Entrenchment Challenges to Conglomerate Mergers

Washington University Law Review Volume 60 Issue 2 Topics in Corporation Law January 1982 Entrenchment Challenges to Conglomerate Mergers Cristofer Esty Lord Follow this and additional works at: https://openscholarship.wustl.edu/law_lawreview Part of the Antitrust and Trade Regulation Commons, and the Legislation Commons Recommended Citation Cristofer Esty Lord, Entrenchment Challenges to Conglomerate Mergers, 60 Wash. U. L. Q. 537 (1982). Available at: https://openscholarship.wustl.edu/law_lawreview/vol60/iss2/10 This Note is brought to you for free and open access by the Law School at Washington University Open Scholarship. It has been accepted for inclusion in Washington University Law Review by an authorized administrator of Washington University Open Scholarship. For more information, please contact . ENTRENCHMENT CHALLENGES TO CONGLOMERATE MERGERS In 1950' Congress enacted the Cefler-Kefauver Act2 as an amendment to section 7 of the Clayton Act 3 the basic merger provision of the antitrust laws.4 The purpose of the amendment was to plug loopholes in the original act' and thus fortify the merger law. A review of the 1. Prior to 1950, § 7 of the Clayton Act read, in pertinent part: [N]o corporation engaged in commerce shall acquire, directly or indirectly, the whole or any part of the stock or other share capital of another corporation engaged also in commerce, where the effect of such acquisition may be to substantially lessen competition between the corporation whose stock is so acquired and the corporation making the acquisition, or to restrain such commerce in any section or community, or tend to create a monopoly of any line of commerce. Clayton Act, ch. 323, § 7, 38 Stat. 730 (1914) (current version at 15 U.S.C. § 18 (1976)). 2. Celler-Kefauver Act of December 29, 1950, ch. 1184, 64 Stat. 1125 (amending ch. 323, § 7, 38 Stat. 730 (1914)). 3. Section 7 now reads, in pertinent part: No corporation engaged in commerce shall acquire, directly or indirectly, the whole or any part of the stock or other share capital and no corporation subject to the jurisdiction of the Federal Trade Commission shall acquire the whole or any part of the assets of one or more corporations engaged in commerce, where in any line of commerce in any section of the country, the effect of such acquisition. . . may be substantially to lessen competition, or to tend to create a monopoly. 15 U.S.C. § 18 (1976). 4. Mergers are also susceptible to challenge under § 1 of the Sherman Act, 15 U.S.C. § I (1976). The last time a merger was challenged under § 1, however, was in 1948. See United States v. Columbia Steel Co., 334 U.S. 495 (1948). 5. To effectuate that purpose Congress made several significant alterations in the wording of the section. For a general, but comprehensive, discussion of the changes in wording of § 7 of the Clayton Act, see Brown Shoe Co. v. United States, 370 U.S. 294, 311-23 (1962). See generally Bok, Section 7 ofthe ClaytonAct andthe Merging of Law andEconomics 74 HARV. L. REV. 226, 233-38 (1960); Handler & Robinson,.4 DecadeofAdministration ofthe Celler-Ke/auverAntimerger Act, 61 COLUM. L. Rnv. 629, 652-74 (1961). Prior to the amendment, § 7 applied only to a firm's acquisition of the stock of another firm. See, e.g., Arrow-Hart & Hegeman Electric Co. v. FTC, 291 U.S. 587, 595 (1934); FTC v. Western Meat Co., 272 U.S. 554, 557-60 (1926); United States v. Celanese Corp., 91 F. Supp. 14, 17 (S.D.N.Y. 1950). See generally Brown Shoe Co. v. United States, 370 U.S. 294, 312-13 (1962). The amendment included the acquisition of assets within the reach of the Clayton Act. See ProposedAmendmentsto Section 7 ofthe Clayton Act: Hearingson H.R. 515 Before Subcomm. 2 ofthe House Comm on the Judiciary, 80th Cong., 1st Sess. 4 (1949). See also Brown Shoe Co. v. United States, 370 U.S. 294, 312-13 (1962); Davidow, Conglomerate Concentrationand Section Seven: The Limitations of the Anti-Merger Act, 68 COLUM. L. REV. 1231, 1236 (1968). Prior to 1950, § 7 read, "where the effect of such acquisition may be to substantially lessen competition between the corporation whose stock is so acquired and the corporation making the acquisition," and consequently applied only to horizontal mergers. H.R. REP. No. 1191, 81st Cong., 1st Sess. 2 (1949). See, eg., Brown Shoe Co. v. United States, 370 U.S. 294, 313 (1962); General Foods Corp. v. FTC, 386 F.2d 936, 944 (3d Cir. 1967), cert. denied, 391 U.S. 919 (1968). Contra, United States v. E.I. du Pont de Nemours & Co., 353 U.S. 586, 590-93 (1957). Washington University Open Scholarship 538 WASHINGTON UNIVERSITY LAW QUARTERLY [Vol. 60:537 legislative history of the Celler-Kefauver Act reveals that Congress was deeply concerned about increased market concentration. Congress feared that an increase in concentration was producing radical changes in the structure of American industry7 by eliminating small business and local control.' Congress viewed mergers as the primary means by which business concentration increased 9 and thus chose the regulation of mergers as the vehicle for curbing increased concentration' 0 and reCongress deleted this language to extend § 7 beyond horizontal mergers to reach vertical and conglomerate mergers as well. H.R. RP. No. 1191, 81st Cong., 1st Sess. 11 (1949)o See Brown Shoe Co. v. United States, 370 U.S. 294, 317 (1962); General Foods Corp. v. FTC, 386 F.2d 936, 944 (3d Cir. 1967), cert. denied, 391 U.S. 919 (1968); Hood, PotentialCompetition, 21 ANTITRUST BULL. 485, 486 (1976). Contra, United States v. E.I. du Pont de Nemours & Co., 353 U.S. 586, 590-93 (1957). Congress altered § 7 to read, "the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly." H.R. REP. No. 1191, 81st Cong., Ist Sess. 8 (1949). See Brown Shoe Co. v. United States, 370 U.S. 294, 318-23 (1962); General Foods Corp. v. FTC, 386 F.2d 936, 943 (3d Cir. 1967); Blair, 7he ConglomerateMergerin Economics andLaw, 46 GEO. L.J. 672, 700 (1958). Congress intended that the vagueness of this clause should provide the courts with ample latitude to effectuate the purpose of the amendment, that is, to thwart further concentration of American industries. H.R. REP. No. 1191, 81st Cong., Ist Sess. 3 (1949). See United States v. Aluminum Co. of Am., 377 U.S. 271, 280 (1964); Brown Shoe Co. v. United States, 370 U.S. 294, 315 (1962); Stanley Works v. FTC, 469 F.2d 498, 503 (2d Cir. 1972), cert denied, 412 U.S. 928 (1973); Allis-Chalmers Mfg. Co. v. White Consol. Indus., Inc., 414 F.2d 506, 519 (3d Cir. 1969), cert. denied, 396 U.S. 1009 (1970). See generally Brodley, Ohigopoly Power Underthe Sherman and Clayton Acts-From Economic Theory to LegalPolicy, 19 STAN. L. REv. 285, 289 (1967); Hood, supra, at 485. 6. S. REP. No. 1775, 81st Cong., 2d Sess. 3 (1949); H.R. REP. No. 1191, 81st Cong., 1st Sess. 3 (1949). 7. S. REP. No. 1775, 81st Cong., 2d Sess. 3 (1949); H.R. REP. No. 1191, 81st Cong., Ist Sess. 3 (1949). Se (...truncated)