At the end of September, the Antitrust Division of the U.S. Department of Justice filed suit challenging a transaction that had previously passed through the merger review process set out in the Hart-Scott-Rodino (HSR) Act.1 This suit provides a stark reminder that the fact that a transaction clears the merger review process does not mean it is safe from future government (or private) challenge. Although challenges to “cleared” transactions are unusual, they are permissible under the statute, and this case provides some useful reminders to parties considering strategic transactions that may raise serious antitrust concerns.
On Sept. 26, the Antitrust Division filed a lawsuit seeking to unwind Parker-Hannifin’s consummated $4.3 billion acquisition of Clarcor. The complaint alleges that the transaction was effectively a merger to monopoly in the supply of certain types of aviation fuel filtration systems to U.S. airline and military customers, a line of business that in total is about $20 million annually.2 It is not unusual for the U.S. antitrust agencies to challenge consummated transactions; what is unusual in this case is that the transaction had been filed with the agencies pursuant to the HSR Act, and the agency had taken no action during the required waiting period, allowing the transaction to close. Nothing in the substantive U.S. antitrust laws or the HSR Act provides “cleared” transactions repose from future challenges.
In December 2016, Parker-Hannifin announced its acquisition of Clarcor.3 Shortly thereafter, the parties made merger notification filings as required under the HSR Act.4 The initial 30-day waiting period expired on Jan. 17 without the government taking any further action, allowing the parties to close, which they did at the end of February.5 Apparently, not long after the closing, the Antitrust Division reopened its investigation of the transaction, sought documents and information from Parker-Hannifin and third parties, concluded that the transaction did, in fact, violate Section 7 of the Clayton Act, which prohibits transactions that may substantially lessen competition or lead to monopoly6 and filed the current suit in the District of Delaware.
Lessons from Parker-Hannifin
The HSR Act Does Not “Immunize” Transactions: Unlike the merger clearance regimes in many other jurisdictions, nothing in the HSR Act says that passing through the merger review process without the government taking action prohibits a subsequent challenge.7 Since the passage of the HSR Act in 1976, the antitrust agencies have repeatedly noted that if new information becomes available after the transaction closes, they are free to act on that information. This is not the first time there has been a challenge to a transaction that had passed through the HSR process. For example, in 2001, the Federal Trade Commission successfully challenged Chicago Bridge & Iron’s acquisition of assets from Pitt-Des Moines Inc., which had passed through the HSR process a year earlier8 and ultimately required a divestiture of the acquired assets.9 Also in 2001, the Federal Trade Commission challenged the Hearst Trust’s 1998 acquisition of Medi-Span, resulting in Hearst agreeing to divest Medi-Span.10
The Size of the Market Has Little Effect on the Decision to Challenge: In Parker-Hannifin, the fuel filtration business that is the subject of the government’s suit is only about $20 million, or less than 0.5 percent of the value of the overall transaction. Despite the small size of the business and its small percentage of the overall transaction, the government has concluded that the potential competitive harm is large enough to justify both an extensive investigation and litigation. It would be unwise to assume that just because an overlap product has small sales or constitutes only a small portion of an overall transaction it will not be the subject of a merger challenge. Parties to a transaction where antitrust issues arise in only a small portion of the businesses involved may wish to consider addressing those issues affirmatively.
The Risk of Postclosing Challenges Rests With the Buyer: Even where the seller survives the transaction, postclosing challenges almost never seek to have the seller reacquire the business that is the subject of the challenge. Further, in most cases, the seller no longer exists, having been subsumed within the buyer. Thus, it falls to the buyer to defend against the challenge and to bear the economic burden both of that defense and of any divestitures or other relief that may be agreed to or ordered by a court.
Revealing Serious Competitive Overlaps Can Be Advantageous: In most cases any competitive overlaps between parties to a transaction are easy for the reviewing agency to determine from the content of the HSR filing or through a quick review of the parties’ public documents or websites. However, where that might not be the case but where the overlaps are competitively significant, it can, in certain circumstances, be advisable to make sure the reviewing agency is aware of that overlap so any concerns can be resolved before closing. If the agency has thoroughly reviewed the relevant overlaps and lets the transaction proceed, or if those concerns are resolved by consent, the likelihood of future government action is reduced to near zero.
The Parker-Hannifin Case Is Unusual: Parties considering transactions and those that have passed through the HSR process successfully need not be overly concerned about this case. These sorts of challenges are infrequent and are highly fact-specific. The only time to be concerned is if the parties believe there is a significant antitrust issue in their transaction and that issue is not raised by the reviewing agency during the course of the HSR review. This concern should be greater if it is likely that customers may be upset by the transaction after it is consummated, as it is often customer complaints that cause an agency to review a transaction.
Every strategic transaction has its own unique aspects and considerations, and no single strategy is applicable to every deal. But parties to transactions that may raise material antitrust issues should carefully consider what may be the best way to approach the merger review process in light of their particular needs and the antitrust risks posed by the proposed transaction.