Before the HSR Filing

• Pages: 159-237

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CHAPTER V

BEFORE THE HSR FILING

This chapter describes the role of antitrust counsel before notification

of a transaction is made to the federal antitrust enforcement agencies.

Parties to a proposed transaction that may raise competition issues should

consult with antitrust counsel early in the process of evaluating and

negotiating the transaction. A full-scale government merger investigation

is a costly and intrusive process. A client may choose not to incur those

costs if the prognosis for successful completion of the government

antitrust review process is not good. In many cases, however, proper

advance preparation can make it possible during the initial review to

demonstrate to the government that a full-scale investigation (which

would involve issuing a Request for Additional Information and

Documentary Materials (second request) and/or civil investigative

demands) is not necessary. Antitrust counsel should anticipate that a

client considering a transaction will require a quick and well-informed

initial assessment of the likelihood that a transaction can be

consummated, the time and costs involved in getting the transaction

through the government review process, and business risks that might

arise from delays in consummation or failure to consummate due to

antitrust concerns.

In any transaction subject to the filing requirements of the Hart-

Scott-Rodino Antitrust Improvements Act (HSR Act), the government

may terminate the initial waiting period early or permit the initial waiting

period to expire or delay consummation of the transaction by opening a

full-scale investigation. In some cases, a full-scale investigation is not

carried through to completion, either because government investigators

determine during the course of their review that the transaction is

unlikely to harm competition or because the parties abandon the

transaction rather than suffer the delay and expense of a full-scale

antitrust investigation. The completion of a full-scale investigation can

produce any of three potential outcomes: (1) the transaction may be

permitted to go forward without challenge; (2) the transaction may go

forward subject to a negotiated consent order; or (3) the transaction may

become the subject of government antitrust litigation.

This chapter addresses how antitrust counsel makes the initial

antitrust assessment of a proposed transaction and describes the steps that

counsel should take before any filing is made to prepare management for

the merger review process, control the company’s exposure to an

160 The Merger Review Process

antitrust challenge, and develop a strategy for the merger review process.

This chapter also describes how to determine whether a transaction is

reportable under the HSR Act, how to prepare the Notification form, and

what, and to what extent, prefiling contacts with the government may be

effective. The role of inside counsel is explored, and the process by

which the agencies may commence their initial review before formal

HSR notification is described.

The conclusion that there is a significant likelihood of a government

challenge to a transaction as first conceived should not be the end of the

analysis. It may be possible to restructure the transaction to eliminate or

mitigate competitive concerns while achieving the parties’ business

objectives. The parties can often overcome government concerns by

restructuring a transaction, with certain assets being retained by the seller

or sold to a third party. In some situations, competition concerns may be

resolved through licensing of intellectual property or through conduct

restrictions. In transactions where there is a significant possibility of an

antitrust challenge, consideration should be given at the outset to

avoiding problems by restructuring the transaction, as opposed to

proffering divestiture at the conclusion of an expensive and time-

consuming agency investigation. In that regard, it is worth noting that the

federal antitrust agencies look very closely at “viability” issues,

particularly where divestitures are proposed at the end of an antitrust

investigation.522 The decision as to when to address competition issues

through restructuring will often turn on, among other things, the

likelihood the government will conclude that there is a problem, the

relative significance of the assets involved to the transaction as a whole,

the feasibility of cleanly separating the assets or business units at issue,

the likelihood of the government accepting the parties’ restructuring, and

the extent to which the transaction must be accomplished within a

relatively tight time frame.

A. Making the Initial Substantive Assessment

Antitrust counsel should seek to predict, at an early stage, the

outcome of the government’s antitrust review process. This initial

substantive assessment will help guide the client’s decision making

regarding which potential transactions to pursue and how to pursue them.

It will also guide antitrust counsel’s participation in negotiations over a

522. See Chapter X.A.1.

Before the HSR Filing 161

transaction’s commercial structure and contractual terms and the early

steps that are taken to minimize subsequent legal costs, delays, and risks.

It is beyond the scope of this Handbook to address the substantive

antitrust analysis that must be undertaken to evaluate the competitive

impact of a transaction, but the ultimate goal of such an analysis is to

determine whether the transaction is likely to create or enhance market

power or facilitate its exercise.523 Market power is the ability of a seller

or sellers in the market to maintain prices above competitive levels for a

significant period of time (or to decrease output or quality or lessen

innovation). To make the necessary assessment, counsel must determine

relevant product and geographic markets and, for each relevant market,

assess the competitors and potential competitors in those markets, the

market shares to be attributed to each competitor, the market

concentration, the change in concentration attributable to the transaction,

the nature of competition in the market, how the transaction might affect

the likelihood of coordinated interaction or a unilateral exercise of

market power, the relative ease or difficulty of entry into the market, the

nature and magnitude of efficiencies the acquisition will generate and

their effect on competition, and whether one of the firms or divisions is

failing and likely to exit the market absent the transaction.

A full assessment of the competitive impact of a proposed

transaction often requires an exhaustive investigation and complex

analysis. The assessment is fact-intensive, and obtaining the necessary

information can itself be a challenge. Much of the evidence that

ultimately would be relied on by the government to challenge the

transaction may not be available to antitrust counsel at the early stages of

the transaction. By the conclusion of a full-phase investigation,

government antitrust investigators will have reviewed a broad range of

nonpublic material that may not be available to antitrust counsel during

the prefiling period, or, for that matter, ever (e.g., information from third

parties), including the following: (1) documents in the files of the other

party to the transaction; (2) documents in the files of counsel’s own

client that the client may not be able to identify and review within the

time and cost constraints typically imposed on an initial assessment;

(3) competitors’ capacity, production, and sales data that can be

estimated only very roughly by the parties but that the government can

obtain directly from the competitors; and (4) customers’ reactions to the

523. See generally 1 ABA SECTION OF ANTITRUST LAW,ANTITRUST LAW

DEVELOPMENTS (6th ed. 2007).