HSR Primer: §7 and HSR
If you think it’s bad having to admit at parties that you are a lawyer, try explaining that what you deal with is called the Hart-Scott-Rodino Antitrust Improvements Act of 1976. At least you won’t be stuck talking about work all night. But if there isn’t much glamor in HSR work, there certainly is the devil in it: The Act and the Rules accompanying it are hopelessly complicated and convoluted. Hopelessly? Not quite. There is the new edition of Axinn/Fogg/Stoll/Prager/Pisa. And I am planning a series of posts about HSR, and specifically about questions of reportability, to show some principles, shortcuts, and tricks that I have found helpful. I’ll add the disclaimer now that it will all be eclectic and some of it apocryphal. Probably none of it will be news to those who deal with HSR regularly. Please let me know your comments.
The big question of course is, to what extent does §7 guide the interpretation of HSR? §7 Clayton Act forbids acquisitions of voting securities or assets that will substantially lessen competition or tend to create a monopoly. The HSR Act, as a procedural statute, seeks to aid the enforcement of §7 by requiring the premerger notification of transactions that are likely to run afoul of §7. It is obviously easier to prevent a merger than it is to undo it. But how likely must a transaction be to violate §7 in order to justify premerger notification? There are two opposing interests at work: The interest of the enforcement agencies is to cast the net wide in order not to miss anything. The interest of merger parties is not to incur the costs of the premerger notification process needlessly. But it is also in our general interest not to make the premerger notification process too costly, since inefficiencies in the process by definition will deprive consumers of efficiency-enhancing benefits. The slightly simplified view of antitrust lawyers is that there are only two reasons for a merger or an acquisition: To enhance efficiency or to increase market power (thus potentially lessening competition and harming consumers). If a transaction that doesn’t fall under §7 is subject to premerger notification requirements, the efficiencies flowing from the transaction are delayed, temporarily depriving consumers of the benefit. This trade-off between prevention and efficiency is a necessary feature of a premerger notification program, and the only question is: how can we optimize the selection of mergers that should be notified and subject to a waiting period?
This graph shows the overlap between §7 and HSR reportability. HSR is overinclusive, since it requires the notification of transactions that have little or no potential of substantially lessening competition (that will be theme throughout these posts). But it is also underinclusive, since there are transactions that do (or could) lessen competition but that are not subject to reporting requirements. The primary example are transaction that fall below the minimum threshold of currently $63.1 million. The graph shows the three tools that HSR gives the antitrust agencies: a waiting period of usually 30 days (15 days for cash tender offers), access to the parties’ relevant documents (specifically those discussing markets, market shares, competition, competitors and so forth), and Requests for Additional Information and Documentary Evidence, known as Second Requests, which function as subpoenas and interrogatories that the agencies may issue without recourse to the courts.
The size of the green circle, for transactions violating §7, is probably too large in the graph, as the following graph suggests. The information comes from the DOJ/FTC Annual Report for Fiscal Year 2007.
The statistics show that about 1.5% of all reportable transactions are ultimately challenged by the agencies. The empirical question raised is whether the competitive harm to consumer welfare of those 1.5% outweighs the cost of premerger notification imposed on the other 98.5% transactions. But phrasing the question that way skews it. It will be hard to quantify the preventive effect of the premerger notification requirement: anti-competitive transactions are restructured or abandoned because it is clear to the parties that the agencies would challenge them after HSR notification has been filed. My hunch is that the preventive effect is significant and significantly higher than it would be if all §7 enforcement occurred post-closing; the HSR Act therefore is not ludicrously broad in its reach.
Rather, the message is that in interpreting HSR’s notification requirement, the ultimate reach of §7 should be kept in mind and the reportability of transactions that cannot even potentially violate §7 avoided.
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