The Federal Trade Commission (FTC) and U.S. Department of Justice (DOJ) recently announced important changes to the merger review process. First, the FTC announced proposed changes to its merger filing rules and the notification form parties to certain transactions must submit under the Hart-Scott-Rodino (HSR) Antitrust Improvements Act of 1976, as amended. On the heels of that announcement, the FTC and DOJ released their final revisions to the Horizontal Merger Guidelines (Guidelines). These announcements will increase the burdens of compliance with the merger review process and, more generally, require increased sensitivity to avoid unnecessary antitrust pitfalls.
Proposed Changes to Hart-Scott-Rodino Premerger Notification Rules
As detailed in our August 18, 2010 On The Subject, "FTC Proposes Changes to Hart-Scott-Rodino Notification Rules and Form," the FTC announced proposed changes to its HSR rules and notification form. These proposed changes will eliminate disclosure requirements for information the FTC and DOJ no longer find helpful in their initial antitrust review, and introduce new provisions intended to capture additional information to make clear competitive relationships and implications not revealed by current HSR filings. Among the proposed changes are increased document disclosure requirements and the introduction of the concept of “associates” of the acquiring party. While the proposed changes may decrease the burden of reporting in some areas, they will significantly increase the burdens in other areas, likely resulting in an overall net increase in the effort required to prepare HSR filings.
Additional Document Disclosures: 4(d) Documents. Item 4(c) of the HSR notification currently requires submission of documents prepared by or for an officer or director "for the purpose of evaluating or analyzing the acquisition with respect to market shares, competition, competitors, markets, potential for sales growth or expansion into product or geographic markets." The proposed changes will add an Item 4(d) and significantly expand the scope of documents parties will be required to submit to include:
- Documents prepared by or for an officer or director of the notifying party that evaluate or analyze synergies and/or efficiencies related to the proposed transaction, and
- Documents prepared in the ordinary course of business – and not necessarily for purposes of analyzing the transaction – "by investment bankers, consultants or other third party advisors" for an officer or director of the notifying party that reference the entity or assets to be acquired, and evaluate or analyze market shares, competition, competitors, markets, potential for sales growth or expansion into product or geographic markets.
If implemented without change, this rule will significantly expand the scope and burden of the document collection and search necessary for submission of an HSR filing, requiring a two-year search for documents from officers' or directors' files for these broad-ranging classes of documents.
Introduction of "Associates." The FTC’s proposed changes introduce the concept of "associates" of the acquiring party to gather information not currently captured about entities not under common control pursuant to the HSR rules, but under common management, as well as entities controlled or managed by an "associate." By collecting this data, the agencies can assess the potential competitive impact of acquisitions by funds. This proposal will most directly impact private equity firms, and greatly increase their reporting burdens. The FTC recognizes that because associates are not controlled by the acquiring person, the acquiring person may not have perfect visibility into the operations of their associates, and will only require that information about associates be supplied based on best knowledge and belief.
Revised Horizontal Merger Guidelines
As we anticipated in the March/April 2010 issue of Inside M&A, the FTC and DOJ finalized their revisions to the Guidelines. The final Guidelines, which set out the agencies' current analytical framework for assessing the legality of proposed transactions, follow an earlier draft issued for public comment in April 2010. (See "FTC and DOJ Issue Revised Horizontal Merger Guidelines for Comment" for more on the April Guidelines, and "FTC and DOJ Issue Final Revised Horizontal Merger Guidelines" for more on the final Guidelines.)
The most significant revelations in the Horizontal Merger Guidelines include increased emphasis on evidence of competitive effects at the expense of traditional market definition, and greater evidentiary weight for documents prepared by parties in the ordinary course of their businesses over documents prepared in anticipation of the transaction. Like the proposed changes to the HSR rules, the revised Guidelines suggest an approach designed to consider the totality of the circumstances surrounding a proposed transaction.
Evidence of Competitive Effects and the De-emphasis of Market Definition. The goal of the agencies’ analysis is to determine the likely impact the proposed transaction will have on competition. Under the earlier Guidelines, the agencies would begin their analysis of the likely competitive effects by defining the relevant market, measuring the level of concentration that would occur within that defined market as a result of the transaction, and then extrapolating from that and other evidence the likely competitive effects within that market. The revised Guidelines express a preference for relying upon competitive effects outright, instead of trying to measure them within a defined market. This approach will provide the agencies with greater flexibility in challenging a transaction, and eliminates the need to rely on market definition, which has been a difficult evidentiary hurdle for the FTC and DOJ in past cases. However, it is uncertain how courts will accept this new approach because of the extensive body of case law that relies on market definition as a prerequisite for a successful antitrust challenge.
Greater Weight Placed on Documents Prepared in the Ordinary Course of Business. Under the revised Guidelines and following current practice, the agencies will look to the merging parties, customers and other industry participants for evidence of competitive effects. The new Guidelines explicitly state that the agencies will give more weight to the parties’ internal documents prepared in the ordinary course of business than transaction-related documents. Especially probative are documents that provide explicit or implicit evidence that the parties intend to raise price or reduce output, quality or innovation as a result of the transaction. In addition to the agencies’ traditional focus on prices, the revised Guidelines make clear that they will evaluate non-price dimensions of competition. The revised Guidelines also emphasize the role that certain economic methodologies and metrics may play in the overall competitive analysis.
The proposed changes to the HSR rules and the newly revised Guidelines demonstrate a more concerted effort by the FTC and DOJ to capture and review information about a proposed transaction more holistically. These changes, taken together, will increase the burdens of compliance and necessitate businesses to incorporate best practices into their everyday operations to avoid the pitfalls that may arise when planning a transaction. For example, in house counsel should regularly be involved in the document creation process – both during the ordinary course of business and transaction planning – to assure that company employees and outside consultants and advisors observe antitrust sensitivities and document market dynamics appropriately. Such attention can avoid distractions during the antitrust review process from carelessly worded documents.
Further, parties will want to build in more time into the transaction planning process to allow for internal antitrust analysis and strategic positioning to minimize risk of deal delay. For example, in light of the heavy emphasis the new Guidelines place on economic evidence, clients may consider engaging economic consultants earlier in the transaction planning process. Clients will also need additional to prepare HSR filings in light of the broader scope of documents required by the proposed rules. While this may seem more resource-intensive on a day-to-day basis, careful wording of documents and additional planning may allow for a smoother, more efficient, and ultimately more successful antitrust review of a proposed transaction.