Constantine & Partners
The U.S. Merger Review Process:
What It Takes to Get It Done
Quickly, Cheaply, and Effectively
by
Gordon Schnell and Matthew Cantor
Constantine & Partners
June 26, 2002
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TABLE OF CONTENTS
•
HSR FILING BASICS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
•
INITIAL AGENCY REVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
•
PRE-FILING ISSUES/ PREMERGER COORDINATION . . . . . . . . . 32
•
4(C) DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46
•
SECOND REQUESTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
•
ANTI-MERGER LAWSUITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
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THE HART-SCOTT-RODINO ANTITRUST
IMPROVEMENTS ACT OF 1976
15 U.S.C. §18a (as amended)
HSR FILING BASICS
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HSR ACT IN BRIEF
Basic Requirement:
• Requires notification filings to FTC and DOJ.
• Requires waiting specified period of time prior
to closing.
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HSR ACT IN BRIEF
Background:
• Became effective September 5, 1978.
• Created in response to the so-called “midnight
mergers.”
• Once transaction closed, it became very
difficult to “unscramble the eggs” and restore
competition to pre-existing levels.
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HSR ACT IN BRIEF
Purpose:
• Provides antitrust enforcement agencies with
the opportunity to review transactions before
they occur and take appropriate preventive
measures.
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HSR REPORTABILITY
• “Size of Parties” Test:
Party A has annual sales or total assets  $10m
Party B has annual sales or total assets  $100m
and
“Size of Transaction” Test:
Value of Transaction Between $50m - $200m
or
• Value of Transaction  $200m
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DETERMINING VALUE OF TRANSACTION
• The value of publicly traded voting securities
is the greater of the “market price” or
“acquisition price.”
• The value of non-publicly traded voting
securities or assets is the “acquisition price,”
or if not determined, the “fair market value.”
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EXEMPT TRANSACTIONS
• Acquisitions of goods in the ordinary course of
business.
• Certain acquisitions of real property.
• Certain transactions which are subject to review by
another government agency.
• Intraperson transactions.
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EXEMPT TRANSACTIONS
• Acquisitions solely for the purpose of investment.
• Acquisitions within 5 years of prior filing not
exceeding next notification threshold.
• Certain acquisitions of foreign assets or voting
securities by U.S. entities.
• Certain acquisitions by foreign entities.
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SECONDARY ACQUISITIONS
Example: A acquires 100 percent of B. B
owns 20 percent of C. A’s acquisition of
20 percent of C will be treated as a separate
transaction.
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HSR FILLING FEE
Fee
Transaction Value
$45k
Between $50m - $100m
$125k
Between $100m - $500m
$280k
 $500m
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WHEN TO FILE
• As soon as an agreement in principle or letter
of intent is reached.
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HSR WAITING PERIODS
Initial Waiting Period:
• 30 days from the date completed filings are
received from both the buyer and seller (15
days for cash tender offers).
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HSR WAITING PERIODS
Early Termination:
• Early termination may be granted at any time
prior to the expiration of the initial 30-day
waiting period.
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HSR WAITING PERIODS
Second Request Waiting Period:
• 30 days from the date the parties have
“substantially complied” with the Second
Request (10 days for cash tender offers).
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COMMENCING THE WAITING PERIOD
• For most transactions, the waiting period starts
as soon as the FTC and DOJ receive completed
filings from both the buyer and seller.
• Failure to pay the appropriate filing fee or
omitting certain information from the filing,
may delay the start of the waiting period.
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INFORMATION REQUIRED
•
Description of Acquisition
•
Documents Filed With the SEC
•
Annual Reports and Balance Sheets
•
4(c) Documents
•
Dollar Revenues By Industry
•
Information on Subsidiaries, Shareholders, and Company
Holdings
•
Information on Buyer/Seller Overlap
•
Information on Prior Acquisitions
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CONFIDENTIALITY
• All of the information submitted with the HSR
filing will be kept confidential and is exempt
from FOIA.
• Can be used by the government in an
administrative or legal action.
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FAILURE TO FILE
• Closing a reportable transaction without filing
and waiting is a violation of Section 7 of the
Clayton Act and subject to civil penalties of up
to $11,000 per day.
• Violations may be found even after agency
“clearance” if agency later discovers that
certain documents or information were omitted
from filing.
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INITIAL AGENCY
REVIEW
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INITIAL FTC REVIEW
• FTC Premerger Notification Office has administrative
responsibility for the HSR program and reviews all
filings for technical compliance.
• An FTC staff attorney or compliance specialist
reviews transaction for technical compliance and
initial antitrust review.
• For minor deficiencies, the waiting period is not
interrupted. For significant deficiencies, the filing
may be “bounced.”
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INITIAL FTC REVIEW
• FTC reviewer prepares short summary of the deal
and a recommendation as to whether an investigation
should be opened.
•
Merger Screening Committee (made up of senior officials
of the Bureaus of Competition and Economics) meets
weekly to review filings and recommendations.
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INITIAL DOJ REVIEW
• Filings received by the Premerger Notification Unit
of the Office of Operations of the Antitrust Division.
• The filing is checked for completeness and any
deficiencies are reported to the FTC.
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INITIAL DOJ REVIEW
• Filing is assigned to relevant litigation and economic
sections. After their substantive review, they request
from the Director of Operations and Merger
Enforcement to open an investigation, or recommend
no further review.
• Decision is typically made within 3 to 5 days of
receipt of the filing by the assigned litigation section
or field office.
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ABANDONED HSR CLEARANCE PROCEDURE
• The agencies will not contact the parties or any thirdparties until the investigation has been “cleared” to
one of the agencies.
• Clearance issues arise only if both agencies want to
investigate the transaction.
• Traditionally, clearance has been based on industry
expertise and prior contact with the parties.
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ABANDONED HSR CLEARANCE PROCEDURE
• New clearance procedure strictly divided the
industries over which each agency would have
reviewing authority.
• Recently abandoned due to threat from Sen. Fritz
Hollings (D.-S.C.) to cut agency funding.
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ABANDONED HSR CLEARANCE PROCEDURE
FTC
Airframes, Autos and Trucks; Building Materials;
Chemicals; Computer Hardware; Energy; Healthcare;
Industrial Gases; Munitions; Grocery Stores; Retail
Stores; Pharmaceuticals; Biotechnology; Professional
Services; Satellites; Textiles.
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ABANDONED HSR CLEARANCE PROCEDURE
DOJ
Agriculture; Avionics and Defense Electronics; Beer;
Computer Software; Cosmetics; Financials Services;
Glass; Health Insurance; Industrial Equipment; Media
and Entertainment; Metals and Mining; Naval
Defense Products; Photography and Film; Pulp, Paper,
and Timber; Telecommunications; Travel and
Transportation; and Waste.
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POST CLEARANCE INVESTIGATIONS
• Once clearance authority is determined, the
appropriate agency will contact the parties.
• Information typically requested:
– Business Plans, Marketing Plans, Sales and Product Data.
– Industry Studies and Consultants Reports.
– List of Each Party’s Largest Customers, Competitors.
•
May want to speak with the parties’ business people as
well as third-party customers, suppliers, and competitors.
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AVOIDING A SECOND REQUEST
• Weigh the balance of providing unsolicited
information with the risk of raising issues and
concerns.
• Meet with the agencies early and often.
• Offer up company executives and customers.
• Cooperate with the government.
• The “Merger Review Process Initiative.”
• The “Pull and Trigger.”
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PRE-FILING ISSUES/
PREMERGER CORDINATION
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ANTITRUST “WALK-AWAY”PROVISIONS
• Provides parties to a merger agreement with
the unilateral right to abandon the deal upon
the occurrence of one or more HSR triggering
events.
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ANTITRUST WALK-AWAY PROVISIONS
CASE STUDY
The Abandoned United Airlines/US Air Merger
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OTHER ANTITRUST CONTRACTUAL PROVISIONS
• Cooperation Provisions
• Reasonable Efforts Provisions
• Divestiture Provisions
• Penalty Provisions
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PREMERGER COORDINATION
Gun Jumping:
• Transferring the incidents of beneficial ownership
from the seller to the buyer prior to HSR “clearance.”
Premerger Information Exchanges:
• Exchanging competitively sensitive information prior
to HSR “clearance.”
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PREMERGER COORDINATION
Standard:
• Rule of reason -- is the conduct reasonably necessary
for the parties’ evaluation, negotiation, and closing of
the deal.
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RISKS
• Increased Scrutiny
• HSR Delay
• Legal Challenge
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CONSIDERATIONS
• Competitive sensitivity of deal
• Competitive sensitivity of conduct
• Justification for conduct
• Likelihood of deal collapsing
• Timing and frequency of exchange
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PREMERGER COORDINATION CASE STUDY
United States v. Input/Output, Inc.
• DOJ sued claiming that the parties’ premerger
coordination activities constituted illegal “gun
jumping.”
• The parties settled for a fine of $225,000,
the full amount of penalties authorized by the
Act ($11,000 per day).
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PREMERGER COORDINATION CASE STUDY
United States v. Computer Associates, Int’l.
• DOJ sued claiming that the parties’ premerger
coordination activities constituted (i) price
fixing under Section 1 of the Sherman Act, and
(ii) illegal gun-jumping under the HSR Act.
• The parties settled for a fine of $638,000.
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“JUMPING THE GUN” PRACTICE POINTERS
• No agreements which allow buyer to exercise
influence or control over the seller.
• No agreements which are inherently anticompetitive.
• Limit meetings to those necessary for due diligence.
• Do not modify competitive behavior.
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“JUMPING THE GUN” PRACTICE POINTERS
• Do not refer common customers to one another.
• Delay discussion relating to integration as long as
possible -- the closer to closing the better.
• Limit discussions relating to post-merger integration
issues to that which is absolutely necessary and to
those individuals who will be directly involved.
• Do not implement integration plans until after closing.
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INFORMATION EXCHANGE PRACTICE POINTERS
• Limit the information exchange to material reasonably
necessary to the buyer’s due diligence review.
• Limit the information exchange to a one-way
exchange from seller to buyer.
• Limit the information exchange to a one-time
exchange.
• Do not exchange information after a final agreement
and price has been reached.
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INFORMATION EXCHANGE PRACTICE POINTERS
•
Limit the number of employees who have access to the
information.
•
Do not share information about current customers, pricing
and costs; marketing studies; and strategic plans.
– Any competitively sensitive information that is provided
should be historical or in aggregate form.
– Use outside lawyers or accountants to review competitively
sensitive information.
•
Enter into a confidentiality agreement which limits use of
the information to evaluating the proposed transaction.
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4(C) DOCUMENTS
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4(C) DEFINITION
“all studies, surveys, analyses and reports
which were prepared by or for any
officer(s) or director(s) . . . for the purpose
of evaluating or analyzing the acquisition
with respect to market shares, competition,
competitors, markets, potentials for sales
growth or expansion into product or
geographic markets . . .”
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HOBSON’S CHOICE
• Produce too little - risk regulatory backlash
• Produce too much - risk raising questions or
concerns about deal
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4(C) DOCUMENT CASE STUDY
FTC v. Hearst Corp.
• The FTC sued claiming that Hearst duped the
antitrust authorities into countenancing a
merger to monopoly.
• Hearst agreed to pay a $4 million fine, divest its
Medi-Span business, and disgorge $19 million
in profits.
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4(C) DOCUMENT PRACTICE POINTERS
• Perform a thorough search.
• When in doubt, don’t leave it out.
• Don’t forget e-mails.
• Search for broad categories of documents.
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4(C) DOCUMENT PRACTICE POINTERS
• Don’t come up empty.
• Use outside counsel as a screen.
• Don’t be afraid to seek informal government
assistance.
• Immediately report any inadvertently withheld
documents.
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4(C) SCREENS -- LANGUAGE TO AVOID
• Do not use the term “dominant” to describe the
company generally, its goals, or its presence in
any industry.
• Do not use the term “market power” to
characterize the company’s strength in any
industry.
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4(C) SCREENS -- LANGUAGE TO AVOID
• Do not use the term “leverage” to characterize
the company’s ability to operate in one industry
because of its strength in another industry.
• When describing the company as “the
leading,” “the most,” “the largest,” or “the”
anything, generally use the qualifier “one of
the.”
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4(C) SCREENS -- LANGUAGE TO AVOID
• Do not use the term “market” to describe any of the
businesses in which the company competes. Instead,
use the terms “business,” “industry,” “segment,”
“category,” or “area.”
• Do not use terms such as “crush,” “eliminate,” “kill,”
“destroy,” “overpower,” when discussing the impact
of the transaction on competition.
• Do not use the terms “entrench.”
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4(C) SCREENS -- PREVIOUS FAUX PAS
The transaction will . . .
•
“put us in position to kill [our competitor] ...”
•
“eliminate [our competitor] as a viable threat ...”
•
“allow us to gain an unfair competitive advantage ...”
•
“make it very difficult for [our competitor] to
compete ...”
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4(C) SCREENS -- PREVIOUS FAUX PAS
•
“obviously undergo significant antitrust review by the
government ...”
•
“increase our ability to secure favorable pricing ...”
•
“catapult us into the position of market leader ...”
•
“provide us with more flexibility in our pricing
decisions ...”
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SECOND REQUESTS
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SECOND REQUESTS
•
Issued pursuant to 15 U.S.C. § 18a (e), which states that the
FTC or DOJ “may, prior to the expiration of the 30-day waiting
period . . .,” require the submission of additional information or
documentary materials relevant to the proposed acquisition,
from a person required to file” a pre-notification form.
•
Essentially “massive” document request and detailed
interrogatories.
– Generally, requires interview of all key strategists, financial
officers, executives, attorneys and agents of the firm.
– Could amount to search of tens, if not hundreds, of persons.
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SECOND REQUESTS -- HOW FREQUENTLY ISSUED?
• In FY 2000, 4926 HSR pre-merger filings
made.
• In FY 2000,
– only 43 Second Requests issued by the FTC.
– only 55 Second Requests issued by the DOJ.
• As a matter of course, less than 5% of merger
cases result in the issuance of Second Requests.
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OBJECTIVES IN ISSUING SECOND REQUESTS
•
Gather information relevant to merger investigation.
–
–
–
–
–
Information on pricing of relevant service or product
Information on scope of relevant market
Market share information
Documents relating to analysis of competition
Information relevant to product output
•
Extend HSR “waiting period” in order to have enough time to
complete review of merger in a thoughtful and proper manner.
•
NOT TO PUNISH MERGING PARTIES IN ORDER TO
RUN UP COSTS!!!
– Antitrust enforcers will be sensitive to over burdening parties, if parties
can demonstrate that compliance with request for particular information
will be problematic.
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SECOND REQUESTS -DEALING WITH ANTITRUST ENFORCERS
•
Antitrust enforcers are public servants and are reviewing the
proposed deal to see if it will likely result in consumer
harm.
•
Antitrust enforcers -- at least in investigation stage -- should not
be treated as adverse parties representing private interests.
– Motives of antitrust enforcers are different than motives of private
litigants, which, for example, may be to increase costs in order to gain
favorable settlement.
•
Do not create “enemy” of antitrust enforcers even if they are
being unreasonable.
– Remember to be courteous in negotiations.
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HIERARCHY OF FEDERAL ANTITRUST ENFORCERS
•
Staff attorneys at DOJ/FTC will be persons given day-to-day responsibilities
for merger review.
– May be junior lawyer.
– Staff will recommend how to proceed with investigation to superiors, who are
responsible for deciding to issue Second Request.
– Staff will, if Second Request is issued, draft closing memorandum that will
recommend what type, if any, action should be taken.
•
Staff attorneys will report to senior attorneys, e.g, Section Chiefs, DOJ
Director of Merger Enforcement, FTC Chief of Bureau of Competition.
– These are persons who will decide whether Second Request should be issued.
•
Ultimate responsibility for determining federal agency action will lie with
executive personnel at antitrust agencies -- FTC Commissioners, AAG in
Charge of Antitrust Division.
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TECHNIQUES FOR STEMMING OFF
SECOND REQUEST
•
Be credible - Do not make statements that certain “high ranking”
executives cannot be searched because they are “too busy.”
•
Contact enforcers if transaction is noted by media.
– Risky: could make enforcers interested, but probably good idea if
transaction will likely raise competitive concerns.
• signals willingness to work with antitrust enforcers on deal
• may want to do if merger will lead to concentrated market or there
are problematic 4(c) documents
•
Provide voluntary information to antitrust enforcers if requested.
– Provide information quickly because of “waiting period” constraints.
– Request confidentiality protection for any competitively-sensitive or
proprietary information furnished voluntarily.
– Do not “dump boatloads” of information, but provide that which is most
relevant to antitrust enforcer’s investigation.
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TECHNIQUES FOR STEMMING OFF
SECOND REQUEST
•
Provide presentation to antitrust enforcers regarding
transaction during “waiting period” if you assess that a
presumption might arise that the transaction will have
anticompetitive aspects.
– May wish to draft white paper during negotiation stage.
– May wish to provide economist studies (and backup materials).
•
Be willing to extend HSR “waiting period” if enforcers
need more time to review merger or to digest voluntary
information provided.
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TYPE OF VOLUNTARY INFORMATION
TYPICALLY REQUESTED
• Information may be publicly available or proprietary.
– Market Studies/Share Data
– Strategic Plans
– Financial Reports
– Top Ten Customer Names and Contact Information
– Organizational Charts/Personnel Directories
– Historic Rate Information
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ISSUANCE OF SECOND REQUEST
• Generally, Second Request will be issued after
conference with parties and enforcers where
discussion will take place re:
– substance of investigation
– corporate structure (e.g., subsidiaries held by ultimate
parent entity and affiliates)
– major players in company and their responsibilities
• Once Second Request is received, it creates a duty to
preserve relevant information and documentation
(which may be in hard copy or electronic form) held
by company.
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ELECTRONIC DOCUMENTS
• All Second Requests, which are based on Model
Second Request adopted by FTC and DOJ, request
documents held in electronic form.
– Word processing documents
– Electronic spreadsheets
– e-mail!! (see Bill Gates e-mail used by DOJ in Microsoft
case).
• If Second Request is broad enough, parties may wish
to hire vendor who can assist with collection of
electronic materials.
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TECHNIQUES FOR NEGOTIATING SECOND REQUESTS
• Narrow Defined Terms
– Definition of “Company” -- Second Request may call
for information from subsidiaries or affiliates that are
wholly irrelevant to the transaction.
– Ask antitrust enforcers to agree to custodian list.
• Furnish personnel directory with custodian titles.
• Explain to DOJ why various persons in company
should not be searched, i.e., they are not relevant to
investigation.
• Even though senior executives may not have much
paper, realize that they will likely not be excluded
from search.
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TECHNIQUES FOR NEGOTIATING SECOND REQUESTS
• Demonstrate why certain requests are
–
–
–
–
unclear
overbroad
unduly burdensome
irrelevant to investigation
• If parties are prepared to agree to certain relief,
such as divestiture of certain assets, parties may
wish to use this offer to “cut down” Second
Request.
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APPEAL PROCEDURES
• Recently enacted.
• Appeal to executive appointed to hear Second Request
appeals.
– DOJ -- Chief of Legal Policy
– FTC -- General Counsel
• Appeal is made by letter request. Agencies must
respond within time period (about ten days). Letter
must demonstrate problem with various requests.
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DOCUMENTS -- HOW TO PRODUCE
•
Review documents to see if protected by privilege
– Attorney/Client Communication
– Attorney Work Product - Materials prepared in anticipation of litigation
– Joint Defense/Common Interest Privilege
•
Bates Stamp
– If extended investigation, may wish to code documents electronically for
privilege, subject matter, and to which request documents are responsive.
– Electronic coding requires scanning of documents into central database,
such as IPRO.
•
Manner of production
– Hard copy or electronic -- check with DOJ/FTC staff re this.
• If coding documents, electronic production may be less costly and
easier.
– Rolling production or send all documents on completion of review.
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SIGNALING SUBSTANTIAL COMPLIANCE
• Certificate of Substantial Compliance must be
executed and forwarded.
– Must be executed by person “responsible” for ensuring
compliance. Usually in-house attorney or compliance
officer.
• Enforcers generally accept certificate, but may
try to “bounce” it if materials are dumped
upon them and there is reason to believe that
sufficient amounts of responsive materials not
provided.
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CONFIDENTIALITY OF MATERIALS
•
Under 15 U.S.C. § 18a (h) no materials provided during Second
Request process can be disclosed by antitrust enforcers unless:
– used during investigation with third-party (such as at deposition)
– used in the context of an anti-merger lawsuit
– can be provided to Congress by statute
•
Materials can be provided to certain states under Merger
Compact, if parties agree.
–
•
If parties do not agree, states could issue independent CID for materials,
which can run up cost of merger investigations.
Regulatory agencies may request materials. Parties are not
under any obligation to share materials with other regulatory
agencies. This is a strategic call.
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ANTI-MERGER
LAWSUITS
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ANTI-MERGER LAWSUITS
•
Brought pursuant to Section 7 of the Clayton Act,
15 U.S.C. § 18
•
Statute states: “No person engaged in commerce or in any
activity affecting commerce shall acquire, directly or indirectly,
the whole or any part of the stock or other share capital and no
person subject to the jurisdiction of the Federal Trade
Commission shall acquire the whole or any part of the assets of
another person engaged also in commerce or in any activity
affecting commerce, where in any line of commerce or in any
activity affecting commerce in any section of the country, the
effect or such acquisition may be substantially to lessen
competition, or to tend to create a monopoly.”
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WHO HAS STANDING TO BRING
AN ANTI-MERGER LAWSUIT?
• Federal Antitrust Authorities
– Full FTC commission must vote on whether to bring lawsuit
first.
– Decision made by AAG of Antitrust Division.
• State Attorneys General
– By statutory parens patriae authority, i.e., on behalf
of the natural person citizens of the state: 15 U.S.C. §15(c).
– By common law authority, i.e., on behalf of general welfare
and economy of state.
• Private parties -- under Section 4 of the Clayton Act
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PRIVATE PARTY STANDING
•
Issue over whether private parties have standing to sue
during the pendency of a government review.
•
Most courts have allowed for these suits, but recent
Seventh Circuit decision dismissed antitrust suit because
Federal Communications Commission was engaged in a
competition review of transaction. South Austin Coalition
Community Council v. SBC Communications, Inc.,191
F.3d 842 (7th Cir. 1999) (Eastbrook, J.)
•
Solution may be to allow such suits and stay them until
antitrust enforcers have finished reviewing the deal.
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SECTION 7 SUIT STANDARDS
• Merger must likely “substantially lessen
competition” or “tend to create a monopoly”
in a relevant market.
• In other words, critical question is whether
merger will lead to the creation of market
power, e.g., the power to raise price or reduce
output. See United States v. E.I. Du Pont de
Nemours & Co.,351 U.S. 377 (1956)
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DEFINING RELEVANT MARKETS -PRODUCT MARKET
• 1997 DOJ/FTC Horizontal Merger Guidelines -informs prosecutorial discretion of enforcers
• 1993 Horizontal Merger Guidelines of the National
Association of Attorneys General -- likewise informs
prosecutorial discretion.
• Most courts will defer to the guidelines. See F.T.C.
v. H.J. Heinz & Co., 246 F.3d 708 (C.A.D.C.2001)
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DEFINING RELEVANT MARKETS -PRODUCT MARKET
• Test: Market consists of all products that are
sufficiently substituted for core product in light of
small, but significant, non-transitory price increase.
– If price for product A is raised by 5%, all products that are
sufficiently substituted for that product are deemed to be in
relevant market.
– All products that constrain the price of the core product are
in the relevant market.
– In other words, “[t]he outer boundaries of a product market
are determined by the reasonable interchangeability of use
[by consumers] or the non-elasticity of demand between the
product itself and substitutes for it.” Brown Shoe v. United
States, 370 U.S. 294 (1962).
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DEFINING RELEVANT MARKETS -GEOGRAPHIC MARKET
• Test for geographic dimension of market
contained in Guidelines.
• Test: The region includes all areas that
consumers would go to receive substitute
products in light of a small, but significant,
non-transitory price increase for the core
product.
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MARKET DEFINITION -- GENERAL RULES
• The broader the product dimension or regional
dimension of the relevant market, the less likely it is
that antitrust authorities or private parties will be able
to prove that the merger will lead to anticompetitive
effects.
• Best way to terminate review of transaction is to
demonstrate that, even assuming a narrow market, the
merger will not lead to the creation of market power.
– Similar to summary judgment standard, no issue of material
fact over market definition.
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DEMONSTRATION OF MARKET POWER -HHI CALCULATIONS
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Herfendehl-Hierschman Index (HHI) -- measure to determine whether market will
become concentrated as a result of merger.
1.
2.
3.
4.
Define scope of market.
Determine share of all players in market.
Square shares.
Calculate totals
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If HHI is over 1800 with a change in HHI from pre-to-post merger of over 100,
merger is presumed to create or enhance marketpower of the merged entity.
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If HHI is between 1000 and 1800 and there is a charge of 50 (but less than 100) of
pre-to post merger HHI, the merger is said to raise significant competitive concerns.
•
This does not mean that antitrust enforcers will automatically challenge mergers that
meet these thresholds. In recent years, Antitrust enforcers have generally not
challenged mergers that increase the HHI by less than 100. Antitrust enforcers will
consider “defenses” in its using their prosecutorial discretion and courts will
consider certain defenses as a matter of law.
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MERGER DEFENSES
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Failing firm defense -- See Citizens Publishing Co. v. United
States, 394 U.S. 131, 138-39 (1969).
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–
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The firm must be in “imminent danger” of failing.
The firm must have no realistic prospect for a successful reorganization.
There is no viable alternative purchaser that poses less anticompetitive
risk.
•
Barriers to entry are low. If entry is timely (within two
years), likely and sufficient in magnitude, merger may be
permissible. See Section 3.0 of Federal Merger Guidelines.
•
“In the absence of significant barriers, a company probably
cannot maintain supra-competitive pricing for any length of
time.” United States v. Baker- Hughes, Inc., 908 F.2d 981
(A.D.C. 1990).
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MERGER DEFENSES
•
Efficiency defense. Economies of scale will be created by
the merger which will lead firm to charge lower costs.
– Supreme Court never recognized efficiencies defense, but is
product of federal and state merger guidelines, which inform
prosecutorial discretion.
– Efficiency defense recognized by lower courts, including Court of
Appeals of the District of Columbia in FTC v. H.J. Heinz & Co.
•
Merger will not lead to creation of market power - rebut
presumption through economic evidence.
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F.T.C. v. H.J. HEINZ & CO., 246 F.3d 708 (C.A.D.C. 2001)
•
Heinz and Beech-Nut attempt to merger to “better compete” against Gerber.
•
Lower court refuses to enjoin merger because it holds that efficiencies of
scale achieved by Heinz and Beech-Nut will lead to consumer benefit.
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–
–
•
economies of scale
integration of operation
use of better recipes
Appellate court reverses.
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–
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Adopts as law merger guidelines test for evaluating merger
• first, HHIs to see if merger is presumed to be anticompetitive, etc.
Recognizes defense when “extraordinary efficiencies” proven
States that defendant failed to prove extraordinary efficiencies in this regard.
Extraordinary efficiencies standard may not apply to all mergers -- Heinz/BeechNut merger was a merger to duopoly (extreme market concentration).
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FEDERAL TRADE COMMISSION v. LIBBEY, INC.,
2002 WL 984209 (D.D.C., April 22, 2002)
• After Section 7 litigation, merger agreement is
amended to alleviate competitive concerns
• Court did not require new HSR filing and did not give
FTC time to investigate whether merger agreement
was anticompetitive.
• FTC was “forced” to continue suit over amended
agreement or give up suit and allow for potentially
anticompetitive result.
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RELIEF IN SECTION 7 SUIT
• If brought before merger, generally parties
will seek preliminary and then permanent
injunction.
• If brought after merger, can sue for treble
damages.
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