Just because a proposed transaction does not have to be reported in advance to the Department of Justice (“DOJ”) or the Federal Trade Commission (“FTC”) because it falls below the Hart-Scott-Rodino (“HSR”) Act size of transaction threshold (currently$75.9 million), you are not out of the woods. The growing list of companies defending antitrust challenges to non-reportable transactions confirms this. But before you end up in court defending a non-reportable transaction, there are number of strategic calls you can make to minimize the risk of an investigation and potential negative outcome.
First, some numbers. According to a recent speech by Leslie Overton, the DOJ Antitrust Division’s Deputy Assistant Attorney General for Civil Enforcement, between 2009 and 2013 the Division launched 73 preliminary inquiries into transactions that were not reportable under the HSR Act. These transactions included both consummated transactions and non-reportable ones that came to the Division’s attention before closing. The resulting investigations represented nearly 20% of all merger investigations opened by the Division during that period, and more than one in four of the Division’s investigations into these non-reportable deals resulted in a challenge.
How do non-reportable transactions get on the antitrust enforcers’ radar screens? As Overton explains in her speech, Antitrust Division staff actively monitor developments in their assigned areas. Take the Division’s successful challenge to Bazaarvoice’s consummated acquisition of PowerReviews, for example. The preliminary investigation into that transaction was opened after a Division attorney read about the deal in a trade publication. Other times, “marketplace participants” (such as customers) express concern about a deal, either publicly or privately to the enforcement agencies.
Are there benefits of self-reporting to the enforcement agencies? The agencies do not accept voluntary HSR filings, but they will be glad to talk to you about the deal. According to Overton, approaching the Antitrust Division before closing may provide greater flexibility going forward. In a post-acquisition challenge, for example, “the acquirer may bear the risk of the remedy alone, rather than sharing it with the seller.” And, “where assets have become scrambled, an effective remedy to an unlawful transaction may well necessitate disruption of the combined company’s operations, might require divestiture of assets beyond those acquired in the underlying deal, and could even potentially entail disgorgement.”
What are the benefits of constructive engagement? Working with the Antitrust Division, Overton says, enables the parties “to design a mutually agreeable investigative plan that gives [the Division] reasonable time to investigate, but also provides the parties with predictability and the opportunity to provide evidence of any pro-competitive benefits.” And, if a transaction has already closed, Overton suggests that “a hold-separate or asset preservation agreement, which can benefit the merged firm as well as help facilitate the restoration of competition, should a divestiture ultimately be required” can be agreed to as well.
How should company executives and lawyers evaluate the antitrust risk posed by a non-reportable transaction? In Overton’s view, they should take “potential antitrust issues seriously” when considering a non-reportable transaction. Overton sees transactions that involve a niche product, narrow geographic market, or indications that the contemplated merger is viewed “as an opportunity to end margin erosion, reduce pricing pressure, or eliminate a key competitor” as raising “red flags.” Above all, Overton counsels that “early and constructive engagement with the [Antitrust Division] often helps the parties to a non-reportable transaction resolve [the Division’s] competition concerns on terms and timing they find palatable.”
What can you do when considering a non-reportable transaction? Ask hard questions internally about the business rationale and competitive consequences of the deal, and don’t end the inquiry when it is determined that the transaction falls below the HSR Act threshold. Doing so when faced with the “red flags” Overton identifies may come back to haunt you.