2007 Hart-Scott-Rodino Act Statistics Released
The Federal Trade Commission and the Department of Justice recently released their Hart-Scott-Rodino Annual Report for Fiscal Year 2007 for the period from October 1, 2006 to September 30, 2007. The Annual Report summarizes fiscal 2007 statistics related to the premerger notification program under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
This Update provides key highlights of the Annual Report and offers practical advice.
Background of the Hart-Scott-Rodino Act
Under the Hart-Scott-Rodino Act, specified acquisitions of voting securities or assets require the parties to submit information about the parties and the potential transactions to the Federal Trade Commission and the Department of Justice about the parties and the potential transactions. During a required 30-day waiting period, the agencies review the information to identify transactions that may be anticompetitive and warrant further investigation. Where a concern exists, one of the agencies may open a preliminary investigation, during which agency lawyers and economists request more information about the transaction and its potential impact on customers and competitors in the relevant product or service markets. Preliminary investigations, which are most likely to occur when the reporting firms are direct competitors, are intended to provide a basis for the agency's decision whether to issue "second requests" to the reporting companies at the end of the 30-day waiting period.
Second requests require the companies to submit substantial additional information and extend the waiting period, sometimes for many months. The transaction may not be completed until the extended waiting period has expired or the investigating agency decides to close the investigation. Consequently, a second request may significantly delay a transaction. If, at the end of the review period, the Federal Trade Commission or the Department of Justice believes the proposed transaction will substantially lessen competition, either may challenge the transaction and ultimately prevent its completion.
The Annual Report Shows Upward Trend in Reporting and
Review Under the Hart-Scott-Rodino Act
Reported Transactions Increase From Fiscal 2006. For fiscal 2007, companies reported a total of 2,201 transactions under the Hart-Scott-Rodino Act, up 24% from transactions reported for fiscal 2006. Early termination of the waiting period (that is, termination before the full 30 days had expired) was granted for 76% of the reported transactions, which was similar to the percentage for the prior year.
The Bad News: Second Requests Also Increase From Fiscal 2006. Of the total transactions reported under the Hart-Scott-Rodino Act in fiscal 2007, the Federal Trade Commission or the Department of Justice investigated a total of 296 transactions, or 13% of the reported transactions. Of these investigations, 63 transactions, or 21% of the transactions investigated (representing 3% of the total transactions reported), resulted in the issuance of a second request, an increase of 40% over fiscal 2006. Of those 63 second requests, 34 transactions, or 54% of the transactions receiving a second request (representing less than 2% of the total transactions reported), were challenged. These challenges resulted in abandoned transactions, consent decrees requiring divestiture of assets, or litigation in federal court and/or before the Federal Trade Commission.
The Good News: A Significant Majority of Transactions Are Not Reviewed or Challenged. Eighty-seven percent of transactions reported under the Hart-Scott-Rodino Act were not investigated, and the companies were able to complete the transaction after termination or expiration of the 30-day review period without providing any additional information to the Federal Trade Commission or the Department of Justice. In 79% of the 296 transactions that the Federal Trade Commission or the Department of Justice investigated, the companies were able to persuade the investigating agency not to issue second requests at the end of the review period. Of those transactions that did draw second requests, 46% were ultimately allowed to proceed without challenge.
Antitrust clearance of transactions involving competitors will likely take a long time and be expensive, a trend that will likely increase under the Obama Administration. Acquisition transactions subject to the Hart-Scott-Rodino Act in which the parties are direct or indirect competitors are likely to draw preliminary investigations, especially under the Obama Administration, which has promised closer scrutiny of potentially competitive transactions. Any investigation by the Federal Trade Commission or the Department of Justice could make the transaction a candidate for a second request. The issuance of a second request extends the waiting period, sometimes for months, during which time the value of the transaction may change significantly. Complying with a second request could cost a company legal and related expenses of well over a million dollars, even where the investigating agency ultimately decides not to challenge the transaction.
Companies should perform a thorough competition analysis prior to filing. Companies engaging in acquisition transactions may be able to lessen the risk of a second request by doing a competition analysis of the transaction before they file their Hart-Scott-Rodino Act reports. A good analysis will identify any areas about which the Federal Trade Commission or the Department of Justice may be concerned and the types of documents and information the agencies are likely to request during any investigation.
Companies should identify competition concerns early. The earlier companies identify likely competition concerns the better. The existence of these concerns may have an important effect on deal negotiation and documentation, including, for example, terms governing "walk away rights" if the transaction is held up by a second request.
This Update is only intended to provide a general summary of the Hart-Scott-Rodino Annual Report for Fiscal Year 2007. You can find discussions of other recent cases, laws, regulations and rule proposals of interest to public companies on our website.