Merger in Sight?

Pre-merger review under the Hart-Scott-Rodino Act and the duties of the filing parties
by Richard Lieberman and Jeff Gardner

In November 2017, the United States Department of Justice filed an antitrust lawsuit to block AT&T’s $85-billion purchase of Time Warner. The lawsuit was eye-opening and sent significant ripples across legal and business landscapes. In particular, the suit showed an inclination of the federal government to block a large merger between two companies that were not direct competitors but, rather, proposed to integrate “vertically.” Moreover, it demonstrates that the anti-trust scrutiny of potential transactions remains active regardless of the changes in the White House.

The Hart-Scott-Rodino Antitrust Improvements Act of 1976 

As background, federal antitrust laws apply to virtually all industries and to every type of business. These laws prohibit practices that restrain trade, reduce competition or are designed to secure monopoly power. 

The Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act) requires parties to large proposed merger or acquisition transactions to file a notice with the U.S. Federal Trade Commission and the U.S. Department of Justice in advance of the transaction, unless an exemption from that filing exists. The FTC and DoJ have 30 days to decide whether to review the transaction for potential anti-trust implications or to permit it to occur. The parties may not consummate that transaction until HSR Act clearance has been obtained.

If the government seeks to review the transaction, it will typically send out an information request seeking substantial additional information to assist with reviewing the competitive impact of the proposed transaction.

In preparing the initial filing and responding to the government’s information requests, parties need to fully comply with those disclosure obligations to avoid potential penalties for non-compliance. In 2016, the FTC imposed $12.1 million of penalties against three companies that either failed to file the required reports or did not file complete submissions. 

HSR Act Filing Thresholds

HSR Act compliance is required for mergers and for acquisitions of equity, assets or other non-corporate interests. The thresholds for which proposed deals must file the HSR Act notice depend on the size of the transaction or the size of the parties. Those thresholds are adjusted each year, typically in January or February. The current thresholds (as this January issue goes to press) are that no reporting is required if the acquiring person will not hold voting securities, assets or non-corporate interest of the other party above $84.4 million. If that threshold is crossed, reporting is required if one party has annual net sales or total assets above $16.9 million and the other has annual net sales or total assets of at least $168.8 million. All transactions in excess of $337.6 million must file unless exempt.

Anti-Trust Review

Most transactions filed under the HSR Act do not result in additional scrutiny by the DoJ or FTC. In 2016, the FTC reported that 1,832 filings were made under the HSR Act. Of those, 238 (about 13 percent) raised competitive concerns and were reviewed in more detail; 54 resulted in a second request for information; and the government brought 47 enforcement actions. Those filings not only sought to block transactions, but also included actions for failure to file the required notices and information with the DoJ and FTC.

More importantly, significant transactions were abandoned by the parties following the DoJ’s review, including the Staples-Office Depot, and the Penn State Hershey-Pinnacle transactions.

Historically, the DoJ and the FTC scrutinized and, at times, sought to block “horizontal” mergers — those that involved two or more competing companies within a specific industry. 

What is particularly noteworthy about the government’s case against AT&T is that the contemplated merger did not involve competitors in a specific industry; the merger was, instead, “vertical,” which often avoids government action. The DoJ believed that the AT&T-Time Warner merger would limit competition and raise customer costs — perhaps by as much as $500 million per year, according to the government’s expert witness in the case.

The DoJ’s lawsuit signaled that the regulator may be examining a different approach to antitrust regulation — one where large corporate mergers would be closely scrutinized even where the mergers did not involve direct competitors in a specific industry. 

In June, a federal district court judge approved the purchase, but the DoJ appealed that ruling to the U.S. Court of Appeals for the District of Columbia. Oral argument on the appeal took place on Thursday, December 6. There is no ruling yet. For now, businesses, lawyers and consumers will need to stay tuned.   

Richard Lieberman has extensive experience in a broad range of business law issues, including mergers and acquisitions, securities, corporate governance, finance and banking, employment, executive compensation, bankruptcy and corporate restructuring, litigation and legislation. Jeffrey Gardner focuses his practice on securities litigation, class action, employment, and intellectual property matters. He currently serves as national Co-Chair of the Section of Litigation Trial Practice Committee of the American Bar Association.
Richard Lieberman and Jeff Gardner are members with Jennings Strouss.

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