Companies can still file new mergers during the government shutdown and the antitrust agencies will initially review them, but no staff are available to work on most deals sent to a second request, a member of the Federal Trade Commission has said.
“It is an unfortunate fact of the shutdown that deals are going to be somewhat delayed,” FTC commissioner Christine Wilson said during a teleconference on Friday.
The standoff between Congressional Democrats and President Donald Trump over funding a wall on the US-Mexico border means no money has been appropriated to pay for federal government operations. Agencies have shut down activities other than those covered by exceptions and put the majority of employees on unpaid leave – called furlough – where they are not needed for the excepted work.
Employees recalled from furlough to work on the excepted activities are not paid until the shutdown ends with a new appropriation of money to fund the government. Workers who are paid by means other than annual appropriations and presidential appointees – such as assistant attorney general Makan Delrahim and the five FTC commissioners – are not subject to furlough.
The Hart-Scott-Rodino Act mandates that the FTC and Department of Justice’s antitrust division accept merger filings, so both the FTC’s Premerger Notification Office and the Antitrust Division’s Premerger Office are open to receive those notifications.
But under the antitrust agencies’ shutdown plans, the limited staff excepted from furlough will not answer inquiries about filing rules or procedures, nor issue early terminations of the 30-day waiting period under the Hart-Scott-Rodino Act.
The FTC’s shutdown plan estimates that 43% of 306 bureau of competition employees – or 132 workers – remain on the job. It estimates that 9% of 105 bureau of economics employees – or 10 economists – will continue working.
The DOJ’s plan estimates that of 655 Antitrust Division employees, 40% or 264 workers – 144 attorneys and 120 other staff – would not be furloughed.
Speaking at an American Bar Association event on Friday, Wilson said the FTC is recalling personnel from furlough to work on mergers as they are filed. The commission is clearing some deals, but others require further investigation and the issuance of second requests for additional information, she said.
Once an antitrust agency issues a second request, the statutory clock on time to review the deal stops. Wilson said the personnel reviewing the matter will then return to being furloughed.
The companies are free to work together on materials to respond to the second request, but staff are not available to negotiate the scope of the request nor answer any other questions about it.
For deals that it had already accepted with “built-in closing dates” – whether timing agreements made with the agencies, or agreements between the merging companies that cannot be moved – the commission will continue working, she said.
“But the commissioners and the chairman are in, and working, and actually finding time to have very constructive conversations with each other,” Wilson said. “We are using the time as effectively as we can.”
The commissioners’ attorney advisors are working on a much narrower set of matters considered essential for the government to carry on, rather than their typical broad portfolio, which includes writing speeches and articles and reaching out to advocacy groups, she said.
Wilson contrasted the “polarised” and “counterproductive” nature of some debate outside the FTC with a unified goal within the agency to work on a bipartisan basis for consumers, even if people disagree about how to achieve that goal.
“The extent of our alignment can vary widely,” she said of discussions among the commissioners, particularly where there are “policy issues, squishy facts or grey areas of law”.
Wilson distinguished the kind of “policy writ large” issues that question the status quo and have been topics of the FTC’s ongoing series of hearings with the very specific kind of policy issues companies may raise effectively with the antitrust agencies. For example, she said, the companies may say that action by the agency will create unintended negative consequences.
The burden on companies
Once companies certify substantial compliance with a second request, the statutory clock begins ticking again for the reviewing agency to decide what it will do. A second request extends the waiting period for 30 days after substantial compliance by all parties, or for 10 days after substantial compliance by the acquirer in acquisitions made entirely in cash or of a bankrupt target.
But many merging companies never comply fully with a second request. They negotiate with the agencies to modify its scope – as the model second request invites them to do – or they discuss the staff’s competition concerns and reach a settlement.
With staff on furlough except when required by law to work on the deal, those options to speed up the process are not available.
Speaking on condition of confidentiality, one practitioner said they had two deals both go to second request while the government was partially closed in autumn 2013. One deal had two agency attorneys deemed essential who kept working, while the other had the entire investigatory team deemed non-essential. The observer said they knew of no reason the agency treated the deals differently.
Having served as an attorney advisor to FTC commissioners Tom Rosch and Josh Wright from 2009 to 2013, Darren Tucker – who is now a partner at Vinson & Elkins – went through “a couple of shutdown scares” but left the agency before the 2013 shutdown began. They are “not ideal from a morale standpoint”, he said.
Tucker said he continues to submit HSR filings routinely despite the unavailability of staff to interpret the “very technical” rules and regulations.
That is “certainly an inconvenience” for outside counsel advising on complex transactions, he said. “Where it comes up the most is a transaction with a huge number of steps,” such as a deal that involves making many transfers for tax reasons, where counsel normally would call the agencies to confirm their analysis of what needs to be notified and how.
“For routine filings, we have not altered our practice. We have not seen a lot change from the agencies” on such deals, which continue to be cleared on a 30-day clock, he said.
But second request investigations “likely will take longer to complete as a result of the partial shutdown, and of course the longer the shutdown lasts, the greater the impact on delays and investigations,” Tucker said. “I think where we’re likely to see the biggest impact is on what we call ‘quick look’ investigations.”
In such reviews, he said, the agencies will issue the standard broad second request, but the staff’s concerns “are really more limited, so staff will focus on a few key issues and be able to resolve them” before certification of substantial compliance with the written request.
Again, that option is not available with staff on furlough.
Merging companies can still make progress on the second request in the absence of staff, Tucker noted, and if the shutdown ends before the point at which they want to discuss modifications, there would not be much practical effect on timing.
“We’ve not had this happen yet, but if we were in a situation where we believed we would be getting a second request during the partial government shutdown, one natural strategy parties would have is to discuss modifications even before second request issues,” he said, “depending on staff’s willingness”.
A modified second request in writing allows the companies to certify compliance once they have met its requirements, Tucker said. “But if parties don’t comply with a second request because they want to enter settlement discussion, I don’t believe the FTC and DOJ could engage in those discussions unless under a 30-day clock” after the certification of substantial compliance.
While second requests often cost several million dollars, he said, that is less significant in the context of a billion-dollar merger than the consequences of delay: lost efficiencies, departing employees and other effects of uncertainty.
Dechert has estimated that second request processes now average 11 months, which the Antitrust Division has vowed to cut to six months – but during the shutdown, “that initiative I’m sure is not effective,” Tucker said.
Nor do the agencies during a shutdown have resources to handle many matters that are not on a statutory deadline, such as already-consummated deals or conduct investigations.
“Staff really don’t want us to communicate with them,” Tucker said. “We were going to comply with a subpoena in a non-merger investigation, but they asked us not to do that because they want to keep things on pause while they’re not in the office.”
Goodwin Procter partner Andrea Murino, a former attorney at the Antitrust Division and the FTC, said her firm has not received a second request since the shutdown began, but that she has heard from other private practitioners who have.
They suspect some second requests have been “placeholders”, giving the skeleton crews at the agencies more time that would not have been necessary if the government were operating at full strength, she said.
The unavailability of staff to respond to questions about second requests puts companies in “a difficult position”, Murino said, as they may in good faith understand the second request as making one set of employees the most useful to search for the needed information, only to be told when the staff return from furlough that those are the wrong people.
“It’s a juggling act. It’s unclear what people are going to be able to accomplish, what parties are going to be able to do,” she said. “You run the risk of investing time, effort and energy to do something and the FTC or DOJ ends up saying ‘we didn’t need that’. It’s uncomfortable.”
Murino said timing agreements have also preempted the shutdown plan in the past. The last time a shutdown seemed imminent, she negotiated a timing agreement with the FTC including a provision that once the companies certified full compliance with the second request, the agency would move on their merger as if the shutdown were not happening.
With respect to agreements between the companies for a built-in closing date on the merger, Murino said the DOJ and FTC staff take that into account if there is a bona fide reason for the deadline. “They know it can be extended, but sometimes there really are reasons” for such a deadline, such as the possibility that deal financing will evaporate if the review extends indefinitely.
Norton Rose Fulbright partner Amanda Wait, a former staff attorney in the FTC’s mergers III division, said companies need to factor the delay into timing for deals that have no competition concerns – such as merging companies that are not at all in the same industry, or a private equity acquisition with no overlapping products in the acquirer’s portfolio.
These would normally receive early terminations 10 to 20 days after being notified to the agencies, she said, but now have to wait out the full 30 days.
Since the shutdown began, Wait said none of her clients has received civil investigative demands or subpoenas as third parties to a merger probe. While the agencies legally can issue such compulsory requests for information in the initial 30 days, discussions with third parties during that time are more typically informal telephone interviews and requests for the voluntary provision of information.
If staff were to issue civil investigative demands or subpoenas at the time of a second request and then go on furlough, "that could potentially add a lot of burden” to the third parties who cannot talk to anyone at the agency about the scope of the compulsory process request, Wait said.
“Oftentimes the CIDs and demands issued to non-party witnesses in merger investigations are quite broad in the scope of materials the agency is asking for and have a quick turnaround given the timing of the government review process,” Wait said.
She described a deal review process that normally works smoothly due to cooperation between agency staff and the merging companies’ counsel, even if the latter ultimately disagree with the enforcers’ analysis or the outcome. With frequent communication between the two sides, “you can understand what their issues are so you’re not shooting in the dark at a target you can’t see,” Wait said.
“In the context of a government shutdown, those conversations are limited at best, nonexistent at worst. The whole process becomes less efficient and more costly,” she said.