Item 4(c): The Next Step In HSR Reform - Arnold & Porter

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Spring 2001 Item 4(c): The Next Step in HSR Reform Clayton Act Newsletter, Vol. I, No. 2, ©Spring 2001. Reprinted by permission of the American Bar Association Introduction  Congress' recent action to raise the HSR filing thresholds represents real progress in the effort to update the federal government's merger notification process. Since its passage in 1976 and the promulgation of implementing regulations in 1978, the Hart-Scott-Rodino statute and implementing regulations had remained largely unchanged. The new $50 million size of the transaction test effectively adjusts the reporting requirement to account for the effects of twenty-five years of inflation while establishing filing fees that should avoid a reduction in funding for the FTC and the Antitrust Division. The agencies should continue their welcome effort to reexamine and improve the HSR process. One other aspect of the HSR process that calls out for reform is the requirement found in Item 4(c) of the HSR form - that filing parties submit certain materials relating to the competitive merits of the proposed transaction. In our experience, that requirement is subject to very different interpretations by the business community, inside and outside antitrust counsel and the enforcement agencies. It is time to come up with a rule that is commonly understood, uniformly observed and consistently applied. Background In 1978 when the FTC and the Antitrust Division promulgated the HSR implementing rules and devised the basic reporting form, they sensibly included a requirement that each filing party provide certain pre-existing documents that might shed light on the competitive rationale for a transaction. Then, and today, the rule requires submission of:

Studies, surveys, analyses or reports which were prepared by or for officers or directors for the purpose of evaluating or analyzing the transaction with respect to market shares, competition, competitors, markets, potential for sales growth or expansion into product or geographic markets.1

The requirement reads simply but it has spawned much debate and confusion over the years. Virtually every phrase in the 4(c) regulation can be interpreted in different ways "Study, survey, analysis or report." On its face, Item 4(c) is not an "all documents" request. Yet staff often reads the requirement broadly, demanding handwritten notes, informal e-mails and any sort of written material if it relates to the 4(c) topics. This "all documents" view cannot, however, be found in speeches by any of the recent heads of the FTC's Premerger Notification Office2. Over time, many members of the outside bar have concluded that it is safest to treat 4(c) as an all documents request so as to avoid fights over the adequacy of compliance. In contrast, some literalists read the language as quite limiting. Unless a document is self-described as a "study," "survey," "analysis" or "report, it is withheld. From our experience in and out of government, we have known parties to withhold detailed competitive analysis contained in memos, e-mails and even board presentations on the grounds that Item 4(c) does not specifically mention those types of documents. Similarly, practice varies regarding production of drafts. The agencies say the rule requires production of the most recent "draft" of a document if it otherwise satisfies the criteria of 4(c)3. Some practitioners ignore this view, which cannot be found in the language of the rule, and exclude anything that does not identify itself as a final document, including elaborate drafts of competitive analyses where no "final" version has been prepared. "Prepared by or for officers or directors." This seemingly simply phrase has also engendered much confusion. If something was prepared by the author to go to an officer, but was never sent, is the document nevertheless prepared "for" an officer- If a document was initially prepared for someone else, but the officer eventually obtains a copy, does that become a 4(c) document- Some say yes to both; others say only the first is a 4(c); some say neither qualifies. "For the purpose of evaluating or analyzing." There is no common understanding of where the line is drawn between a document which merely discusses the 4(c) topics and one which "evaluates or analyzes" those topics. Many staff attorneys would consider any document which uses the word "market" or describes the target as "a meaningful player in the South Eastern regional subject markets" as 4(c) material. Yet in unpublished remarks by the Assistant Director of the Premerger Notification Office and two private practitioners at the April 2000 Spring Meeting, it was suggested that such references would not trigger the 4(c) requirement because they lack sufficient analysis. The lack of clarity as to what "evaluates or analyzes" means contributes to the confusion surrounding 4(c). Practitioners have generally read the "evaluating or analyzing" language to cover those documents prepared during consideration of a deal that help the officers and directors determine whether to enter into the transaction. Some, though not most, believe that no document created after the transaction documents are signed can be a 4(c) document. In contrast, some agency staff contend that any document that discusses the 4(c) topics should be included. Accordingly, staff have complained about the exclusion of scripts for investor calls after a deal announcement and Q&As for the press. Under this broad reading, even the press release for the transaction could be considered a 4(c) document if it discusses the 4(c) topics. It is hard to argue that these documents, which were created not to evaluate or analyze the deal but to explain it to the outside world after the deal was struck, should be considered 4(c). "The transaction." Some read this phrase as limited to the specific transaction described in the HSR filing. Staff often takes the view that even if the form changes considerably, from a joint venture to a minority stock acquisition, that it is the same transaction. Staff also believes that documents that consider multiple possible buyers or acquisition targets relate to "the transaction" at issue. "Market shares, competition, competitors, markets, potential for sales growth or expansion into product or geographic markets." This phrase invoked less dispute than most. But disputes arise over documents such as pro formas showing increased sales over time where parties contend the document does not analyze sales growth. Note too that efficiencies or synergies are ignored in this list of subject matters. In many, if not most, transactions, the ability to achieve cost savings is the motivating factor. It is often how parties begin presentations to agency staff, only to be confronted with skepticism because there was nothing in the 4(c) documents about efficiencies or synergies. While such documents can be provided voluntarily, many counsel are understandably concerned about putting in only certain documents voluntarily or taking the extra time and effort needed to ensure that all documents on a given topic are provided. The differences in interpretation enumerated above most often surface in second request investigations when the investigating staff of the antitrust agencies find documents in the second request production that they contend should have been included in the initial filing. Investigating staff typically demand that the HSR clock be reset to zero, starting the initial waiting period from scratch. The back and forth between parties who believe they complied fully with Item 4(c) and staff who think material information has been withheld is understandably intense. Often the merging parties accede to the investigating staffs interpretation, not because they think it correct but because the alternative of raising the issue with the Premerger Notification Office or others would take even more time than resetting the clock. Some investigating staff interpretations of 4(c) have been so far from the explicit language (and inconsistent with the position they believe the Premerger Notification Office takes) that parties simply reject it. They believe that no court and probably not even senior officials at the agencies would uphold such an interpretation. One doesn't need to take sides on who correctly interrupts the current language of Item 4(c) to conclude that the current situation is unhealthy and unnecessary and that the agencies' interpretation of 4(c) is hard to square with the language. Revised 4(c) language would allow the agencies to articulate a requirement that is consistent with their law enforcement objectives while eliminating the current confusion and inconsistency in interpretation. The agencies made a run at this in 1994, publishing proposed revisions to 4(c) in a federal register notice.

Item 4(c)(i): All studies, surveys, analyses, or reports or documents which were prepared by or for any officers) or directors) including officers or directors of any entity within the filing person (or, in the case of unincorporated entities, individuals exercising similar functions or, in the case of a limited partnership, any general partners) of such partnership and, in the case of a general partnership, the partners of such partnership) for the purpose of discussing, evaluating or analyzing the acquisition with respect to (i) market shares, competition, competitors, markets, potential for sales growth or expansion into product or geographic markets; (ii) the businesses of, products manufactured by or services provided by the acquiring person and the business enterprise being acquired (as represented by the assets or issuer whose voting securities are being acquired); or (iii) the integration of the operations of the acquiring person and the business enterprise to be acquired. Item 4(c)(ii): All investment bankers' books, offering memoranda, and similar documents which have been prepared by any person for the purpose of soliciting expressions of interest from prospective purchasers for the assets or entity to be acquired.

The proposed revision went nowhere for one simple reason. It overreached, converting Item 4(c) into an "all documents" request. After a firestorm of criticism, the agencies simply left the proposed revision twisting slowly in the wind and continued to apply the current language. The FTC and Antitrust Division apparently preferred the status quo to a situation where they had to either formalize their broad reading of the current language or accept something less than all documents. It is time to get back to basics and come up with a revised proposal. There is a balance that can be struck between burdening the numerous filings made each year where no investigation is undertaken and providing the agencies with competitive analyses that will aid the decision as to what transactions to investigate. New language should more clearly specify the particular kinds of documents that 4(c) would require. It should not be an "all documents request." Although such a requirement would provide staff with more documents, its costs outweigh the benefits. It would require an extensive search - including e-mail, and considerable time to identify the author of each document. It would result in boxes of documents accompanying some filings, also increasing the burden on staff without sufficient warrant. Our experience in and out of government convinces us that making 4(c) an "all documents" request will not materially enhance the staff's mission at the front-end of the HSR process - deciding which transactions warrant further scrutiny. With appropriate revised language, however, the agencies can obtain the documents they need and reduce the current uncertainty. Clarity is the goal.4 To be consistent with staff's current interpretation, revised language should do the following:ConclusionThere can be little doubt that the existing state of confusion and contention over what Item 4(c) properly requires is not healthy. The vast majority of parties and practitioners want simply to comply with the regulations and not to take advantage of any ambiguities in the language. They cannot do this without clear guidance from the agencies. We believe that some modest changes to the language can alleviate the problem and urge the agencies to address this issue in their continued and welcome efforts to clarify the HSR Act.1The statement of basis and purpose accompanying the requirement explains that: "Internal documents of the parties to an acquisition provide a perspective on matters of antitrust concern that even detailed statistical information is unlikely to yield. . . . . The agencies have found from past experience that the viewpoints of the participants are extremely valuable in analyzing the antitrust implications of an acquisition and have determined that some of these perceptions are indispensable to the preliminary review envisioned by the act. 43 Fed. Reg. 33,525 (July 31, 1978).2John M. Sipple, Jr., Prepared Remarks Before the New York Bar Association (Jan. 16, 1990) (the "Sipple Speech"); Joseph G. Krauss, New Developments in the Premerger Notification Program, Speech before the D.C. Bar Association Antitrust, Trade Regulation and Consumer Affairs Section Antitrust Committee (Oct. 7, 1998) (the "Krauss Speech"); Marian Bruno, Brian Mohr, Bruce Prager, Locating and Identifying 4(c) documents, Speech Before the ABA Spring Meeting (Apr. 2000) (the "April 2000" speech).3Sipple Speech, supra note 1.4The very fact that an entire presentation at the ABA Spring Meeting was devoted to 4(c) compliance demonstrates that the plain language of the rule is not self?explanatory. It also emphasizes the need for transparency in guidance. That helpful presentation, at last spring's ABA Antitrust meeting, by the current head of the Premerger Notification Office and two members of the private bar has not been widely circulated. See also ABA Section of Antitrust law, The State of Federal Antitrust Enforcement?2001, p.31 at n.12 (noting that additional guidance with respect to the 4(c) instructions would be useful).

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