United States: U.S. Merger Control: A Discussion With V&E About Process And Current Trends

First published in Acquisition International, October 2012

While the U.S. was an early leader in applying antitrust concepts, it continues to be a leader in applying the most modern technology and economics to merger control. U.S. merger control operates very differently than outside the U.S. because the American filing process is much more predictable than the non-U.S. process and the investigatory process is much more document and data intensive than outside of the U.S. We also note that the process is plagued with inefficiencies and burdensome information requests.

The Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act") is the statute that governs merger control in the United States. A filing is required and parties must observe the applicable waiting period if the size of transaction is greater than $272.8 million (all of the statutory thresholds are adjusted annually). Transactions between $68.2 million and $272.8 million are reportable if one party has $136.4 million in net sales or assets and the other party has $13.6 million in net sales or assets. The waiting period is 30 days (15 days in bankruptcy and cash tender offer). If the antitrust authorities require an investigation, they issue a request for additional information and documentary material ("Second Request"). The parties cannot close until 30 days (10 days in bankruptcy and cash tender offer) after they comply with a Second Request.

The process is standard, well established and predictable. Filing parties, the ultimate parent entities of the buyer and seller, must submit, among other things, a transaction description, specific information regarding the revenues of the buyer and target classifying the information using the North American Industrial Classification System (NAICS). In addition, filing parties must provide certain documents, called 4(c) and 4(d) documents. These documents are prepared by or for any officer(s) or director(s) and by investment bankers, consultants or other third party advisors retained for the transaction for the purpose of evaluating or analyzing the proposed acquisition with respect to market shares, competition, competitors, markets, potential for sales growth or expansion into products or geographic markets. Also, any studies, surveys, analyses and reports evaluating or analyzing synergies and/or efficiencies prepared by or for any officer or director for the purpose of evaluating or analyzing the transaction and confidential information memoranda prepared in connection with the transaction must be submitted.

The search for 4(c) and 4(d) documents is potentially the most difficult and unpredictable part of the filing. Private equity and hedge funds may also find it difficult to report revenues for companies in which they hold 5% interest. Unlike outside of the U.S., there is no process for submitting a draft and engaging in pre-filing discussions. Rather, the submission of a filing containing all of the information begins the waiting period. Submitting an incomplete filing may subject the filing parties to civil penalties up to $16,000 per day for each day they are in violation of the HSR Act.

Very few mergers are actually prevented in the U.S. as compared to the number of HSR filings that occur each year. For example, in fiscal year 2011, 1,450 transactions were reported under the HSR Act. The Department of Justice Antitrust Division challenged 20 merger transactions – 13 in U.S. District Courts and 7 others were resolved by the parties either abandoning or restructuring their proposed transaction or changing their conduct to avoid competitive problems. Of the 13 merger challenges brought in U.S. District Court, the Division successfully litigated one, resulting in a permanent injunction against the merger, one was dismissed after the parties abandoned the transaction, and eleven were resolved by consent decrees. Similarly, the Federal Trade Commission challenged 17 transactions, leading to nine consent orders, three administrative complaints (along with attendant requests for preliminary injunctions in federal district courts), and five transactions that were abandoned or restructured after the parties learned of the Commission's concerns. The extent to which the agencies challenge a transaction and the remedies sought to resolve competitive concerns depends on the facts and circumstances of each case and the structure of the specific industry and relevant product markets involved. Notably, the DOJ and FTC issued Second Requests (explained below) in a small percentage of the transactions, 4.1%. The DOJ and FTC combined issued 58 Second Requests during fiscal year 2011 (24 issued by the FTC and 34 issued by the DOJ).

Each industry presents its own challenges to the competition analysis. For example, when industries go through rapid expansion or decline, the competition analysis can be more challenging than when industries are stable. Another challenge to the merger analysis is when consolidation presents both benefits of synergies and risks of anticompetitive pricing. This is one of the difficulties faced by federal agencies today in the U.S. healthcare industry. Further, the merger of firms producing complementary products in the technology industry presents challenges. Such mergers raise questions of the pro- and anticompetitive effects of vertical integration, rapid technological change and the implication of patent protection in the industry. Related to this is the growing focus on the competitive effects on the acquisition of intellectual property rights, particularly patent rights.

The key issue plaguing U.S. merger control continues to be the size, cost and complexity of responding to government requests for information. If after the initial 30 day waiting period, the antitrust agencies are not persuaded a merger does not have anticompetitive effects, they issue a request for additional information and documentary material, generally called a Second Request.

The expansive nature of the Second Request is driven by two factors in our view. First, as merger analysis has become less reliant on presumptions and more fact intensive, the agencies want to gather more information to undertake the required analysis. The second factor is that the federal agencies only have one chance to request information and when parties substantially comply with the Second Request, they need to complete their review in 30 days. Many agency leaders have tried to develop and have implemented systems and processes to streamline the Second Request process, but the review process continues to be dogged by this enormous burden.

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