Constantine & Partners 1 The U.S. Merger Review Process: What It Takes to Get It Done Quickly,...

Constantine & Partners


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The U.S. Merger Review Process:What It Takes to Get It Done

Quickly, Cheaply, and Effectively

by

Gordon Schnell and Matthew CantorConstantine & Partners

June 26, 2002



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TABLE OF CONTENTS

• HSR FILING BASICS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

• INITIAL AGENCY REVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

• PRE-FILING ISSUES/ PREMERGER COORDINATION . . . . . . . . . 32

• 4(C) DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46

• SECOND REQUESTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

• ANTI-MERGER LAWSUITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74



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THE HART-SCOTT-RODINO ANTITRUST IMPROVEMENTS ACT OF 1976

15 U.S.C. §18a (as amended)

HSR FILING BASICS



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HSR ACT IN BRIEF

Basic Requirement:

• Requires notification filings to FTC and DOJ.

• Requires waiting specified period of time prior to closing.



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HSR ACT IN BRIEF

Background:

• Became effective September 5, 1978.

• Created in response to the so-called “midnight mergers.”

• Once transaction closed, it became very difficult to “unscramble the eggs” and restore competition to pre-existing levels.



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HSR ACT IN BRIEF

Purpose:

• Provides antitrust enforcement agencies with the opportunity to review transactions before they occur and take appropriate preventive measures.



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HSR REPORTABILITY

• “Size of Parties” Test:

Party A has annual sales or total assets $10m

Party B has annual sales or total assets $100m

and

“Size of Transaction” Test:

Value of Transaction Between $50m - $200m

or

• Value of Transaction $200m



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• The value of publicly traded voting securities is the greater of the “market price” or

“acquisition price.”

• The value of non-publicly traded voting securities or assets is the “acquisition price,” or if not determined, the “fair market value.”

DETERMINING VALUE OF TRANSACTION



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• Acquisitions of goods in the ordinary course of business.

• Certain acquisitions of real property.

• Certain transactions which are subject to review by another government agency.

• Intraperson transactions.

EXEMPT TRANSACTIONS



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• Acquisitions solely for the purpose of investment.

• Acquisitions within 5 years of prior filing not exceeding next notification threshold.

• Certain acquisitions of foreign assets or voting securities by U.S. entities.

• Certain acquisitions by foreign entities.

EXEMPT TRANSACTIONS



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Example: A acquires 100 percent of B. B owns 20 percent of C. A’s acquisition of 20 percent of C will be treated as a separate transaction.

SECONDARY ACQUISITIONS



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Fee Transaction Value

$45k Between $50m - $100m

$125k Between $100m - $500m

$280k $500m

HSR FILLING FEE



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• As soon as an agreement in principle or letter of intent is reached.

WHEN TO FILE



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Initial Waiting Period:

• 30 days from the date completed filings are received from both the buyer and seller (15 days for cash tender offers).

HSR WAITING PERIODS



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Early Termination:

• Early termination may be granted at any time prior to the expiration of the initial 30-day waiting period.

HSR WAITING PERIODS



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Second Request Waiting Period:

• 30 days from the date the parties have “substantially complied” with the Second Request (10 days for cash tender offers).

HSR WAITING PERIODS



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• For most transactions, the waiting period starts as soon as the FTC and DOJ receive completed filings from both the buyer and seller.

• Failure to pay the appropriate filing fee or omitting certain information from the filing, may delay the start of the waiting period.

COMMENCING THE WAITING PERIOD



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• Description of Acquisition

• Documents Filed With the SEC

• Annual Reports and Balance Sheets

• 4(c) Documents

• Dollar Revenues By Industry

• Information on Subsidiaries, Shareholders, and Company Holdings

• Information on Buyer/Seller Overlap

• Information on Prior Acquisitions

INFORMATION REQUIRED



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• All of the information submitted with the HSR filing will be kept confidential and is exempt

from FOIA.

• Can be used by the government in an administrative or legal action.

CONFIDENTIALITY



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• Closing a reportable transaction without filing and waiting is a violation of Section 7 of the Clayton Act and subject to civil penalties of

up to $11,000 per day.

• Violations may be found even after agency “clearance” if agency later discovers that certain documents or information were

omitted from filing.

FAILURE TO FILE



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INITIAL AGENCY REVIEW



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• FTC Premerger Notification Office has administrative responsibility for the HSR program and reviews all filings for technical compliance.

• An FTC staff attorney or compliance specialist reviews transaction for technical compliance and initial antitrust review.

• For minor deficiencies, the waiting period is not interrupted. For significant deficiencies, the filing may be “bounced.”

INITIAL FTC REVIEW



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• FTC reviewer prepares short summary of the deal and a recommendation as to whether an investigation

should be opened.

•Merger Screening Committee (made up of senior officials of the Bureaus of Competition and Economics) meets weekly to review filings and recommendations.

INITIAL FTC REVIEW



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• Filings received by the Premerger Notification Unit of the Office of Operations of the Antitrust

Division.

• The filing is checked for completeness and any deficiencies are reported to the FTC.

INITIAL DOJ REVIEW



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• Filing is assigned to relevant litigation and economic sections. After their substantive review, they request from the Director of Operations and Merger

Enforcement to open an investigation, or recommend no further review.

• Decision is typically made within 3 to 5 days of receipt of the filing by the assigned litigation

section or field office.

INITIAL DOJ REVIEW



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• The agencies will not contact the parties or any third- parties until the investigation has been “cleared” to one of the agencies.

• Clearance issues arise only if both agencies want to investigate the transaction.

• Traditionally, clearance has been based on industry expertise and prior contact with the parties.

ABANDONED HSR CLEARANCE PROCEDURE



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• New clearance procedure strictly divided the industries over which each agency would have

reviewing authority.

• Recently abandoned due to threat from Sen. Fritz Hollings (D.-S.C.) to cut agency funding.




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FTC

Airframes, Autos and Trucks; Building Materials; Chemicals; Computer Hardware; Energy; Healthcare; Industrial Gases; Munitions; Grocery Stores; Retail Stores; Pharmaceuticals; Biotechnology; Professional

Services; Satellites; Textiles.




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DOJ

Agriculture; Avionics and Defense Electronics; Beer; Computer Software; Cosmetics; Financials Services; Glass; Health Insurance; Industrial Equipment; Media and Entertainment; Metals and Mining; Naval Defense Products; Photography and Film; Pulp, Paper, and Timber; Telecommunications; Travel and Transportation; and Waste.




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• Once clearance authority is determined, the appropriate agency will contact the parties.

• Information typically requested:

– Business Plans, Marketing Plans, Sales and Product Data.

– Industry Studies and Consultants Reports.

– List of Each Party’s Largest Customers, Competitors.

•May want to speak with the parties’ business people as well as third-party customers, suppliers, and competitors.

POST CLEARANCE INVESTIGATIONS



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• Weigh the balance of providing unsolicitedinformation with the risk of raising issues and concerns.

• Meet with the agencies early and often.

• Offer up company executives and customers.

• Cooperate with the government.

• The “Merger Review Process Initiative.”

• The “Pull and Trigger.”

AVOIDING A SECOND REQUEST



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PRE-FILING ISSUES/ PREMERGER CORDINATION



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• Provides parties to a merger agreement with the unilateral right to abandon the deal upon the occurrence of one or more HSR triggering events.

ANTITRUST “WALK-AWAY”PROVISIONS



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ANTITRUST WALK-AWAY PROVISIONSCASE STUDY

The Abandoned United Airlines/US Air Merger



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• Cooperation Provisions

• Reasonable Efforts Provisions

• Divestiture Provisions

• Penalty Provisions

OTHER ANTITRUST CONTRACTUAL PROVISIONS



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Gun Jumping:

• Transferring the incidents of beneficial ownership from the seller to the buyer prior to HSR

“clearance.”

Premerger Information Exchanges:

• Exchanging competitively sensitive information prior to HSR “clearance.”

PREMERGER COORDINATION



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Standard:

• Rule of reason -- is the conduct reasonably necessary for the parties’ evaluation, negotiation, and closing

of the deal.

PREMERGER COORDINATION



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• Increased Scrutiny

• HSR Delay

• Legal Challenge

RISKS



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• Competitive sensitivity of deal

• Competitive sensitivity of conduct

• Justification for conduct

• Likelihood of deal collapsing

• Timing and frequency of exchange

CONSIDERATIONS



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• DOJ sued claiming that the parties’ premerger coordination activities constituted illegal “gun jumping.”

• The parties settled for a fine of $225,000, the full amount of penalties authorized by the

Act ($11,000 per day).

PREMERGER COORDINATION CASE STUDYUnited States v. Input/Output, Inc.



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• DOJ sued claiming that the parties’ premerger coordination activities constituted (i) price fixing under Section 1 of the Sherman Act,

and (ii) illegal gun-jumping under the HSR Act.

• The parties settled for a fine of $638,000.

PREMERGER COORDINATION CASE STUDYUnited States v. Computer Associates, Int’l.



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• No agreements which allow buyer to exercise influence or control over the seller.

• No agreements which are inherently anticompetitive.

• Limit meetings to those necessary for due diligence.

• Do not modify competitive behavior.

“JUMPING THE GUN” PRACTICE POINTERS



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• Do not refer common customers to one another.

• Delay discussion relating to integration as long as possible -- the closer to closing the better.

• Limit discussions relating to post-merger integration issues to that which is absolutely necessary and to

those individuals who will be directly involved.

• Do not implement integration plans until after closing.

“JUMPING THE GUN” PRACTICE POINTERS



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• Limit the information exchange to material reasonably necessary to the buyer’s due diligence review.

• Limit the information exchange to a one-way exchange from seller to buyer.

• Limit the information exchange to a one-time exchange.

• Do not exchange information after a final agreement and price has been reached.

INFORMATION EXCHANGE PRACTICE POINTERS



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• Limit the number of employees who have access to the information.

• Do not share information about current customers, pricing and costs; marketing studies; and strategic plans.

– Any competitively sensitive information that is provided should be historical or in aggregate form.

– Use outside lawyers or accountants to review competitively sensitive information.

• Enter into a confidentiality agreement which limits use of the information to evaluating the proposed transaction.

INFORMATION EXCHANGE PRACTICE POINTERS



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4(C) DOCUMENTS



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4(C) DEFINITION

“all studies, surveys, analyses and reports which were prepared by or for any officer(s) or director(s) . . . for the purpose of evaluating or analyzing the acquisition with respect to market shares, competition, competitors, markets, potentials for sales growth or expansion into product or geographic markets . . .”



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• Produce too little - risk regulatory backlash

• Produce too much - risk raising questions or concerns about deal

HOBSON’S CHOICE



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• The FTC sued claiming that Hearst duped the antitrust authorities into countenancing a merger to monopoly.

• Hearst agreed to pay a $4 million fine, divest its Medi-Span business, and disgorge $19 million in profits.

4(C) DOCUMENT CASE STUDY

FTC v. Hearst Corp.



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• Perform a thorough search.

• When in doubt, don’t leave it out.

• Don’t forget e-mails.

• Search for broad categories of documents.

4(C) DOCUMENT PRACTICE POINTERS



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• Don’t come up empty.

• Use outside counsel as a screen.

• Don’t be afraid to seek informal government assistance.

• Immediately report any inadvertently withheld documents.

4(C) DOCUMENT PRACTICE POINTERS



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• Do not use the term “dominant” to describe the company generally, its goals, or its presence in any industry.

• Do not use the term “market power” to characterize the company’s strength in any industry.

4(C) SCREENS -- LANGUAGE TO AVOID



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• Do not use the term “leverage” to characterize the company’s ability to operate in one industry because of its strength in another industry.

• When describing the company as “the leading,” “the most,” “the largest,” or “the” anything, generally use the qualifier “one of the.”




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• Do not use the term “market” to describe any of the businesses in which the company competes. Instead, use the terms “business,” “industry,” “segment,” “category,” or “area.”

• Do not use terms such as “crush,” “eliminate,” “kill,” “destroy,” “overpower,” when discussing the impact of the transaction on competition.

• Do not use the terms “entrench.”




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The transaction will . . .

• “put us in position to kill [our competitor] ...”

• “eliminate [our competitor] as a viable threat ...”

• “allow us to gain an unfair competitive advantage ...”

• “make it very difficult for [our competitor] to compete ...”

4(C) SCREENS -- PREVIOUS FAUX PAS



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• “obviously undergo significant antitrust review by the government ...”

• “increase our ability to secure favorable pricing ...”

• “catapult us into the position of market leader ...”

• “provide us with more flexibility in our pricing decisions ...”

4(C) SCREENS -- PREVIOUS FAUX PAS



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SECOND REQUESTS



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SECOND REQUESTS

• Issued pursuant to 15 U.S.C. § 18a (e), which states that the FTC or DOJ “may, prior to the expiration of the 30-day waiting

period . . .,” require the submission of additional information or documentary materials relevant to the proposed acquisition,

from a person required to file” a pre-notification form.

• Essentially “massive” document request and detailed interrogatories.– Generally, requires interview of all key strategists, financial officers, executives, attorneys and agents of the firm.– Could amount to search of tens, if not hundreds, of persons.



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SECOND REQUESTS -- HOW FREQUENTLY ISSUED?

• In FY 2000, 4926 HSR pre-merger filings made.

• In FY 2000, – only 43 Second Requests issued by the FTC. – only 55 Second Requests issued by the DOJ.

• As a matter of course, less than 5% of merger cases result in the issuance of Second

Requests.



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OBJECTIVES IN ISSUING SECOND REQUESTS

• Gather information relevant to merger investigation. – Information on pricing of relevant service or product – Information on scope of relevant market – Market share information – Documents relating to analysis of competition – Information relevant to product output

• Extend HSR “waiting period” in order to have enough time to complete review of merger in a thoughtful and proper manner.

• NOT TO PUNISH MERGING PARTIES IN ORDER TO RUN UP COSTS!!!

– Antitrust enforcers will be sensitive to over burdening parties, if parties can demonstrate that compliance with request for particular

information will be problematic.



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SECOND REQUESTS -- DEALING WITH ANTITRUST ENFORCERS

• Antitrust enforcers are public servants and are reviewing the proposed deal to see if it will likely result in consumer

harm.

• Antitrust enforcers -- at least in investigation stage -- should not be treated as adverse parties representing private interests.

– Motives of antitrust enforcers are different than motives of private litigants, which, for example, may be to increase costs in order to gain favorable settlement.

• Do not create “enemy” of antitrust enforcers even if they are being unreasonable. – Remember to be courteous in negotiations.



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HIERARCHY OF FEDERAL ANTITRUST ENFORCERS

• Staff attorneys at DOJ/FTC will be persons given day-to-day responsibilities for merger review.

– May be junior lawyer.– Staff will recommend how to proceed with investigation to superiors, who are

responsible for deciding to issue Second Request. – Staff will, if Second Request is issued, draft closing memorandum that will

recommend what type, if any, action should be taken.

• Staff attorneys will report to senior attorneys, e.g, Section Chiefs, DOJ Director of Merger Enforcement, FTC Chief of Bureau of Competition.– These are persons who will decide whether Second Request should be issued.

• Ultimate responsibility for determining federal agency action will lie with executive personnel at antitrust agencies -- FTC Commissioners, AAG in Charge of Antitrust Division.



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TECHNIQUES FOR STEMMING OFF SECOND REQUEST

• Be credible - Do not make statements that certain “high ranking” executives cannot be searched because they are “too busy.”

• Contact enforcers if transaction is noted by media.– Risky: could make enforcers interested, but probably good idea if

transaction will likely raise competitive concerns.• signals willingness to work with antitrust enforcers on deal• may want to do if merger will lead to concentrated market or there are problematic 4(c) documents

• Provide voluntary information to antitrust enforcers if requested.– Provide information quickly because of “waiting period” constraints.

– Request confidentiality protection for any competitively-sensitive orproprietary information furnished voluntarily.

– Do not “dump boatloads” of information, but provide that which is mostrelevant to antitrust enforcer’s investigation.



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TECHNIQUES FOR STEMMING OFF SECOND REQUEST

• Provide presentation to antitrust enforcers regarding transaction during “waiting period” if you assess that a

presumption might arise that the transaction will have anticompetitive aspects.– May wish to draft white paper during negotiation stage.– May wish to provide economist studies (and backup materials).

• Be willing to extend HSR “waiting period” if enforcers need more time to review merger or to digest voluntary information provided.



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TYPE OF VOLUNTARY INFORMATION TYPICALLY REQUESTED

• Information may be publicly available or proprietary.

– Market Studies/Share Data

– Strategic Plans

– Financial Reports

– Top Ten Customer Names and Contact Information

– Organizational Charts/Personnel Directories

– Historic Rate Information



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ISSUANCE OF SECOND REQUEST

• Generally, Second Request will be issued after conference with parties and enforcers where discussion will take place re:

– substance of investigation– corporate structure (e.g., subsidiaries held by ultimate

parent entity and affiliates)– major players in company and their responsibilities

• Once Second Request is received, it creates a duty to preserve relevant information and documentation (which may be in hard copy or electronic form) held

by company.



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ELECTRONIC DOCUMENTS

• All Second Requests, which are based on Model Second Request adopted by FTC and DOJ, request

documents held in electronic form.– Word processing documents– Electronic spreadsheets– e-mail!! (see Bill Gates e-mail used by DOJ in Microsoft case).

• If Second Request is broad enough, parties may wish to hire vendor who can assist with collection of electronic materials.



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TECHNIQUES FOR NEGOTIATING SECOND REQUESTS

• Narrow Defined Terms – Definition of “Company” -- Second Request may call

for information from subsidiaries or affiliates that are wholly irrelevant to the transaction.

– Ask antitrust enforcers to agree to custodian list.• Furnish personnel directory with custodian titles.• Explain to DOJ why various persons in company

should not be searched, i.e., they are not relevant to investigation.• Even though senior executives may not have much paper, realize that they will likely not be excluded from search.



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TECHNIQUES FOR NEGOTIATING SECOND REQUESTS

• Demonstrate why certain requests are – unclear – overbroad – unduly burdensome – irrelevant to investigation

• If parties are prepared to agree to certain relief, such as divestiture of certain assets, parties may wish to use this offer to “cut down” Second

Request.



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APPEAL PROCEDURES

• Recently enacted.

• Appeal to executive appointed to hear Second Request appeals.

– DOJ -- Chief of Legal Policy – FTC -- General Counsel

• Appeal is made by letter request. Agencies must respond within time period (about ten days). Letter

must demonstrate problem with various requests.



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DOCUMENTS -- HOW TO PRODUCE

• Review documents to see if protected by privilege– Attorney/Client Communication– Attorney Work Product - Materials prepared in anticipation of litigation– Joint Defense/Common Interest Privilege

• Bates Stamp– If extended investigation, may wish to code documents electronically

for privilege, subject matter, and to which request documents are responsive.

– Electronic coding requires scanning of documents into central database, such as IPRO.

• Manner of production– Hard copy or electronic -- check with DOJ/FTC staff re this.

• If coding documents, electronic production may be less costly and easier.

– Rolling production or send all documents on completion of review.



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SIGNALING SUBSTANTIAL COMPLIANCE

• Certificate of Substantial Compliance must be executed and forwarded. – Must be executed by person “responsible” for ensuring compliance. Usually in-house attorney or compliance officer.

• Enforcers generally accept certificate, but may try to “bounce” it if materials are dumped

upon them and there is reason to believe that sufficient amounts of responsive materials not

provided.



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CONFIDENTIALITY OF MATERIALS

• Under 15 U.S.C. § 18a (h) no materials provided during Second Request process can be disclosed by antitrust enforcers unless:

– used during investigation with third-party (such as at deposition) – used in the context of an anti-merger lawsuit – can be provided to Congress by statute

• Materials can be provided to certain states under Merger Compact, if parties agree.

– If parties do not agree, states could issue independent CID for materials,which can run up cost of merger investigations.

• Regulatory agencies may request materials. Parties are not under any obligation to share materials with other regulatory agencies. This is a strategic call.



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ANTI-MERGER LAWSUITS



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ANTI-MERGER LAWSUITS

• Brought pursuant to Section 7 of the Clayton Act, 15 U.S.C. § 18

• Statute states: “No person engaged in commerce or in any activity affecting commerce shall acquire, directly or indirectly,

the whole or any part of the stock or other share capital and no person subject to the jurisdiction of the Federal Trade

Commission shall acquire the whole or any part of the assets of another person engaged also in commerce or in any activity

affecting commerce, where in any line of commerce or in any activity affecting commerce in any section of the country, the effect or such acquisition may be substantially to lessen competition, or to tend to create a monopoly.”



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WHO HAS STANDING TO BRING AN ANTI-MERGER LAWSUIT?

• Federal Antitrust Authorities– Full FTC commission must vote on whether to bring lawsuit first.– Decision made by AAG of Antitrust Division.

• State Attorneys General– By statutory parens patriae authority, i.e., on behalf of the natural person citizens of the state: 15 U.S.C. §15(c).– By common law authority, i.e., on behalf of general welfare and economy of state.

• Private parties -- under Section 4 of the Clayton Act



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PRIVATE PARTY STANDING

• Issue over whether private parties have standing to sue during the pendency of a government review.

• Most courts have allowed for these suits, but recent Seventh Circuit decision dismissed antitrust suit because

Federal Communications Commission was engaged in a competition review of transaction. South Austin Coalition

Community Council v. SBC Communications, Inc.,191 F.3d 842 (7th Cir. 1999) (Eastbrook, J.)

• Solution may be to allow such suits and stay them until antitrust enforcers have finished reviewing the deal.



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SECTION 7 SUIT STANDARDS

• Merger must likely “substantially lessen competition” or “tend to create a monopoly” in a relevant market.

• In other words, critical question is whether merger will lead to the creation of market

power, e.g., the power to raise price or reduce output. See United States v. E.I. Du Pont de Nemours & Co.,351 U.S. 377 (1956)



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DEFINING RELEVANT MARKETS -- PRODUCT MARKET

• 1997 DOJ/FTC Horizontal Merger Guidelines -- informs prosecutorial discretion of enforcers

• 1993 Horizontal Merger Guidelines of the National Association of Attorneys General -- likewise informs

prosecutorial discretion.

• Most courts will defer to the guidelines. See F.T.C. v. H.J. Heinz & Co., 246 F.3d 708 (C.A.D.C.2001)



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DEFINING RELEVANT MARKETS -- PRODUCT MARKET

• Test: Market consists of all products that are sufficiently substituted for core product in light of small, but significant, non-transitory price increase.– If price for product A is raised by 5%, all products that are sufficiently substituted for that product are deemed to be in relevant market.– All products that constrain the price of the core product are

in the relevant market.– In other words, “[t]he outer boundaries of a product market

are determined by the reasonable interchangeability of use [by consumers] or the non-elasticity of demand between the product itself and substitutes for it.” Brown Shoe v. United States, 370 U.S. 294 (1962).



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DEFINING RELEVANT MARKETS -- GEOGRAPHIC MARKET

• Test for geographic dimension of market contained in Guidelines.

• Test: The region includes all areas that consumers would go to receive substitute

products in light of a small, but significant, non-transitory price increase for the core product.



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MARKET DEFINITION -- GENERAL RULES

• The broader the product dimension or regional dimension of the relevant market, the less likely it is

that antitrust authorities or private parties will be able to prove that the merger will lead to anticompetitive

effects.

• Best way to terminate review of transaction is to demonstrate that, even assuming a narrow market, the merger will not lead to the creation of market power.

– Similar to summary judgment standard, no issue of material fact over market definition.



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DEMONSTRATION OF MARKET POWER -- HHI CALCULATIONS

• Herfendehl-Hierschman Index (HHI) -- measure to determine whether market will become concentrated as a result of merger.

1. Define scope of market.2. Determine share of all players in market.3. Square shares.4. Calculate totals

• If HHI is over 1800 with a change in HHI from pre-to-post merger of over 100, merger is presumed to create or enhance marketpower of the merged entity.

• If HHI is between 1000 and 1800 and there is a charge of 50 (but less than 100) of pre-to post merger HHI, the merger is said to raise significant competitive concerns.

• This does not mean that antitrust enforcers will automatically challenge mergers that meet these thresholds. In recent years, Antitrust enforcers have generally not

challenged mergers that increase the HHI by less than 100. Antitrust enforcers will consider “defenses” in its using their prosecutorial discretion and courts will consider certain defenses as a matter of law.



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MERGER DEFENSES

• Failing firm defense -- See Citizens Publishing Co. v. United States, 394 U.S. 131, 138-39 (1969).– The firm must be in “imminent danger” of failing.– The firm must have no realistic prospect for a successful reorganization.– There is no viable alternative purchaser that poses less anticompetitive risk.

• Barriers to entry are low. If entry is timely (within two years), likely and sufficient in magnitude, merger may be permissible. See Section 3.0 of Federal Merger Guidelines.

• “In the absence of significant barriers, a company probably cannot maintain supra-competitive pricing for any length of time.” United States v. Baker- Hughes, Inc., 908 F.2d 981 (A.D.C. 1990).



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MERGER DEFENSES

• Efficiency defense. Economies of scale will be created by the merger which will lead firm to charge lower costs.

– Supreme Court never recognized efficiencies defense, but is product of federal and state merger guidelines, which inform prosecutorial discretion.

– Efficiency defense recognized by lower courts, including Court of Appeals of the District of Columbia in FTC v. H.J. Heinz & Co.

• Merger will not lead to creation of market power - rebut presumption through economic evidence.



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F.T.C. v. H.J. HEINZ & CO., 246 F.3d 708 (C.A.D.C. 2001)

• Heinz and Beech-Nut attempt to merger to “better compete” against Gerber.

• Lower court refuses to enjoin merger because it holds that efficiencies of scale achieved by Heinz and Beech-Nut will lead to consumer benefit.– economies of scale– integration of operation– use of better recipes

• Appellate court reverses. – Adopts as law merger guidelines test for evaluating merger

• first, HHIs to see if merger is presumed to be anticompetitive, etc.– Recognizes defense when “extraordinary efficiencies” proven– States that defendant failed to prove extraordinary efficiencies in this regard.– Extraordinary efficiencies standard may not apply to all mergers -- Heinz/Beech-Nut merger was a merger to duopoly (extreme market concentration).



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FEDERAL TRADE COMMISSION v. LIBBEY, INC., 2002 WL 984209 (D.D.C., April 22, 2002)

• After Section 7 litigation, merger agreement is amended to alleviate competitive concerns

• Court did not require new HSR filing and did not give FTC time to investigate whether merger agreement

was anticompetitive.

• FTC was “forced” to continue suit over amended agreement or give up suit and allow for potentially anticompetitive result.



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RELIEF IN SECTION 7 SUIT

• If brought before merger, generally parties will seek preliminary and then permanent

injunction.

• If brought after merger, can sue for treble damages.

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