The Intersection of Chapter 11 and Antitrust

Journal Issue

Sep 2006

Column Name

Chapter 11 - “201”

Citation

ABI Journal, Vol. XXV, No. 7, p. 18, September 2006

Bankruptcy Code

363

Topic Tags

Asset Sales

Practice and Procedure

Journal HTML Content

Acquiring or selling a business in bankruptcy is somewhat different than doing so outside
of bankruptcy. We focus here on one way in which asset sale procedures differ
in bankruptcy—obtaining antitrust approval. The prospect of navigating
the applicable antitrust rules and procedures can be daunting even outside of
bankruptcy. When the target is in (or facing) bankruptcy, it is even more complicated.
To do this right, you will want an antitrust lawyer on your team, preferably
one with experience in distressed and bankruptcy transactions. But it also helps
for bankruptcy counsel to have some familiarity with the applicable antitrust
laws and procedures.
Basic Antitrust Procedural Rules 
The starting point is the Hart-Scott-Rodino Act (HSR).1 HSR procedures
govern how and when parties involved in transactions of a certain size must
submit information to the federal antitrust agencies.
HSR requirements and the accompanying rules in 16 C.F.R. §§801-8032
(Rules)3 apply to acquisitions of stock or assets. The federal antitrust
agencies are the Federal Trade Commission (FTC) and the Department of Justice
Antitrust Division (DOJ).

The regulatory scheme is "soup to nuts," beginning with the requirement
that parties to a transaction notify the FTC and DOJ of a potential acquisition
and then wait a prescribed amount of time while one of the agencies conducts
a preliminary review.4
The process can involve phases of additional investigation requiring elongation
of waiting periods, submission of additional information, and an agency challenge
to the transaction. Alternatively, the process can end with the transaction
being green-lighted by the agencies after preliminary review. Failure to follow
HSR procedures can result in significant fines of up to $11,000 for each day
that an entity is found not to be in compliance.5
HSR generally requires both parties to an acquisition to notify the FTC and
DOJ when certain dollar thresholds are met:
<blockquote>
 (1) (a) One entity has sales or assets of at least $100 million; and 
(b) The other entity has sales or assets of at least $10 million; and 
(c) As a result of the transaction, the acquiring entity will hold an aggregate
amount of stock and assets of the acquired entity valued at more than $50
million; or

(2) As a result of the transaction, the acquiring entity will hold an aggregate
amount of stock and assets of the acquired entity valued at more than $200
million, regardless of the sales or assets of the acquiring and acquired persons.6

</blockquote>
The rules governing treatment of a reportable transaction are modified if the
target is in bankruptcy, as we describe below.
How HSR Procedures Do and Do Not Change When the Target Entity Is in Bankruptcy
 Notification. As noted above, once the parties have determined that
the transaction is reportable, HSR procedures require that both parties to the
transaction submit notification of the transaction to the federal agencies.7
In cases where the target is in bankruptcy, §363(b) specifies who should
submit the notification on behalf of the acquired entity—either the trustee
or, where no trustee has been appointed, the debtor-in-possession (DIP).8

Filing notification requires submission of a notification form9
and, in most cases, an accompanying affidavit and certification concerning the
outlines of the transaction and the parties' intentions.10 These
requirements are designed to ensure that the parties are sufficiently committed
to the transaction such that the agencies do not waste resources reviewing hypothetical
deals. The affidavit should describe the assets to be acquired and should reflect
that the parties have a good-faith intention to proceed with the transaction.11
Outside the bankruptcy context, parties are required to attest to the existence
of an executed letter of intent or contract; however, this requirement is waived
when the sale will have to be approved by the bankruptcy court and where there
may be several potential buyers that will bid on the acquired entity. It is
helpful to the agencies if the notifying party attaches any order from the bankruptcy
court that addresses the procedures to be followed in the sale of the target
entity.
Initial Waiting Period. Where the target entity is in bankruptcy, the
normal 30-day waiting period before a transaction may be consummated is shortened
to 15 days.12 The truncated waiting period ensures that the agencies'
assessment of a transaction will be done quickly to facilitate the overarching
goal of the Bankruptcy Code to maximize the value of the distressed entity being
sold. It is another feature of the modified HSR procedures designed to recognize
the special circumstances of the distressed target entity.
Where the agencies determine that the transaction does not present any significant
antitrust issues, they may grant early termination prior to expiration of the
waiting period and allow the transaction to be consummated.13 Prior
to expiration of the waiting period, the reviewing agency (DOJ or FTC) may also
move to enjoin the transaction as anti-competitive or, where it determines that
the competition issues deserve further scrutiny, the reviewing agency will issue
what is known as a "second request."

Second Request. A second request is a "request for additional information
or documentary material"14 that will yield greater insight into
the parties and the markets in which they compete. Usually the particulars of
a second request will be communicated through mechanisms such as interrogatories
and document requests. Issuance of a second request outside the bankruptcy context
starts a new waiting period. The government has 30 days after both parties have
substantially complied with the second request to seek a preliminary action
in federal court to clear the transaction.
In a normal HSR pro-merger notification process, responding to a second request
is notoriously expensive and prolonged, and the agencies may challenge whether
the parties are in "substantial compliance" even after a significant
amount of material has been produced. Where a target entity is in bankruptcy,
the HSR procedures in conjunction with §363(b) provide for a modified second
request protocol that limits the circumstances in which the time prior to potential
approval of a transaction may be extended. Moreover, if a second request is
issued, the waiting period begins after only the acquiring person substantially
complies with the second request.15 After the agencies have determined
that the acquiring party is in compliance with the second request, a second
waiting period of 10 calendar days is imposed, in contrast to the 30-day period
imposed outside the bankruptcy context.16
Ultimately, however, the mere threat of a second request being issued may be
sufficient to persuade a bankruptcy court judge (or debtor, bank lenders or
committee) that a particular bidder cannot offer value on a sufficiently timely
basis to be considered the best offer. This is because even with the more expedited
procedural rules, responding to a second request can take a bidder months.
Challenges to the Transaction. Where the target entity is not in bankruptcy,
the government may challenge a transaction that it deems anti-competitive by
filing for an injunction in federal district court, and private parties
may also file challenges where they have antitrust standing under the Clayton
Act.17 Bankruptcy does not affect the government's right to challenge
the transaction, nor does it per se limit a private party's right. However,
in bankruptcy, considerations of venue and standing can complicate the issue
of who may challenge the transaction and where. For private third parties, the
existence of the automatic stay, combined with strict standing requirements
to bring a challenge to a transaction under the antitrust laws in either bankruptcy
or district court, may foreclose any opportunity to launch a challenge.

For the government, there may be a question of whether to launch a challenge
in the district court (where the challenge would ordinarily be filed, absent
bankruptcy) or the bankruptcy court. In some cases, the bankruptcy court may
believe that the government has in some way subjected itself to its jurisdiction,
for instance by appearing before it or filing a proof of claim. Typically, however,
the reviewing agency seeks to avoid subjecting itself to the bankruptcy court's
jurisdiction so that it may file an antitrust proceeding in the federal district
court of the agencies' choosing.18 The government may also contend
that an antitrust challenge is subject to mandatory withdrawal of the reference
under 28 U.S.C. §157(d) because of the antitrust law considerations, or
alternatively discretionary withdrawal. The government may believe that it can
achieve a better result in the district court on the theory that the district
court will rule solely based on the antitrust law issues, while the bankruptcy
court is more likely to consider the needs of the debtor and the estate. For
converse reasons, the debtor may prefer to have the issues adjudicated by the
bankruptcy court.
Defending Against Challenges Based on Financial Distress 
The U.S. Supreme Court's opinion in United States v. General Dynamics Corp.19
established the principle that courts assessing the competitive effects of a
transaction should take into account the future competitive significance of
the target entity. Specifically, General Dynamics directs courts to consider
the likely performance and market share of the acquired company based on its
current condition and implications of those conditions for the future rather
than its past performance.20 Showing that the target entity would
likely leave the market or persist in a greatly diminished state allows the
parties to the transaction to rebut a presumption of anti-competitive effects.21
In its most extreme state, this is called the "failing firm" defense,
which is asserted by showing that:

<blockquote>
• the failure of the target is imminent, 
• there is no course other than the proposed transaction that would
be less harmful to competition, and 
• the company could not regain competitive stature through reorganization
in bankruptcy.22
</blockquote>
 In discussing the defense, the DOJ/FTC Horizontal Merger Guidelines Section
5.1 counsels that unless the target entity's assets will exit the relevant market
absent the transaction, the "failing firm" defense should not prevail.23
<blockquote>
<blockquote>
<blockquote>
<blockquote>
<blockquote>
<h3 align="center">The U.S. Supreme Court's opinion in United States
v. General Dynamics Corp. established the principle that courts assessing
the competitive effects of a transaction should take into account
the future competitive significance of the target entity. </h3>

</blockquote>
</blockquote>
</blockquote>
</blockquote>
</blockquote>
While adhering to this rigid approach, courts have nonetheless rarely granted
relief based on the defense. In theory, where the transaction is shown to have
no effect on future competition, reviewing courts should pause in enjoining
the transaction, whether the target company is shown to be truly "failing"
or merely to be unlikely to pose a threat to competition.24 In practice,
the standard for showing no future anti-competitive effect is a high one. In
most instances, the defense may be one factor the court considers in its overall
assessment of the competitive impact of the transaction and may tilt the balance
to finding no violation, but will not, standing alone, be sufficient to avoid
an injunction.25
Practical Tips for Proceeding

As counsel in a transaction where the target is in bankruptcy, there are a
number of checklist items to keep in mind as you proceed through the HSR maze.
For example:
<blockquote>
• Be mindful of the fact that every potential buyer for the target
entity represents a separate transaction for which notification may be required.
Whether the sale is negotiated or occurs through an auction process, and whether
there are two or 10 potential buyers, the HSR procedures need to be followed
in each instance, sometimes simultaneously. 
• Line up individuals to execute affidavits and certifications for submission
with the notification form as soon as possible. Check the Rules to identify
the proper individuals in the requisite corporate positions. 
• Be realistic in advising the client as to which transactions are likely
to be approved. Keep your expectations and those of the parties within reasonable
limits regarding the likelihood of success with the "failing firm"
defense. Although it may appear to make a great deal of economic sense for
the bankruptcy company, it is very difficult to make the necessary showing
in light of the antitrust laws' focus on protecting competition rather than
individual companies. 
• As each potential transaction appears on the horizon, consider approaching
the antitrust agencies early to educate them on the transaction in the hopes
that they will be in a better position to conclude their investigation quickly. 
• Get customers on board. Marshalling customer support can be a crucial
part of clearing the regulatory hurdles.
</blockquote>

<hr>
<h3>Footnotes</h3>
1 Hart-Scott-Rodino Antitrust Improvements Act of 1976 §201, 15 U.S.C.
§18a (2000) (amending §7 of the Clayton Act, 15 U.S.C. §18 (2000)).
The FTC maintains useful guides to the process. FTC Pre-Merger Introductory
Guides, www.ftc.gov/bc/hsr/introguides/introguides.htm. 
2 FTC Subchapter H - Rules, Regulations, Statements, and Interpretations Under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, 16 C.F.R. §§801-803
(2005). The FTC guides noted above also provide guidance with regard to the
rules in conjunction with the requirements of the HSR Act. See supra
n.1.

3 For convenience, we use "HSR" to refer to the statute and/or the
Rules. 
4 The agencies determine which of them will review a transaction. 
5 15 U.S.C. §18a(g)(1) (2000); see also United States v. Hearst Trust,
No. 1:01CV02119, 2001 WL 1478814 (D. D.C. Oct. 15, 2001), |73.451 (D. D.C. 2001)
(imposing $4 million in civil penalties for non-compliance with HSR procedures).

6 See 15 U.S.C. §18a(a). The FTC publishes additional information
on determining whether a transaction is "reportable." FTC Guide,
To File or Not to File: When You Must File a Pro-Merger Notification Form, available
at www.ftc.gov/bc/hsr/introguides/guide2.pdf. 
7 16 C.F.R. §803.2(b) (2005).

8 11 U.S.C. §363(b)(2)(A) (2000); see also Instructions to FTC
Form C4 (rev. 04/07/05), available at www.ftc.gov/bc/hsr/050407InstructRpt.pdf
(specifying that either an appointed trustee or the DIP may submit the form).
 9 16 C.F.R. §803.1 (2005). The form is available at www.ftc.gov/bc/hsr/050407Rptform.doc.

10 16 C.F.R. §§803.5, 803.6 (2005). 
11 16 C.F.R. §803.5 (2005) (outlining what the affidavit should contain).

12 11 U.S.C. §363(b)(2)(B) (2000). 
13 15 U.S.C. §18a(b)(2) (2000). 
14 Id. at §18a(e)(1)(A) (2000); 16 C.F.R. §803.2 (2005).

15 15 U.S.C. §18a(e)(2) (2000). 
16 Id. at §803.20(c)(2) (2005). This can be helpful in two ways.
First, it shortens the time prior to consummation of the transaction. Second,
it may encourage the agencies to think realistically when requesting material
in light of the limited timeframe for review. 
17 15 U.S.C. §26 (2000). 
18 The bankruptcy court may find that it has jurisdiction to entertain all
antitrust claims. See In re Adelphia Commc'ns. Corp. v. Amer. Channel LLC,
et al., ___ B.R.___, Bankr. No. 02-41729, 2006 WL 1731147 at *10 (Bankr.
S.D.N.Y. June 26, 2006) (finding that in absence of affirmative relief from
automatic stay, bankruptcy court was only appropriate jurisdiction for antitrust
claim of private litigant attempting to enjoin purchase of bankruptcy estate);
In re Fin. News Network Inc., 126 B.R. 157 (S.D.N.Y. 1991) (district
court opinion finding that bankruptcy court had jurisdiction over FTC and state
regulatory agency claims seeking to enjoin sale of bankruptcy estate). 
19 415 U.S. 486, 501 (1974). 
20 Id. at 503.

21 Id.; FTC v. Univ. Health Inc., 938 F.2d 1206, 1221 (11th Cir.
1991); FTC v. Arch Coal Inc., 329 F.Supp.2d 109, 153 (D. D.C. 2004).

22 Gen. Dynamics, 415 U.S. at 507; Dr. Pepper/Seven Up Cos. Inc.
v. FTC, 991 F.2d 859, 864-65 (D.C. Cir. 1993); Michigan Citizens for
an Indep. Press v. Thornburgh, 868 F.2d 1285, 1288 (D.C. Cir. 1989). 
23 FTC & DOJ, Horizontal Merger Guidelines §5.1 (rev. 1997). The section
reads in full: A merger is not likely to create or enhance market power or facilitate
its exercise if the following circumstances are met: (1) the allegedly failing
firm would be unable to meet its financial obligations in the near future; (2)
it would not be able to reorganize successfully under chapter 11 of the Bankruptcy
Act; (3) it has made unsuccessful good-faith efforts to elicit reasonable alternative
offers of acquisition of the assets of the failing firm that would both keep
its tangible and intangible assets in the relevant market and pose a less-severe
danger to competition than does the proposed merger; and (4) absent the acquisition,
the assets of the failing firm would exit the relevant market. Id. (footnotes
omitted), available at www.usdoj.gov/atr/public/ guidelines/hmg.htm#51.

24 Id.; cf. Dr. Pepper/Seven Up Cos., 991 F.2d at 865
(finding, based on three-element test, that target entity in acquisition had
"colorable" claim under the failing firm doctrine and remanding for
further explanation by FTC as to why transaction should not be consummated);
Arch Coal, 329 F. Supp. 2d at 156-58 (explaining that although target
entity not "technically" a failing firm, its dismal future prospects
should be considered when determining the competitive effects of the proposed
acquisition). 
25 See Kaiser Aluminum & Chem. Corp. v. FTC, 652 F.2d 1324, 1339,
1341 (7th Cir. 1981) (finding that "financial weakness, while perhaps relevant
in some cases, is probably the weakest ground of all for justifying a merger"
and "certainly cannot be the primary justification of a merger in resistance
to a [§]7 proceeding").

Journal Authors

John D. Ayer

Jonathan P. Friedland

Michael L. Bernstein

Journal Date

Friday, September 1, 2006 - 12:00

Bankruptcy Rule

2006

none