The HSR Act requires companies to notify the DOJ and the Federal Trade Commission (FTC) of certain mergers and acquisitions, allowing the agencies to review transactions for potential anticompetitive effects before they close. For transactions meeting specific size thresholds, parties must file an HSR notification and observe a mandatory waiting period while the agencies evaluate the deal. If the waiting period expires or is terminated early, the parties may proceed. However, if the DOJ or FTC issues a “second request” for additional documents and information, the transaction is paused until compliance is met, a process that can be time-consuming and costly. In some cases, the agencies may block the transaction entirely.

To evade the HSR Act’s waiting period, Canon and Toshiba created a special purpose company to conceal the transaction. This allowed Toshiba to quickly improve its financial statements following the public disclosure of financial irregularities.

To settle the charges, Canon and Toshiba each agreed to pay a $2.5 million fine, implement HSR compliance programs, and adhere to inspection and reporting requirements, among other obligations.

Lessons Learned

The DOJ views HSR Act violations as a serious matter. The Act’s notification and waiting period requirements are essential for enabling the DOJ and FTC to review and challenge potentially anticompetitive mergers before they are finalized. This enforcement action underscores the Antitrust Division’s commitment to upholding the HSR process and ensuring compliance.

The revised thresholds are expected to become effective in late February 2016, 30 days after the date of their publication in the Federal Register.  These changes increase the dollar thresholds necessary to trigger the HSR Act’s premerger notification reporting requirements.  The FTC also increased the thresholds for interlocking directorates under Section 8 of the Clayton Act.

The HSR Act requires parties to certain transactions to notify the Federal Trade Commission and Department of Justice, and to observe a waiting period prior to consummation. The HSR Act enables antitrust regulators to review transactions, investigate and address potential competitive concerns prior to consummation, and also carries with it monetary penalties for failure to comply.

Section 8 of the Clayton Act prohibits certain interlocking directorates between competing companies to guard against the facilitation of anti-competitive coordination and information exchanges that can arise as a result of simultaneous board membership. As a general rule a person cannot serve on the boards of two competing companies.

Revised HSR Thresholds

The HSR thresholds that trigger the obligation to submit HSR filings will be increased from $76.3 million to $78.2 million.

Unless otherwise exempt, a person or entity that directly or indirectly acquires assets or voting securities (or interests in an unincorporated entity) in excess of the HSR threshold may be required to file notification under the Act and to observe the applicable waiting period before consummating the transaction. Subsequent transactions involving the acquisition of additional interests in the same company typically are exempt from further notification unless a subsequent notification threshold is exceeded.

Under the revised thresholds, transactions valued at $312.6 million or less will be subject to the HSR Act if the parties also meet the size-of-person thresholds. The size-of-person is generally met where a person with annual sales or total assets of $156.3 million acquires a person with annual sales or total assets of $15.6 million, or vice-versa. Transactions valued at more than $312.6 million are subject to the HSR Act without reference to the size of the person, unless otherwise exempt.

Revised Thresholds for Interlocking Directorates

Section 8 of the Clayton Act is particularly relevant for investment funds taking minority positions in competing companies and seeking board representation. Under the statute, no person, or representative of the same person or entity, is permitted to serve simultaneously as a director or officer of competing companies, but there are important carve-outs and exceptions.

The prohibitions of Section 8 are limited to cases in which each of the companies has, under the revised thresholds, capital, surplus, and undivided profits of more than $31,841,000. This is generally read as a net equity test.

Even where the threshold is met, however, the restrictions do not apply where the competitive sales of either company represents less than 2 percent of its total sales, or are less than $3,184,100; or where the competitive sales of each company represent less than 4 percent of its total sales.  The statute also permits directors and officers whose appointments were not prohibited at the time of appointment to continue to serve for up to a year after the Section 8 thresholds are exceeded, thus the revised Clayton Act Section 8 thresholds can potentially eliminate an existing violation.

Lessons Learned

Correct application of the HSR Act and Clayton Act Section 8 can be complex, and requires detailed and careful analysis.  Investment funds must consider Section 8 of the Clayton Act when installing board members of potentially competing portfolio companies that are not under common control.  During the one grace period, it is a good time to examine whether violations exist and to cure them.

According to Commissioner Swindle’s thorough and well-reasoned ruling, on behalf of a unanimous Commission, the acquisition provided CB&I with a monopoly or near-monopoly position in each of four relevant markets and violated Section 7 of the Clayton Act and Section 5 of the FTC Act. To restore competition as it existed prior to the merger, the Commission ordered CB&I to create two separate, stand-alone divisions capable of competing in the relevant markets and to divest one of those divisions within six months. The Commission’s goal is to restore competition as it existed prior to the merger.

Background

CB&I completed the acquisition of PDM assets on February 7, 2001. On October 25, 2001, the Commission filed a complaint challenging the acquisition. The complaint alleged, among other things, that the consummated merger significantly reduced competition in four separate markets involving the design and construction of various types of field-erected specialty and industrial storage tanks in the United States: liquefied natural gas storage tanks; liquefied petroleum gas storage tanks; liquid atmospheric gas storage tanks; and thermal vacuum chambers. On June 12, 2003, the initial decision by the ALJ held that the deal was anticompetitive and ordered CB&I to divest all assets obtained in the acquisition. Both CB&I and counsel supporting the complaint appealed the initial decision, and the case was reviewed by the full Commission. The Commission upheld the initial decision’s finding that the acquisition was illegal, but differed with that decision’s analysis and with the decision’s final relief.

At the time and prior to the 2001 transaction, CB&I and PDM competed against each other as the two leading U.S. producers of large, field-erected industrial and water storage tanks and other specialized steel-plate structures. According to the Commission’s opinion, the acquisition substantially lessened competition in four relevant product markets in the United States. The Commission held that the consummated merger significantly reduced competition in four separate markets involving the design and construction of various types of field-erected specialty and industrial storage tanks in the United States: liquefied natural gas storage tanks; liquefied petroleum gas storage tanks; liquid atmospheric gas storage tanks; and thermal vacuum chambers.

Opinion

According to the unanimous opinion of the Commission, this case involves the acquisition of a company by its closest competitor in four relevant markets in the United States. CB&I and PDM were the dominant suppliers in each of the four relevant markets prior to the acquisition. The Commission stated that the acquisition provided CB&I with a monopoly or near-monopoly position in each of the markets. It also ruled that entry into each of the relevant markets is not only difficult, but is also unlikely to happen within a timely manner to restore the competition lost from the acquisition. The Commission stated that the size of the commerce affected by an acquisition is not a factor in determining the legality of a merger. Moreover, the FTC found that the customer testimony demonstrated that customers could not constrain a price increase despite the parties’ claims that the customers were sophisticated and powerful enough to constrain prices.

As did the ALJ’s initial decision, the Commission’s order requires a divestiture to restore competition as it existed prior to the merger. The order differs from the relief proposed in the ALJ’s initial decision because the Commission believed that the relief sought in the initial decision was unlikely to restore a viable competitor to the market. Specifically, the Commission ordered CB&I to reorganize its business unit related to the relevant products into two separate, stand-alone subsidiaries, and to divest one of those subsidiaries within six months. Rather than giving the responsibility to a third party trustee, who would have to learn the business, the Commission explains that CB&I is in the best position to know how to create two viable entities from its current business.

The order also requires CB&I to divide its current customer contracts between the two newly-created subsidiaries, and to facilitate the transfer of employees so that each subsidiary has the technical expertise to complete the customer contracts assigned to it and to bid on and complete new customer contracts. In particular, CB&I must provide incentives for employees to accept offers of employment from the acquirer and remove contractual impediments that would prohibit employees from accepting such offers. The Commission appointed a monitor trustee to oversee the divestiture and, among other things, to assess the need for CB&I to provide technical assistance and administrative services to the acquirer. The Commission also reserved the right to appoint a divestiture trustee in the event that CB&I does not accomplish the divestiture in six months.

Conclusion

The decision is noteworthy for several reasons. First, it demonstrates that the expiration of the HSR waiting period should not be interpreted to mean that the Commission has approved the deal. Second, the Commission can and will challenge a consummated deal if it determines that the deal is anticompetitive. Third, the FTC has a particular interest in post-acquisition competitive effects of consummated mergers. Fourth, the FTC will seek a complete divestiture to remedy an anticompetitive merger, whether it is integrated or not. Therefore, parties to a consummated deal, particularly transactions that avoided HSR scrutiny, for whatever reason, should proceed with reasonable caution and monitor closely post-acquisition conduct.

Andre Barlow