In response to an announcement by Endocare, Inc. terminating its proposed merger with Galil, Ltd. because of delays in the Federal Trade Commission's (FTC) review of the transaction, several FTC Commissioners took the unprecedented step of issuing contrary statements on June 9, 2009 on the causes for the delayed review. Commissioner Thomas Rosch's statement criticized the Commission’s staff for instituting a “de facto” block of the Endocare-Galil merger. In a counterstatement, Commissioners Pamela Jones Harbour and William Kovacic joined Chairman Jon Leibowitz to defend the Commission’s investigation.
Endocare’s proposed acquisition of Galil would have combined two companies that make and sell products used to provide cryotherapy, a therapeutic treatment for prostate and renal cancer. The proposed merger fell below the $65.2 million threshold that would have triggered the HSR Act’s pre-merger clearance requirements. The lack of an HSR filing does not preclude either the FTC or the Department of Justice (DOJ) from investigating a merger, and in late 2008 the FTC initiated an investigation of the Endocare-Galil transaction. The parties apparently agreed to delay closing their transaction until the FTC completed its review. The companies produced several boxes of documents in response to Commission requests; however, they declined to produce additional materials requested by the FTC staff, citing undue burden and limited resources. After six months, the Commission had neither taken formal action to block the merger nor closed the investigation. As a result, the deal remained unconsummated, due to Endocare and Galil’s agreement with the Commission not to close while the FTC investigation remained open. Eventually, Endocare exercised an option to terminate the deal.
Stating that “[t]he Commission must simply do better,” Commissioner Rosch blamed termination of the Endocare-Galil merger on the Commission’s failure to bring its investigation to a timely close. Although Rosch acknowledged that the parties did not fully comply with the FTC’s requests, he emphasized that, if additional documents were needed, the Commission should have issued a more targeted subpoena or brought a subpoena enforcement action in federal court. Because the stated purpose of the merger was to enable the parties to finance research and development to market cryotherapy for additional types of cancer, Rosch argued that the public interest in permitting the transaction outweighed any risk of undercutting compliance with FTC subpoenas. Moreover, he noted that producers of competing methods of treating prostate and renal cancer would ensure that the merged entity did not price its cryotherapy products at a supra-competitive level.
In contrast, the joint statement of Leibowitz, Harbour, and Kovacic called the Commission’s investigation “diligent, competent, even-handed, and professional.” They argued that the Commission worked with the parties to obtain relevant information without undue burden. In their view, the Commission was unable to determine whether to challenge the merger or permit it to proceed because the parties chose to disclose only limited information. Given the merger’s elimination of head-to-head competition in a critical healthcare technology, Leibowitz, Harbour, and Kovacic contended that “the Commission would not be fulfilling its obligation to protect competition” if it were to close its investigation absent full disclosure. Moreover, although their joint statement acknowledged a “thinner than usual” record for a six-month investigation, based on the limited information available, the Commissioners indicated that the merger likely would have resulted in anticompetitive effects. Permitting the deal to proceed based on “hypothetical, undocumented efficiencies,” they emphasized, would constitute inadequate government enforcement.
These unusual dueling statements provide a unique window into Commission review process for non-reportable transactions. They also illustrate the potential problems that parties may face in a non-reportable transaction if they agree to an open-ended agreement not to close until the Commission’s investigation is concluded. Without the benefits of the statutory deadlines in the HSR Act, parties can be subjected to lengthy and indefinite delays in the event they agree to delay closing without giving agency staff a firm but reasonable deadline to complete their review. Companies contemplating transactions that are not HSR-reportable would be prudent to consider these factors when planning their post-signing actions in response to an agency inquiry.