On September 26, the DOJ challenged Parker-Hannifin’s $4.3-billion consummated acquisition of Clarcor, serving as a reminder that receiving HSR clearance does not immunize transactions from being challenged, even after closing.

Background

The transaction, which the parties announced on December 1, 2016, was reportable under the Hart-Scott-Rodino Act. Parker’s public filings indicated that the statutory waiting period under the Act expired on January 17 and that the DOJ had not issued a Request for Additional Information and Documentary Materials (commonly referred to as a second request). The timing also suggests that the DOJ did not open a preliminary investigation in the initial 30-day waiting period, since there would have been little opportunity to contact customers. The parties completed their transaction on February 28, 2017.

The DOJ opened an investigation, reportedly in response to customer complaints, after the initial 30-day waiting period had expired and ultimately filed a civil antitrust suit in federal district court seeking a divestiture and any other action necessary to restore Clarcor’s competitive significance in the qualified aviation fuel filtration marketplace.

Complaint and Challenge

According to the DOJ’s Complaint, Parker and Clarcor were the only two domestic suppliers of qualified aviation fuel filtration systems and fuel filtration elements. The transaction allegedly eliminated their head-to-head competition and effectively created a monopoly in these markets in the United States. The DOJ concluded that the merger threatened to result in “higher prices, reduced innovation, less reliable delivery times, and less favorable terms of service for the American businesses and military that depend on these critical products.”

To restore competition and restrain the anticompetitive effects resulting from the transaction, the DOJ is seeking a divestiture of tangible and intangible fuel filtration assets sufficient to recreate the competition that existed in the fuel filtration markets prior to Parker’s acquisition of Clarcor.

The Complaint refers to internal company documents that, according to the DOJ, reveal the merging parties knew that the transaction raised serious antitrust concerns. In a document created in the weeks before the transaction was announced, a Parker executive identified “the notable area of overlap” between the parties in “ground aviation filtration” and asked whether the company should be “forthcoming” about this “aviation antitrust potential.” In the same document, the executive said the company was preparing for a potential divestiture of Clarcor’s aviation fuel filtration business.

Notably, the markets that are being challenged represent a relatively small part of the overall deal: while the parties’ combined 2016 revenues exceeded $13 billion, the combined annual revenues for the fuel filtration businesses under inquiry are less than $20 million, according to a Parker press release.

Key Takeaways

The DOJ’s challenge of Parker/Clarcor highlights a number of important considerations that parties contemplating a transaction should keep in mind, including the following:

  • The DOJ and the FTC can and do challenge consummated deals, no matter how small the businesses in question may be.

  • The expiration of the HSR waiting period does not immunize a deal from investigations or challenges (although challenges of reportable deals post-closing are still very rare).

  • There is no statute of limitations on government actions challenging mergers.

  • Parties should be aware of the importance of customer satisfaction and document creation—both before and after closing—which can affect the likelihood, length and outcome of any regulatory review.