FTC Staff Comment to the Hon. John T. Doolittle Concerning California A.B. 671 to Require Certain Persons who File Hart-Scott-Rodino Premerger Notification to also File Reports to the California Attorney General

V89a~79
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OFFICE OF
'THE CHAIRMAN
~..
	. ,	.
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
COMMISSION AUTHORIZED
July 	7, 	1989
The Honorable 	John T. 	Doolittle
State 	Senate
Room 	5087
State Capital
Sacramento, 	California 	95814
Dear 	Senator 	Doolittle:
Thank you 	for 	your 	invitation 	to 	comment 	on Assembly 	Bill
671, 	which, 	if 	enacted, 	would 	require 	certain persons 	who 	file
premerger 	notification 	reports 	with 	federal 	authorities 	under 	the
Hart-Scott-Rodino Antitrust 	Improvements 	Act, 	Section 	7A 	of 	the
Clayton Act, 	15 	U.S.C. 	S 	18a, 	simultaneously 	to 	submit 	the
reports 	to 	the 	Attorney General 	of 	California. 	The 	bill 	would
permit 	the 	California Attorney General 	to 	disclose 	the 	reports 	to
the 	attorneys 	general 	of 	other 	states, 	and 	it would 	authorize
California 	courts 	to 	order 	divestiture 	of 	assets 	acquired 	in 	a
merger. 1
The 	state 	of 	California may 	have 	reasons 	for 	enacting 	a
merger 	statute 	and 	a 	premerger 	notification 	requirement 	to
facilitate 	enforcement 	of 	that 	statute, 	and we 	express 	no 	opinion
in 	that 	regard. 	State 	law enforcement 	can 	playa 	valuable 	role
in 	restraining 	anticompetitive 	conduct, 	particularly when
competitive 	effects 	are 	limited 	to markets 	in 	the 	state.
Although we 	express 	no 	opinion 	on California's 	decision whether
to 	adopt 	premerger 	notification, 	we 	believe 	that 	it 	may 	have 	some
negative 	effects 	on 	federal 	law enforcement, 	on 	business 	and
ultimately 	on 	consumers.
1 	We 	offer 	no comments 	on 	Section 	1 of 	A.B. 	671, 	which
would 	prohibit monopolization and 	is 	similar to 	Section 2 	of 	the
Sherman Act, 	15 	U.S.C. 	S 	2, 	or on 	Section 	2 of 	A.B. 	671, 	which 	is
similar 	to 	Section 	7 	of 	the 	Clayton Act, 	15 	U.S.C. 	S 	18.

The Honorable 	John T. 	Doolittle 	Page 	2
Section 	3 of A.B. 	671, 	which would require 	certain entities 2
that 	file 	premerger 	notification 	reports 	with 	the Commission 	and
the 	Department of 	Justice 	simultaneously to 	submit:the reports 	to
_-~the California Attorney General, 	may 	adversely 	affect 	compliance
~"vith the 	Hart-Scott-Rodino Act 	and 	federal 	merger 	law
-- 	enforcement. 	Premerger reports 	(as 	defined 	in A.B. 	671) 	contain
highly 	sensitive 	information, 	often 	including 	trade 	secrets,
confidential 	marketing 	and 	other 	corporate 	plans. 	Congress 	has
mandated 	that 	the 	federal 	enforcement 	agencies 	keep 	these 	reports
in 	strict confidence, 	15 	U.S.C. 	S 	1Ba(h), 	and 	the 	high degree 	of
voluntary compliance 	with 	Hart-Scott-Rodino may 	be 	attributable
in 	part 	to 	the 	confidence 	of 	businesses 	that 	their 	reports 	will
be 	kept 	confidential. 	By requiring 	submission 	of 	HSR 	reports 	to
the 	California Attorney General, 	who 	then 	could disseminate 	it 	to
many 	different, 	independent 	law enforcement 	agencies, 	A.B. 	671
could 	increase 	concern 	that 	sensitive 	data 	might 	be 	disclosed 	to
competitors. 	Reporting 	firms 	may 	believe 	that 	increasing 	the
number 	of 	recipient 	agencies 	will 	increase 	the 	risk 	of
disclosure. 	Insofar as 	firms 	perceive 	that 	they 	face 	an
increased 	risk 	of 	disclosure, 	whether or not 	they 	in 	fact 	do,
compliance 	with 	the 	Hart-Scott-Rodino Act 	could be 	diminished.
This, 	in 	turn, 	could 	impose 	higher 	costs 	on 	the 	federal 	agencies,
both 	to 	enforce 	compliance with 	the 	Act 	and 	to 	review mergers 	on
the 	merits.
Reports 	prepared 	under 	the 	Hart-Scott-Rodino Act 	may 	not
provide 	information 	that 	would 	assist 	the 	California 	Attorney
General 	to 	assess 	the 	competitive 	effects 	of 	proposed
acquisitions 	within 	the 	state. 	The 	federal 	reports 	typically
would 	include 	information not 	relevant 	to 	markets 	within 	a
specific 	state, 	and 	they 	generally do 	not 	identify 	areas 	of 	local
concern. 	Such 	reports 	also 	would 	not 	facilitate 	state 	review 	of
mergers 	that 	fall 	below the 	size-of-person and 	size-of-
transaction 	thresholds 	of 	the 	Hart-Scott-Rodino Act. 	A premerger
notification 	program 	tailored 	to 	businesses 	and markets 	within
the 	state may be more 	useful 	to 	implement 	state 	merger 	law
enforcement 	than HSR 	reports.
2 	Filing 	persons 	would 	be 	required 	to 	submit 	reports 	to 	the
California Attorney General 	if 	either 	party 	to 	the 	proposed
transaction 	is 	incorporated 	in 	the 	state, 	has 	its 	principal 	place
of 	business 	in 	the 	state, 	is 	registered 	to 	do 	business 	in 	the
state 	or 	has 	"any 	tangible 	assets, 	employees, 	or agents" 	in 	the
state. 	Because of 	the 	broad 	reach 	of 	the 	last 	two 	criteria, 	a
substantial 	proportion 	of 	federal 	HSR 	filings 	are 	likely 	to 	be
covered 	by A.B. 	671, 	even 	though 	the 	proposed 	transaction 	might
involve 	assets 	or 	businesses 	having 	no 	contact 	with 	or 	effect 	on
California.

,I
:
The Honorable 	John T. 	Doolittle 	Page 	3
Businesses 	confronting the 	prospect 	of 	simultaneous
investigations 	by 	federal 	and 	state 	authorities 	may be 	deterred
. from 	initiating mergers 	and 	acquisitions. 	Multiple enforcement
~;efforts would 	involve 	direct 	costs 	to 	businesses 	and to 	the
~ 	federal 	and 	state 	government 	agencies, 	as 	well 	as 	the 	possibility
of 	inconsistent 	results. 	Particularly 	in crafting 	appropriate
relief, 	difficult 	judgments 	are 	required, 	about 	which 	different
agencies 	or 	judges 	may 	differ. 	To 	the 	extent 	that 	a 	proposed
transaction may 	be 	competitively neutral 	or 	even procompetitive,
this 	deterrence may 	impose 	costs 	that 	ultimately 	are 	borne 	by
consumers.
For these 	reasons, 	we 	believe 	that 	A.B. 	671 	may 	fail 	to
achieve 	the 	purposes 	of 	the 	state 	of 	California 	to 	implement 	a
program 	of 	premerger 	notification 	to 	facilitate 	state 	law
enforcement. 	In 	addition, 	A.B. 	671 	may 	harm 	federal 	merger 	law
enforcement 	and 	impose 	costs 	on 	both 	businesses 	and 	consumers.
We 	urge 	you 	to 	consider whether 	the 	benefits 	of 	the 	proposed
legislation warrant 	the 	imposition of 	such considerable 	costs.
By 	direction 	of 	the 	Commission*,
~~~~-baniel 	Oliver
Chairman
* 	Commissioner 	Strenio 	does 	not 	join 	in 	this 	letter.