Mercantile Texas Corporation v. Board of Governors of the Federal Reserve System

Mercantile Texas Corporation is a bank holding company operating nine banks throughout Texas. PanNational Group, Inc., a smaller bank holding company, operates five banks in El Paso and Waco, cities not presently served by Mercantile. Mercantile seeks review of a Federal Reserve Board order denying approval to a proposed merger between the two companies. The Board held that elimination of potential competition between the two companies would have a substantially adverse effect on competition in El Paso and Waco without countervailing benefits to those communities.

On review, the Board argues that Section 1842(c) of the Bank Holding Company Act, 12 U.S.C. § 1842(c), grants it broad discretion to reject proposed mergers upon finding that a merger would have an anticompetitive effect detrimental to the convenience and needs of the community even if the merger would not violate the explicit antitrust standards included in Section 1842(c). We conclude that the statute denies the Board the broad discretion it claims. If the Board rejects a proposed merger on anticompetitive grounds, it must find a violation of the Sherman and Clayton Act standards written into the statute.

Anticipating our interpretation, the Board argues that the merger would violate the Clayton Act standard by eliminating potential competition in the two markets. Because the Board failed to make several important findings of fact (and because we can affirm the Board’s decision only on the basis of the findings that the Board actually made), we cannot determine whether the merger would violate the potential competition doctrine. Without adequate findings, we are also unwilling to decide whether the elimination of potential competition constitutes a violation of the Clayton Act standard.

Accordingly, we vacate the Board’s order and remand Mercantile’s petition to the Board for reconsideration and more thorough findings.

I.

Mercantile Texas Corporation is the fifth largest bank holding company in Texas. Its nine banks have aggregate deposits of $2.8 billion, representing 4.2 per cent of the total commercial bank deposits in the state. 1 PanNational controls five banks with deposits of $622 million, representing 0.9 per cent of the commercial bank deposits in Texas. The merged corporation would have 5.1 per cent of Texas commercial bank deposits. Mercantile would remain the fifth largest banking organization, but its total deposits would increase by approximately 22 per cent.

PanNational operates four banks in El Paso; the nearest market served by Mercantile is San Antonio, more than 500 miles *1260 away. PanNational also owns one bank in Waco; the nearest market served by Mercantile is Dallas, 95 miles away. Because of these distances, the Board found that the proposed merger would not eliminate any significant present competition between the two companies.

The Board found, instead, that future potential competition in Waco and El Paso between the two companies would probably be eliminated by the merger. 2 It predicted that, if the proposed merger were rejected, Mercantile would nevertheless enter the two markets, but in a manner resulting in greater competition. The Board stated this conclusion after only a limited discussion of the relevant economic data.

The Board’s findings as to the facts, if supported by substantial evidence, are conclusive. 12 U.S.C. § 1848; First State Bank of Clute v. Board of Governors, 553 F.2d 950 (5th Cir. 1977). See 5 U.S.C. § 706(2)(E) (judicial review under the Administrative Procedure Act). Like decisions of other agencies, however, the Board’s order may be affirmed only on the basis of the findings explicitly made in its opinions. SEC v. Chenery Corp. (Chenery I), 332 U.S. 194, 67 S.Ct. 1575, 91 L.Ed. 1995 (1947); Real v. Simon, 514 F.2d 738 (5th Cir. 1975). See Gravois Bank v. Board of Governors, 478 F.2d 546 (8th Cir. 1973). Its decision cannot be affirmed on the basis of “appellate counsel’s post hoc rationalizations for agency action;” Burlington Truck Lines Inc. v. United States, 371 U.S. 156, 168, 83 S.Ct. 239, 246, 9 L.Ed.2d 207, 215 (1962); Real v. Simon, 514 F.2d 738 (5th Cir. 1975); or because the contents of the record support conclusions that the Board has not stated. When, as here, an agency makes only minimal findings, its decision rests on precarious ground.

We begin by examining Section 1842(c) to determine what standard governs the Board’s discretion in reviewing proposed mergers.

II.

Section 1842(c) of the Bank Holding Company Act, 12 U.S.C. § 1842(c), 3 forbids Board approval of any merger that would foster a monopoly or “whose effect . . . may be substantially to lessen competition” unless “it finds that the anticompetitive effects are clearly outweighed in the public interest.” 4 The phrase “substantially to *1261 lessen competition” is, of course, borrowed from Section 7 of the Clayton Act, 15 U.S.C. § 18. Because this repetition was purposeful, 5 the principles developed under the Clayton Act are applicable to mergers of bank holding companies under Section 1842(c), Mid-Nebraska Bancshares, Inc. v. Board of Governors, 627 F.2d 266 (D.C. Cir. 1980), as well as to mergers of banks under Section 1828(c)(5)(B) of the Bank Merger Act, which uses the same language. See United States v. Marine Bancorporation, 418 U.S. 602, 94 S.Ct. 2856, 41 L.Ed.2d 978 (1974); United States v. First City National Bank, 386 U.S. 361, 87 S.Ct. 1088, 18 L.Ed.2d 151 (1967).

If the antitrust consequences of the merger do not require Board disapproval, then the statute commands the Board to “take into consideration . . . the convenience and needs of the community.” Counsel for the Board argues that this second provision enables it to reject proposed mergers if it finds that the anticompetitive effects of the merger would thwart the “convenience and needs” of the community even if these effects are insufficient to violate the antitrust standards. While an agency’s interpretation of its own governing statutes is entitled to great deference, Board of Governors v. First Lincolnwood Corp., 439 U.S. 234, 99 S.Ct. 505, 58 L.Ed.2d 484 (1978), we are not persuaded that Congress intended the Board to have nearly unlimited discretion to reject proposed mergers on anticompetitive grounds beyond Clayton Act violations.

Two circuits have already rejected the Board’s contention. In Washington Mutual Savings Bank v. F.D.I.C., 482 F.2d 459 (9th Cir. 1973), the Ninth Circuit considered this argument in the context of the identical language of the Bank Merger Act provision, 12 U.S.C. § 1828(c)(5). The court held that Congress intended to impose a uniform antitrust standard for consideration of bank mergers, thereby enabling the agencies and courts to develop a “discernible body of law.” 482 F.2d at 464. The community’s “convenience and needs,” which the Board must also consider, was found to refer exclusively to banking (as distinguished from competitive) factors. Id. at 465. In County National Bancorporation v. Board of Governors, No. 79-1783 (8th Cir. Sept. 3, 1980), rehearing granted, the Eighth Circuit followed Washington Mutual and held that the Clayton Act standard was the exclusive test for evaluating anticompetitive effects under the Bank Holding Company Act provision, 12 U.S.C. § 1842(c).

The legislative history of the two provisions establishes that Congress did not intend for the Board to apply a more stringent standard than ordained by Section 7 of the Clayton Act. Above all, Congress sought to establish “uniform standards” for consideration of anticompetitive effects of bank mergers and acquisitions by bank holding companies. S.Rep.No. 1179, 89th Cong., 1st Sess. 10, reprinted in [1966] U.S. Code Cong. & Ad. News 2385, 2394 (1966 amendment to the Bank Holding Company Act). See H.R.Rep.No. 1221, 89th Cong., 1st Sess. 1, reprinted in [1966] U.S. Code Cong. & Ad. News 1860 (1966 amendment to Bank Merger Act); Austin, The Evolution of Commercial Bank Merger Antitrust Law, 36 Bus.Law. 297, 315 (1981). 6 Allowing the Board to employ a more stringent standard tailored to the “convenience and needs” of each community would destroy that uniformity.

The House Banking and Currency Committee designed the language of the statute as a compromise between those seeking the most vigorous possible application of the antitrust laws to banks and those seeking to *1262 exempt banks from' their operation. 7 The two sides compromised by applying the established principles of the antitrust laws to bank mergers, but allowing those mergers whose anticompetitive effects are outweighed by “the convenience and needs of the community.” By applying standards more stringent than the antitrust laws, the Board would go beyond the terms of the compromise to gain a victory that Congressional antitrust proponents may not have sought and certainly did not obtain.

The Board argues that Congress established standards that would be uniform only when the Board is required to reject a proposed merger, but did not limit the Board’s discretion to apply a standard stricter than the Clayton Act if the “convenience and needs” of the community warrant. This construction, however, gives “convenience and needs” an additional meaning unknown to the bill’s proponents.

The statute twice uses the same term, “convenience and needs” only a few lines apart. The term is first used to state circumstances that may outweigh even Clayton Act anticompetitive effects. It is next used to state a criterion to be applied “in every case.” There is some indication in the congressional debate that the two phrases are intended to reflect the same values. See 112 Cong.Rec. 2453 (1966) (remarks of Congressman Gonzalez). The Board’s interpretation would require the clause to be given a different effect the second time it is used.

In the first usage, the phrase “convenience and needs” is explicitly contrasted with Clayton Act anticompetitive factors and refers to considerations other than competitive impact. These are referred to as “banking factors.” They include such considerations as the general availability of banking services, their adequacy for the economic needs of the community, the geographic location of banking facilities and all of the other indicia by which it can be determined that, notwithstanding anticompetitive effect, there is a real social and economic necessity for additional banking service. The Board’s interpretation of the second usage would treat it as embracing undefined anticompetitive factors together with the banking factors that measure convenience and needs. Under the Board’s interpretation, these factors must necessarily create a standard more stringent than the Clayton Act exacts. Any merger violating the Clayton Act standard would ipso facto fail the test set under Section 1842(c)(2).

The House Report accompanying the 1966 amendments to the Bank Merger Act states that the phrase “convenience and needs” was substituted for “archaic” phraseology describing “the so-called banking factors.” H.R.Rep.No. 1221, 89th Cong., 1st Sess. 4, reprinted in [1966] U.S.Code Cong. & Ad. News 1860, 1863. 8 Throughout the debate *1263 on the Bank Merger Act amendments, the bill’s proponents consistently contrasted “convenience and needs” with competitive factors. Congressman Brock, the leading Republican supporter, explained:

. . . this bill would make the competitive factor, as defined by the antitrust laws, the primary factor to be used both by the bank supervisory agencies and the courts in determining whether to approve a merger.... In place of the six banking factors [contained in the original version of the Bank Merger Act], this bill substitutes “the convenience and needs of the community to be served.”

The way in which this factor of convenience and needs of the community to be served is juxtaposed against the antitrust competitive standard is important. . . .

112 Cong.Rec. 2444 (1966). 9 It is possible that Congressman Brock was referring exclusively to the use of “convenience and needs” in subparagraph (2). However, no supporter of the bill gave any indication that he regarded the phrase as referring to more than banking factors in either context.

To buttress its interpretation, the Board relies mainly on two statements made during the House debate on the Bank Merger Act amendments. Two opponents of the bill declared that the need for a competitive market in banking was a primary “need” of the community. See 112 Cong.Rec. 2457 (1966) (remarks of Congressman Todd); Id. at 2459 (remarks of Congressman Weltner).

While statements by a bill’s opponents are relevant in determining congressional intent, Arizona v. California, 373 U.S. 546, 83 S.Ct. 1468, 10 L.Ed.2d 542 (1963), they are entitled to little weight. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 203 n.24, 96 S.Ct. 1375, 1386 n.24, 47 L.Ed.2d 668, 682 n.24 (1976); Holtzman v. Schlesinger, 414 U.S. 1304, 94 S.Ct. 1, 38 L.Ed.2d 18 (1973) (per Marshall, Circuit Justice). Given greater weight, however, they would not compel the Board’s interpretation. While the meaning of the statements is not entirely clear, they appear to be merely rhetorical complaints by two congressmen desiring strict antitrust enforcement in the banking industry, not attempts to construe language to which both congressmen were opposed.

The Board also points to a statement in the House Report accompanying the 1966 Bank Merger Act amendments that the Board may consider “in any particular case such other factors as [it] might deem relevant.” H.R.Rep.No. 1221, 89th Cong., 1st Sess. 4, reprinted in [1966] U.S.Code Cong. & Ad.News 1863. This statement, however, is made in the context of a discussion of banking factors; it indicates only that the language substituted for the “archaic . . . phraseology” of the previous version of the statute (see id.) does not exhaust the possible banking and financial factors that the Board may consider. 10 No mention is made of additional anticompetitive factors.

Finding that the Board’s interpretation of Section 1842(c) contradicts the antitrust policy embodied in the statute, we hold that the Board may not deny approval to a proposed merger of bank holding companies without finding a violation of the antitrust standards explicitly incorporated into the statute.

III.

In rejecting Mercantile’s application, the Board concluded that the merger would violate the Clayton Act standard by eliminating “actual potential competition” between Mercantile and PanNational. 11 The Board relied on a controversial doctrine whose validity remains a current subject of debate.

*1264 A. The Potential Competition Doctrine

In a concentrated market, a small number of firms can dominate the market through their ability to manipulate the supply of a given product or service. Collusion is difficult to prove, but easy to accomplish either by agreement or through consciously parallel action. In banking, for example, a concentrated market enables dominant banks to avoid cutting interest rates, offering new services or extending credit to all but the safest credit risks, secure in the knowledge that their customers cannot go to a competitor and get better service. 12

Seeing the possibility of significant profits, companies outside of the market will desire to enter it. One way to enter easily is to acquire a successful company already in the market. Thus, the new entrant does not add to the number of competitors and yet enjoys the opportunity to enjoy the oligopolistic profits that result from the noncompetitive environment.

The potential competition doctrine postulates two benefits if outside firms are prevented from acquiring dominant firms within a concentrated market. “Perceived potential competition” describes the effect exerted on a concentrated market by large firms outside of the market who are “perceived” as likely entrants. The threatened entry of a powerful new competitor may intimidate already dominant firms into maintaining nearly competitive prices to avoid enticing the outside “midget killer” into the market by the prospect of oligopoly profits. The Supreme Court accepted this branch of the theory in United States v. Falstaff Brewing Corp., 410 U.S. 526, 93 S.Ct. 1096, 35 L.Ed.2d 475 (1973), remanding for a determination whether Faistaff Brewing’s threatened entry into the New England beer market deterred local brewers from raising prices. The Board now maintains that Mercantile was also a perceived potential competitor. Because the Board made no finding to that effect in its decision, we cannot consider this post hoc rationalization on appeal. Burlington Truck Lines, Inc. v. United States, 371 U.S. 156, 83 S.Ct. 239, 9 L.Ed.2d 207 (1962); SEC v. Chenery Corp. (Chenery I), 332 U.S. 194, 67 S.Ct. 1575, 91 L.Ed. 1995 (1947).

While perceived potential competition describes a present procompetitive effect, “actual potential competition” 13 describes the future procompetitive benefit that occurs when an effective new competitor “actually” enters the market on its own. (Hereafter, “potential competition” and “potential competitor” refer exclusively to the actual potential competition doctrine.) The potential competition doctrine holds that, if a strong outsider is prevented from acquiring a dominant insider, the outsider will still enter the market independently, either de novo or through the purchase of a small (i. e. not dominant) company to establish a “toehold” in the market. If the outsider is forced to enter independently, it is more likely to become an aggressive price-cutting competitor as it attempts to increase its share of the market. The addition of a new effective competitor to the band of dominant firms will also make collusion or conscious parallelism more difficult. Had the outsider been allowed to merge with a successful insider, it would have assumed the role of the insider and continued the anticompetitive practices. Because the outsider’s full competitive force will never be felt, the merger is said to substantially lessen competition for purposes of the Clayton Act standard. 14

*1265 B. Validity Under the Clayton Act

The Supreme Court has twice refused to decide whether the elimination of “actual potential competition” violates the Clayton Act. See United States v. Marine Bancorporation, 418 U.S. 602, 94 S.Ct. 2856, 41 L.Ed.2d 978 (1974) (decided under the Bank Merger Act provision); United States v. Falstaff Brewing Corp., 410 U.S. 526, 93 S.Ct. 1096, 35 L.Ed.2d 475 (1973). This Circuit has not yet passed on the issue. 15 As the Second Circuit noted in BOC International Ltd. v. FTC, 557 F.2d 24 (2d Cir. 1977), we are on the frontiers of antitrust law in attempting to determine the validity and applicability of the theory to specific mergers.

We believe that the doctrine has logical force and is consonant with the language and policy of the Clayton Act. The Act bars any merger that would “substantially lessen” competition. Some commentators have argued that it prohibits only those mergers substantially lessening present competition. See Kaplan, Potential Competition and Section 7 of the Clayton Act, 25 Antitrust Bull. 297, 314-317 (1980); Rahl, Applicability of the Clayton Act to Potential Competition, 12 ABA Section of Antitrust L. 128, 142-43 (1958); Comment, Toehold Acquisitions and the Potential Competition Doctrine, 40 U.Chi.L.Rev. 156, 180-82 & n.105 (1972). The statute, however, does not command us to determine whether only present competition has been substantially lessened. In evaluating a merger under Section 7, the courts have looked at its effect on future competition. In United States v. Penn-Olin Chemical Co., 378 U.S. 158, 84 S.Ct. 1710, 12 L.Ed.2d 775 (1964), the Court invalidated a joint venture between Pennsalt Chemicals and Olin-Mathieson whereby “Penn-Olin Chemical Co.” would enter the sodium chlorate market in the southeastern United States. While the Court relied on several grounds, it noted that the joint venture (in effect, a merger) “may well foreclose any prospect of competition between Olin and Pennsalt in the relevant sodium chlorate market.” 378 U.S. at 173, 84 S.Ct. at 1718, 12 L.Ed.2d at 786. Such competition could, of course, take place only in the future. In FTC v. Procter & Gamble Co., 386 U.S. 568, 87 S.Ct. 1224, 18 L.Ed.2d 303 (1967), we are instructed to look at a merger’s impact on competition “present and future.” 386 U.S. at 577, 87 S.Ct. at 1229, 18 L.Ed.2d at 309. The Clayton Act standard was designed as a “prophylactic measure, intended ‘primarily to arrest apprehended consequences of inter-corporate relationships before those relationships could work their evil.’ ” Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 485, 97 S.Ct. 690, 695, 50 L.Ed.2d 701, 710 (1977), quoting United States v. E.I. Du Pont de Nemours & Co., 353 U.S. 586, 597, 77 S.Ct. 872, 879, 1 L.Ed.2d 1057, 1069 (1957). See Brodley, Potential Competition Mergers: A Structural Synthesis, 87 Yale L.J. 1, 45-52 (1977).

In the absence of necessary findings by the Board, however, we will not decide whether the doctrine adequately describes a violation of the Clayton Act standard. Professor Posner has argued that it is impossible to develop workable criteria for determining the applicability of the theory to specific mergers. See R. Posner, Antitrust Law: An Economic Perspective 113-25 (1976). We do not yet accept Professor *1266 Posner’s despair. The Clayton Act prohibits more than “certainties;” it also prohibits “probabilities,” but not “ephemeral possibilities.” Marine Bancorporation, 418 U.S. at 622-23, 94 S.Ct. at 2870, 41 L.Ed.2d at 996-97; Brown Shoe Co. v. United States, 370 U.S. 294, 323, 82 S.Ct. 1502, 1522-23, 8 L.Ed.2d 510, 534 (1962). Because the Board made only minimal findings, we cannot tell whether more thorough findings can separate probabilities from “ephemeral possibilities.”

We join the Second and Fourth Circuits in attempting to set adequate standards of proof in preference to rejecting an admittedly problematic doctrine. See United States v. Siemens Corp., 621 F.2d 499 (2d Cir. 1980); BOC International Ltd. v. FTC, 557 F.2d 24 (2d Cir. 1977); FTC v. Atlantic Richfield Co., 549 F.2d 289 (4th Cir. 1977). 16

The findings we require necessarily involve economic prediction, 17 but this is not unusual. Many of the findings we call on juries to make are equally speculative; for example, the future loss that an injured person will suffer. The Board’s expertise entitles its findings to an additional degree of confidence. We cannot determine whether such findings are inherently too speculative until they have been discussed by the parties and employed by the Board in actual fact finding.

To establish a violation of the doctrine, the Board must make explicit findings as to the degree of concentration in the market, the existence of other potential competitors, the probability that the potential competitor will enter the market independently and the probability that the potential competitor’s entry will have a significant procompetitive impact in either El Paso or Waco. 18 The Board made an adequate finding only as to the degree of concentration in El Paso and Waco.

C. The Required Findings

1. Market Concentration

“The potential competition doctrine has meaning only as applied to concentrated markets.” Marine Bancorporation, 418 U.S. at 630, 94 S.Ct. at 2874, 41 L.Ed.2d at 1000. If the market is competitive, collusion or conscious parallelism cannot affect the availability of credit and other banking services. An agency refusing to sanction a merger must find that the market is highly concentrated. Siemens, 621 F.2d at 505.

*1267 The Board found that the El Paso and Waco markets are highly concentrated. 19 The four largest banking organizations in El Paso control 86.1 per cent of the market and in Waco control 73.8 per cent of the market for commercial bank deposits. These high concentration ratios establish a prima facie case of a concentrated market. Marine Bancorporation, 418 U.S. at 631, 94 S.Ct. at 2874, 41 L.Ed.2d at 1001. 20

Mercantile countered only with evidence that the markets were deconcentrat ing but not with evidence that the markets were now deconcentrated to a significant degree. Mercantile failed to establish a “clear trend to deeoncentration;” a small decline does not constitute a clear trend. United States v. Black and Decker Mfg. Co., 430 F.Supp. 729, 751 (D.Md.1976). Even with a stronger trend towards deconcentration, years may pass before the influence of the dominant firms is substantially reduced. The addition of more competition could still have the requisite beneficial effect. We conclude that there was substantial evidence to support the Board’s conclusion that the markets are concentrated.

2. Other Potential Competitors

If there are numerous potential competitors waiting in the wings, elimination of Mercantile as one potential entrant would not be significant. FTC v. Atlantic Richfield Co., 549 F.2d 289 (4th Cir. 1977); United States v. First National State Bancorporation, 499 F.Supp. 793 (D.N.J.1980); 5 P. Areeda & D. Turner, supra at H 1123; R. Posner, supra at 113-25; Brodley, supra, 87 Yale L.J. at 75-77. The Board made no findings concerning the effect, if any, of Mercantile’s independent entry on the willingness and ability of other potential competitors to compete in the two markets.

Economic theory suggests that, where oligopoly profits are available, a multitude of firms will eagerly seek to enter the market. See R. Posner, supra at 124-25. Barriers to entry, however, will reduce the number of potential entrants. In regulating the banking industry, Congress and the states have created a number of such barriers. For example, federal anti-branching legislation prevents banks and bank holding companies domiciled outside Texas from entering El Paso and Waco. 21 A potential competitor must also hurdle more universal barriers, for it must have the necessary capital and managerial resources.

Despite these obstacles, there are likely to be other potential competitors in Texas. Mercantile is the fifth largest Texas bank holding company. While two of the four larger Texas bank holding companies have already entered the El Paso market, no outside bank holding company (besides Pan-National) has yet entered Waco. A significant number of large Texas bank holding companies remain as possible entrants for both markets.

On remand, the Board should attempt to identify any other potential entrants into El Paso and Waco. In particular, the Board should consider the other large Texas bank holding companies (or *1268 those large Texas banks capable of becoming bank holding companies). The Board should then evaluate whether the number of other potential entrants and the likelihood of their potential entry vitiate Mercantile’s importance as a potential competitor. We leave to the Board’s expertise the task of developing standards for determining the number and importance of the other potential competitors.

3. The Probability of Procompetitive Entry

While “approval of the [merger] proposal would do nothing to reduce the concentration of banking resources” in El Paso and Waco (Board Op. at 4), forbidding the merger accomplishes nothing unless Mercantile will, in fact, enter the two markets independently. 22 Accordingly, the Board had to determine the likelihood that Mercantile will do so. Siemens, 621 F.2d at 506-07.

The Board did make two necessary preliminary findings. It concluded, on the basis of substantial evidence, that no significant barriers to entry prevent an outsi