Parties contemplating transactions in the defense sector need to know about a new obligation to provide materials to the Department of Defense (DOD) that will substantially affect their obligations for transactions that are notified to the US antitrust authorities. This new requirement promises to make DOD even more active in antitrust reviews of defense industry deals. Under Section 857 of the National Defense Authorization Act (NDAA) for Fiscal Year 2024:
The parties to a proposed merger or acquisition that will require a review by the Department of Defense who are required to file the notification and provide supplementary information to the Department of Justice or the Federal Trade Commission under [the Hart-Scott-Rodino (HSR) Premerger Notification Act] shall concurrently provide such information to the Department of Defense during the [HSR waiting period].
This is a major change from current practice. Although DOD – particularly its Industrial Base Policy (IBP) office – plays a substantial role in cooperating with the Federal Trade Commission (FTC) and Department of Justice (DOJ) in reviews of many defense mergers, parties have not been required to provide DOD any materials in connection with those reviews. Under Section 857, they will now be required to provide DOD information that may include not only HSR notifications but all other materials submitted during an antitrust investigation of a defense sector transaction. As we discuss, however, Section 857 is unclear in terms of precisely what transactions it covers and what materials parties must produce to DOD.
Section 857 comes on the heels of a report from the Government Accountability Office (GAO) that raised concerns about whether DOD’s role in antitrust reviews is sufficiently robust. Because of Section 857’s requirements and the increased scrutiny of DOD’s role in defense industry merger reviews, we could see a material increase the number of defense transactions that receive significant scrutiny and an intensified DOD role in some of those reviews.
DOD’s Role in Defense Industry Merger Reviews
DOD has long played a substantial role in the antitrust reviews of defense industry transactions. DOD consults with the antitrust agency reviewing the transaction – either DOJ or the FTC – and provides its views about whether deal could harm competition in market(s) where DOD is a customer. DOD has defined procedures for working with the antitrust agencies on merger reviews (see DOD Directive 5000.62) and dedicated staff in its IBP office to seek views from DOD constituencies (e.g., procurement leadership, contracting offices, and technical experts), evaluate the input, and communicate with and make recommendations to the antitrust agencies. DOD’s recommendations have traditionally played a crucial – often determinative – role in FTC and DOJ decisions whether to challenge mergers.
There have recently been concerns that DOD’s role in antitrust reviews is not sufficiently robust. An October 2023 GAO report, DOD Needs Better Insight into Risks from Mergers and Acquisitions, found that DOD has lacked sufficient resources to participate in as many merger reviews as it should be. Id. at 19-20. The GAO found that from 2018-2022, DOD averaged about 40 transaction assessment per year (see id. at 23-24), which was only about 10 percent of all defense sector transactions (see id. at 13). Further, the GAO found that for transactions where DOD worked with an antitrust agency, DOD typically has not had access to all the information the antitrust agencies received in connection with its review. Section 857 addresses that concern.
Uncertainties Regarding Section 857’s Requirement
There are significant uncertainties regarding how Section 857 will apply, and neither DOD nor any other government entity has yet provided any guidance. Most fundamentally, Section 857’s requirements to supply HSR notifications and “supplemental information” to DOD apply to the “parties to a proposed merger or acquisition that will require a review by the Department of Defense,” but there is no explication of what transactions fit that definition. There is particular ambiguity in this language because, unlike some agencies, DOD does not have its own authority to review and then clear or reject mergers but rather consults with the antitrust agencies. It may be clear that a major defense industry transaction will “require a review by the Department of Defense.” But what about transactions that implicate only markets for commercial products that DOD might purchase?
Further, it is unclear exactly what Section 857’s requirement that merging parties supply DOD with “supplemental information” that they provide to an antirust agency captures. Must merging parties produce to DOD every document or piece of data that they supply to an antitrust agency during the initial HSR waiting period, every advocacy submission, and all documents and data that they supply to an antitrust agency in response to a second request? Section 857, moreover, does not specify the DOD component to which merging parties must supply materials or how much time they have to provide DOD with materials after providing them to the reviewing antitrust agency (must it be the same day?).
It is possible DOD may provide guidance on how merging parties are to meet their obligations under Section 857. But in the meantime merging parties will need to coordinate closely with DOD and the antitrust agencies to make sure they are in compliance.
Implications of Section 857
Section 857 imposes substantial new production obligations on parties to mergers in the defense segment, but as discussed there is considerable uncertainty about the precise scope of those obligations. Parties to potentially covered transactions must be prepared to address the uncertainty, including by conferring with the antitrust agencies and DOD, and ensure that they are complying with Section 857.
On the substance, we expect the new production requirement will result in some transactions receiving substantial antitrust scrutiny that otherwise would not have. For instance, we may see statements in HSR notifications or accompanying documents that cause DOD to ask DOJ or the FTC to open an investigation of transactions that the antitrust agency otherwise would have cleared without a significant review. Additionally, even where DOJ or the FTC is first to flag a deal for review, materials that DOD receives from the merging parties during an initial HSR waiting period review or second request may cause DOD to flag questions or concerns that the reviewing antitrust agency might not have raised on its own.
Section 857 may have fewer implications for major or clearly potentially controversial transactions that DOJ or the FTC will clearly investigate robustly and consult closely on with DOD. And Section 857 will not affect non-HSR reportable transactions. But we may well see DOD ask the antitrust agencies to review more non-reportable transactions, too, based on recent concerns that not enough defense sector transactions that could pose risks to competition are receiving antitrust scrutiny.