Facing the Bad Odds of Second Request Review

Facing the Bad Odds of Second Request Review

Part I of a series where we examine what you’re up against, and follow up with the promise of AI to help. 

Amid the high-stakes and often high-stress negotiations that accompany corporate mergers and acquisitions, a government-mandated “Second Request” poses another formidable hurdle for a company and its antitrust counsel to clear.

In accordance with the Hart-Scott-Rodino Antitrust Act (HSR), if either the Federal Trade Commission (FTC) or Antitrust Division of the Department of Justice (DOJ) determines after initial corporate filings that further investigation is warranted to complete a competitive harm analysis of a proposed deal, the burden falls to the parties involved to fulfill a Second Request for Additional Information and Documentary Material.

Whether a company is contemplating how best to navigate a current Second Request or preparing for that eventuality, understanding the challenges inherent to this complex process will inform strategy for moving ahead during this pivotal juncture.

When The Odds Aren’t In Your Favor

Receiving a Second Request from one of the agencies should be a legitimate cause for concern, particularly when considering potential impacts on the future of the deal in question.

While only a small portion of HSR filings trigger a Second Request (approximately 3% annually), the vast majority of those requests – upwards of 70% over the past decade – result in an enforcement action. A recent Cornerstone Research survey of corporations subject to Second Requests revealed that only a handful of the deals involved emerged unscathed, and almost all resulted in challenges to the proposed transactions. Former Assistant to the Director of the FTC’s Bureau of Competition Barry Reingold has echoed the ominous nature of these statistics, noting, “The odds really turn against you when that Second Request is issued.”

Though the business community anticipated greater leniency in antitrust merger enforcement pursued by the current Republican-led Antitrust Division and FTC under Trump, such hopes have not been realized. Recent actions in both antitrust agencies instead reflect a clear shift away from regulatory measures and towards aggressively enforcing the law. Reflecting its updated stance that “Antitrust is law enforcement, not regulation,” the DOJ’s Antitrust Division sued to block AT&T’s $85 billion merger with Time Warner last year in a move AT&T’s general counsel called “a radical and inexplicable departure from decades of antitrust precedent.” Ultimately, AT&T had to pay a $4 billion reverse break fee, and its stock price took a significant hit.

With legal stakes seemingly higher than ever and the government breathing down the necks of corporations with the threat of law enforcement, deploying a strategic plan to ensure full compliance with agency Second Request specifications is not just recommended: it is essential.

When Time Isn’t On Your Side

Extending the typical 30-day waiting period for M&A filings by months or even years, Second Requests rob companies of invaluable time and can even jeopardize the closing of deals.

The NY Bar Association has estimated that companies require an average of three months to comply with all the terms of a Second Request. More specifically, deals that necessitate Second Requests on average take 171.5 days after the initial waiting period to close, nearly 2.5 times longer than the average 41-day duration for deals that pass the antitrust agencies’ first review. In addition to days lost, extending the time to completion for a deal leaves the acquiring company vulnerable to bidding competition, financing uncertainty, and potential industry changes that could threaten the delicate balance of an intricately choreographed deal. Given that Second Requests are also associated with a five percent increase in the withdrawal rate for mergers and acquisitions, receiving one could quite literally be a ‘deal breaker.’

The costly delays associated with Second Requests are further exacerbated by the outdated approach to ediscovery still employed by a majority of companies that rely, at least in part, on armies of lawyers tasked with the tedious work of sifting through massive collections of documents to identify responsiveness and privilege. However, attempts to speed up the process utilizing the current inefficient approach could prove disastrous, as rushing to produce documents without full compliance can trigger hefty penalties or even potential rejection of the transaction.

To reduce the length of time deals are left in limbo and curtail the costly consequences associated with such delays, corporations subject to Second Requests must revamp and modernize their approach, particularly when it comes to accelerating e-discovery.

When Costs Are Prohibitive

A recent Charles River Associates survey found the median cost of Second Request compliance for a company to be $4.3 million. This sizeable figure reflects the direct, measurable expenditures associated with filing charges and compensating the army of lawyers needed for inefficient e-discovery as well as unanticipated costs, such as non-compliance penalties of up to $40,000 per violation-day and breakup fees associated with deals that fail. However, this number actually understates the true cost of Second Requests because it fails to capture the more intangible costs.

As anyone involved in the business world can affirm, ‘Time is money.’ Second Requests significantly hobble both these key commodities by redirecting management resources and employee energy to working toward compliance rather than focusing on their primary business duties. In addition, delaying a merger invariably translates into lost revenues, so while a company is consistently shelling out money to ensure compliance, it is simultaneously forfeiting unrealized gains as each day passes without closing the deal.

When it comes to compliance and costs, efficiency is essential: If a corporation hopes to preserve its bottom line in the midst of a Second Request, the process must be streamlined to minimize both measurable and intangible costs.

Stay tuned

In the next installment of this Second Request series, we will more closely look at obstacles related to ediscovery in the midst of staggering volumes of documents and also assess the inadequate interventions currently in use.