On September 26, 2017, the U.S. Department of Justice filed a complaint in Delaware federal court challenging Parker-Hannifin Corporation’s $4.3 billion acquisition of CLARCOR Inc. This challenge is unusual because it occurred almost seven months after the expiration of the Hart Scott Rodino (“HSR”) Act waiting period and the consummation of this transaction.

As background, the HSR Act requires that certain transactions be reported to the U.S. antitrust authorities prior to closing, unless an exemption applies. Whether a particular transaction is subject to these requirements depends, among other things, upon the value of the transaction and the size of the parties as measured by their sales and assets. After the parties submit their HSR filings, the HSR Act prohibits them from closing their transaction until they observe a statutory waiting period (usually 30 days) during which the U.S. antitrust authorities can review the transaction. Unless the U.S. antitrust authorities extend the initial waiting period by requesting additional information (known as a “second request”), the parties are permitted to consummate their transaction following the expiration of the waiting period. However, the expiration of the HSR waiting period does not constitute formal approval of a transaction. Unlike in some other foreign regimes, the U.S. antitrust authorities may still challenge a transaction after closing under Section 7 of the Clayton Act.

That said, subsequent challenges of consummated transactions in which the parties have already gone through the HSR process are rare, which makes the Parker-Hannifin case particularly newsworthy.

The DOJ’s complaint alleges that Parker-Hannifin’s acquisition of CLARCOR will substantially lessen competition in the US market for aviation filtration products, a small segment of the parties’ broader businesses. To restore competition, the DOJ has asked the court to require the divestiture of enough of the parties’ aviation filtration assets to recreate the competition that existed prior to the acquisition.

Reports indicate that the DOJ’s investigation began after receiving customer complaints about the deal following the expiration of the HSR waiting period and the closing of the transaction. The DOJ has also alleged that the parties did not fully cooperate with its investigation into the transaction, and that internal company documents revealed the parties knew that the transaction raised serious antitrust concerns.

While more facts may still emerge as the litigation progresses, the following are some initial key takeaways from this case for parties that are contemplating a transaction:

• The U.S. antitrust authorities can and do challenge transactions that have already closed, no matter the size of the business in question.
• Although it rarely occurs, the expiration of the HSR waiting period does not protect a deal from subsequent challenges by U.S. antitrust authorities.
• The reactions of customers to the transaction should be carefully considered prior to closing, particularly if the transaction involves direct competitors in overlapping products or services. Customer reaction is a critical factor for the U.S. antitrust authorities when analyzing the competitive effects of a transaction. Complaints from customers or other third parties can trigger antitrust scrutiny, so having an effective communication plan to engage key stakeholders is vital.
• Internal documents discussing the competitive implications of a transaction are a frequent source of evidence used by the U.S. antitrust authorities to challenge transactions. Parties should take great care not to create an unhelpful record by misstating or overstating a transaction’s effects on competition.
• In a transaction that may raise significant antitrust issues, parties and their counsel should carefully consider the merits of being proactive and directly engaging the U.S. antitrust authorities in order to address any potential issues and avoid a post-closing challenge.

If you have any questions concerning the foregoing, or HSR generally, please contact your Seward & Kissel relationship attorney or Nick Katsanos in the firm’s Business Transactions Group.