On September 26, the U.S. Department of Justice Antitrust Division “the Antitrust Division” filed a complaint in Delaware federal court to partially unwind Parker Hannifin Corporation's $4.3 billion acquisition of CLARCOR Inc., saying the consummated merger combined the only two domestic companies making qualified aviation ground fuel filtration systems used by the military and airlines. This deal marks the first merger challenge brought by the Antitrust Division under the Trump Administration.  The challenge is unusual because it occurred seven months after the Antitrust Division allowed the Hart Scott Rodino “HSR” Act waiting period to expire.  This case serves as a reminder that parties can be subject to additional inquiries from the Antitrust Division or the Federal Trade Commission the “Agencies" even if the parties reported the transaction and received HSR clearance.

Legal Background 

In the U.S., the Agencies do not grant formal “approval” of parties’ proposed transaction. Although the Agencies may issue a notice of termination after parties have made a required filing or issue a public statement upon closing certain investigations without taking enforcement action, such notice does not constitute an official “approval” and the statement creates no legal rights for the parties. As a practical matter, subsequent challenges of consummated mergers in which the parties have gone through the HSR process is rare.  Typically, challenges to consummated mergers with horizontal overlaps involve transactions in which the parties were not required to report the transaction or transactions in which the parties failed to report a transaction despite being required to do so.  If the Agencies later conclude that a transaction raises competitive concerns, the Agencies have continuing authority under Section 7 of the Clayton Act to conduct additional investigations, including issuing a Civil Investigative Demand “CID”, and may file a complaint challenging the transaction even if the customary HSR waiting period expired.  

Parker Hannifin-CLARCOR and Challenges of Reportable Consummated Mergers 

Parker Hannifin announced its intention to acquire CLARCOR in December 2016. After the parties reported the transaction to the Agencies, the HSR waiting period expired on January 17, 2017 without drawing a request for additional information from the Agencies i.e. a “second request”. Shortly after the deal received clearance in Germany and Austria, the parties closed the transaction on February 28, 2017. While the Antitrust Division did not allege any violations of the HSR Act in its complaint, it is seeking temporary relief to require the companies to hold CLARCOR’s aviation fuel filtration business separate while the case proceeds and for Parker Hannifin to divest enough assets to recreate a viable competitor.  Reports indicate that the Antitrust Division’s investigation began after it received customer complaints about the deal following the expiration of the HSR waiting period.  In a press release announcing the lawsuit, the Antitrust Division also stated that the parties did not fully cooperate with its investigation into the transaction. Specifically, the press release noted that the parties “failed to provide significant document or data productions” during the Antitrust Division’s investigation and that the company would not enter into a “satisfactory” hold separate agreement related to the parties qualified aviation ground fuel filtration systems.   To support its allegations that the parties were aware that the transaction raised competitive concerns, the Antitrust Division cited an internal email from the Vice President of Business Development for Parker Hannifin’s Filtration group that stated written to the President of the Filtration group that identified “the notable area of overlap” between the merging parties in “ground aviation fuel filtration” and asked whether the company should be “forthcoming” about this “aviation antitrust potential.”   In a statement acknowledge the Antitrust Division’s lawsuit, Parker Hannifin insisted that the company “cooperated fully with the [Antitrust Division] throughout this process and has been working diligently to respond to their post-closing inquiry.”  The company also emphasized that the business that was subject to the Antitrust Division’s inquiry constituted “less than $20 million”, which represents a relatively small portion of the overall $4.3 billion deal.    A similar case arose in 2001 when the Federal Trade Commission sued the Chicago Bridge & Iron Company “CB&I” to divest the Engineering Construction and Water Divisions associated with its acquisition of Pitt-Des Moines, Inc. In this case, the HSR waiting period expired after the parties had reported their transaction. Shortly thereafter but prior to closing, the FTC received complaints from customers and the FTC subsequently issued the parties a voluntary CID. Thus, when the parties closed their merger on February 7, 2001, the parties were aware that the FTC staff believed that the merger raised “substantial competitive issues.” On October 25, 2001, the FTC announced the Commission had unanimously voted to issue an administrative complaint challenging the transaction. The Commission subsequently approved a divestiture in 2004.

Key Takeaways

The Antitrust Division’s lawsuit serves as a reminder that the Agencies will review consummated transactions that raise competitive concerns—even where such transactions are reported. Unlike other foreign regimes, the Agencies have continuing authority under Section 7 of the Clayton Act to review transactions that raise competitive issues. Therefore, even if the HSR waiting period has expired, parties are still subject to additional investigational inquiries by the agencies and may even be subject to litigation. The Antitrust Division’s enforcement action against Parker Hannifin offers the following practical guidance for companies undertaking reportable transactions:  

Parties should conduct a meaningful competitive assessment of the proposed transaction as early as possible, particularly if the transaction involves direct competitors in overlapping products, and carefully consider the reactions of key stakeholders, including customers and other third parties.  Even if the HSR period expires, parties should be ready to cooperate with the Agencies in responding to subsequent inquiries into the transaction.  Moreover, in some cases it may be advisable to be proactive in highlighting potential issues with Agency staff during the HSR period to avoid the possibility of a subsequent post-closing challenge.  Patricia Brink, the Director of Civil Enforcement at the Antitrust Division, noted in a speech on Thursday that Parker Hannifin had failed to alert the agencies about potential product overlaps during the HSR waiting period, stating in response to a question about the lawsuit that  “[t]here should be serious consideration given to whether counsel should be forthcoming and raise very clear issues such as these.”

 

Input from customers and other third parties are critical considerations for the Agencies in conducting their investigation and analyzing the competitive effects associated with the transactions.  Parties should develop effective communication programs to engage key stakeholders immediately upon announcement of the transaction.

 

Ordinary course business documents are a key source of evidence for the Agencies in seeking to challenge a transactions. It is important for the relevant executives and other officers to recognize that all discussion related to a transaction and the nature of competition are discoverable in an investigation and may be part of the reviewing Agency’s record in the event of litigation.