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30 March 2006
Mergers and acquisitions that may raise antitrust issues are reviewed by the Federal Trade Commission or the Antitrust Division of the Department of Justice by issuing a request for additional information and documentary material, commonly referred to as a 'second request'. Second requests typically involve broad document and data requests as well as detailed interrogatories. Responding to a second request can delay the closing of a transaction by many months and cost millions of dollars.
The second request process has always been burdensome, but recent years have seen an explosion in the volume of documents and data that are required to comply with a second request. As the burden has grown, so have calls for reform.
On February 16 2006 the Federal Trade Commission responded to these concerns with a series of changes aimed at streamlining the process.(1) The new policies are a good start and address some of the core problems with the merger review process. But open and honest communication between the agency staff and the parties will be required to ensure that the benefits of these reforms are realized. In addition, the Department of Justice should promptly implement similar reforms.
By any measure, second requests are burdensome. At a time when, in addition to running a business, senior executives are consumed with due diligence, closing requirements, transition planning and managing investor relations, a wide-ranging investigation into the company's products, marketing and competitive position puts a significant strain on management.
A large second request can typically require searching 100 or more employees for a broad range of documents, submitting huge volumes of competitively sensitive data and answering detailed interrogatories. The expenses involved can also be significant. A recent report estimated that second requests typically last six months and cost the parties $5 million, with complex cases taking an additional year and costing up to $20 million.(2)
Over the last several years, this burden has grown significantly for reasons that include the following:
The need for reform has been apparent for several years. Earlier attempts at change focused on the margins and made relatively minor adjustments that were largely ineffective.(3) However, the most recent set of reforms may significantly improve the process.
The commission's announced reforms make five changes that could substantially reduce the amount of time, costs and resources spent responding to a second request.
The first, and perhaps most important, change is a new presumption that parties will be required to search no more than 35 employees and that the staff has the discretion to go below this ceiling. This cap excludes central or corporate files. The director of the Bureau of Competition can authorize a larger search list, but if this presumption holds for most second requests, the number of documents that must be reviewed should be significantly reduced. The number of custodians is the most important determinant of the size of the production.
In return for this cap on the number of custodians, parties must:
Many of these trade-offs already occur through negotiations between experienced counsel and staff. In particular, it is common to assist the commission in identifying relevant employees and to discuss how data is stored at the company to avoid a shotgun approach to document requests. Similarly, parties often produce documents on a rolling basis in exchange for concessions on the part of the agency. Most parties also give the agency more than 30 days for the final review.
While these steps create small upfront delays, they often save time in the end by reducing the volume of the second request. Of course, if a transaction is challenged in court, the mandatory discovery period will likely lengthen any litigation. In deciding whether the upfront savings in time and effort are warranted in exchange for the risk of greater delays during litigation, parties should be aware that only a small handful of cases are challenged in court.(4)
The second significant reform is a presumption that only documents created in the last two years need to be produced, which is reduced from the usual current period of three years. Given that the time period covered by a second request is one of the two big drivers of document volume (the other being the number of custodians), if staff uses the two-year presumption, this limitation should reduce the burden on parties.
The date presumption does not apply to data requests, such as financial data and reports from sales databases, but that should not significantly affect the costs or time to produce the data.
The third change is a presumption that parties will only have to preserve back-up tapes for two days identified by the commission staff. By eliminating the need to maintain all back-up tapes during the course of an investigation, the new policies eliminate a significant cost to companies and reduce the chances that the company will have to restore back-up tapes so they can be searched.
The fourth major change is that the commission will no longer require parties to produce a full 'privilege log' listing each privileged document withheld from production. Parties can submit a list of custodians for whom documents were withheld and the number of privileged documents in the relevant files. The commission can then request a full log for a few custodians. Because preparing a full privilege log for all custodians can consume several weeks and cost thousands of dollars, this is a significant reform.
The fifth reform is a requirement that commission staff discuss with parties their theories and the types of empirical evidence that could be used to test those theories early in the investigation. Without clear explanations of the staff's concerns, parties are unable to address those concerns or provide relevant information to assist in completing the investigation. The Bureau of Economics has a similar requirement in its best practices,(5) but this agency-wide policy should help ensure that staff is upfront about its concerns and that useful economic data is reviewed early in an investigation.
The commission's reforms also institute several smaller changes which, taken together, should speed up the second request process. These changes include clearer rules about removing duplicates from electronic productions and a revised definition of 'documents' that excludes information, such as tax documents, that is not relevant to an antitrust investigation.
For these new policies to have a real effect, both the commission and private parties must follow through by honouring the need for honest negotiations implicit in the reforms. In the introduction to the reforms, the commission noted that "conduct of staff or the parties that is perceived as unreasonable or untrustworthy can significantly disrupt and prolong a merger investigation". Commission staff should avoid regularly seeking exceptions to the custodian and data limitation, and should be clear about their potential theories of harm. Private parties also must operate in good faith and should be upfront in responding to the commission's questions.
Unfortunately, these reforms apply only to the commission because the Department of Justice has lagged behind and has not yet announced any reforms to its merger review process. The costs and burdens on parties should not vary depending on which agency is reviewing the transaction. The Department of Justice should move quickly to reform its merger review process and give parties a single set of rules to follow.
The commission has taken a good first step towards easing the burden of responding to a second request by addressing the core issues that typically add time and costs to a merger investigation. If the commission and private parties can work cooperatively in this new framework while aggressively protecting their clients' interests, future merger reviews should be more efficient, and less burdensome and costly.
For further information on this topic please contact Janet L McDavid, Joseph G Krauss or Andrew Graziani at Hogan & Hartson LLP by telephone (+1 202 637 5600) or by fax (+1 202 637 5910) or by email (firstname.lastname@example.org or email@example.com or firstname.lastname@example.org).
(1) "Reforms to the
Merger Review Process", February 16 2006, available at www.ftc.gov/os/2006/02/mergerreviewprocess.pdf.
(2) Cecile Kohrs Lindell, "Majoras Hopes to Streamline Reviews", The Deal (May 10 2005), available at www.thedeal.com.
(3) For instance, in 2002 the commission's Bureau of Competition released "Guidelines for Merger Investigation", available at www.ftc.gov/os/2002/12/bcguidelines021211.htm. In 2000 the American Bar Association published "Guidelines for Mergers", available at www.abanet.org/antitrust/comments/2000/mergerguidelines.html. Neither of these efforts stopped the spiralling costs and delays created by second requests. Indeed, of the seven guidelines announced by the commission in 2002, only a few are still followed in most merger investigations.
(4) In a recent two-year period, the Department of Justice reported that it challenged only four of the 180 transactions that received second requests. See Cecile Kohrs Lindell, "Kinder, Gentler Regulators", The Deal (March 2 2006), available at www.thedeal.com.
(5) "Best Practices for Data, and Economics and Financial Analysis in Antitrust Investigations", available at www.ftc.gov/be/ftcbebp.pdf.
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