Does Avoiding a Second Request Mean that Your Deal Is Approved?

The answer is No.  The fact that your deal avoided a second request investigation does not mean that you are in the clear if your deal substantially lessens competition in a relevant antitrust market.

The Department of Justice’s Antitrust Division (“DOJ”) and Federal Trade Commission (“FTC”) have for years emphasized that they will investigate and challenge consummated transactions that were not initially reviewed or slipped through the cracks if those transactions substantially lessen competition.  It does not matter that for one reason or another that merging parties were able to successfully avoid a long drawn out investigation.  The DOJ’s lawsuit to block Parker’Hannifin’s acquisition of CLARCOR, Inc. illustrates that the DOJ may open an investigation and challenge a transaction even after it allowed the Hart-Scott Rodino (“HSR”) waiting period to expire.  The enforcement action also serves as a reminder that if merging parties do not cooperate with a merger investigation, they risk being sued.

DOJ Sues Parker-Hannifin Seven Months After Allowing it to Close its Acquisition of CLARCOR

On September 26, 2017, the DOJ continued its policy of blocking consummated transactions that harm competition, with its legal challenge to Parker-Hannifin’s $4.3 billion acquisition of CLARCOR.  Parker-Hannifin and CLARCOR entered into a deal on December 1, 2016 and closed the transaction on February 28, 2017 so the DOJ allowed the HSR waiting period to expire without taking any enforcement action or issuing a Second Request.  Approximately, seven months after closing the transaction, Parker-Hannifin is now put in the position of defending itself in court for a deal that it likely thought was approved.

Apparently, the DOJ opened an investigation into the combination after the deal closed.  There are not many details on what happened, but the DOJ’s Press Release announcing the lawsuit says that “during the pendency of the department’s investigation, Parker-Hannifin failed to provide significant document or data productions in response to the department’s requests.  In addition, the company has not agreed to enter into a satisfactory agreement to hold separate the fuel filtration businesses at issue and to maintain their independent viability pending the outcome of the investigation and, now, this litigation.”  What is also clear from the DOJ’s complaint is that several weeks prior to the deal announcement, Parker-Hannifin and CLARCOR had an email communication about the competitive overlap in the aviation filtration business, whether they should be forthcoming about the anticompetitive concern, and Parker-Hannifin informed CLARCOR that it was preparing to divest CLARCOR’s aviation fuel filtration business to obtain antitrust approval.

From the Press Release, however, the DOJ appears to be suggesting that Parker-Hannifin was not fully cooperating with the merger investigation or at least to the DOJ’s liking nor has Parker-Hannifin offered a sufficient remedy to resolve the DOJ’s competition concerns.

DOJ Alleges that the Deal is a Merger to Monopoly in a Relevant Market that Requires a Divestiture to Resolve the Concerns 

The DOJ alleges that the deal substantially lessens competition in the development, manufacture, and sale of aviation fuel filtration products in the United States.  Aviation fuel must be filtered properly to remove particulate contaminants and water droplets before such fuel is delivered into commercial or military aircraft.  The failure to do so can result in engine failure.  For this reason, aviation fuel filtration systems and filtration elements must be subjected to rigorous testing and qualification requirements.  U.S. commercial and military planes can only use aviation fuel filtration products qualified by the Energy Institute (“EI”).  The DOJ further alleges that the deal creates a monopoly in the United States as Parker-Hannifin and CLARCOR were the only two manufacturers of El-qualified aviation fuel filtration systems and filters.  So, the acquisition eliminated direct competition and the DOJ alleges that entry is not likely.

With this set of facts, the DOJ would typically requires a divestiture of the aviation fuel filtration business or assets to an appropriate buyer in order to restore competition that existed prior to the acquisition.  Allegedly, to date, Parker Hannifin has not fully cooperated with the investigation nor has it offered a remedy to the DOJ’s liking.  Thus, the DOJ filed a lawsuit seeking an order that Parker-Hannifin divest tangible and intangible assets sufficient to create a separate, distinct, and viable competing business that can replace CLARCOR’s competitive significance in the marketplace.

The ball is in Parker-Hannifin’s court now.  It must decide whether to defend the lawsuit or enter into settlement negotiations regarding a divestiture.

Observations

The DOJ’s willingness to file a complaint challenging this deal demonstrates that the DOJ is serious about enforcing the antitrust laws against consummated mergers that substantially lessen competition and that the DOJ will not back down to companies that fail to fully cooperate with its merger investigations.  The challenge also demonstrates that completed deals that slip beneath the agency’s radar screen initially are fair game if the DOJ learns about the anticompetitive effect later.  Corporate executives that enter into deals that raise competitive concerns must be aware that antitrust investigations that appear to be done may not be.  While corporate and private antitrust counsel would like assurances that the expiration of the HSR waiting period provides closure to the antitrust review, they must be mindful that the expiration of the HSR waiting period does mean that the merged firm is in the clear because sometimes competitive concerns are not readily apparent or customers may fail to raise concerns within the relevant HSR waiting period.  Accordingly, parties to a consummated deal that raise significant antitrust issues and avoided HSR scrutiny, for whatever reason, should proceed with reasonable caution and closely monitor post-acquisition conduct.  Moreover, corporate and private counsel should be aware of the likely consequences and the risks of not cooperating with the government’s merger investigation and consummating transactions that raise significant competitive issues.  The risks may include: defending against costly and lengthy government investigations; reorganizing to the government’s demands of possible divestitures even after integration has taken place; and disgorgement of profits gained from the alleged anticompetitive merger.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com