United States: DOJ Announces Merger Review Amendments To Streamline Second Requests

The U.S. Department of Justice (DOJ) recently unveiled several amendments to its Merger Review Process Initiative. These amendments are part of the DOJ’s effort to reduce the time and cost of merger investigations. The Federal Trade Commission (FTC) also introduced similar merger review process reforms earlier in 2006. These reforms, which address the process for administering "second requests" under the Hart-Scott-Rodino (HSR) Premerger Notification Act, represent significant efforts by the agencies to streamline the second request process.

These reforms formalize many of the practices that DOJ staff has been offering merging parties over the last few years, but they also provide options that give the parties more control over the timing of the review of their transactions. The most important of the changes to the DOJ second request procedures include: limiting the number of custodians whose files need to be searched for documents to approximately 30 people per party; decreasing the relevant time period for responsive materials from three to two years; lessening companies’ obligations to conduct a second document collection sweep during the second request period; restricting the number of back-up tapes that the agencies will request to be searched; and reducing the burdens of the privilege log. These reforms will hopefully result in reduced compliance costs for a second request and an expedited DOJ review. As noted below, there are also a few significant differences between the DOJ and the FTC approaches to these reforms.

The DOJ amendments, like the FTC reforms, leave parties with a potentially significant strategic choice on whether to work with the agency in narrowing the scope of the second request (as described below), but with the understanding that the agency would be entitled to fairly extensive federal court discovery if it decides to challenge the transaction in court. In particular, if merging parties believe the agency is likely to challenge a transaction and the parties are willing to litigate, then providing the agency with an extended post-second request discovery period may result in greater costs and delays than complying with a broad second request. Nevertheless, the reforms appear to be a major step towards forcing the agencies to make quicker decisions about whether to challenge transactions, and to make the decision based on more limited (although still extensive) data.

The DOJ’s process, if followed, would enable a party to certify substantial compliance with a second request based on this more limited data, thereby allowing a party to gain more control of the HSR timing clock. In contrast, in past practice, this limited production alternative would be viewed as a "quick look," after which the DOJ always had the option of requiring parties to produce significantly more material (more custodians, etc.) in order to substantially comply with the second request to end the statutory waiting period, thereby delaying the time at which the agency needed to decide if it would seek to block the transaction. Under the new procedures, it appears the DOJ is willing to make earlier decisions about which transactions raise competitive issues, as long as the parties agree to give the agencies sufficient time to prepare a case for court following the decision. This option should reduce the time and expense needed to achieve clearance for transactions that raise significant substantive issues but, at the end of the day, the agencies should not challenge. Nevertheless, it is important to note that this reform is conditioned on the merging parties entering into an "acceptable" timing agreement with the DOJ relating not only to how much time the DOJ will have to conduct discovery post-complaint, but also to how much time the DOJ will have to review the second request materials. Therefore, the DOJ’s timing demands will significantly influence the strategic options for merging parties.

First, the DOJ amendments include a voluntary option that would limit the document search to certain central files and the files of a targeted list of 30 employees. The DOJ expects parties to provide organizational charts and relevant databases, as well as access to employees to interpret them. Most importantly, the DOJ will condition this limitation on the parties agreeing to certain timing and procedural agreements, including providing the DOJ "sufficient time to conduct post-complaint discovery" if the DOJ decides to challenge the transaction. In its comments to this amendment, the DOJ states that "four to six months is generally necessary to conduct post-complaint discovery."

This amendment is similar to the FTC reform, which includes a "presumption" that each party will not need to search more than 35 of its employees during a second request. However, the FTC reforms impose greater timing requirements than the DOJ. Importantly, the FTC requires that parties taking advantage of this presumption provide at least 30-days notice before formally certifying its substantial compliance with the second request or agree to "rolling" production of the responsive materials, in addition to requiring at least a 60-day discovery period, if the FTC challenges a transaction in court.

Both the DOJ and FTC reforms leave a certain amount of discretion with the agencies to expand the number of custodians, even if parties choose the limited custodian option. For example, the DOJ staff, subject to approval of the Section Chief, may add up to five custodians to each party if it is "reasonably necessary." The FTC retains similar authority to increase its presumptive 35-custodians search list. However, both agencies have indicated a willingness to streamline so that productions from hundreds of custodians hopefully will become a relic of the past.

The DOJ amendments also make several changes to the "model second request," the document on which the DOJ bases its actual requests. Most notably, the model calls for documents going back two years, rather than the three- or four-year period traditionally used. The FTC also has a two-year presumption for most materials but may require databases and other empirical data for longer periods. The reduction in the relevant time period substantially reduces the amount of materials that need to be produced.

The DOJ’s model second request also reduces parties’ obligations to perform a second sweep for responsive materials prior to certifying substantial compliance. Parties will generally not be required to conduct a "second sweep" if they comply with the second request within 90 days of its issuance. The FTC’s reforms also contain a provision to limit parties’ obligation to "refresh" the data they provide to the agencies. Again, this is a practical step that will reduce the burdens of compliance.

The new DOJ model also attempts to reduce and simplify each party’s obligation to search back-up tapes for responsive files. Instead of searching all back-up tapes, parties have the option of selecting a subset of back-up tapes, subject to the approval of the DOJ. The FTC similarly limits parties’ back-up tape obligation to a presumption that only two calendar days of back-up tapes (one for each relevant year) will be required.

Finally, the DOJ’s new model second request allows parties to omit certain documents from their log that were sent only between the company and its counsel. Communications directly between counsel and employees can be omitted although attachments cannot unless counsel created them specifically for the company. The FTC took a somewhat different approach to limit parties’ privilege log obligations; its reforms allow parties to create only a partial privilege log for all but a few of its custodians except in "appropriate circumstances."

The DOJ and FTC’s recent merger review amendments potentially reduce the burden on parties during second requests. However, companies contemplating transactions that are likely to receive a second request should recognize that the DOJ and the FTC retain a significant amount of discretion in shaping those requests. As a result, parties are left with several important strategic considerations in negotiating the terms of the second request with the agency staff and in responding once the request has been issued. Parties should also keep in mind the differences between the DOJ and FTC second request procedures when developing response strategies.

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