Antitrust Alert: In the Face of Mounting Costs, Jones Day Proposes New Approach to U.S. Merger Review Process
Jones Day antitrust lawyers recently authored an article – "Merger Process Reform: A Sisyphean Journey?" – advocating significant changes to the federal merger regulatory review process. For the last thirty years, since the FTC and DOJ first promulgated rules implementing the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act"), there has been one constant: complaints about the burden of the merger review process. The agencies have produced several "reforms" that have obviously not solved the problem, as the costs borne by merging parties continue to grow. The article, published in the ABA's Antitrust magazine, does more than just catalogue the problems – it proposes a whole new approach: the imposition of binding limitations on Second Request production requirements (probably by legislation) in exchange for the antitrust agencies having both the time and the opportunity to perfect their discovery in federal court should they decide to challenge the transaction by the creation of a short automatic stay on the closing of the transaction upon the filing of a complaint in federal court.
The cost of agency merger review is increasing exponentially. Today it costs $5-$10 million to respond to a Second Request, ten to twenty times what it was a decade ago. For larger deals, average costs are in the $10-$20 million range. The main reason for this is technology. Far more electronic material is available and too much of it is demanded by agencies. Our experience has shown that the amount of material collected per person searched has tripled in just three years. The average number of electronic pages gathered and reviewed from a merging party during the 2006-08 time period was over 6 million pages. Apart from electronic documents, another huge cost is reprogramming mountains of data to convert it into the form that the agencies insist on – a cost that is magnified by the fact that the agencies do not always use the most sophisticated technology.
Obviously, there is a legitimate and inevitable tension here: the agencies need enough information to make an informed decision about whether to challenge a transaction, but the more they scrutinize a transaction, the higher the costs for the merging parties and the longer the merger review. It is clear the agencies use the HSR review process to prepare for litigation, and that should be avoidable. Unfortunately, so long as the agencies have the unilateral ability to set the rules of procedure, they have little incentive to make it efficient; the longer the review process, the more time the agencies have to analyze, evaluate, and (in the small number of cases that this is actually relevant) to prepare for litigation. So costs continue to increase, when all the agencies really need to do is gather enough information to make an intelligent determination of whether a transactions should be challenged; any further discovery necessary for litigation should be conducted under the supervision of a judge, as is the case in any other litigation.
The authors' proposal seeks to correct the imbalance by realigning the agencies' incentives. They suggest that agencies be required to make a decision whether to challenge a transaction within forty-five days of certification of substantial compliance, and would impose an automatic thirty-day stay on the closing of the transaction from the filing of a complaint in federal court. The parties would then be required to come to an agreement within ten days on both discovery obligations and a schedule for a preliminary injunction or trial on the merits, or present within another seven days their respective positions to the court, leaving an additional thirteen days for the court's decision. Post-complaint discovery would be subject to the Federal Rules and the court's discretion. This proposal would reduce the incentive for agencies to prepare for litigation in every deal by ensuring that they will have the time for discovery should they decide to challenge a transaction.
Additional recommendations for improving the merger review process are contained in the article, as well as descriptions of other challenges faced by merging parties.
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For more information, please contact your principal Jones Day representative or any of the lawyers listed below.
Robert C. Jones
Hugh M. Hollman