Corporate mergers and acquisitions are high-stakes, high-stress situations. While the vast majority of mergers raise no serious competition concerns, some proposed transactions—especially high-profile strategic mergers and acquisitions that are over a certain size and meet specific criteria1— and are subject to close scrutiny by the United States Antitrust Division of the Department of Justice or the Federal Trade Commission and require premerger notification. For comparable sized and complex transactions in EU countries, the European Commission (EC) requires notification (Phase 1).
Approximately 97% of all Hart-Scott-Rodino Antitrust Improvements Acts (HSR Act) premerger notification filings with the Department of Justice (DOJ) or Federal Trade Commission (FTC) are resolved after the initial waiting period,2 and 90% of all Phase I EC cases are resolved.3
The dreaded Second Request or EC Phase II investigation
However, when a government agency believes the proposed transaction may have anticompetitive impacts on the market based on documents contained in the initial filing, the agency will typically issue a “Second Request” in the U.S. and a Phase II Request for Information (RFI) in the EU. In Canada, the Competition Bureau, which oversees complex mergers, may issue a supplementary information request or SIR, which looks like a Second Request and EC RFI.
Both start an investigatory process in which the agency requests tremendous amounts of documents and information about the transaction from the merging companies.
Let’s (not) make a deal
When companies receive these dreaded requests, the resultant sweeping investigations divert and exhaust valuable company time and resources, disrupt the business and delay (or sink) the transaction.
Time is not on your side
For companies receiving a Second Request or EC RFI, the clock is the enemy. Second Requests and RFIs require that documents be produced to the requesting agency within 30-days, and the scope can be all-encompassing, for example, “all documents relating to competition, company’s pricing, strategies, the proposed transaction, industry participants and competitors, business plans, sales data,” and more. In the U.S., parties can negotiate with the DOJ or FTC for an extension; in the EU, parties cannot.
Many companies struggle to meet the stringent deadlines, which are subject to the standard of substantial compliance. While not defined, “substantial” has been interpreted to mean a complete response by the merging parties.
Costs are prohibitive
This deeper antitrust investigation is also prohibitively expensive, where it can on average cost $4.3 million but up to as high as $9 million4 for legal advisors, economic experts, eDiscovery vendors and armies of lawyers needed for document review. There are also unanticipated costs, such as non-compliance penalties in the U.S. of up to $40,000 per violation-day, and breakup fees associated with deals that fail.
Scrutiny is higher than ever
In late 2021, the FTC announced new processes in order to have better insight into whether a merger could violate antitrust laws. First, it announced that the investigatory scope may broaden to include a focus on how a proposed merger will affect labor markets, cross-market effects of the transaction, and how the involvement of investment firms could affect market incentives to compete.
Second, the FTC said it will align more closely with current DOJ practice on privilege logs, which requires full privilege logs versus the former “partial privilege” log.
The odds of deal closure are slim
At the end of the review period, the agency must sue, settle, or allow the deal to close. But the odds of the transaction closing aren’t on your side either. In recent years, a Second Request has been followed by a lawsuit, a consent decree or abandonment 75% of the time, so it’s bad news all around.5 A common factor in deal failures is that the parties ran out of time in the middle of the government’s antitrust investigation; and the hurried and incomplete productions risked rejection of the transaction in more than 60% of cases.
Use of technology-assisted review in U.S. antitrust merger investigations
In order to manage these stringent deadlines, merger and acquisition (M&A) lawyers are increasingly embracing the promise of technology-assisted review (TAR), also known as predictive coding, to identify responsive documents in private litigation and government investigations. In the U.S., the use of TAR is becoming a standard practice in response to the significant compulsory document requests in a Second Requests, and the DOJ amended its “Model Second Request” to require merging parties to disclose and discuss “any software or technology used to identify or eliminate potentially responsive documents and information produced in response to this request, including predictive coding.”
If a merging party chooses to use TAR, the DOJ and the party typically will agree to a certain recall rate, which is the percentage of responsive documents in a data set that have been classified correctly. In addition, the DOJ could review statistically significant samples of non-privileged presumptively non-responsive documents to verify the agreed-upon recall rate. The FTC’s position is largely the same.
Even though the embrace of TAR by the DOJ and FTC is encouraging, the sheer volume of documents warranting review in a Second Request – even using TAR – is likely to outstrip even the most capable of captive law firm solutions or managed review provider capabilities and can result in unforeseen risks and costs.
More reviewers impair quality and increase costs and risks
Most in-house legal and M&A teams approach Second Requests and EC RFIs the same way when it comes to actually reviewing the documents that they will produce. To meet tight deadlines, they rely on their law firms to prepare the response, and their law firms ramp up staffing with large numbers of reviewers, believing that the more bodies, the faster the review will go, the more rapidly the relevant documents will be uncovered, and the fewer dollars spent.
In actuality, the larger the review team, the greater the inefficiency, the greater the chance of misalignment that results in coding inconsistencies, and increased quality control (QC) time and costs—even when using TAR to accelerate the review. Based on a real-life case, on average a team of more than 100 reviewers found 50% of documents to be responsive, but 50% coded a document as relevant while 50% coded a similar document as non-relevant.
Moreover, with a larger team of reviewers, knowledge is spread out among individuals. This is not a good thing, since a centralized view of the risks and the benefits of the transaction may not be known by any individual or small team. So even though TAR prioritizes similar documents, each reviewer in a large team doesn’t have collective knowledge for immediate insights.
The potential negative ramifications of large review teams are more magnified in the EU, since the EC has not yet accepted TAR as an acceptable review methodology and instead requires the parties to use manual document-by-document (linear) review.
For companies and their outside counsel involved in high-stakes transactions, there are new approaches that can help you think about and plan for how to respond to an antitrust investigation so it doesn’t break the bank or ruin the deal.
Let’s do a deal!
Forward-thinking and acquisitive companies are adopting new approaches that strike a balance between time constraints of looking at every document, costs and risks, and looking at ways to meet sweeping agency requests that:
- Lower document review costs by 50% or more over alternative approaches (including straight TAR review)
- Leverage a small team of experts instead of armies of document reviewers
- Ensure comprehensiveness and defensibility with centralized privilege review and decision-making logs with accuracy up to as high as 98% recall and 98% precision
- Centralize eDiscovery management, from collections and processing to hosting in eDiscovery platforms, review, privilege review and logging, production and statements to the agencies on how to load the production
- Free up outside counsel time and spend on eDiscovery logistics and review so they can focus on the potential risks and merits of the merger
Control the clock, costs and risks
OpenText Rapid Analytics Investigative Review (RAIR) solves the time, cost and risk challenges around Second Request and EC RFI productions. RAIR is a review protocol that uses investigative techniques to quickly find groups of documents with similar characteristics that are amendable to bulk coding leading to production. And the tight team approach to a RAIR review improves consistency and posits more comprehensive knowledge of the substance of the production in just a handful of individuals. RAIR can be used together with Recon Investigations, and/or in place of managed document review.
It’s not surprising that so many companies struggle to complete comprehensive and defensible productions on time and within budget to requesting agencies – and with heightened scrutiny in both the U.S. and the EU, Second Requests and EC RFIs are likely to become even more challenging.
Companies contemplating transactions can plan for success – and plan earlier – with new approaches such as OpenText’s RAIR solution.
To learn more, contact OpenText Legal Tech.
1Unless an exemption applies, premerger notification is required if the transaction meets three tests: (1) the Commerce Test, (2) the Size of Transaction Test, and (3) the Size of Person test.
5 Wilson Sonsini, The Merger Review Process.