Failure To Comply with the Hart-Scott-Rodino Act: Braveheart or Dead Man Walking?

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The Clayton Act Committee, 44th Annual Spring Meeting, American Bar Association

Washington, D.C.

George S. Cary, Former Senior Deputy Director


The Hart-Scott-Rodino Act is not yet twenty years old but it has already fundamently altered the landscape of antitrust merger enforcement.(1) Before the Act went into effect in 1978, mergers could be negotiated and finalized in secret. Competitive analysis of the merger by the enforcement agencies often occurred after the fact. Of course, this made effective remedy of an anticompetitive merger difficult. It was concern over these “Saturday Night Specials” that motivated Congress to provide the agencies with a process that would allow them to analyze large mergers before they were consummated. We can say with confidence that this is a narrowly tailored law that has been highly successful in accomplishing the objectives of its sponsors. It has enabled the Commission and the Department of Justice to make a pre-closing competitive analysis of the majority of mergers that have probable anticompetitive effects, without causing undue delay for the bulk of transactions that are procompetitive or competitively neutral. I would like to take a look at the current state of the law -- of the record of compliance by private parties, enforcement by the Federal Trade Commission, and of its importance to our continuing mission to preserve competition.

Compliance with the Hart-Scott-Rodino Act is vital to effective merger enforcement at the Commission. Stopping potentially anticompetitive mergers that could result in increased prices and reduced output protects consumers and the continued functioning of a competitive economy. It is through this Act that the Commission initially finds out about most competitively significant mergers. In addition to this announcement function, the Act provides for both defined waiting periods and the information the agencies use for their antitrust analysis. In fiscal year 1995, the Commission and the Department of Justice received filings for 2,617 reportable transactions.(2) The filing thresholds, including the size of person and size of transaction thresholds, are set at levels that reach most mergers that are likely to have anticompetitive effects while minimizing filings in transactions that do not require strict antitrust scrutiny.

The notification provided by the Act is important for effective antitrust enforcement. Also important are the waiting periods built into the statute and the information requirements found in the Premerger Notification Rules and staff interpretation of those Rules, which provide the agencies with a meaningful opportunity to review transactions prior to consummation.. The initial 30 day waiting period before a merger can be consummated allows the staff an opportunity to do a preliminary antitrust review of the transaction to determine whether a more in-depth review is needed to assess whether the transaction will violate the antitrust laws. The initial review consists of analyzing the information provided with the filing, interviewing the parties to the transaction, interviewing interested third party complainants and disinterested experts, and working through any publicly available data on the relevant geographic and products markets. This entire preliminary investigation must be completed in this short statutorily-defined time period, which necessitates complete and timely initial filings. When filings do not meet the requirements of the statute or the Rules, the Commission’s investigation is delayed and the time period for the closing of the transaction will be unnecessarily lengthened. The fact that Congress provided for a 15 day initial waiting period for cash tender offers shows that the HSR Act was not designed to influence the outcome of contests among buyers for productive assets -- the Act was designed strictly for antitrust enforcement purposes and we treat that mandate seriously.(3)

We expect corporate America to treat its obligations under the Act equally seriously. It is critical to effective merger enforcement that merging entities comply fully with the HSR Act. Full compliance means not only that a filing is made in a timely manner but that the parties to a transaction turn over all of the information that is required under the Act. Additionally, the required information must be included in the initial filing, rather than being kept in reserve to be turned over if a second request for information is made.

It is worth noting at the outset that a complete initial HSR filing not only enables the Commission to effectively enforce the substantive federal merger standards, it also eliminates much unnecessary burden on the parties. The HSR Act and the Rules call only for the data to be submitted with the HSR Form that is necessary to make a preliminary antitrust analysis of a particular transaction. Indeed, it is probably correct to say that most of the data called for by the statute and the Rules is already used by the parties to make their own analysis of the proposed transaction. If the information is provided in the initial filing, the waiting period will begin and the transaction can close that much sooner. If the initial filing is incomplete, the parties could be faced with a second search of their files and a delayed start to their waiting period, both of which can substantially increase the compliance burden.

The Commission has discovered several instances of incomplete and inadequate compliance with the HSR Act in recent months. I would like to discuss several of the cases that resulted from our investigations of HSR compliance. These cases illustrate a number of HSR issues that the Bureau would like to stress in order to increase compliance levels in the future.

Recent Enforcement Actions

Filing avoidance is one kind of problem that the Commission has addressed lately. The Commission recently brought a case of a deliberate failure to file. In United States v. Sara Lee Corporation,(4) the Commission obtained $3.1 million in civil penalties, the largest amount ever paid under the HSR Act. The record penalty was warranted by the actions of Sara Lee when it acquired without making an HSR filing the British and the American shoe care businesses of Reckitt & Colman on October 4, 1991. At that time, Sara Lee was already the dominant shoe care company in the United States. Its subsidiary, Kiwi, had ninety percent of the mass merchandising market for shoe polish and related products. Acquiring Reckitt & Colman’s Griffin brand eliminated one of the few remaining competitors in that market and further bolstered Kiwi’s market power.

The investigation showed that Sara Lee was well aware that its acquisition would have faced antitrust opposition had it been called to the agencies attention. For that reason, Sara Lee made it a condition of its offer to Reckitt & Colman that the transaction not be reported under HSR’s premerger notification reporting system. The Commission rejected the conclusion that Sara Lee was not required to file because it paid less than the $15 million that triggers the HSR notification requirement for the American shoe care assets. The HSR Rules state that reporting obligations are determined by the greater of the fair market value of assets or the acquisition price and here Sara Lee’s own documents demonstrated the value of the American assets was well in excess of the filing threshold. Sara Lee failed to perform a fair market value determination as required by the HSR Rules. Sara Lee’s self-serving allocation of too much of the total purchase price to the British assets and too little to the American assets could not alter its reporting obligations. Our case was based both on Sara Lee’s failure to value and on an “avoidance device” theory under section 801.90 of the Rules.

Sara Lee’s fears that the Commission would seek to block the merger were justified. The Commission required, in a Consent Order, that Sara Lee divest the Griffin brand and another brand, Esquire, that had been acquired in a previous transaction. Thus, the Commission ultimately obtained both antitrust relief under section 7 of the Clayton Act and section 5 of the Federal Trade Commission Act and penalties under the HSR Act.

A word is warranted about the HSR penalty. We have emphasized in the past that we do not see the absence of an antitrust violation as a mitigating factor. We consider the attempt to avoid the filing obligation because of an expectation of antitrust opposition to be an aggravating factor that requires higher penalties. Even the record settlement in this case reflects a compromise; nevertheless, the $3.1 million is more than the maximum penalty for the period following the acquisition until the time that Sara Lee submitted the antitrust documents that we subpoenaed in the section 7 investigation.(5) At $10,000 a day, that would have amounted to a maximum of $2.93 million for the 293 days it took Sara Lee to provide us with the documents.

The Commission will continue to seek maximum or near maximum penalties where there is evidence that parties relied on dubious interpretations of notification criteria because they wanted to realize tax, stock market, or other benefits that might be lost if consummation were delayed by the HSR waiting period. We will be vigilant to ensure that the Act guarantees the antitrust agencies the opportunity to consider the competitive effects of acquisitions and mergers before they occur. Consequently, if you have doubts about the reportability of an acquisition, our advice remains the same: call the Premerger Notification Office.

Another area of increasing concern at the Commission is the filing of HSR forms without a full submission of the required 4(c) documents. The instructions to Item 4(c) require the filing person to submit:

all studies, surveys, analyses, and reports which were prepared by or for any officer(s) or director(s). . . for the purpose of evaluating or analyzing the acquisition with respect to market shares, competition, competitors, markets, potential for sales growth or expansion into product or geographic markets. . . .(6)

The documents provided under Item 4(c) are the most competitively sensitive of the documents required by the HSR Form. As such, they are vital to the Commission’s determination of the substantive competitive effects of the transaction. The Statement of Basis and Purpose in the Federal Register emphasizes the importance of the documents to be submitted under Item 4(c):

Internal documents of the parties to an acquisition provide a perspective on matters of antitrust concern that even detailed statistical information is unlikely to yield. SIC data, while the most satisfactory data available, are occasionally imperfect for determining product market. . . . The agencies have found from past experience that the viewpoints of the participants are extremely valuable in analyzing the antitrust implications of an acquisition and have determined that some of these perceptions are indispensable to the preliminary review envisioned by the act. . . .(7)

Because of the vital nature of 4(c) documents to making a proper substantive analysis of a transaction, the Commission will vigorously pursue failure to provide such material. On Wednesday of this week, the Commission announced a civil penalty action in a case where we discovered after the transaction had been consummated that the acquiring party did not provide all of the required 4(c) documents with its HSR Notification and Report Form. In United States v. Automatic Data Processing, Inc.,(8) ADP agreed to pay $2.97 million, the third highest penalty ever paid under the HSR Act. That amount is equal to the maximum penalty for the period from the time of the acquisition until ADP recertified its filing and submitted the documents required by Item 4(c) of the Form. This maximum penalty was warranted in this case because the HSR notification did not give effective notice of the transaction without the required 4(c) documents. An aggravating circumstance in this case was the wholly inadequate search for 4(c) documents.

On the basis of the HSR Form that was submitted without any 4(c) documents, the Commission’s staff did not seek the issuance of a request for additional information that is authorized by the HSR Act. Nothing else in ADP’s responses on the Form alerted staff to the competitive issues posed by the merger. As a result, the HSR waiting period closed without issuance of a Second Request and the merger was consummated. Only as a result of complaints from the public, did the staff become aware of possible anticompetitive effects. It then opened an investigation, issued a subpoena, and ultimately received documents relevant to the transaction. It was then that the staff became aware that ADP had failed to include documents in its HSR filing that were required by Item 4(c) and requested that ADP conduct a search for all documents responsive to Item 4(c) and recertify its filing.

This belated submission of documents illustrates why responses to Item 4(c) are frequently the most important part of the Notification. For example, one of the 4(c) documents states baldly that the acquisition would enable ADP to “monopolize the salvage industry in an expeditious, and timely manner.” Numerous other documents prepared by and for ADP officers detailed the nature of the market and projected the effects of the acquisition. There can be no doubt that had the staff been aware of these documents, a full antitrust investigation would have proceeded before consummation, to the benefit of consumers and the parties alike.

We have no evidence that this was a deliberate attempt by ADP to hide these 4(c) documents to avoid a Second Request. However, ADP’s testimony outlines procedures that were so inadequate as to constitute gross negligence or reckless disregard of the notification obligations imposed by the Act. The prejudice to antitrust scrutiny was inevitable.

Even if the HSR filings that we receive provide sufficient information to warrant a second request, nonetheless, failure to provide 4(c) documents may cause substantial prejudice to the Commission’s enforcement efforts. The Commission has encountered situations where the parties fail to file such documents with the initial Notification and Report Form. In one such instance, the Commission became aware of the documents when they were produced as part of the subsequent submission in response to a Second Request. The filing in this case raised enough substantive antitrust questions that a Second Request was issued. In reviewing the parties’ response to the request for additional information, the staff found several documents that appeared to be 4(c) documents. One document was a board presentation that discussed new markets and analyzed the reasons for acquiring certain assets. Significantly, it stated that one of the main reasons for acquiring the assets was to control a major competitor. The document contradicted the parties argument that the acquiring firm and the firm selling the assets were not major competitors. The other documents were ones prepared by officers and directors and were used to analyze the acquisition.

The parties took the position that even if the documents in question were 4(c) documents, the Commission would have to prove that staff was prejudiced in some way by not having the alleged 4(c) documents. The Bureau took the position that prejudice was not necessary. In any event, the Bureau’s investigation was in fact hampered because without the documents, the initial waiting period could not have been used as effectively as it otherwise would have been. After conducting several hearings, staff confirmed that the omitted documents were indeed called for by Item 4(c) and, not surprisingly, also discovered that the parties conducted a wholly inadequate search for 4(c) material. As a result, the parties were required to recertify and undergo a new 30 day initial waiting period.

The acquiring company had also asserted that it had made a good faith effort to comply with the requirements of Item 4(c) and the failure to produce the questioned documents as part of its initial filing was inadvertent and should not be cause for compelling it to refile. During the hearings, the company continually invoked the attorney/client privilege. However, the Bureau took the position that, having put into issue its good faith compliance with the legal requirements of Item 4(c), a party can no longer rely on the attorney/client privilege to shield from Commission scrutiny the adequacy of its legal advice regarding the scope of Item 4(c) or the search conducted. Alternatively, assertion of the privilege was deemed to estop the parties from arguing good faith.

These cases, and a number of other instances of apparent failure to completely supply 4(c) documents raise the question of why a party would not fully comply with its obligation? Our investigations have shown that part of the problem is a result of inadequate searches for responsive documents. We have taken a number of depositions of persons responsible for certifying compliance with the HSR Form and have discovered that the person certifying the Form does not always have first hand knowledge about the search that was conducted to assure compliance with Item 4(c). Certifying compliance with the HSR Form reporting requirements is not a rubber stamp. Rather, the certification provides that:

This NOTIFICATION AND REPORT FORM, together with any and all appendices and attachments thereto, was prepared under my supervision in accordance with instructions issued by the Federal Trade Commission. Subject to the recognition that, where so indicated, reasonable estimates have been made because books and records do no provide the required data, the information is, to the best of my knowledge, true, correct, and complete in accordance with the statute and rules.(9)

Thus, the person certifying the HSR Form must have knowledge about the requirements of filling out the Form and about the steps taken to comply to certify that the response is “true, accurate and complete.” The certifying person should not rely, for instance, on general assurances from a subordinate, or even from counsel, without inquiring specifically as to what was done so as to gain some independent knowledge that a complete search was actually made.

There is no secret as to what kind of search is required by Item 4(c). Long ago, Axinn, Fogg, Stoll and Prager laid out in their treatise(10) a useful discussion of what documents are required by Item 4(c) and how to search for them when you make a filing. They said, in part:

As to the issue of a due diligence search of the files of the person making a preacquisition filing, it seems that, at the very least, a review must be made of the files of all of the company’s officers and directors (both inside and outside). Any in-house files regarding the target should also be searched, as should those of the individuals, other than officers and directors, within the person who are responsible for preparing documents of the type called for by Item 4(c).(11)

In both the ADP and Sara Lee cases, the focus was on internal documents prepared in the ordinary course of business. While the documents in those cases may indicate violations of the antitrust laws and the HSR Act, internal documents are more commonly used to educate us about the industry affected by a proposed merger and reassure us that competition will not be harmed. Congressman Rodino foresaw the importance of internal documents when he urged passage of the HSR Act:

In most cases, the Government will be requesting the very data that is already available to the merging parties, and has already been assembled and analyzed by them. If the merging parties are prepared to rely on it, all of it should be available to the Government.(12)

We also suspect that another reason for non-compliance with Item 4(c) is that filing persons may be interpreting the requirements of Item 4(c) in an unduly narrow way. Documents may be withheld because a determination is made that a particular document is not a “report, study, survey or analyses” or that the document does not “analyze or evaluate the acquisition with respect to market shares, competition, competitors, markets, potential for sales growth or expansion into product or geographic markets.”

In an attempt to mitigate this problem, the Bureau will be recommending a slight modification to the language of Item 4(c) that should increase compliance with the HSR Act without increasing the burden on filing parties. On June 14, 1994, the Commission published a Notice of Proposed Rulemaking proposing changes the Notification and Report Form. Among the proposed changes, the Bureau has decided to go forward with the following two that would require the submission of documents:


  1. prepared for the purpose of discussing (in addition to evaluating or analyzing) the acquisition with respect to various aspects of competition; and
  2. adding the word “document” to the instruction requiring the submission of “all studies, surveys, analyses, or reports.”

These proposed changes in the 4(c) rules reflect the Commission’s concern with a perceived noncompliance with that item. The ADP and other matters are merely the latest in a series of troubling instances where it appears that filing parties have not fully complied with their obligations to provide us with documents that are called for under Item 4(c). Noncompliance on this issue appears to occur when filing parties perform an inadequate search for responsive documents and/or narrowly interpret the terms “studies” or “reports” or “analyze” inappropriately to reject classification of certain material as items called for by 4(c). Such over interpretation could seriously compromise the Bureau’s ability to make a correct determination of the competitive effects of a particular transaction. If these proposed changes are enacted, they should ameliorate at least part of the problem of noncompliance with Item 4(c). The changes will clarify the parties’ responsibilities and leave less “wiggle room” to interpret the Rules in ways that compromise the integrity and effectiveness or the Hart-Scott-Rodino Act.

These proposed changes should not result in any additional burden to the filing parties. Any additional material that would be required to be submitted is already a part of the universe of documents that must be culled to determine if they are responsive to Item 4(c). The Rule changes would only require the submission of documents that the Bureau already considers 4(c) material necessary for an adequate antitrust analysis.

In addition to these Rule changes, the Bureau will look more closely in the future at transactions in which no 4(c) documents are submitted. This will increase the risk of inadequate searches or certifications and should encourage stricter compliance with Item 4(c) requirements. Both of these initiatives should result in more efficient merger enforcement. After all, it is in the interest of the parties, the agencies, and consumers to have the antitrust analysis completed before consummation of the transaction. Inadequate compliance with the HSR Act can lead to divestiture after consummation, which is less efficient for all parties and wasteful of economic resources.

Recent Improvements in the Filing Process

The Commission enforcement actions just described result when compliance with the HSR process is inadequate. Both merger process and substantive merger enforcement are enhanced when Hart-Scott-Rodino filings are timely and complete. Towards that end the Commission is constantly trying to improve the filing process to make compliance easier and less burdensome while retaining the information necessary to make the proper substantive determination of the merger’s competitive effects.

A significant accomplishment in this area this year is the amendments to the notification and reporting requirements. Theses amendments consist of five new rules and were announced on Monday, March 25, 1996 and will be published in the Federal Register today, Thursday, March 28, 1996.(13) These new rules make clear the types of transactions that are in the ordinary course of business of the parties to the transaction and thus are exempt from the filing requirements of the HSR Act. They also provide a number of new exemptions for certain types of acquisitions of real property and carbon-based mineral reserves that are unlikely to violate the antitrust laws. They are designed to accomplish two important goals: (1) reducing the compliance burden of the business community by no longer requiring filings for certain transactions that are not likely to violate the antitrust laws; and (2) allowing the Commission and the Antitrust Division to channel their resources more effectively to acquisitions that need to be investigated because of their potential for competitive harm. These new rules represent the most ambitious attempt to develop exemptions to the filing requirements since the premerger notification rules were first promulgated in 1978.

Even without additional Rules changes, the Commission has moved a long way towards reducing unnecessary burdens that potentially may be caused by filing requirements. Last year Chairman Steiger and Assistant Attorney General Bingaman announced a series of initiatives designed to make the HSR process less burdensome without reducing its effectiveness. Those initiatives included:

  • issuance of a joint FTC/DOJ model second request;
  • adoption of procedures to expedite the clearance process;
  • implementation of uniform procedures to review the burden of second requests and to examine disputes as to substantial compliance;
  • adoption of a joint “quick look” policy for reviewing HSR filings;
  • and, development of proposals to increase the number of transactions exempt from HSR requirements.

Both the Commission and the Division have made substantial progress in meeting these ambitious goals. The annotated, uniform second request model was developed by the two agencies and has been in place for almost a year. Under this new model, and with continued use of the “quick look” policy, there has been a 40 percent reduction in document production burden in second requests in the last year. Lessened document production burden means parties need take less time to comply with the second request. Consequently, there has been a corresponding 30 percent reduction in the time between issuance of the second request and substantial compliance.

Clearance times also have been substantially reduced under the new procedures. Previously, it took an average of more than 17 days out of the 30 day waiting period to resolve clearance disputes. This often left the staff with less than one half of the statutory period in which to examine the transaction. It also caused unnecessary delays in transactions which would be granted early termination because they were unlikely to have anticompetitive effects. Since April, we have shortened the average time period by almost 40 percent, to about 10 calendar days -- which works out to about 7 business days. This has given the staff more time for investigation during the initial waiting period, resulting in better-informed second request decisions and more focused investigations.

By settling clearance disputes earlier and giving the staff more time to focus on the substantive investigation, the new initiatives have allowed the Commission to resolve our competitive concerns without resorting to the second request process nearly as often. Since adopting the expedited clearance procedures, we have increased the percentage of transactions we have investigated during the 30 day waiting period. Simultaneously, we decreased the transactions requiring a second request by 40 percent. The extra investigating time is increasing the efficiency of the Commission while reducing the burden on the parties.


Recent actions by the Federal Trade Commission, as well as actions taken in conjunction with the Department of Justice, show the seriousness with which we take our obligations under the Hart-Scott-Rodino Act. The Commission has aggressively enforced the filing requirements of the Act in order to be certain that required filings are made, that they are timely, and that they are complete. We have paid particular attention to the issue of noncompliance with Item 4(c).

The Commission has also undertaken policy initiatives and Rules changes in order to make the entire HSR filing process work more efficiently, thus reducing the burden on filing parties and increasing the ability of the staff to make quick, complete and accurate substantive reviews of potentially anticompetitive mergers. Early evidence indicates that these initiatives are working as planned.

With the cooperation of the antitrust bar, we intend to continue to improve the HSR process to the benefit of both persons who have an obligation to file and effective antitrust enforcement.

(1) These remarks are my own, and not necessarily those of the Federal Trade Commission or any individual Commissioner.

(2) The Commission and the Department received filings for a total of 2,816 transactions, of which 199 were not reportable or were filings for exemptions under section 7a(c)(6) and (8) of the Clayton Act.

(3) The Commission administers the HSR program as much as possible so that the Act will not affect the outcome of competing bids. Nevertheless, if a particular transaction poses a competitive problem, the Commission is obligated to take steps to prevent violations of the law and this may affect the outcome.

(4) Civ. Act. No. 98 0196 (D. D.C. February 9, 1996).

(5) Section 7A(g)(1) of the Act, 15 U.S.C. 18a(g)(1), provides for a penalty of $10,000 a day for each day a person is in violation of the Act. Thus, the period for calculating a penalty does not end until the HSR waiting period terminates and, if warranted, the status quo prior to the merger is reestablished.

(6) Instructions to Notification and Report Form, appendix to 16 C.F.R. Part 803.

(7) 43 Fed. Reg. 33525 (Monday, July 31, 1978).

(8) Civ. Ac. No. 1: 96CV00606 (D. D.C. March 27, 1996).

(9) Notification and Report Form, Item 10.

(10) Acquisitions Under the Hart-Scott-Rodino Antitrust Improvements Act.

(11) Axinn at 8.5.13, p. 370-71, Revised edition (1988).

(12) 122 Cong. Rec. H10293 (daily ed. September 16, 1976).

(13) Premerger Notification; Reporting and Waiting Period Requirements: Final Rules (March 25, 1996).