadden of the United States District Court for the District of Columbia granted the Federal Trade Commission’s request for a preliminary injunction preventing Tronox Ltd. (“Tronox”) from completing its proposed $2.4 billion acquisition of National Titanium Dioxide Company Ltd. (“Cristal”) until after a final ruling in the FTC’s administrative proceedings challenging the deal. Federal Trade Commission v. Tronox Ltd., et al., 1:18-cv-01622 (TNM) (D.D.C. Sept. 12, 2018). Tronox intends to appeal and will consider whether to proceed with a divestiture to resolve potential competitive concerns.
Background: A Global Transaction With Complex Regulatory Hurdles
The FTC filed its administrative complaint on December 5, 2017, challenging Tronox’s acquisition of Cristal over significant concerns that the deal would substantially lessen competition for chloride-process titanium dioxide in the United States and Canada. Titanium dioxide is an industrial chemical primarily used as a white pigment in paints, coatings, and specialty paper products. According to the FTC, the transaction, originally announced in February 2017, would “combine two of the three largest producers” and result in “increase[d] concentration in an already concentrated market.” Complaint, In the Matter of Tronox Ltd., FTC Dkt. No. 9377, at 1-2. The FTC alleged that the deal would increase the likelihood of coordination in an oligopolistic market and allow Tronox to “discipline its output” to influence supply and increase prices. Id. The month-long administrative trial on the merits was completed in June, but the administrative law judge has not yet issued a ruling.
Despite a challenge in the United States, the European Commission cleared the deal on July 4, 2018, contingent on Tronox’s agreement to divest its global titanium oxide operation for pigment used in paper laminate. The transaction also has received approvals in Australia, China, Colombia, New Zealand, Saudi Arabia, South Korea and Turkey. The United States is the only outstanding jurisdiction where clearance is required.
Decision: A Highly Concentrated Market Cannot Be Cured By Distant Future Competition
After completing the administrative trial in July, the FTC filed its complaint in federal district court on July 10, 2018, seeking a preliminary injunction over concerns that the companies would close the transaction “as soon as July 16, 2018” because of the European Commission’s decision to clear the deal. Complaint, FTC v. Tronox Ltd., No. 18-1622, at 2 (D.D.C. July 10, 2018). After an evidentiary hearing, Judge McFadden announced his decision to preliminarily enjoin the transaction until the FTC’s administrative process concluded.
On September 12, Judge McFadden released a redacted version of the decision, which finds that the FTC has shown “that the Tronox-Cristal merger will likely result in undue concentration in the North American chloride-process TiO2 market. It has strengthened this case by showing that the merger will increase already prevalent incentives to engage in strategic output withholding.” Slip op. at 35.
Critically, the Court agreed with the FTC’s market definition—North American chloride-process titanium dioxide—and rejected defendants’ attempts to expand the market to worldwide chloride-process and sulfate-process titanium dioxide because Tronox and Cristal internal documents supported the existence of both a separate chloride-process submarket and a distinct North American regional market. Judge McFadden found that internal documents and the economic realities of the market favored the agency’s market definition.
Though Tronox and Cristal effectively conceded that their merger would turn an already “moderately concentrated” market into a “highly concentrated” market, they insisted that competition from Chinese producers would reduce or negate any perceived anticompetitive effects from increased market concentration. The Judge rejected this nascent competition argument because while “[i]t is no doubt possible, and perhaps inevitable, that competition from [Chinese producers] will someday redefine the North American market,” the “pertinent question here is whether the emergence [of those producers] can be rapid enough” to overcome the anticompetitive effects identified by the FTC. Slip op. at 36-37. In Judge McFadden’s opinion, there was no indication that the entry would be quick or prevent a merged Tronox-Cristal firm from reducing output or increasing prices in the interim.
While Tronox may appeal Judge McFadden’s decision and the outcome of the administrative proceedings is still pending, the preliminary injunction highlights two key points: (1) internal, contemporaneous business documents often show how the parties view the market and can be evidence that supports the definition of a relevant antitrust market; and (2) though entry can be a critical component of any defense, the relative likelihood and speed of that possible entry are indicative of whether it can assuage agency or courtroom concerns.