1
“Second Requests” under the HSR Act
CBA Fall Competition Law ConferenceSeptember 30, 2010
Nelson O. Fitts
Wachtell, Lipton, Rosen & Katz2
Avoiding “Second Requests”
◦
Best “second request”
is one never received◦
When FTC or DOJ opens a preliminary investigation during the initial HSR waiting period (or even before filing), parties voluntarily respond to staff data and document requests, submit letters, and
offer meetings with counsel and business people
•
Passivity is almost never advised•
If investigation is highly likely, parties often reach out to agency staff
◦
Strategies to avoid a Second Request•
Delay HSR filing (the Act provides no deadline after agreement)•
Pull-and-refile: Buyer can pull its HSR notification any time during the initial waiting period, and if it refiles
within two business days avoids a new filing fee◦
Second pull-and-refile
requires new fee and renewed acquired person filing
•
Preemptive remedies
◦
Even if a Second Request cannot be avoided, early submissions and advocacy —
and extra time —
may significantly narrow the scope◦
Counsel’s judgment —
informed by facts, experience, and staff feedback —
is critical in making timing decisions
Wachtell, Lipton, Rosen & Katz3
Basic Scheme of “Second Requests”
◦
Suspensory: Agencies can use the Second Request process both as an investigative tool and as a timing lever
◦
Successful compliance initiates 30-day (or 10-day) second waiting period — absent some other timing agreement — at the end of which the agency must take action or allow deal to close
◦
Can also grant early termination or enter into a consent decree without compliance, but no compliance = no leverage
◦
Probing: HSR Form and voluntary submissions give agencies basic information about the transaction, parties, and overlaps, but a Second Request is truly thorough
◦
Costly: Millions of dollars, weeks of time, substantial distraction
◦
Substantive: A response to a Second Request is both discovery and advocacy, and requires intense care at every step
◦
Exacting: Failure to comply on time could delay, impair, or end a deal
Wachtell, Lipton, Rosen & Katz4
Power to Issue “Second Request”
◦
15 U.S.C. § 18a(e)(1): •
Affirmative “Second Request”
power: Prior to expiration of the initial HSR waiting period (30 or 15 days), DOJ and FTC may “require the submission of additional information or documentary material relevant to the proposed acquisition,”
a/k/a issue a “Second Request”
•
From whom?: “from a person required to file notification with respect to such acquisition”
under § 18a(a)
◦
Affirmative authority to issue a Second Request extends to acquiring and acquired persons, regardless of form or type of acquisition
◦
See also 16 C.F.R. § 803.20(a)(1)
•
From “a person”?: includes “any officer, director, partner, agent, or employee of such person”
Wachtell, Lipton, Rosen & Katz5
Effect of “Second Request”
on Timing
◦
15 U.S.C. § 18a(e)(2): •
Timing consequences of Second Request: Following issuance of a Second Request, FTC or DOJ “may extend”
the waiting period ◦
“for an additional period of not more than 30 days (or in the case of a cash tender offer, 10 days) after the date on which [the agency] receives from any person to whom a request is made . . . or in the case of tender offers, the acquiring person
•
“(A) all the information and documentary material required to be submitted pursuant to such a request, or
•
“(B) if such request is not fully complied with, the information and documentary material submitted and a statement of the reasons for such noncompliance”
(cf. 16 C.F.R. §
803.3 (“unable to supply”))
•
Restarted period triggered by whom?: Everyone who receives a Second Request, except for acquired person in a tender offer (cash or otherwise)
•
By submission of what?: “all the information and documentary material . . .”◦
See also 16 C.F.R. § 803.10(b)(2)(i)
Wachtell, Lipton, Rosen & Katz6
Bankruptcy Rules
◦
The HSR Act makes no special provision for acquisitions in bankruptcy, but the bankruptcy code does
◦
11 U.S.C. § 363(b)(2) specifies accelerated treatment for certain asset sales, and the HSR rules implement that law
•
Shorter waiting periods:
◦
Per 16 C.F.R. § 803.10(b)(2)(i), acquisitions under § 363(b) of the bankruptcy code get the same 10-day second waiting period as cash tender offers
•
Only acquiring person triggers compliance:
◦
Under 16 C.F.R. § 803.20(c)(1)(ii) and (c)(2)(ii), the acquired person in a § 363(b) sale need not comply for the buyer to restart the waiting period under the HSR Act
◦
Thus, bankrupt companies —
like tender offer targets —
cannot hold up HSR clearance by failing to comply
Wachtell, Lipton, Rosen & Katz7
“Substantial”
Compliance
◦
Wherefrom the emphasis on “substantial”
compliance?
◦
15 U.S.C. § 18a(e)(1)(B)(i)(II):•
Internal agency review of whether Second Request “has been substantially complied with by the petitioning person”
◦
15 U.S.C. § 18a(g)(2)(B): •
“If any person . . . fails substantially to comply with . . . any [Second Request] within the waiting period specified in subsection (b)(1) of this section as may be extended under subsection (e)(2) of this section, the U.S. district court . . . shall extend the waiting period specified in subsection (b)(1) of this section and as may have been extended under subsection (e)(2) of this section until there has been substantial compliance”◦
Exception for acquired persons in tender offer (cash or otherwise), whose failure to comply does not extend the waiting period
•
Read literally, § 18a(g)(2)(B) makes no sense, as one cannot fail to comply “within”
a § 18a(e)(2) waiting period —
the waiting period never begins to run if it’s never triggered
◦
The word “substantially”
does not appear in the implementing rules
Wachtell, Lipton, Rosen & Katz8
Legislative History of “Substantial”
Compliance
◦
“What constitutes ‘substantial compliance’
is to be determined by the court, and is to be measured in both qualitative and quantitative terms as well as whether the court finds that the compliance effort was reasonable and appropriate under the prevailing circumstances.”
— Sen. Hart, 122 Cong. Rec. 29,341 (Sept. 8, 1976)
◦
“If the omitted data is withheld by the parties for frivolous, unjustifiable, or improper reasons, the [agency] may seek a court order . . . . A broad and liberal interpretation of the doctrine of ‘substantial compliance’
should protect the rights of the Government as well as the parties . . . . And plainly, Government requests for additional information must be reasonable. The House conferees contemplate that, in most cases, the Government will be requesting the very data that is already available to the merging parties, and has already been assembled and prepared by them. If the merging parties are prepared to rely on it, all of its should be available to the Government. But lengthy delays and extended searches should consequently be rare. . . . In sum, a government request for material of dubious or marginal relevance, or a request for data that could not be compiled or reduced to writing in a relatively short period of time, might well be unreasonable. In these cases, a failure to comply with such unreasonable portions of a request would not constitute a failure to ‘substantially comply’
with the bill’s requirements. All the equities of the particular situation should be considered in determining what constitutes ‘substantial compliance.’”
— Rep. Rodino, 122 Cong. Rec. 30,876-77 (Sept. 16, 1976)
◦
Agencies killed 2000 HSR reform provision defining “substantial compliance”
Wachtell, Lipton, Rosen & Katz9
“Substantial”
Compliance (cont.)
◦
Agencies’
position in the original Statement of Basis and Purpose:
“A complete response, within the meaning of the act and rules, is one that supplies all requested information. Anything less than a complete response potentially is not substantial compliance. The rule [§ 803.3] does not define substantial compliance, and the agencies contemplate resolving whether a person has substantially complied on a case-by-case basis. The provisions of § 803.3 are designed to focus on the information necessary to determine whether the filing person actually cannot supply the required information or documents, or whether the failure is
based on a mere unwillingness to comply or misunderstanding of what is required by a particular item.”
— 43 Fed. Reg. 33,508-33,509 (July 31, 1978)
Wachtell, Lipton, Rosen & Katz10
“Bounce”
Process
◦
If Second Request does not comply with HSR rules, agency “shall promptly notify”
party “of the deficiencies in such filing”
under 16 C.F.R. §
803.10(c)(2), and the waiting period does not run until “the date on which a filing which complies with these rules is received”
◦
2000 HSR reforms amended statute to require internal appeals of both Second Requests and their compliance per 15 U.S.C. §
18a(e)(1)(B)
•
(i) The Assistant Attorney General and the Federal Trade Commission shall each designate a senior official who does not have direct responsibility for the review of any enforcement recommendation under this section concerning the transaction at issue, to hear any petition filed by such person to determine—(I) whether the request for additional information or documentary material is unreasonably cumulative, unduly burdensome, or duplicative; or (II) whether the request for additional information or documentary material has been substantially complied with by the petitioning person.
•
(ii) Internal review procedures for petitions filed pursuant to clause (i) shall include reasonable deadlines for expedited review of such petitions, after reasonable negotiations with investigative staff, in order to avoid undue delay of the merger review process.
Wachtell, Lipton, Rosen & Katz11
Internal Appeals
◦
FTC (February 2001) —
16 C.F.R. §
2.20
•
Appeals to the FTC’s General Counsel
•
Takes up to 10 business days
◦
DOJ (June 2001) —
http://www.justice.gov/atr/public/8430.pdf
•
Appeals to neutral Deputy Assistant AG via Office of Operations
•
Takes up to 5 business days (plus time to respond to any DAAG questions)
◦
Same processes used for modification and compliance appeals
◦
Internal appeals are imperfect
•
May take longer than repairing “deficient”
compliance, with less certain outcome
•
Appeal could imply troubling substantive trajectory —
deal may be heading to litigation, regardless of compliance outcome (e.g., Blockbuster/Hollywood Entertainment)
Wachtell, Lipton, Rosen & Katz12
“Bounce”
Process (cont.)
◦
15 U.S.C. §
18a(g)(2) provides that if any person “fails substantially to comply with”
a Second Request, upon application of the DOJ or FTC a U.S. district court
•
May order compliance;
•
Shall extend the waiting period until there has been substantial compliance; and
•
May grant other equitable relief deemed necessary or appropriate
◦
Implies judicial review (by an Article III court) of agency claims of failure substantially to comply
•
Posture is normally agency as plaintiff upon an acquiring person’s threat to close, but in theory parties may pursue a declaratory action (see, e.g., McCormick & Co.
v. FTC
(D. Md. April 22, 1988))
◦
Parties best position themselves by exhausting internal appeals at the FTC or DOJ before getting to federal court
Wachtell, Lipton, Rosen & Katz13
Litigating a “Bounce”
◦
Scant legal precedent on “substantial compliance”
under §
18a(g)(2)
◦
FTC
v. McCormick & Co., 1988-1 Trade Cas. (CCH) ¶
67,976 (D.D.C. 1988)•
FTC issued Second Request in connection with McCormick’s planned acquisition of the Spice Island assets from Specialty Brands, Inc.
•
McCormick sued for declaration that Request was “unduly broad, burdensome, and oppressive,”
seeking either invalidation or declaration of compliance
•
FTC brought separate action under §
18a(g)(2) alleging that McCormick had not complied with Second Request; McCormick sought declaration that Second Request was unduly burdensome◦
Opinion does not identify the deficiency in McCormick’s response (if any response was made)
•
“The statutory . . . waiting period has not begun, and will not begin, unless and until McCormick substantially complies with the Commission’s request for additional information by providing complete responses as mandated by Section 7A(e)(2) and 16 C.F.R. § 803.10(c)(2)”◦
“A complete response is one that either (a) sets forth all the information and documentary material required to be submitted pursuant to the request, or (b) in the event a person is unable to provide a complete response, a detailed statement of the reasons for non-compliance”
•
Court granted a TRO and injunction to prevent the acquisition prior to compliance + waiting period, and McCormick abandoned the deal
Wachtell, Lipton, Rosen & Katz14
Litigating a “Bounce”
(cont.)
◦
FTC
v. Blockbuster, Inc., Complaint, 2005 WL 919219 (D.D.C. 2005)•
FTC issued Second Request re: contested offer for Hollywood Entertainment
•
Blockbuster complied in 23 days, but with serious data deficiencies ◦
inaccurate rental fee data for more than half of approximately 120,000 data points (caused by a “programming error”)
◦
missing late fee data for 90%+ of its stores (ultimately 800,000
data rows)
◦
did not respond to one specification, deeming it “impractical”
•
FTC issued 2 deficiency letters; Blockbuster remedied the data issues but would not re-certify, claiming its original submission was substantial compliance
•
Blockbuster exhausted internal appeals and threatened to close, so FTC brought suit under §
18a(g)(2) to enjoin closing
•
Blockbuster argued the errors were (1) inadvertent, (2) immediately corrected, and (3) insufficiently consequential in the context of the entire Second Request response (and as they related to the FTC’s substantive analysis) to fail the test for “substantial compliance”
•
Parties quickly settled without court reaching issue of substantial compliance◦
Agreed to Solomonic
two-week extension of original waiting period (basically 30 days from the time Blockbuster submitted the accurate rental fee data)
◦
Very similar case and outcome to FTC
v. Dana Corp.
(N.D. Tex. Jan. 2, 1981)
•
Blockbuster ultimately abandoned bid, citing FTC’s failure to decide merits
Wachtell, Lipton, Rosen & Katz15
Unmotivated Targets
◦
Even though targets of tender offers and bankrupt companies cannot prevent substantial compliance, they may lack a motivation to further the agency’s investigation
◦
Moreover, targets in other types of § 801.30 transactions (open-market purchases, negotiated sales) can prevent the waiting period from restarting by failing to comply
•
Failure to provide information can impede resolution of the substantive issues, sometimes to an even greater extent than affirmative cooperation with the FTC or DOJ
◦
16 C.F.R. § 803.21 requires that “[a]ll
additional information or documentary material requested pursuant to section 7A(e) and § 803.20 . . . shall be supplied within a reasonable time”
•
“What constitutes a reasonable time must be judged on a case-by-case basis, considering all the facts and circumstances”
(43 Fed. Reg. 33,516, July 31, 1978)
•
In theory, under 15 U.S.C. §§ 18a(g)(2)(A), (C) the agency could seek civil penalties or an order of compliance from a federal district court
◦
18-month “time out”
provision in 16 C.F.R. § 803.7(b) —
added in December 2005 —
does not apply to acquired persons in all types of § 801.30 transactions
Wachtell, Lipton, Rosen & Katz16
Unmotivated Targets (cont.)
◦
Agencies typically issue a subpoena and/or civil investigative demand to tender offer targets and bankrupt firms to compel response to Second Request by a date certain
•
Return dates may be unreasonable to target (though arguably tied
to requirements of 15 U.S.C. §§ 18a(g)(2)(A), (C))
•
Per 16 C.F.R. § 2.7(d), target in FTC investigation must make any petition to quash within 20 days of receipt or prior to the return date, whichever is earlier, after conferring with FTC counsel◦
Per 15 U.S.C. § 1314(b), same deadline in DOJ investigations
•
Even if staff gives extension of return date, target may also seek extension of quash petition date
◦
FTC
v. Take-Two Interactive Software
(D.D.C. 2008)•
After weeks of negotiation, FTC sought order to compel target to
respond to Second Request and compulsory process
•
FTC claimed Take-Two was estopped
from raising burden arguments because it failed to make a petition to quash compulsory process
in time
•
FTC and Take-Two ultimately resolved the matter out of court, so no decision issued
Wachtell, Lipton, Rosen & Katz17
Key Procedural Conclusions
◦
Second Request process can be a critical determinant of substantive merger review outcomes
◦
While no compliance is “bounce-proof,”
there are important considerations
•
Risks of non-compliance place a premium on early issue-spotting and cooperative negotiation of Second Request’s scope
•
Second Request readiness is key
◦
Team assembly, vendors, internal client resources
•
Apprise agency staff of timing and, if appropriate, negotiate timing agreement
•
Repeated quality checking is essential
•
Rapid reaction to and mitigation of compliance issues
18
Negotiating And Responding to
Second Requests
Wachtell, Lipton, Rosen & Katz19
Standard of Care
◦
For every Second Request, some officer or director of filing person must certify
that information is true, correct, and complete
•
Certification made under penalty of perjury
◦
If omission or error is sufficiently grave, compliance could be “bounced”
or rendered ineffective pending correction and re-
certification
•
Failure timely to comply could implicate a merger agreement’s “best efforts”
provisions or push deal against drop-dead date
◦
In Sarbanes-Oxley environment, public companies are particularly careful and look to outside counsel for guidance
◦
Second Requests can be byzantine, even tedious, requiring constant reevaluation of compliance posture
Wachtell, Lipton, Rosen & Katz20
Key Precepts
◦
Maintain your credibility at all times
◦
Get it in writing
•
There is no such thing
as an “understanding”
with agency staff about modifications
◦
All Second Requests state that, unless modified in writing by agency staff, the original Second Request governs
◦
Reliance on mere discussions can backfire weeks later, when it has become impracticable or impossible to change compliance course
•
Agency staff are highly experienced with Second Request negotiations, and both FTC and DOJ policies require staff to respond to modification requests promptly
◦
Explain in detail what you did and didn’t do
•
Use a § 803.3 Statement of Reasons for Noncompliance where appropriate
Wachtell, Lipton, Rosen & Katz21
2006 Merger Review Process Reforms
◦
In 2006, FTC and DOJ announced separate initiatives to reform the Second Request process
•
Quid pro quo: parties grant agencies additional time, agencies mitigate burden of compliance
•
Reforms provide general guidance but set forth neither mandatory
procedures for staff nor entitlements for merger parties
◦
FTC (February 2006)
•
http://www.ftc.gov/os/2006/02/mergerreviewprocess.pdf
◦
DOJ (December 2006)
•
http://www.justice.gov/atr/public/220237.pdf
Wachtell, Lipton, Rosen & Katz22
Key Aspects of DOJ and FTC Reforms
Issue DOJ FTC
Pre
sum
ptio
n “D
ea
l”
Custodians 30 + up to 5 more (extra custodians do not delay certification, provided documents produced within 15 business days of request) + secretaries + predecessors + central files
35 + secretaries + central files
Timing of Production As agreed 30 days prior to certification, or
“rolling”
production, or
other timing agreement
Post-Complaint Discovery Period
Generally 4 to 6 months At least 60 days
Relevant time period for documents
Start: Two years prior to issuance of Second Request
End: Generally 30 days prior to certification; parties may limit “refresh”
search to transaction and efficiency documents if comply within 90 days of Second Request
End: Generally 45 days prior to certification, unless otherwise agreed regarding a rolling production
Privilege Log Negotiation of categorical exclusions encouraged; may omit documents solely between counsel
Parties produce partial log listing numbers of privileged documents for each custodian; in 5 business days staff may select up to 5 custodians or 10% of total custodians for whom full log is required prior to
compliance
Backup tapes In lieu of searching backup tapes, parties may preserve a select subset of backup tapes approved by staff; staff may in their discretion require production from this subset
Parties preserve backup tapes for two dates selected by staff; staff requires production from backup tapes only when responsive documents are not otherwise available
De-duplication Must negotiate Must negotiate
Wachtell, Lipton, Rosen & Katz23
Timing Agreements
◦
Framework of DOJ Model Process & Timing Agreement is agreement as to dates of the following events:
•
Closing of transaction
•
Substantive communications between DOJ and parties, including white papers
•
Second Request compliance
•
Interviews/depositions
•
Section recommendation to Front Office
•
Front Office meetings (if staff recommends filing of Complaint)
◦
FTC has not provided model timing agreement
◦
In practice, timing agreements can be almost anything •
highly detailed
•
modestly detailed
•
bare-bones
•
dual-track/conditional
Wachtell, Lipton, Rosen & Katz24
Preparing and Submitting Documents
◦
Critical to negotiate all aspects of document production up front
•
Extraction/OCR
•
Metadata
•
Deduplication
and near-deduplication
•
Production standards
•
Backup tapes
◦
Most agency staff require sessions with knowledgeable company IT
personnel, vendors, and/or law firm IT personnel
◦
DOJ and FTC e-discovery resources
•
http://www.justice.gov/atr/public/electronic_discovery/index.htm
•
http://www.ftc.gov/bc/guidance/index.shtml
◦
Errors in handling the electronic production of documents and data can have major compliance and timing implications
Wachtell, Lipton, Rosen & Katz25
Approaches to Data Production
◦
Data production may encompass provision of company’s ordinary course databases and drafting of responses to targeted data requests
◦
Even by Second Request standard, current database requests are extremely broad
•
Database requests in DOJ Model Second Request not limited to relevant product, seek every
database in the company
•
Some tradeoff observed in traditional data inquiries
◦
Interactive process driven by agency economists
•
Second requests require
detailed data meetings or teleconferences
•
Use data production for parties’
affirmative econometric arguments
◦
Approaches to database production
1.
Identify potentially responsive databases, ask staff to select databases of interest and modify Second Request to exclude all others, produce selected subset in accepted format
2.
Direct access to all or selected databases via dedicated laptop or web
26
Questions?
Top Related