January 26, 1996
Donald S. Clark
Office of the Secretary
Federal Trade Commission
Sixth Street and Pennsylvania Avenue, N.W.
Washington, D.C. 20580
Re: Comments on Hearings on Global Competition and Innovation -- Antitrust Improvements Act of 1976
Dear Mr. Clark:
We are writing in response to the Federal Trade Commission's notice in the Federal Register requesting comments to be included in the record of its recent hearings on the impact of antitrust enforcement on American businesses competing in a global economy. We believe that the Antitrust Improvements Act of 1976 ("HSR Act" or "Act"), as currently applied, is having a detrimental effect on smaller American businesses because the costs that the Act imposes on smaller businesses are not offset by the enforcement benefits achieved. We recommend that the Act's reporting thresholds be raised to eliminate this negative effect.
The HSR Act's size of the parties and size of the transaction reporting thresholds have remained fixed (and have not been indexed) since the Act was passed in 1976. Consequently, the percentage of transactions subject to the Act's reporting requirements has steadily increased and a growing percentage of parties involved in mergers and acquisitions have had to incur the Act's substantial filing fee and the cost of submitting the required information. These costs have plainly fallen disproportionately on small and medium-sized businesses that more frequently engage in smaller transactions, which in real dollars would have been exempt at the time the HSR Act was passed, but because of inflation and productivity increases (resulting in higher sales to equity ratios) are now covered by the Act. (The increase in HSR filings has also probably had a negative impact on the allocation of resources within the Commission and the Antitrust Division of the Department of Justice.)
Although the costs imposed by the failure to raise the HSR Act's reporting thresholds may not prevent efficient transactions, it is nevertheless certainly clear that these costs exceed the enforcement benefits achieved and place an inordinate burden on smaller American businesses. Indeed, there is a growing conviction among companies and the antitrust bar that because the reporting thresholds have remained unchanged for so long, the percentage of transactions reported that raise no antitrust issue has significantly increased.
The data in the Commission's fiscal year 1993 Annual Report to Congress support these conclusions.(1) According to the Report, in fiscal year 1993 second requests were issued for only 4.1% of the 1745 transactions reported. See Appendix C, Table I. Even more significant, the Report states that in that year the Justice Department only filed five complaints in merger cases, on five occasions informed the parties to a transaction that it would file suit unless the parties restructured the transaction, and investigated seven bank merger transactions for which divestiture was required prior to or concurrently with the acquisition. Report at 7-11.
The number of challenges brought by the Commission against proposed transactions was similarly low in 1993. The Report states that the Commission sought preliminary injunctions to halt three mergers and accepted consent agreements in nine other cases. Report at 12-17. Thus, it appears that there were at most 29 instances (1.6% of the reported transactions) in fiscal year 1993 where an agency took direct action to block or modify a proposed transaction.
The statistical information contained in Chairman Pitofsky's December 19, 1995 letter to Senator Christopher Bond further confirms our conclusion that an extremely low number of smaller transactions reported under the HSR Act is challenged (or blocked) because of antitrust concerns. According to the letter, only three of the 518 (.6%) filings between 1992 and 1995 in which the size of the transaction was $50 million or less and the size of the acquired party was $25 million or less ("the request group") were blocked or modified as a result of agency review. Although the agencies initiated investigations into other transactions that fell within these dollar ranges, an agency's decision to initiate an investigation, by itself, obviously does not indicate that the transaction was potentially anticompetitive. Furthermore, the data reflect that for those transactions in which an investigation was authorized, there was a 44% greater likelihood that a transaction larger than the request group would be challenged or blocked than transactions within the request group.
Given the extremely low number of transactions challenged, particularly in the lower dollar ranges, it appears that the reporting thresholds could be significantly raised without sacrificing the enforcement benefits achieved by the Act. In our view, it would be prudent policy to raise the thresholds so that they were at least equivalent to their 1976 level in today's dollars. Such a change would do nothing more than provide for a level of enforcement consistent with Congress' intent when the HSR Act was passed. Additionally, to prevent future erosion of the thresholds by inflation and economic growth, we recommend annual indexing of the thresholds in proportion to changes in the gross national product or other appropriate economic indicators.
Indexing minimum dollar thresholds is a common practice in drafting all forms of economic regulations, including antitrust statutes. Section 8 of the Clayton Act, which limits the ability of individuals to serve on the boards of directors of competing companies, has minimum dollar thresholds that are expressly tied to the percentage change in the gross national product.(2) This provision is designed to avoid the exact problem that is currently plaguing the HSR scheme, the erosion of minimum dollar thresholds by economic growth and inflation. Amending the HSR Act in this way will bring the Act into conformance with contemporary antitrust legislation.
These changes would accurately reflect Congress' recognition that, although there are significant enforcement benefits of a premerger review process, those benefits are outweighed by the costs of the process for smaller transactions. Indeed, the legislative history of the HSR Act is replete with references reflecting Congress' intent that the HSR Act apply only to larger companies involved in substantial transactions so as to avoid an undue burden on small business. The Report of the House Judiciary Committee states that the HSR Act's purpose is to establish "premerger notification and waiting requirements for corporations planning to consummate very large mergers and acquisitions."(3) The Committee's Report goes on to emphasize Congress' concern that the HSR Act not impose a counterproductive burden on smaller companies and transactions:
If these premerger reporting requirements were imposed on every merger, the resulting added reporting burdens might more than offset the decrease in burdensome divestiture trials. That is why H.R. 14580 applies only to approximately the largest 150 mergers annually: These are the most likely to "substantially lessen competition" -- the legal standard of the Clayton Act.(4)
Congress' expectation that the HSR Act would only apply to the several hundred largest mergers and acquisitions has obviously not been realized for many years. To the contrary, the data provided in Chairman Pitofsky's letter indicate that the number of filings has almost doubled, increasing by more than 1200 in the last three years alone. The Chairman's letter states that there were 1451, 1745, 2196, and 2686 filings in 1992, 1993, 1994, and 1995, respectively.
A quick review of the major financial indicators indicates that economic growth and inflation have substantially cut into the reach of the HSR Act's exemptions. Since September 1976, the Dow Jones Industrial Average has risen 529%.(5) More significantly, the broader market indices, those most representative of the companies affected by the HSR Act, have risen even faster. Since September 2, 1976 (the date the HSR Act took effect), the S & P 500 has risen 592% and the NASDAQ Over The Counter Composite Index has risen 1866%.(6) The practical effect on the HSR Act's reporting requirements is that, in relative terms, only about one-third as many mergers and acquisitions today qualify for the HSR Act's exemptions as did when the legislation took effect in 1976.
Chairman Pitofsky's letter also defends the current HSR Act regime, noting that the Commission's experience is that there is little correlation between potential anticompetitive effect and the size of the merger and that raising the thresholds may increase the number of post-merger enforcement actions. While this point may be correct in the abstract, it applies regardless of the level of the HSR Act's reporting thresholds. Taken literally, this position argues in favor of lowering the thresholds, a position that is clearly contrary to Congress' original intent.
We respectfully submit that the critical issues concerning the HSR Act are the appropriate minimum size transaction that should be subject to the Act and the substantial effective reduction in the reporting thresholds over the past twenty years. As noted, our view is that because the reporting thresholds have remained at their current level for so long, Congress' objective of limiting application of the HSR Act to larger transactions so that the burdens of the premerger notification process do not exceed its enforcement benefits has been, and will continue to be, significantly impeded if the thresholds remain at their current level. Consequently, we recommend that the thresholds be increased by regulation (e.g., an amendment to 16 C.F.R. § 802.20) or statute amendment.
We recognize that a substantial portion of the Commission's and the Antitrust Division's budgets is generated by HSR filing fees and that this condition in some sense creates a disincentive to consider raising the reporting thresholds. For this reason, we concur in the recommendation made by Thomas Leary of Hogan & Hartson during a Commission hearing in October 1995 that HSR filing fees be removed from the Commission and Antitrust Division appropriation process.
We appreciate the opportunity to make our comments part of the record of the Commission's hearings on the impact of antitrust enforcement on American businesses competing in a global economy.
Peter J. Kadzik
(4) Id. at 11 (emphasis added). These sentiments were emphasized in debate on the floor of the House of Representatives and the Senate. See, e.g., 122 Cong. Rec. 25054 (1976) (Congressman Hughes noted that "As a result of the limitations set forth in the bill, only the very largest mergers would be required to give advance notice. Of the several thousand mergers which have taken place annually over the last several years, only 150 per year would have met all three of the threshold requirements."); 122 Cong. Rec. 17036 (1976) (Senator Eastland noting that the bill contains an "exemption for small business").