INTERNATIONAL COMPETITION POLICY ADVISORY COMMITTEE
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November 3, 1998
APPEARANCESAdvisory Committee Members:
James F. Rill, Co-Chair and Senior Partner, Collier, Shannon, Rill & Scott, PLLC
Paula Stern, Co-Chair and President, The Stern Group, Inc.
Merit E. Janow, Executive Director and Professor in the Practice of International Trade,
School of International and Public Affairs, Columbia University
John T. Dunlop, Lamont University Professor, Emeritus, Harvard University
Eleanor M. Fox, Walter Derenberg Professor of Trade Regulation, New York University School of Law
Steven Rattner, Deputy Chief Exececutive, Lazard Fré½es & Co., LLC
Members of the Public Who Made an Appearance or Presented Written or Oral Statements:
Panelists - Commercial and Economic Perspectives on the Current Merger Wave:
James A. Langenfeld, Principal, Law and Economics Consulting Group
Ali E. Wambold, Managing Director, Lazard, Frères & Co., LLC
Steven B. Wolitzer, Managing Director, Lehman Brothers
Panelists - Information Sharing and Procedural Harmonization:
Michael D. Blechman, Kaye, Scholer, Fierman, Hays & Handler
Gabriel Castañeda Gallardo, Castañeda y Asociados, Mexico
Calvin S. Goldman, Davies, Ward & Beck, Canada
Barry E. Hawk, Skadden, Arps, Slate, Meagher & Flom LLP
Masahiro Murakami, Professor, Yokohama National University, Japan
and Visiting Scholar, Harvard Law School
Phillip A. Proger, Jones, Day, Reavis & Pogue
Michael J. Reynolds, Allen & Overy, Belgium
Spencer Weber Waller, Associate Dean and Professor of Law, Brooklyn Law School
Panelists- Conflicts and Remedies:
James R. Atwood, Covington & Burling
Ilene Knable Gotts, Wachtell, Lipton, Rosen & Katz
William J. Kolasky, Jr., Wilmer, Cutler & Pickering
J. William Rowley, McMillan Binch, Canada
Clive Stanbrook, Stanbrook & Hooper, Belgium
IN ATTENDANCEAdvisory Committee Staff:
Cynthia R. Lewis, Counsel
Andrew J. Shapiro, Counsel
Stephanie G. Victor, Counsel
Eric J. Weiner, Paralegal
Estimated Number of Members of the Public in Attendance: 60
Reports or Other Documents Received, Issued, or Approved by the Advisory Committee:
Dr. James Langenfeld
Ali E. Wambold
Barry E. Hawk
Michael H. Byowitz and Ilene Knable Gotts
Ilene Knable Gotts
Calvin S. Goldman, Q.C. and Brian A. Facey
William J. Kolasky and Leon B. Greenfield
William J. Kolasky Jr. and William F. Adkinson Jr.
William J. Kolasky, Jr. & James W. Lowe
PROCEEDINGSDR. STERN: Good morning, ladies and gentlemen. We are ready to begin, slightly delayed by the rain, but certainly prepared. We are beginning the second day of our hearings for the International Competition Policy Advisory Committee. We had an excellent day yesterday, and I know we will have another superb day today. We will begin by asking Steve Rattner to moderate the first session, session 1, on Commercial and Economic Perspectives on the Current Merger Wave.
And as you recall from yesterday, we had the participation of everyone. We had the opportunity to hear those prepared remarks made by panelists who had been invited to attend, and then we were able to open it up and get a good exchange, and I am sure that we'll be able to do as thorough a job as we did yesterday. Steve, thank you. I know it was tough for you to get down from New York City, but we appreciate your attendance, as well as so many others who have come both from New York, from Chicago, Jim, and from around the world. Steve?
MR. RATTNER: Thanks, Paula, and apologies again for our tardiness but I think you had a full day yesterday on many of the legal and particularly international aspects of antitrust regulation enforcement. And what we thought we would do on this panel is address the business and economic perspectives relating to the current merger wave and we have three panelists who are all active in that area.
As you all know, we are, or at least have been until recently, in a period of unprecedented merger activity, and although the last couple of months has been a little slower than the preceding six or eight and the preceding several years, for that matter, there has been a recent pickup in activity and certainly the issues that are before this Committee that were discussed yesterday, the Committee has been discussing and are still very much in the forefront of what's going on in the commercial world, as well as in the legal world.
So what we thought we would do is begin with some opening statements by our three panelists, who I'll introduce before each of them speak, and then as Paula said, hopefully we'll have a lively discussion and questions from the rest of us and from each of the panelists as well.
So let me start, if I could, with Steve Wolitzer, who is managing director of Lehman Brothers and is global head of their Mergers and Acquisitions Department, who serves on a number of the firm's important committees. Steve has been at Lehman Brothers for quite a long time. He joined Kuhn Loeb, which was the predecessor firm, in 1977, and was appointed as co-head of the global mergers group in 1989. He has worked on many of Lehman's very important clients and important recent transactions including MCI/WorldCom, Digital Equipment/Compaq, Fujitsu/Amdahl, KLA/Tencor, Washington Mutual/Great Western, and so on. Steve graduated summa cum laude from New York University in 1973, he has an MBA from Harvard, and is also a CPA and was associated previously with Arthur Andersen. So Steve, if we could ask you to begin, we appreciate it.
MR. WOLITZER: Good morning, thank you, Steve, and I appreciate the opportunity to be here. What I would like to do is spend a little bit of time providing from the investment banking perspective, a general overview of what I see are the determining business and economic factors that have been driving the recent merger and acquisition environment and how they relate to the topics we are discussing at the conference here.
At the outset, I think we can divide the overall drivers of activity into three broad categories. One is the macroeconomic factors in the environment; the second is the condition of the financial markets; and the third is the sectoral changes occurring in particular industry areas. If we start off with the macroeconomic factors, I think we see at least in the last three to four years, certainly in the decade of the '90s, a fundamentally different environment than we saw back in the '80s.
The '80s really were a period of great merger and acquisition activity, a boon time, a little bit of cowboyism out there in the marketplace. In the '80s we were in an environment where a lot of the activity occurred simply because stocks and companies were perceived as being quite inexpensive and cheap. I think one of the best ways of putting that activity into perspective is to look at what happened in the so-called crash of '87: we see that we were in an environment where the Dow went down to a low of 1700, while in the current environment of the last couple of months, where we have seen some downturn in market activity, we sit today at 8700, a 7000-point difference. So we can see that the '80s were really much more about financial determinants and that's what drove that activity.
In the '90s, a very different environment exists. What we have had is an economic environment of extended period of positive economic growth, but I think importantly, very low real growth and very low inflation. This has been mainly in the U.S. but has impacted economic activity globally.
In fact, we have been on the borderline very close to always worrying about going into a recessionary period, but yet we have been able to maintain the so-called steady course of always being slightly positive on the other side of the equation, with slow and continued steady growth in a low inflation environment. Not only has this created very favorable economic conditions for growth here in the U.S., but it has also created the right combination of variables to create a very active merger and acquisition environment, and the reasons for that conceptually are very simple.
This growth profile has created an environment in which there is very slow and little growth in the demand equation and at the same time, very little or almost no flexibility around pricing. And so the ability to grow revenues appears for many parts of industry to be quite difficult.
And so there has been tremendous pressure on top-line growth, the revenue line, for many companies and for those that are trying to continue to grow and to prosper in this environment. The focus of many industry executives has been twofold; one, ways to increase revenues without investing or expanding new capacity because of the general lack of demand for their products. Or alternatively, a way to reduce or rationalize their cost structure in order to increase margins and enhance profitability as another way to achieve that growth.
And it's that blend of activity and the economic environment, that has driven many companies to the merger and acquisition marketplace as an avenue in which it can be cheaper and more practical to buy, acquire, et cetera, than to really invest in new capacity where that demand may not exist.
Now, we do see some differences as we look at the global scene and I think that has had at the same time a different impact on the merger and acquisition environment. When we look at Asia, for instance, until most recently, we had seen a period of dynamic growth and in fact, we saw tremendous capital formation and capital investment going into Asia to expand new capacity and to invest in new capital formation, and there was a considerable lack of merger and acquisition activity relative to an area like the United States. In many cases, we had seen that again until recently in Latin America. In Europe, there was a little bit of a mixture of that but coming into 1999 the big factor impacting the marketplace is obviously the creation of the Euro and the reduction of trade barriers, and I'll come back to that.
So this is the backdrop: what we'll call a healthy economic environment to promote merger and acquisition activity, the cause of that merger and acquisition activity, and the fact that such activity has to be fueled somehow in the financing markets (and during the course of the '90s, that fuel has indeed been there).
The stock market had been steadily rising, actually reaching peak prices back in July until August, although recently we have seen a comeback. The rest of the financing markets were equally strong. The bank loan syndication markets were extremely healthy and so the banks were lending a great deal of money. There were very strong public high yield markets so those companies that were less than investment grade were trying to expand rapidly where they could, the high yield money was available, and interest rates were relatively low on an historic basis. It appeared that at one point they were at an historic 10-year low, then a 20-year low, then a 30-year low. Rates were constantly going down.
Interest rates appeared to be low on a global scale, being low in Japan and in many centers in Europe. That combination of access to relatively easy, inexpensive money, whether it be through the bond markets, the debt markets, or the stock markets, created the cheap fuel for those people who wanted to participate in merger and acquisition activity.
The third driver was the actual strategic activity in demand in the different industry areas. And again, somewhat unprecedented in the '90s, it appeared that just about every industry sector was impacted by different factors of rapid change, and I think the three broad categories that those fall into were: number one, new technologies and rapid technological change; number two, economic deregulation and government deregulation and changes in policies; and, number three, general globalization.
Coming back to each of these forces of change and how they impacted industries overall, let us look at: number one, rapid technological change, which generated a huge number of new companies in the '90s, such as in the telecom and media sectors; the health care sectors; the Internet-related sectors; and the technology sectors. New wireless technologies were created and expanded, as were satellite technologies; and the Internet, which is changing a number of different industries; and the combination of data and voice. All of these were converging in an entirely new multimedia environment. Convergence was further fueled by advances in semiconductors, network technologies, software technology and, again, the Internet. On the health care side, advances in the life sciences including genomics, were changing industries very rapidly. Additionally, the need for investment and the need to create new research and development was driving a lot of M&A activity in the sector.
When we turn to economic deregulation we see wholesale change in major industries, whether it be the banking sector, insurance sector, utilities and power, and again the telecom and media areas. In the United States, barriers to interstate banking came down; in Europe, barriers came down between countries to create consolidation.
In the utilities sector we saw deregulation at both the federal and the state levels, as well as the same over in Europe. The telecom and media sectors now have competing channels of information, content, and people that cross over into different forms of the media, often with different ownership. The same is true in the insurance sector. Deregulation has driven massive consolidation in these industries, consolidating what were highly fragmented industries.
When we look at similar changes in government spending policies we see a lot of change in the aerospace/defense areas, as well as in the health care sector. Obviously, as we have gone into a period of reduced military spending, we have seen automatically the aerospace/defense sectors around the world rapidly consolidated. The same occurred in the health care area as people became more conscious of cost control, new industries emerged on the services side, and consolidation occurred as people rapidly were trying to find ways to cut costs, thereby reshaping those industries.
Finally, we had the overall impact of globalization which affected some of our "bread and butter" industries: industrial companies; consumer companies; and energy companies, which were all impacted by cross-border expansion and consolidation. Companies' main concern was how to cut costs, how to cut costs, how to cut costs. In terms of being able to compete on a worldwide basis, and in what was an incredibly competitive environment, while trying to find a way to maintain or even build market share. Across broad industrial sectors, whether it be steel or automotive or any basic industries, or in the consumer area, the need to sell brands on a global basis became critical.
The energy sector was very much impacted by low inflation as commodity prices of oil were quite low, and therefore inhibiting many companies from investing in the research and development for new exploration and production and forcing them to seek other ways to cut costs. We saw tremendous consolidation activity in the energy sectors in order to pool resources to invest cost effectively in exploration of production or to find ways to cut costs out of refining and marketing organizations; this was highly unusual, but we have seen it occur rapidly in the United States and through Europe in particular over the last few years.
In energy we have seen terms like "BTU convergence" come into play or whether it be electricity, power or any form of power, different companies have come together to be able to sell energy profitably on a commodity basis. I think a subset of almost all of these globalization trends is the privatization wave of the '90s, which was driven particularly out of Europe.
We saw entire industries and large companies be created virtually overnight in the public markets as a result of privatizations that took place throughout Europe, Asia, and Latin America. These created new competitive companies that all of a sudden had to raise capital independently and compete on a worldwide basis in a new way which they hadn't had to face before; this has created a new dynamic in the merger and acquisition environment.
I think much of this privatization wave actually presents an interesting microcosm of some of the overall activity that is taking place: let us focus on privatization and how that has unfolded, along with a look at the telecom market with the preceding comments that we made in terms of how that has been shaped by deregulation and technological change already.
When you layer the impact of privatization on the telecom sector, what you have had are companies that are basic infrastructure industries worldwide, crucial to the public interest globally. Within that, after all of these companies have become public and are owned by new private investors, they will be more profit and loss oriented than perhaps the governments that recently owned them. We have seen examples such as, most recently: a Telecom Italia investing in Telecom Austria; Ameritech in the United States investing in Belgacom and TeleDanmark; France Telecom and Deutsche Telecom investing in Sprint back here in the United States; and, initially, a British Telecom proposed investment in MCI in the United States which then unfolded into an MCI/WorldCom transaction which then had significant repercussions in the European market in terms of control over voice and data communications and significant divestitures to Cable & Wireless as a result. We have also seen the Spanish telephone operator investing in telecoms in Latin America.
Those are just certain examples that demonstrate that what has developed from a global perspective in one particular industry, where for many years previously people really only cared (and I say this somewhat facetiously) about local phone calls, that now a global environment has been created with large telecommunications companies on a globally competitive scale that are competing on a worldwide basis and trying to find their way within this new structure. You see this pattern being repeated throughout all of the industries that I mentioned earlier.
And that struggle continues in many areas. In Latin America or in Asia what a year ago may have been an environment of rapid expansion with new capital easily available, is now starved for capital, and will increasingly look to the merger and acquisition market as a proxy for new investment to be able to continue the infrastructure spending that was so important to the creation and expansion of those economies.
And so in that respect, the financing markets and the merger and acquisition markets have become largely proxies for each other, depending on which avenue can best supply the capital to fuel growth. I think as we look at this overall commercial scene, our own perspective is that the last couple of months have been an exception, and have really been an interruption in the financing flow but as we take a step back all of the other dynamics that we described are still very much in place.
It is probably highly unlikely that any of those factors can be interrupted at the present time given what's been happening on a global scale from social, political, and economic standpoints. The demand that we see from Wall Street, from companies on a global scale, that are interested in mergers and acquisitions as a way to solve their corporate strategies, as an integral part of their corporate strategies find their way in increasingly global competitive world can only increase.
We have seen in this past year the absolute all-time record of activity in the United States. Given the changes that will be happening in the European marketplace next year, our own prediction is that we will see (and we have seen a good deal of it already) an unprecedented level of merger and acquisition activity in the European theater. We don't see that diminishing. We think that activity will only increase, due to the competitive pressures in the global economy. And that's our prediction from the business side. Thank you.
DR. STERN: Thank you.
MR. RILL: Steve, do you want to have all the panelists go through before questions?
MR. RATTNER: I thought so, if that's all right with you, Jim.
DR. STERN: It was very provocative. I'm sure there are a lot of questions.
MR. RATTNER: I'm sure there are a lot of questions, but just to be sure we have time for everybody why don't we do the other presentations and I think perhaps next we'll hear from the other investment banker on the panel, Ali Wambold, who is also my partner, who is a managing director of Lazard Frères which he joined in 1986, '85, and has been based not only in New York but also in London for Lazard, so he has worked on both continents for the firm. Before that he was vice president of Lehman Brothers. He is currently a Non-Executive Director of The Albert Fisher Group PLC and Tomkins PLC, as well as being involved with Corporate Partners, an investment fund affiliated with Lazard. Ali received a bachelor's degree magna cum laude from Harvard College and an MBA from Columbia Business School.
DR. STERN: Those mikes will pick up, by the way, in theory at least two voices.
MR. WAMBOLD: Merit didn't tell me that I would be following Steve but she did tell me it was okay and it didn't matter if we overlapped or contradicted each other. I'm kind of used to following Steve because I used to be at Lehman Brothers as well and I think Steve gets the credit or blame, as the case may be, for being one of the key people to train me in this craft.
So everything I say is either complicated by a filial piety or rebellion. I think I kind of come at it at a slightly different perspective, and I start within the broader context of the formation of this Committee and of some of the comments that were made at the time by Attorney General Reno and Assistant Attorney General Klein, and I quote, they urge the U.S. and their trading partners to "work together to stamp out agreements among international competitors to fix prices and allocate customers in markets in order to protect consumers." Probably sounds familiar.
The international dimension is underscored in Mr. Klein's statement that, "In today's global economy no aspect of antitrust enforcement and antitrust policy is more important than its international dimension." An obvious inference from these statements is that the antitrust authorities are concerned that international mergers may be anticompetitive and damaging to U.S. consumers.
I'm sure you'll understand if as a business person and someone who makes his living negotiating mergers, my own perspective on these matters may differ somewhat from that of government officials charged with enforcing antitrust laws. Accordingly, as I describe what I think is happening in the field of international M&A, I hope you will indulge me if I go a bit further than mere description and try to put the topic within a practitioner's view of the broader context, the interest of consumers.
What's actually happening? People speak of a merger wave. Is there one? Is it conspicuously international and what are its causes and effects? It's understandable that the international dimension has gotten people's attention. There are flashy cross border deals like some that Steve mentioned and other household names like BP/Amoco, Daimler-Benz/Chrysler, deals that are not M&A deals strictly speaking like British Airways and American Airlines, and as Steve mentioned the busted deals like British Telecom/MCI.
The numbers are also staggering. According to Securities Data Corp. in 1997 in the first half of 1998 there were 1.3 trillion dollars worth of deals announced involving a non-U.S. company, at least one non-U.S. company. But international activity is only part of this story. The value of domestic mergers in 1997 represented 11 percent of GNP which was almost double the previous peak figure in each of the earlier two peaks of the postwar era, in 1968 and 1989.
During that same 18-month period I mentioned earlier worldwide M&A activity was just under $3 trillion, leaving $1.6 trillion of strictly domestic volume or 55 percent of the total domestically, therefore, which is higher than levels that prevailed in the early 1990s. Cross-border deals involving a U.S. company represented only 11.5 percent of total transaction values, which is about average for the past 18 years, in fact a little bit below. And of the 50 largest deals ever, only two that involved a U.S. company were cross-border: Chrysler and the unclosed Amoco deal.
Having said that, perhaps the most interesting statistic is the deals involving no U.S. participant at all totaled a trillion dollars in the last 18 months, 60 percent of the U.S.-only volume, and you can contrast that with the previous peak's worldwide M&A volume in 1989 of under $600 billion. So the numbers really are big. There really is a merger wave. And even though cross-border deals remain a modest proportion of the total, there is a tremendous amount of international activity that does not even involve a U.S. party at all.
Mergers of the latter type can still have an important impact on U.S. businesses and consumers, though. Two large offshore deals in 1997 illustrate the point. The acquisition by ICI of the UK of Unilever's chemical business for $8 billion and the $30 billion merger of Guinness and Grand Met. Neither deal involved a U.S. parent but both included U.S. operations that might have been affected. Both also involved companies that could have easily ended up in the hands of U.S.-headquartered companies. Big as we are, it looks like we should indeed pay some attention to what is happening abroad.
Why are we in the midst of a merger wave and why does this one differ from past ones, and if so, how? Steve touched on some of this. Again, I have a slightly different perspective, if I may. There have actually been a lot of studies done about what drives mergers, and by academics instead of just investment bankers, so you can take your pick. The National Bureau of Economic Research did a study in 1959 of U.S. merger movements from 1895 through 1956, of which there were three, and basically concluded that the primary drivers are in this order: a strong capital market and a strong economy, which also happened to be linked with each other.
It may surprise some people that the author also concluded, and this I think will surprise people, that technological innovation among other logical candidates, in fact, was not an important immediate factor in those merger waves. What was the case then is consistent with the subsequent 40 years in my own view. Practitioners know this experientially and it reflects the most mundane of factors. First, business people like to succeed and often that means to make more money. Second, for every buyer, there has to be a seller and vice versa.
Buyers don't buy if they are up to their ears in problems in their own operations and sellers don't sell if they feel buyers won't pay them full value. At the same time to buy a company, you need currency: cash or stock. If lenders won't lend and lend cheaply enough and if the stock market won't provide equity, again cheaply enough, the ability to pay for one's ambitions is limited. Simply put, while there will be mergers even in bad times, especially where economic pressure forces people to sell, by and large, merger waves are associated with periods when financial markets and the economy are booming, not just healthy.
The conclusion that merger waves are basically driven by macroeconomic factors is somewhat counterintuitive since there is such a tendency to focus on the dynamics of specific industries that exhibit the greatest activity, and in the latest round, again as Steve pointed out, people look at telecommunications, financial services, utilities, and life sciences as industries disproportionately involved in mergers.
Deregulation is frequently cited as a driver along with globalization and technological change. On reflection, it's not terribly surprising that the most dynamic industries will be most involved in M&A. They are undergoing rapid change. They tend to command the affections of the capital markets and by virtue of being newer will tend to be more fragmented. This is true in the high-tech industries of today as it was in the high-tech industries of the early 20th century, namely autos, railroads, utilities, petroleum, and chemicals.
Indeed, today technology is changing the economics of older industries like banking and utilities, creating a new dynamism and thence pressure to merge and arguably driving deregulation, not, in my own view, the other way around. Probably the right chain of causation is what it has been in the past. Simplistically, politics start the process by creating a climate that is favorable for business development. A growing economy and ebullient financial markets reinforce each other. Technology shapes the direction of sectoral evolution, i.e., industries. And mergers can occur because buyers have the currency to pay.
Why is the international arena so visible to us today? Generally speaking, the same factors that drive domestic mergers drive foreign mergers. The difference today is that what is happening abroad has finally become big enough to matter here. First, foreign trade has risen to about 25 percent of GNP today from just under 10 percent in 1960. Second, leaving aside the triumphalists who claim the U.S. is the only superpower left, our share of world GDP has been slipping for decades, down to approximately 25 percent today, if only as the rest of the world caught up following the devastation of World War II.
Finally, growth and scale outside the U.S., along with the development of more transparent capital markets, have prompted a huge outflow of portfolio investment by U.S. investors, further raising international awareness and involvement here. From an American point of view, these trends have become translated into a bona fide international merger wave because foreign companies, specially Europeans, became big enough to catch our otherwise somewhat parochial eye.
They began to merge in a big way because political developments in the 1980s and early 1990s, principally center-right governments hospitable to business and the collapse of the Soviet Union, ignited a secular boom in European business and financial markets and, as in the U.S., booms led to mergers. U.S. companies have participated too since basically you buy abroad for the same reason you buy instead of building at home: the acquiree has a position that would be too expensive or impossible to replicate; or, in a mature economy or industry, merging, as Steve mentioned, again can allow the two parties to reduce aggregate fixed costs, improving earnings.
It's worth touching on the European Union in this context because it's often cited as a cause of increased merger activity in Europe. In fact, however, cross-border activity within the EU has been dwarfed by domestic mergers. For example, from January 1997 to date, the percentages of domestic -- strictly domestic -- merger volumes for the UK, France, Germany and Italy were 93 percent, 83 percent, 70 percent, and 86 percent, respectively, as compared with the aggregate volumes among those four. So in other words, of all the deals done by the UK in the UK, France, Germany and Italy, 93 percent were done just between UK companies.
This is not to say that the EU is not relevant. It is. But the EU per se is not the principal factor and the direction of causality is at least ambiguous.
What's going to happen to the great merger wave of the end of the millennium? If the markets and the economy turn down the merger wave will too. Period. How drastically will also depend on the macroeconomics. The downturn that Steve mentioned may have already begun. Average monthly volume since June has dropped by about a third from the first half's pace.
Interestingly, the 1959 study found that peaks in mergers, like stock market peaks, tended to lead peaks in underlying economic activity. Even if the U.S. economy retreats, merger activity in Europe may remain relatively strong in the short term as long as the politics allow it, because the Continent's economy has lagged behind our own and because companies do feel the need to achieve scale on a Europe-wide basis. Secondary effects may therefore occur here as in Guinness/Grand Met.
In addition, Europeans who are feeling flush may acquire here more aggressively, although they have been doing so all along with a few valleys when their economies were at their worst in the early 1990s. The most active sectors will be what they have been: telecommunications, financial services, life sciences and energy, for all the reasons Steve mentioned.
In the emerging markets large scale activity will await recovery and the formation of larger business units and more developed equity markets and, in my own view, will be a long time coming. In general, M&A as we know it tends to require vibrant, transparent capital markets. They in turn depend on limiting corruption and essentially on a commitment on the part of people, not just governments, to market economics and true democracy without which it has no long-term sustainable foundation.
Internationally, commitment to free trade is also a sine qua non. In the current political environment there are straws in the wind in Russia and Malaysia and maybe even in a resocialization of Western and Eastern Europe that suggest we may have already in fact passed the peak for this wave. My personal opinion is that the commitment to free market economics in most of these countries around the world is skin deep.
What do all these mergers imply, assuming they do continue, for the consumer? Obviously if international mergers are merely another way to concentrate markets to conspire against the consumer, the consumer would be getting damaged. There is a larger view of consumer benefit, however, for which business people might like to find some sympathy under antitrust authorities. That view holds that a lower price per se should not be the only measure of consumer benefit. Prices that justify sustained investment in capacity, R&D, innovation and quality greatly benefit the consumer within the context of a wider value proposition.
There is such a thing as destructive price competition and relief on the U.S. auto industry may be one reason your cars are getting better. A financially healthy industry also benefits consumers by providing employment and the resources with which to develop and maintain productive skills and improve their standard of living.
An excessive reliance on price and on traditional measures of market shares can have perverse effects. The international arena is particularly subject to distortion due to political intervention. Price signals instead of providing their functions so cherished by economists of allocating resources efficiently can in fact reflect and perpetuate serious distortions. Wild currency fluctuations can make a healthy domestic industry appear uncompetitive artificially. It's hard to blame businesses for trying to hedge by investing or buying abroad. Government subsidy is perhaps the worst perpetrator of distorted price signals through managed industries that create national champions, which is essentially cronyism, domestic protection in the service of international economic competition, and financial subsidization by creating an artificially low cost of capital.
All of these have been practiced in Asia and to a lesser extent in the European Continent. If we do have a global depression it's more likely to be due to massive overcapacity built up around the world as a result than to the people who financed a few rash hedge fund managers beyond prudent lending standards.
For the regulator, if you believe in the U.S. free market model, and I hope you do, growth abroad will track the commitment of foreign countries to that model, and international mergers that implicate U.S. companies and assets will follow. In the larger notion I expressed of the consumer's interest's this could be very positive, leading to a more rational and professional business culture through proliferation and homogenization of best practices on a global scale. The presumption here of course is that such a culture fosters more efficient allocation of scarce world resources than what have had in the past.
In protecting consumers, there may be scope to look beyond traditional definitions of markets and consumer interest, including global markets, and at the more complex issues arising from the fact that assumptions that work well in the U.S. political, business and legal culture don't always translate abroad. In particular, the "right" outcome may take into account the long-term health of an industry, currency effects, and distortions caused by the policies of other governments, including capital subsidies, domestic favoritism, and domestic protection. Thank you.
MR. RATTNER: Our third and final speaker before we begin the discussion is James Langenfeld. Dr. Langenfeld has extensive experience in antitrust, intellectual property and damage estimation. His work experience includes 11 years at the FTC, the last six of which he served as director for antitrust in the Bureau of Economics. He has also worked as a vice president at Lexicon, a senior economist at General Motors, an economist at Amtrak and the Interstate Commerce Commission, and taught at the University of Missouri and Washington University in St. Louis. He has testified many times and is the author of numerous scholarly and policy articles, including the Department of Justice and Federal Trade Commission 1992 Horizontal Merger Guidelines and 1993 Antitrust Health Care Statements and so on. Let me now turn it over to Dr. Langenfeld, who has an overhead presentation for us.
DR. LANGENFELD: The first thing I wanted to do is thank the Committee for the opportunity to come and speak in front of you. After hearing part of yesterday's presentation, I think you are doing very, very important work, but you all know that, and to some degree I must say I'm a little intimidated by this group of experts, because I'm challenged to think of what I'm going to say that's going to be new to you, who have thought about these issues for so long and in such detail. And also people who have put together some of the biggest mergers, which we have all read about in the papers.
I typically help with strategic planning, and also do a lot of regulatory work. Obviously the merger wave and particularly mergers affect my business. What I thought I would do here today is to take the picture that the investment bankers have put together, and see if I can glue that to some of the issues identified by the regulators that spoke yesterday and addressed by the Committee. So that's what I'm going to attempt to do, and you will see how well I do that.
I'm not going to talk about the international merger wave. My co-panelists have talked about that from a macro point of view. As a microeconomist, I'm going to talk a little bit about the specific motivations for mergers. I'm also going to talk about the competition agencies and how they fit into this picture, and about the current and future impact of merger regulations on the merger wave, on business, and on consumers.
I think we have a lot of convergence between what I see as the motivations for mergers and what the investment bankers have described. But because I'm an economist and we think more simply, I have divided the motivations for mergers into two groups. One is financial motivations for mergers. As Steven indicated before, the current merger wave is different than previous merger waves because in part there is less financial motivation. Although I still see a very strong financial motivation in many of the mergers that I work on, it's less important now than other motivations for mergers.
Let's just think about what the financial motivation is, very specifically and very visually. Partly the motivation can be a cash buying opportunity in a strong environment. You have the choice of investing in your own capital, or you can buy someone else's. It could be easier. It could be cheaper. It's a way to maximize your returns.
The second is relative stock valuation. In the markets that we have seen recently, a very strong market, some companies have been doing better than others. And most of the deals that I see are financed through stock, so in an opportunistic way some companies have been basically acquiring other companies -- not for strategic purposes but because they have stock that they consider to be highly valued compared to another company that they can purchase. Another are tax credits. We who have worked on mergers know we have to get the deal done by the end of the year because there are great tax benefits, which obviously is a smaller focus, but there can also be some long-term gains to be had.
Sustaining growth is another financial motivation. Sustaining growth is something that I as an economist still do not completely understand. The reason I don't understand this is, to some degree, the stock market clearly rewards growth. It's very, very important. But there are some deals where it's very surprising to me that that's going to actually increase the bottom line profitability, given the prices that are being paid. But yet it's still a major motivating factor and it doesn't necessarily mean that there is a strategic component to it. It just means that the stock market rewards that.
Another financial motivation is diversification. Obviously as the economy goes up and down on a macro level, that has an effect on everyone. However in many industries, and I used to work in the auto industry, they perform countercyclically. Diversification can play an important role in reducing the risk of a company. You buy somebody who is going to be strong when you are weak.
I see all of these as being a part of the current merger wave, but I agree with Steven. I think that to a large degree the other motivations, the ones that I'm more familiar with, the more strategic motivations, have been the ones keeping the merger wave going. The most important motivations that I see frequently are complementary products. A lot of times you want one-stop shopping, so complementary products can exist. Complementary geographic coverage can be very important, especially in international mergers. It can be less expensive to expand into a new market by simply buying someone who is there, someone who knows what's going on on the ground rather than having to do those investments yourself.
Also complementary technologies and technology transfer are another important strategic motivation for mergers. In a lot of the high-tech industries, this is part of the motivating factor. It's not just a shakeout of the industries. A lot of times in telecom, drugs, and other innovation driven industries, people are looking for products that complement one another. That is to say, if I need a specific technology to put together a good telecommunications network, I may need your piece to get better access to the international markets, be it a geographic piece or be it a technological piece. I think that's a key driving factor in many of the high visibility, high-tech mergers that we see today.
Protecting intellectual property is also important, once again looking at the international aspects. As you expand throughout the world, intellectual property is not protected everywhere the way it is in the United States and in certain countries in Europe. One way to protect that is for you to actually acquire someone locally, so you do not lose control of your technology. This motivation goes beyond patents. I see a lot of instances of practices that are developed within a company, that are not patentable but you want to protect them. One of the most effective ways is to merge, so you keep that in house so that you can't be duplicated by a joint venture partner in another country.
Also, cost savings are very important. These can be administrative cost savings. A lot of times the antitrust agencies they don't want to hear about these savings, but in general you don't need two presidents, etc., and that's a major cost savings. Sometimes you do need two presidents as it turns out, and that wasn't such a big cost savings as it turned out. Another savings that the agencies don't like to hear about is best practices. It's not trivial to move a best practice in my experience. I worked at General Motors and God knows we couldn't do it easily. It's in general not trivial to move a best practice from one company to another, and that's a very important motivation in many industries. Auto industry is just one example.
Ensuring, and this is a great economist term, "minimum viable scale" is another strategic motivation. In many industries you have to be at least "this" large. You have to reach a certain size to be an effective competitor. And so some of the mergers I see, in fact one of the ones that I'm working on right now, it's one of the main reasons the mergers are taking place. In one merger, there are two big companies. However, they realize they are in an industry where they are being pushed by their relatively small sizes. If they don't achieve a larger scale, they are going to be out of business.
And last, the strategic motivation that the antitrust officials and this panel is primarily looking at, is acquiring market share. Acquiring market share is obviously a way just to eliminate a competitor. I have seen documents and I have worked with companies where that is the major motivation. Often these mergers don't get through the agencies, but that is a legitimate or at least one possible consideration businessmen can have in making a merger.
I see these strategic motivations not going away over time, even with a lower investment level, because of the factors that Steve has described.
Let's think a little bit and change gears in terms of what is the role of the competition agencies. This is something that obviously the panel knows; it's to prevent dominance in local markets, depending on the antitrust officials and the law, and to safeguard against forming cartels more easily. The concerns are focused just on the last of those motivations for mergers that I described. This motivation often doesn't play a very important role, but it is one role and it's one aspect of what motivates mergers.
So in thinking about that motivation, what is the impact of the competition agencies on mergers and what impact should they have looking forward? I look at here, which are fairly simple statistics, the U.S. enforcement trend to see how the U.S. enforcement agencies have monitored mergers over time. The blue chart shows denials of "early termination." This is one aspect of any regulatory review of competition agencies. For those of you who don't know, early termination is going into the U.S. antitrust agencies and asking for an immediate review and clearance in less than the normal 30-day waiting period for the antitrust agencies. The agencies say either yes, or they will deny it.
Here you can see there is a fair number, well over 800 in 1997, of denials of requests for early termination. If nothing else, this indicates that there is at least some small regulatory cost to preventing the dominance or the formation of cartels. Obviously the investment bankers, Ali and Steven, know this better than I do, there is a cost to any delay due to these denials. And days in a big transaction can mean a lot of money and a lot of inefficiency.
In terms of the total second requests, there has been a slight trend upwards. It hasn't increased as much as the denials for early termination, but we are talking about in the neighborhood of 100 between the two antitrust agencies. A second request for anybody who has been in this business knows is a painful process for everyone involved. It is a detailed look through seemingly all of the companies' documents, giving them everything that they are interested in. This is a detailed look that can really go on for months in the United States. We see that there has been a trend upwards. Although 100 mergers a year go through this process, this is a small percentage of the total mergers and not all of these ended up in antitrust actions. Once again, there is a clear potential delay here and the cost of copying boxes and boxes of documents.
However, if you look at it in terms of the overall merger activity, one thing I found interesting is there really hasn't been that much change in the relative number of second requests over time. The main driver of those big numbers in terms of second requests and denials of early termination has been the fact that the merger wave has hit. On a percentage basis, the antitrust agencies really haven't changed that much. Despite having limited staffs and despite an unprecedented number of mergers, the agencies are still out there doing about the same amount of activity in the U.S. that they have been over time. I can't discern any trend there.
However, outside the United States, there has been an increase in merger review. Once again, the data I am presenting does not reflect the number of actions that were taken. This is just to give you an idea of the level of activity. As was indicated yesterday by Mr. Van Miert, there is a dramatic increase in the number of merger filings at the EU level. As you can see, it is over 180 in 1997. This is a fairly big change for them, and they actually have a much smaller staff than in the United States. So they are actually seeing a lot more -- and if anything, in my view and experience, the staff of the Merger Task Force is running a lot harder than they have in the past.
The number of initiating proceedings really still only is in the 6, 7, 8 level. But these are important mergers with a significant impact on all the economies, and there is a slight trend upward. I don't know whether that reflects the pinch that they are feeling on their staff or whether they are just being very good about deciding a lot of these mergers don't really have an antitrust problem.
But given those figures, what's the impact of antitrust review of the mergers? There is a tradeoff to economists at least, because -- I have already mentioned -- the review results in delay. Economists focus on economic efficiency primarily, but in some sense we had a debate in the 1980s and it went over to a consumer welfare standard. Taking that as the basis, the tradeoff tends to be: is there a significant reduction in competition compared against the costs of delay and the costs of denial. And how does that affect consumers, because the cost is a cost. Someone is going to eventually pay for these costs either in terms of a product that they didn't get, or those costs are going to be translated into higher prices at some point in time.
The impact of merger regulations on these tradeoffs is important, and I know the next panel is going to talk about this. In particular the institutional impediments to efficient mergers can be very significant, because the vast number of mergers turn out to be not a competitive problem.
In part, I think there are several things that are going to impact a merger beyond the cyclical nature of the global demand and beyond the specific markets where technology and strategic factors are fueling the mergers. One of these influences is what is going to happen with antitrust enforcement. I do see increasing scrutiny outside of the United States by several individual competition agencies, although not all of them. There is more regulatory activity going on, and more activity means either more delays on efficient mergers or perhaps better focus and more analysis of potentially problematic ones.
Different legal standards can be a real problem affecting many mergers. I worked on several international mergers over the last year where it's become clear to me that the consumer welfare standard in the United States is not the governing standard. Dominance is the one that's recognized by many countries and, to the extent that the consumers are an issue, it's a second step. For example, the EC goes into the relevance of consumer welfare in competitive effects analysis, and it's given a lower priority. So in a place like the EC the potential for damaging a competitor, rather than protecting consumers, is much higher. That can lead to disagreements internationally. These regulatory disagreements can be a real problem for mergers where an international company is trying to explain what it's going to do and why it's going to do it. Because you have different rules in different areas, one set of legal standards can create problems for a merger, where the legal standards in another country would not.
Multiple review by agencies will cause increasing problems, even if they enforce similar laws. Obviously the more agencies that look at a merger in a world without true harmonization, the more time and the more cost. There was a merger that I worked on, just finished, where it completely cleared in the U.S. The U.S. was the only place there really could be a competitive problem, and there wasn't. However, the merger needed to be reviewed in Mexico and in Canada. Because of slower filings the merger was delayed because all the paperwork wasn't in. These were not substantive issues. It was an efficient merger and yet the multiple review clearly had a negative impact on it.
Also, and I try to put this as delicately as an economist can, there is the potential for decisions being influenced by factors unrelated to competition. Ignacio de Leon mentioned yesterday that anti-dumping in many ways is a fundamental problem for antitrust agencies because the goals seem to be different. They can be harmonized, but even within a country those type of multiple reviews really need to be worked on for harmonization.
And lastly, even in perfectly legitimate mergers, there is always the reality for the delays in costs that have nothing to do with one of the problematic potential motivations for a merger. So far a lot of the clients that I work with, we go through the strategic phase and then we start talking about what do we do to get this clear to the antitrust agencies. After a discussion with the business people, this last figure shows what they feel like. They look and they see all the hoops they have to jump through, all the forms, and with all respect to the attorneys here, all the attorneys they are going to have to pay. If it's filling out forms, you don't need an economist. If you need an economist, then you do need --
MR. RILL: Can we quote you on that?
DR. LANGENFELD: Yes. Deals I worked on had specific troubles in Italy and no place else. As the antitrust agencies become more active and more numerous, this is going to be a "dead weight" on efficient mergers. That's not to say it doesn't have a good goal and that they are not protecting their consumer interest in their countries. But the one thing I think was raised yesterday, one thing this panel has to look at and think about is all these agencies and what they do, and how is this different in, for example, the United States. Let's take the United States as an example, obviously a place that I do most of my work. We have 50 states in the United States. We have two antitrust agencies which generally divide the market. They collude.
MR. RILL: Not always perfectly.
DR. LANGENFELD: But collusion is not easy. Even with two, it's not necessarily easy. But if you look at that, we see mergers that disadvantage someone. In Chicago, we had a merger that closed down a facility in Chicago. We were very happy in Chicago about that facility. We were going to lose jobs. But overall, it was a wealth creation and a job creation merger throughout the United States. When you have this type of multiplicity of interests, it's inevitable that there are going to be those types of could be conflicts. And I think we have been fairly fortunate in the United States that under Jim Rill and other people at the agencies that we have been able to get good cooperation between the states of the United States to not put barriers up for noncompetition reasons. But that's something that we have had to work on just in the United States.
As these other competition agencies become stronger and more sophisticated, it's going to create a bigger and bigger impediment to international transactions. Generally speaking, I think fairly efficient mergers are used to expand geographically, to exchange technologies, to expand competition from a strong competitor from the United States into Europe and vice versa. There is a real danger to these type of mergers from increased antitrust review, and I applaud the Committee for the work it's doing. Multiple agency review is a problem now, but I think it's only going to become a much greater problem in the future. Thank you.
MR. RILL: Steve? You want me to --
MR. RATTNER: Yes, please.
MR. RILL: I just want to lead off the discussion or participate in the discussion by reacting to some of the comments made by Ali which I thought were very perceptive. I do think in fairness that the selection of the quotes from Attorney General Reno and Assistant Attorney General Klein were focused, the ones you used were focused on the cartel phase of our work. And as you work through Assistant Attorney General Klein's comments, you will see that there is another phase of our work entitled mergers.
MR. WAMBOLD: It's too long for an investment banker.
MR. RILL: I know that investment bankers don't have time but they are fast readers. And in the merger phase I think you will find that the quite reasonable hostility towards cartels does not emerge. I would like to get into somewhat more of a substantive observation in your comment. You suggested the focus on the market share price analysis is somewhat wimpy, somewhat myopic, and I think that's correct. I personally think that's correct. However, I think that it doesn't fairly characterize the analytics used, certainly in the United States and really most other jurisdictions that have a mature merger policy, it doesn't fairly characterize the review process.
Certainly market structure is relevant as a starting point but under the merger guidelines approach is only the starting point. Equally important factors are market dynamics, competitive conditions of the marketplace, likely supply response, facility of sufficient scale. Now there is a debate in the U.S., and I think a very legitimate debate, as to the extent to which the agencies appropriately weigh efficiencies in the market but in many respects they have certainly paid attention to them.
I think that while I agree that a pure structure price analysis would be the wrong way to go, and I don't think it's the way the agencies have gone, I particularly appreciate Jim Langenfeld's concerns with frictions in the process, and I think that's going to lead into the next panel. But I wonder if the investment banker representatives here would give us some thought as to how, after all, we are supposed to advise on competition and enforcement of competition policy, how should the U.S. competition agencies in cooperation with sister agencies in other jurisdictions possibly change their process or fine-tune their process so as not to facilitate error.
MR. WAMBOLD: I think that the agenda for this Committee is what you need to do and what you are talking about. I think that the problem from a practical point of view in putting together a big merger is there are all sorts of elements that involve personal motivations, how many presidents you have and if fewer than two, which one, there are the reaction of competitors, the reaction of suppliers, reaction of customers. People also worry a lot about employees being poached, the key employees being poached, and so uncertainty is the enemy of commerce and that notion is at the heart of a lot of debate about how much the world can continue to tolerate the volatility of the currency swings we have.
So I think anything you can do to streamline and speed up the process to make it more predictable so that business people won't start something that they have a pretty good ability to assess they are not going to bring to fruition. And I must say that from my own point of view, in things that I have been involved in, I have had much more of a feeling that it's a bit of a black box than I think it should be. Now, that obviously suits the infrastructure. There is a lot of economic infrastructure that Jim calls friction, in the form of attorneys, in the form of experts, in the form of people who make a living out of this so there is an entrenched interest in friction.
MR. RILL: I certainly hope that's not true.
DR. STERN: I think it is true.
MR. RILL: Easy for you to say.
DR. STERN: Exactly right. I have no interest.
MR. WAMBOLD: But predictability is important in business. It's hard to come by in the essential elements of commerce like the economy, growth rates; to pile on regulatory uncertainty is really kind of too much.
MR. WOLITZER: The only thing I might add to that is I think in terms of using pricing and market share dynamics, I'm not sure there is a better way as a first cut to look at a particular situation. And to some extent I have been frustrated but also impressed that in the United States when we use the mysterious Herfindahl indices, that they haven't been hard and fast rules, or at least that's the way it's been recently, so that you can get to the other factors that I think are equally important that take place here.
There are a number of different factors that will affect the public interest and consumers beyond just your price and one of your interesting dynamics is you look at several industries and I don't know how much attention has really been paid on its own investment or return on capital as opposed to what the price dynamics would be.
One of the classic ones has always been the airline industry where certainly consumers are more sensitive to increases in airline tickets than many other things. Yet I think there have been studies that at a point in time the industry as a whole has lost money since its origination, and therefore can get a different dynamic as to what would make sense and what really defines competition in an industry like that, so companies' and industries' return on capital in order to promote the future progress of capital investment in the industry should certainly be taken into account.
I think increasingly there will be another factor which is very hard to analyze, which is really in today's technological era, really time to market. There's a great business school notion that has really at the same time been behind what companies have been doing, where frankly pricing doesn't become nearly as important from a competitive standpoint to be able to hit as soon as possible your ability to reach the marketplace.
From a competitive standpoint, if you look at what's been happening with the ability of computers and the Internet and R&D and scientific advancements, which I really think have been staggering in the last decade or two, the way companies analyze time to market and the way they believe if I miss the next generation I may indeed be out of business. The best industry to look at that is the computer industry itself but there are graveyards of great names in the computer industry that literally 10 years later don't exist anymore because they missed the next generation of product and they have disappeared.
And you can get into long arguments as to whether that's good or bad in terms of the economic scene, whether companies should live and die, but when you put the regulatory framework on top of that, again, as Ali says, the regulatory framework shouldn't be what drives the company to disappear from existence but strictly the market competitive dynamics that takes it there. So time to market is going to be a very important notion I think going forward aside from just market share and pricing.
DR. STERN: Thank you, Steve, and thank each and every one of you for really, very helpful presentations. It set the stage just as we were hoping, and really I am grateful for how well you complemented one another as well. Going from the macro all the way down to the regulatory impacts of this merger wave which may still be continuing. I have a couple of areas that I'd like to pursue.
One is this question of the importance of friction, if you will, and whether the regulatory intervention in oversight is of greater concern going forward because as you discussed, the time to market is so much sharper and a competitive consideration. Does it suggest that not only do we have a proliferation problem of regulators who are potentially involved in this globalizing environment, but because of the time factor driven by technology that regulatory friction can become an even greater problem going forward?
I'm wondering if that's something that can be a generalization or if that's more particular just to the "high-tech" companies? I have an answer to that myself, which is that everyone from the retailer as well as the high-tech company has to be able to hit the market and that there is kind of a natural speed-up going on. But I'd like to get your overview of all the sectors in that sense.
MR. WOLITZER: My own view is that it's not limited to just high-tech areas. I think most companies one way or the other are increasingly impacted by the time to market. I think that the pace of that may differ, however, for different industries and therefore the regulatory concerns are a little bit harder to define and I wish I had the answers to those issues.
I think there is a number of industries, I think the financial institutions industry may be one in particular where as I believe there would be a pace of change that takes place there, and that pace will dictate different degrees of regulation from different bodies. It seems that the typical pattern will be the poor financial institution given the regional nature of its business and that you will see the local domestic activity consolidate first in any particular area, or country as that's defined.
Europe will be an interesting example of this. In France, UK, Germany, more local consolidation taking place first to create a certain critical mass and sort of weeding out the inefficient from the more efficient competitor and those will start to emerge more as European combinations start to cross country lines. And then ultimately you will start to see more of a global consolidation as you rise from that and start to cross limited to the United States or into Asia or into Latin America and you see little bits and pieces of that already, but I think the vast majority will take place over time. So there the time to market is defined a little differently. And the concerns of the regulators will in fact change as you go from the country, as you go to an entire continent, as you start to go globally. And so to create a single body up front that will define that dynamic is necessarily difficult because the needs of the constituencies will change as the institutions change their framework.
DR. STERN: Staying on that regulatory friction potential going forward. Do you feel that there are going to be those sectors which will have more regulators participating? We've talked about two dynamics, the proliferation problem in terms of the numbers of countries involved who are antitrust regulators. We talked about this time to market which will put the pressure on even more to the regulatory burden of dealing with this efficiently, but there is also the problem in not only the United States but every country around the world that you have potentially other regulators who are not necessarily antitrust regulators but who are players.
Is that a greater problem, say, in the financial area where you have the finance ministries who want to be players and may have other considerations? Is again that a problem that we ought to take into account, and is it a greater problem in some sectors than in other sectors? The banking one, of course, is the one that you mentioned, but we have got transportation, telecom.
DR. LANGENFELD: I want to pick up on two points. The answer is clearly yes. I do telecom work also. When you have different agencies with different goals and a lot of regulatory power, there is a tension. Think about when the FCC deregulated in theory the long distance markets and their most recent attempt at deregulation was 800 pages. Hard to believe but true. So clearly there had been different goals and different agendas. That's really a problem and a lot of this takes place in the high-tech industry. Some, like computers, you don't really have that problem as much. The antitrust agency is getting more involved, but it's not a recognized public utility with an entrenched infrastructure.
Energy is another where there is multiple regulation, and that's going to make it more difficult as they try to move from giving up the old regulations and putting in competition as an alternative. It's already been a long, tedious process and it's going to continue.
I'd like to pick up on one point, though. When you were asking about the friction from regulation, I have thought about this a lot. One of the issues I think that's a particular problem sectorally for high-tech industries are the tools that antitrust regulators, competition policies, and economists unfortunately use to evaluate it. This is as much a problem, some may disagree, but I think it's as much of a failure in economics as it is anything else. If you are talking about a high-tech industry, and you are talking about "bang, bang" competition. Time to market becomes important, one company is eliminated, another one jumps in.
The tools that we use and we developed over time although good for stable industries are just not necessarily very good evaluations of high-tech industries. Looking just at current market shares may not be informative. You saw what happened to Netscape, what happened to their market share very quickly for either illegal or legal business. Their share fell from 90 percent to 50 percent in a year and a half. Looking at a lot of the indicia, simple and complex indicia, that economists and antitrust regulators use, doesn't necessarily fit very well there. Part of it is we need a better paradigm. We need a better way to understand those and better ways to quantify that.
In part we know that the issues exist but unlike market shares, quantifying the dynamics and weighing them is a very difficult thing. I see that being a particular problem in dynamic industries because these are the ones where there is going to be in some sense the most regulatory burden, because we are using tools that are snapshots of past behavior when it's many times not a very good predictor of future behavior.
DR. STERN: Well, I suspect in general we are going to come across, in the course of these hearings and our investigation generally, comments on antitrust and competition policy practices which may be part or may or may not be part of our charge from the attorney general. We are supposed to be looking at the international implications of everything, if you will, and therefore we can get into these tool boxes that are being used. We can get into Hart-Scott-Rodino and how it operates generally. But it's a pandora's box, if you will, so I'm constantly trying to remind myself that we have to think about the international implications of these things.
MR. RILL: Jim, may I just --
DR. STERN: Do you have a comment?
DR. LANGENFELD: Yes. The only comment I have is that one aspect of that is that different agencies use different tools. Part of the harmonization I think is very beneficial from what you're doing, and I see this in EU decisions, they are moving more towards the same process. The process overall might be improved but to the extent that there is a harmonization of approach, that's something that still needs work.
DR. STERN: Yes.
MR. RILL: Technical question, Jim, on your chart on the EU, the initiation of proceedings, is that actual proceedings involving a challenge that required an adjustment in the merger or is that opening a phase II?
DR. LANGENFELD: Yes. That's phase II.
MR. RATTNER: Are we supposed to wind up now?
DR. STERN: That is a shame.
MR. RATTNER: It is a shame. Let me thank our panelists for three very, very interesting presentations that gave us a very clear picture of what's going on in the macro and micro in the merger arena from a business point of view. And with that I guess we will break.
DR. STERN: That's right.
DR. STERN: We are now moving into session two of day two. We are going to be hearing from a variety of individuals on the question of information sharing and procedural harmonization. These are the folks who we were accusing of being part of the problem earlier. Now you are going to be part of the solution, and Merit is going to moderate you folks so you better stay in line. Merit, do you want to give them their marching orders?
MS. JANOW: Thank you very much. Yesterday we had a very stimulating and rich discussion by leading foreign competition officials. I can't do justice to the comments made on mergers, but I think our task here is to cover some of the same issues with this very distinguished and expert practitioner and academic panel.
Let me highlight a few points from yesterday as a context for what will follow and again, this is certainly less than a complete summary. We discussed the proliferation of antitrust merger control regimes around the world, perhaps as many as 50, including established countries introducing new legislation, such as Japan, to cover offshore mergers with domestic effects. We also discussed the need for greater transparency and heard some very candid remarks by enforcement officials about the challenges to transparency even in established regimes.
We also discussed the evolution of cooperation between jurisdictions, especially bilaterally, and heard some officials speak to an emerging system of soft harmonization on substantive and procedural issues. The issue of timetable differences was identified as a particular problem, and the system in the European Union was noted by several as attractive in part because of fixed time tables. Conversely, differences in timetable between U.S. and foreign jurisdictions was thought by many as an especially challenging aspect of fashioning remedies.
We had a fairly extensive discussion of confidentiality: what is confidential information, how might we define it, how serious a problem are leaks? In fact, no one thought leaks were a problem. We also had a broad suggestion that global concentrations may be calling for a multilateral system for merger control in the distant future. I'm hoping that this panel will give some very concrete analysis and suggestions on the direction that procedural harmonization and information-sharing might usefully go in the years ahead.
In the interest of time, I think I will dispense with introductions -- all of us have your biographies and they are available to everyone here. We have such an outstanding group of experts here that we could use all our time in making your extraordinary backgrounds more fully known to us. I will dispense with that. What I would suggest, unlike the morning session, is that we end with an opportunity for each of you to underscore what you see as the critical factors in this area, but we start with a more free-ranging discussion and let you individually intervene as you wish by raising or putting your nametags on end if you wish to make an intervention.
Let us start by each of you offering your assessment of the procedural differences that you see as the most serious issues for merging parties. Then, let us turn to an identification of what you see as the most useful policy responses.
Anyone like to lead us off?
MR. RILL: Why don't we do it alphabetically.
MS. JANOW: Very well.
MR. REYNOLDS: I really just want to comment on what I see as the main differences between the system of the European Union and the merger control regulation and the United States system because so many of these merger deals are subject to simultaneous assessment on both sides of the Atlantic.
And the first thing that I'm going to say is if we didn't have a merger regulation the problem would be infinitely worse because we would then have to deal with the combination of a U.S. system and up to 13 or 14 different systems in Europe. The fact that we've got a merger regulation should make some of these problems far less than they would be. Even so, between the European Merger Regulation and the American system, there are indeed differences.
The amount of information that is required under the EU system in the initial notification, of course, is very considerably more than it is in the United States, and that in my experience always makes the EU filing assume a much bigger importance in the initial planning stage. And even when parties are not clear that they have to answer a number of questions because they have these things called affected markets, nonetheless they have to put a lot of effort into identifying that they don't have affected markets. The fact that the European notification system requires a lot of information country by country is a problem.
We have different thresholds, of course, in the EU Merger Regulation and the U.S. system under Hart-Scott-Rodino, but that of course is a function of merger control in Europe which is to establish a high level so that only mergers with a community dimension will get caught. And I would say right away on the issue of thresholds that I think as the Commissioner said yesterday, it would be extremely difficult politically to achieve any lowering of those thresholds to bring them more into line with the United States.
The thresholds are something that we are going to have to live with because that has to be agreed amongst the Member States and there has been a long history of, I won't say tension, but negotiation between the Commission and Member States to arrive at a mutually acceptable division of competence between the Member States and the Commission. So on the thresholds I think it's something that we will not be able to change on the European side.
But on the actual process of notification, e.g. what you have to put into a Form CO, those are areas where one could look to achieve a greater degree of conformity. It should also be possible to have greater conformity as to the triggering event -- the triggering event that requires you to notify. In the U.S. you have a much more flexible system, whereas in the EU technically you have to file within seven days of a signed legally binding agreement being concluded. And the Commission won't accept letters of intent as a basis for notification, and therefore there is not much flexibility in the European system. That is something which would not necessarily require the approval of all the Member States, and it is something which the Commission could, I think, work on.
The other area, of course, is what happens in the second phase. The big difference is that we have in Europe a fixed time limit of four months, which means that simultaneous investigations in the EU and U.S. could get out of sync. Now, I think it's a tribute to the cooperation that has been able to take place that this hasn't posed as much of a problem as it could have done and in cases like WorldCom/MCI and the Guinness case, we have seen that despite the differences in the timetable of the review process in the second phase that it hasn't been a problem. But that doesn't mean to say it will never be a problem. And historically, if one reversed history, if in the Boeing case the Commission had taken the first ruling before the FTC, whereas of course it was the other way around, one could speculate on how that case would have come out. So it's not always going to be the case that those things can be satisfactorily and harmoniously dealt with. I think those are amongst the major differences that I would see and I'm sure Barry Hawk could amplify on that.
MR. HAWK: Thank you for the invitation. I'm going to suggest what perhaps is an unconventional perspective. You have accurately heard that there is a proliferation of merger controls throughout the world. What is the problem? The problem to me in our experience is not differences. The problem is volume. The solution is volume control, not narrowing of differences. That suggests to me that the solution is therefore not harmonization of differences, it's minimization of the volume. That's my basic theme.
I think the conventional wisdom is that differences in merger control regimes are the problem faced by private parties. Our experience is that the differences in merger controls do not significantly increase transaction costs. We have learned to live with differences in timing. From our perspective, timing differences is a nonissue. That just gives you another way of playing the tactics and what have you. The differences in filing requirements and duplication of filings, with word processing today and assuming tight coordination by the client, does not significantly raise transaction costs. You have word processors and you do a basic form for around the world.
Again, our experience is that in most transactions the differences in substantive tests does not significantly increase private parties' costs. Again, you need coordination. The client can't have 25, 30, 100 different law firms all doing the same thing. Now, assuming tight coordination by the client, your basic antitrust analysis can be a white paper, 80 percent of which will be used everywhere in the world. And then you tack on issues in certain jurisdictions if you're notifying there. If you're in certain countries -- e.g., Ireland, Belgium or France -- employment is going to be important. So you think about employment and you add that to the filing. The markets are defined somewhat differently in some jurisdictions but the differences in the substantive rules -- as far as costs go -- are not the problem.
There are differences which perhaps raise costs, but they are more of a policy problem. For example, merging parties can face a dilemma or tension between employment considerations and efficiencies. You think about that tension as you run around the world, because in some jurisdictions you are hesitant to say that the merger may be efficient, particularly when what you mean by efficiencies is that people lose jobs. But even with non-employment efficiencies or synergies, there is a fear that efficiencies may make you dominant or strengthen your position. It's something you live with but it doesn't raise your costs.
You don't need to harmonize differences as far as costs go. You want to minimize the volume. Now one way to minimize the volume would be for this Committee in the United States to announce to the rest of the world: "thou shall not have merger controls. We are the only one in that can have a merger statute. You can't." Obviously and appropriately, this is not acceptable. But the trick is minimizing all this volume of merger control and all these costs or somehow try to reduce the volume so that transactions that have little or no antitrust importance are screened out. And that's the answer here to me.
You've got to eliminate all these thousands, tens of thousands of transactions that raise no significant antitrust concerns in order that the costs for those transactions are reduced. It's the volume. I'll just throw out for consideration three possible solutions. First, the notification thresholds could be revised to require assets or sales within the jurisdiction -- transaction-related assets or sales in the jurisdiction. That would screen out a lot of transactions, that one change.
Second, information has to be cut down. My preference today would be for some kind of a two-stage approach, maybe something along the lines of the EC, i.e. you provide a minimum amount of information so the agency can make an intelligent decision as to whether or not there is a concern. If they have a concern, then they can ask for more information, but nothing like the Hart-Scott second request. Understand that what happens in the United States is an American obsession with documents.
Third, I'm a believer in firm deadlines. The firmer and clearer, the better. I think everybody operates better with firm and clear deadlines, so those would be my three suggested changes to try to screen out transactions that aren't interesting from an antitrust point of view.
MR. RILL: How does firm deadlines, Barry, relate to your earlier comment that difference in timing is a nonissue?
MR. HAWK: Well, if you say to me, everybody has the same loosey-goosey deadline, it looks like a deadline but it's not really a deadline because the agencies can force the parties to extend, and everybody in the world has that kind of a deadline. The second alternative is that there are firm deadlines but the deadlines are different: e.g., in one jurisdiction it's one month plus three months and in another you have three months plus four months. I would rather live with different firm deadlines than a world-mushy deadline or a world-form CO or a world second request. If you're going to harmonize, don't harmonize bad law.
MR. RILL: Don't suggest that it's only in an international context that the second request is viewed as an abomination.
MR. HAWK: I'm not suggesting that. I'm a European in this respect. I have no experience with Hart-Scott so I'm voicing non-American shock by what happens in some merger cases in the United States, the second requests. We are unique in the world, as far as I can tell. We are beyond the pale and if we are unique, that means we are smarter than everybody else (because we have these sophisticated economic models for which you need all these thousands of documents) or we are dumber than everybody else and therefore we need all these documents.
MS. JANOW: If I'm not mistaken, Barry, Hart-Scott has some exemptions and screening of foreign transactions so you have some effort to incorporate just this notion of eliminating those transactions with de minimis domestic effects -- leaving open for the instant whether the thresholds are too low or high.
MR. HAWK: No. No. I agree. You want to set a threshold requiring transaction-related sales or assets within the jurisdiction. My sense is that maybe the Hart-Scott threshold is a little too low today for international mergers; certainly the EC thresholds are too high. Other countries are all over the place. But I don't have an exact global number to offer; probably some percentage of gross GDP or something makes sense. But it has to be an Arabic number. I don't think market share is a good idea from the enforcer's point of view. Uncertainly gives counsel flexibility, too, so uncertainty is not always a bad thing from a party's point of view. I know you are not supposed to say that, but it's true.
MS. JANOW: Thank you very much. Phil, would you like to be next and then Gabriel and Michael.
MR. PROGER: As usual, Barry and Michael started us off with some food for thought. However, let me look at this a little bit differently. I believe that one has to look at three discrete and separate areas. One is the notification threshold which I do not believe is a procedural issue. I think it's a separate, independent issue and I agree with Barry. We need to stay away from a market share test or an effects test. The current U.S. financial trigger is preferable. It is predictable and relatively easy to determine. I believe, however, that the current $15 million threshold is too low and should be raised. The second is the procedural harmonization and the third is the substantive harmonization.
I may be in the minority when I tell you I think it is going to be easier in the long term to get closer to substantive harmonization than it will to get to procedural harmonization. I think there is something about procedural harmonization that we do not talk about that we need to talk about. You are not going to achieve procedural harmonization unless you harmonize the culture of the countries involved. And what I mean by that is in the United States, given our Anglo-Saxon heritage of laws, we have adopted basically an adversarial system.
And the whole process is geared to an adversarial system, and the second request is a creature of that culture. I do not think the problem is with the individuals. I think the problem emanates from the culture. If I was at the enforcement agencies, I think I would also be asking for a lot of documents and information. And until there is some agreement worldwide on what the merger investigation process is, I do not believe that there can be procedural harmonization. I think in our adversarial system, that individual is charged with enforcing a competition policy, where in a regulatory system, there are broader policies that can be taken into account.
Almost all of the procedural differences, and particularly when I talk to counterparts across the world, and their dislike for the American system, I think can be traced back to the fact that our system and procedures are born out of an adversarial system. I personally prefer the adversarial system, but it has consequences. And I think it is going to be hard to obtain procedural harmonization as long as you have this underlying difference in the drivers between the systems.
Defense counsel in an adversarial system may react differently than in a regulatory system. Thus, defense counsel may react differently in how he or she provides information, when he or she seeks confidentiality, under what terms, circumstances and timing he or she is willing to give the information. It alters the incentives and changes the process. So I think until we have a unified culture, you are going to have a great deal of difficulty in trying to achieve procedural harmonization. Both parties to this process, particularly in the United States, are going to be reluctant to give up sort of the rights and advantages that they retain in this process.
Finally, the concept of sovereignty. I think that the nations are going to be reluctant to give up a lot of sovereignty. Illustrative of this problem is the fact that in the United States states do not entrust the federal government to look at a variety of transactions which I think are better left to the Federal Trade Commission or the Department of Justice. I think the states tend to be more political in their review of these types of transactions. While that is not inappropriate under our system of federalism, it does lead to less predictable, less true decisions. But the very issues I think that confront us internationally confront us domestically and I do not see them rapidly improving. I have got a lot of other comments on some of the other points but I think it would be a good place to stop and let someone else speak. But I am very concerned about what I call this driver on the system. That is, the different cultures.
MS. JANOW: Thank you very much. Whether we are talking about prospects for procedural harmonization or differences or minimizing the volume of applicable law, may I also invite you to remember and draw out for us the nexus with global transactions as you see it: Is there a differential impact that warrants special scrutiny by this Advisory Committee or identify systemic features? Gabriel. Please.
MR. CASTANEDA: Thank you. I think the main problem that perhaps this solution will face is how to design a system that takes account of transnational transactions being monitored by several merger control systems, and at the same time, trying to reduce transaction costs. I have two warnings before we get into the tools. First warning is that we face many asymmetries between systems. We are talking of basically two systems, the U.S. and the EU's systems which are quite developed, and then you have a large number of systems that are being developed which are now struggling to define themselves. So the pressure you are going to put on the latter systems to internationalize controls is going to be quite substantial. I believe merger control systems cannot be cloned. Systems very much depend on substance and before we discuss tools, we have to discuss analytical differences tied to the goals, as goals are going to define tools.
Before we go into anything else, you should evaluate how easy it is to harmonize goals before we harmonize tools and I suspect that the problem is that before we talk of harmonization, we should talk about compatibility. I suspect that this is the way systems will evolve before we see any real harmonization work. So the first thing to look for would be to look at the different goals of different systems: are systems the same? Do they answer the basic questions why a particular jurisdiction wants to control a specific merger causing effects out of a particular country?
Statutes, although they seem to be the same, are not identical. They show profound analytical differences and then enforcement become a Babel tower: it becomes impossible to understand the languages that are being implied in a specific multijurisdictional transaction. So one would have to look for a system whereby it is transparent to see what a particular jurisdiction is really looking for. Is it efficiency, what kind of efficiency? Is it innovation? Is it allocative efficiency? Is it a combination of the two? How much is consumer protection an issue? Is it a combination of consumer protection versus the others?
The last thing one wants to see here is asymmetries that come into conflict when you see an agency enforcing an antitrust statute which has a chapter about mergers. I worry about a lot of merger activity, which comes to the agencies for free and they even get a fee for it, whilst we see no activity on the cartel area: a lot of work on the merger side and nothing on the cartel side. There is a problem and I would say that before we go on discussing the tools, one would have to look into the goals of the merger system itself. I will stop here.
MS. JANOW: Thank you. I hope later on you'll come back and tell us whether you think that one can change the incentives through some global efforts.
MR. BLECHMAN: I'd like to come back to one issue that a number of people have touched on in terms of procedural differences, which is the second request procedure in the United States. And I was thinking of Jim's question whether this is a specifically international problem or whether this is just a problem with our procedures in the United States that is independent of the global element.
I think that the second request procedure is probably the major source of friction that I am aware of in terms of international transactions, and I think it impacts international transactions in particular for a number of reasons. First, Barry mentioned the "shock" of foreign companies that are involved in second request procedures. In my experience, that is literally true. I have had a number of cases where people call up and say, "I'm looking at this, this can't be right. I mean, this is all of our documents with respect to all of these product lines. They can't want that."
And one of the reasons why I think that impacts foreign companies more than American ones is that they come for the most part from legal systems in which discovery is not the rule, so they are not used to litigations in which you have to produce huge quantities of documents. In such systems there are in fact concepts of privacy, for example, that are violated by the notion of large-scale document production in discovery.
Second, I think that second requests have a particular impact internationally because they discourage mergers that are not only efficient in many cases, but also ones where there are international flows of capital. I think we have an interest in a regime that promotes an international flow of capital, especially when it's coming in our direction. And if burdensome second requests are a source of friction that discourages people from investing in the United States, that's a concern that I think is particular to international transactions and that ought to be considered in terms of its impact.
Now, I understand that second requests affect only some 4 percent of all mergers, but many of those are very significant transactions. And most importantly, many of those mergers -- about half, more or less -- are not challenged or at least allowed at the end of the day without substantial changes, which means we are talking about very substantial, presumably efficient mergers that are being discouraged by a procedure that is peculiar to the United States.
The other thing that is different about foreign companies is that, strange as it may seem, German and French companies, for example, typically write their internal memos and other documents in German and French. And the United States has this peculiar rule in both its antitrust agencies that we refuse to have anybody on the staff of the DOJ or the FTC who will own up to reading French and German, for example. Every document has to be translated into English. So, in the case of foreign companies from non-English speaking countries, we add to the normal burdens of a second request, man-months of work and huge expenditures which profit only the translating services that must be paid to translate all these documents. And it's not only the key documents that must be translated -- it's all foreign language documents, no matter how marginal they are to an investigation.
The final point about our second request system is that, as Barry was saying, we don't have a firm deadline for the completion of a merger investigation. Instead, the time limit for the second phase of a merger investigation only starts to run when compliance with a second request is completed. Thus, there is built into the system an incentive for enforcers who need time to investigate a merger to make the second request as broad as possible to gain that time. Now, whether the enforcers in fact do that or don't do it in a given case, it is certainly the perception of many foreign companies that second requests are made overly broad to achieve that result. And that perception tends to undermine confidence in our system and a feeling that our system is not fair.
In terms of what could be done about this problem, other than having, for example, a fixed end point for the second phase of an investigation, there are a number of possibilities. Phil mentioned that our system is inherently adversarial. I think it is once you hit the second-request stage. However, I think all of us have been through cases where there has been a "one and a half request," i.e., where, after the initial filing you talk with the enforcers. You, in effect, ask what's bothering them, if anything. They tell you, and you produce a very narrow class of documents, and maybe have an interview of a knowledgeable business person to resolve their problem, and it goes away.
And that process, which is I think part of the practice in the United States, is something that maybe could be fostered through making it an official part of the way we review mergers. And the other thing that could be done easily is to invest in hiring some people at the FTC and DOJ who speak at least the most common European languages and stop insisting on translations of all documents.
MS. JANOW: It's interesting that you say that, Michael. In my corporate experience there has been a reluctance to rely on any translation except one's own supervised translation. If you would be willing to rely on staff interpretation that's intriguing.
MR. RILL: Can I suggest two comments have prompted a particular issue, and that is the fixed timetable. And one of them is something that has been in my mind for quite sometime and in the minds of other members of the Committee.
Some of the responses we get in informal conversations with the staffs at the agencies and we kick that around with them is well, it's a nice idea but how does that protect us against the company's refusal to turn over any documents during a second phase or an in-depth phase. We run up against a timetable, the company is saying well, we'll give you this, you just be happy with it or we'll give you nothing. They say that's intolerable. My response is well, it's tolerated by the European Commission. And the response to that is well, they just don't do quite as thorough a job as we do. We have to be more certain than they are. I'm not sure that's a valid answer, but I wonder if you could address that and the balancing problem that's been raised by anonymous staffers.
MR. BLECHMAN: I think, Jim, that how we strike that balance reflects a basic difference between the American legal system and many European legal systems. Generally, we are very intolerant of any uncertainty as to facts and any holes in the evidentiary picture, and we really don't weigh that off against an interest in efficiency or anything else. I think that it's something that needs to be more balanced in a world regime where you recognize that there are certain economic benefits to transborder transactions and to getting them done within a reasonable time frame. Also, there are certainly other tools, besides an infinitely expandable deadline, that can be used to enforce compliance with subpoenas. There are other ways of doing that.
And Merit, to address the point that you raised about don't you always want to control your translations, I think that, in any merger, there are only about a handful of really outcome determinative documents, and it is only with respect to those that you are going to be talking about the accuracy of the translation and what the document really means. The real burden comes in translating hundreds of thousands of documents that are not outcome determinative.
MS. JANOW: Thank you. Spencer?
MR. WALLER: I have a perspective that in many ways is similar to what Barry Hawk says. I'm tempted to say I agree with everything people have said and just let the discussion move on. I do have one different perspective to offer. I don't practice in this area on a day-to-day basis like most of the people on this panel. But I do study and teach it. I agree with Bill, that our system is born out of the adversarial system. I think it's increasingly clear, especially in the area of mergers that we do really have a system that we can view as regulatory, and I think that that can be a key to a lot of this. I think almost everybody who interacts with the system recognizes that in the United States and virtually every other country around the world it's far more important what the agency people think than what the courts think.
And in the U.S., I think it's the same, even though it is certainly born out of the adversarial system and it certainly influences the attitudes and baselines of the people who work in it, but the laws aren't created in the courts anymore in the merger area, it is created through the agencies, through guidelines and through the consent decrees that they reach. And the critical decision is will the agency make a second request? Will the agency challenge it? Can you work out a restructuring that makes people happy?
And it's only the tiniest number of deals where a challenge is made and a district court judge has anything to say about it, and if you view it as a regulatory system, I know that's just an anathema to some people but if you do, I think you have to compare it to some systems and you have to take a look at the same kind of inherently often beneficial or neutral transaction. I think almost alone of the major regulatory systems that are multijurisdictional, companies involved in multinational, transnational mergers do not get the benefit of the bargain. This is a concept and maybe it's related to what you said, the key is volume, not harmonization. My way of thinking about it is the benefit of the bargain.
And I'll give you two examples, it's an issue I raised at your program a couple of weeks ago, Barry, which is when you compare antitrust merger regimes to securities and tax regimes, you have just as many agencies with just as many legitimate interests in looking at a transaction and figuring out who is going to do something and what are they going to do. And, in each case, by the way, there are widespread information sharing and cooperation agreements in both of those areas.
In fact, the antitrust area borrowed heavily from the securities and to a lesser extent the tax in creating this kind of model that we use when we go out and negotiate with other countries. In the securities area, it's a little more informal, but obviously there are many, many private and public regulatory bodies. And to the extent that in the United States a company, especially a foreign company, is adequately regulated by one or more of those foreign bodies, the company gets some major benefits out of the way the SEC approaches it.
And the benefit of the bargain is that the agencies cooperate, but there is either a formal or an informal kind of allocation of jurisdictions so that the company is not getting pecked too many times by different people with different regimes. For example, in the area of disclosure of corporate governance information, the SEC has simply passed regulations that effectively exempt foreign companies to limit their disclosure in the U.S. to whatever they would disclose back home. It's sort of a form of mutual recognition, in the sense of a German company, whatever is good enough for the German authorities is good enough for us for that purpose.
I'm also told by people who work in this on a daily basis, there's a lot more informal deference in the securities area. That once the SEC has the confidence that a company is being regulated by a bona fide securities commission or exchange, that they go easy in a number of ways that never is even reflected in our statutes and regulations. I think in the tax area, it's even more formalized. There are tax cooperation treaties between the United States and dozens of countries. And the cooperation is used to provide a very tangible benefit, in particular, to avoid double taxation and to give companies a degree of certainty in their planning with respect to things like transfer pricing.
It's a model that I think we ought to at least study. I'm not expert enough to be able to say how much of it we can borrow from, but I think there are some tantalizing possibilities. The basic model of both the U.S. model double taxation treaty and the OECD model which came somewhat later, is that a company that thinks it's subject to double taxation can bring that issue to the attention of the competent authority, meaning its own taxing authority.
And the burden shifts, the burden shifts from the company being subject to two or more taxation regimes to the countries having to consult with each other and work it out in order to avoid that double regulatory regime to the detriment of the private company. And it's done quite regularly and routinely.
And to take it one step further in the tax area, and I'm exhausting my information on the subject with this revelation, is the concept of the advanced pricing agreement, where companies that are concerned that they may be subject to different countries' regimes on how they allocate income and expenses can essentially shift the burden to the countries in advance, for them to reach agreement as to who will take a look at what part of the global operations of that firm.
And I think there are other areas as well from the international trade area as part of the WTO regime they are pushing the idea of mutual recognition in many, many regulatory regimes, especially in food and drug law where companies have to get multiple approvals under different standards with different timings. And there is substantial deference for the decisions of one or more regulators. In all of these many settings, there is a point at which the burden shifts from the companies who are subject to the multiple regulations to the governments to work it out.
That's the common theme that I have observed, and that's an area that could be extremely helpful in the particular subject matter that you are charged with looking at and reporting.
And I think these issues have to be viewed at all three stages. Clearly, the vast majority of deals get reported in a burdensome and expensive way and never challenged. We have to address that. Somewhere in the middle is whatever you call the second stage, second request in the United States or the full formal investigation of other jurisdictions. And there is still these issues at the handful of deals where more than one agency at the end of the process has indicated a serious attempt to challenge, unless there is some restructuring of the deal. And I think the people at this table know far better than I do that you can often accommodate one or more jurisdiction's concerns especially if they are not a critical market to the business purpose behind the transaction, but there is a point at which, after having run the gauntlet, you are just getting pecked one too many times and the deal will collapse under its own weight.
And I think we have to address that as well, because that has the greatest impact although in the smallest number of cases. And one of the most encouraging things I heard at the recent Fordham conference was this idea that at least in some of the cases some of the jurisdictions are informally taking a position that if the relief in country A looks good enough, country B will say fine, we are done. We are not going to do anything further or anything different and that's again a notion of mutual recognition and a burden shifting from the companies to the regulators to ensure that double regulation is kept to a minimum so that is the germ of a solution that I would throw out as part of my view of the problem.
MS. JANOW: Thank you very much. I think that theme was echoed yesterday by the enforcement officials, in the merger context in that cooperation breeds cooperation. Cal Goldman.
MR. GOLDMAN: I'm pleased to participate in this discussion and I want to raise perhaps a slightly different tangent in examining the kinds of issues that we are wrestling with in this Committee. We all recognize that there are differences in timing and thresholds and waiting periods and substance and so on. I'm not going to attempt to categorize them because you are well aware of the evolving differences and there is a debate as to whether they add to transaction costs. I believe they do. There is a different view on that but certainly corporations that I have worked with find it astounding to be hit with an information request in one jurisdiction that requires certain disclosure at times even beyond disclosure of the counterpart of the United States. By way of example, we have a discussion today in Canada where the bill before the Canadian Parliament which will in the first filing of a long form require information beyond 4(c) Hart-Scott, in terms of business planning documents. So you can see how that difference in itself raises questions when a business person is operating in more than one jurisdiction as to why we have to file more even in a country like Canada as compared to the United States, and these are legitimate questions. I'm not going to criticize or compliment the issue. I just note that these issues exist and will continue to exist as we face more and more transborder transactions.
One of the ways that I would like to suggest that the problem be addressed is to adopt the adage of walking before you run. Jim and I and others sitting at this table have all talked about the need to move carefully in very small steps, especially when dealing with international issues, or you may trip and fall. And in this regard, it may be worth considering some form of optional filing, this has been talked about on other fronts. In fact, we had a discussion on it about two years ago in an informal roundtable at the FTC that Debra Valentine convened as part of the OECD merger convergence project.
There should be in place a mechanism that permits corporations in the context of a transborder deal, which we are all seeing more of, to elect voluntarily to proceed with a common form. And we can use that as a laboratory for a period of time, for a number of years to try to ascertain the concrete issues and the kinds of problems which may arise. I'm going to touch more on the whole realm of issues dealing with confidentiality and information sharing, but I would like to roll that kind of framework into this optional filing mechanism.
The mechanism would, at least in Canadian terms, probably have to be subject to regulatory approval but not necessarily treaty status, again, walking before one runs. I can't speak with expertise on the U.S. system and whether one could get a deferral from strict compliance with Hart-Scott but certainly in Canadian terms if and when the bill passes before Parliament, the one that amends the filing provisions under the Canadian Competition Act, there will be discretion in the government to change filing requirements by regulation as opposed to legislative amendment. If it can be done by regulation there is no reason why a concurrent optional mechanism can't be introduced and blessed. I'm not going to answer the issue from a U.S. perspective.
If a mechanism were in place that permitted a common form with specific thresholds it probably would necessitate upping the threshold to make it worthwhile from the perspective of merging parties and it may be worthwhile from the perspective of governments as well. You are going to get the ability to work together. You are going to get the ability to share information. There has to be a tradeoff on both sides.
With that in place with fixed timetables, to come back to Barry Hawk's point, which I completely agree with, certainty is essential for investment and to the greatest extent possible should be maximized, with substantive information requirements that would necessarily be different in both jurisdictions because you would have to answer issues between two markets within each jurisdiction. I think this would go a long way to achieve the kind of effective use of time on both fronts.
And that's really what we are talking about, cutting down government resources so that the time can be used effectively and efficiently and the same on the private sector side that Spencer referred to in the MJDS type of system within securities filings. It's working. I have spoken to my colleagues on the security side and it is working. And people can elect, it's not compulsory. You can elect to proceed with an MJDS kind of filing, that works as between the Ontario Securities Commission and the SEC. You're saving time and saving headaches and I have to wonder why the same principle could not be employed in this field.
I would amend my initial statement by saying that I would like to come back to the whole issue of confidentiality because when you ask what problems we are seeing today, Merit, from my perspective talking to business people I deal with in Canada and through other organizations internationally, I really do believe that effective results on the merger front and in other transborder investigations necessitates finally dealing with many of the confidentiality issues that are perceived to be significant by business persons outside of the U.S. in particular.
That has to be addressed, and it may be that if this framework is put into place, it may also be one that spells out a protocol or a series of safeguards upon which the agencies in both jurisdictions will operate, vis-à-vis issues such as risks of downstream disclosure, lawyer-client privilege, questions of notice, any other disposition information and so on. I will come back to that but it's a real problem. It's a thorny issue. It's not a simple one. If it were, it wouldn't have been part of the IAEAA. Thank you.
MR. RILL: Let me just intervene for one second before we get to Mr. Murakami. One idea I thought out yesterday, I'm not going to go through the whole litany, but if you want to react to it on the confidentiality issue and that is, some framework of prohibition of downstream disclosure, including to perhaps other agencies, certainly other agencies. We would have to do something with the EC and their advisory committee, but the other thought I had was an absolute privilege against third party discovery of the information in the hands of the one supplying the information.
The problem is when the information is shared by a third party, let's just say the hypothetical Attorney General of a state in the United States, although they would never think of doing something like this, then says well, I can't get it from the Department of Justice so I'm going to subpoena it from the party who supplied it. Why not have that absolutely privileged in the hands of the party who supplied it?
MR. GOLDMAN: Jim, that's the kind of safeguard that should be explored. In fact, today, as you well know around the Canada-U.S. Mutual Legal Assistance Treaty, it's my understanding from experience in that field that a state attorney general cannot obtain access to the information that the U.S. Attorney General has and may in fact, arising from a grand jury proceeding, disclose to the Canadian Attorney General. So these kinds of walls if public policy dictates, can in fact be established. There is precedent for it on both fronts and the state attorney general would have considerable difficulty going after the Canadian Attorney General, for obvious reasons.
Jim, it does require articulating the risks of downstream disclosure not just to public officials in other agencies in federal governments and state levels, but also, of course, private plaintiffs and more importantly state-owned enterprises that may have access to information through other channels.
MR. RILL: I'm suggesting there is precedent in the U.S. census laws. I'm suggesting that if the Goldman Corporation gives information and the Goldman Corporation has offices in Canada, gives information to Canada which then transfers it to the U.S. Department of Justice, that that information is absolutely privileged in the hands of the Goldman Corporation. In other words, the plaintiff cannot come after that information that's been prepared and sits in the files of the Goldman Corporation.
MR. GOLDMAN: I think we would find a lot of business people pretty sympathetic to that.
MR. RILL: It happened in the census case, in the St. Regis Paper case. They passed a law to protect that privilege.
MR. GOLDMAN: Jim, the problem today in merger cases, and it's one I raised before, is that there is no publicly articulated framework which governs the sharing of information. Again the IAEAA excluded Hart-Scott filed material from any IAEAA type of disclosure, there is nothing more than good will, and I'm not suggesting there isn't good will, and the usual confidentiality provisions that each agency has to work with. But these are negotiated on a case-by-case basis and often the terms upon which there was cooperation are not made public.
Now, I took a look before coming down here at the number of cases where there has been cooperation at least between the Canadian Competition Bureau and the U.S. antitrust authorities as publicly reported recently. They include cases like Ciba-Geigy/Sandoz, many involve Brussels as well, Grand Met and Guinness, Kimberly Clark/Scott Paper, the recent Waste Management case, Price Waterhouse/Coopers & Lybrand and so on. These cases are ongoing without a public framework governing what has taken place.
MS. JANOW: Thank you very much. Mr. Murakami.
MR. MURAKAMI: When considering harmonization, harmonization of substantive standards would be extremely difficult in my opinion. In addition, each international merger has a different impact on each country or each market. So, for example, while we all could agree on the same merger guidelines, such as U.S. 1992 joint guidelines, even so, probably each agency would reach different conclusions and a different remedy.
Moving to harmonization of the procedure, when we are talking about harmonization of the procedure actually we are talking about two different kinds of problems or issues.
The first issue is related to the multijurisdictional international merger which notification is required in several countries, but that merger has no serious competitive impact or only one country has a serious interest in that merger. In this situation, the main concern or the main issue is how to reduce unnecessary burdens on merging parties.
In this respect, actually almost all harmonization of the procedure is welcomed by private parties, including a unified form, establishing the same timetable for merger review, and also common notification thresholds. Among them probably notification thresholds is the most crucial issue. A second issue is related to multijurisdictional merger, to which more than two countries, more than two competition authorities find a very serious competitive problem and decide to issue a second request, or open a so-called full-phase investigation. In the EC procedure it means the case where a competition authority initiates formal proceedings.
In this kind of a complicated international merger, the main issue should be how competition authorities coordinate their investigation activities and coordinate the remedies. In this second international merger probably setting a common form, namely a standard form, is almost meaningless because each agency tries to collect any documents or information until their own standard of investigation is satisfied, and this satisfied standard is in fact very different in each country in my opinion.
And next point is information sharing. Information sharing is a more important issue and may be useful in coordinating investigations and final remedies. And this is my opinion, merger investigation is a little different from other antitrust violation investigations because the merger review process is not always adverse to the merging parties, sometimes it is beneficial to the merging parties. So in my opinion it's not so difficult to get consent from merging parties to waive confidentiality.
With respect to the second international merger, the most crucial point is establishing the common timing of filings and establishing the same timetable for review periods. If we agree on such kind of common timing and timetable, it will be useful in every respect, including information sharing.
Okay. I'll stop.
MS. JANOW: Thank you very much. I know that Michael Reynolds needs to depart shortly. He also has provided us with a very interesting paper which we'll share with all participants and the general public shortly. Michael, in light of your need to depart, could you offer us your parting wisdom.
MR. REYNOLDS: I will be self-regulating in my timing because if I go on too long I'll miss my plane. Everything I'm suggesting is in my paper but I did want to pick out some comments that I heard. I always hate to disagree with Barry Hawk but I do disagree with him on the point of transaction costs and the fact that differences don't create a problem. In my experience, the fact that in an initial notification we are asking fundamentally different questions in a Form CO to a Hart-Scott-Rodino report is a problem. When you talk about transaction costs, it's executive time. I think if you ask most companies what is the cost, it's the cost of executive time, and in my experience the cost of executive time in dealing with different questions, questions of a different orientation, really can be a substantial problem.
Whereas I have heard that the second request is the bugbear here, certainly for us in the European system it is the Form CO. I know the Commission is looking at ways of modifying that, particularly for transactions which have little impact in the European Union. The problem is at the moment that quite a number of large international transactions, for example international banking mergers, have very little competitive impact on the European Union, and even with the waiver system that the Commission does employ, the notification of such deals is very onerous despite the fact that they rarely give rise to serious competition problems.
The Commission, if they were sitting here, I think would say that is the price of time limits. They have to have this information up front because that's the only way they can operate the time limits. And I'll just come on in a moment to say that often an explanation for not changing anything is the question of resources and I think that's something that has to be addressed.
Second, Phil Proger made the point that it's often very difficult to change procedure without changing substance and often it is difficult to come up with an idea for a common form. You know, the agencies in France, Germany and the UK, very courageously and valiantly and very helpfully suggested a common filing to help overcome some of the differences in their jurisdictions and to make it easier.
Well, the reality is that that form hasn't worked that well, although I think it was a great idea. The trouble is trying to combine a common form with systems which are really quite different, and particularly systems which require compulsory notification and those that don't. Of course, that wouldn't be such a problem between the EU and the U.S.
Finally, a lot of improvements could be made without very, very major steps but obviously sovereign states in the world again find it very difficult to give up jurisdiction and the idea that Eleanor Fox has often suggested of a single passport, with first notification having preference, I think is going to be difficult to enforce but there are other modifications which could be achieved. For example, within the European Union something that's crying out for change in my view is greater harmonization between the Member States own national laws.
After all, we are meant to have a single market, we have the legislative means to achieve greater harmonization and it's encouraging that the Commission is contemplating either soft harmonization or possibly even a directive I think to try and address the problem. It is a very severe problem, because I can tell you in a lot of cases that come to us, you know, when you point out to clients the difference of coming out of the Merger Regulation and having to file in what is possibly now 12 jurisdictions, it can sometimes be enough to kill a deal for an American corporation. And so therefore that is something which ought to be dealt with because a lot of cases fall below the EC Merger Regulation thresholds.
And other minor changes are possible such as a more flexible approach on what is the triggering point for notification. Again the answer that the Commission in Brussels gives on that is that if they had to look at letters of intent, companies would keep changing their minds and the Commission would have employed a lot of resources unnecessarily.
I think on the resource issue, what is often lost sight of, is that certain reforms, such as a less onerous notification for mergers which don't really raise major problems would actually ease the burden in one area and enable the deployment of resources elsewhere. But I think there must be a happy medium and if it takes more resources then more resources should be made available to achieve some of these changes because they are not big changes. But the answer one always gets is that "we don't have resources."
On the U.S. side, it does seem to me from experience that it's the second request side of the process which really creates the most problems also for European companies involved in mergers. This problem of the EU and U.S. second periods of review falling out of sync is not only theoretical.
Finally, there is obviously going to be a very interesting discussion on confidentiality in these hearings. I do agree entirely with Jim's suggestion that we must have some downstream limitation of disclosure. Most clients and companies in my experience are worried most about documents being handed over to the European Commission and what happens to them particularly in an expanded community of 20 Member States when documents are sent around to 20 capitals, which will soon include a number of new capitals, not necessarily familiar with the process. And I think that is a major problem which will need to be addressed, and there are solutions for that.
MS. JANOW: Thank you very much. Before we let you go, let me ask my colleagues if there is anything else you would like to ask Michael.
MR. RILL: Michael, one subject you haven't addressed, or maybe you've addressed it in the prepared statement, but if you have just a moment to address an issue that's come up a number of times, let's call it uncertainty, transparency. Barry seems to think that's not much of a problem. I wonder if it is a problem and how you would deal with it.
MR. REYNOLDS: The general problem of uncertainty?
MR. RILL: Uncertainty of results. Not so much the friction in the system, but the question of, with the volume of agencies, is there something that can be done to improve transparency? Now, we are advising initially at least the United States, whoever else may read us after that, but in the United States that's something of a problem, one of the topics.
MR. REYNOLDS: Well, certainly within Europe, I mean a greater transparency between the Member States and a much more harmonized system would lead to greater certainty because at the moment of course you can run into problems in Ireland or new countries like the Netherlands that have adopted merger control. And actually the problem in Europe is getting worse rather than better with the proliferation of merger systems. And we have got five new Member States coming into the European Union. It is doable within the European system to have more harmonized national merger laws, whether it's through soft harmonization or hard harmonization.
If you ask me on an everyday basis what is the biggest problem? That is the biggest problem, the number of states in Europe with very different requirements, filing requirements, time limits, substantive tests. They all differ. And it really doesn't make a lot of sense in what is meant to be a single market. And that problem, if it's not controlled will get worse rather than better so that is the one thing I would propose for greater transparency. This would help a lot of international transactions, and of course it's not just a European problem. But in Europe we do have the means to remedy this. The present system affects and infects international transactions, a lot involving American companies.
MR. BLECHMAN: Just one last question, Michael, if it's not going to make you miss your plane.
MR. RILL: It's really all right with us if you miss your plane. In fact we would probably endorse it.
MR. BLECHMAN: You had mentioned that sometimes if you don't have an EU filing, you have to file in a number of Member States, that it can be a deal killer. And I wonder, from your perspective, whether what makes it a deal killer is just the cost of multiple filings or is it the fact that some jurisdictions are known to be tougher than others and therefore it's not something that procedural harmonization will cure, you somehow have to have substantive harmonization?
MR. REYNOLDS: I think the cost is not inconsiderable. What's much worse is the uncertainty particularly when there are competitive issues because even though it's a case with lower thresholds, that can still raise very significant competitive issues of course in individual Member States. And perhaps it's the lack of certainty of outcome given the range of jurisdictions.
Of course, you can manage these things and in our firm we regularly do this. We have achieved ways, as other law firms have achieved ways of managing this process. The trouble is the process is getting more difficult to master because more Member States adopting merger control means an addition to the problem. And as I say, it's a problem getting worse rather than better, so it's a problem that's harder to deal with rather than easier to deal with. Sometimes that does make clients really move mountains to come under the Merger Regulation. We're not going to have a reduction in thresholds, so the only other change that there must be is soft or hard harmonization between the Member States.
MS. JANOW: If you have time.
DR. STERN: My question is about leakage. You can answer it later if you wish. As you know, I think you were in attendance, I went around and asked all the authorities yesterday about confidential information and we got I think a 100 percent perfect report card from self-tested individuals who responded that they have not had any leakage in coordination with -- and also within -- their own jurisdictions.
You have now mentioned the vision of 20 capitals receiving information, particularly as the EU expands. Did you agree with the folks yesterday who said that they have 100 percent good behavior, and do you feel therefore that this concern that we often hear from the business community particularly in Europe about further harmonization with the United States on merger matters is troubling to them because they fear they are going to lose out in essential confidential information going the way they do not want to go?
MR. REYNOLDS: I think, you know, the record has been very, very good, particularly, the record of the Commission in Brussels. I think there is a very legitimate concern there because of course as you have more Member States the possibility becomes a greater one and I'm certainly not saying that this is something which happens a great deal, and often one wouldn't know necessarily if it did happen because you could have leaks within a government ministry, you know that officials have seen a document which is then in their memory. And we had a case in Europe, the Spanish banks case, which has limited the extent to which an authority can rely on documents which it has received for one purpose in its own proceeding. But that doesn't induce amnesia.
MS. JANOW: Thank you so much. We appreciate it.
MR. RILL: Thank you very much, Michael. Fly safely.
MS. JANOW: Phil Proger has been very patiently waiting. I think you get the last comment, Phil, before we break for lunch.
MR. PROGER: Just a few quick ones. I think we have to be very careful in talking about these problems. One has to concede that right now both in the United States and Europe, which are the two, in terms of at least volume, preeminent merger reviews right now, that there are not a lot of transactions that are undergoing undue scrutiny that have no competitive issues associated with them.
The enforcement authorities are focusing on transactions that raise concerns. Now, there are differences on what the standards should be and the procedures but we do not have a lot of horror stories about transactions that no one would think is a problem suddenly being reviewed. I am not sure that is going to be true in the future with the growth of merger review by many more antitrust enforcement agencies. So I think there is something to really be concerned about in the future.
Second of all, with respect to Spencer's suggestion, I like the concept of borrowing from the SEC and the tax regimes. Unfortunately, I think there is an essential difference between antitrust enforcement and those regimes that makes it difficult to model an antitrust process around them. In contrast to securities or tax laws, antitrust is intensely geographic. There are a few transactions, the one that immediately comes to mind is McDonnell Douglas/Boeing where I think truly the effects are worldwide. There are not that many airframe manufacturers and there are not that many purchasers and the purchasers are international and the market was international.
But in most transactions, even if they are of large multinational corporations that have effects in a variety of jurisdictions, the effects are factually intensive to that particular jurisdiction and that geographic area. And you can have a transaction that may have significant effects on the United States and the European Union but have different anticompetitive aspects to those effects in both those jurisdictions, and unless we are prepared to cede jurisdictional authority from one to the other, you are going to have multijurisdictions looking at the effects locally and wanting to protect their individual citizens.
And so the inherent linchpin of antitrust analysis -- facts, and factual intensity, makes it more difficult to apply operating rules across the board in this area than other areas.
MR. RILL: It seems to me that, first of all a little anecdote, the 1991 agreement between the U.S. and the EU had its genesis in the visit that Leon Brittan paid to me in 1989 suggesting something along the lines of Spencer's proposal only somewhat more formally -- a treaty on deference. I suggested that would be politically somewhat difficult in the United States. But it led to I think a very useful agreement.
The possibility of what Michael refers to as soft harmonization might however suggest itself in the vein of some kind of soft deference, and I think as a practical matter, we have seen examples where there has been deference. In the Federal/Mogul case the FTC said we took this action, there may be other questions to it, but we took this action which would satisfy the Federal Cartel Office.
Those types of proposals, if there is some standard for soft deference, that might be useful. Remember the 1991 agreement itself embraces not only the notion of positive comity but also the notion of traditional comity. I'm not sure how widely applied that's been but I take your point that a treaty on deference would be very difficult. But maybe something that moves in that direction, not so formally, is something very worthwhile exploring.
MR. PROGER: To say it is difficult is not to say it is not laudatory. I think it is laudatory but I think this group is going to have to think through how you approach it. I'll follow through an example. I won't use the one you mentioned because I was involved in it but let's say two European Union firms --
MR. RILL: That was a matter of public record in the FTC papers. I mean, we're not divulging any secrets.
MR. PROGER: Right. Let us take an easy example. What do we do with a situation where we have two corporations that are headquartered in the European Union. They agree to merge. Through subsidiaries, I'm actually thinking of an actual case, one in Brazil and the other in the United States with the Brazilian subsidiary also having operations in the United States. Thus, you have the merger of two out of three U.S. suppliers of a product that because of freight and other costs has no other substitutes immediately available in the United States.
Who takes the lead on this? The merger is between two companies headquartered in one member state of the EU. And there were no competitive effects in that member state, but in the United States, at least in the opinion of one of the federal enforcement agencies, there were significant competitive effects. And I think having a process to agree on what rules apply is important.
I would add two other issues to complicate the analysis. The merger in part was driven by public policy on jobs and environmental concerns in the home nation and was somewhat brokered in part by governmental officials. So there were public policies, other than competition, involved in that particular transaction.
Thus, does the United States or whatever other countries in which there are competitive effects cede the investigation to the nation that has the merging parties domiciled there? Does the United States rely on that nation to enforce U.S. competition law? Does the nation that has the two companies which are merging cede to the United States the competition issue?
On your confidentiality point, I would just say two points. One is I do not think a lot of transactions are not going forward because the companies are concerned about confidentiality. Maybe I am just dealing with the wrong people, but I have not seen that.
I do think that you are exactly right, Jim, that there ought to be an operating principle of how confidentiality works. I would submit to you that your formulation is not altogether different than the way we look at the dichotomy between transactional and use immunity in the United States.
Perhaps there is some rule that if you turn over the information, it can only be used for that purpose and if at any point anyone seeks the information it is seeking party's burden to show that they did not know about the information or were not advantaged by the prior turnover. And so I think, Jim, you have got what is the beginning of a formulation that works.
And then finally, on the issue of the timing. I think that this is a factor that's underestimated. I think that people have to realize that one of the significant concerns of businesses across the world is timing. A transaction often puts the merging parties on hold for four to six to nine months has unintended consequences that often are pretty significant to its long-term competitive vitality. And I think there are a number of situations where businesses simply do not want to take the risk of a lengthy investigation. I think it affects them in the marketplace, whether customers are willing to sign long-term contracts with them for example and in other ways.
Having said that, and having made my earlier point that I think that this problem is only going to occur in a few cases that are unique and have competitive issues, I do not have a ready solution to shorten the process. Those transactions that truly raise competitive concerns need to be fully and adequately vetted.
I do think that it could be the parties who have a desire to speed it along do have some control over this, and they could give information more up front more readily. Having said that, I'll go to my original point. In an adversarial system if you believe that the consequence of providing more information and providing it sooner, rather than later is to increase your chances of being challenged, you have an incentive not to do that.
MS. JANOW: Thank you very much. You have given us a lot to think about. In deference to the hour, perhaps we should adjourn for lunch, resume promptly at 1:30 and then rise to the challenge, Phil, that you have raised for us, which is to think of the specific policy responses that could address some of the problems that you have identified including questions of deference. All speakers and participants are welcome to a meager sandwich next door.
MS. JANOW: Good afternoon. Let me start off this afternoon's session with just a procedural clarification. Several people have asked me how their words will be memorialized, and I just wanted to let you know that this lady is producing a transcript of what is being said, and once you have reviewed your comments to correct transcription errors, that document will be put on our Web site and made available to the general public. We also intend to make available all of the papers that you kindly produced for our consideration. I hope that this discussion and indeed these three days will stimulate interest in further contributions to us. We are very eager for your input and we welcome the opportunity to share that with the Committee members who are not able to join us today.
So with that --
MR. RILL: Merit, just another preliminary point. I'm delighted to be able to put on the record that serious offers are being made by the leadership of the antitrust side of the ICC, the ABA and the IBA to get us a joint project on the confidentiality issue that we were talking about this morning. Hearing no dissent, we appreciate your comments.
MS. JANOW: Whose dissent? Would there be absentia dissent?
MR. RILL: The ABA's antitrust section and the IBA antitrust section and the ICC and its antitrust competition working group.
DR. STERN: You know, we had a lot of conversation about this yesterday and again everything is being memorialized and if you see the colloquies there, it will, I think, help sharpen the focus at least of my interest because I put a lot of questions on the record yesterday.
MR. ROWLEY: May I just for the record correct that I am not the head of the IBA antitrust section. That is Kevin Arquit but since I am head of the business section which incorporates the antitrust section, I'm able to speak on their behalf.
MS. JANOW: With that good news to kick us off, let me now ask that this distinguished panel now help focus our attention more specifically on what would be the most useful policy responses by the United States, as well as other jurisdictions; what incentives should we think about undertaking to encourage jurisdictions, including our own, to consider new approaches?
We identified for your consideration in advance of today's session a few ideas that I think are actively being debated. For example, some have argued for a promulgation of a procedural bill of rights to make regimes more transparent, and guarantee certain due process rights. Alternatively, countries could agree on mutual recognition of a first-filed notification.
It was mentioned earlier, and Eleanor Fox has called for global merger review, or a global clearinghouse authority of some kind.
The idea also is on the table that countries might agree not to require premerger notification in the case of transnational mergers where the companies have few or no assets in the jurisdiction. I think this point is implied perhaps by Barry Hawk's comments this morning. So, please amplify what might be useful responses by the United States. Don't be reluctant, if you are not from the U.S., to opine on U.S. practices.
MR. RILL: Barry?
MR. HAWK: One solution, as I see this as a volume problem, is to revise the notification requirements. This is a problem separate from the amount of information required. You have two separate problems. One is notification of transactions which have little to no antitrust interest under anybody's notion of antitrust law. The second problem is how much information.
The first problem concerns the capturing of too many transactions of no antitrust interest. I think one way of getting at that is to revise the notification requirements. Although it is difficult to get jurisdictions to change their law, I think there is a relatively simple solution that would significantly reduce the problem, and that's just requiring no more world thresholds. That is, notification would be required only if there were transaction-related sales or assets within the reviewing jurisdiction.
Yes. There may be some horrible law school example of a world merger that has an anticompetitive effect in the jurisdiction despite the fact that neither party has sales or assets in the jurisdiction before the merger. But that is such a remote possibility that I wouldn't worry about it.
That change alone I think would reduce a lot of the filing, and that would be important. A clearing-house is out of the question.
MR. RILL: Would that help in the U.S., though?
MR. HAWK: Well, you already have a U.S. asset and sales requirement in the U.S.
MR. RILL: But a very low one.
MR. HAWK: Well, I don't have a concern about that today. You have to have a sensible number.
MR. RILL: Well, the number is about 4,500 and climbing, filings every year.
MR. HAWK: When you look around at world thresholds, it seems to me the U.S. has done a good thing by requiring sales or assets in the United States. That's a good thing. But maybe the number they have come up with is a little low. It's an old '70s number. It hasn't taken into account inflation, et cetera. So the number may be a little low, but the concept is good.
There is a trend in the world now. The Germans are amending their law to expressly require sales within Germany. That will come into place in January 1999. Austria had worldwide thresholds. In fact, if you went to the wrong local counsel, the local counsel would formally cite the statute which speaks of worldwide sales, therefore everybody has got to notify in Austria. But the Austrian Supreme Court sensibly came along without a change in the statute and said well, that doesn't make sense, so what it really means is Austrian sales.
If everyone did that, that would go a long way, just that one change.
MR. BLECHMAN: Just to address one of the other things you mentioned, Merit, because we really didn't talk about it before the lunch break, that relates to this procedural bill of rights, and particularly the subject of transparency. We didn't really talk about transparency before, and transparency is something that's generally discussed when one is talking about comparative law and different antitrust regimes. I think it's less discussed with respect to our own antitrust system.
It is my impression that we do very well in the United States in terms of transparency as to what the rules are. We have merger guidelines, we have international enforcement guidelines. We have lots of speeches. We have a lot of disclosure as to what people are thinking in terms of the normative principles that should govern antitrust.
I think that there is, in our own antitrust agencies, less transparency, at least less uniform transparency in terms of the decision making in a particular case. That is varied depending on the individuals that you are dealing with in a particular agency, how forthcoming they are or are not. And I think people who have dealt with the Merger Task Force and with our FTC or Justice Department tend to think that they get an earlier indication, a more reliable indication with the Merger Task Force as to what's going to happen on a deal.
I think sometimes that will happen here, too, but in the FTC, for example, there are certain institutional characteristics of the agency that impede that. For example, it is axiomatic that policy decisions are ultimately made by the Commissioners. No one on the staff wants to speak for the Commission or for any individual Commissioner. One example I can think of from my own experience involves the Oerlikon-Buhrle transaction. On the remedy side of that there was the question of whether divestiture could take place through an IPO or not. That was investigated I thought very ably by the Competition Bureau and also simultaneously by the Economics Bureau.
Finally, we found out there was a problem but it was not clear what it was. We only knew there were mixed recommendations on the issue. So we went through this procedure of speaking to each of the five Commissioners individually, and I had to explain to this client, who was from Germany, that this was not really from Mars, that this was really the procedure in the United States to go and talk to each of the five. And in the course of doing that --
MR. RILL: From Hell, perhaps, but not Mars.
MR. BLECHMAN: It was only during that process that, for the first time, we really found out what some of the problems were that the Economics Bureau had and were able to address them. Ultimately, the IPO was approved 4-1 by the Commission. But what was missing -- and what I don't think we have is a general principle -- is an overriding principle of transparency as a procedural right that should get translated into knowing what the decisions are in an agency at each stage -- what the recommendations are and the reasons for them -- so that you can fairly address an agency's concerns.
Sometimes there are obviously countervailing considerations in terms of protecting the investigation and so on. But I don't think that we really have adopted transparency as something that should be carried through in the terms of the reasons for decisions at each stage so that objections can be addressed clearly. And I think that would be a useful principle. Maybe there are other principles for the procedural bill of rights, but if that one -- transparency -- were adopted generally, including in the United States, I think it would be helpful.
DR. STERN: May I pursue that? What about just at the final stage, taking baby steps to at least have something at the final stage where it could be a useful guide for the perplexed in future cases?
MR. BLECHMAN: Well, I think we generally do pretty well there. With the FTC there are decisions that usually are in writing. With both agencies there are speeches which refer back to cases that indicate what normative rules are to be drawn from them.
DR. STERN: Are speeches satisfactory?
MR. BLECHMAN: Well, I think along with a lot of other things they help. But from a lawyer who wants to meet objections, argue the point and win, it's nice to know earlier on a particular decision what it is you are up against.
DR. STERN: No. I appreciate that and I'm not taking away from the need to have it at each stage, I'm just saying at a minimum in the final stage other than just in the form of speeches, et cetera and for you to address the need for jurisdictions in other countries to do the same?
MR. BLECHMAN: Actually upon reflection, Paula, I think that may be a good idea because, as Spencer was saying, merger law is increasingly being made administratively, so probably the same kind of reasoned decisions in each case that you get with a court decision would --
MR. RILL: Maybe not, though. Let me just press the point a little further and challenge you on the notion that you have expressed. I think the U.S. has not done nearly so good a job as the European Commission, in explaining situations when actions are not challenged, when mergers are subject to careful review, and some notoriety about it, it's not challenged. Boeing/McDonnell Douglas, the FTC came up with a three liner. A good three liner, but it was a three liner.
The Commission routinely, at least in several paragraphs, points out that we did this merger and for this reason didn't challenge it. Most merger law is made by inaction or by consent. I think because of the proliferation of international mergers this has international dimensions, because of the Tunney Act the Justice Department has to go to court, file a rather comprehensive statement.
Because the FTC is not subject to the Tunney Act, its statements to aid public comment in its consent orders are quite often, not always, but quite often, rather poor copies of the complaint. Maybe there can be more done in transparency there.
DR. STERN: You know, again to add a point to this, based on my experience at the International Trade Commission, we had to write opinions, and it was supposed to help, again, to those in the future to see whether they had a meritorious case or not and what was guiding the outcome of the decision. And frankly when I listened to Professor Handler give his lecture at the Justice Department where many of us were there, I was most impressed by just this point, how little is actually written down and available for clarity's purpose and precedence purposes going forward.
MR. BLECHMAN: I think Jim's reference to Commission decisions has persuaded me, now that I think about it. I think probably we could do better.
DR. STERN: Good.
MS. JANOW: Before we leave the transparency point, what about later phases? I have heard, for example, that foreign jurisdictions have a more competitor-driven process that has less transparency associated with it than other jurisdictions. Would anyone care to comment on transparency in the U.S. as well as abroad?
MR. PROGER: Well, I guess I share Michael's reaction. I think you have got to really distinguish between two different situations. One, an adjudicative process where you are announcing the decision versus a prosecutorial process where you may be exercising prosecutorial discretion.
I am not sure which you are looking at, Paula, but I think that for a variety of reasons, I would be concerned about a process that required the Assistant Attorney General in charge of the Antitrust Division or the Federal Trade Commission to make some sort of disclosure when they chose not to bring a case. I think that failure to make prosecutorial discretion more transparent has been something that from time to time the antitrust bar has criticized. I think the criticism is wrongly placed and for a variety of reasons, I do not think that that is something that you want.
MR. RILL: Why?
MR. PROGER: I think it reduces the flexibility of the prosecutors to take into consideration a variety of unique circumstances.
MR. RILL: I have trouble saying why they shouldn't explain what they did. I tried to do it. Confidentiality I understand.
MR. PROGER: That is what I am trying to get at. In a number of instances I have seen prosecutorial discretion exercise based on unique situations, such as R&D or intellectual property, information that you could not disclose about the companies.
MR. RILL: Barry, you are now the official representative of the European Commission. Are the parties in Europe concerned about the explanations or the reason why the Merger Task Force or the Commission doesn't take action on a merger?
MR. HAWK: Are they concerned?
MR. RILL: Phil says parties would be concerned about that disclosure.
MR. HAWK: I see. The parties first get the decision. You are given the opportunity to redact. Well, my own experience is there has never been a problem getting the Commission to redact something unless you make outrageous requests, but that aspect has not been a problem.
MR. PROGER: Do you find those statements particularly helpful?
MR. HAWK: Future?
MR. PROGER: Yes.
MR. HAWK: Yes. Oh yes. What you now have is eight years of Commission decisions. I mean, you can see trends. Yes. Yes.
MR. PROGER: How do you distinguish between the fact that a lot of the prosecutorial discretion will be before it reaches the Commission versus decisions at the Commission level? Would you do both?
MR. RILL: You would be selective, Phil. I don't think that in every case that is filed with the Commission you have an explanation when there is inaction. I mean only 4 percent of the cases there is action. Use your judgment. There are some cases that are important.
MR. HAWK: No. No. Jim. You are giving too much away. There's no prosecutorial discretion. You must notify the merger, and every notified transaction results in a written decision.
MR. RILL: I'm sorry. I was applying it to the FTC. I think the FTC would have to use some discretion.
MS. JANOW: The same 4 percent. Cal has been wanting to intervene on this point on transparency.
MR. GOLDMAN: Just to compare the pros and cons of different regimes doing almost exactly the same function on the issue of transparency. In Canada, at the time the merger review provisions were added to the legislation in 1986, the administration adopted a very well publicized, open-door, compliance-oriented policy in the administration of competition law, which preceded Brussels.
In fact, in the late '80s, when they were in the process of bringing in the merger control regulation, the so-called Westminster approach of come talk to us in advance, let us know what you are doing and determine whether it may be possible to obtain confidential guidance in a nonbinding fashion but in a manner that can help you alleviate concerns up front, was an objective that some in Brussels found very appealing. We had been working on this not just since '86. The predecessors who ran the Competition Bureau had started the open door confidential guidance or advisory opinion program from years gone back, prior to the new merger laws.
Now, in some transborder cases -- and this is a point I made during the FTC global hearings to the surprise of some on the panel -- it is indeed a fact, and I can speak to this with firsthand knowledge, that counsel have brought the proposed transaction for a reading to the Canadian Competition Bureau without bringing the same transaction to either of the U.S. antitrust authorities.
The reason they had brought it in is because if they come to see the USDOJ they are not going to get the same level of confidential guidance. What is available, of course and I won't carry coals to Newcastle on this one, are business review letters and other procedures that are on the public record, full transparency. Whereas in Canada, you can get qualified confidential advisory opinions that are not put on the public record.
Of course, we have heard about the process of seeing an FTC Commissioner, which is rather challenging, and I won't even go down that path. So in every regime, there are pros and cons to the objectives of transparency and accountability and the question is what is the right balance? Does the Canadian system work? There are some who would say well, in a tough case if you go in, you are going to have such a qualified opinion, as I guess Bill Rowley said during the Fordham conference, that it may not be beneficial to you.
But having said that, I have seen examples where you do get a reading from the agency that is applying very similar substantive principles to that which will be applied by their counterpart in Washington, and you do get almost a test case in confidence that can be taken back, reworked if you have the luxury of time, which is not often the case, at least provide a week or two weeks to digest before the matter breaks publicly, and go in to see the U.S. authorities. I just thought I would put that on the record.
MS. JANOW: Thank you. Spencer.
MR. WALLER: I think this is in part, I'm echoing Cal, never make a motion you are not prepared to win. There are some down sides to this and I think the down side to transparency is the cacophony that can result when you have even more things to look at for counseling purposes and the litigation strategy for those cases that get that far because I'm thinking about an article that Michael's partner, Richard Steuer wrote awhile ago called Counseling Without Case Law. I think it's in the Antitrust Law Journal, and it lays out nicely what you do in this area.
You start with guidelines and you realize that the guidelines are not necessarily the current voice of the current administration and even if just a few years have passed it may no longer reflect how things are actually being done. So then you go to the consent decrees, and then you go to the competitive impact statements, to the extent they may or may not be 100 percent consistent with the consent decrees. On the FTC side, you go to the aids to analysis of consent decrees, and then you start looking at other things that range from business review letters to advisory opinions to export trading company certificates and things that are being done in the health care area that may have some general carryover to whatever you are studying.
And then you start throwing in the speeches, trying to distinguish between when they are talking about something they have done or when an enforcement official is floating a trial balloon about a future change. And I think to an extent, there is pretty good transparency. The problem is they are not always consistent when you are trying to add those all up. And if you added in from the U.S. perspective, let's say the cases for which a second request was issued but no further action was taken, or there was a voluntary restructuring or something like that, well, you are adding another couple hundred pieces of information every year, and I think that could slow down the merger process on the agency side, and add in another source of information that may or may not be consistent with all the other statements of agency practice that we already have.
And I think there is, if you wanted to know the FTC's articulated reasons for Boeing/McDonnell Douglas, it's easy to find. It's in all the testimony and speeches that ensued which are in as much detail and more than any official kind of statement that any of us would reasonably contemplate that they do. And I'm aware of others, and they are more selective. Maybe we should do it a little more often. But I can think of, going back to the '80s when the Justice Department chose not to challenge a merger involving, I believe it's pronounced Versattile. It's the Canadian tractor case.
MR. GOLDMAN: John Deere and Versattile.
MR. WALLER: John Deere, Versattile, where they basically issued a press release that said, as a result of representations from the Canadian Government they were accepting the failing firm defense and simply chose not to challenge the merger on that basis, which is as good an articulation of that. But again I'm not sure what that gets you for future guidance. So I'm just saying I think transparency is good, but it can come as a cost to both sides.
And I think the procedural bill of rights and due process, that's kind of a baseline. I think we have to in many ways even do better in the merger area because we are not just talking about harmonization of various kinds to help the agencies do their work. We are talking about a second set of really important legitimate interests of the firms and their advisors in doing these transactions. Maybe I'll save the rest of my comments for where that leads on the next set of topics.
MS. JANOW: Thank you, Gabriel, you opened up the door in thinking about incentives to encourage jurisdictions, be it to revise thresholds or increase transparencies or change approaches. Please speak to this or anything else you would like.
MR. CASTANEDA: Thank you. "Back to basics" comments I made earlier on, I think transparency leads to accountability, domestically and internationally. I think before any system goes international, there has to be some house cleaning and there are two things I'd like to touch upon. One has to do with the overlap of other regulations. The way I see it is that the explosion of merger control systems and other systems around the world are copying the wrong things of developed systems, like the U.S.: sometimes, especially in the telecom or energy areas, it's quite easy for a government to give away to regulatory capture and grant specific exemptions to the antitrust or competition statutes by letting some other agencies have a first go at any transaction or regulatory aspect.
If you take into consideration that all privatization programs and deregulation programs have to go through the process, at the end of the day, issues would have to be reviewed by an antitrust agency. These overlaps are quite worrying. We are seeing in Latin America various agencies in the telecom area that do have several times the budget of the antitrust agencies. That's absolutely dangerous, because agencies don't have the resources to do major monitoring of the whole economy, whilst than the other agencies just take care of the telecom or energy areas.
And I think this is a problem which is not particular of Latin America because if you take a look at what's going on in the U.S., one is absolutely set aback by a 1996 case where a transaction had to do with the merger of Union Pacific and Southern Pacific where you find two ingredients. First of all, the case was decided by a non-antitrust agency, the U.S. Surface Transportation Board, against the will of the U.S. Department of Justice.
Secondly, you have some international spillovers that at least were very preoccupying from the Mexican side. It meant that more than 90% of the southbound traffic was monopolized or held by just one entity, by one single gateway to the Mexican territory. So coming back to transparency, international traders not only have to see what the antitrust agency cares about, but also other agencies with God knows what analytical tools. This is a major problem that I would classify under the house cleaning area before systems go international.
The second point I wanted to make has to do with thresholds. The way I see it, only a few jurisdictions do resist a thorough analysis of why and how the thresholds are set. In the case of Mexico, I can say that analysis went as far as saying well, what is the U.S. threshold? This is it? Well, what is Mexico's GNP, take a proportion of that and that will be the threshold. That is absolutely wrong. There are many other major ingredients to take a look at and when it comes to international threshholds one has to think about what are the real ingredients to tie the transaction to real effects with a national territory, not just something that looks right because other jurisdictions do it.
I would carefully analyze what is the rationale of other systems defining threshold.
Taking a look at real effects, I would support totally Barry Hawk's suggestions in terms of considering fewer assets, ingredients really have to do with competition within a country. Without that, you cannot talk about transparency because to talk about transparency you have to have a model to talk about against. In this case, I think that the ingredients are not there and before you go into the harmonizing discussion, you have to talk in terms of compatibility. I'll stop there.
MS. JANOW: Thank you very much. Let me just clarify, though, when you spoke about real effects, are you talking about nexus to the jurisdiction? Are you agreeing with Barry that market share need not be the trigger, but there needs to be an actual amount of transaction or a dollar amount, peso amount?
MR. CASTANEDA: Yes. I think one of the issues here would be the peso amount of real assets or real turnover in the Mexican economy. Forget about the potential competition issue. I think you cannot win everything in merger review and one really problematic issue is to justify to the business community why that merger will have to take one or two months to be reviewed, and, again, I don't think an international passport would be available at this time, but some sort of international ID for the very specific or essential characteristics of a specific merger.
I do worry about what my clients would say if we take the U.S. assessment of a market definition, let's say. If it's too broad, that's fine, but if it's too narrow, I'm sure that my client is not going to like the Mexican FCC taking a narrow view of the market. So we have to worry about as to how much that ID would contain. I would say that the ID has to do more with taking the "baby step" position, more essential information that would be easy to use, quick to find, and quick to confirm. But once you start going into a more detailed analysis as to threshold, there is not one and only specific formula.
I think one has to think of what is the real impact that some mergers cause within one specific jurisdiction, and some of the worries can be solved by a very simple applicable threshold. In the case of NAFTA, I think things shall be a lot easier. Canada, U.S. and Mexico could sit together, talk about it, and have an international ID designed with no substantial geographical issues.
DR. STERN: Can I follow up on that? And you may want to answer it now or later, but the question of timing, of when a merger transaction that's contemplated in a multiplicity of jurisdictions is triggered. We heard yesterday from particularly Brazil and from Mexico, authorities who pointed out the Grand Met/Guinness case came in basically six to eight months after the decisions had come down in the U.S. and in the EU.
I would like to hear comments of everyone, assuming they have no clients and no particular interests, whether they think it would be good public policy for these mergers when the companies know that they are operating in a multiplicity of jurisdictions to be notifying those jurisdictions at the same time?
MS. JANOW: Well, Barry, I know had his flag up before that question was asked.
MR. HAWK: I have no clients.
DR. STERN: I said to try to just assume you have none and talk about public policy.
MR. HAWK: From a purely public policy point of view (and I hope my colleague, Mr. Blechman, will not think I'm crazy for saying this), but, from an enforcer's point of view, I'm skeptical about market share thresholds. For the same reason if you really want to have enforcement then you probably should have a pre-closing notification requirement with a bright line test from a public policy point of view. Market share thresholds give the parties some uncertainty that counsel can use and if you are worried about somebody coming in eight months later, well then you just have a preclosing notification requirement with a bar on closing within the jurisdiction. This is purely from an enforcer's point of view, of course.
MS. JANOW: Was that also the point you were going to make?
DR. STERN: There were some nods around here and I didn't know if the reporter can pick up nods.
MR. RILL: That's why they nodded.
DR. STERN: I know that. But we are talking about public policy here. I encourage you to speak frankly for the purposes of building the record as we heard yesterday from the enforcers themselves.
MS. JANOW: I know Spencer Waller has to catch a plane. So would you like to leave us with some final thoughts?
MR. WALLER: Some of this is just directly related to what Michael and others have just been referring to and I have a couple other comments responding to the listing of possible solutions. I think a lot of this is relating to the advice that jurisdictions are receiving as they create and revise their laws particularly relating to mergers.
My suspicion is, since I'm not directly involved in that process, my suspicion is they are hearing from a lot of people in a very nonuniform, kind of conflicting way. I think jurisdictions that are adopting these laws are hearing from a combination of U.S. Government enforcement officials, a variety of multilateral lending agencies who are getting involved with this and in addition, all of the private bar groups and individuals that have an opportunity to play a part in that process.
And I'm guessing that they are getting tremendous numbers of conflicting advice that range from oh, this is how they do it in the U.S. or the EU, to actual recommendations about what they should do. And if we are going to have a conversation about at least not making the situation we're all concerned about worse, and making it better, the people who give that advice around the world and I suppose to the reform within the U.S. and the EU as well, need to speak with a reasonably consistent voice.
And I think it's important for this Committee to have at least some sense of what groups like the IMF and the World Bank and the OECD are saying to countries that want to participate in the merger game. I don't know how consistent or inconsistent that advice is, but if you go around the world and you are just describing new countries or countries thinking about changing their existing laws, they are going to hear about a system with preclosing deadlines and filing fees and just descriptively that's what they are going to hear, as kind of both what the large players are doing and what the growing numbers of players are doing.
And if that's a system that we are uncomfortable with, the message has to go out with a consistent voice.
More globally, I have written and talked about why I don't think a global merger clearing-house is necessarily feasible or advisable, at least at this stage. I'm more enamored, as you can tell from my earlier comments, about systems that are more like mutual recognition in the way they operate, but I also think the agreements that we have seen tend to operate best when they sort of track what everybody is actually doing rather than trying to get out front of actual behavior.
And I think that's the reason why the kinds of agreements that Jim helped create with the EU are so successful and why for the moment the IAEAA agreements have not taken off. Let me throw out three possible types of mini steps that represent more or less actual practice and that can be embodied and then more formalized.
One is I think there could be some kind of a protocol on the types of public information that are exchanged between enforcement agencies when you have a multijurisdictional merger. I think that would be very helpful to know that when a deal gets the initial round of notification, what can agencies reasonably expect to share with each other from the public record, not relying on the sharing of confidential information, because that's fairly far down the road under most scenarios.
Second, companies increasingly are being asked to waive confidentiality so the enforcement agencies can work together on those deals where there is some serious investigation going on. Some kind of a protocol on waiver would be tremendously helpful to take it out of the realm of just an ad hoc and occasionally implied threat that you better do this or your clients will be disadvantaged in some ways. And I think, I don't know if I would even call it a protocol, but some kind of a mechanism for consulting on remedies on the back end for when you get to the multiple jurisdictions intending to do something about it.
However you can institutionalize and embody that in these kind of baby step agreements, I think would be very helpful. I think that is why government agencies are interested in harmonization and why business in particular in this area is so keen on something changing.
So I thank you and I apologize for not being able to stay for the rest of the discussion.
MR. RILL: Thank you very much for your participation.
DR. STERN: If you can get one of your students to do that IMF-World Bank review we'd be happy to use it.
MR. WALLER: I'll do my best. I'm teaching that in the spring.
DR. STERN: Great. Thank you.
MR. RILL: Next, Merit.
MS. JANOW: Well, I think actually I might ask that we think about this first point you have made, Spencer. There have been suggestions floated in the past that, when a party files in the United States it would indicate where else it was filing, and that there might be that kind of information sharing or self-identification by the companies as to other reviewing jurisdictions as a way of facilitating information exchange between jurisdictions. Is that a useful step to think about?
MR. HAWK: Maybe just while Spencer is here just quickly --
I mustn't keep you from your plane, but the whole question of cooperation, information exchange, frankly I find is largely a nonissue in our experience in merger cases. It happens, fine. You frequently tell authorities in Europe that you have notified elsewhere. It is simply a trivial thing. We don't spend time worrying, even thinking about it. You just do it. And if they want to exchange information, fine.
Of course there is a confidentiality concern. But I have difficulty seeing cooperation and information exchange as a generator of costs in merger review. They can be important with respect to remedies. If you have a conflict in remedies, that's one in 10,000 cases. So I don't understand the fuss about information exchanges and cooperation.
MS. JANOW: Is that a universally held view around this table?
MR. GOLDMAN: I don't disagree with Barry. Spencer, just before you're going -- I won't let you make that plane.
I don't disagree with Barry that in a great majority of transborder mergers it is not a problem, because the parties want the deal done and they want it done as quickly as possible, they want uncertainty removed and they are willing to provide essentially the same information to every agency that's working on it. They do that quite willingly for good, sensible reasons.
However, there are exceptional cases, and I have encountered one, where the clients were concerned about certain information falling into the hands of another authority because they didn't know what the limits were. So there are exceptional cases. I agree with Barry that on the majority it's not up front and center. But as the number of transborder cases increases -- I want to go back to Spencer's point and I guess one I touched on earlier as well -- the almost ad hoc methodology that is currently being used is simply wrong.
It can't be allowed to continue because there are not certain standards, there are not publicly reviewable and accountability standards that the agencies can be held to. We are back to your point about transparency and, in my view, because the decision making process affects rights, ultimately there has to be at least an attempt made at encouraging transparency and accountability. You can't do it in all cases because it simply doesn't work -- look at the Canadian confidential guidance program. But those are just preliminary reads.
I'm suggesting that we should be striving to achieve much more accountability and setting the rules of the game because it's going to be far more commonplace. It's a baby step in the process. Now this is the topic of merger cases and confidentiality where it is not as much of an issue as it is in nonmerger civil and criminal cases. I just want to park the other category where I believe it is a major issue. It is the, in my view, primary reason why the IAEAA has not taken off.
MS. JANOW: Thank you. Can Spencer go now? Thank you, Spencer. Well, I think that we should now turn to the issue of waivers. Can you give us some guidance under the circumstances where you would be advising merging parties to waive confidentiality? Is there something we can learn from that that would be helpful in thinking about interagency cooperation and how you think that should evolve with respect to confidential information? Gabriel?
MR. CASTANEDA: Thank you. Again within the domestic and international positions, I would say that newly enacted statutes do carry a lot of mistrust domestically, so in order for domestic corporations to render all the information which would be useful for analysis is going take a lot of confidence-building. And if you talk about incentives, I think it's a quid pro quo situation whereby agencies do have to offer the corporations involved enough assurances as to no leakages.
Secondly, enough comfort in terms of using that information for the proper analysis. Agencies could ask for thousands of documents which are not even relevant or used. So it's not the matter of using secretaries or assistants to photocopy documents, but it's the sinking feeling of having your documents in a warehouse over which you have no control. And it's rather awkward to face the fact that most of that information is not going to even be reviewed.
So you have to start by having enough guidelines, and I'm talking about transparency again, as to what is going to happen with that information. To see the critical route of that process, very transparently and then justify every document that the agency is asking for.
If you go to the international plane, it's very much the same. A U.S. corporation dealing with a Panamanian agency for the first time doesn't even know what the analytical process will be. It will be shocked to know that the level of secrecy that agency is going to take. So again, in order for this to work, domestically and internationally, you have to give assurances as to how transparent the system is, secondly, what is the use of those documents according to law or specific regulations. And a quid pro quo situation whereby agencies offer the companies speedier procedures, assurances that there will be responsibility for any official leaking that information or documents to the outside world, and thirdly, assurances that the documents that are going to be really reviewed are substantial to the matter.
I think those three basic points would encourage people to build some trust towards the agencies nationally and internationally.
MR. RILL: It's with some modest amount of trepidation but I'm going to take you on on your issue, Barry, that information exchange is a nonissue. I think it's perhaps not an issue in every case but there are a number of cases in which it is an issue. Let me take confidentiality off the boards. Let's assume that's solvable, the ICC/IBA/ABA is going to solve that for us. So we take that off the board.
The question is then should we encourage the agencies to exchange information, communicate as to what they're doing? Now in Boeing/McDonnell Douglas, as you know, there are widespread rumors, reports, perhaps even speeches that suggested that at least things could have been smoothed out earlier, better, had there been a better exchange of information in that case.
You can debate whether those statements and so forth were true or accurate or not, but they came, some from official sources. Why not at least in those cases would it not be useful and particularly as we have a proliferation, a glut, if you will, of merger review law, to encourage that kind of information sharing provided the confidentiality issue could be solved. Producing greater certainty, perhaps commonality of result.
The only case in which I think we shouldn't encourage it is strategic behavior which is okay, but I think that's getting to be less and less a viable game.
DR. STERN: Yes.
MR. HAWK: I must be misspeaking today because Michael Reynolds accused me of desiring uncertainty this morning. I don't.
MR. RILL: That's right. You were.
MR. HAWK: What I should have said was that sometimes uncertainty is useful. But information exchange is not a significant problem. Yes. We exchange information. I think the tactical question is who is going to read the document, the 4(c) document or the submission that you have made to a reviewing authority? There are three possible reading groups. One will be another authority. That in our experience is largely a nonissue. We don't, rightly or wrongly, worry about that. Sometimes we actually encourage it. It's a nonproblem in that sense, right?
The second group of people could be the local national champion. We think about that. Knock wood, I don't think we have had a leak yet, but I don't see that as a major problem although it's certainly intellectually a problem.
The third group of potential readers which we worry more about, the one we really think about, is the third party competitor, who is or may be complaining about a transaction. Competitors and not the national champion (who get it through the friend in the economics ministry) are the ones that you are concerned about getting your confidential information. This then ties into the broader issue which is what role should competitors play in merger review. Because certainly outside the United States, a lot of people feel that if there is any interesting question on the merits, some colorable issue on the merits in Brussels, a well-heeled competitor will get you into phase two, that's a five-month delay. So you can cause competitive harm to the merging parties through the five-month today. Well, that's an interesting use of merger review.
Again, I think that most of the time you can handle the disclosure of confidential information to these third party complainants through redactions of the submissions. The EC Commission is very good at this. You always submit two pieces of paper, the full paper and the redacted version. Only the redacted version goes to the competitor.
We worry more about competitors. We don't worry at all about other authorities.
MR. MURAKAMI: I agree with Professor Hawk's conclusion. In a big international merger, both merging parties probably consent to the exchange of information when officials of the countries are needed to talk about what kind of remedy should be imposed, at the final stage. Until now such mergers are limited to ones in the European market and the American market and consents are actually given. Also I think information sharing should be limited to a case in which both competition authorities find serious competitive problem. I find it is not difficult to get consent from the merging party in general. That's just my observation.
MS. JANOW: Thank you very much. Cal Goldman.
MR. GOLDMAN: I don't know if now is the time or if you want to deal with it later, but are we going to address the comparatively more serious issues of information exchange and confidentiality in nonmerger cases or is that for another day? Is that really another day? Are we just doing mergers?
MR. RILL: Today's really a merger panel but I wouldn't want to cut you off. If there are other ways to submit your views.
MR. GOLDMAN: I will send them in then in written format because I do want to highlight the distinction. The ICC who I'm not representing today and others have written statements on the subject and I don't want to in any way take away from the importance of that distinction for your consideration, but we'll do it in writing elsewhere.
MR. RILL: I'm sure that will be discussed in the panel tomorrow.
MR. PROGER: In answer to your question about the waiver, my own view is it is not a particularly significant issue. It is mutually given. What is expected in return is coordination and a reduction in the discovery burden.
MS. JANOW: Thank you. This discussion takes me back to a question that I keep asking, which is: are there problems that could be dealt with at a global level through coordinated action that you think should be taken? Bill Rowley, I recall at the recent Fordham conference, said that this should be privatized. Shouldn't we have a European group, an American group, or some effort by experts, advise each jurisdiction on ways of improving their systems and find some broader incentives for adjusting those national practices in the light of global trends.
I think it would be valuable to hear whether you think there are problems of procedural features of merger control that warrant that kind of concerted effort, either by the private bars or by intergovernmental discussion? Barry?
MR. HAWK: Well, I think your Committee, and the timing of this study, are superb because you are the ones that are going to issue a report next year. You are in a wonderful position in this report to do things like propose a model notification requirement, a model notification form, the amount of information. My inclination is toward a two-step approach rather than a long form, short form. If you went to a two-step approach, it would be very interesting to draft a model of what is the minimum amount of information that an authority needs, in the first step, to make a reasoned judgment that there is an antitrust issue here. Without asking for too much information, all right? That's going to be more than a Hart-Scott notification. It's going to be a lot less than a Form CO. That would be a very interesting thing to do.
If you propose a two-step approach, then what's the second step look like? You have to distinguish between information and documents.
The U.S. is out of control with documents. That's the problem. I mean, it's all these documents. They're document-obsessed. But the whole legal system is, it's not just antitrust, all right? So that's something very useful you could do. So there is a lot. Phil raised an extremely fundamental point this morning. Or issue, and a lot of things flow from how you resolve that issue. He put it in terms of sort of the nature of the agencies that are adversarial or regulatory.
I think a somewhat different way of saying the same thing is to ask the question, who decides? Does the authority have the power to make a prohibition decision? Most authorities in the world do. Now, some of them are subject to stronger or weaker judicial review -- but most authorities have the power to prohibit your transaction. And when you have that kind of a system, all kinds of different things flow.
These authorities don't need a lot of documents. I mean, they effectively, emotionally, aesthetically, I don't know how to put it, shift the burden to the parties. It all makes sense, it's not complicated. And if they are under a firm deadline, they have a credible threat when they say to you: we must clear or block you by November 14th; we have three concerns. We love you, but unless you meet our three concerns we are going to block you on November 14th.
It then behoove the parties to then meet those concerns.
MR. RILL: I think you raise an excellent point. I just would like to see a response on the record to the argument that some microeconomic geniuses at the agencies would raise in response that, I mean particularly in the U.S., that there is no way without requesting incredible amounts of price, volume documents over long periods of time that we can test whether or not there is likely to be a differentiated unilateral effect as a result of a merger. And under the guidelines we have to look at that potential issue.
I'm not advocating this as a good answer. I'm saying this is an answer that I have heard to that kind of comment. I'd love to hear you say that's baloney.
MR. HAWK: Well I don't know if it's baloney. I like baloney. Baloney is not a pejorative term for me. First, I don't know how many contemporaneous documents, corporate documents you need to run all your fancy econometrics, residual demand studies and all this business. My point is that I didn't know that you needed the kind of Hart-Scott second request documents to make those sophisticated economic analysis. That's sort of news to me, so I don't understand that explanation for the documents.
If you want to run very fancy economics analyses, fine, you have deadlines. You do it. This is why I liked Phil's point so much. If I'm before an agency that's under deadlines, I'm under a deadline, and if the agency says that it now has a concern in this product market or geographic market and that it wants some price studies, then it's up to me. I have to get them what I think they want. And if I don't do it within the deadline, I lose.
MR. RILL: Let me just interject. The U.S. agency would say in that context that's a very European response because the agency could say you lose and therefore you lose. Here the agency has to make its case in court. It doesn't happen often that it has to, but at least there is always the requirement that it go to court. I sound like I'm supporting this, but --
MR. HAWK: No. This is why Phil's point this morning struck me as critically important. Most places in the world are not like the U.S. in a lot of ways and this is one. So in trying to work out solutions, you always have to keep Phil's distinction in mind. Some things aren't going to work here very well unless you decide to give the FTC or the Justice Department the same kind of reviewing authority. That would make it symmetric.
MR. RILL: Suppose you get support from Justice and the Commission on that?
MR. HAWK: That would make it symmetric. I have my own skepticism on the economics. But that's--
MR. RILL: I do, too. Phil is I think looking for recognition.
MR. PROGER: I felt the point I was making this morning and I'm making now is that I do not think it is the people. I think it is the incentives.
By and large the massive document subpoena that is done in the United States is because ultimately the prosecutors may have to prove their case before a U.S. federal judge, or some other reviewing authority, and finding a hot document may be beneficial to that prosecution. The fact that some deranged middle manager wrote something four years ago that no one supported within the corporation, that does not do much for the analysis but does help you prepare for litigation.
MS. JANOW: Thank you. Michael.
MR. BLECHMAN: Back to Jim's question. If, what's driving the need for very extensive second requests, is the need to litigate, as Phil said, that need could probably be met in another way without perverting the merger review process. You could always have subpoenas and other trial-oriented discovery when it comes to that very small number of cases that are actually going to trial.
In terms of the documents that you need to determine whether a merger really is anticompetitive enough that it should come to that stage, the thing that makes me think that probably you can make do with far less is the great number of cases in which there are "one and a half" requests. Thence, with a much more pointed kind of request for documents, the agencies do make a determination as to what to do.
In terms of whether the amount of documents that are requested in a typical second request is something that's necessary, whether it could be less, I think that procedurally the way I would like to see that investigated is not so much through general abstract discussions about it, but by looking at the empirical evidence. There aren't that many second requests that have been issued. Maybe that's something that your Committee could usefully do through the staff -- take a look at, say the second requests that have been issued in the last couple of years; the number of documents that were produced in response to them and what happened as a result, whether all those documents were really needed for an economic analyses as to impact, unilateral effects, and other issues.
MR. RILL: Fully apart from the huge size of our staff, we don't have access to information that's confidential.
MR. BLECHMAN: But no, the requests themselves are not confidential, are they?
MR. RILL: No. No.
MR. BLECHMAN: To look at the scope of the second requests, you need to look at the second request which is eight, nine, ten pages long and then have some notion of the number of documents that were produced.
MR. RILL: They could redact it.
MR. PROGER: They could redact it. I think the big problem in this area is there is no independent third-party review of the reasonableness of the Second Request.
But the problem is are the parties willing to slow or stop the process while waiting to get before a United States judge.
Maybe one alternative is whether within the enforcement agency there should be an independent reviewer to whom the parties could appeal.
MR. RILL: This is something I thought of too, Phil. It just seems to me that you put your finger also on the problem, and that is, how do you get that review accomplished within a reasonable time frame?
MR. PROGER: Well, if you treat the second request like a subpoena, then you could have an Article III judge in the United States look at it. But that is not practical because it would take too long.
MR. RILL: The merger context is very difficult. John?
MR. DUNLOP: I think you could appoint the equivalent of a trial examiner to express an opinion.
MR. RILL: I think the current review process, with all good intentions and I do assume good intentions, just doesn't work.
MR. MURAKAMI: With respect to merger procedure, we have almost consensus, that is, preliminary review should be conducted within 30 days/one month. Formal review should be completed within probably five or six months.
In the United States, even in the serious cases, procedure is finished within half a year, and in an extremely exceptional case, where the agency wants to block the merger completely, in the United States, in order to stop the merger, the antitrust agency has to bring preliminary injunction and has to win the case. In the EC procedure, in the same case, the party can appeal the decision to the EC court, but in order for the parties to consummate or complete the merger, the merging parties have to appeal the decision to the court and win the case, as a result, under EC procedure judicial review doesn't work at all. Usually, when the EC Commission decides to block the merger, the parties give it up.
In a very exceptional case, it is better to consolidate the procedure. But in most cases, the preliminary review should be conducted for one month. Formal review should be conducted within six months. Almost all agencies agree.
In addition, it's also desirable to set the common timing of that. If so, the agency has the same starting date. Harmonization of the procedure is not so difficult.
MS. JANOW: Thank you.
MR. CASTANEDA: Going back to this problem of information versus documents, I think it would be ideal if you didn't have to prove what you are saying and the agency would take at face value what you are saying.
If you say, well, this is fine, we'll attach no documents, you have to believe my own definition of the relevant market, fine. But then you get to the point where econometrics will have to play a role and agencies do have this tendency to do a thorough assessment of cases where they feel that there is some concerns, and nobody will be better equipped than the person or the corporation who is taking their own filing to the agency as to have a simple definition of the market and then try to prove it. But I think probably there will be a quick cure for that.
I think thorough analysis has to be done in cases where some antitrust concerns arise, but perhaps something which would be more agreeable would be to use some sort of safe harbor standards, whereby taking into account differences between one economy and the other. There would be at least some transparent rules as to safe harbors to do the planning process, an easier path for transnational companies doing business.
The second thing is that if parties know about the timing, with enough allowance to do the planning process, and there is some sort of a sunset mechanism whereby they know after 30 or 20 days the transaction has been approved, that certainly helps.
One of the problems that I find with new jurisdictions is that there is no responsibility for agencies who are not doing their job properly in time. So with that very elementary code would have to agree upon some sort of concept mechanism and timing tied to some also elementary factors to be taken into consideration. At the end of the day, I think some sort of common early termination procedure would be recommendable for every system.
MS. JANOW: Thank you. When we were planning this panel we promised each of you an opportunity to make some closing remarks. As we already have had a comprehensive discussion, I don't know if you have lost interest in such a closing statement, but this is the time for that if we were going to stay on schedule.
DR. STERN: Before you each make your closing remarks, I would like to put one more question on the table in terms of information versus documents. Are we talking about document mania?
One of the reasons why documents are produced up front or required or demanded in a bureaucracy is that if you are not the ultimate decision maker, and you are only making a recommendation to a supervisor, who in turn is making a recommendation to perhaps another supervisor, you want to have all your ducks in line, including the possibility of litigation.
So my question to you is how much of this is driven by bureaucratic considerations and how much of it is actually driven by the realistic notion that the case is going to get litigated?
I put this out generally to the group because we often hear the statement that we have got to have everything because it may be litigated. Well, it may be we have got to have everything because we have to cover our bureaucratic backside. So that's my question.
MR. PROGER: I think that given the incentives if I was on the other side, I would do exactly what they do. So I do not know if it is bureaucratic or not.
I think that the Assistant Attorney General or Chairman of the Federal Trade Commission should ask the staff if I proceed with this challenge am I likely to win? And if the staff does not have that type of backup information, I think it's sort of difficult to answer the question.
I question, however, the relevancy and the value of the documents to begin with in making the analysis. But the issue, and Michael raised it, of whether you can do this after the fact. I think it is difficult to bifurcate the process given that you are trying to make a prosecutorial decision.
MR. RILL: Probably should have asked more questions.
MS. JANOW: I think Cal would like to speak to this.
MR. GOLDMAN: You pose two good questions, covering backside or preparation for litigation.
In fact, in my experience, in a parallel chair to the Assistant Attorney General, the more prevalent question is neither of those two.
The more prevalent question is the need to know what the material facts really are. And in that regard, the professional staff more often are looking, you may call it hot-dogging, it's an open barrier, someone talked about hot-dogging, is what they're really looking for are key documents. For example, we have seen cases like this where the two merging parties have operations in certain urban centers and not operations as against each other in other urban centers, and in the two urban centers where they have operations the prices happened to be significantly less than in places where they do not have competing centers.
So that tends to cause this professional analytical group to get their shorts in a knot and say hum, maybe the two do have a position of checks and balances and so on and so forth. And there's cases that are litigated on the basis of those kind of material documents. So, the question that is actually the one that tends to drive it in the first instance is not protecting the rear end, and not necessarily going for litigation, because you know the ones right up front. And Jim, you have been there. You know the ones that come in the door and those very small category cases that are going to have to go for some kind of fix it first or resolution. They're our small category. There is a large group in the middle where the staff wants to know what the true facts are and there are legitimate reasons to go and get them.
The real issue from my perspective is how you can balance that bona fide public interest objective against certainty, reasonableness, fairness, accountability and all the good words that we have talked about.
MS. JANOW: Thank you very much. Michael?
MR. BLECHMAN: The thing, Cal, is to make those kind of determinations. I think you can do it with a much more pointed request than is typical of a second request. The reason for a second request in the form we have it, I believe, is partially driven by the, I wouldn't call it bureaucratic, but by the legal fact that, for the staff, it's their last shot. Decisions as to the scope of second requests are not made by the head of the Antitrust Division or by a Commissioner of the FTC. They are made by staff people who know that if they leave something out of a second request, and they need it later, they won't have it.
But that kind of flexibility could be restored to the system in a way that would relieve the pressure that maybe leads to expanded requests. That's why I was thinking that if you look at actual second requests that have come in, knowing what the cases are about, I suspect that you will find that they go way beyond what is necessary.
DR. STERN: That's what I was trying to say. And, therefore, how you can deal with what is a realistic and defensible position? Without just dumping a lot of documents to respond?
MR. GOLDMAN: May I just come back to that? I'm not suggesting that there is a problem every time there is a second request. In fact, we have all witnessed half second requests, full second requests, ones that are three times as long as others. And I think that your group could do a very beneficial service if in addition to looking at the number of second requests that led to a challenge or some other substantive change or result or withdrawal, you were able to take an objective look at the scale of second requests.
And in the wonderful world of developing what I call the optional elective filing, I believe as I said earlier, there have to be tradeoffs. And one of the tradeoffs is to narrow the time frame, provide certainty on that front and provide some degree of certainty on the range of information that may be demanded across the border because it's going to be shared. And I believe that at least there have been attempts in Canada to develop information requests that are creeping toward full second requests, but they are not quite there yet.
They are learning from the U.S. experience, and they don't have it quite right. They don't have it quite right, but there are attempts being made to find a midpoint and I'm wondering whether you may be able to not only develop some of the other parameters, but a suggestive list of the x number of primary areas that could bona fide be explored in the vast majority of cases. Is the list 10, 15, 30 questions? I'm certain it's not 50 or 100 questions.
MS. JANOW: Well, thank you. I really would invite you to submit your own perspectives on what would be that list. That's an open invitation to everyone here and for the record.
Let me ask you if you would like to speak briefly before we end this session. Please indicate otherwise. Phil, would you like to kick us off?
MR. PROGER: It would be nice to have a common triggering standard for premerger notification. The standard should be simple and objective. The financial size standard used in the United States is preferable to a more subjective test, such as market share or effects tests. However, as long as the underlying substantive analysis differs, there is always the danger that if you try to have one standard that fits all, you are going to get a much harder, more encompassing standard. Similarly, to the extent that you have safe harbors, there will be a tendency to draw those safe harbors narrowly.
If a financial standard is used, then there will be some form of indexing. We should not have the situation that we have today where we have 1976-77 dollar thresholds.
On the process itself, there needs to be some mechanism by which the parties have resort to an independent neutral authority that can review the process. And I do not think that the solution would be judicial review. But leaving the decision ultimately to those making the prosecutorial decisions, as good as they are and as fair-minded as they try to be, is not a situation, in part because of the parties' reluctance to seek that relief, that is workable.
On transparency, I guess I deviate from the group. I have some concerns about transparency. I think that our merger guidelines provide a lot of guidance. One thing that you might consider is, if we are going to have those guidelines, some requirement that those guidelines be updated periodically.
And then, finally, there is going to have to be some way of dealing with the proliferation of merger enforcement regimes. And I think this is going to be an increasingly difficult and important task.
MS. JANOW: Thank you very much. Barry?
MR. HAWK: I want to pick up on Paula's question. I know it's pretty interesting on the why, why is there this document mania in the U.S.? And I think my response affects what this Committee can usefully do. There are bureaucrats all around the world and they are not document-crazy, so I don't think it's bureaucracy that causes the document mania. I think it's legal culture. The United States legal system puts an emphasis on documentary proof that is very different from anywhere else in the world. In the U.S. we believe that you can best arrive at the truth by relying on contemporaneous documents. That's where we are exceptional, I think, and that just carries over to antitrust.
And so I would be a little pessimistic as to how much the Committee can do in trying to harmonize and to address the document problems. I see this as a U.S. problem. Documents are not a non-U.S. problem. It's a North American problem.
MR. RILL: Well, it's a problem for companies overseas that have to supply documents.
MR. HAWK: It's a U.S. antitrust law problem. Right? That's all.
DR. STERN: And whether as we increase mutual recognition or harmonization among countries, maybe we might in this country import some of that truth-seeking in ways other than through collecting documents. But that may be asking too much.
MR. HAWK: Well, there was a reference earlier to the common form that the German, the French and UK authorities have issued. You should really ask Dr. Wolf how often parties have used the common form. We haven't used the common form in any transaction, partially because two of the jurisdictions are voluntary. But let's say France and the UK were not voluntary. Why in God's name would I use this new common form so long as the Bundeskartellamt will permit me to use their present non-existent form, which is wonderful.
The common form is not an advance over the present BKA form, if you will, of how you notify, or the way you notify a merger in Germany, which is maybe the most perfect in the world from a party's point of view. And the BKA doesn't seem to miss too much.
MR. BLECHMAN: Just a last thing. Barry, you referred to document mania, I guess my view is that contemporaneous documents are a valuable check for the truth of a party's assertions, but that the documents that serve that function -- which are the documents that discuss the transaction and planning documents and other kinds of documents that bear on an analysis of the market -- are far narrower than the universe of documents typically asked for.
It's not the mere fact documents are requested, it's requesting all documents that relate to products, however insignificant, from R&D through production, through sales, through advertising -- and, by the way, also give us a sample of each product so we can feel it and see it. That's a huge quantity of material, as opposed to the documents that are really necessary to test the truth of a party's assertions.
MS. JANOW: Gabriel, in closing?
MR. CASTANEDA: Yes. Just a last statement. I would say that if we know who the four percent devils are, why don't we picture them again. Let's do it, an exercise every three years, have meaningful guidelines as to what those four percent devils are, and then try to set up some rules as to what other concerns there are and ask companies to bring documents and information in good faith. I think that could bring a lot of confidence to markets.
MR. MURAKAMI: I will make it very simple. I simply want to establish common timing of the filings and also common review periods. And probably that would contribute to increased transparency and promote information sharing. Probably, the primary review period should be one month and the formal review period should be within five or six months after filing. And, most, in very exceptional cases, but when the agency decides to drop that merger okay between the United States and EC has to consolidate or create one procedure. But that's a very exceptional case but that's very difficult because that's comes from the difference of the culture.
MS. JANOW: Thank you very much.
MR. RILL: Thank you all very much. I appreciate it. I think it was extraordinarily helpful. I appreciate the time. All the pro bono hours that you put in here today.
DR. STERN: Thank you.
MR. RILL: Well, perhaps for ten minutes to resume.
DR. STERN: Right. I have to leave at 5:30 p.m. We're going to try and close up by then. But let's go with a break for 10 minutes.
MR. RILL: I want to give this eminent panel our fullest possible attention, so we'll cut short on the break. What I will not do is introduce each member of the panel individually, because in keeping with our last panel and the panel before that and the panel before that, were I to do so, I would eat up all the time between now and 5:30, having known them all and more importantly, read each of their 10 pages of biography. But the way we are going to do this is to have comments, five, ten minutes from each of you and then open it up basically to a roundtable.
Obviously, when one or more jurisdiction reviews the same transaction, conflicts as to substantive principles of review can arise; therefore, you can have conflicting results on the merits. These may be relatively unusual at the present time. Boeing/McDonnell Douglas, of course, got a great deal of attention. But the question arises whether or not this forces the merging parties to respond to the least common denominator, offers strategic opportunities, presents an opportunity for a best common denominator or creates other asymmetries, if you will, in the system.
What we need to do today is to get your advice and information as experts in the field. And you are, each of you, truly eminent experts in the field as to the types of transactions where these types of conflicts of result or conflicts of remedy are most likely to arise and what steps we might take as a Committee to recommend possible solutions to the U.S. Government, and perhaps to anyone else who would want to listen to us.
At the end we are going to ask each of you to provide any closing remarks that might ensue from the conversations that we are about to have in the next hour and a half or so. I want to particularly appreciate Clive Stanbrook. I'm going to ask you to open, Clive, who has come from the UK and who has been sitting here through almost all of the proceedings starting yesterday morning. And having heard all of this, Clive, it's your turn.
MR. STANBROOK: I'll say first of all that it's been a privilege to be able to sit through this time. It's not often that you can come along and hear 10 heads of antitrust authorities speaking on one day. The contribution I propose to make, I propose to do via an examination of a number of cases. The first one is the KPMG/Ernst & Young case, which I can talk about rather candidly because it didn't get too far, but it does disclose many problems as to the way conflicts can or can't be resolved. I think we have to be fairly modest with the extent to which we can pretend to be able to provide solutions to conflict problems in merger cases.
In the KPMG/Ernst & Young case, it was a merger that came at the same time as Price Waterhouse and Coopers & Lybrand, something that Bill next to me has more than a passing knowledge of, but is probably less able to talk about than I am. We faced initially three regulatory authorities that were interested in this: Canada, the U.S., and the EU. That doubled very quickly to six and was in the process of doubling again had we not reached Friday the 13th of February, and the merger didn't go any further than that. It's a matter of interest in terms of merger control rules.
As an aside, the effect of that was that the Price Waterhouse/Coopers & Lybrand merger had gone past the stage at which it could have been referred back to the national authorities, and therefore had to go on for consideration essentially at the Commission level. If it had been referred back to the national authorities, then there might have been more to be said, for example, in the United Kingdom and other areas where there were significant market shares.
But the interesting thing is that these were global operators, operating in global markets, but substantially also in national markets. Looking at that case, one must wonder the extent to which, where the analysis was of a national market, there was really much that could be done to create efficiencies in terms of a global analysis of the merger control problem.
If it's a national market, it seems to me it's inevitable that there is going to be a national appraisal and there is very little that can be done at an international level for that purpose. All that can be done is to encourage the development of a common approach, not common national approach, to competition rules. Of course, national markets create concerns over differing remedies and this perhaps brings me on to Grand Met and a number of other cases where the national analysis has resulted in each, either the U.S. or the EU, looking at, for example, brands and considering whether this brand or the other brand should be divested.
Obviously, a lack of coordination between the U.S. and the EU in circumstances like that could have a double effect, and clearly coordination is necessary in order to ensure at least an efficiency of process.
The question is how does one achieve that coordination, particularly in the EU context, of very strict deadlines. It may be that what is needed here is some sort of time-out period when that issue can be looked at and resolved. It may be that rather than look at all these issues on a bilateral basis, some sort of code of cooperation should be drawn up in the context of the WTO, in which some of these concepts are set out. So that as each country's antitrust regulation is developed, there is a blueprint for the sort of system that will assist in cooperation. So much for Grand Met.
Of course, the area where there should be the maximum amount of ability to cooperate and avoid conflict is in the circumstance where there is a global competitor with a global market. An example of that has been discussed a number of times today and yesterday is the Boeing/McDonnell Douglas case. The Boeing/McDonnell Douglas case is clearly an exceptional case in many ways. It's not often that in the course of a merger control case 100 senators write, expressing their concern about investment in their own constituencies. Or Vice President Gore makes a speech in a company's home city (Seattle) about the U.S. concerns.
And of course, this evoked a response from the rivals across the Atlantic from Britain and from Karel Van Miert. This was hardly an environment in which an appraisal of merger control should take place. Perhaps all that one can say about that is that at the end of that procedure, Boeing said that they really would have preferred if it had been a single authority that had dealt with that case.
That, of course, is what happened in MCI/WorldCom, because in MCI/WorldCom both the DOJ and the Commission worked hand-in-hand throughout the procedure and worked in effect as a single agency. There were joint meetings in the U.S. There was a member of the Commission that was attached for a couple of weeks to the Department of Justice in the course of the investigation. And the analysis and the remedies were coordinated between the parties.
It was held out by Commissioner Karel Van Miert yesterday morning as an excellent example of cooperation. In fact, it would be only fair to say that cooperation would not have been possible without the parties being prepared to waive confidentiality. So you could only claim this case as a victory for the system if you presuppose that in successive cases that waiver of confidentiality will take place.
I think that in one sense this case illustrates some of the frailty of the system of analysis because if it is entirely dependent upon the parties making that waiver, then it's not to be excluded that a different analysis may be arrived at by each authority because they simply haven't got the same information. So much for those cases. Clearly cooperation, the avoidance of conflict is much easier in the context of a global market with a global competitor.
The question is what sort of general structure can one put over this whole panoply of merger control that will enable the better integration of the different systems in different jurisdictions? I think probably some form of code/guidelines, probably in the context of the WTO, a code that would deal with cooperation as such, deal with exchange of information at the initial phase, deal with confidentiality issues so that there could be some common approach to confidentiality, and then perhaps deal with the sort of order in which the appraisal of each issue might take place.
Again, it could only be a guideline or set of recommendations, not anything more because anything more is going to be ignored by all the respective authorities.
The reason I think that it should be in the context of the WTO is because I feel very strongly indeed, and this is my last point, that the lack of some common understanding over competition rules in international trade is going to corrupt trade liberalization and the reduction of tariffs process. International trade principles encouraging and catalyzing the reduction in tariffs must be accompanied by some multilateral concensus on competition regulation such that developing countries will not find themselves excluded from bilateral arrangements that encourage economic integration.
And so those 32 countries that Dieter Wolf mentioned as being part of those that were wanting to join the WTO at the moment are ones that certainly would want to see competition rules applied in such a manner that they weren't excluded from the economic benefits that come from a liberalized and more integrated economic world environment. Thank you.
MR. RILL: Thank you, Clive. Bill Kolasky, we'll hold the questions I think until after everyone's had an opportunity to speak so that we're sure everybody has an opportunity to speak. Bill Kolasky, a partner at Wilmer, Cutler & Pickering, I'm not sure you want to respond to Price Waterhouse/Coopers or Coopers/Price Waterhouse or respond to some comments made yesterday and today by earlier panels on Union Pacific/Southern Pacific, both of which matters among many others that you have been involved with. Bill has been kind enough to come and help out his colleague, Jim Venit, who will also be tape recorded.
MR. KOLASKY: Thank you very much. It's very nice to be here. Jim and I cheated a little bit. We are speaking together in a panel in Brussels next week and in preparation for that we had prepared a paper, which, an early version which was published in the Global Competition Review and so I have handed out a copy of that. In addition, again, probably thinking forward toward this session, I've also provided a copy of a short article from this week's Legal Times in dealing with this subject. And then finally an article, which I published one year ago, suggesting various reforms in our Hart-Scott-Rodino merger notification process, which would have the effect, I think, of bringing it somewhat closer to the process in the European Commission.
I do want to say a few words about Price Waterhouse/Coopers that you might expect.
MR. RILL: I'm not surprised. Welcome back. Eleanor Fox has returned from New York after presumably voting.
MS. FOX: Voting and teaching.
MR. RILL: Bill was in the middle of a statement, Eleanor.
MR. KOLASKY: It probably will not come as any surprise that I have a somewhat happier memory of the Price Waterhouse/Coopers & Lybrand merger than Clive does. And I think from the U.S. perspective there were several things about it which were instructive. One of the most important was that it actually was not a Hart-Scott-Rodino reportable transaction. It proceeded outside of HSR and in many ways that allowed us to conduct, allowed the agencies to conduct the investigation in a way that was tailored to fit the European timetable very nicely.
For example, rather than have to issue a single expansive second request, the agencies were able to issue much more tailored CIDs and during the course of the investigation, they issued two rounds of CIDs, as well as several informal requests. Right from the outset, by agreement with the agency, we had a timetable that was intended to dovetail with the European Commission timetable, and that timetable was modified as we went forward and as the EC decided to open up a phase two investigation.
I think all of that helped to facilitate coordination not only with the EC, but also with Canada, Australia, Switzerland, and other jurisdictions. And as a result of that, all of the jurisdictions, I believe, adopted very similar analyses in terms of identifying what the issues were and then applying that in their particular markets.
The merger is instructive also in the sense that although there was this kind of close coordination, the structure of the markets in Europe and in the United States were quite different. In Europe, because of guild-type restrictions on who can practice public accounting, you really had, you still have national markets. In the United States, of course, we have a much larger national market than any of the individual countries in Europe. And that might have led to potentially different results had the Ernst & Young/KPMG merger not dropped by the wayside as we went forward.
Among the lessons I think that Jim Venit and I took away from that experience were that the substantive standards in the United States and Europe do seem to be moving closer together. And I think that that's a salutary development. In our paper we cite several examples of that. First of all, the EC's adoption of the SSNIP approach to market definition used in the United States for many years now. Second, the decision in the Kali und Salz case last March, which gives official sanction to the EC attacking or challenging mergers on a coordinated effects, oligopolistic coordination theory, and also adopting a very rigorous economic analysis of when coordination is likely.
Conversely, in the United States, beginning with the 1992 guidelines that, Jim, you were largely responsible for, the United States has very much moved away from a focus on coordinated effects, although that's still important, to more of a focus on unilateral effects, which again bears some similarity to the single firm dominance or abuse of dominance that has always been the principal focus of merger review in Europe.
In a way, and this I think echoes something that Phil Proger said in his closing remarks, our merger guidelines are arguably in need of revision, because I think that in fact the agencies have made less and less use of the Herfendahl index, for example, as part of their review, and that as we say in our papers, we are now in a situation in the United States, for example, where although there are always exceptions, as a general matter, it's unlikely that the agencies will challenge a merger on a coordinated effects theory unless it results in a market structure in which there are two firms that occupy the majority of the market. Very similar to the approach taken in the EC, which is concerned with oligopolistic coordination only when it's a duopoly situation.
On the unilateral effects side, and again although there are exceptions to this, when you look at the decisions, as we had occasion to do in the past year, you find very few merger challenges in the United States on unilateral effects theories where the combined market share of the merging firm is less than 40 percent. And again, that is remarkably similar to the threshold in Europe for challenging a merger on an abuse of dominance theory.
So I think our substantive standards really are moving much closer together. That really shouldn't be surprising, because I think both in Europe and in the United States, as well as in Canada and Australia, merger analysis is very much driven by economics, and the economy, thanks in part to the Internet but for other reasons, really is becoming increasingly global.
One of the interesting things about some of the investigations which the Justice Department has conducted in the past year, including the MCI/WorldCom merger, is that some leading European economists are now being used as experts in proceedings before the Justice Department -- Jan Tirol in the case of MCI/WorldCom and also in the case of the credit card investigation.
Similarly, leading American economists teach in Europe and frequently appear before the EC, so it's not surprising that their thinking is informing jurisdictions around the world. Finally, of course, as this week's American Lawyer illustrates with its cover story, law firms are becoming global, as are economic consulting firms. So it's not surprising that we are all informing one another.
There are, I think, two areas in which there are still important differences where greater convergence is needed, and I'd like to spend just a minute on those. The first is efficiencies. I think Australia and Canada were actually the first two major jurisdictions that formally incorporated efficiencies into their merger review process. The United States has now somewhat belatedly done that with the 1996 revisions to the merger guidelines, and I think they have a very sound general approach to efficiencies, although one can argue about whether they are being construed too narrowly.
The EC, at least based on my limited experience there, still appears to be very conflicted when it comes to efficiencies. There are no decisions to my knowledge where efficiencies have been expressly used as a reason not to challenge a merger that the Commission might otherwise have challenged, and in fact there are even some decisions within the last five years in which efficiencies were used as one of the reasons for challenging a merger, because it might contribute to a dominant position.
The other area in which there clearly is still some divergence is with respect to remedies. The best example of that recently were the proposed conditions that the EC considered adopting in the American Airlines/British Airways alliance where one of the two conditions, there were two conditions, one would have been a requirement of forced divestiture of slots with no compensation. Second, and of greater concern, was a proposed remedy that in effect would have restricted output by limiting the frequency of flights between New York and London.
That's clearly the type of remedy that the U.S. antitrust authorities would never consider, and in fact I think if any practitioners suggested it to the agency, they would be laughed out of the room. But be that as it may, it did creep into a proposed decision at the EC.
I think I'll stop at that point. I have probably taken more than my five minutes. Thank you very much.
MR. RILL: Jim Atwood, partner at Covington & Burling, professor, national antitrust author and frequent lecturer and writer in this area, we are delighted to have you here.
MR. ATWOOD: Thank you. Very nice to be here. I will be brief in part to avoid repetition, because I think the two prior speakers have already put a lot on the table that is useful. I would like to come back to a fairly basic point, and that is that I think in merger analysis, as in all antitrust law, my view is it is essentially going to be a national analysis, that that is appropriate, that the enforcement authorities in various jurisdictions analyze the effects of the transaction in their country, and that that is true whether or not the economic market is a global market or a more local market.
It is still the role of the Justice Department and the FTC to figure out what the impact of the transaction will be in the United States, taking into account whatever international factors bear on that inquiry. But that is still fundamentally what has to be the inquiry for the U.S. agency, and similarly in Europe and in Canada and in Japan and Australia and what have you.
I do not think there is any getting away from that, and that necessarily means that there are going to be different judgments about the desirability of the same transaction by different national authorities, even if one is applying the same standards. The markets are going to be different and the conditions are going to be different.
The Aenupiat language has about 35 different words for snow. I only know one word for snow, and if I were analyzing a merger of snow-making companies, I would analyze it much differently than would an Eskimo. And so likewise, the French may look at a merger of wine companies very differently than the U.S. would, and what have you. Perceptions are going to be different in different countries because of different conditions, not just in terms of product definition, but in terms of the thrust of the businesses involved.
For example, merging firms in the U.S. may be primarily very heavily exporters. That's going to have very different effects in terms of competition analysis than if say, from the European perspective, where those same companies are primarily importing into Europe. There may be more local competition in one country or another. So obviously you are going to get different results even if the basic substantive analyses are the same.
As Bill has indicated, there are still, despite all the convergence, there are still very different substantive rules from time to time and different approaches to remedies as well. And added to that reality is the proliferation of merger enforcement programs around the world, which in a sense is a good thing because we are all in favor of good competition, but there is no doubt that the proliferation adds systemic costs and risks such that desirable transactions are going to be frustrated, either by the very cost of the process or by kind of a least common denominator result.
If a transaction makes sense only if the parties can put together all the pieces and they are blocked in 4 of 16 jurisdictions, then the transaction goes down, perhaps even though, as a whole, it would be a very beneficial transaction.
And the United States, of course, has taken a lead in promoting broader, more international antitrust enforcement, which is understandable and very good. But I suspect that there is a cost that can come back at us as a result.
Bill made the comment 10 days ago at Fordham about how high filing fees for pre-merger notification programs are catching on like wildfire, and it really is beginning to add some systemic costs. I think that there is no easy answer to this. I don't think an international code is frankly practicable or workable. It's likely, I fear, to add another layer of analysis but not replace the nation-by-nation analysis, which antitrust authorities are going to feel that they have to do in any event. Standards are likely to be so vague that they are not going to dramatically influence in any legal sense the discretion of individual enforcement authorities.
I suspect that what is really necessary is continuing informal cooperation, continuing convergence of approach, through everything like conferences like this and the OECD exchanges and educational programs in the WTO. I think that it's moving things in the right direction in a lot of respects, in terms of common thinking on these problems. Enforcement officials must know each other and be able to deal with each other candidly and responsibly and with an atmosphere of trust.
And, I think as we proliferate merger regulation around the globe, it's more and more important for enforcement officials to be willing to take the long view of things in two senses. One is they have to realize that, even though they may have sort of a neat "gotcha" argument they can use in this transaction, somebody else might have a neat "gotcha" argument they can use in the next transaction and frustrate U.S. interests. So there has to be informal play at the joints when agencies discuss with each other how they are going to deal with particular transactions.
There has to be a greater trust in the market in the long run to alleviate short-term competitive problems that particular transactions may create. This is, after all, part of the global economy and the rapid advancement of technology. I think we can take increasing comfort that the market is going to sort out problems faster rather than sooner, and if enforcement agencies give greater appreciation to that, and through a process of informal forbearance in the close cases, I think the problems are going to be manageable.
But if there are very aggressive approaches taken on a national level, and I don't see any way under international law, policy or practice to stop that, the problems could become unmanageable.
MR. RILL: Thank you very much for your contribution. Ilene Knable Gotts is a partner at Wachtell, Lipton. Delighted to have you here. Ilene and I are working on a merger right now that makes it somewhat remarkable that either of us is here.
Putting that to one side, Ilene is a former enforcer, practitioner and partner in a firm formerly in Washington, currently at Wachtell, Lipton, which as everyone knows has an active merger practice, the Clayton Act committee chair of the ABA antitrust section, intellectual property committee as well.
MS. KNABLE GOTTS: Thank you, Jim. I really appreciate the opportunity to be here today because if nothing else it provides an excuse to reflect on broader topics than in our day-to-day practice where we are worried about the mergers and the facts that are related to them, and also allows us to think a little bit about what ought to be, which is again something we don't usually have the luxury to do.
And one of the things I was thinking about is 15 years ago, when I was at the FTC, how during my time there, there wasn't one merger I had where we were talking about really foreign competitors coming into the United States or global markets. We were concerned about the Rockies, east of the Rockies versus west of the Rockies. That seemed to be the biggest barrier. Often, if there was a national market, the merger's impact would look a lot different.
Part of why things have changed today is because we have seen the trade barriers come down. We have seen political and cultural differences decrease and as a result firms have looked for opportunities through which they can become global; one way for you to become global is through mergers. It's a very quick and effective way. It's often also a way that's very pro-competitive.
And although our topic today is on resolving some of the substantive conflicts in remedies, I think we have to start out with process. And in this regard, we, as the first country that had a pre-merger notification scheme could also learn instead of dictating to other nations what we think the way it should be and that we have somehow invented the right system here.
We need to step back a little bit and try to learn a little bit from the other jurisdictions as well to come up with a system that would work more efficiently. When I look at the process and what's wrong with it, and how it impacts on the substance, we start out with thresholds. You have in many jurisdictions these de minimis thresholds where there is not even a nexus to that economy. So when we talk about national markets, as Jim was mentioning, if there is no impact on that national market, that's an area that comity would suggest there should be a stepping back. That's not a country where they should be taking a lead in looking at it.
When we also look at thresholds, we get into issues like our process and Hart-Scott-Rodino filing fees that have really gotten out of hand. I have a transaction right now where there is a whole bunch of secondary filings that have to be made that have absolutely no impact on the merits of the case and could result in anywhere from a half a million dollars worth of the filing fees. It's a tax for doing business with the United States Government, but it discourages and when you try to explain to foreign companies and foreign countries how our system works, they just shake their heads at what we are doing here.
The forms. We have a Hart-Scott-Rodino form that does not provide enough information on deals that raise substantive concerns and imposes too much on transactions which have no substantive overlaps. Again, we could learn from our Canadian colleagues here about the difference between short forms and long forms.
Hand in hand with the forms goes timing. One of the problems you see under comity is that jurisdictions say, well, if I sit and I wait until another jurisdiction acts here, I might not have any options, I might not be able to act. Having jurisdictions where you have mandatory filings required within 7 days or 14 days is not a way that facilitates an efficient way of resolution or coordination among companies.
The parties can help with the timing issues if there are no mandatory dates by which they must file. To get the agencies to work together, you might end up saying "we're not going to trigger the 20 days of a second request and send in the materials. We would rather you sat down with the EU or with Canada and coordinate your activities."
Discovery requests. Another area which is "process" but which also affects substance. Again, we have a system with the second request where you get this "one bite of the apple" although we all have gotten CIDs as well in many of our mergers where they have missed something or something else has come up, which seems like an inefficient way to deal with it.
The second request is a way in which to stop the time clock. It isn't a way upon which to necessarily get the information in the most efficient way. We have all tried to work with the staff by staggering our production and other things; better if we had a system that didn't trigger off of that, but where we had a much more open process where the information flow continued on a gradual basis, that allowed us to coordinate discovery.
It shouldn't be that we are dealing with our second request at the FTC and at the same time be in Europe dealing with them in their initial form and going in there and having to deal with Canada separately. That's not the most efficient way to get to a resolution. To say "no, you should follow the U.S.'s lead" is not giving them deference to their sovereignty and to the fact that they could have their own concerns here.
When we look at international codes, I don't think they work because we do have our differences in how we may treat the impact of the merger. To work at mandatory requirements of any sort, that isn't how you get anyone to change how they are going to proceed. I look at the United States. We have a compact with the states in which there is supposedly a process that will be followed. You waive confidentiality. The states will supposedly work with the FTC, but they won't issue their own CIDs.
Increasingly, states aren't willing to do that. They want their cake and eat it too. They want you to waive confidentiality and yet they issue CIDs, so here you have an agreement that's been entered into, but it doesn't necessarily work. What you need is a change of policy, and that takes time, trust, some guidelines. I call it more an adoption of a protocol of restraint, and in that regard I see that there are really three types of mergers, and each one really suggests to me a different policy that we should be aiming to try to do.
One is where you have, it's again tied to the thresholds, where the impact on a jurisdiction would be de minimis, and where there is another jurisdiction that is: likely (1) to have the same issues (if there are any issues) and (2) is likely to resolve it. In those, I would suggest to you those jurisdictions in which there is just a de minimis impact should instead try to talk to the jurisdiction that is more primarily affected and share with them their views or their concerns, but then should try to step back and not necessarily take action, including not investigating, or try to deal separately with it from the start. They can wait and see.
Then there are those transactions which raise more substantive questions, but again, where another jurisdiction might, because of where the parties are located or because of just the extent of commerce of the parties in that country, might be a better source to investigate and again to come up with the relief. In those the other jurisdictions might want to have an investigation but they might want to coordinate that investigation with a primary jurisdiction and they might want to maybe have some impact on the fix. But, again, let one country take the lead. We have seen this happen in Canada to some extent where, for instance my understanding of the Kimberly Clark transaction is that Canada made their views known to the U.S., ultimately the U.S. fixes the transaction to deal with the Canadian concerns as well.
And then we have the third type in which the issues and the relief are likely to be different because of the substantive standards that the countries apply, because of how important the product might be to the countries, or because of the regulatory schemes. We are thinking of telecommunications, for instance, and certain areas that our U.S. system might regulate more than in Europe. In these cases there might be an area where both countries are going to want to investigate, and both countries might ultimately want to have relief, but there is no reason why the parties and the systems shouldn't be facilitating coordination of the investigation and the relief by the agencies.
The joint meetings of MCI/WorldCom are a very good model to be followed in that respect. And that worked that way because the parties wanted it that way and it was the EU and the United States that were working together. I question whether if we were talking about Japan, you would see the same sort of relationships between, let's say, Japan and the United States. The cultures and the level of trust isn't at the same level.
What we have seen being developed in the way of cooperation among the U.S. and the EU could become the model for what might work out with other countries.
The last area, is what I'll call the deferral or comity sort of principles that I would really encourage agencies everywhere really to try to do, is not to use the pre-merger review process as a way to address what I'll call non-merger-related issues or to achieve non-competition-law objectives. You have these two companies that want to proceed to that finish line as quickly as possible. That doesn't mean that that's an opportunity to extract a toll from these companies.
Either because the fix you want is so small compared to the value of an entire transaction, you know the parties are going to give, even though it's not the merger that will have the impact or because you want them to do something that's beyond what's needed, you want to improve the market from the status quo; there are other avenues to address those concerns.
That isn't an area where pre-merger reviews should be used, and we have seen allegations being expressed that maybe this is part of what happened in Boeing/McDonnell Douglas. I was not involved and I do not want to criticize our European colleagues because I don't have firsthand knowledge. But, again, I'll suggest to you that we see some of this in our own country, both at the federal level when you look at the Thompson/West transaction, where it was not merger-specific although there was a competition-related relief. Or you deal with the states on a day-to-day basis where it isn't again necessarily competition or merger-related relief of sorts, but instead is relief that is possibly labor-oriented, jobs in a jurisdiction, or politically oriented.
Until we clean up our own shop it's hard for us to be saying to other jurisdictions that they need to be making these changes as well. I think I've more than used my time, so I'll turn it over.
MR. RILL: That's a great contribution. Bill Rowley is a partner at McMillan Binch in Toronto, a long-time practitioner in antitrust, a leading practitioner and scholar of the Canadian bar, of the merger and antitrust field generally, a frequent lecturer at Fordham and other fora, and a writer of some significant note in the field, and a good friend. Bill? And oh, by the way, head of the business section of the IBA.
MR. ROWLEY: Well, to your latter point that is the truest remark you made in your comment. And in that connection, let me just say that, to the extent the International Bar Association can help, should you wish to utilize workers outside this jurisdiction in your cause, we would be delighted to do so, and we have the bodies around the world to call in aid.
Like Ilene, I tend to focus this afternoon on form, or process, over substance, although I do not mean to imply that Ilene's remarks were anything but substantive.
I read a lead editorial in a new Canadian national newspaper last week , the National Post -- newly published by one of Canada's would-be market dominators, Mr. Conrad Black. An aspect of the editorial made me think about this afternoon's subject. The editorial had to do with Microsoft, and it was not wholly complimentary. But I do not quote it for that reason. I read it for these words: "At the root of the whole antitrust system is a failure to believe -- despite overwhelming historical evidence -- that markets work to restrain monopoly (monopoly power)."
The lead writer castigates Joel Klein for his comments in a speech given earlier this year, to the effect that, ". . . the natural state of markets is not to move towards increasing competition. Market power, rather than a competitive market, is something that every businessman understandably wants -- because it allows his business to increase its profitability at the expense of the consuming public." The lead writer concludes: "Typically, this both libels the vast majority of entrepreneurs and confuses intentions with results."
The reason I draw our attention to this editorial this afternoon has to do with issues surrounding faith in markets (whether markets work or not) and who has that faith. This question is highly relevant to the task of this Committee, given the proliferation of new antitrust regimes we are experiencing.
Doug Melamed told us at Fordham the other day that there are some 80 antitrust systems in place in the world today. To my count, over 50 of those have merger control schemes, and 24 other jurisdictions have systems in the works. To understand the potential problem this creates, it is important to understand that 90% of these schemes have been put in place in the last 10 years, and they have been put in place by people who really have no grounding in either antitrust theory or enforcement.
Against that backdrop, I turn my mind to a merger in the making on which I have a small role. To my horror it will involve 43 jurisdictions which have some sort of a merger review requirement. Now, if that merger takes hold and is announced, a lot of people will have a lot of work to do. While that will benefit those of us who are involved, the issue for this Committee is cost/benefit for the system, and the global economy.
Turning now to merger review, remedies and inter-system conflicts, I don't think we are doing the job we should be. And that goes both for the process side and the substantive side. If I'm right, I would hope that one of the recommendations of this Committee is that we all come to grips more effectively with the problem.
To do so one of the first things we need to do is to determine what the costs of our errors are. With knowledge of these costs, which I suspect are enormous, we will have a much greater incentive to address them.
On the merger front, what adds to costs? Filing fees add to costs. Eighty world merger regimes add to costs. Efficiencies delayed add to costs. (And these can be enormous. I am aware of a current merger where the annual efficiencies exceed a billion dollars. This particular merger will take at least a year to clear, and that's one merger out of a world of mergers.)
Other costs concern the diversion of executive energy -- i.e. their inability to get on with life when they are grappling with a multijurisdictional merger review process. These costs all impose a chill factor which overlies the system. Added to this is the risk that the agencies will get things substantively wrong.
Against this background we need to think about when business people will say enough is enough. We are not going to do this merger because we can't afford it.
So, my first hope is that we get serious on costs, and that this Committee might say, "let us test the costs."
How might we approach the task? Well, we actually have a huge pot of money available to fund research. It's not been identified I think until now, but the rainbow's pot of gold I have identified is all those filing fees that people are now paying. There are 12 jurisdictions that I can count that collect these fees. Should this Committee not give consideration to whether some small portion of the filing fees that are paid for merger review be set aside for proper empirical research on the cost side.
DR. STERN: Would you like to be the bill collector? In principle, it's a great idea.
MR. ROWLEY: I wouldn't have to go very far. I was at the DOJ for a drink last night. It's a very nice place, and I bet they keep all the money right there.
DR. STERN: Go ahead.
MR. ROWLEY: If I may say just a word or two about extraterritoriality and remedies. This morning we talked about whether today's merger review system is broken. It is imposing undue costs in the system.
My answer is yes, to a degree, but not on the substantive remedy side. The problem is not with the Boeing cases. It's not with the Kimberly Clarks of the world. The problem is with the 10,000 other mergers that have to be notified and that are delayed and that pay the costs identified earlier. It's those mergers which cannot afford to do so. And it is those costs which the global economy may be wasting.
Turning to a question which Ilene addressed relating to lead jurisdictions and other follower jurisdictions. Canada has been a follower in a couple of notable cases. In both the Novartis and Kimberly Clark mergers, the Canadian agency was satisfied with a remedy imposed by and after consultation with foreign agencies, one being a U.S. agency.
This can be seen as a positive in some cases, especially if costs have been saved. But there may also be reason for worry. One reason relates to positive comity. For example, if I as the Canadian enforcer have concerns, but lack the crisp case I would need in order to litigate, I might well turn to my good friends at Justice and ask them to expand their remedy slightly, to look after us both. How do we guard against this sort of positive comity?
Perhaps we should consider a role that where one agency proposes to address the concerns of other agencies or impose a remedy with effects elsewhere, it checks with both the affected jurisdiction/agency and the parties before it acts.
I don't think I'm going to say very much more now. In the questioning which follows, I hope we might talk about providing incentives to get us to where we need to get to. I hope we might also talk about agency accountability deficiencies in the United States and Canada. I am not all sure that we got our regulatory system in terms of accountability and testability. My concern is that we are getting wrong results, and people don't know it. We need to put in place a way to measure outcomes.
MR. RILL: Let me just open with some questions. Several, almost all of the panelists indicated a need for some form of greater substantive convergence. Some proposals have suggested a code developed through the WTO. There are significant discussions about this in various circles. Others talk about convergence. Jim Atwood suggests conferences, speeches, hopefully more than that, but meetings like this. Is there something more than that and less than a code that you could conceive of, which I agree is even necessary within the U.S.-EU, U.S.-Canadian relationship. It just raises even more potential frictions as we have at last count 50, 60 and climbing jurisdictions that have an antitrust law with some sort of merger review. What more can we recommend? Bill, you have your flag up.
MR. ROWLEY: Right. Let me offer a short thought. I don't think you should recommend the use of the OECD, because it is a developed nations club. It is perceived as that. And the problem that is developing does not originate there. I do think there is a role for the WTO and for the next GATT ministerial. If your job is done before then, and it may well be, many of your good recommendations will not be implemented by then. I would like to see some consideration be given to asking the WTO, through a ministerial, to look at these questions and to address I think four goals.
The first is convergence of substance, the second is process convergence, the third is to approach the first two with an understanding of systems costs and their reduction, and the fourth is to understand whether our agencies' decisions are doing harm. I would involve the private sector in this process. At least half of those involved in these projects should represent private industry, because there it is that the cost has been borne. Also, regulators do not have a natural incentive to change the system. And I am against the OECD playing a lead role for another reason. It is unbearably slow.
DR. STERN: Well good, because I have a question and I'm delighted that you answered the question that was put to you in the manner in which you did, which was the emphasis on the business community and how to get to the resolution of proposals that are feasible in a businesslike time frame. I am impressed by reading the materials that you provided us, and particularly the statement that you made, Mr. Kolasky, in your Global Competition Review with your co-author, in which you said that although substantive standards are converging, there remain fundamental differences in the procedures under which the EC and the U.S. agencies review mergers.
You have made the argument a number of ways in which there is more deeply substantive convergence, particularly in the context of the U.S. and the EU. On the face of that, it would seem counter intuitive that somehow you think you could get agreement among government folk on their procedures than on the substance, but I think that that's a surface idea, and I think that, in fact, it looks like businesses in the marketplace do move faster than government regulators, including when they are changing their procedures.
Therefore, I would like to ask, as we look towards a recommendation from this Committee for what should be adopted to enhance a more efficient system that helps the consumer, and one that will get adopted sooner rather than later, isn't it a useful approach to pursue a U.S.-EU agreement and convergence prior to, if you will, trying to get the whole WTO to sign on, particularly in light of the fact that the U.S.-EU trade partnership represents such a predominant portion of the world GNP?
I'm asking this question to lawyers obviously, but I am trying to elicit some thinking that relates to what makes sense when you are making recommendations to governments. Would it be best to go in a plurilateral or first bilateral, then plurilateral before you get to a multilateral, assuming that convergence is happening as you suggest. So I would like to kind of reframe the question in that light because I think we might get some more direct guidance on what is doable in a shorter period of time.
MR. RILL: Bill, you had your flag up initially.
MR. KOLASKY: Yes. I'd like to respond to that and pick up on a couple of points that Bill Rowley was making. I think the fundamental reason why in the procedural area we've had less convergence than in the substantive area is that in the procedural area in the United States our procedures were set by Congress in the Hart-Scott-Rodino Act. And so that makes it much more difficult to change the procedures than to change the merger guidelines and how they are interpreted.
DR. STERN: Yes. It is.
MR. KOLASKY: I think that the idea of bilateral discussions is a very useful one. I think as perhaps a preliminary step in that direction, one thing that would be very helpful would be to have some in-depth conferences with academic papers being prepared on some of the issues that we talked about with respect to substantive convergence.
For example, the difference in the way the agencies or the different jurisdictions handle efficiencies. I'm reminded of the Airley House Conferences that were held in the early 1980s, where people like Phillip Areeda were asked to contribute papers that subsequently had considerable influence on Supreme Court decisions like NCAA. I think it would be very useful to have those same types of conferences looking at these kinds of comparative law issues.
An even humbler suggestion, if you will, is that there may be a technological, if not solution, at least it will help here. One of the things that I found in the last year is that there is actually a larger body of merger law in Europe than there is in the United States. There is a substantial body of merger law in Canada. Most American lawyers are oblivious to the existence of that. They never look at it.
One of the reasons, I think, in the case of the EC law, is that it's not readily available over our Nexis and Westlaw databases. Were that to change then suddenly you would have a much richer body of precedent that lawyers and agencies could look to in trying decide how to apply the guidelines to a particular set of facts.
MS. JANOW: Interesting. I'd like to ask a question if I could in clarifying. This panel was characterized as conflicts and remedies and what I think our eminent practitioners here have not emphasized are many direct conflicts. You have been emphasizing the soft harmonization and how that's occurring, about the misuse of competition for noncompetition objectives, for transaction cost reduction and the necessity of that, and some differences on remedies -- I think Clive Stanbrook and Bill Kolasky both emphasized. But I haven't heard mention of conflicts and I wonder if we could just for the record here, get clarity on whether or not this is a substantial problem. If so, if there are any defining features to it, and if we need to be thinking about instruments for either avoiding it or resolving it.
MR. ROWLEY: At the risk of going out on a limb -- one of my partners used to say, Bill, you are quite a long way from the trunk of the tree, come back in and put your arms around it. Because that partner is not here I'll go out on a limb.
One of your first questions this afternoon was what are the principal sources of conflicts and how do we fix them. I asked myself, really what does that question mean, conflicts of what sort? Between whom?
The agencies that oversee merger control in the various jurisdictions that have regimes are not contestants, they are not combatants. They are all doing their job to assess a merger insofar as it comes within their jurisdiction to the best of their ability under their particular set of rules, many of which have slightly different approaches to the things.
I may get a deal through the DOJ and I may get it through the Commission, but I may not get it through the Australian authority, and I may fail to get it through the Australian authority because I have the same issues exactly but I haven't convinced them or they have a different set of rules or they've perceived something somewhat differently. Now, is that a conflict? No.
Of course, Boeing/McDonnell Douglas got air time this summer. But was it really an antitrust agency conflict? And was it desirable for the agencies to get involved in the air time? I'll give you a view on both questions: I don't think it was, and I don't think they should have.
MR. RILL: Come back to the question of substantive convergence and the issue of the quickest way to do it, whether there would be a U.S.-EU approach or a WTO approach or whether there needs to be some other formulation as President Sanchez Ugarte pointed out yesterday, the director of the Mexican antitrust agency.
Not all antitrust problems are trade problems and to use the WTO to solve an antitrust problem that for our purposes must have a transnational issue, doesn't necessarily mean there is also any trade problems. Is the WTO an organization that has the jurisdiction and dare I say capacity to deal with that kind of situation? Or is there some other solution rather than bilateral convergence, just to throw out some ideas -- regional organizations, greater exchange of personnel, building on some of the thoughts that have been said by President Oliveira of the Brazilian agency yesterday that two Argentinian enforcers sat with the Brazilian agency and helped them resolve a merger dispute. Are there more ideas? I'm throwing out too many of my own ideas. Let's hear yours. Eleanor.
MR. RILL: Bill or Eleanor.
MR. ROWLEY: I have had too much air time, but I do have a thought after others.
MS. FOX: Go ahead and address it, Jim, and then I'll jump in.
MR. RILL: You came down in the rain, all this way. Go ahead.
MS. FOX: I came back from beautiful sunshine in New York. On conflicts, let me just say one more word about conflicts because there's the narrow way of thinking about it, which is like the Souter and Hartford or Scalia and Hartford way of thinking about it.
One country says this merger is fine we have no problem with it and another country says, gee, we think this is a really big problem; we're going to stop it. You want to call that a conflict. Well, I think we ought to think of it, whatever word you want to give, it is a conflict of jurisdictions. It is a problem, especially if the merger may be considered productive and maybe by U.S. analysis it's productive and efficient and good for consumers and by somebody else's analysis it's harmful either to consumers or to competitors or to jobs. I think we ought to at least think of that as a conflict in the world not just for the parties, but for the public. And if that is thrown into it, do we see more conflicts? Question number one.
Question number two. About substantive convergence and should we have an international or at least more of the national frameworks for thinking about substantive convergence of merger law? I just want to throw this thought out to be commented upon.
The first proposition is it's soft harmonization -- Jim won't smile -- but it still might be the best in thinking about substantive convergence and on substantive convergence there are at least two very different problems. One is that countries are trying to do certain things but they get it wrong; some of them get it wrong because they don't understand the analysis and they surely would learn if they are really trying to do the same thing like either enhance consumer welfare or enhance total welfare. If they are really trying to do the same thing they will probably learn from all of these seminars.
The other is, and I wanted to ask you all who have had experiences with this, how many times do you find the substantive differences not because nations or states are trying to do the same thing but because they are trying to protect jobs, whether or not they say it or they are trying to promote exports?
Canada has a clause in its statute that says that enhancement of exports is a plus aspect to the merger. So I wonder whether you are running into those areas for diverse decisions and if we are, is there anything that the world should do or that countries as a whole should do or should we just let those differences bubble up and be treated as they are treated.
MR. RILL: One footnote to that is the question of at the minimum I suppose there would be transparency as to their differences.
MS. FOX: Yes. I think at a minimum there could be transparency. I think there is also another step that's going to be important in the world because sometimes a merger will be approved for noncompetition reasons that may have significant negative spillover effects in the world. Whether or not we are seeing a lot of that now, I think that's the kind of thing we have to be alert to. One nation approves a transaction and it's major negative impact is the rest of the world.
MR. RILL: Bill?
MR. ROWLEY: Eleanor, I'm going to try to answer some bits of your questions and some bits of Dr. Stern's question about whether it should be bilateral, whether it should be multilateral, is there a process to do it and then maybe I'll have a little discussion to address your conflict issue.
I'm not against bilateral efforts between Europe and the United States. I just don't think that they are going to achieve what we need quickly, if at all. And the reason I am in favor of starting with the WTO is that the problem of costs to the vast majority of cases is going to be enhanced significantly through nations that trust the WTO environment and distrust the OECD.
DR. STERN: But bilateral is not OECD.
MR. ROWLEY: No. I understand. Forgive me. I had said WTO as a multilateral, but I prefer the WTO as opposed to the OECD. Nothing to do with the bilateral.
DR. STERN: Okay. Fine.
MR. ROWLEY: I said, have a go at a bilateral approach. But I don't think it will get us there. As between OECD and WTO, go to the WTO because the marketizing economies trust the WTO more, I think, than they trust the OECD. There has been a concern whether there is the expertise there, whether there is the infrastructure. Of course, it's not there. Can it be acquired? And can it be acquired relatively speedily? Yes. It can be. Many agencies have acquired this over time. Why not provide the WTO with our best?
Why, also, the WTO, you know, one of the concerns that I have about all these merger controls we have -- John Dunlop raised the question at lunch, he said to me, is there a common definition of merger? And I said, well, I know about 50 odd systems and excluding about 15 which are based on the same thing, and the answer is no.
We also should ask ourselves, what is it that is so special about the business transaction that we call merger that requires this extraordinary system when a merger in some jurisdictions is simply a contract? Is there more conflict if we look at it your way, Eleanor, yes. There is more conflict if we look at it your way because jurisdiction A will allow a market reformer and jurisdiction B will disallow it.
MS. FOX: Under the same market conditions.
MR. ROWLEY: Well, that's the question, you see. Then you say, but is that a problem? No, not unless you have the same market conditions, and you are purporting to either apply the same test and get it differently, or you are applying a different test, one component of which is preventing an efficiency. Now, leaving aside global welfare or total welfare, or consumer welfare, we in North America think that that is a desirable goal, so you have conflicts, but there are many, many jurisdictions that don't accept that goal.
DR. STERN: If I can pursue this on the bilateral, or the plurilateral, and I don't want to leave Canada out here, kind of gain the response or undermine my -- the end result that I guess I'm trying to elicit here.
Yesterday we did hear, of course, from Karel Van Miert about the WTO and the notion of a dispute mechanism, and to deal with some of these matters, we also heard from his Mexican counterpart that well, some of these issues are trade issues so why go to the WTO when we are talking about mergers, for example?
The WTO dispute mechanism which exists now is having a problem dealing with the trade issues, and I am wondering again, if there is convergence going on between certain jurisdictions now, whether that paradigm is just a quicker paradigm for achieving agreements so that it would then snowball into Canada, other countries and then eventually perhaps into some international code or agreement that may or may not belong in the WTO.
I guess I'm curious about the attractiveness of the WTO to solve these problems. I don't know if Professor Matsushita is still out there but we were talking about the work that he was doing sitting on the appellate at the WTO and how overworked they are as it is now and I'm sitting here reading about three cases which they did agree to and in each one of those the losers are frustrating the outcome of the decision by going back and creating another potential violation and challenging people to just bring the case again. So I just, I'm very curious about the attractiveness here.
MR. RILL: Bill, you had your flag up?
MR. KOLASKY: Yes. I would like to address that, though somewhat indirectly. I think that one of the difficulties here is that antitrust merger review doesn't lend itself to sort of a code writing approach. And as I think, as I indicated, look at the decisions from the EC and from the United States. You look at what they say, with the possible exception of efficiencies and remedies, they are basically applying the same substantive standards and to the extent that they end up reaching different results, it may reflect two factors.
One is maybe differences in the staff to agencies. Jim Venit has told me repeatedly that one of the problems the EC faces is that it does not have as large a professional staff, especially of economists, as the Justice Department and the FTC does, so you have "bureaucrats" making economic decisions without the advantage of having professional economists who are objective as opposed to the ones hired by the parties to consult with.
Second, and even more fundamental, is simply differences in the background and views of the head of the agencies. I think -- and Jim would agree -- that notwithstanding the revisions to the 1992 guidelines that he and Ann Bingaman were basically applying the same substantive standards and I suspect that there were some merger cases in which they would have reached different decisions. And I suspect the same is true as between Joel Klein and Karel Van Miert. Those are just fundamental differences that you can't get around. And where that takes me is Eleanor's question about conflicts.
I think as Bill Rowley indicated, and I think Ilene made the same point, there really have been very few conflicts in the past. Boeing/McDonnell Douglas is one that gets so much air time because it is so unique. And one way to help avoid conflicts, and this comes to Eleanor's point, is to have the various jurisdictions adopt one basic principle and that is that the relief that they seek in any merger case will be as narrowly tailored as possible to address specific problems that they find.
So, for example, one possible cause of conflicts is that the structure of markets may be different. The accounting market in Australia may be different from in the United States, and you may reach different results. If that's the case, then the remedy ought to be one which is limited to solving a problem where you find it. That's something which here in the United States we have a lot of experience with from the old days that Ilene was talking about when we used to look at local and regional markets and have narrowly structured divestitures, structural remedies that address only that one problem.
A very interesting article by Robin Aaronson in the Global Competition Review addresses this point. Robin was one of the partners at Coopers & Lybrand who also worked on the accountancy merger and he makes the point that he thought that one of the reasons why the Price Waterhouse/Coopers merger was approved in the EC as quickly as it was, was that the EC recognized that there were no structural remedies short of disapproving the entire merger, and as soon as they recognized that, they recognized that they should give some deference to the views of the United States, Canada and Australia, all of whom by that point had reached a conclusion that the merger should go forward.
MR. RILL: I think just to close out on the substantive convergence issue, I sense that there is a general positive feeling towards other types or substantive convergence. We have discussed bilaterals, we have discussed the WTO and I think largely because the WTO happens to be there and has a lot of people, a lot members, a lot of nations. It doesn't have any particular expertise in the area. It doesn't have any particular mechanism in the area. But it's there.
The OECD is there. It has considerable expertise in the area. It doesn't have useful business input as much as it should. That can be worked on, but the OECD, as I think Bill correctly points out, is viewed by some as an elitist club and it's a fairly large elitist club of some 29 or 30 nations, with another half a dozen with observer status and the EU isn't even among the members. It's an observer. But it's viewed by some as a club. Are there any other ways to move towards soft convergence, any other mechanisms that you all can think of? Jim?
MR. ATWOOD: Well, you know, ultimately the constituencies here that we are trying to serve are the business community and the consumer community. Both of which have tremendous political power in their respective jurisdictions. And they actually have the potential, from the ground up rather than the top down, of causing our systems to move closer together. But that doesn't seem to be happening.
I don't sense that the business community is really charged about this position. You all have been reaching out to them, I know, in recent months and perhaps you have got a different perception. I don't have clients telling me that we need to organize something in order to persuade our government and the EU to act more cooperatively. Maybe the business community is just shortsighted. They just seem more interested to have their particular deal handled a little more efficiently, a little faster. They are satisfied if that can be accomplished.
Merit mentioned a couple of weeks ago when we were talking that there hasn't been a ground swell from the business community and I wonder if that is a perception and it's curious, but maybe that tells us something and that is that the system isn't all that broke.
MR. RILL: We hear you. Eleanor?
MS. FOX: Following up on Paula's question about what is the attractiveness of the WTO and following up on all of the statements about the problems of WTO, I was wondering, this is as much addressed to Bill Rowley, I think, and Ilene, if there were to be desire for an agreement, this, of course, assumes that the system is broke. I think Bill is saying I look down at it. I see it. It makes no sense. If anybody was designing a system to handle these coordinated merger reviews, it would never look like this. It's only grown up like this because of the United States getting their first selling and exporting as antitrust.
OECD now proposes that every nation have pre-merger review and everybody has merger review even when it has the tiniest corner of the merger. Well, if something orderly were to be desired and possible despite the business communities not realizing that they really want it and their lawyers not realizing that they want it, because why should the lawyers want it except for those who are public interest people as well, no offense, one of the things of the WTO as a good community, that is, it has the people in place who might be there to negotiate an agreement.
For this kind of thing we might need an agreement, not enforcement. We might need an agreement, taking one of Ilene's ideas, that if one nation has only a minimal flow of commerce and no market that's not clearly being taken care of elsewhere it ought to defer and it ought to agree to defer. So, maybe there is an agreement that could be negotiated and negotiated by Bill's task force of people very familiar with the problem who are dealing with international business without borders.
Is the WTO just there as kind of a forum, as these are the people who can get these people together, maybe within the walls of the "WTO" up in the sky? And have it as a forum for just getting these people together to work out an agreement and with still in charge of sort of designing the process of who, what kind of person should be thinking about these issues and how to think about it and Ilene contributing all your many insights as to what does and doesn't make sense and actually your insights about what a right-thinking person would say make sense if they are in charge of the community.
MR. RILL: The question again is whether it should be housed in the WTO?
MS. FOX: Oh. Yes, so this is my question: Is it just that it's this population of people? Can you remove it from the WTO and get the whole same population and negotiate your relationship? And where would that forum be?
MR. RILL: That's my question. Let Merit.
MS. JANOW: Just a footnote to that, we do have some important jurisdictions like China and Russia, for example, that are not part of even that universe.
MS. FOX: That's right. And should be.
MS. JANOW: Right. I do want to underscore Jim's question about trade-relatedness of merger control: namely, whether or not if you were to have an invitation sent out to countries whether or not they would be prepared to gather to consider these issues. Let us also delink the fora question and see if we come up with a different result.
MR. RILL: Ilene?
MS. KNABLE GOTTS: I think Bill was right in one respect and that is that you really needed it not only to be the government that's involved with the private bar, because I actually think there is a lot to be done to facilitate working relationships among the government. We could be obstacles or we can be facilitators and increasingly I'm finding that it only works to be a facilitator. So you try to bring -- maybe start with WTO as your framework but you split off a separate organization to invite other countries like Russia and China and the private bar in business.
MR. RILL: Well, I guess this is where Paula's point is very well taken, but that it's not just the private bar but the business community in that kind of a forum, if there is to be that kind of a forum now, there are those who have been involved in OECD work who are really reluctant to let the business community have any significant role in the governmental circles and I just think that's dead wrong. That's a big mistake. What's done isn't accepted unless it has a business input.
Let me change the subject just for a minute. Knee flexibility or flexible knees I think was the reference that was made to adapting remedies under current law to accommodate some form of convergence. Let's not get into a discussion of whether it's legal or not. One thing we can do is recommend legislation. Nobody might listen, but we can do what we want.
I took two examples that have come up. One I think Clive, you mentioned the Grand Met/Guinness case where there was some flexibility in the remedies, and the one that occurs to me is the FTC's own pronouncement in the Federal Mogul case that the relief it had accepted was in part at least a reflection of concern of the Federal Cartel Office and therefore the Federal Cartel Office action was obviated. Tell us a little bit about that, Clive or Bill, or anyone who wants to comment on it, and whether that's something we should focus on as a possible recommendation.
MR. STANBROOK: You are referring to remedies and the possibility that the conclusions of one regulatory authority will be different to that of another. The likelihood of this happening is significant and probably likely to increase. The nature of business in the retail sector is such that we are frequently talking about brands. The prospect that one brand would be quietly divested in one jurisdiction and all your other brands would be divested in another obviously creates the conflict that Ilene is talking about. There clearly has to be a degree of flexibility, the application of common sense, a sort of proportionality in the adoption of an overall solution.
In most of these cases, there isn't a definitive answer to a particular issue. There is no reason why another of the alternative approaches can't be crafted to the satisfaction of the two administrations. This is in fact what happened in Grand Met. There is another case, where there was a provisional arrangement as to what aspect of business would be divested but it was agreed to be subject to working out the way in which the divestment could be implemented in a complementary manner in another jurisdiction.
This is important which is why my suggestion was that there be a time-out period that can be adopted to facilitate these negotiations. Incidentally, I am not suggesting there should be a binding code in relation to the harmonization of merger control rules. I am talking about guidelines. One of the most interesting and effective guidelines in the European Community are those on competition in telecommunications. They had no force of law whatsoever but had a huge impact on the way people approached issues relating to competition in telecoms.
I favor the WTO because I see competition very much contributing to progressive trade developments but I can entirely accept, Jim, your point that it's not always like that.
Digressing slightly, in the EC Paper Pulp case, in the early 1980s, the initial meeting of all the defense lawyers took place in the Paris Chamber of Commerce. There we heard from the U.S. counsel of different companies that the Statement of Objection was a gross violation of the sovereignty of the U.S. and the integrity of its law. The basis for this was that the U.S. pulp producers were authorized under U.S. law to fix export prices to Europe under the Webb Pomerene Act. One of the general counsel actually went so far as to fly over to Brussels to explain to the head of DG-IV that there could not be any unlawful collusion because they had agreed to the price in the States. But those were the early days. It just shows how fast attitudes have changed, in relation to that kind of conflict.
MR. RILL: Eleanor?
MS. FOX: You mentioned that. It was certainly a time maybe before the 1950s where a way of solving certain conflicts was for each nation to withdraw so I won't attack your export cartel if you don't attack my export cartel. There is a possibility that it could happen in merger control if the principle is that each nation reins itself in when another nation says I want this merger to go through and that merger is anticompetitive. I'm thinking a little bit about what Dieter Wolf said yesterday and we may or may not agree but it's certainly a possibility that there is a road towards increasing concentration in the world, and nobody to mind the world store and nations can play their political games or else their nationalistic games. So I think to the extent that we are thinking about reining in remedies, remedies that a nation would say are less than I would otherwise do except that I don't want to tread on the toes of nations X, Y, and Z.
MR. RILL: Or on the parties' transaction.
MS. FOX: Or on the parties' transaction. We ought to have this little red flag and say we don't want to race to the bottom; we don't want to really create a circumstance where everybody loses because their nationalistic interests are being given priority over consumers of the world.
MR. RILL: I think your point is valid, a very valid point that you raise. I think in the Grand Met example it was really sort of the opposite that the parties accommodated various relief as best they could to preserve what would otherwise be viewed as a procompetitive efficiency generated merger.
MR. ROWLEY: I have a word about reining in remedies because Bill, I don't mean to speak for you but I don't think Bill's point in reining in remedies was in a comity sense but more in the sense that this is a predictive game and in advance of a merger it's very hard to predict what's going to happen. And this is one of the reasons that I have begun to think more about accountability, about testability of the way people behave and so I look at Canada and the United States and I see what they are doing.
They are regulating results. They are doing guidelines and then negotiating solutions. They are not often coming up with a litigated remedy. We don't have much precedent. I compare it to the EC. And I say, if we had more jurisprudence we would be better off. This would mean asking the U.S. and Canadian agencies when they say "no" to set out a substantive set of reasons, and I mean substantive. They would also do so when they say "yes." Perhaps not for every case, but appropriate cases. One could design a format for a substantial set of reasons for both types of cases. I would like to see them set out the party's positions as to their predictions as to what the market was and how it was going to develop. Then we would have an ability to test the agencies' results. When you have that body of precedent, you would use a bit of the $45,000 filing fee cache to hire some smart people who could look at the markets two years later and see how they have come out.
MR. RILL: What was the price?
MR. ROWLEY: No. Because I come back to my first point. I honestly do not feel, and I know this sounds critical of people who work for agencies, but it's not been my experience that people who work for the agencies have an overdeveloped faith in markets.
MR. RILL: I don't know. I'm not going to comment, or certainly not going to endorse the comment that the agencies do not have an overdeveloped faith in markets. Let me go to -- I'm sorry, did someone -- Bill, yes?
MR. KOLASKY: Just one quick point on the WTO/OECD as opposed to a bilateral approach. I think it may be helpful to separate the two issues that we have been talking about, one is the procedural requirements, for example, filing fees, thresholds. That is the type of issue that would seem to be suitable for a WTO-type forum much more so than substantive differences.
DR. STERN: I was just saying to Jim, you really think that the filing fees really do have an impact? I mean, on the aggregate number of the, not the volume of cases, because there are lots of smaller cases, perhaps, but, you know, if you count up them in terms of value, are filing fees really that --
MR. KOLASKY: My experience has been that they clearly raise the transaction costs. Do they result in transactions not going forward? Probably not, but I have seen many instances where they have been a contributing factor in the way a transaction is structured. For some time now, the structure of transactions of LLC where you don't have to report under Hart-Scott-Rodino and especially for transactions in the $15 million to $50 million range. A lot of people are structuring those as LLCs in part because of the filing fees.
DR. STERN: I would buy that.
MR. RILL: I want to give you a chance to close up and certainly we are going to have an opportunity to get written views on this. I want just one other question to be put on the table, and that is Clive, you mentioned WorldCom/MCI. One aspect of that was the dual review in the United States. You had the Antitrust Division review and the FCC review.
To me it was striking that two Commissioners of the FCC, Michael Powell and others said why are we duplicating the competition analysis of the Antitrust Division. It takes time. It's wasteful. Now, to say for us to recommend, let's do away with all the regulatory agencies probably is not the most politically attractive recommendation we could make, although even to some segments of the business community, but does it make any sense and would it make any difference from the standpoint of efficient global competition review to suggest that at least insofar as the competition review is concerned that the antitrust agency have the final call, and then the regulatory agency can consider the other sorts of issues, the universal service, public interest, whether the railroad will run on time. A review that it would do under its statutory framework against the backdrop of the antitrust agency, saying as Justice virtually did in AA/BA, we probably wouldn't approve this, but if open skies mean something to you, well you guys in Transportation, you go ahead and do it, is this a worthwhile topic for us to talk about and recommend?
MR. KOLASKY: Two points on that. Actually Furchgott-Roth, one of the Commissioners, basically said if it had been up to him he would not have reached the same decision that Justice and the EC reached. I agree with you completely that it makes sense to try to eliminate duplicative review of the same issues. Secondly, though, on MCI/WorldCom, that's a very good illustration of why I think both the EC in this case and the Justice Department could do a better job of explaining reasons for their positions. The only publicly available insight into what the issues were in that case are the filings that were made at the FCC and the FCC decisions. At both the EC and the Justice Department, the only public releases were one-page press releases.
DR. STERN: The EC too?
MR. KOLASKY: The EC too. There was a statement of objections but there is no final decision yet public.
MR. RILL: Can we go around now and close up. We are going to close up in about 12 minutes. Ilene you have had your hand up so you can incorporate whatever you want to say into your closing remarks.
MS. KNABLE GOTTS: Yes. There is a problem on the other side. It was in the FCC's decision and the public comments that you saw. But increasingly you see that the FCC will want the parties, or where SBC for instance has raised the AT&T/TCI matter, that the documents that were given to the Justice Department as part of the Hart-Scott process be available maybe to outside counsel to parties for their review as part of the FCC process, which in some ways has a way of possibly corrupting the ability of the Justice Department, and the willingness of parties to give them competitively sensitive information.
So yes, there is a need for transparency. I think that's something we have all been saying. And as a practitioner the more transparency I have on what it takes to resolve matters, why things come out certain ways, the more that different agencies from different countries get to see that the better it is. But at the same time we have to be very sensitive to who is going to get access to that information, and that is one of the concerns that is raised in the EC.
MR. RILL: Or that it can be redacted in some way. Bill, do you want to sum up your points?
MR. ROWLEY: Yes. I will give you three points, two of which are answers to questions that were raised by Dr. Stern about using a bilateral route to substantive convergence. I say make it a plurilateral route. There is also a lot to be said for a two-phase process. To get to substantive convergence, start with process. For mergers, start with a common form filing treaty. Perhaps an opt-in treaty which would be additional to current forms. If you can get that, people will love it and eventually the underlying systems will fall away.
My second point concerns the WTO. Numbers, in the sense of dollars, are the problem in the merger control area. This is the cost problem. Because the developing economies with the new regimes are adding to the burden, the WTO is the forum to say why developing countries ought not to have merger review. Or if they opt for a regime, why the threshold should be high, and why a regime imposes a cost on them.
My third point makes me a rude guest. But I'm going to tell you what you already know. The world doesn't like your HSR regime. Let me suggest that this Committee should not be satisfied with the current system. You can do a great deal better.
MR. RILL: Many of us do not view that comment as xenophobic on your part.
MR. ROWLEY: Thank you for having me.
MR. RILL: Thank you for coming. Clive.
MR. STANBROOK: Well, I think I'll limit myself to this. There is clearly a lot to be done in this area. There are emerging regimes. We've heard of effectively 50 going up to 75. If we don't put into place some sort of guideline, some sort of basic approach to competition issues, then there will be no natural precedent to follow. To have a precedent will help people to coordinate their respective substantive as well as procedural aspects.
I think what is clear from the discussions is that we need consensus on both procedure and substance. That it helps to achieve this if individuals from each of the authorities get together and exchange experiences. The regulators need to recognize the common aspects of the environment in which they work and use the same generally accepted concepts that we use amongst ourselves. Probably that sounds like a soft option but if it is, I think it would be most effective.
MR. RILL: Bill?
MR. KOLASKY: I think I have very little to add to Clive's and Bill's remarks. I agree completely as an American lawyer who has been doing Hart-Scott-Rodino ever since the act was passed, there is no question that the production of documents has gotten out of hand. I think that the reason for it has to do with the basic statutory design in that a too-short waiting period gives the agencies the incentive, if not the need, to game the system by buying themselves time with very burdensome document requests.
And I do think that we Americans have a great deal to learn from the EC system. I think the detailed statement of concerns that comes at the beginning of a phase two investigation is a very useful document, and structures the rest of the investigation so I think that it would be very desirable to have discussions between the United States, Canada, Europe, Australia, not that I'm too Anglo-Saxon, to try to develop a more common procedure, a harmonizing procedure. At the same time, I think we shouldn't make the EC system sound as if it's perfect. Clearly the initial Form CO is too burdensome. I think that there probably is too little judicial review there which is part of what gives the Commission so much power and that they have something to learn from us as well.
MR. RILL: Jim?
MR. ATWOOD: Three idiosyncratic points without any effort at a world view here. One on what impact the Hart-Scott-Rodino fees have. Any single transaction in the U.S. is not significant but because of the proliferation aspect it's a model for other countries so that you are going to start seeing more and more of these fees around the world. And also I'm cynical enough to think that the level of the fees of the United States has been a disincentive for raising the thresholds because it's a loss of revenue for the Justice Department and as a result we have very low thresholds relative to Europe.
Second, Bill Rowley's call for more transparency in merger decisions in the sense of explanations as to why transactions are and are not challenged is obviously desirable from a broad standpoint. I'd be very wary, though, of anything that made that a requirement. I think it would end up as an extra step of the process. It would slow things down at DOJ and FTC more as they wrestled with exactly what they are going to say.
We'd have the same problem there that we have with business review letters now. When the agency has to go on record in explaining a sensitive issue they tend to be conservative. They are less willing to make a bold step than if they can just say do it but we would rather not issue a detailed press release explaining just why we are allowing you to do it.
One final point: nobody has mentioned tender offers, and that is a concern in the current system. It's difficult enough with a major transaction to get it through multiple agencies if you have got cooperating parties and six months or nine months or 12 months, but if you have got a hostile tender offer that's a major transaction where you don't have the luxury of time and the opportunities and the incentive for one party to game the system and take advantage of the delays and the slowdowns. And, tender offers do have a valid place in the world economy, and I think they are at risk here.
MR. RILL: That's a good end, because you point out a new point. Paula?
DR. STERN: That's a very good point. I'm glad you put it on the table. And I want to thank everybody here. I have read all of the materials that you all provided, each and every one of you, and listened carefully to your comments, and I think that some of your points were particularly about giving authorities discretion and about how the transparency may constrain decision makers was one that Phil Proger made in the previous forum that we had earlier this afternoon.
I'd like to say that each of you combined with the rest of the individuals who participated today and yesterday are adding to my understanding. I think in certain cases we have reshaped the questions. I think that that has been extremely important. Not only did you answer the questions that you were given, but you've come back to us and made us challenge our thinking about whether we were asking the right questions. And whether we are therefore on to the right answers so I just want to express my appreciation to everyone's contribution today.
MR. RILL: I certainly want to echo those sentiments. I think that the contributions you have made have presented some novel and I think very worthwhile ideas. To take the time that you have taken out of your schedules to perform this pro bono work, we admire and deeply appreciate it. Eleanor, do you have anything?
MS. FOX: Just to thank all of you. It really was very stimulating. We might have questions to ask you.
MR. RILL: We will feel free to contact you. You should feel free to communicate with us. Merit?
MS. JANOW: I would like to just thank you as well. Bill you will have to strike that word employ that you used at the beginning here that this Committee could employ the IBA. We can't employ the IBA but we would welcome the IBA's contributions --
MR. ROWLEY: I'm sure I said implore.
MR. RILL: Let me remind you all, all of the participants today, tomorrow, yesterday and staff and others that we have a cocktail reception in half an hour at the Collier, Shannon law firm, 3050 K Street, fourth floor. People will be there to guide and direct you to food and drink. Thank you.