Even if the parties determine that a proposed transaction is not subject to the requirements of the Hart-Scott-Rodino Antitrust Improvements Act (the “HSR Act”),1 the parties should take note of the recent activities and current views of agency staff regarding investigations of non-reportable transactions. Almost 20 percent of merger investigations opened by the Department of Justice (“DOJ”) between 2009 and 2013 related to non-reportable transactions.
DOJ has stated that non-reportable transactions can have a significant impact on consumers and competition, including, for example, transactions that:
- pose a significant risk of antitrust harm to consumers in local or regional markets;
- threaten the loss of competition in a narrow product market but with broader impact; or
- involve a relatively small transaction with a key input to a downstream product.
In recent remarks to the Institute for Consumer Antitrust Studies, Leslie C. Overton, Deputy Assistant Attorney General for Civil Enforcement at the DOJ Antitrust Division, warned that “[m]erging parties should assume that, even if no HSR filing is required, a deal that presents competitive concerns is unlikely to escape agency attention.”
Agency personnel maintain a watchful eye over U.S. industries, interact with key contacts in those industries, and closely monitor trade publications and other news so that they can identify non-reportable transactions that may pose a significant threat to competition. Once they identify a transaction for review, DOJ and the Federal Trade Commission (“FTC”) apply the same established antitrust law and principals that apply to reportable deals in order to determine whether the transaction may substantially lessen competition.
Recent Investigations of Non-reportable Transactions
United States v. Bazaarvoice (N.D. Cal. Jan. 8, 2014)2
In a recent case arising out of the acquisition of PowerReviews by Bazaarvoice, Inc. - a non-reportable transaction consummated in 2012 and later challenged by DOJ - the U.S. District Court for the Northern District of California confirmed that the same antitrust principals under Section 7 of the Clayton Act that apply to reportable transactions also apply to non-reportable, consummated deals.
Holding that Bazaarvoice violated Section 7 when it acquired its only serious competitor in a $168 million non-reportable merger under the HSR Act, the court held that DOJ had the right to a court order forcing Bazaarvoice to unwind the deal. DOJ had argued that the merger was anticompetitive based in part on emails and other comments from Bazaarvoice’s top executives indicating that they believed their company’s acquisition of its competitor would allow Bazaarvoice to dominate the market and raise prices.
In that case, the court also noted that the lack of post-merger anticompetitive effects is not a permissible defense to a Section 7 challenge; this decision supports DOJ and FTC’s position that a consummated merger may be anticompetitive even if post-acquisition effects cannot yet be observed. On the other hand, the agencies continue to afford substantial weight to post-acquisition evidence of anticompetitive effects and will appropriately credit otherwise relevant and reliable post-acquisition evidence - e.g., actual competitor entry post-merger - that is not arguably subject to manipulation by the merged firm.
United States v. Heraeus Electro-Nite (D.D.C. 2014)3
Earlier this year, DOJ announced that it and Heraeus Electro-Nite Co. LLC had agreed to a settlement under which the company would divest certain assets acquired in 2012 from Midwest Instrument Company Inc. (“Minco”) to Keystone Sensors LLC, another sensor manufacturer created to encourage competition in the market for sensors used in steel manufacturing. In a simultaneously-filed complaint filed with the District Court for the District of Columbia, DOJ alleged that Heraeus’s completed (and non-reportable) acquisition of Minco significantly reduced competition in the sale and service of the single-use sensors and instruments used to manufacture steel products. On April 7, the district court approved the parties’ settlement, eliminating the antitrust issues in the suit.
Although the $42 million Heraeus-Minco deal was not reportable under the HSR Act, DOJ alleged that the acquisition eliminated head-to-head competition between the companies and created a “near monopoly” in the relevant market in violation of the Clayton Act. As part of the settlement, Heraeus must notify DOJ in advance before pursuing any future acquisitions in the United States, whether or not the acquisitions meet the reporting thresholds under the HSR Act. This challenge by DOJ, in particular, should serve as a cautionary tale to any companies who might think that a non-reportable transaction in a relatively narrow market will escape regulatory scrutiny.
Focus on Parties’ Documentation Relating to an Acquisition
DOJ will continue to place significant weight on pre-merger business records and communications of the merging parties and other industry participants, even in an investigation of a completed transaction. As stated above, in Bazaarvoice, DOJ relied on emails, memos, and presentations created by the company’s senior executives prior to the transaction to demonstrate that pre-merger competition had resulted in lower prices and increased innovation and, importantly, that the goal of the merger was to eliminate competition. Similarly, the agencies will appropriately credit normal course pre-merger business records that tend to substantiate a merged firm’s defenses. Companies currently considering or implementing a transaction - reportable or not - should always record in writing the procompetitive aspects of their deal as well as think carefully about how they plan, communicate, and implement the transaction.
Suggested Approach and Strategy
For companies considering or implementing non-reportable transactions that may present competitive concerns, self-reporting and early engagement with the agencies is extremely important. As noted by Overton in her recent remarks:
- Company executives and their lawyers should take antitrust laws and issues seriously, even in the context of non-reportable transactions.
- If a proposed transaction does involve potential antitrust issues, parties should approach DOJ before closing in order to facilitate investigation and, if needed, discuss the appropriate remedy to eliminate any anticompetitive effects.
- Constructive engagement with DOJ is important, and DOJ is prepared to work with parties to achieve smooth and efficient investigation.
- Companies would do well to think proactively about possible remedies for anticompetitive effects.