For this final piece, a bit of explanation seems called for, particularly since it has nothing to do with investing. One 1963 morning, I got a call in my dorm room at Harvard Business School from the assistant to my favorite teacher, Charles M. “Charlie” Williams, saying: “Professor Williams wants to see you in his office … this afternoon … to discuss your paper.” My heart sank. Was it really so bad that he felt we had to discuss it in person?
When I arrived at the appointed time, I was told, “You can go right in. Professor Williams is expecting you.” As I entered the office, he looked at me, held my paper above his head, smiled warmly and, in his West Virginia accent, said, “Pretty good!” What a relief! He went on, “Could get published!” and soon gave me a short list of trade journals, none of which I'd ever heard of, and advised me to send copies to all and hope for the best.
Three months later, I got a call from my father. This was unusual. Dad called because he wanted to congratulate me. His law partner, John Ferry, had just come to his office to ask, “Anyone in your family named Charles?”
“Yes, my son Charley. Why?”
“I've been reading a rather interesting article and checked to see who was the author, saw he was an Ellis, and thought there might be a connection. It's quite interesting, so if you have not seen it, I thought you might like to see it—so I brought it along.” Dad was more than interested. He was delighted and that's why Dad had called me.
A little background will explain. When Dad was at Yale, he was Managing Editor of the Yale Daily News. He had a great experience and hoped I would follow in his footsteps and have the satisfaction of seeing my work earn a byline. But, I had decided to join the student radio station instead, so there would be no byline. Now, at last, I did have a byline—even if only in a specialized journal. As anyone with a father would recognize, if Dad was pleased, I was delighted.
For me, the consequential result would be that this experience, thanks to Charlie Williams and John Ferry, launched me on a lifelong journey of writing, and as physicist Richard Feynman so aptly put it, “figuring it out.” As I've learned, the discipline of writing for publication starts with thinking how to figure out an interesting question.
No one will be more surprised by this decision than the Department of Justice,” wrote Associate Justice Harlan, commenting for the minority on the majority decision of the Supreme Court that the merger of the Philadelphia National Bank and the Girard Trust Corn Exchange Bank was in violation of Section 7 of the Clayton Act and therefore not lawful.
While the Justice Department probably was the most surprised by this decision, many official and private observers also were surprised. They included, among others, the Chairman of the Senate Banking and Commerce Committee, the Federal Judge about to try another bank merger case, the Comptroller of the Currency, the banking trade press, and two Associate Supreme Court justices.
Beside the initial expressions of surprise, this decision will have a profound influence on future bank mergers. The purpose of this article is to explain why informed observers were so surprised by the Supreme Court decision and to identify some of the implications of that decision for both economic and anti-trust policy.
The original laws governing corporate mergers and acquisitions were passed in response to the great merger movement at the turn of the century when major trusts were a recognized threat to the maintenance of a competitive business system. By 1914, the Sherman Act was believed inadequate to cope with most mergers because effective action could only be taken after a monopoly had been achieved.1 The Clayton Act was passed to “arrest the creation of trusts, conspiracies, and monopolies in their incipiency and before consummation.”2 Section 7 of this Act prohibited the acquisition of the stock of one corporation by another: “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.”3
While the provisions of the Act appeared effective at first, a series of restrictive court decisions left their application ineffective and the Justice Department sought “by regular efforts over a period of years”4 to obtain stronger laws. Finally, in 1950, Section 7 of the Clayton Act was amended to prohibit any acquisition of assets which “might have the effect of substantially lessening competition or tending to create a monopoly in any line of commerce in any section of the country.”5 While this change gave the Justice Department the authority it had been seeking, the amendment applied only to corporations subject to the jurisdiction of the Federal Trade Commission and, therefore, did not include banking.6 Thus, the Clayton Act applied only to bank mergers effected by stock acquisition, a method no longer used.
In virtually all post-war bank mergers, asset acquisition was the only method used,7 and the Justice Department was powerless to contest any bank merger unless it resulted in a monopoly as defined in the Sherman Act. The difference between “monopoly” and “tends to lessen competition” made it much harder for the Department to demonstrate a violation of the Sherman Act than would have been the case with the Clayton Act, had it applied.
During the 1950s, an increasing number of bank mergers served to dramatize the Justice Department's campaign to obtain stronger and broader authority over bank mergers. The President's Economic Report for 1956 called specifically for legislation in this area and Congress held initial hearings in the Spring. Representative Emmanuel Celler, who had proposed and supervised the 1960 amendment to Section 7 of the Clayton Act, sought to extend the same basic terms to cover banking. This Celler Bill would have given the Justice Department a veto over regulatory agency approvals and therein final authority on any bank merger.8
The three federal agencies charged with regulating banks and approving bank mergers9 proposed an alternate bill which would sustain and formalize their authority to make the final decisions on bank merger applications. They expressed a willingness to consult with the Justice Department on anti-trust matters, but asked Congress to provide more liberal criteria for judging bank mergers than those which apply to industry generally.10
The terminology of the key phrases of these two bills differed in a significant manner. The Celler Bill provided that there should be no merger which would substantially lessen competition, while the Regulatory Agency Bill would have denied a merger only if it unduly lessened competition. The agencies contended that there could be a substantial lessening of competition that was not an undue lessening of competition.11 In support of the agency contention that substantial need not mean undue, Senator Fulbright listed several situations in which a merger might substantially lessen competition and yet serve the public interest:
While the Celler Bill had support from the Justice Department and the House Judiciary Committee, the Agency Bill was supported by its sponsors, by banking associations, and by the Senate Committee on Banking and Currency. In the end, those who advocated reliance on the bank supervisory agencies prevailed over those who favored the Justice Department. But it was not a quick and simple settlement. Before the final bill was enacted, three years had passed and both an attempt to exempt banks entirely from the anti-trust laws and an attempt to make banks explicitly subject to those laws had been proposed and turned down.13
The final compromise bill—an amendment to Section 6 of the Federal Deposit Insurance Corporation Act—enumerated the following criteria by which the regulatory agencies should evaluate a merger application:
Before passing on the merger's effect on competition, the regulatory agency was required to obtain an advisory letter from the Attorney General dealing with the competitive factors in the proposal. Thus, in the view of legislators, “the knowledge of the Anti-trust Division of the Department of Justice would be available to the banking agencies. However, we think it is wholly appropriate and necessary that the final decisions should be made by the respective bank supervisory agencies rather than the Department of Justice.”15
The Senate Committee on Banking and Currency showed its determination to limit the authority of the Justice Department during the Committee's hearings when the representative of the Anti-trust Division was admonished at some length to restrict the advisory letters to the facts of the competition and not to become involved with considerations of public interest.16
Thus, the Congress ultimately passed an act which denied the Justice Department's petition for authority to control bank mergers, refused to extend the usual anti-trust regulations into banking, and specifically limited the Department's authority; and then provided a special means of controlling bank mergers and specified a novel set of criteria for judging the proprietary merger applications.
Even this brief review of legislative history makes Congressional intent quite clear and allows the reader to share with other observers the surprise of finding the Majority Opinion of the Supreme Court contend that there was real uncertainty regarding the scope of Section 7 and its applicability to bank mergers.
The key passage in the Majority Opinion argues that since Congress did not explicitly deny the applicability of the Sherman and Clayton Acts to bank mergers, it therefore could not have intended to make Section 7 inapplicable to bank mergers:
It was not Congress, but history that made the Clayton Act inapplicable. Bank merger “fashion” had changed and the new technique was not regulated by this Act. Recent bank mergers had been exclusively asset acquisitions and it was therefore solely to this merger method that the Congress felt obligated to direct its attention. Clearly, Congress intended something very different from a simple exercise in loophole plugging when it rejected the convenient plug offered by Representative Celler.
Among those who would be surprised by the Supreme Court decision, Associate Justice Harlan singled out the Justice Department because this agency had been rebuffed not only by Congress, but also by the courts. Moreover, the Department seemed to have accepted defeat, at least for the present.
Prior to the Supreme Court decision, the Justice Department had failed on several occasions to win a courtroom reversal of a merger approved by a bank supervisory agency. The courts rejected the idea that anti-trust regulations should be applied with the same force and effect to a regulated industry as to one in the so-called “free enterprise” field. Moreover, the courts were disposed to rely on the bank supervisory agencies to which Congress had given authority and warned that the Attorney General must present substantial and convincing evidence to win a reversal of an agency approval.17 Thus it appeared that the courts offered no hope of remedy for the Justice Department.
In its advisory letters, the Justice Department gave the appearance of the defeated contender withdrawing from the ring with nothing more than the hope of returning in the future for another, perhaps successful, bout. The advisory letters—which the new Act obliged the Justice Department to write to the bank supervisory agencies to advise on the effect of a proposed merger on competition—took a consistently negative position. While the banking agencies carefully discussed both pro and con, the Justice Department's comments were restricted to the disadvantages of a given merger. During the first year of the Bank Merger Act, the Department favored merger for only 3% of the applications which were eventually approved. The few mergers condoned by the Department were not only necessary to prevent a bank failure but were also cases in which the effect of the merger on any aspect of competition would be inconsequential.
In addition to taking such a persistently negative approach to these mergers that it was impossible to identify the Department's standard of acceptability, the Attorney General's letters also carefully avoided any mention of the banking business per se. By following this policy in the advisory letters, the Justice Department divorced itself from the eventual approval of the mergers and avoided both commitment to the decision-making process and acceptance of the special rules governing bank mergers.
Thus, prior to the Supreme Court's decision, the Justice Department had been explicitly limited to an advisory role by the Congress, had been rebuffed by federal courts, and had apparently refused to participate in an anti-trust process it could not control. It was the dramatic reversal of this history that led Justice Harlan to predict the Department's surprise.
It is an interesting matter of record that following the Supreme Court's decision, the Comptroller of the Currency received a letter from the Justice Department asking that two merger applicants “not be permitted to consummate their agreement until there has elapsed reasonable time to permit us to consider the significance and application the Supreme Court decision …”18 Apparently, the Department had not anticipated and was not prepared for the surprise decision of the Majority Opinion. The writer is not an attorney and is therefore not qualified to pass judgment on the legal merits of the majority opinion. However, the decision bears significantly on the development of our national anti-trust policy and it seems appropriate to indicate the direction of recent developments. In a largely unnoticed sequence of decisions, the courts are developing a theory of anti-trust that protects small local business from abrupt intrusion by large and efficient competitors.19 This theory is advocated by the Justice Department in a much broader application which tends to emphasize the number of competitors rather than the vigor of competition. Yet, the “public good” as represented by greater service at lower cost is not served by the number of competitors but by their ability and competitive determination to serve.
While preserving the motivation of competition is a traditional and fundamental objective of anti-trust policy, an overzealous campaign to preserve competition by preventing mergers and combinations may prevent firms from increasing their services and decreasing their costs. It was because determining the proper balance between protecting competition and promoting the expansion of bank services was a particularly difficult and highly specialized problem that the Congress refused to entrust the administration of bank mergers to the Justice Department.
As the wise supervision of mergers becomes more dependent upon understanding the economics of a market area and the technical nature of a particular business, Congress may appropriately consider developing more sophisticated criteria for judging the proprietary of mergers than those now employed by the Department of Justice. A second effort to provide special treatment for bank mergers is appropriate now.
Source: Reproduced from The Banking Law Journal with permission. Copyright 2022 LexisNexis. All rights reserved.