BUREAU OF COMPETITION
September 13, 1979
John W. Barnum, Esquire
White & Case
1747 Pennsylvania Avenue, N.W.
Washington, D.C. 20006
Dear Mr. Barnum:
This is in response to your March 1, 1979, letter to Chairman Pertschuk, discussing the treatment of attorney-client communications in the premerger notification rules under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
We appreciate your concern that the integrity of the attorney-client relationship not be compromised and we share this concern. The Act, however, mandates that the Federal Trade Commission and the Department of Justice shall require that filing parties submit information and documents relevant to the proposed acquisition that are necessary and appropriate for an assessment of the transaction. Clayton Act § 7A(d)(1). The Act does not exempt any categories of documents from this requirement. We therefore do not believe it is appropriate to amend the rules to provide a broad exemption for "privileged" documents, especially because the rules already provide a mechanism by which the reporting person may assert a privilege.
In appropriate instances a reporting person, both in its initial notification and in a response to a request for additional information or documentary material, may make an incomplete response, provided that each omission is accompanied by a statement of reasons for noncompliance. So long as other required responses have been provided, the inclusion of such a statement begins the applicable waiting period. The content of such a statement is prescribed by § 803.3 of the premerger notification rules. In the situation you describe, the statement should identify each document by author, recipient, date and its subject matter. The statement should also state who has control of the document and where it is located and should invoke the attorney-client privilege as the reason for not supplying it.
As is set forth in the Statement of Basis and Purpose for the premerger notification rules, 43 Fed. Reg 33526 (July 31, 1978), we have responded and will continue to respond to claims of privilege on a case by case basis. Our procedure is to determine (usually through a request for clarification or amplification under § 803.20(d)(2) of the rules) whether the privilege has been properly invoked.
We have no interest in compromising the relationship between a party to an acquisition and its attorney. We are concerned only with fulfilling the main objective of the Act -- evaluation of the antitrust implications of a proposed merger or acquisition prior to its consummation. We believe that a general exemption to 4(c) could frustrate that objective.
I hope that this reply meets your concerns, and I would be happy to continue to discuss these issues with you if you have further questions.
Very truly yours,
Malcolm R. Pfunder
Assistant Director for Evaluation
[WHITE & CASE LETTERHEAD]
March 1, 1979
The Honorable Michael Pertschuk
Federal Trade Commission
8th & Pennsylvania Avenue, N.W.
Washington, D.C. 20580
Following you appearance at the American Enterprise Institute in January, a BNA reporter who had been present followed up on our discussion of the treatment of attorney-client communications in the premerger notification rules and the result was the attached blurb in the February 15 issue. Although I have not gone back through the comments on the draft regulations to see whether the "chilling effect" point was made or stressed, I would like to repeat the argument that I offered at AEI because I think that the FTC's responses that I see in BNA and have heard elsewhere miss the underlying policy problem.
I believe that the premerger notification regulations should not require production of antitrust counsel's communications to management or a board of directors because the effect of that requirement will be (and already has been) to deter companies from obtaining such opinions when considering an acquisition. Companies will want to avoid having to submit such opinions and then having to risk an incomplete filing and a subsequent argument that the statutory time has not expired because such opinions were not supplied. While companies are still asking antitrust counsel to do much of the same analysis, when they are alerted to the problem that formal delivery of the resulting memoranda may entail they are limiting the transmission of the results of that analysis to an oral presentation to a few members of management.
I do not think that is a very satisfactory way for either counsel or management to do business. I believe that on a major acquisition a board of directors should have an opportunity to study a comprehensive antitrust opinion. Moreover the company should have such a document in its files in order to be able to demonstrate, should the need arise, that the board and management proceeded prudently. I am not just thinking of creating a paper record to defend against possible shareholder suits (or of assuring more work for the antitrust bar); I am concerned with the substance of the record upon which the merger decision is taken. If the board or members of management must proceed on the basis of an oral regurgitation of counsel's opinion, the antitrust implications of the transaction are less likely to receive adequate attention and in any event counsel's views become vulnerable to both conscious and unconscious distortion in their oral repetition. (I note in passing that someone may raise the question whether the regulations now require submission of notes of such an oral presentation that members of the board or management may have taken while counsel is talking or their analysis is being regurgitated.)
It is this chilling effect on responsible and effective antitrust analysis and the communication of the results that is unfortunate in the present regulations. It has often been said that the best enforcers of the antitrust laws are the private bar. While sometimes I think that characterization has been overdone, it is nevertheless true that the private bar has deterred management from violating the antitrust laws. Although aborting anticompetitive mergers has probably been less important than, for example, preventing price fixing or similar anticompetitive practices, I still think that you should not create a barrier to complete antitrust analysis of a proposed merger.
It is not enough, in my judgement, for the Commission merely to exercise restraint in requiring actual production of otherwise privileged memoranda. The problem is created by the perception that nonproduction would be an exception to the general rule. It should be the other way around. In a situation where the staff has decided to investigate a transaction more completely after the initial filing, and obviously in any subsequent litigation, there is always the opportunity to attempt discovery of such communications in circumstances where such discovery might be warranted. But it is a different matter to require in the premerger notification regulations that any such opinion be submitted in the first instance as an ingredient of substantial compliance. It puts the company on notice that it will have to either submit the opinion or obtain an exception, either affirmatively or by acquiescence or even by a court ruling, before it can consummate the transaction. If the regulations did not include the express requirement, a corporation that is willing to take its chances on having to submit an attorney-client communication in the course of an investigation or subsequent litigation would be willing to obtain the full written analysis for its executives to study. But after the Commission has expressly rejected the criticism of the requirement and included it in the final regulations, the same company would be less inclined to assume the risks or to invite the dilemma that the regulations may create.
Having the requirement in the regulations also raises the possibility that the antitrust opinion will be prepared more with an eye to its submission in connection with premerger notification than to its consideration by the management and the board of directors. The temptation for counsel to make the best case for the merger, rather than to give the company their most dispassionate advice, presumably would not affect the result of the FTC investigation, but it could have a significantly different effect on the company's decision, no matter what oral caveats accompany its transmission. Obviously I would prefer that antitrust counsel resist that temptation in rendering an opinion, but we should not overlook the fact that your regulation also makes that opinion ipso facto a brief.
If you thing there is any validity to these observations, I would appreciate your forwarding them to the appropriate docket or office of the Commission, and of course I would be pleased to pursue the question with anyone on your staff who would be interested.
Thank you again for your excellent presentation at AEI, and also for your cogent speech on licensing at the Mayflower last week.
John W. Barnum