On February 16, 2006, U.S. Federal Trade Commission (FTC) Chairman Deborah Platt Majoras announced several reforms to the agency’s merger review process, which have the potential to significantly reduce the time and costs involved in obtaining merger clearance from the FTC. The reforms, which address the process for administering “second requests” under the Hart-Scott-Rodino (HSR) Premerger Notification Act, are the product of a year-long review by the FTC’s Merger Process Task Force.
The primary goals of the reforms are to reduce the cost to parties of complying with second requests, the cost to the agency to review the proposed merger and the time required to complete a merger investigation. Today, to comply with a second request, merging parties will pay on average approximately $5 million or more, and the agency’s merger review might take as long as a year to complete, which delays the proposed transaction in the interim. For entities contemplating transactions with substantive competitive issues before the FTC, these reforms will hopefully result in reduced compliance costs for a second request and expedited FTC review. The Antitrust Division of the Department of Justice, which is also responsible for reviewing mergers for possible anticompetitive effects, is expected to announce similar reforms in the near future.
The reforms apply to all HSR notifications made on or after February 17, 2006, and address five main areas.
FTC second requests will now include the presumption that each party will not need to search the files of more than 35 of its employees, referred to as custodians, unless the FTC’s Director of the Bureau of Competition authorizes a larger search group. Prior to this reform, there was no limitation on how many custodians the FTC could require the merging parties to search for responsive documents; frequently, the FTC would require merging parties to search more than 100 different custodians. However, if the merging parties want to obtain the benefit of this presumption, they must agree to several conditions that provide the FTC more time to review the documents and information. In particular, a party taking advantage of this presumption must produce responsive materials 30 days before formally certifying its substantial compliance with the second request or agree to “rolling” production of the responsive materials. Also, in the event the FTC challenges the transaction in court, the party must agree that both parties will jointly propose (with the FTC) a scheduling order that contains at least a 60-day discovery period. Moreover, to accept this presumption, the FTC imposes minor additional conditions.
Although limiting the number of employees subject to the second request will likely reduce the costs and time of compliance, parties facing a second request must determine, on a case-by-case basis, whether agreeing to the conditions associated with the presumption is the correct strategic decision. In particular, if merging parties believe the FTC is likely to challenge a transaction and the parties are willing to litigate with the FTC, then providing the FTC additional time during the second request and an extended discovery period during litigation may result in greater costs than complying with a broader second request.
Two-year Relevant Time Period
Going forward there will be a presumption that the “relevant time period” for which parties are required to search for documents to respond to a second request is two years prior to the date on which the FTC issues the second request. This presumption represents a shift from the FTC’s previous model second request, which recommended the relevant time period include the three years prior to the date on which the FTC issued the second request. The relevant time period does not apply to data, and staff may enlarge the relevant time period if it deems it necessary to analyze the competitive effects of a transaction. Further, the FTC has also agreed to limit the “refresh” obligation and will no longer require parties to “refresh” their search for relevant documents created between the initial search and their certification of substantial compliance with the second request. Presumably, parties subject to a second request will save costs incurred by eliminating a year’s worth of documents or searching for newly created documents in order to “refresh” their production.
Data, such as sales, production and distribution databases, are not subject to the two-year relevant time period and often represent a burdensome component of the second request. The FTC often requests data in formats that businesses do not normally use. To ease some of the burden and cost of gathering this data, the FTC staff should now inform the parties of the competitive effects theories it is considering and the types of empirical data most useful to reviewing the transaction. The FTC will encourage each party to provide: a written description of how the party collects, maintains and uses the types of data it is seeking; a proposal to limit the data request, including samples of data in support of the proposal; and access to the party’s employees knowledgeable about how the party collects, maintains and uses the requested data. The Chairman intends for this collaborative approach to limit the parties’ compliance costs while supplying the agency with the data it needs to effectively analyze the transaction.
Preservation of Backup Tapes
Searching and extracting documents contained on backup tapes presents one potentially large cost of second request compliance. In an effort to contain parties’ costs of compliance, second requests issued by the FTC will include the presumption that a party may elect to preserve backup tapes for only two calendar days (identified by the FTC staff). Further, the FTC will only require parties to produce documents contained on backup tapes if responsive documents are not more readily available from other sources. The FTC reserves the discretion to require a party to preserve and produce information contained on additional backup tapes, particularly when backup tapes are the only source of information relevant to its review.
Partial Privilege Log
Creating a privilege log for second request compliance is an extremely time consuming and expensive process. Today, parties are required to produce a log of all responsive documents the party withholds on the basis of privilege. Now parties may elect to produce a partial privilege log for all custodians, while producing a complete privilege log for a small subset of the custodians (subject to other minor conditions). The FTC may require a party to produce a complete privilege log for all custodians in “appropriate circumstances.” However, the Chairman’s announcement does not explain what constitutes such appropriate circumstances.
The Chairman announced other minor reforms to the second request and also “encourages” the FTC staff and parties to employ processes that will enable a “quick look” review of a transaction in appropriate situations. The FTC will continue to review mechanisms for improving the merger review process, including internal reforms.
While these reforms will presumably lower the cost of parties’ compliance with a second request and lead to faster resolution of a pending transaction, parties subject to a second request still have several strategic considerations when deciding whether to employ some of these potentially time- and cost-saving options.
McDermott’s Antitrust and Competition Group regularly provides guidance to clients regarding premerger reporting, the scope of permissible premerger activities and defending transactions before the U.S. and international competition authorities.