A recent complaint filed by the Department of Justice (“DOJ”) challenging the acquisition of PowerReviews, Inc. by Bazaarvoice, Inc. should serve as a cautionary tale for all parties contemplating a transaction, regardless of the size of the transaction and the reporting thresholds set in the Hart-Scott-Rodino Antitrust Improvements Act (“HSR”).
United States v. Bazaarvoice
On January 10, 2013, the DOJ filed a civil antitrust lawsuit against Bazaarvoice, a social media marketing company. The lawsuit challenges Bazaarvoice’s acquisition of its competitor, PowerReviews, which supplies product ratings and reviews platforms, as an anticompetitive transaction under Section 7 of the Clayton Act.2 Bazaarvoice did not report the June 2012 transaction to the government because the transaction did not satisfy HSR reporting thresholds.3
The DOJ’s lawsuit alleges that the transaction substantially reduced competition in the ratings and reviews platform industry in the U.S., raising prices and reducing innovation. The DOJ seeks to divest Bazaarvoice of sufficient assets to create another competitive business to replace PowerReviews in the market for social media.4 Bazaarvoice claims that it investigated the social media market extensively before entering into the transaction, and found that the relevant market is bigger and more varied than the DOJ assumes and could therefore sustain the acquisition.5 The trial in this case has been scheduled for September 2013.6
Merger Reporting Requirements Under the Clayton Act
Section 7 of the Clayton Act prohibits mergers and acquisitions where the effect “may be substantially to lessen competition, or to tend to create a monopoly.” HSR amended the Clayton Act in 1976 and requires all persons contemplating certain mergers or acquisitions that meet or exceed certain thresholds to file notifications with the Federal Trade Commission (“FTC”) and the DOJ.7 Specifically, the government must be notified of any pending transaction where the parties meet the “size-of-person” test and the transaction itself meets the “size of transaction” test, if no exemptions are applicable.8 The thresholds for the tests are adjusted annually, based on changes to the gross national product.
Effective February 11, 2013, the “size of transaction” threshold was increased to $70.9 million.9 Thus, except in very unique circumstances, any transactions valued below $70.9 million need not be reported to the government.10 For transactions between $70.9 million and $283.6 million, the “size of person” test further determines whether a filing need be made. For an HSR filing to be required in this range, one party to the transaction must have annual net sales or total assets of at least $141.8 million and another party must have annual net sales or total assets of at least $14.2 million (note that PowerReviews’ revenues were below those levels).11 If the transaction is valued above $283.6 million, there is no “size of person” test, and it must be reported to the government before closing unless an exemption applies.12
“the lack of an HSR filing does not mean the transaction will necessarily escape government review”
The DOJ’s recent lawsuit against Bazaarvoice demonstrates a risk that should be considered by those seeking to enter transactions below the reporting thresholds required by HSR. HSR is mainly a logistical statute designed to facilitate review of larger transactions prior to consummation. The DOJ and the FTC have recently confirmed that below-threshold transactions may be scrutinized as a matter of policy.13
There are other recent examples of transactions falling below the HSR thresholds that are being challenged. In 2009, Election Systems & Software acquired Premier Election Services at a transaction valued at $5 million. The DOJ filed suit later that same year, claiming that the deal combined the two largest companies that tallied votes in U.S. elections, thereby substantially reducing competition. In 2010, Election Systems & Software was ordered to divest the majority of the assets of the acquisition.14
The FTC has also challenged non-HSR reportable transactions in the last few years, particularly in the area of healthcare. In 2010, ProMedica Health Systems, Inc. purchased St. Luke’s Hospital in a transaction that fell below HSR reporting thresholds. In 2011, the FTC challenged the transaction, alleging that the merger created a company with a disproportionate market share. In March 2012, the FTC held that the merger violated the Clayton Act and ordered ProMedica to divest the hospital.15
Seeking out government scrutiny of a proposed transaction that is not HSR-reportable seems counterintuitive, and we are by no means suggesting it as a blanket approach.
However, parties to a transaction should be keenly aware that the lack of an HSR filing does not mean the transaction will necessarily escape government review and perhaps be challenged in court. Thus, parties contemplating a nonreportable transaction should at a minimum evaluate the potential antitrust enforcement exposure and consider whether to allocate risk of such exposure in the purchase or merger agreement.