The latest annual report issued on April 30, 2013 by the U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC) on their activities under the Hart-Scott-Rodino Act (HSR) provides valuable insights.
HSR requires that U.S. acquisitions exceeding a certain threshold ($70.9 million in 2013) must be reported to the DOJ and FTC, and a waiting period (generally 30 days) must be allowed to expire before the acquisition may close. The HSR reports submitted are required to contain, among other things, revenue data by product code and documents used by each party’s management to evaluate the transaction’s competitive aspects.
If the acquisition presents no anticompetitive issues, the agencies may grant early termination of the waiting period.
If one of the agencies would like to investigate the acquisition further, it may seek clearance to do so (so that one agency, not both, conduct the investigation). If cleared to investigate further, the agency can issue a request for additional information and documents (Second Request). The Second Request generally extends the waiting period to 30 days after the parties to the acquisition have substantially complied with the Second Request. Second Requests are extensive and compliance is generally very time-consuming (possibly taking several months) and expensive (potentially costing millions of dollars for document retrieval, review, coding and production services, economists and legal services).
In follow-up to a Second Request, the reviewing agency may terminate the investigation and allow the transaction to close without any changes. Or it may challenge the transaction, which might entail initiating administrative litigation (in the case of an FTC challenge), filing a complaint in court, entering into a consent order (which might require, for instance, divestiture or other remedy), abandoning the transaction or restructuring the transaction.
The two most recent HSR annual reports (for fiscal years 2011 and 2012) yield the following statistics related to transactions reported for which the agencies could have issued Second Requests:
- Total eligible transactions: 1,4141 in 2011 and 1,400 in 2012
- Clearances: 257 in 2011 and 206 in 2012
- Second Requests issued: 55 in 2011 and 49 in 2012
- Challenges: 37 in 2011 and 44 in 2012
These statistics are further illustrated in the following chart:
Click here to view chart.
Some interesting observations from this data:
- Although there were more transactions reported and more Second Requests issued in 2011, there were more challenges in 2012.
- The number of Second Requests as a percentage of clearances was higher in 2012 (23.8 percent) than in 2011 (21.4 percent).
- The number of challenges as a percentage of Second Requests was much higher in 2012 (90 percent) than in 2011 (67 percent). (Note: The challenges in any one year may relate to Second Requests from prior years.)
Other data indicate that, if the DOJ is granted clearance, it is more likely than the FTC to issue a Second Request. In 2011 the DOJ issued Second Requests in 33 percent of the clearances it received; in 2012 that number increased to 40.1 percent. Conversely, 14.7 percent of the FTC’s 2011 clearances and 14.8 percent of its 2012 clearances resulted in Second Requests being issued.
According to the 2012 report, companies representing a wide variety of industries were subject to challenges, including bakeries, manufacturers, computer services and equipment suppliers, energy supply and transportation companies, retailers and banks. But companies in the health care sector faced by far the most challenges in 2012. These included hospitals, health care insurers, pharmacy providers, pharmaceutical manufacturers, medical auditors, laboratories, dialysis providers, medical device manufacturers and cardiology groups.
Of the challenges described in the 2012 report, almost all involved a merger between direct competitors. Two also involved potential competition between the parties as an additional claim to actual competition. The report did not in all cases describe concentration or the number of competitors involved in the markets being challenged, but the following should be noted from the information that was included:
- In six challenges, the transactions were characterized as being between the two largest competitors in a market (when other competitors remained in the market).
- In seven challenges, the transactions were described as reducing the number of competitors from three to two.
- In four challenges, it was alleged that the transactions would reduce the number of competitors from two to one.
- In six challenges, the report said higher prices would have resulted from the transactions.
Of course, it is likely that parties to these transactions disputed the market definitions used by the DOJ or the FTC.
The 2012 report suggests a number of considerations for parties to a proposed acquisition (especially one reportable under HSR, though non-reportable transactions may also be challenged):
- At least some preliminary evaluation of the transaction should be made to assess the potential antitrust risk before the acquisition agreement is signed. This is particularly recommended if the acquisition involves competitors and will result in fewer than three competitors in a market after the transaction closes.
- The acquisition agreement should include provisions detailing each party’s obligations if antitrust-related actions are taken by the DOJ or FTC. For instance, the agreement should specify whether the parties may terminate the transaction if a Second Request is issued or if they are obligated to comply with a Second Request and try to close.
- If a reported transaction is cleared to the FTC or DOJ, the parties should begin (if they have not already done so) serious preparation to defend the transaction, particularly if clearance is granted to the DOJ.
- While it is likely that an enforcement action may be taken after a Second Request is issued, it is possible that the transaction may still be allowed to proceed without changes. Even if an enforcement action is taken, it might consist of a change to the transaction that will be acceptable to the parties.