There's a widely held belief that regulatory programs rarely achieve what they're intended to achieve. One notable exception has been the DOJ's 2001 Merger Review Process Initiative (MRPI). Designed to reduce the time and cost of merger investigations, the program has done just that by helping the DOJ identify critical competition issues in proposed mergers more quickly and cutting down the agency's requests for additional information.

But requests for additional information–known as “second requests”–still come. And when they do, they are increasingly slowing down the deal process.

The main reason for the slowdown is that courts are relying ever more heavily on the likely competitive effects of transactions and less on market-share presumptions. As a result, the DOJ has had to step up both the quality and the quantity of the information it requests from parties to a merger or acquisition.

“The costs of compliance review have continued to escalate, and practitioners continue to criticize the second-request process as unduly burdensome,” says Robert Joffe, a partner in Cravath, Swaine & Moore in New York.

In response to this growing criticism, the DOJ announced Dec. 15 it was amending the MRPI to include a voluntary process that will expedite second requests. But there's a tradeoff. If a company agrees to this process, it will face a much more extended discovery process if the DOJ decides to file a complaint. And that extended process could derail the deal.

“The changes front-end load the disclosure process, so parties are going to have to pay closer attention to antitrust issues earlier in the transaction,” says Theodore Edelman, a partner at Sullivan & Cromwell.

Quick Relief

The second-request process is an integral part of the Hart-Scott-Rodino Act premerger review process. The 1976 Act requires parties to certain proposed acquisitions to report them to the antitrust division and FTC. The parties must then wait 30 days while the DOJ reviews the acquisition. If the agency believes there is an antitrust issue, it issues a second request for information. This request extends the review period until the regulators are satisfied there are no antitrust issues. If it isn't satisfied, the DOJ will file a complaint.

While DOJ practice under the 2001 Initiative allowed for a limited production alternative, known as a “quick look,” the procedure wasn't always a satisfactory salve because the DOJ could always undercut it with requests for more information.

“The difficulty with the quick look was that the DOJ had the option of requiring parties to produce more material after reviewing the returns to the second request, which would effectively extend the time the department had to decide whether to block the transaction,” says Jon Dubrow, a partner at McDermott Will & Emery.

The DOJ also could seek even more discovery once it had filed a complaint, although the parties could apply to the courts to limit the time for discovery by setting a fixed trial date.

What the December amendment does is introduce a voluntary option under which parties can limit the second request to a single search of certain central files and the files of 30 key employees. It also decreases the search period from the current three or four years to two years; restricts the number of backup tapes a company must search; reduces their obligation to conduct further electronic document collection sweeps; and cuts down the scope of the “privilege log” documenting communications between a company and its attorneys.

Once the parties have complied with the limited request, the DOJ cannot make further requests until it has decided whether to file a complaint. But that comes with a price.

Bad Timing

To begin with, parties invoking the option must assist the DOJ in selection of the 30 employees by providing organizational charts and relevant databases, as well as access to employees to interpret that information.

More importantly, however, the parties must agree to certain timing and procedural conditions. These include providing the DOJ “sufficient time to conduct post-complaint discovery” if the agency challenges the deal in federal district court after the second look.

“[The amendments] are part of our ongoing efforts to reduce enforcement burdens, while at the same time preserving our ability to conduct thorough investigations and protect consumers from anticompetitive transactions,” said Thomas Barnett, assistant attorney general in charge of the DOJ antitrust division, in a statement.

According to the DOJ, the post-complaint discovery could take four to six months. Some experts argue that those conditions are onerous.

“Courts know that time is of the essence in M&A and many wouldn't give the regulators that much time to get to trial under the existing procedure–especially if the parties can demonstrate some urgency,” Joffe says. While he believes many parties will be reluctant to enter into these types of agreements, Joffe also notes that the amendments give the DOJ a fair bit of discretion to negotiate.

“Hopefully, the parties can work out a second-request agreement that gives the DOJ adequate time to prepare for trial with less than a four- to six-month hold on the court process,” he says.

The difficulty is that whether an antitrust issue exists isn't always all that clear.

Uncertain Outcome

“Quite often, companies and their attorneys who have a sense that there's a competition issue out there can't really predict how the regulators will react,” Edelman says. “I've been surprised both ways.”

Compounding the problem is the fact that companies need to make decisions on second-request strategy early in the deal process.

“The parties may not want to spend precious resources analyzing the second request strategy at a very busy time when they have to pay a lot of attention to other things, such as negotiating and dealing with competing bidders,” Edelman says.

The real value of the amendments comes when it's clear that there is a competition issue. “In that scenario, parties are well advised to engage the second-request issue and spend the time and effort formulating a strategy no matter how busy they are,” Edelman says. “In my experience, that's what most parties in that situation will do.”

Peter Thomas, a partner at Simpson Thacher & Bartlett, says counsel's judgment regarding the risk involved will dictate whether companies will opt in to the new second-request procedures.

“If you decide that the risk of the DOJ ultimately filing a complaint is low, and if you think you can persuade them that there is no antitrust issue or that there are solutions [like selling off assets] to deal with the issue, then you're not giving up that much if you agree to the procedural conditions for a limited second request,” he says.

There's a widely held belief that regulatory programs rarely achieve what they're intended to achieve. One notable exception has been the DOJ's 2001 Merger Review Process Initiative (MRPI). Designed to reduce the time and cost of merger investigations, the program has done just that by helping the DOJ identify critical competition issues in proposed mergers more quickly and cutting down the agency's requests for additional information.

But requests for additional information–known as “second requests”–still come. And when they do, they are increasingly slowing down the deal process.

The main reason for the slowdown is that courts are relying ever more heavily on the likely competitive effects of transactions and less on market-share presumptions. As a result, the DOJ has had to step up both the quality and the quantity of the information it requests from parties to a merger or acquisition.

“The costs of compliance review have continued to escalate, and practitioners continue to criticize the second-request process as unduly burdensome,” says Robert Joffe, a partner in Cravath, Swaine & Moore in New York.

In response to this growing criticism, the DOJ announced Dec. 15 it was amending the MRPI to include a voluntary process that will expedite second requests. But there's a tradeoff. If a company agrees to this process, it will face a much more extended discovery process if the DOJ decides to file a complaint. And that extended process could derail the deal.

“The changes front-end load the disclosure process, so parties are going to have to pay closer attention to antitrust issues earlier in the transaction,” says Theodore Edelman, a partner at Sullivan & Cromwell.

Quick Relief

The second-request process is an integral part of the Hart-Scott-Rodino Act premerger review process. The 1976 Act requires parties to certain proposed acquisitions to report them to the antitrust division and FTC. The parties must then wait 30 days while the DOJ reviews the acquisition. If the agency believes there is an antitrust issue, it issues a second request for information. This request extends the review period until the regulators are satisfied there are no antitrust issues. If it isn't satisfied, the DOJ will file a complaint.

While DOJ practice under the 2001 Initiative allowed for a limited production alternative, known as a “quick look,” the procedure wasn't always a satisfactory salve because the DOJ could always undercut it with requests for more information.

“The difficulty with the quick look was that the DOJ had the option of requiring parties to produce more material after reviewing the returns to the second request, which would effectively extend the time the department had to decide whether to block the transaction,” says Jon Dubrow, a partner at McDermott Will & Emery.

The DOJ also could seek even more discovery once it had filed a complaint, although the parties could apply to the courts to limit the time for discovery by setting a fixed trial date.

What the December amendment does is introduce a voluntary option under which parties can limit the second request to a single search of certain central files and the files of 30 key employees. It also decreases the search period from the current three or four years to two years; restricts the number of backup tapes a company must search; reduces their obligation to conduct further electronic document collection sweeps; and cuts down the scope of the “privilege log” documenting communications between a company and its attorneys.

Once the parties have complied with the limited request, the DOJ cannot make further requests until it has decided whether to file a complaint. But that comes with a price.

Bad Timing

To begin with, parties invoking the option must assist the DOJ in selection of the 30 employees by providing organizational charts and relevant databases, as well as access to employees to interpret that information.

More importantly, however, the parties must agree to certain timing and procedural conditions. These include providing the DOJ “sufficient time to conduct post-complaint discovery” if the agency challenges the deal in federal district court after the second look.

“[The amendments] are part of our ongoing efforts to reduce enforcement burdens, while at the same time preserving our ability to conduct thorough investigations and protect consumers from anticompetitive transactions,” said Thomas Barnett, assistant attorney general in charge of the DOJ antitrust division, in a statement.

According to the DOJ, the post-complaint discovery could take four to six months. Some experts argue that those conditions are onerous.

“Courts know that time is of the essence in M&A and many wouldn't give the regulators that much time to get to trial under the existing procedure–especially if the parties can demonstrate some urgency,” Joffe says. While he believes many parties will be reluctant to enter into these types of agreements, Joffe also notes that the amendments give the DOJ a fair bit of discretion to negotiate.

“Hopefully, the parties can work out a second-request agreement that gives the DOJ adequate time to prepare for trial with less than a four- to six-month hold on the court process,” he says.

The difficulty is that whether an antitrust issue exists isn't always all that clear.

Uncertain Outcome

“Quite often, companies and their attorneys who have a sense that there's a competition issue out there can't really predict how the regulators will react,” Edelman says. “I've been surprised both ways.”

Compounding the problem is the fact that companies need to make decisions on second-request strategy early in the deal process.

“The parties may not want to spend precious resources analyzing the second request strategy at a very busy time when they have to pay a lot of attention to other things, such as negotiating and dealing with competing bidders,” Edelman says.

The real value of the amendments comes when it's clear that there is a competition issue. “In that scenario, parties are well advised to engage the second-request issue and spend the time and effort formulating a strategy no matter how busy they are,” Edelman says. “In my experience, that's what most parties in that situation will do.”

Peter Thomas, a partner at Simpson Thacher & Bartlett, says counsel's judgment regarding the risk involved will dictate whether companies will opt in to the new second-request procedures.

“If you decide that the risk of the DOJ ultimately filing a complaint is low, and if you think you can persuade them that there is no antitrust issue or that there are solutions [like selling off assets] to deal with the issue, then you're not giving up that much if you agree to the procedural conditions for a limited second request,” he says.