Milestones in FTC history: HSR Act launches effective premerger review

Some will remember 1976 as the year of the nation’s bicentennial, but it was also the year that Congress gave the antitrust agencies an important tool to prevent harmful mergers before the harm occurs and before the assets and operations of the merging parties are joined in a way that precludes effective relief after-the-fact. 

Named for its three principal sponsors, Senators Philip Hart and Hugh Scott, and Representative Peter W. Rodino, Jr., the Hart-Scott-Rodino Antitrust Improvements Act requires prior notification to the antitrust agencies of certain mergers and a waiting period to permit pre-consummation review. In the words of Congressman Rodino, the wisdom of premerger notification was a lesson learned the hard way:

The problem this bill cures is startlingly simple, but it goes to the very foundations of our merger law.  Under present law, companies need not give advance notification of a planned merger to the Federal Trade Commission and the Department of Justice. But if the merger is later judged to be anticompetitive, and divestiture is ordered, that remedy is usually a costly exercise in futility—untangling the merged assets and management of the two firms is like trying to unscramble an omelet. 122 Cong. Rec. 25051 (1976).

The HSR Act, and its companion rules promulgated by the FTC, fundamentally changed the process of U.S. merger review and finally allowed the antitrust agencies to fulfill the mandate of Section 7 of the Clayton Act to stop anticompetitive combinations in their incipiency. But passage of the HSR Act was also the end of a journey. The HSR Act was, in fact, the culmination of years of effort by the FTC and others to review mergers before they occurred. The story extends back some seven decades before – to the Bureau of Corporations, the FTC’s predecessor agency, and the Presidency of the original “trust buster,” Theodore Roosevelt. 

Early Efforts at Advanced Notice

In 1903, President Teddy Roosevelt urged Congress to create the Bureau of Corporations, headed by a Commissioner and empowered to conduct investigations and issue reports. In 1908, at the urging of TR and Commissioner of Corporations Herbert Knox Smith, an alliance of businessmen, academics, labor officials and others pressed for new legislation to broaden the Bureau’s powers. The “Hepburn bill” would have effectively required large firms to submit advance notice of proposed mergers (as well as significant agreements short of a merger).  Proposals would have been subject to government disapproval, although the government could also later challenge a merger that it had not disapproved. The bill also would have provided some immunity for noticed arrangements after one year had passed. But the idea of premerger review was an idea not ripe for the time: the Hepburn bill did not become law.  And in 1914, Congress passed the FTC and Clayton Acts, including Section 7 which outlawed anticompetitive mergers but did not provide for premerger notification.

Consensus for a broad premerger notification requirement started to gain traction after 1950. President Eisenhower endorsed premerger notification in 1956, and FTC Chairs repeatedly pressed Congress for such legislation: John Gwynne in 1957 and 1958; Paul Rand Dixon in 1961; and Lewis Engman in 1975. Annual reports of the Commission for 1958 and 1960 refer to continuing efforts by the FTC to obtain legislation requiring prior notice for acquisitions, in order to “make possible faster and more effective action to maintain fair business competition.”

In the meantime, the FTC turned to existing tools to create opportunities for pre-closing merger review. For instance, in some cases where respondents’ past merger activity was found unlawful, FTC orders required the respondents to obtain the Commission’s prior approval for subsequent mergers.  See Luria Brothers, 62 F.T.C. 243, 635-8 (1963), aff’d, 389 F.2d 847, 865–66 (3d Cir.), cert. denied, 393 U.S. 829 (1968). (After the HSR premerger notification program was well established, the Commission decided to rely on HSR filings in lieu of prior approval provisions except in very limited circumstances.) 

The Era of Special Reports

Antitrust practitioners of a certain age also may recall (from personal experience or via urban legend) that starting in 1967, the Commission used its investigative authority under Section 6 of the FTC Act to require “special reports” that provided 60-day advance notice of certain mergers. This initiative first focused on the food distribution and cement industries, and was later expanded to include grocery stores and textile mills. In 1969, the program was extended to large mergers generally. Under this precursor program, all corporations subject to FTC jurisdiction with total assets or sales of $250 million or more were required to file a special report when acquiring a firm with $10 million or more in total assets or sales. 34 Fed. Reg. 7592 (1969). But the Commission’s power to require special reports was not without critics, and the agency began to retreat in 1974. That year, the Commission required notification ten days after an agreement in principle to merge or acquire assets was signed, but dispensed with the requirement that the filing be made sixty days before consummation. 39 Fed. Reg. 35,717 (1974). None of these programs required the companies hold off on their merger plans.

New Tools for Modern Times

Back in the days before the HSR Act, mergers that were executed in the dark of night to avoid government intervention were referred to as “midnight deals,” and some resulted in protracted litigation to undo the harmful effects. Perhaps the most egregious example from antitrust lore is United States v. El Paso Natural Gas Co., 376 U.S. 651 (1964), a post-merger Section 7 case that required 17 years of litigation and eight trips to the Supreme Court before a divestiture finally took place. In those days, government merger cases often resulted in pyrrhic victories where a court found that the merger harmed competition yet couldn’t order relief to “unscramble the eggs.” 

What emerged in 1976 as the text of the HSR Act was actually an amalgam of three bills that had been introduced to address perceived shortcomings in the mechanisms of antitrust enforcement. Title I addressed DOJ civil investigative demands; Title II established premerger notification; and Title III created parens patriae authority for state attorneys general. Passage was not assured as there were many objections from all quarters, especially to Title III.  But last minute procedural maneuvering by Senator Hart and Representative Rodino steered the bill through Congress. President Ford signed the bill on September 30, 1976, with the following statement:

The second title of this bill will require parties to large mergers to give the Antitrust Division and the Federal Trade Commission advance notice of the proposed mergers. This will allow these agencies to conduct careful investigations prior to consummation of mergers and, if necessary, bring suit before often irreversible steps have been taken toward consolidation of operations. Again, this proposal was supported by my Administration, and I am pleased to see it enacted into law.

In the years since its passage, premerger review has become an indispensable part of effective antitrust enforcement. In remarks celebrating the 25th Anniversary of the HSR Act, Congressman Peter Rodino recalled the bipartisan effort that led to its climatic passage, observing: “From what I hear, the legislation absolutely has transformed merger enforcement. Competition, as well as the consumer, has benefitted.”

More Reading on the History of Premerger Notification

William J. Baer, Reflections on 20 Years of Merger Enforcement under the Hart-Scott-Rodino Act, Remarks Before the 35th Annual Corporate Counsel Institute (Oct. 31, 1996).

Martin J. Sklar, The Corporate Reconstruction of American Capitalism (1988) (including discussions of the Hepburn Bill at 228-85) and Marc Winerman, The Origins of the FTC: Concentration, Cooperation, Control and Competition  (2004), 71 Antitrust L.J. 1, 15-20 (2003).

For more on early FTC merger enforcement, including a rare premerger challenge from 1923, see Marc Winerman and William E. Kovacic, Outpost Years for a Start-up Agency:  The FTC from 1921-1925, 77 Antitrust L.J. 145, 190-92 (2010); Marc Winerman and William E. Kovacic, The William Humphrey and Abram Meyers Years:  The FTC from 1925-1929, 77 Antitrust L.J. 701, 735-39 (2011).

Willard F. Mueller, Director of the Bureau of Economics, Ch. 7, Fighting for Antitrust Policy:  The Crucial 1960’s.

Philip Marcus, Antitrust Law and Practice 332 (1980) discusses the FTC special reporting program.

Irving Scher, Emerging Issues Under the Antitrust Improvements Act of 1976, 77 Col. Law Rev. 679 (1977).

Kintner, Earl, The Legislative History of the Federal Antitrust Laws and Related Statutes, Vol. 10.

The records of President Ford’s consideration of the HSR Act are available online at http://www.fordlibrarymuseum.gov/library/document/0055/1669524.pdf.