Robert A. McTamaney

May 2013

Hart-Scott-Rodino and the

Revised Merger Guidelines

Hart-Scott-Rodino

• Hart-Scott-Rodino Antitrust Improvements Act of 1976

• Eliminated “Midnight Mergers”

• Pre-Closing Filing with DOJ/FTC

• Time for Agencies to review and challenge before companies combine.

2013 Filing Thresholds

• Thresholds adjust annually to reflect changes in the U.S. GNP. • “Size-of-Transaction” $68.2 million, if one party has sales or assets

of $136.4 million and the other has sales or assets of $13.6 million. • If transaction exceeds $272.8 million, size-of-persons is irrelevant.• Plateaus increased in 2012 to $68.2 million, $136.4 million, and

$682.1 million; fees are $45,000, $125,000, and $280,000, respectively.• Applies to partnerships/LLCs if acquirer has 50% profits or assets.• Report using North American Industrial Classification System; see

Bureau of Census home page (http://www. census.gov/epcd/ www/naics.html). Reporting base year was 2002 but new HSR Rules effective August 2011 eliminate this requirement.

• Covers foreign acquisitions if target’s U.S. sales/assets exceed $66.0 million.

“Item 4(c) Documents”

• HSR Filing requires any competitive or market related studies/reports used by parties to review proposed transaction, the so-called “Item 4(c) documents,” named for corresponding item in the notification form.

• Item 4(c) documents can be a trap for the unwary, as analyses prepared by party or advisor can be “roadmap” to concerns that might otherwise pass unnoticed.

• Failure to produce Item 4(c) Documents, or to file the notification form, attracts penalties up to $16,000 per day; several cases have imposed substantial fines.

• Substantial additions are proposed in new 4(d) requirements.

New HSR Form Disclosures• Effective August 2011, new, possibly burdensome changes to the

premerger notification rules, allegedly to “streamline” filings.• Unsolicited documents such as pitch books prepared by third-

party advisors must now be filed if they relate to the sale of the acquired entity or assets and discuss competition-related topics. This had been the practice formerly.

• Also, new “Item 4(d)” requires confidential information memoranda prepared during previous year relating to sale of entity or assets and any documents given to buyer “to serve the function” of a CIM, but not including most data room or other due diligence documents. Synergies/Efficiencies Analyses now also required.

New HSR Form Disclosures• Filing Party “associate” information is now also required if they

are investors in the same area or under common management, even if not under common control. This could be burdensome.

• Effective August 2011 new rules eliminate former revenue reporting applicable to the “base year” (2002), and now require reporting of revenues for most recent year by 6-digit NAICS codes for non-manufacturing activities (as formerly required) and by 10-digit NAICS codes for manufacturing activities (only 7-digit breakdown formerly required). The new rules also require revenues from operations outside U.S. to be included if they result in sales in or into the U.S.

• The new rules expand the Form's reporting requirements to include non-corporate entities in most instances.

Waiting Periods and Second Requests

• Parties wait 30 days (15 days in tender offer or bankruptcy), before closing. • “Early termination” may be requested, but confidentiality is only

preserved if waiting period simply expires.• “Gun-jumping”-- Substantial civil penalties for premature control, even

where HSR is cleared. Competition as usual is only safe advice. • Agency can issue formal “second request”-- extends waiting period for 30

days (10 days if a tender offer) after parties have complied with request. • Effectively, a second request means several months or more of delay.• Agency can also suggest parties “re-file” and re-start the waiting period.

Since alternative is second request, parties usually comply. No additional fee if re-file within two business days. New Item 4(c) documents required.

• Practice criticized as back-door avoidance of waiting period limits, but when second request is alternative, parties often comply.

Key Supreme Court Decisions

• Illinois Tool Works -- seller of patented tying product -- market power not presumed.

• Texaco v. Dagher -- “lawful, economically integrated” JV is a single actor.

• Volvo Trucks -- secondary-line price discrimination claims under Robinson-Patman.

• Leegin -- all resale price agreements now are evaluated under the “Rule of Reason.” (State Oil Co. v. Kahn had held that maximum RPM would be tested under Rule of Reason.

2012 Enforcement

• April 2013 Annual DOJ/FTC Report• http://www.ftc.gov/os/2013/04/130430hsrreport.pdf• Decline in HSR Filings but more enforcement• 1,429 Filings. 49 Second Requests. 25 FTC Challenges. 19

DOJ Challenges.• Banking/Insurance had most mergers.• But Health Care attracted most challenges.• Courts so far are applying traditional market analysis, and

not the new Guidelines.

Revised Merger Guidelines

• August 19, 2010 FTC and DOJ latest revision of Horizontal Merger Guidelines, first issued 1982 and last revised 1997.

• Latest revisions intended to “more accurately” reflect FTC and DOJ current conduct of reviews in practice rather than theory.

• This is debatable, and courts so far disagree and apply their usually more conservative standards.

• For example, FTC v. Lundbeck, New York v. Group Health, Inc., FTC v. Laboratory Corp, and H&R Block all followed traditional geographic and product market proofs.

• AT&T – T-Mobile Complaint read like an “old Guidelines” case.• So far the new Guidelines are being all but ignored by the courts.• New Guidelines propose a series of alternative analyses to identify

virtually any negative effects of a combination, so as to give the Agencies more bases upon which to make a challenge.

• Will the courts ever agree? Yet to be determined, but not so far.

Principal Differences From Prior Guidelines

• Analysis is very fact-specific process; Agencies use variety of tools. • 1997 version was 5-step, fairly logical approach to merger analysis

process: (1) market definition, (2) competitive effects, (3) ease of entry, (4) efficiencies, and (5) the failing company doctrine.

• Revised Guidelines are more wandering, to say the least.• Certainly much more subjectivity proposed than before.• Requirements to define “product market” and a “geographic

market” are much less pronounced, but still a “useful tool.” • Much more emphasis on “unilateral effects” of a merger.• “Targeted Customers and Price Discrimination,” -- issues of

selective prices directed against the more vulnerable purchasers, which may themselves constitute a separate market.

More Principal Differences from Prior Guidelines

• “Critical Loss Analysis”– will a SSNIP ( a “small but significant and non-transitory increase in price”) raise or lower a “hypothetical monopolist’s” profits?

• If explicit or implicit prices for firms’ contribution to value can be identified, test will typically based on a 10% SSNIP.

• Where implicit prices cannot be identified, test is based on SSNIP of 5% (or lower). • HHI “safe harbor” thresholds increased. This reflects reality, since almost 90% of

challenged mergers have a post-merger HHI above 2,400.• 35% share comfort level no longer quoted, but will continue as a rule of thumb.• Entry must be timely (but 2-year window no longer appears), likely, and sufficient.• “Efficiencies” continue in analysis, but still less than the courts assign.• Post-merger innovations and inhibitions on innovation are given new weight.• Monopsony power, buyer monopolies, now discussed specifically. • Much-maligned “failing company doctrine” continues, as does the criticism of it.• New discussion of partial acquisitions.

Key Concepts

• Section 7 of US Clayton Act makes it illegal for two companies to merge “where in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.”

• Guidelines say they are roadmap for determining the likelihood of challenges.

• Guidelines not binding in court; Clearance no defense to later challenge.• Continuing major emphasis on “unilateral effects” of a merger. • U.S. v Oracle, Court equated unilateral effect with traditional “market

power” concepts -- does combined company have ability to raise prices without effective counter from other market participants?

• Unifying theme of Guidelines-- mergers should not be permitted to create, enhance or facilitate the exercise of “market power,” -- ability of one or more selling firms to maintain prices above competitive levels profitably over time (“monopoly power”) or ability of one or more buying firms to depress prices below competitive levels (“monopsony power”).

Evidence of Competitive Effects

Many categories of evidence will be used to predict likely competitive effects of merger:

• Actual Effects Observed in Consummated Mergers • Direct Comparisons Based on Experience • Market Shares and Concentration in a Relevant Market • Substantial Head-to-Head Competition• Disruptive Role of a Merging Party– eliminating the “Maverick”

Most common sources of evidence are the merging parties, customers, other industry participants, and industry observers.

Documents created in the normal course are considered far more probative than documents created as advocacy materials in merger review.

Targeted Customers and Price Discrimination

• When discrimination seems reasonably likely, Agencies may evaluate effects separately by type of customer.

• For price discrimination to be feasible, two conditions typically must be met: differential pricing and limited arbitrage.

• First, suppliers engaging in price discrimination must be able to price differently to some targets than others.

• Second, the targeted customers must not be able to defeat price increase of concern by arbitrage, e.g., by purchasing indirectly from or through other customers.

Market Definition

• Agencies now say market definition not end in itself, but “one tool” to assess merger.

• But Courts so far continue to insist on a market definition as the first step in the antitrust analysis of a merger. E.g., City of New York v. Group Health Inc. (SDNY May 11, 2010). See also cases cited earlier.

• Far more weight in the new Guidelines to predictable competitive effects than to traditional market share harbors.

• Market definition focuses solely on customers’ ability and willingness to substitute products in response to price increase or a non-price change. Responsive actions of other suppliers are also important, but emphasis is competitive significance of the products much more than their strict “substitutability” or their “geographic availability.”

• Product Markets -- When a product sold by one merging firm competes against one or more products sold by the other, that product and its substitutes define the market, and there may be multiple markets.

• The “hypothetical monopolist test” requires that a product market contain enough substitutes so that it could be subject to post-merger exercise of market power significantly exceeding that existing before.

“Hypothetical Monopolist” Test

• Assumes that a monopolist would impose a SSNIP on at least one product.• Agencies may instead employ a “hypothetical profit-maximizing cartel.” • E.g., if merging firms sell products outside candidate market that affect

their pricing incentives products in the market (such as spare parts). • As with present Guidelines, SSNIP is tool for performing the hypothetical

monopolist test; it is not a tolerance level for price increases. • Hypothetical monopolist test ensures that markets are not defined too

narrowly, but does not lead to single relevant market. Agencies may evaluate a merger in any relevant market satisfying the test, guided by principle that purpose of defining markets and measuring shares is to evaluate competitive effects.

• Relative competitive significance of more distant substitutes is overrepresented by their share of sales, so analysis is smallest relevant market satisfying the test.

• The Agencies clearly want the courts to give them more ways to win.

“Hypothetical Monopolist” Prices

• SSNIP starts from prices that would likely prevail absent the merger. • If prices likely to change absent the merger, e.g., because of innovation or entry,

Agencies may use anticipated future prices as the benchmark for the test. • If prices might fall absent the merger due to the breakdown of pre-merger

coordination, Agencies may use those lower prices as the benchmark for the test.• SSNIP is a “small but significant” increase in prices charged by firms in the market

for value they contribute to the products or services. This properly directs attention to the effects of price changes commensurate with those that might result from a significant lessening of competition caused by the merger.

• Where explicit or implicit prices for the firms’ specific contribution to value can be identified, the Agencies typically use a SSNIP of ten percent of those prices. Where such implicit prices cannot be identified with reasonable clarity, Agencies instead base the SSNIP on the price paid by customers for the products or services to which the merging firms contribute. In such cases, because the base prices will be larger, a lower SSNIP will normally be used, typically five percent but possibly lower.

Implementing the Hypothetical Monopolist Test

• Hypothetical monopolist’s incentive to raise prices depends both on extent to which customers would likely “substitute away” in response to price increase, and on profit margins earned. Profit margin on incremental units is difference between (1) price and (2) incremental cost.

• In considering customers’ likely responses, use any reasonably available evidence. • Also may consider a “critical loss analysis” to assess whether it corroborates

inferences, and asks whether imposing at least a SSNIP on products in a candidate market would raise or lower the monopolist’s profits. Price increase raises profits, but is offset to extent that customers substitute away. “Critical loss” is number of lost unit sales that would leave profits unchanged. “Predicted loss” is number of sales that hypothetical monopolist is predicted to lose due to price increase.

• The price increase raises profits if predicted loss is less than critical loss. • Agencies require that estimates of predicted loss be consistent with evidence,

including pre-merger profit margins. Unless firms are engaging in “coordinated interaction,” high pre-merger margins normally indicate that each firm’s product individually faces demand that is not highly sensitive to price. Higher pre-merger margins thus indicate a smaller predicted loss and make it more likely that the predicted loss is less than the critical loss and that the candidate market satisfies the hypothetical monopolist test.

Market Definitions

• Product Market Definition with Targeted Customers -- If hypothetical monopolist could profitably target subset of customers, Agencies may identify “price discrimination markets” around those customers, to whom hypothetical monopolist would impose at least a SSNIP.

• Geographic Market Definition -- Often depends on transportation costs, language, regulation, tariff and non-tariff trade barriers, custom and familiarity, and service availability may impede long-distance or international transactions. Absent price discrimination based on customer location, Agencies normally define geographic markets based on locations of suppliers.

• Geographic Markets Based on Locations of Suppliers -- Often apply when customers receive goods or services at suppliers’ locations. The hypothetical monopolist test requires that a hypothetical profit-maximizing firm that was the only present or future producer of the relevant product(s) located in the region would impose at least a SSNIP from at least one location. When geographic market is defined based on supplier locations, all sales by suppliers located in the market are counted, regardless of the location of the customer. Historical reactions to prices and other factors such as costs and customer service are relevant.

• Geographic Markets Based on the Locations of Customers -- When hypothetical monopolist could discriminate based on customer location, the Agencies may define geographic markets based on the locations of targeted customers.

Market Participants and Shares, and the Herfindahl-Hirschman Index

Market Participants are all firms that currently earn revenues in the relevant market, and “rapid entrants.”

Market Shares based on historical evidence, unless current share understates or overstates competitive significance.

• Market concentration, actual and anticipated, is useful indicator of likely competitive effects of a merger. More weight when market shares are stable over time. By contrast, even a highly concentrated market can be very competitive if market shares fluctuate substantially over short periods in response to changes in competition.

• HHI ranges from 10,000 (pure monopoly) to number approaching zero (an atomistic market).

• The increase is twice the product of the market shares of the merging firms. Unconcentrated Markets HHI below 1500; Moderately Concentrated Markets HHI between 1500 and 2500; and Highly Concentrated Markets HHI above 2500.

Changes in HHI• Small Change: Increase less than 100 points = unlikely adverse

competitive effects; ordinarily no further analysis. • Unconcentrated Markets: unlikely to have adverse competitive effects and

ordinarily require no further analysis. • Moderately Concentrated Markets: and increase more than 100 points

often warrant scrutiny. • Highly Concentrated Markets that involve an increase in HHI of between

100 points and 200 points potentially raise significant competitive concerns and often warrant scrutiny. Mergers resulting in highly concentrated markets that involve an increase in HHI of more than 200 points will be presumed to be likely to enhance market power. The presumption may be rebutted by persuasive evidence.

• Therefore only mergers resulting in highly concentrated markets that involve an increase in the HHI of more than 200 points (previously 100 points) will be presumed to be likely to enhance market power.

Unilateral Effects

• Elimination of competition that results from merger may alone constitute a substantial lessening of competition. Such “unilateral effects” are most apparent in a merger to monopoly, but are by no means limited to that case.

• In differentiated product industries, some products can be very close substitutes, while others are more distant substitutes and compete less strongly.

• Capturing sales lost through acquiring the beneficiary may make price increase profitable even though it would not have been profitable prior to merger. A merger may produce significant unilateral effects even though many more sales are diverted to products sold by non-merging firms than previously sold by the merger partner.

• The “diversion ratio” is the fraction of unit sales lost by the first product due to an increase in its price that would be diverted to the second product. Diversion ratios between the merging firms can be very informative for assessing unilateral price effects, with higher diversion ratios indicating a greater likelihood. Diversion ratios between merging firms and non-merging firms have at most secondary predictive value.

Adverse Unilateral Effects• Adverse unilateral price effects can arise when the merger gives the

merged entity an incentive to raise the price of a product previously sold by one merging firm and thereby divert sales to products previously sold by the other merging firm, boosting the profits on the latter products.

• The Agencies rely much more on the value of diverted sales than on the level of the HHI for diagnosing unilateral price effects in markets with differentiated products. Will the courts agree?

• A merger is unlikely to generate substantial unilateral price increases if non-merging parties offer very close substitutes. In some cases, non-merging firms may be able to reposition to offer close substitutes. Repositioning is evaluated much like entry, with consideration given to timeliness, likelihood, and sufficiency.

Unilateral Effects Bargaining and Auctions • Merger between sellers prevents buyers from playing sellers off against each other.

This enhances ability and incentive of merged entity to obtain a result more favorable to it, and less favorable to buyer.

• Anticompetitive unilateral effects are likely in proportion to the frequency/probability with which one of the sellers had been runner-up when the other won the business. Effects also tend to be greater, the more profitable were the pre-merger winning bids.

Capacity and Output for Homogeneous Products • A unilateral output suppression strategy is more likely to be profitable when: (1)

merged firm’s market share is relatively high; (2) share of merged firm’s output already committed for sale at prices unaffected by the output suppression is relatively low; (3) the margin on the suppressed output is relatively low; (4) the supply responses of rivals are relatively small; and (5) the market elasticity of demand is relatively low.

• A merger may provide the merged firm a larger base of sales on which to benefit from the resulting price rise, or it may eliminate a competitor that otherwise could have expanded its output in response to the price rise.

• In some cases, a merger between a firm with a substantial share of the sales in the market and a firm with significant excess capacity to serve that market can make an output suppression strategy profitable.

Innovation and Product Variety• Agencies consider whether merger is likely to diminish “innovation competition.”• This is most likely to occur if one of the merging firms is in efforts to introduce new

products that would capture substantial revenues from the other. • Second, longer-run effect is most likely to occur if one of merging firms has

capabilities likely to lead to new products in the future that would capture substantial revenues from the other. Agencies therefore consider whether merger will diminish innovation competition by combining two of a small number of firms with strongest capabilities to successfully innovate in specific direction.

• Agencies evaluate extent to which successful innovation by one merging firm is likely to take sales from the other, and extent to which post-merger incentives for future innovation will be lower than those in absence of the merger.

• Agencies also consider whether the merger is likely to enable innovation that would not otherwise take place.

• The Agencies also consider whether a merger is likely to give the merged firm an incentive to cease offering one of the relevant products.

Coordinated Effects • Merger may diminish competition by enabling “coordinated

interaction” by multiple firms that is profitable for each of them only as a result of the accommodating reactions of the others.

• Can involve explicit negotiations, or common “understandings,” as well as parallel accommodating conduct, and includes situations in which each rival’s response to competitive moves by others is individually rational, not motivated by retaliation or deterrence, but nevertheless emboldens price increases and weakens competitive incentives to reduce prices or Improve terms. Includes conduct not otherwise condemned by the antitrust laws.

• Unilateral effects focuses on enhanced incentive of the merged firmto raise its prices, coordinated effects analysis focuses on ability of multiple firms to raise their prices.

Analysis of Coordinated Effects• Agencies examine whether a merger is likely to change the manner

in which market participants interact, inducing substantially more coordinated interaction.

• Under “incipiency” standard, Agencies may challenge mergers that pose real danger of harm through coordinated effects, without specific evidence showing precisely how this will happen.

• The Agencies presume coordinated interaction if firms appear to have previously engaged in express collusion, unless competitive conditions have since changed significantly.

• Failed previous attempts at collusion suggest that collusion was difficult pre-merger but not so difficult as to deter attempts, and merger may tend to make success more likely.

Analysis of Coordinated Effects• Can each important firm’s significant competitive initiatives be promptly and

confidently observed by rivals? More likely if the terms are relatively transparent. • Market more vulnerable to coordinated conduct if prospective competitive reward

from attracting customers away from rivals will be significantly diminished by likely responses of those rivals. Firm more likely to anticipate strong responses if products in the market are relatively homogeneous, if customers find it relatively easy to switch between suppliers, or if suppliers use meeting-competition clauses.

• Firm more likely to be deterred from making competitive initiatives by whatever responses occur if sales are small and frequent rather than via occasional large and long-term contracts or if relatively few customers will switch to it before rivals are able to respond.

• A firm is less likely to be deterred if the firm has little stake in status quo. For example, a firm with small market share that can quickly and dramatically expand, constrained neither by limits on production nor by customer reluctance to switch providers or to entrust business to an historically small provider, is unlikely to be deterred.

Harm From Coordinated Effects• Significant harm normally is likely only if a substantial part of the market

is subject to such conduct. • The prospect of harm depends on the collective market power, in the

relevant market, of firms whose incentives to compete are substantially weakened by coordinated conduct. This collective market power is greater, the lower is the market elasticity of demand. This collective market power is diminished by the presence of other market participants with small market shares and little stake in the outcome resulting from the coordinated conduct, if these firms can rapidly expand their sales.

• Buyer characteristics and the nature of the procurement process can affect coordination. For example, sellers may have the incentive to bid aggressively for a large contract even if they expect strong responses by rivals. This is especially the case for sellers with small market shares, if they can realistically win such large contracts.

Powerful Buyers

• Powerful buyers are often able to negotiate favorable terms with their suppliers. Such terms may reflect the lower costs of serving these buyers, but they also can reflect price discrimination in their favor.

• Even buyers that can negotiate favorable terms may be harmed by an increase in market power. Normally, a merger that eliminates a supplier whose presence contributed significantly to a buyer’s negotiating leverage will harm that buyer.

Entry

• Firms that have committed to enter, or would rapidly and easily enter market in response to a SSNIP are market participants and may be assigned market shares.

• Prospect of entry will alleviate concerns about adverse competitive effects only if such entry will deter or counteract competitive effects.

• Agencies consider the actual history of entry, and give substantial weight. Lack of successful and effective entry suggest that successful entry is slow or difficult.

• If entry is so easy that merged firm could not profitably raise price – would entry be timely, likely, and sufficient to deter or counteract competitive effects of concern.

• Timeliness To deter competitive effects of concern, entry must be rapid enough to make unprofitable overall the actions leading to those effects and to entry.

• Likelihood Entry is likely if it would be profitable, accounting for the assets, capabilities, and capital needed and the risks involved, including the need for the entrant to incur costs that would not be recovered if the entrant later exits.

• Sufficiency The Agencies normally look for reliable evidence that entry will be sufficient to replicate at least the scale and strength of one of the merging firms.

Efficiencies • Merger-generated efficiencies may enhance competition by permitting two

ineffective competitors to form more effective competitor. Marginal cost reductions may reduce or reverse any increases in incentive to elevate price. Efficiencies may lead to new or improved products, even if they do not immediately and directly affect price. Marginal cost reductions may make coordination less likely by enhancing incentive of a maverick to lower price or by creating a new maverick.

• Even when efficiencies enhance a firm’s ability to compete, a merger may have other effects that may lessen competition and make the merger anticompetitive.

• Agencies credit only merger-specific efficiencies. Efficiency claims will not be considered if they are vague, speculative, or otherwise cannot be verified.

• Agencies will not challenge if cognizable efficiencies are such that the merger is not likely to be anticompetitive in any relevant market.

• Agencies consider whether cognizable efficiencies would be sufficient to reverse potential to harm customers, e.g., by preventing price increases.

• Greater the potential adverse competitive effect of a merger, the greater must be cognizable efficiencies, and the more they must be passed through to customers.

Efficiencies• When potential adverse competitive effect of a merger is likely to be particularly

substantial, extraordinarily great cognizable efficiencies would be necessary to prevent merger from being anticompetitive.

• Antitrust laws give competition, not efficiency, primacy in protecting customers. • Efficiencies make a difference when likely adverse effects are not great. • Efficiencies almost never justify a merger to monopoly or near-monopoly. • Certain efficiencies more substantial, such as shifting production among facilities. • Other efficiencies, such as R&D, less susceptible to verification and may be the

result of anticompetitive output reductions. Others, such as procurement, are less likely to be merger-specific or substantial, or may not be cognizable.

• When evaluating effects on innovation, Agencies consider ability to conduct R&D more effectively, and ability of merged firm to appropriate a greater fraction of the benefits resulting from its innovations. Licensing and IP conditions may be important to, as they affect ability of firm to appropriate benefits. R&D cost savings may be substantial and yet not be cognizable because they are difficult to verify or result from anticompetitive reductions in innovative activities.

Failing Companiesand Exiting Assets

• A merger has traditionally not been deemed likely to create market power if failure of one of the merging firms would cause that firm to exit.

• The Agencies historically said that they would not challenge a merger if: (i) failing firm would not be able to meet its financial obligations in the near future; (ii) would not be able to reorganize successfully under Chapter 11; (iii) has made unsuccessful good faith efforts to elicit reasonable alternative offers that would pose a less severe threat to competition and (iv) absent the merger, the assets would exit the market.

• Agencies traditionally have applied a three-part analysis when considering a failing division argument. The division must have had a negative operating cash flow. Absent the acquisition, the assets of the division would have exited the relevant market in the near future. Third, the owner of the failing division must have solicited and not received a reasonable offer for the assets or stock of the division from a competitively preferable purchaser.

• Given all this, the failing company doctrine has life. In 1997, FTC did not oppose acquisition of McDonnell Douglas by Boeing, even though combination was of the only two significant commercial aircraft manufacturers in the U.S., and two of only three in the world. McDonnell Douglas “no longer constitutes a meaningful competitive force in the commercial aircraft market and there is no economically plausible strategy that [it] could follow . . . that would change that grim prospect.”

Mergers of Competing Buyers; Partial Acquisitions

• Mergers of competing buyers can enhance “monopsony power.”• Not significant concern if suppliers have numerous attractive outlets. When not the

case, Agencies may conclude that merger of competing buyers is likely to lessen competition in a manner harmful to sellers.

• Clayton Act also applies to partial acquisition that results in effective control of the target firm, or involves substantially all of the relevant assets of the target.

• Or a partial acquisition can give acquiring firm ability to influence competitive conduct of target firm. A voting interest in the target firm or right to appoint members to the Board of Directors, can permit such influence.

• Second, partial acquisition can lessen competition by reducing incentive of acquiring firm to compete. Acquiring minority position in a rival might significantly blunt the incentive of the acquiring firm to compete aggressively because it shares in the losses thereby inflicted on that rival.

• Third, a partial acquisition can lessen competition by giving acquiring firm access to non-public, competitively sensitive information from the target firm, which can lead to adverse unilateral or coordinated effects.

Remedies• June 17, 2011 DOJ Updated Remedy Guide from earlier 2004 Guide.• FTC Remedy Policy still separate, and there are differences, such as “Fix-it-First.” • Usually a Consent Decree which attracts Tunney Act Comments and Court approval.• “Behavioral” remedies are preferred in vertical mergers over “Structural” remedies in

Horizontal Mergers. Conduct restrictions versus Divestitures.• “Office of the General Counsel” now in charge of compliance to ensure consistency.• Behavioral Remedies can include firewalls within the merged firm); non-discrimination

provisions; mandatory licensing; transparency; anti-retaliation agreements; and prohibitions on certain contract practices such as exclusives.

• Behavioral remedies require careful wording and ongoing oversight.• Structural remedies such as divestiture or sale or licensing of assets or IP and could

require buyer in hand or sale of Crown Jewel to make divestiture attractive.

Tactics

• In light of recent court decisions, analyze with the new Guidelines, but also apply the existing standards, since that’s what it seems the courts will do, and the Agencies realize this.

• It does no good, and usually does harm, to argue about the size of a transaction if it satisfies jurisdictional requirements, or to threaten to go to court -- the staff are going through the analysis for the purpose of determining whether they want to go to court.

• Courtesy is key.• Do not appear to be too weak -- Agencies have their own statistics

in mind, and if they sense an easy victory via an offered partial fix-it-first divestiture or otherwise, they will be inclined to it.

• If in doubt, ask for advice. Penalties are severe for not filing; staff members are very available.

• Be very careful during the waiting period not to take control in fact.

Tactics• Don’t ask for Congressional help unless absolutely necessary. • Each merger will be analyzed on its facts. There will always be some exercise of

judgment, and Agencies’ standards will be applied to a broad range of possible, factual circumstances.

• Be careful about what you write, and what your advisers and analysts write, especially if the “4(c)” rules are amended as proposed, which would require far more disclosure and possible “roadmaps” than presently.

• The proposed revised Merger Guidelines are intended to be the basic analytical structure for merger analysis, but the facts of each case will always dictate the outcome of the analysis.

Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. If this outline of Hart-Scott-Rodino and the proposed revised Merger Guidelines prompts any questions, please contact Robert A. McTamaney (mctamaney@clm.com) of our New York Office.

© 2013 Carter Ledyard & Milburn LLP