In October, the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice (DOJ) issued their Hart-Scott-Rodino (HSR) Annual Report for Fiscal Year 2009, covering the period between October 1, 2008, and September 30, 2009. Notably, there were only 716 transactions reported under the HSR Act in FY 2009, a drop of 59% from the previous 12-month period. Given the state of the economy and the banks’ tightening of credit, as well as the increased HSR threshold levels (the lowest deal-size threshold in 2009 was $65.2 million), it is no surprise that there were fewer HSR-reportable deals during that fiscal year. However, the percentage of transactions resulting in the issuance of a Second Request[1] was 4.5% — the highest point in the last decade. Given the current administration’s tougher stance on antitrust enforcement, as well as revisions and proposed changes to merger review guidelines and premerger filings, respectively, an increase in Second Requests in FY 2009 will probably not be a one-off situation. The factors that make the current merger review landscape ripe for more challenges to transactions between competitors are discussed below.

Fewer HSR Filings. With fewer HSR filings to consider, the staff attorneys at the antitrust agencies have had more time to analyze transactions that may, at least on the face of the HSR form, appear to have potentially adverse competitive effects. The two items on the HSR form that are most often red-flagged by the agencies’ staff attorneys are: (i) overlaps between the parties in North American Industry Classification System (NAICS) codes describing their lines of business, and (ii) documents produced in response to Item 4(c) of the HSR form. Item 4(c) requires the production of documents that analyze or evaluate the transaction with respect to certain topics, including markets, market shares, and competition. Provocative “4(c) documents,” in particular, can precipitate an antitrust merger investigation that might otherwise never have occurred by shaping the government’s initial thinking about the proposed deal.

Changes to the Antitrust Merger Review Process. In addition to the increased time that staff attorneys have had to spend on each HSR filing, changes to the Horizontal Merger Guidelines (the “Guidelines”) can also be expected to result in more merger challenges.

The revised Guidelines, which describe how the FTC and DOJ analyze mergers and acquisitions between competitors, were issued in August of 2010. The new Guidelines eliminate the formulaic approach to merger analysis where the first step was to define a market, and the second step was to calculate market shares. Instead, the revised Guidelines establish a more holistic approach to merger review, using a variety of economic theories (some more novel than others) to determine a transaction’s potential competitive effects. This more flexible analytical approach likely will result in more “battle fronts” for antitrust counsel to defend. These additional battle fronts may make it more difficult for antitrust counsel to assuage all of the government’s concerns regarding a deal’s prospective adverse effects during the first 30 days of the HSR review period, thereby possibly leading to the issuance of more Second Requests.

Proposed Revisions to the HSR Protocol. The FTC also issued proposed changes to the HSR form and rules in August. As part of these revisions, the FTC introduced Item 4(d) which, in part, calls for the production of documents that were prepared by the merging parties’ investment bankers, consultants or other third-party advisors over a two-year period that contain content related to certain topics like market shares, competition, and markets.

This proposed addition to the HSR form would significantly expand the scope of documents that merging parties must submit with their filings. Unlike the rule regarding 4(c) documents, there is no requirement that potential 4(d) documents must have been prepared to evaluate or analyze the deal in question. Rather, 4(d) documents need only “reference” the to-be-acquired business. Documents that could potentially fall within the scope of Item 4(d) include investment banker pitch-books, market research studies, financial investor analyses, and other ordinary course business documents having nothing to do with the deal at hand. The more “competitive analysis”-type documents that are filed with the HSR form, the greater the chances that a document will be produced that perceptively may mischaracterize the potential competitive effects of a transaction. Moreover, such ordinary course documents are given greater probative weight than advocacy materials and, thus, may significantly influence a staff attorney’s review of the deal.

Another proposed change to the HSR form would require an acquiring person to report not only its own competitive overlaps with the seller, but also those overlaps between the buyer’s “associates” and the seller. The newly defined term “associates” includes: general partners of a limited partnership; other partnerships that share the same general partner; other investment funds whose investments are managed by a common entity; and investment advisors of a fund. The FTC suggested this change because staff attorneys did not believe the antitrust agencies were getting a clear picture of all of the potential antitrust ramifications in certain transactions, particularly those involving investment funds and limited partnerships as acquiring entities. Thus, not only will the agency staff be concerned with potential overlaps in product and geographic markets of the buyer and the seller, but staff attorneys may also investigate overlaps between buyer’s associates and the seller. These “side shows” could occupy precious time and resources during the initial 30-day waiting period, making a Second Request more likely.

Conclusion.While not as many deals are currently being reported under the HSR Act, the threat of an investigation for deals between competitors is more viable than ever. This is especially so when the staff attorneys have more time to spend per each filing, and when damaging documents exist. Clearing a merger between competitors within the initial 30- day waiting period becomes even more difficult when, in addition to the foregoing, the antitrust agencies adopt a more flexible approach to merger analysis, consider novel economic theories of adverse competitive effects, review a greater number of competitive analysis documents, and analyze competitive overlaps not only between the merging parties, but also between the seller and buyer’s “associates.” The FTC and DOJ effectively have created a “perfect storm” for the issuance of more Second Requests and, consequently, have placed a greater premium on early antitrust risk assessment and merger defense preparation.