Why premerger review needed reform, and still does.

• Author: Howell, Andrew G.

In 1976, Congress devised the Hart-Scott-Rodino Act (1) (HSR) to improve the enforcement of existing U.S. antitrust law. (2) One of the key elements of the scheme was a requirement that transacting parties notify enforcement agencies before launching certain major mergers and acquisitions. (3) This premerger notification, according to advocates, would enhance policing of a small number of transactions, about 150 per year, possessing particular potential to be problematic. (4)

During the twenty-five years since HSR's inception, this originally modest reporting program has grown in a manner not only dramatic, but unintended. (5) By the year 2000, federal antitrust agencies were examining the majority of U.S. merger and acquisition activity (6) and dedicating an ever-expanding portion of their resources to the program. (7) As a result, practitioners and enforcement officials grew concerned that the program was weakening the effectiveness of the enforcement agencies, (8) if not wreaking substantive change in antitrust law, (9) and there were calls for its revision. (10)

On December 21, 2000, President Clinton signed the Fiscal Year (FY) 2001 Commerce-Justice-State Appropriations Bill. (11) At first glance, this legislation appears to answer the calls for revision of HSR's premerger notification program. Buried in this 320-page omnibus bill are four pages (12) of language amending (13) the program. Most notably, the amendment institutes inflation adjustment in an attempt to slow or stop the growth of premerger notification required under the program. (14)

Although it is too early to measure the full impact of the recent amendment, (15) it is not too soon to consider whether this change truly answers cries for reform, or merely mutes them. This Note asserts that the 2000 amendment does not adequately revamp the program because, although the inflation adjustment should greatly slow the growth of the program, the amendment does not reverse the substantive change induced by twenty-five years of HSR growth. Finally, this Note proposes reforms that would help restore balance to antitrust law: a return to a more limited review system and a switch to a less surrogate-based jurisdiction test. (16)

This Note considers premerger notification in five sections. The first section opens the examination with a brief review of U.S. antitrust law prior to HSR and premerger notification. (17) This section discusses the statutory nature of U.S. antitrust law as first established, then it reviews the development of the field and the delicate balance achieved between agency regulation and statutory/judicial guidance.

Section two discusses the creation of the Hart-Scott-Rodino Act as a means of providing understanding of the Act's goals. (18) The section outlines the perceived problems leading to HSR's passage and summarizes the premerger notification provisions. Consideration of the legislative history reveals that Congress sought to cause only procedural changes, to encompass only the very largest of mergers, and to minimize the burden placed on commerce.

The third section addresses the dramatic growth of reporting under the Act and outlines the causes of this growth. (19) It then considers the impact of this growth, particularly with regard to the burdens HSR creates and the substantive changes it has wrought in antitrust law. Next, the section considers how the problems with premerger notification are a product of the surrogate, i.e., dollar-based, definition of the jurisdiction test. This analysis illuminates the need for change in the jurisdiction test.

With this understanding of the preamendment situation, section four examines potential solutions to the jurisdiction test problem. (20) The search for an alternative begins with discussion of the premerger notification programs of other countries. This review reveals no valuable new model, however, because all functional systems use a surrogate definition. Consequently, this section then considers methods of resetting and adjusting the current test. Finally, this section outlines a new, less surrogate-based test, determined more directly by the level of merger activity.

In light of these options for a revised test, section five examines how the test that was actually implemented by the recent amendment fails to resolve the problems at hand. (21) It then considers whether this was an act of commission or omission by reviewing the legislative history of the amendment. Finally, section five explains how a more limited program of review and a new, less surrogate-based jurisdiction test could help restore balance to antitrust law by further reducing the burden of HSR notification and returning responsibility to the courts.

THE DELICATE BALANCE

This section sets the stage for an examination of premerger notification by briefly reviewing the development of U.S. antitrust law prior to HSR. It emphasizes the delicate balance achieved between statutory/judicial guidance and agency regulation. (22)

Early Restraints on Trade

When the American colonists included the British common law tradition among the things they chose to haul to the New World, they implicitly accepted the idea of restraint of trade. (23) In the early days of the Republic, these "unwritten" rules were sufficient for controlling commerce in the new nation. The Industrial Revolution and the Civil War, however, brought fundamental changes in the nature of economic power and the nation in which it was wielded. (24) Until this point, "combinations among manufacturers were few in number and narrow in scope. The inadequacy of transportation facilities, and the comparatively small capital investment per firm, prevented manufacturers from reaching out to any considerable extent into the territory of their potential rivals; and there was thus less occasion for association." (25) This age of primacy for family trades and small businesses was drawing to a close, however, and as the nation entered the Gilded Age, the era of the Robber Baron reached full flower. (26)

Development of The Trusts

The increasing and improving mechanization of Reconstruction industry allowed producers to turn out far more goods than ever before, (27) while the improving system of canal and railroad transport allowed the nationalization of previously isolated markets. (28) The result was a business environment ripe for the growth of larger, more efficient companies than ever before. Smaller competitors who could be driven out or bought out were absorbed rapidly, (29) but as the survivors began to achieve the efficiencies (30) of vertical integration (31) and interstate operations, they faced state law roadblocks to their continued consolidation.

Some states threatened taxation on the entire capital stock of any corporation doing business within their borders. (32) It was preferable, therefore, to hold control of other companies rather than to hold ownership of those companies' assets. Almost all states, however, did not allow chartered companies to hold the stock of other firms. (33) The less-expensive option of acquiring a controlling interest would not suffice; outright purchase of the competitor's business was required. By making that purchase, though, companies risked substantial tax liability. (34)

The escape from this Catch 22 came in the form of an old common law device known as a trust. Typically, stockholders of several companies exchanged their stock and voting power for trust certificates representing their percentage of the combined businesses, now labeled a "trust." (35) Thus, a trust was simply a form of holding company, "but without the `formalities' of a name or legal incorporation, and without the necessity of public disclosure." (36) By the end of the century, there would be more than 300 such trusts formed, (37) the largest of them individually controlling more than one billion dollars--in 1900 dollars--worth of capital. (38) This concentration of massive economic power without close public supervision was to be their undoing.

Public Outcry Against The Trusts

The profound economic and social changes in the United States during this period were quite traumatic, and corporations and trusts became a lightning rod for discontent. Books, magazines, newspapers, and political cartoons touted "fraudulent schemes, graft, and political corruption." (39) From 500-page treatises decrying the "rapacious monopolists" who were "allowed by Congress to plunder the nation," (40) to magazines such as North American Review covering the "growing antimonopoly movement" and "`destructive hostility toward moneyed corporations,'" (41) to newspapers, exemplified by Henry Lloyd's perfection of muckraking for the Tribune, trusts were under attack on all fronts, with the "public" demanding that Congress take action. Even law reviews joined in the hunt, with the very first Harvard Law Review volume warning that this "new monster ... may realize the Satanic ambition,--infinite and irresponsible power free of check or conscience." (42) Those who attacked the trusts were said to be "anti trust," and with Congress open to the idea of statutory regulation of commerce, (43) they were about to impel the creation of an entirely new--and eponymous--field of law.

The Sherman Act: Statutory Regulation

Between January 10, 1888, and President Benjamin Harrison's signing of the Sherman Antitrust Act (44) on July 2, 1890, Congress considered forty-two bills and two resolutions for constitutional amendment (45) to control these "commercial monsters." (46) Had Congress desired to establish administrative regulation of this field, its recently enacted Interstate Commerce Act provided a ready model. (47) A similar, though less-powerful, administrative agency for antitrust was in fact proposed, (48) as were regulation by tariff, taxation, voiding of patents, prohibition of purchase of trust-made goods, forfeiture of corporate stock and rights, voiding of trusts' contracts, and...