the antitrust source Ⅵ www.antitrustsource.com Ⅵ February 2 01 9 1 Nothing to See Here! Clearing the Deal in the Initial HSR Waiting Period Amanda L. Wait and Andrew W. Eklund Over the past ten years, over 83 percent of reportable transactions that have received Second Requests from either the Federal Trade Commission or Antitrust Division of the U.S. Department of Justice have been challenged. 1 Merger review in the United States is taking longe r2 and get - ting more expensive. In the past year, both federal antitrust enforcement agencies in the United States have recognized this increased burden on merging parties and are taking commendable and encouraging steps to address unnecessary burdens on merging parties. One way to elimi - nate the burden of a Second Request, however, is not to get one in the first place. OBy statute, deals that trigger premerger filings under the Hart-Scott-Rodino Antitrust Improve - ments Act (HSR) are usually subject to a 30-day initial waiting period (certain transactions, such as cash tender offers and transactions involving assets in bankruptcy, have a shorter waiting peri - od) during which the parties cannot consummate the pending transaction. 3 At the conclusion of the initial waiting period, 4 the reviewing agency may either close its investigation without further action or seek additional information from the parties in the form of a “Second Request.” A Second Request is a request from the reviewing agency to the transaction parties for documents, data, and other information. The issuance of a Second Request tolls the statutory waiting period under the HSR Act until 30 days after the parties “substantially comply” with the Second Request. As a prac - tical matter, compliance can take several months and command substantial financial and man - agement resources. Avoiding a Second Request is not possible in all transactions, of course. Some transactions are “red lights”—highly likely to receive significant scrutiny because they involve direct competitors in industries and geographic areas served by few (or no) other competitors. On the other end of the spectrum, many other deals are unlikely to receive a Second Request in the first place. These Ⅵ “green light” deals, for example, may involve acquisitions by private equity firms of companies that Amanda L. Wait is a Partner at Norton Rose Fulbright. Ms. Wait 1 Bureau of Competition, Fed. Trade Comm’n & Antitrust Div., U.S. Dep’t of Justice, Hart-Scott-Rodino Annual Report-Fiscal Years 2008 previously served as an through 201 7, https://www.ftc.gov/policy/reports/policy-reports/annual-competition-reports . For this purpose, “challenge” means a consent decree, litigation, or abandonment after threat of challenge. attorney at the Federal 2 See Makan Delrahim, Ass’t Att’y Gen. Antitrust Div., U.S. Dep’t. of Justice, It Takes Two: Modernizing the Merger Review Process, Remarks Trade Commission. Before the 2018 Global Antitrust Enforcement Symposium (Sept. 25, 2018), https://www.justice.gov/opa/speech/assistant-attorney- Andrew W. Eklund is general-makan-delrahim-delivers-remarks-2018-global-antitrust . The Dechert Antitrust Merger Investigation Timing Tracker (DAMITT) an Associate at Hunton 2017 year in review report finds that deals are taking, on average, 10.8 months for review. DAMITT 2017 Year in Review: Number of Andrews Kurth LLP. Significant Antitrust Merger Investigations Take Ever Longer to Complete; Signs of Trump Administration Quickening the Pace , DECHERT LLP (Jan. 17, 2018) [hereinafter DAMITT 2017], https://www.dechert.com/knowledge/publication/2018/1/damitt-2017-year-in-review-- The authors recognize number-of-significant-antitrust-merg.html . the significant research 3 15 U.S.C. §§ 18a(a), (b). This timing can be shortened if the parties request, and the FTC grants, early termination of the initial waiting assistance of Catherine period. Kordestani in preparing 4 As discussed in more detail below, the parties may choose to extend the initial waiting period by an additional 30 days by “pulling and re- this article. filing” the HSR form. the antitrust source Ⅵ www.antitrustsource.com Ⅵ February 2 01 9 2 are not in the same or adjacent industries as the firm’s existing portfolio companies. Many deals, however, are “yellow lights” —merging firms should proceed with caution because at least some level of scrutiny is possible. These “yellow light” deals present opportunities for merging parties to proactively address potential issues to obtain U.S. merger control clearance during the initial waiting period. Clearing one of these “yellow light” deals during the initial waiting period often requires signif - icant advance planning. This article discusses some ways merging parties and their counsel can The likelihood of the make efficient use of the initial waiting period to optimize the chance of obtaining clearance with - out the issuance of a Second Request. 5 FTC or Antitrust Second Requests: Months of Work, Millions of Dollars, Business Disruption . Division challenging a and Your Deal Could Be Challenged Anyway The likelihood of the FTC or Antitrust Division challenging a transaction in the form of a consent transaction in the form decree, litigation, or the parties abandoning the transaction entirely after the issuance of a Second Request, has increased dramatically in the past ten years. During the George W. Bush adminis - of a consent decree, tration, an average of 70 percent of adjusted reported transaction s 6 that received Second Requests ultimately were challenged. This number increased to over 82 percent during the litigation, or the parties Obama administration. Said another way, in just a few years, transactions were over 12 percent more likely to be challenged if they received Second Requests. Relevant data for a complete fis - abandoning the cal year under President Trump has not yet been released, but we expect the percentages of chal - lenges after receipt of a Second Request to remain high. transaction entirely FIGURE 1. Combined FTC and Antitrust Division Merger Challenges as a Percent of Second Requests by Fiscal Year after the issuance of a 120 Second Request, has 100 increased dramatically 80 60 in the past ten years. 40 Bush Obama 20 Average = Average = 69.6% 82.6% 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20 11 2012 2013 2014 2015 2016 Source: Bureau of Competition, Fed. Trade Comm’n & Antitrust Div., U.S. Dep’t of Justice, Hart-Scott-Rodino Annual Report-Fiscal Years 2001 through 2017, https://www.ftc.gov/policy/reports/policy-reports/annual-competition-reports . 5 To the extent a Second Request has been issued, there are several strategies that parties may use to reduce the scope or burden of the Second Request. These strategies are beyond the scope of this article. 6 “Adjusted reported transactions” are those in which the agencies could issue a Second Request. “Adjusted transactions exclude transac - tions that are not subject to antitrust review under the HSR Act because: (1) the notification filing was incomplete or withdrawn before the start of the initial waiting period; or (2) the transaction reported was subject to review by another federal agency or later determined to be not reportable.” Andrea Zach, Diving into the Data in the HSR Report , FTC: News & Events, Blogs, COMPETITION MATTERS (Oct. 4, 2017), https://www.ftc.gov/news-events/blogs/competition-matters/2017/10/diving-data-hsr-report . the antitrust source Ⅵ www.antitrustsource.com Ⅵ February 2 01 9 3 This increase occurred over a time period in which the percentage of adjusted reported trans - actions receiving Second Requests remained fairly constant. From fiscal year 20 01 through fiscal year 2016, on average, 3.2 percent of adjusted reported transactions received a Second Request from either FTC or the Antitrust Division, with a high of 4.5 percent in fiscal year 200 9 and a low of 2.5 percent in fiscal year 200 8. FIGURE 2. Percentage of Adjusted Reported Transactions Receiving Second Requests by Fiscal Year 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 Avg . 3.2% 1.00 0.50 0.00 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20 11 2012 2013 2014 2015 2016 Source: Bureau of Competition, Fed. Trade Comm’n & Antitrust Div., U.S. Dep’t of Justice, Hart-Scott-Rodino Annual Report-Fiscal Years 2001 through 2017, https://www.ftc.gov/policy/reports/policy-reports/annual-competition-reports . Many companies are unwilling to play these odds, especially given the additional expense, time, and deal disruption that comes with Second Request compliance. Assistant Attorney General Makan Delrahim recognized that, even though the Antitrust Division issued Second Requests in less than 1 percent of reported transactions, “[t]hat 1%, however, is expensive [and] resource intensive. ”7 A 2014 survey of antitrust practitioners reported a median cost of Second Request compliance of $4.2 million, with a reported range of $2 to 9 million. 8 This same survey reported, on average, production of documents from 26 document custodians, typically employ - ees of the merging parties. 9 The duration of merger reviews is also increasing. One U.S. law firm compiles statistics regard - ing the length of review of public transactions. While their reporting metrics cannot account in all instances for some non-public aspects of merger review, such as the dates when HSR filings are made, Second Requests are issued, and parties comply with those requests, they provide direc - tionally relevant information showing that the duration of merger reviews is increasing steadily. 10 7 Delrahim, supra note 2. 8 See Peter Boberg & Andrew Dick, Findings from the Second Request Compliance Burden Survey , THE THRESHOLD (ABA S ECTION OF ANTITRUST LAW COMM . N EWSL .), Summer 2014, at 33. 9 Id. at 31. 10 DAMITT 201 7, supra note 2.