DAMITT Q3 2018: U.S. Antitrust Agencies Announce Merger Review Reforms in Response to DAMITT Findings
Number and Duration of Significant Merger Investigations on the Decline in U.S. and EU
- Both U.S. antitrust agencies, citing DAMITT, have announced new efforts to speed up the merger review process.
- The number of significant merger investigations in both the U.S. and EU is down compared to CY 2017.
- In the U.S., the two significant investigations concluding during Q3 2018 averaged only 6.9 months — the quickest pace in over four years.
- All three significant EU investigations involved Phase II cases and averaged 13.5 months, faster than the 15.1-month average in CY 2017.
- Two U.S. merger litigations concluded during Q3 2018 and averaged only 105 days from complaint to decision — nearly half as long as litigations brought in 2017 — largely due to the unique posture of one of these cases.
Citing findings from the Dechert Antitrust Merger Investigation Timing Tracker (DAMITT) that have demonstrated a marked increase in the duration of significant merger investigations in recent years, DOJ Assistant Attorney General Makan Delrahim and FTC Chairman Joseph Simons recently announced reforms to the U.S. antitrust merger review process. Beyond these process reforms, which appear to be significant, there is little to report on Q3 2018 significant antitrust merger investigations in either the United States or European Union, but there were some intriguing developments in U.S. merger litigation.
Through the first three quarters of 2018, the number of significant investigations is down compared to 2017 in both the U.S. and EU, with Q3 2018 representing a particularly slow quarter. In the U.S., only two significant investigations concluded during the quarter, averaging only 6.9 months from announcement to clearance — the lowest average in the past four years. In the EU, three significant investigations — all Phase II proceedings — concluded during the quarter. These three EU cases averaged 13.5 months from announcement to clearance, which is faster than the 15.1-month average for 2017.
Two U.S. FTC merger litigations filed in 2018 (Wilhelmsen/Drew Marine and Tronox/Cristal) were concluded during Q3 2018, both resulting in preliminary injunctions blocking proposed transactions. These two litigations were decided an average of 3.5 months after the filing of the district court complaint, a pace nearly half as long as the almost seven-month average observed for complaints filed during 2016 and 2017. However, the Tronox case presented a unique procedural posture that contributed to the faster pace and may not be representative of the duration of future litigations, which is likely to remain closer to the 5-7 month range observed in the Wilhelmsen litigation and in recent years.
Citing DAMITT, DOJ and FTC Announce New Efforts to Speed Up Merger Reviews
Acknowledging DAMITT’s findings of a trend toward longer investigations, both the head of the DOJ Antitrust Division and the FTC Chairman announced antitrust merger review reforms intended to accelerate the process. As DOJ observed, faster investigations would reduce the waste of both public and private resources, provide greater certainty to the business community and markets, and reduce risks inherent in merger delays.
DOJ Assistant Attorney General Makan Delrahim announced several process changes with the “aim to resolve most investigations within six months of filing,” a metric slightly different from the announcement-to-agency action measurement period used for DAMITT and which would also presumably include certain investigations not tracked by DAMITT (e.g., second request investigations closed without a public statement by the agencies). To complete an investigation six months after filing, and assuming a 60-day period after substantial compliance for agency review, merging parties would be expected to certify substantial compliance within three months after receiving the second request at the conclusion of the initial 30-day waiting period for most transactions.
While officials from three prior administrations have made more general statements about streamlining the merger review process, Mr. Delrahim presented encouraging, concrete steps that could shorten investigations and reduce second request burdens. For example, he mentioned DOJ’s plans to revise the model timing agreement to limit the number of document custodians to 20 and the number of depositions to 12, and to limit the DOJ’s time following substantial compliance to a period of 60 or fewer days. These changes would be significant. While no systematic data are available, under current practice the custodian count can be in the high double digits, the deposition count can be closer to 30 than to 12, and the post-compliance period can be closer to 100 days than to 60 days. Mr. Delrahim has authorized his deputy assistant attorneys general to raise these limits as may be needed in a particular investigation, though it is unclear how these exceptions would be applied.
To further speed up reviews, DOJ plans to offer front-office meetings with the merging companies’ key executives earlier in the process to understand the deal rationale and key facts, require faster third-party compliance with civil investigative demands and increase international coordination to potentially accelerate action by non-U.S. antitrust authorities.
As a condition of these benefits, Mr. Delrahim told Congress that he expects parties to produce documents and data earlier in the investigation and to agree to extend the time allowed for post-complaint discovery, if the DOJ challenges a merger in court. This latter stipulation potentially could keep the few mergers that result in litigation on the same lengthy path as today, but the deferral of more in-depth discovery until litigation begins could shorten investigations for the vast majority of deals that do not reach litigation.
FTC Chairman Joseph Simons similarly responded to DAMITT’s observations by announcing that the FTC’s goal is “definitely to reduce the time it’s taking” for merger reviews. Mr. Simons and Bruce Hoffman, Director of the FTC’s Bureau of Competition, also recognized that the FTC would benefit from shorter reviews in terms of saving more resources.
Importantly, both the DOJ and FTC announced plans to track more closely the length of merger reviews to better understand ways to make them more efficient, while also identifying potential sources of delays in order to improve the overall process. The agencies will not face the same limitations as DAMITT, which relies on publicly observable events. With access to internal data, the agencies have an opportunity to identify and implement changes that will benefit all parties to a merger investigation. For example, the agencies can systematically study filing dates, the terms of timing agreements and the frequency with which they are used, the number of second request custodians and depositions, the volume of second request documents and data, the frequency and success rate of pull-and-refile strategies, and the frequency of multi-agency and multi-jurisdictional reviews. These statistics will enable the agencies to more precisely identify common attributes driving longer (or shorter) investigations. Timely and detailed public reporting of these statistics would also increase accountability and transparency, providing valuable guidance to the business community and the antitrust bar.
In light of the significant attention U.S. enforcement agencies have devoted to the merger review process, their encouraging proposed reforms, and DAMITT’s analysis below suggesting that reform efforts may already be having some effect, we expect that the duration of significant U.S. antitrust merger investigations will continue to shorten. Whether DG Competition staff will come forward with similar ideas for shortening the overall duration of significant merger investigations remains to be seen. The different articulation of EU and U.S. procedures means that U.S. reforms cannot simply translate across the Atlantic. While the evidentiary requirements applied in judicial oversight of Commission decisions have become more stringent over time, it may well be that the pendulum was given a nudge to swing too far, and that a middle ground should be identified.
Number of Q3 2018 Significant Investigations Second Lowest in Past Five Years
The number of significant U.S. antitrust merger investigations has declined in 2018. There were 15 significant U.S. merger investigations concluded by the Department of Justice (DOJ) and Federal Trade Commission (FTC) through the first three quarters of 2018, slightly behind the 18 during the same period in 2017. Only two significant investigations concluded during Q3 2018 — the lowest for any quarter in more than five years and the second lowest quarterly total since DAMITT began tracking the data in 2011. This decline in 2018 is consistent with the steady trend observed by DAMITT since 2015, when the number of significant investigations reached its peak. The decrease does not necessarily reflect a decline in enforcement or aggressiveness by the agencies, but instead could be the result of fewer antitrust-sensitive deals due to a general decline in deal volume, or as a trailing consequence of higher enforcement activity in recent years, which can have a deterrent effect.
“Significant U.S. merger investigations” include investigations of proposed Hart-Scott-Rodino (HSR)-reportable transactions that result in a closing statement, consent order, complaint challenging a transaction, or transaction abandonment for which the antitrust agency issues a press release during the year in question.
For the second time this year — and only the second time in the last three years — the agencies issued a closing statement explaining the rationale for their decision. By comparison, zero closing statements were issued in 2016 and 2017. Closing statements provide guidance to the business community and suggest an effort by the current administration to increase transparency.
Significant U.S. Antitrust Merger Investigation Outcomes (2011 – Q3 2018)
Significant EU Merger Investigations Declining in Number and Shifting Toward a Higher Proportion of Phase II Proceedings
The number of significant EU merger investigations has declined in 2018. There were only three significant EU merger investigations resolved in Q3 2018, which is in line with the four investigations that were resolved in Q3 2017. The low number of investigations that were resolved in Q3 2018 may be partially attributable to the summer holidays. Companies are actively discouraged by the Commission from notifying transactions in the lead up to August because it is difficult to conduct any meaningful market testing. However, the 13 significant EU merger investigations concluded through Q3 2018 YTD is well behind the 18 concluded during the same period in 2017. This decline is consistent with the trend observed in the United States thus far in 2018.
Due to procedural differences between the EU and the United States, DAMITT defines “significant” EU merger investigations to include transactions subject to the EU Merger Regulation that are resolved either with Phase I remedies or after a Phase II investigation.
The distribution between Phase I transactions resulting in remedies and Phase II proceedings has shifted significantly from 2017 to 2018. During the first three quarters of 2018, Phase II proceedings were opened in the majority (62%) of significant investigations compared to only 24% in CY 2017.
Significant EU Antitrust Merger Investigation Outcomes (2011 – Q3 2018)
Average Duration of Significant U.S. Merger Investigations Returning to 2015-2016 Levels
The average and median duration of significant U.S. investigations has declined in 2018. The average duration of significant U.S. merger investigations was 9.8 months during 2018 YTD, a month faster than the 10.8-month average for 2017. This 9.8-month average matches the average observed in 2015-2016. The median investigation duration for 2018 YTD is 8.9 months, slightly below the 9.1-month median for 2017 and the 9.8-month median observed in 2015-2016.
The two significant investigations resolved during Q3 2018 averaged only 6.9 months — the fastest average time in any quarter since Q3 2014. While these two significant investigations are an encouraging step in the right direction, two cases do not make a trend. DAMITT will be watching as more data are collected in the upcoming months, particularly as further reforms are rolled out by U.S. antitrust agencies.
Average Duration of Significant U.S. Antitrust Merger Investigations (2011 – Q3 2018)
Average Duration of Significant EU Investigations Continues to Significantly Exceed Statutory Timetable
Through Q3 2018 YTD, the average duration of significant EU investigations involving Phase II proceedings has declined, while the average of those involving Phase I remedies has increased. Phase II EU proceedings that concluded 2018 through Q3 lasted an average of 13.4 months from announcement, nearly double the statutory time limit under the EU Merger Regulation. The five Phase I remedy cases that ended through Q3 2018 YTD lasted an average of 7.9 months, also in excess of the statutory time limit under the EU Merger Regulation. Both the Phase II and Phase I remedies figures continue to reflect the significant duration of pre-filing talks and the frequent use of timetable extensions in Phase II. Like the U.S. agencies, the European Commission may benefit from analyzing internal data to understand whether there are ways to bring the length of significant investigations closer toward the statutory time limits.
Phase II Proceedings
The average duration of Phase II proceedings through Q3 2018 YTD is down from CY 2017. Phase II proceedings concluding through Q3 2018 YTD lasted an average of 13.4 months, down from the 15.1-month average during the same period in 2017 as well as CY 2017. The three Phase II proceedings from the current quarter averaged 13.5 months. Overall, the average duration of Phase II investigations has increased by about four months compared to the 9.4-month average in CY 2011. These averages compare to a theoretical formal timetable of six to seven months counting from the moment of notification. DAMITT data thus far shows that the average EU case proceeding to Phase II is taking about 3-4 months longer than the average duration of significant U.S. merger investigations.
The time between announcement and notification of Phase II transactions that were concluded through Q3 2018 YTD was 5.8 months, about 2.5 months shorter than the 2017 average of 8.3 months, but still well above the 2011-16 average of 4.9 months. Merging parties invariably institute pre-filing talks with DG Competition staff very shortly after transaction announcement, if not before, and the growth of the period between announcement and notification is mostly explained by the intensity of staff demands for the inclusion of data and documentation in the filing, before the formal timetable is triggered.
The EU Merger Regulation allows merging companies to grant “voluntary” extensions of time. These extensions are commonly conceded by merging parties at the urging of staff and have occurred in 88% of Phase II investigations concluding in Q3 2018 YTD. Voluntary extensions typically consume the entire three weeks permitted under the EU Merger Regulation.
The Commission may also use its powers under the EU Merger Regulation to “stop the clock.” Stop-the-clock orders have increased in frequency, occurring in 63% of Phase II investigations concluding in Q3 2018 YTD, compared to only about 30% from 2011-2017. Stop-the-clock orders most typically extend investigations by nearly a month.
Overall, the average duration of cases going to Phase II has greatly exceeded the timetable envisioned under the EU Merger Regulation.
Average Period from Announcement to End of EU Phase II Cases (2011 – Q3 2018)
Phase I Cases
As there were no new Phase I remedies cases concluding during Q3 2018, the five significant 2018 EU investigations resolved in Phase I with remedies remained at an average of 7.9 months. When measured from deal announcement, Phase I cases with remedies are now requiring roughly four times the statutory EU timetable of about seven weeks.
The time between announcement and notification for these Phase I remedy cases also remained at 6.1 months, which was slower than both the 5.2-month average in CY 2017 and the 4.9-month average in CY 2016. During the pre-filing period, companies typically engage in extensive discussions with DG Competition staff over the scope and detail of the parties’ filing, which adds time to the formal schedule.
Average Period from Announcement to End of EU Phase I Remedy Cases (2011 – Q3 2018)
New 2018 U.S. Merger Trials Completed Faster than Prior Years
U.S. merger litigation brought in 2018 has been completed more quickly than in prior years. The FTC’s recent preliminary injunction litigations blocking both the Tronox/Cristal and Wilhelmsen/Drew Marine transactions provide new data points for merger cases filed in 2018. These litigations averaged only 104 days from the filing of the complaint to the judge’s decision, significantly faster than the 207-day average for CY 2016 and the 203-day average for CY 2017.
The shorter duration was primarily driven by the Tronox case, which had a unique procedural posture, and may not be representative of future litigations. Typically, the FTC files complaints in administrative and district court proceedings nearly simultaneously. In Tronox’s case, however, the FTC filed an administrative complaint in December 2017 and a district court complaint in July 2018 — more than seven months later. The FTC and Tronox were able to engage in discovery during this seven-month period and even completed the administrative trial, obviating the need for extensive discovery in the federal court proceeding. Consequently, Tronox’s district court hearing began only 28 days after the district court complaint was filed, more than three months sooner than complaints filed in 2016 and 2017. Overall, Tronox was decided only 58 days after the filing of the district court complaint. By comparison, the FTC’s case against Wilhelmsen was decided 149 days after the complaint, which was closer to, but still faster than, the average in the prior two years. Wilhelmsen and the 5-7 month average observed in recent years should be viewed as more representative of the current duration of merger litigation.
Time to Litigate Government Antitrust Merger Challenges in Federal Court (Complaints Filed in 2011, 2015, 2016, 2017 and 2018 and Litigated to a Decision)
Data for Q3 2018 YTD in both the United States and the European Union continue to indicate that the number and duration of significant antitrust merger investigations may have peaked. While the circumstances of future antitrust-sensitive transactions may lead to results above or below DAMITT averages, the latest statistics suggest that parties to the hypothetical average “significant” deal subject to review only in the United States would have to plan on approximately 10-11 months for the agencies to investigate a transaction, and another five to seven months if they want to preserve their right to litigate an adverse agency decision. Deal timetables for cases likely to go to a European Phase II need to account for an average lapse of almost 14 months from announcement to clearance.
In light of the significant attention that U.S. enforcement agencies have devoted to the merger review process, their encouraging proposed reforms, and indications that reform efforts to date have already had some effect, we expect the duration of significant U.S. antitrust merger investigations will continue to shorten. Prospects for similar effects in the EU remain unclear.