By Stephen M. Hudspeth

Most practitioners know the basic do's and don'ts of Hart-Scott-Rodino Act pre-merger reporting: If your transaction requires reporting, be sure you report it, and be sure to observe the waiting period.

But what does it really mean to observe the waiting period? Most practitioners know that their clients can't close the transaction during that period without facing the wrath (and penalties) of the FTC and/or the Antitrust Division of the Department of Justice, the two US government antitrust regulatory agencies. They also know that de facto closing by giving over control of the acquired company before the HSR pre-merger waiting period is over is also forbidden. However, it seems natural that as the waiting period progresses, especially in deals subject to a lengthy Second Request period, transition planning will need to occur to make for an orderly and effective merger of operations. To the extent that the US antitrust regulatory agency reviewing the proposed transaction and the parties are of like mind as to the general scope of required divestitures, one would think that the planning could occur unimpended. However, think again! I daresay that most practitioners, even those experienced in the HSR area, did not know that the FTC may be concerned even if all the seller does is to transfer confidential operating information to the acquiring person during that period.

This is a new principle which certain elements of the FTC are only now beginning to articulate. Certainly, many companies have engaged in elaborate joint transition planning in which teams from the acquiring and acquired company come together during the waiting period and, in the process of their planning, exchange confidential information. In multiple transactions in the past several years alone, press reports have announced that the acquirer and the would be acquired company have formed transition planning and merger integration groups during the waiting period before the US antitrust reviewing agency has signed off the transaction. In very large transactions, those transition teams have numbered in the hundreds. These groups undoubtedly exchanged and reviewed confidential financial and other information including sales forecasts or the acquired person so they could better plan integration.

You may think that all this transition planning makes sense. However, some within the staff of the FTC, especially in its Compliance Section which handles consent decree enforcement, worry about it, particularly in transactions in which a Second Request issues and a divestiture decree is likely. Interestingly, they worry more about it during the waiting period after the negotiation of a definitive agreement between the parties to the transaction than they do before the definitive agreement is executed. Their reasoning on this is that before a definitive agreement is reached, the seller understands that a deal may not be reached and, therefore, even though a confidentiality agreement ostensibly protects the information exchange, the seller will be wary of giving away the "crown jewels" of commercially sensitive information. By contrast, these FTC staff members reason that after the definitive agreement is signed, employees and senior managers alike are more worried about pleasing their prospective new employer that they are about safeguarding commercially sensitive confidential information of their present employer from their new prospective employer's eyes.

Consequently, these FTC staff members believe that once a definitive agreement of sale has been executed, the seller's employees and officers will deny the acquirer nothing by way of information it seeks from them, no matter how confidential and commercially sensitive that information may be or how damaging it may be to vigorous future competition. The vigorous future competition may be expected as to the seller's assets which figure in the competitive area whether the Second Request process leads to an impasse and the parties drop the deal or the process yields a required divestiture in the competitively sensitive area. Either way, proprietary information has fallen into the would-be acquirer's hands even though the would-be acquirer may not, for antitrust reasons, become the owner of the assets in question.

While this position is not established as an official position of the FTC, it is clear, as noted above, that some in the FTC Compliance Section feel particularly strongly on this subject. Consequently, in a transaction in which a Second Request is likely, it is advisable for the acquirer to obtain as much confidential information as possible from the seller before the definitive agreement is signed (subject, of course, to a strict confidentiality and non-use agreement between the acquirer and seller). The cautious counsel will then want to advise the parties' transition teams to use only the confidential information already obtained before the definitive acquisition agreement was signed and not to exchange further confidential information until the waiting period has ended.

Stephen M. Hudspeth is a partner of Coudert and the Head of its Litigation Department. He is a graduate of Yale University with combined B.A and M.A. degrees in economics and of the Yale Law School with a J.D. degree. Mr Hudspeth has twenty-five years of trial experience in complex civil and criminal commercial litigation in the federal and state courts of the United States and before government agencies. He is a member of the American Bar Association, the New York State Bar Association and the Association of the Bar of the City of New York.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.