Antitrust Disclosure Compliance Memorandum

Antitrust Disclosure Compliance Memorandum

PRIVILEGED AND CONFIDENTIAL

ATTORNEY WORK PRODUCT

ATTORNEY-CLIENT COMMUNCATION

M E M O R A N D U M

TO:

FROM:

DATE:

RE:

This memo briefly summarizes two antitrust precautions that should be observed by (the "Company") in the course of your planning and due diligence activities in connection with proposed acquisitions or divestitures: (1) avoiding creation of unfortunate documents; and (2) avoiding premerger coordination of commercial activities and uncontrolled exchange of competitively sensitive information.

1. Avoiding Creation of Documents with Adverse Antitrust Significance

As we have discussed previously, the Company, including its advisers, should be careful to avoid creating documents that might invite antitrust problems. The existence, or non-existence, of troublesome documents can mean the difference between a transaction that sails through the enforcement agencies and a transaction that is held up for months. Such documents cause particular problems under Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("Hart-Scott") procedures because they are often required to be submitted directly to the government with the initial Hart-Scott filing.

As you know, the government antitrust merger review process typically starts with the filing of a Hart-Scott form. After filing, the parties are prohibited from consummating the acquisition for thirty (30) days (twenty (20) days for cash tender offers). During the waiting period, the government (Federal Trade Commission or Justice Department) considers whether the transaction presents antitrust problems. If it does, the government may issue a so-called "second request" for information on the last day of the waiting period. This would extend the waiting period an additional twenty (20) days (ten (10) days for cash tender offers) after the date of compliance with the request. Because second requests are terribly burdensome, a transaction could be held up for many weeks or even months. Moreover, issuance of a second request is often a prelude to enforcement action.

The government's decision whether to issue a second request is often heavily influenced by the so-called "Item 4(c)" documents required to be submitted with the initial Hart-Scott filing. In our experience, troublesome 4(c) documents-for example, suggesting that a merger will lead to a price increase, market dominance, or a lessening of competition-have ignited investigations that might never otherwise have occurred.

Item 4(c) requires the following documents to be submitted with the Hart-Scott form:

Not all 4(c) documents, of course, are problematic. Many are simply neutral. Others could be helpful, for example, documents that discuss procompetitive efficiencies that may result from a merger fall into this category. On the other hand, documents that address the issues of competition between the merging parties, markets, market shares, or post-merger pricing are often fraught with potential antitrust problems. Troublesome documents concerning these subjects may often result from poor wording or exaggeration. Moreover, there is no need for documents addressing these subjects even to be prepared in the first place as part of normal due diligence activities.

The bottom line is that the Company and its advisors should exercise caution in creating documents that may be covered by Item 4(c). The best policy is to create as few 4(c) documents as possible. However, when such documents are required, the author or authors should proceed as though the FTC and the Justice Department were to receive copies of each document.

2. Avoiding Premerger Coordination of Commercial Activities and Uncontrolled Exchange of Competitively Sensitive Information

The parties to a proposed horizontal transaction should exercise caution to avoid two principal antitrust problems: (1) "jumping the gun" by coordinating their present commercial activities as if the transaction had already taken place; and (2) exchanging competitively sensitive information with inadequate controls on who has access to the information and how it may be used.

To avoid the first problem, merging parties must remember that they remain legally separate entities until the merger is complete. Thus, they are subject to potential liability under Section 1 of the Sherman Act for price fixing, market allocation, or other conspiracies in restraint of trade. Merging parties should not coordinate their competitive activities in any manner until the merger has been consummated.

To avoid the second problem, two precautions should be taken:

(1) Only information reasonably necessary to legitimate due diligence should be exchanged. If, for example, exchange of information on current prices or business plans is not reasonably necessary, it should be avoided. If a reciprocal information exchange is not required, the information should flow one way only, or if some reciprocity is required, it should be as limited as is reasonable to accomplish the required due diligence. Buyers and sellers, for example, typically have very different legitimate needs for information from each other regarding a proposed transaction.

(2) If competitively sensitive information will in fact be exchanged in the due diligence process, the parties should: (a) limit dissemination of the information to individuals with a truly legitimate "need to know" for due diligence purposes (disclosure of the information to persons in a position to use the information for immediate competitive purposes should be avoided); (b) have in place a confidentiality agreement stating that information exchanged will be used solely for due diligence purposes and not for commercial or competitive reasons, and that all information will be promptly returned if the transaction is not consummated.

ATTACHED, FOR YOUR INFORMATION, IS A SPEECH OF AN FTC OFFICIAL THAT ADDRESSES THESE PREMERGER INFORMATION EXCHANGE ISSUES IN MORE DETAIL.

Please do not hesitate to call if you have any questions.

Enclosure

ATTACHMENT

DEPARTMENT OF JUSTICE

CURRENT ISSUES IN RADIO STATION MERGER ANALYSIS

Address by

LAWRENCE R. FULLERTON

Deputy Assistant Attorney General

Antitrust Division

U.S. Department of Justice

Before the

BUSINESS DEVELOPMENT ASOCIATES

ANTITRUST 1997 CONFERENCE

WASHINGTON, D.C.

October 21, 1997

It is nice to be here once again at the Business Development Associates Antitrust Conference to talk about developments in the area of merger enforcement. I look forward to this event, and the chance to catch up with many friends.

I'd like to talk today about an issue that has arisen recently in connection with our review of radio station acquisitions-namely whether an acquiring person, in the context of an acquisition subject to the reporting requirements of the Hart-Scott-Rodino Act, can take over operating control of one or more of the acquired stations before the HSR waiting period has expired. It should come as no surprise that the Justice Department and the Federal Trade Commission believe that transferring operational or management control in such circumstances results in a transfer of beneficial ownership, and raises an HSR compliance issue.

Our review of radio station acquisitions has been much in the news lately, and with good reason. The enactment of the new Telecommunications Act in February has unleashed an incredible consolidation wave in this industry.

The Telecommunications Act raised substantially the FCC-imposed limits on the number of commercial radio stations a single entity could own, operate, or control in one market. The maximum number depends on the number of commercial stations in the market, but the limit was raised from four stations to eight stations in the largest markets. The nationwide limit of twenty FM and twenty AM stations has been eliminated entirely.

While the Telecommunications Act raised the FCC's station ownership limits, it made clear at the same time that antitrust review of radio mergers was preserved. It follows that antitrust law restrictions on station ownership can be more binding than the new telecommunications law statutory limits in some cases. As between the Justice Department and the FTC, the Department has taken the lead in reviewing radio mergers.

And it has been a flood of mergers, indeed. By one count, there were 189 radio deals announced in the first half of this calendar year, worth some $25 billion. We have received over 100 HSR filings for radio transactions, and opened close to twenty investigations.

The deals subject to investigation have ranged in size from the acquisition of a single, major radio station by an operator that already dominates the market in a given metro area, up to the $5.4 billion Westinghouse/Infinity transaction, still pending, which would combine the two largest radio broadcast groups in the country.

Our focus in reviewing these transactions has been primarily on the prospect of increased prices for radio advertising. Using traditional analytic techniques under our Horizontal Merger Guidelines, we have taken the position that radio advertising is a relevant product market for antitrust purposes, and explored both unilateral and coordinated effects theories of harm to advertisers. In many cases, concerns generated by a traditional Guidelines analysis have been bolstered either by complaints about the transaction from advertisers, or by documents from the files of the merging parties that make clear that price increases to advertisers are an anticipated, even an intended, impact of the merger.

We have announced only one formal challenge to a radio merger so far this year. That was a challenge to Jacor's $770 million acquisition of Citicasters, which we settled with a proposed consent decree that would require Jacor to divest one of the larger Citicasters stations in Cincinnati.

Our reviews of radio station mergers have been in the news lately in part because merger enforcement is a comparatively new phenomenon in the radio industry. Historically, the FCC-imposed caps on station ownership have tended to be more binding than antitrust constraints, so we had not devoted much time to looking at radio acquisitions.

The recent statutory changes have increased the practical importance of antitrust constraints in this industry. It is to be expected that the industry would react given that more attention is now focused on the antitrust constraints. Accustomed perhaps to a tradition of regulatory caps on station ownership, some in the industry have pressed us for definitive antitrust "rules of the road." As this audience knows all too well, however, antitrust enforcement rarely lends itself to such bright-line treatment. And, in candor, our investigations get richer and more sophisticated as we explore the various transactions that may raise concerns.

But another reason our reviews of radio mergers have attracted attention is that in the course of reviewing recent radio transactions, we have developed concerns about certain cooperative radio marketing and management arrangements now in use in the industry.

Under one arrangement, known as a "joint selling agreement," or "JSA," a radio station or radio group may sell radio advertising time not only on its own station or stations, but also for one or more competing stations in the same market. Such an arrangement may obviously raise issues under Section 1 of the Sherman Act.

Under another arrangement, known alternatively as a "local marketing agreement" ("LMAs") or "time brokerage agreement," a radio station owner/licensee not only transfers the right to sell advertising time; the third party also provides programming, in some cases as much as 100% of the programming. These arrangements may also raise Section 1 issues. For the remainder of my time, however, I'd like to focus on an HSR-related issue that has arisen concerning LMAs and their use in the specific context of radio station acquisitions.

In a number of radio station acquisitions that we have reviewed recently, the parties entered into an expansive LMA in connection with the acquisition, and did so before filing notification and observing the HSR waiting period. The FTC Premerger Notification Office has informed counsel involved in these transactions that the agencies are concerned that use of LMAs in connection with radio station acquisitions may prematurely transfer beneficial ownership. While we have heard arguments to the contrary-you may have seen reference to a fourteen-page letter on this point-I want to take this opportunity to reiterate our concern and elaborate on our position.

First, let me make clear that in discussing HSR concerns about LMAs, I am referring to LMAs entered into in connection with an acquisition. An LMA or other arrangement such as a joint sales agency outside the context of an acquisition would not violate the HSR Act. Such LMAs, for HSR purposes, are somewhat analogous to leases and management contracts, which have generally been deemed not to transfer beneficial ownership. The station owner has not left the business, and when the LMA expires may operate the station himself or enter into an LMA with someone else.

In our view, however, an LMA entered into in connection with an acquisition transfers operating control of the assets or business before expiration of the HSR waiting period. The buyer, through having operating control of the programming and the pricing of advertising, is essentially operating the business of the radio station. The owner of the station has effectively left the business prior to HSR review being completed. Whether the FCC for its regulatory purposes views the owner/licensee as retaining control of the broadcast license is hardly dispositive for HSR purposes.

Premature transfer of operating control in the context of an acquisition transfers beneficial ownership in all industries, including radio. While some counsel have expressed surprise when informed of the agencies' HSR concern about LMAs entered into in connection with radio station acquisitions, I believe that counsel familiar with HSR understand well that HSR does not permit you to operate the business of the company you are acquiring during the HSR waiting period. Indeed, a 1994 article in the Antitrust Law Journal observed that: "Conduct that prematurely places excessive influence or control over the seller's business in the hands of the purchaser potentially could run afoul of either [Section 1 of the Sherman Act or Section 7A of the Clayton Act]."

Second, I would like to emphasize that our position regarding the application of the HSR Act to LMAs does not prohibit parties from using LMAs throughout the pendency of an FCC application, but only during the HSR waiting period. In transactions that do not present competitive issues sufficient to warrant the issuance of a second request, the HSR waiting period will expire in thirty days-earlier if early termination is granted. The parties are, of course, free under the HSR Act to utilize an LMA once the HSR waiting period expires. I would also note that to the extent that parties to an HSR reportable acquisition have entered into an LMA in conjunction therewith and have not yet filed their HSR Notification and Report Form, they should do so expeditiously as a corrective measure for already having transferred beneficial ownership. Indeed, since the agencies began voicing concern over the use of LMAs in connection with acquisitions, a number of radio transactions have been reported under HSR in which the filing indicates that an LMA will go into effect after the waiting period expires.

It has been argued that LMAs have in years past been used in connection with HSR-reported radio acquisitions without DOJ or FTC objection. Our intention in making our position known with regard to LMAs and HSR is to stop practices that we believe prematurely transfer beneficial ownership, not to punish those who may have engaged in those practices before learning of the agencies' position. Therefore, in exercising our prosecutorial discretion, absent extraordinary circumstances, we do not intend to seek HSR civil penalties as to parties who in the past entered into LMAs in connection with a purchase agreement. In general, I would strongly urge counsel to contact the FTC's Premerger Notification Office if they have questions about how the HSR Act applies to their particular transactions.

The position with respect to LMAs in the radio industry is fully consistent with past precedent of the Department and the FTC. Indeed, in May 1996, many months before the issue over radio station LMAs arose, the issue of operational control during the pendency of the HSR waiting period arose in a civil penalty case brought by the Department at the request of the FTC following their investigation of Titan Wheel International, Inc. Titan had contracted to acquire certain assets of Pirelli Armstrong related to the manufacture of agricultural tires at a Des Moines, Iowa facility. At the time the contract was entered into, the workers at the facility were on strike. The Complaint alleged that Titan's premerger notification stated: "Pending the closing of the acquisition, Seller has agreed to permit Buyer to have immediate possession and use (but not title) to, and to operate, the acquired assets (and to hire the employees) at the Facility for Buyer's account, but subject to an 'unwinding' . . . in the event that the closing does not occur." We further alleged that Titan "took immediate possession and operational control" of the assets covered by the contract.

The government's theory of Titan's HSR violation is stated clearly in paragraph 18 of the Complaint:

The complaint alleged that Titan was in violation of the HSR Act until operating control of the assets covered by the contract was returned to the seller, a total of thirteen days, and Titan agreed to pay the maximum $130,000 civil penalty available under the Act. The FTC Press Release highlighting that Titan had been charged with taking control of Pirelli Armstrong assets prior to expiration of the HSR waiting period is attached to the printed copy of my remarks.

Thank you for your kind attention. At this point, I would be glad to take questions.

I acknowledge that I have reviewed this memorandum and attached materials.