By Tim Haney

Law360 (April 23, 2020, 6:15 PM EDT )

Tim Haney

This article analyzes data from the past 11 Hart-Scott-Rodino, or HSR, annual reports to determine how the Great Recession affected the overall number of HSR filings, antitrust merger investigations and U.S. Department of Justice and Federal Trade Commission merger challenges. Although predictions are particularly difficult at this moment, this data from the Great Recession may provide some guidance on potential decline in the same metrics from the coming COVID-19-related economic downturn.

Background

Every year, the DOJ antitrust division and the FTC put out a joint annual report to Congress, called the Hart-Scott-Rodino annual report, on their merger enforcement activities. The data they report include the number of HSR filings they received, the total number of requests for additional information and documentary material — known as second requests — they issued, and the total number of mergers they challenged, all in that fiscal year. The government's fiscal year begins Oct. 1 of the previous calendar year and ends on Sept. 30 of the calendar year (e.g., fiscal year 2018 began on Oct. 1, 2017, and ended on Sept. 30, 2018).

In their count of challenged transactions, the DOJ and the FTC include transactions in which (1) they brought a litigation in federal or administrative court to block the transaction; (2) they agreed on a settlement — known as a consent decree — with the merging parties; (3) the merging parties abandoned their transaction as a result of the antitrust investigation; and (4) the merging parties restructured the transaction, prior to a complaint being filed, to address antitrust concerns.[1]

HSR Annual Report Data from the Great Recession

During a recession, M&A activity typically falls. This is exactly what happened during the Great Recession. The chart below shows the number of HSR filings received by the DOJ and the FTC for the last 11 available fiscal years, including the pre-recession 2008 fiscal year (which began in October 2007). Although the National Bureau of Economic Research dated the beginning of the recession to December 2007, the worst of the downturn and panic began following the collapse of Lehman Brothers on Sept. 15, 2008. As the chart shows, M&A activity — as measured in HSR filings — fell precipitously in fiscal year 2009 and didn't rise to match the fiscal year 2008 level until fiscal year 2015.



However, the HSR annual report figures also show that merger investigations — as measured by second requests — and merger challenges (litigation, consent decrees, abandoned deals and restructured deals) did not decrease as sharply as filings. The first chart below shows the number of second requests from fiscal years 2008-2018 and the second chart shows the number of merger challenges from fiscal years 2008-2018.





In fiscal year 2009, while HSR filings fell to about 42% of the fiscal year 2008 level, second requests fell to only about 76% of the fiscal year 2008 level and challenges fell to only about 84% of the fiscal year 2008 level. The following fiscal year, fiscal year 2010, filings were only about two-thirds of the fiscal year 2008 level, but both second requests and merger challenges exceeded the fiscal year 2008 level. Another way of looking at the data is that the rate of second requests, per HSR filing, nearly doubled (from 2.4% to 4.3%) and the rate of challenges more than doubled (from 2.1% to 4.3%), from fiscal year 2008 to fiscal year 2009.

Why Did Investigations and Challenges Fall at a Much Lower Rate Than HSR Filings?

Some reasonable guesses as to why investigations and challenges may have stayed fairly steady, despite the sharp decrease in filings, include:

Those Transactions Met the Standard

At the outset, it should be noted that there may have been 37 cases in front of the DOJ and the FTC in fiscal year 2008 that met the Clayton Act Section 7 standard of substantially lessening competition and 31 cases that met the standard in fiscal year 2009. Without a thorough review of the transactions that were not challenged, including the nonpublic information at the DOJ's and the FTC's disposal, it's impossible to know otherwise. Also, anticompetitive mergers are not necessarily evenly distributed through a given number of HSR filings.

Number of Investigations/Challenges Driven by Resource Constraints

When the agencies are less busy, agency staff have more time to review and find anticompetitive issues in certain transactions. Conversely, when agency staff are busier and have fewer resources, they may not be able to either spend the time spotting the anticompetitive issues or may choose to devote limited resources to the more important or more anticompetitive cases.

Keep in mind that the DOJ and the FTC staff cannot block a merger on their own; they must bring a case in federal or administrative court. That means that they must not only have a good faith belief that a transaction substantially lessens competition, they must also be able to prove it. Developing evidence in an antitrust merger investigation takes significant time and resources.

Change in Presidential Administration

President Barack Obama took office on Jan. 20, 2009, toward the beginning of fiscal year 2009, as President George W. Bush's term expired. Democratic administrations in general, and the Obama administration in particular, have been considered very tough antitrust enforcers (meaning that they pursue more investigations and challenge more transactions).

However, it generally takes several months before a new presidential administration, especially from a different party, can make its mark in antitrust enforcement. For example, President Obama's pick to lead the DOJ's antitrust division, Christine Varney, was not confirmed by the Senate until April 20, 2009, and Obama's first FTC Chair Jon Leibowitz did not appoint his senior staff until April 14, 2009, leaving only about five months in fiscal year 2009.

Therefore, Bush appointees, holdovers or career staffers were leading the antitrust agencies for about seven months in fiscal year 2009. Additionally, as filings (and therefore transactions) increased in Obama's second term, the rate of challenges was much closer to the fiscal year 2008 rate than the fiscal year 2009 or 2010 rates.

While the answer is likely to be that all of these factors, as well as other factors, played some role, the most compelling single factor seems to be the DOJ and the FTC staff resource constraints and availability.

Initial Guidance

A few potential lessons can be drawn from the HSR annual report data from the Great Recession and the reasonable guesses as to factors driving that data.

Decline in Overall Transactions 

While it is difficult to make any predictions about the severity of the COVID-19-related economic downturn, or how it will affect M&A activity, some indicators suggest that the recession may be deeper than the Great Recession. For example, new unemployment claims continue to break records, week after week.

In fiscal year 2009, HSR filings fell to approximately 42% of the prior year's number and didn't match fiscal year 2008 until fiscal year 2015. If M&A activity in the COVID-19-related economic downturn generally follows the pattern of the Great Recession, HSR filings likely will decline sharply, and potentially even more severely than fiscal year 2009, and may not increase to pre-COVID-19 levels for several years.

Private Antitrust Bar's Workflow Will Fall, But Not as Sharply as Transactions Drop 

For the private bar, merger antitrust work is driven by two factors: the absolute number of transactions and the number of transactions that are subject to investigations, especially second requests.

• The total number of transactions affects the amount of merger antitrust work because for each transaction (that meets the HSR financial thresholds and is not subject to an exemption), an HSR filing must be made and an analysis of global filing obligations must be done; even in no issue deals. For many transactions, merger antitrust attorneys need to oversee due diligence or integration planning, review the merger agreement, and, if there is an auction, conduct an antitrust risk analysis of bidders.
  
  
• However, merger antitrust attorneys, especially senior antitrust attorneys, do much of their work in transactions with long second request investigations, especially those that are ultimately challenged. Throughout the investigation there is significant advocacy and data and document collection work. Depending on the type of challenge, there is significant work involved in negotiating the remedy or litigating the merger challenge. While merger antitrust workflow will likely decline significantly over the COVID-19 economic downturn, second requests and merger challenges may not fall as severely.

DOJ/FTC Staff Resources and Productivity in Light of Social Distancing 

If the theory laid out above about staff resources — that staff resource constraints is the largest factor driving the number of investigations and challenges — is correct, the extent to which challenges will continue to stay as relatively steady as they did during the Great Recession will depend on the extent to which agency staff remain as productive as they did prior to COVID-19.

DOJ and FTC staff are currently conducting all meetings by phone or video conference. Furthermore, they typically seek the assistance of third parties — customers, competitors, industry experts — who also likely may be working from home.

Those factors may cause agency staff to lose some productivity. Additionally, the DOJ and the FTC are currently in the middle of very extensive investigations into Big Tech (Amazon, Apple, Facebook and Google), and those investigations may absorb resources.

Therefore, even if the theory about staff resource constraints/availability is accurate, potential lower productivity may be a countervailing force.

Potential Change in Presidential Administration

If there is a change in presidential administration, new antitrust leadership likely won't take over until approximately midway through 2021, which would be well into one year of the economic downturn.

Conclusion

During the Great Recession, HSR filings fell by more than half, yet second request investigations and merger challenges fell much less sharply. By some measures, the COVID-19-related economic downturn is already more severe than the Great Recession, so HSR filings likely will fall significantly.

Making reasonable guesses as to why investigations and challenges stayed fairly steady during the Great Recession provides some clues as to what will happen with those metrics in the coming year or two. If the amount of staff resources is the greatest driving factor, then, assuming staff is able to maintain their level of productivity through the work-from-home period, investigations and challenges may, similar to the Great Recession, stay fairly steady.

If presidential administration or some other factor is more significant, then the trends going forward may be idiosyncratic.

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Tim Haney is the antitrust content manager at Lexis Practice Advisor and was previously an associate in the antitrust practice group at Shearman & Sterling LLP.

This article is excerpted from Lexis Practice Advisor®, a comprehensive practical guidance resource that includes practice notes, checklists, and model annotated forms drafted by experienced attorneys to help lawyers effectively and efficiently complete their daily tasks. For more information on Lexis Practice Advisor or to sign up for a free trial, please click here. Lexis is a registered trademark of RELX Group, used under license.

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[1] The HSR annual reports are available here.

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