Merger remedies are supposed to be just that: remedies that preserve competition.
But one provision used with increasing frequency by the Antitrust Division of the Department of Justice—requiring “prior notice” of non-reportable transactions—can have the opposite effect. While simply requiring notice of certain smaller transactions might seem harmless at first, the breadth of such clauses is virtually certain to chill pro-competitive transactions.
For many years, it was common for both the Department of Justice and the Federal Trade Commission to use “prior notice” provisions in merger settlements. As the dollar threshold for statutory notification under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act”) continued to increase, the agencies' concern appeared to be that smaller, yet potentially anticompetitive transactions would escape review. The solution was to impose a provision in merger settlements that required the parties to give the agencies notice of future acquisitions in particular product and geographic markets, regardless of whether those acquisitions were of a size that would otherwise be reportable under the HSR Act.
DOJ and FTC seem to have lost their zeal for the prior notice provision in the 1990s, culminating in the 1995 decision by the FTC to abandon the practice except in rare circumstances. Although prior notice provisions continued to be used at DOJ, for years the practice similarly was focused on a relatively narrow and predictable category of transactions with specific competitive issues for which notification at least arguably served some remedial goals. But it is DOJ's more recent trend to include these provisions seemingly indiscriminately that raises the policy issue of how they can distort marketplace competition in future transactions.
Requiring prior notice of proposed future transactions is ancillary to the core merger relief, typically divestiture of businesses in overlapping markets.1 Legally, the authority to impose such a provision falls within the broad “fencing in”power of the agencies to prevent future violations. But practically, the agencies impose these provisions in situations where they have leverage over parties who just want to close their deal.
The competitive concerns arise out of several aspects of recent prior notice provisions that render them dangerously broad. First, “prior notice” is actually a misnomer, because the typical provision requires a great deal more than a simple “heads up” to the agencies. DOJ recently has required the merged company to comply with the full HSR Act process for any proposed acquisition that falls within specified parameters. In practice, this means preparing an HSR filing with associated documentary attachments, observing the 30-day initial waiting period, and even the possibility of having to comply with a Second Request for documents and data, all involving significant burdens and delays.
Second, the scope of the provision can be quite broad. It generally is based on the relevant product market alleged in the complaint as threatened by the merger, such as “milk processing”2 or “treatment of infectious waste.”3 Of even greater concern are recent examples in which DOJ has imposed prior notice provisions far broader than the complaint's market definition. For example, the DOJ recently imposed prior notice provisions that defined the scope of the product market at issue as essentially anything touching the life cycle of the particular product—from design and development to manufacture, distribution, sale, and aftermarket servicing. 4 And a recent local dairy merger resulted in a notice provision that extended the geographic market nationwide. 5
Third, the standard prior notice provision generally specifies that the companies must provide notice not only for any acquisition of assets but also of any “interest” in any entity operating in the specified product and/or geographic market. The phrase “interest”is defined broadly and generally covers any financial interest or security, debt, equity, or even management interest.6
Nor is there a meaningful de minimis exception. Many recent orders have no dollar threshold and those that do tend to be so low as to be virtually meaningless. The amount varies depending on the characteristics of the other players in the market, but generally ranges from $500,0007 up to a few million.8 Not only are such thresholds far below the Congressionally-set one of $70.9 million,9 but in practice are likely to capture nearly every potential future transaction.
Finally, the notification requirement remains in effect for a specified period of time. At the DOJ, this often is for the life of the final judgment, which typically is ten years.10 And, to top it off, the typical DOJ provision states that the notice requirement is to be “broadly construed …in favor of filing notice.”11
In 1995, the FTC under Clinton Administration Chairman Robert Pitofsky adopted a formal policy statement in which the agency announced its move away from prior notice provisions and affirmed its faith in the HSR Act process as a way of identifying and investigating acquisitions.12 Going forward, the FTC stated that it would only impose a prior notice provision in very limited situations involving the tangible risk of either future unreportable anticompetitive transactions or that the company will attempt again essentially the same anticompetitive transaction under investigation. The FTC explains its standard for imposing the provision as “a credible risk that a company that engaged or attempted to engage in an anticompetitive merger would, but for an order, engage in an otherwise unreportable anticompetitive merger.”13 The FTC's guidance includes a list of factors that are important to consider in determining whether a prior notice provision is appropriate, such as the structural characteristics of the relevant markets, the size of other competitors, other characteristics of the market participants, and whether the challenged transaction itself was unreportable.
As promised, the FTC has used prior notice sparingly since this policy statement was issued, imposing the remedy only in very unique situations. One recent example is the 2002 acquisition of Goodman Fielder's gelatin business by Deutsche Gelatine-Fabriken Stoess AG.14 In lieu of divesting certain operations, the parties amended their purchase agreement such that Goodman Fielder would retain two manufacturing plants.15 Since Goodman Fielder, the acquired company, had expressed a desire to exit the industry altogether, the FTC was concerned that it might attempt to sell off the plants individually when the FTC's view was that the plants needed to remain together to create a viable competitor.16 Because of the likelihood that the sale of these plants would be unreportable under the HSR Act, the Commission took the unusual step of requiring Goodman Fielder to provide prior notice of any proposed sale (as opposed to the standard required notice of proposed acquisitions). Other examples of recent FTC prior notice provisions have involved either similarly unique situations17 or small, localized geographic markets.18
Until recently, the DOJ also used prior notice provisions only in specific circumstances involving either (1) very localized geographic markets, such as in radio stations, billboard advertising, and waste collection and disposal where even small transactions could have significant anticompetitive effects; and/or (2) post-transaction challenges of small, unreportable acquisitions and industries in which small but competitively significant acquisitions are likely to recur.
Local Markets. As to the former category, small geographic markets generally mean very few players, so the DOJ concern is that an acquisition could easily result in anticompetitive effects. For this reason, these provisions are found in settlements involving the waste industry, such as in the Republic Services-Allied Waste merger in 2010.19 Given the cost of transporting waste, the collection and disposal business is typically concentrated into what the DOJ calls “compact, highly localized geographic markets.”20 Republic and Allied Waste both operated on a national scale, but because of these localized markets, the DOJ required prior notice for a collection of individually specified counties in a dozen or so states.21
It was this the same localized market rationale that drove the use of the provision in the settlement of the Chancellor Media-Kunz & Company merger, where the market at issue was outdoor advertising in just three counties in California and one in Arizona.22 In a much more recent example, the DOJ imposed a prior notice provision in the settlement related to the 2011 acquisition of Healthcare Waste Solutions by Stericycle, which involved infectious waste treatment in the New York City Metropolitan Area.23 The nature of that industry was such that treatment services facilities need to physically be located near the collection sites due to high transportation costs, creating localized markets with just a handful of possible competitors.24
Small Transactions. The other common factual scenarios in which DOJ required a prior notice provision are ones in which the merger being challenged was too small to be reportable, or in an industry where small transactions are likely. Both of these raise the same concern – that a dominant company could buy up smaller competitors and create a monopoly or near-monopoly unbeknownst to the agencies.
The Dean Foods-Foremost Farms merger is a recent example of this concept in action.25 That case involved a post-transaction challenge to Dean Foods' unreportable acquisition of regional milk processing plants.26 DOJ imposed the prior notice provision specifically to avoid the same situation from arising again, and to “avoid the difficulties associated with remedying the harms of a consummated anticompetitive acquisition.”27
Although these two circumstances were the norm for many years, the DOJ recently has expanded the use of prior notice provisions to cover a much broader swath of deals, without any stated (or apparent) rationale for doing so. One striking example is the Bemis-Alcan transaction in 2010, which involved companies that each had over a billion dollars in sales in flexible packaging and operated on an international scale.28 The prior notice provision in that consent decree included no dollar threshold, a large geographic market comprising the United States and Canada, and a very broad product market scope of “the business of designing, developing, producing, marketing, servicing, distributing, and/or selling” various types of flexible packaging for fresh foods.29
A survey of other recent prior notice provisions confirms this trend. The DOJ seemingly has dispensed with any limits that would confine the provision to a narrow category of future transactions. Dollar thresholds frequently are abandoned,30 and relevant geographic areas have expanded from just a few counties to cover the entire U.S. or even all of North America.31 In the past few years, DOJ has imposed a notice requirement for proposed transactions of any size of any type of ownership or debt interest in any company engaged in the “design, development, production, marketing, servicing, distribution, or sale” of any of the relevant products.32
Requiring prior notice provisions in such circumstances can be criticized as over-reaching – an agency re-writing the law Congress passed. But the impact can go well beyond the issue of agency authority, and even of unnecessary burden on business. These provisions almost certainly will prevent the company from being able to bid for acquisitions that would make it more competitive.
The potential costs of complying with prior notice provision is one major concern. Smaller acquisitions could become cost-prohibitive for a company that is required to comply with the full HSR Act process, including the potential for a Second Request which typically runs into the millions of dollars, resulting in more companies shying away from otherwise procompetitive transactions. Companies may be dis-incentivized to invest if they feel hamstrung by cumbersome notification requirements. Considering the cost of compliance, a company may decide it is simply not worth it to invest in an entity developing a new technology, if that technology happens to touch on an aspect of the broadly defined product market at issue in the prior notice provision.
But the broader competitive harm derives from the uncertainty inherent in the notification process itself. Consider the seller of a small company or set of assets, the price of which plainly will fall below the HSR threshold. That seller has the choice between selling to a buyer with no constraints who could consummate the transaction immediately, or selling to the party under the prior notice constraint who may not be able to close the transaction for 30 days or perhaps several months. Facing this choice between certainty and uncertainty, the seller will almost always prefer the party that can close the transaction without any strings attached. A rational seller, upon being informed of the prior notice requirement, may even exclude the party from the sale process altogether.
That means the party to the DOJ decree will be prevented from acquiring, or even bidding for, assets that could make that company more competitive. Of course if one focuses only on the acquisition of a small but significant competitor, the reaction may be that such an in terrorem effect is appropriate. But recall the broad scope that would cover the purchase of assets such as some adjacent technology that could improve the product, or regional distribution that would provide better customer service, or aftermarket repair capability that would enhance product performance. There are numerous other scenarios that make clear how overbroad prior notice provisions are likely to reduce competition.
DOJ itself has said that, in merger remedies, its “central goal is preserving competition, not determining outcomes or picking winners and losers.”33 The expansive imposition of prior notice provisions in recent settlements violates that core principle. DOJ should consider these anticompetitive consequences from prior notice provisions, and re-join the FTC in restricting the use of this remedy to a very narrow category of cases in which there is a demonstrable justification.
Randy Smith is a partner and co-chair of Crowell & Moring's Antitrust Group, and Megan Wolf is an associate in the group.
The firm's practice spans the full range of antitrust issues associated with mergers and acquisitions, and Mr. Smith and Ms. Wolf recently have been involved in DOJ and FTC review of several significant transactions.
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