Hearings, Reports and Prints of the Senate Committee on the Judiciary

This idea represents a tremendous potential savings for the Federal Govern ment. The costs when a plant shuts down accumulate with welfare, food stamps unemployment checks, the increased need for social and health services and family disintegration. Medical research indicates a wide variety of serious dis eases can be traced to stress caused from plant shutdowns. There is a loss of employment in industries dependent on the plant's employees, trade adjustment assistance payments must be made, there is the loss of the local and State tax base and, finally, the loss of Federal taxes.

It is just one example of an alternative legislative solution which recognizes that the big-government approach is no longer feasible or realistic for handling every complex economic and social problem. The threat of long-term inflation. deficit budgets and burdensome taxation requires that we enable and encourage the most efficient and sensible nongovernmental solutions. We must begin to phase in as much as is possible citizen cooperative, and local solutions involving minimal Government resources.

In utilizing this approach, the bill authorizes two kinds of loans: to the newly constituted firm and to individual employees for the purpose of enabling them to buy stock in their own enterprise. The company itself would be responsible to the Federal Government for collecting principal and interest payments on the loans granted employees. In order to qualify for such loans, employees are re quired to agree to payroll deductions under terms and conditions to be established by the Secretary of Commerce.

To summarize, Mr. Chairman, our research shows that conglomerate ownership costs jobs and is not responsive to local and regional needs.

Your subcommittee is exploring conglomerate ownership, and the possible abuse of the “failing company” doctrine as a means of conglomerate expansion. I suggest that there are better ways to save jobs than to rely on conglomerates to takeover failing companies. Experience shows that in the long run reliance on conglomerates is counter productive and that other programs and Federal initiatives should be explored.

Senator METZENBAUM. John Shenefield, Assistant Attorney General. Department of Justice.

We are happy to have you with us again this morning. Mr. Shenefield.

STATEMENT OF JOHN SHENEFIELD, ASSISTANT ATTORNEY GENERAL, ANTITRUST DIVISION, DEPARTMENT OF JUSTICE

Mr. SHENEFIELD. Thank you, Mr. Chairman.

Senator METZENBAUM. All statements of our witnesses today will all be totally included in the record at the conclusion of their oral testimony, on the assumption they probably will not read the entire

statement.

Mr. SHENEFIELD. Mr. Chairman, Senator Thurmond, I am pleased as always to be here before this subcommittee, in particular on this day to address an issue of very substantial importance.

Senator THURMOND. Mr. Chairman, would you allow me to interrupt just a moment?

Senator METZENBAUM. Yes.

Senator THURMOND. Mr. Chairman, and Mr. Shenefield, I have to go to another committee in a little bit and you have a statement here of 13 or 14 pages. I always want to get your view in matters.

Mr. SHENEFIELD. Yes, sir.

Senator THURMOND. I wonder if the chairman would object if we put your entire statement in the record and let you highlight it in about 10 minutes before I have to leave.

Senator METZENBAUM. I think he is intending to do just that.

Mr. SHENEFIELD. I was hoping to just summarize it.
Senator THURMOND. That is fine. Thank

you very much. Mr. SHENEFIELD. The question raised by the failing company doctrine is really one of choosing the lesser of two evils, in my view. What you are really dealing with are difficult factual and legal questions which require the most persistent investigation, the most sensitive evaluation of facts and law in particular cases. You start with the proposition that section 7 of the Clayton Act prohibits mergers whose effects are substantially to lessen competition or tend to create a monopoly in any line of commerce in any section of the country.

What has happened, generally, is that the courts have interpreted this statutory language as prohibiting acquisitions between direct competitors, between companies in vertical relationships, and, unfortunately more rarely in conglomerate relationships, one with another. The effort is in the main to attempt to prevent mergers of substantial competitors with one another, the effects of which would be to reduce competition in the marketplace.

But beginning as far back as 1930, and I am now on page 3 of the statement, beginning with International Shoe, the Supreme Court and courts trying to interpret Supreme Court decisions have recognized that the failing company doctrine had an important place in the evaluation of the competitive realities of the marketplace. In that I case, the Supreme Court found that a merging partner's failing financial condition, and the lack of an alternative purchaser for it, might be grounds for upholding a merger even though the transaction would otherwise violate section 7 standards. That formulation of the failing company doctrine reflects two complementary policy considerations.

The first, if what you are interested in is the competitive realities and avoiding anticompetitive results, is that it is quite clear that the total disappearance from the marketplace of one firm as a result of business failure will be the most anticompetitive thing that could happen. That is to say, you would have a competitor that would disappear from the market altogether and no other method than the proposed merger is available to save that competitor.

Now it may not necessarily be clear that permitting the merger, when compared to liquidation of the failing firm, is going to be a superior choice. For instance, there are competitive situations, I think they are rare, but there are competitive situations in which the merger is no improvement. It may not be worse, but it is no improvement. Those situations are alluded to at the bottom of page 3.

The second policy or ground on which the defense is based is that when the competitive effects of a particular merger are ambiguous, it is then appropriate as a matter of antitrust policy to recognize considerations of equity. Here one becomes concerned with, in addition to the normal injury to competition standards, injury to employees, creditors, communities, shareholders and the like.

Because the supervening policy concerns of section 7 are effects on competition, the Supreme Court has throughout its interpretation of this doctrine rather steadfastly decided that the failing company defense must be narrowly construed; that in general it should not be used as a means of bailing out a company that is earning less than the average rate of return in the industry or for a reason is not doing well.

This is a simple way to loan them some money which they would pay back at a very low rate of interest and we would recoup this money. The initial authorization will be coming up this week in the House Banking Committee for $100 million. This money will be recouped. No. 1, and No. 2, a great deal of money which would be expended if they were to lose their jobs would not be expended.

Senator METZENBAUM. Would these be grants or loans under your bill?

Mr. KOSTMAYER. These would be loans and they would be paid back through a simple payroll deduction basis.

Senator METZENBAUM. Do you think that the $100 million can have much of an impact? When Youngstown Sheet and Tube closed down we are talking about $550 million for that one plant. Do you think the $100 million is adequate?

Mr. KOSTMAYER. Well, I don't think it is adequate, but we have to be realistic and ask for something we think we have a chance of getting.

Obviously, in the case of Youngstown Sheet and Tube in your own State, Senator, we would be way short of what is needed. We are talking mainly about smaller manufacturing plants and small towns throughout the Midwest, my part of the country, and New England, or anywhere really.

Senator METZENBAUM. As you probably know, Senator Kennedy and I have several bills with respect to protecting small business by not permitting mergers at a certain economic level. Do you feel that those would help in your efforts to protect the small businesses?

Mr. KOSTMAYER. I think very strongly they would. They would prevent the sort of thing we are trying to prevent, absolutely. Senator METZENBAUM. Senator Thurmond.

Senator THURMOND. Thank you very much, Mr. Chairman.

Mr. Chairman, I have several committee meetings this morning. I will have to run from one to the other, so if I am not here the full time. I am sure you will understand.

Senator METZENBAUM. I certainly will. I appreciate your being here.

OPENING STATEMENT OF SENATOR THURMOND

Senator THURMOND. First I want to say since we are beginning hearings today on a new and more specific subject area within the overall conglomerate merger area, I wish to reserve the right to submit my statement concerning this new area until later. I feel the need to study more carefully the subject matter concerning this particular issue, including the testimony that will be presented at today's hearings. As we proceed to consider any new or specific issues such as this, certainly we need to be extremely careful that we give appropriate studies to the economic consequences and to the equity and fairness for all concerned.

Mr. Chairman, I feel sure that you and the other members of this subcommittee share my feeling that it is our duty to develop and implement legislation that serves the best public interest of the Nation. This, of course, will require our careful consideration and deliberation as we view new legislation approaches such as that before us here today.

Now, Representative Kostmayer, I just want to say we are glad to have you with us and appreciate your appearance.

I would like to propound this question to you. In 1970, the Congress passed the so-called failing newspaper law. Now this gave such failing newspapers an exemption from the antitrust laws so that in a given city where there is a morning newspaper and an afternoon newspaper and one of them is closed as a failing newspaper, the two newspapers can then enter into an agreement to share profits, share advertising and newspaper subscriptions at appropriate percentages without violating the antirust laws.

Now in your opinion how does the failing newspaper company doctrine and the newspaper exemption differ from the failing company doctrine discussed today in this hearing?

Mr. KOSTMAYER. Well, I think as Senator Metzenbaum said, Senator Thurmond, before you came in, there are instances in which the failing company doctrine is very valid. There ought to be some exemptions to the Clayton Antitrust law. But I think what we have to do is to examine closely when those exemptions should be allowed and when they should not be allowed. I think there are instances when exemptions have been allowed that in the long run that advantage has been taken of the failing business doctrine and the conglomerate has just really taken advantage of it to sell out the smaller company to redeem its cash value.

But I do think there are instances where it is valuable. I think really the important work that your subcommittee is involved in is to determine where it is valid and where it is not valid.

I do think there are instances where it is valid.

Senator THURMOND. Do you feel that legislation should be introduced on this subject? And do you feel it would be helpful?

Mr. KOSTMAYER. Yes, I do. On the failing business doctrine or on the-yes, I think so.

Senator THURMOND. Do you think you could distinguish that from the failing newspaper?

Mr. KOSTMAYER. Well, I am not sure.

Senator THURMOND. Do you think they run parallel?

Mr. KOSTMAYER. Well, I am not sure I can make a distinction between or understand the differences between failing companies and failing newspapers. No. I am not sure I recognize the distinctions there.

Senator THURMOND. For instance, if you have a failing company in a small community, is there any objection to the citizens looking to the best solution of that question, even if it requires a merger?

Mr. KOSTMAYER. No, I think not, but I think you have to realize there is a possibility that small company may be merging with a large company and the large company may not really be interested in preserving jobs there. Their interest may just be to acquire the cash value and sell out a couple of years later and then the people who work for that small company, small textile mill, for example, in your State, are out of luck.

What our bill dces is to allow those people who work in that factory or that mill, say 150 of them, to borrow money from the Federal Government and buy that place and take it over. The townspeople,