Public Comments and Response on Proposed Final Judgment United States v. AT&T Corp. and Tele-communications, Inc.

DEPARTMENT OF JUSTICE

Antitrust Division

[Civil No. 98CV03170]

Public Comments and Response on Proposed Final Judgment United

States v. AT&T Corp. and Tele-communications, Inc.

Pursuant to the Antitrust Procedures and Penalties Act, 15 U.S.C.

16(b)-(h), the United States of America hereby publishes below the

comments received on the proposed Final Judgment in United States v.

AT&T Corp. and Tele-communications, Inc. Civil Action No. 98CV03170,

filed in the United States District Court for the District of Columbia,

together with the United States' response to the comments.

Copies of the comments and response are available for inspection in

Room 8000 of the U.S. Department of Justice, Antitrust Division, 1401 H

Street, N.W., Washington, D.C. 20530, telephone: (202) 514-5621, and at

the office of the Clerk of the United States District Court for the

District of Columbia, United States Courthouse, Third Street and

Constitution Avenue, N.W., Washington, D.C. 20001. Copies of any of

these materials may be obtained upon request and payment of a copying

fee.

Constance K. Robinson,

Director of Operations, Antitrust Division.

Comment Relating to Proposed Final Judgment and Response of the

United States to Comment

Judge Emmet G. Sullivan

Pursuant to Section 2(b) of the Antitrust Procedures and Penalties

Act (15 U.S.C. 16(b)-(h)) (``APPA''), the United States of America

hereby files the public comment it has received relating to the

proposed Final Judgment in this civil antitrust proceeding, and herein

responds to the public comment. The United States has concluded that

the change to the proposed Final Judgment that was suggested in the

comment would be in the public interest. Accordingly, the United States

has secured the consent of the defendants to modify the proposed Final

Judgment in this respect. The APPA requires publication of the public

comment and the United States' response. When that publication has been

completed, the United States will file a Certificate of Compliance with

the APPA and a Motion for Entry of the Modified Judgment with the

court.

I. Background

This action was commenced on December 30, 1998, when the United

States filed a civil antitrust complaint under Section 15 of the

Clayton Act, as amended, 15 U.S.C. Sec. 25, alleging that the merger of

Tele-Communications, Inc. (``TCI'') with a wholly-owned subsidiary of

AT&T Corp. (``AT&T'') and the resultant acquisition by AT&T of a 23.5

percent equity interest in the mobile wireless telephone business of

Sprint Corporation (``Sprint PCS'') would substantially lessen

competition in the provision of mobile wireless telephone services in

many geographic areas throughout the country.

In June 1998, AT&T and TCI executed a Merger Agreement and Plan of

Merger pursuant to which TCI would be merged into a wholly-owned

subsidiary of AT&T. The proposed transaction would have resulted in the

acquisition of a 23.5 percent interest in Sprint's mobile

[[Page 23870]]

wireless business, one of the principal competitors to AT&T's mobile

wireless telephone business in many geographic areas throughout the

country. The United States concluded that AT&T's incentives to compete

with Sprint PCS could be lessened significantly as a result of the

ownership of this substantial interest in Sprint PCS. Accordingly, on

December 30, 1998, the United States filed a Complaint seeking to

enjoin the merger. Contemporaneously with its Complaint, the United

States also submitted a proposed Final Judgment, a Competitive Impact

Statement, and a Stipulation signed by the defendants consenting to

entry of the proposed Final Judgment by the Court after completion of

the requirements of the Antitrust Procedures and Penalties Act (15

U.S.C. 16).

Among other things, the proposed Final Judgment requires the

defendants to transfer the Sprint PCS stock to a trustee, who is

required to divest the stock. See Section V.A., proposed Final

Judgment. The proposed Final Judgment also contains a number of

provisions to effect a ``hold separate'' arrangement until this

divestiture has been completed. See CIS at 12-15. One of these

provisions, set forth in Section VI.D. of the proposed Final Judgment,

required that the trustee be instructed not to vote the Sprint PCS

shares held by the trust.

II. Response to Public Comments

The only comment received by the United States was filed by

Sprint.\1\ Sprint's comment is focused on section VI.D. of the proposed

Final Judgment. Sprint points out that some of its potential corporate

transactions require the approval of a majority (or some other

specified percentage) of all shares entitled to vote. For these

matters, shares that fail to vote are the equivalent of shares voting

against a proposal. Given the substantial portion of Sprint PCS shares

that will be held by the trust, Sprint contends that its ability to

obtain shareholder approval on such matters could be impeded by the

non-voting requirement in section VI.D. of the proposed Final Judgment,

and that Sprint's effectiveness as a competitor could be diminished by

this constraint on its strategic flexibility. Comments of Sprint

Corporation at 2.

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\1\ This comment is attached hereto as Exhibit A.

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The United States agrees that section VI.D. of the proposed Final

judgment could have such an effect, and that the modification suggested

by Sprint would be appropriate in order to address the concerns raised

by Sprint. The United States' objective in negotiating the non-voting

requirement in Section VI.D. was to protect competition by ensuring

that the Sprint PCS shares would not be voted in a way that might

reduce competition. In light of the information and analysis set forth

in Sprint's comments, however, the United States has concluded that the

underlying objective would be better served if section VI.D. is

modified, to read as follows: ``The trustee shall be instructed to vote

all of Liberty's Sprint Holdings that are entitled to vote for and/or

against applicable matters in the same respective proportions as the

other holders of the Sprint PCS Tracking Stock.'' This modification

will fully neutralize the voting rights of the Liberty Sprint Holdings,

yet avoids the unintended effects described by Sprint in its comment.

The defendants and the United States have entered into a

Stipulation, attached hereto, agreeing to the entry of a Final Judgment

which incorporates this modification to section VI.D., but which is

otherwise unchanged from the proposed Final Judgment filed on December

30, 1998.

III. Standard of Review

As set forth in Section VII of the Competitive Impact Statement,

the APPA requires that proposed consent judgments in antitrust cases

brought by the United States be subject to a sixty (60) day comment

period, after which the court shall determine whether entry of the

proposed Final Judgment ``is in the public interest.'' 15 U.S.C. 16(e).

A ``public interest'' determination can be made properly on the basis

of the Competitive Impact Statement and Response to Comments filed

pursuant to the APPA. Although the APPA authorizes the use of

additional procedures, 15 U.S.C. 16(f), those procedures are

discretionary. A court need not invoke any of them unless it believes

that the comments have raised significant issues and that further

proceedings would aid the court in resolving those issues. See H.R.

Rep. 93-1463, 93d Cong. 2d Sess. 8-9 (1974), reprinted in U.S.C.C.A.N.

6535, 6538. As the United States Court of Appeals for the D.C. Circuit

recently held, this statute permits a court to consider, among other

things, the relationship between the remedy secured and the specific

allegations set forth in the government's complaint, whether the decree

is sufficiently clear, whether enforcement mechanisms are sufficient,

and whether the decree may positively harm third parties. See United

States v. Microsoft, 56 F.3d 1448, 1461-62 (D.C. Cir. 1995).

Under this standard, the Court's role is limited to determining

whether the proposed decree is within the ``zone of settlements''

consistent with the public interest, not whether the settlement

diverges from the Court's view of what would best serve the public

interest. United States v. Western Electric Co., 993 F.2d 1572, 1576

(quoting United States v. Western Electric Co., 900 F.2d 283, 307 (D.C.

Cir. 1990)); United States v. Microsoft Corp., 56 F.3d at 1457-58, see

also 56 F.3d at 1460 (D.C. Cir. 1995). As the United States Court of

Appeals for the District of Columbia Circuit recognized in reversing

the district court's refusal to enter an antitrust consent decree

proposed by the United States: ``Congress did not mean for a district

judge to construct his own hypothetical case and then evaluate the

decree against that case.'' United States v. Microsoft Corp., 56 F.3d

at 1458-60. To the contrary, ``[t]he court's authority to review the

decree depends entirely on the government's exercising its

prosecutorial discretion by bringing a case in the first place,'' and

so the district court ``is only authorized to review the decree

itself,'' not other matters that the government might have but did not

pursue. Id.

Absent a showing of corrupt failure of the government to discharge

its duty, the Court, in making its public interest finding, should . .

. carefully consider the explanations of the government . . . and its

responses to comments in order to determine whether those explanations

are reasonable under the circumstances.

United States v. Mid-America Dairymen, Inc., 1977-1 Trade Cas.

para. 61,508, at 71,980 (W.D. Mo. 1977). The Court may reject the

agreement of the parties as to how the public interest is best served

only if it has ``exceptional confidence that adverse antitrust

consequences will result. . . .'' United States v. Western Electric

Co., 993 F.2d at 1577 (D.C. Cir.), cert. denied, 114 S. Ct. 487 (1993),

quoted with approval in United States v. Microsoft Corp., 56 F.3d at

1460.

IV. Conclusion

For the reasons stated herein, the proposed Final Judgment, with

section VI.D. of the proposed Final Judgment modified as indicated

above with the consent of the Defendants, is consistent with the public

interest.

Dated: March 26, 1999.

[[Page 23871]]

Respectfully submitted,

Peter A. Gray,

Attorney, Telecommunications Task Force, U.S. Department of Justice,

Antitrust Division, 1401 H. Street, N.W., Suite 8000, Washington, D.C.

20530, (202) 514-5636.

King & Spalding

1730 Pennsylvania Avenue, N.W., Washington, D.C. 20006-4706,

Telephone: 202/737-0500, Facsimile: 202/626-3737

March 11, 1999.

By Hand Delivery

Mr. Donald J. Russell,

Chief, Telecommunications Task Force, Antitrust Division, U.S.

Department of Justice, 1401 H Street, N.W., Suite 8000, Washington,

D.C. 20530

Re: U.S. v. AT&T Corp. and Tele-Communications, Inc., Civil Action

No. 98 CV 03170 (EGS (D.D.C.)

Dear Mr. Russell: In accordance with the Antitrust Procedures

and Penalties Act, 15 U.S.C. Sec. 16(b)-(h), Sprint Corporation

submits the enclosed comments on the proposed consent decree in the

above-entitled action.

Sincerely,

Kevin R. Sullivan

Comments of Sprint Corporation

Sprint Corporation (``Sprint''), pursuant to the Antitrust

Procedures and Penalties Act, 15 U.S.C. 16(b)-(h) (the ``Tunney Act''),

submits these comments on the Final Judgment proposed by the United

States Department of Justice (the ``Department'') concerning the

planned acquisition by AT&T Corporation (``AT&T'') of Tele-

Communications, Inc. (``TCI'').

Summary

TCI owns about 22% of the outstanding shares of Sprint PCS Stock (a

tracking stock which generally tracks Sprint's wireless operations).

The proposed Final Judgment requires TCI to transfer its holdings in

Sprint PCS Stock to a trustee for the purpose of accomplishing a

complete divestiture of such holdings by May 23, 2004, See Final

Judgment Secs. IV.A., V.A., 64 Fed. Reg. 2506, 2507-08 (January 14,

1999). While the PCS Stock is held in the trust, the trustee is

instructed by Sec. VI.D. of the proposed Final Judgment not to vote the

stock 64 F.R. at 2509.

Sprint believes that the non-voting provision of the proposed Final

Judgment could have the anticompetitive effect of limiting Sprint's

financial and operating flexibility. Certain Sprint corporate matters

require the approval of a majority (or some other percentage) of all

shares entitled to vote. For these matters, not voting has the same

effect as a negative vote. Due to the large amount of Sprint PCS Stock

the trust will hold, if the trustee does not vote the shares, it could

be difficult for Sprint to obtain necessary shareholder votes. Many of

the matters that could be affected involve important strategic options

including the authorization of additional stock which could be needed

to fund new products or technologies, the combination of PCS Group with

the rest of Sprint, and the ``spin-off'' of the PCS Group. If Sprint's

strategic flexibility is constrained, it could become a less effective

competitor in the constantly-evolving telecommunications industry.

In order to avoid these potential anticompetitive effects, the

proposed Final Judgment needs to be modified to instruct the trustee to

vote the Sprint PCS Stock pro rata in accordance with the votes of all

other Sprint PCS shareholders. By ordering the trustee to vote its

shares pro rata, the Final Judgment would neuter completely the voting

power of the Sprint PCS Stock held by the trust without constraining

Sprint.

I. The Non-Voting Provision in the Proposed Final Judgment Would

Constrain Sprint's Operating and Financial Flexibility

A. Background

Sprint's PCS Stock is a ``tracking stock'' which generally tracks

the performance of Sprint's wireless PCS operations. Sprint's other

tracking stock, the FON Common Stock, tracks the performance of

Sprint's other operations, including local and long distance telephone

service. On most matters, the FON Stock has one vote per share and the

PCS Stock has a fluctuating vote based on the market price of the PCS

stock relative to the FON Stock.

TCI, through a subsidiary, owns approximately 98.5 million shares

of low-vote Series 2 PCS Stock. TCI's shares are equal to approximately

22% of the total shares and share equivalents of the Sprint PCS Stock

(not including the warrants and preferred stock owned by TCI). On most

matters, the Series 2 PCS Stock owned by TCI has one-tenth of the vote

per share of Series 1 PCS Stock.\1\ However, on matters for which the

PCS Stock votes as a class (as opposed to voting with the FON Stock),

the Series 2 PCS Stock has the same voting power as the publicly-traded

Series 1 PCS Stock.

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\1\ Upon sale by TCI to an unrelated party, the Series 2 PCS

Stock now owned by TCI will convert to Series 1 PCS Stock with full

voting power.

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B. The Proposed Final Judgment

Under the terms of the proposed Final Judgment, TCI must, prior to

the closing of AT&T's acquisition of TCI, transfer the Sprint PCS Stock

it currently owns to a trustee. Final Judgment Sec. IV.A., 64 FR at

2507. Pursuant to Sec. V.A., the trustee must divest by May 23, 2002,

the portion of TCI's holdings sufficient to bring the holding to no

more than 10% of the outstanding Sprint PCS Stock and must completely

divest the Sprint PCS Stock by May 23, 2004. 64 FR at 2508. Section

VI.D. of the Final Judgment states that ``[t]he trustee shall be

instructed not to vote [the Sprint PCS shares] for so long as they are

held in trust.'' 64 FR at 2509.

C. The Potential Anticompetitive Effects

The trustee's inability to vote the shares in the trust will

adversely affect Sprint's ability to obtain the necessary shareholder

vote in any matter that requires a majority (or some other percentage)

of all shares entitled to vote. On these matters, if the trustee does

not vote, the large block of PCS stock held by the trust will

effectively vote no.\2\ Because many important corporate actions

require a majority of all shares entitled to vote, Sprint's operating

flexibility will be constrained significantly.

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\2\ The trustee's inability to vote will not affect Sprint's

ability to obtain shareholder approval in matters where a percentage

of the shares that actually do vote at a given meeting is required.

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The difficulties caused if TCI's PCS shares don't vote are most

significant where the Series 2 PCS Stock that the trust will hold has a

full vote per share. Spring will be exposed to significant

anticompetitive harm if it is unable to obtain shareholder approval for

this category of actions.

For instance, in order for Sprint to increase the number of

authorized shares of PCS Stock, Article Sixth, Section 3.1(ii) of its

Charter requires that the PCS Stock vote as a class (with the Series 2

PCS Stock, that the trust will hold, having a full vote per share). For

more PCS shares to be authorized, the approval of a majority of all

shares entitled to vote is needed. Assuming, hypothetically, that at

the time of a vote Sprint has 450 million shares of PCS Stock that vote

and the trust holds approximately 22% of the PCS Stock or 98.5 million

shares of Series 2 PCS Stock, Sprint would need approval of 225,000,001

shares. If out of the 351.5 million non-trust shares, only 275 million

are voted on this issue due to shareholders failing to send in proxy

cards and if the trustee does not vote its shares, Sprint would be

required to

[[Page 23872]]

obtain affirmative votes from 81.8% of the shares that are voted

(225,000,001 out of 275,000,000 votes), a difficult percentage to

obtain in any public vote. If less than 225 million shares were voted,

then Sprint's proposal would fail, even if a full 100% of the shares

voted in favor.

Any difficulty in authorizing more PCS Stock could have substantial

anticompetitive effects:

Sprint might need to have more shares of PCS Stock

authorized in order to issue more shares to raise capital for the

buildout of its PCS network, or to raise substantial capital for events

that are not foreseeable today, such as improvements or changes to

technology that are necessitated by competitive developments in the PCS

business.

Sprint might desire to complete certain pro-competitive

acquisitions using PCS Stock as consideration, which could require the

authorization of additional shares.

Without the ability to fund the buildout of its network and other

activities that become necessary in the future, and without the ability

to acquire strategic business partners that may become critical to the

survival of Sprint PCS, Sprint could be placed in a position of

substantial competitive disadvantage.

There are numerous other examples of important Sprint corporate

actions that require a majority of all shares entitled to vote and

entitle the Series 2 PCS Stock that the trust will hold to a full vote

per share including:

Amendment to the Charter that would alter or change the

powers, preferences or special rights of the shares of the PCS Stock so

as to affect them adversely;

``Spin off'' of the PCS Group within 2 years of November

23, 1998; and

Acquisition by the FON Group or another Group of more than

33% of the assets of the PCS Group.

For each of these actions, the trustee's inability to vote could

constrain Sprint anticompetitively by preventing Sprint from

structuring itself most effectively.

If the trustee does not vote TCI's PCS shares, the financial and

operating flexibility of Sprint will be constrained. To be competitive

in telecommunications, a company needs the ability to change its

capital structure in order to provide new technologies and compete in

new markets. In the past year alone, each of AT&T, MCI, and Sprint has

undergone substantial structural changes in an effort to be more

competitive. Exactly what will be demanded in the next five years is

unknown, but it is certain that technology will progress and companies

will need to organize themselves properly to efficiently deliver these

developing technologies to their customers.

II. To Avoid Anticompeititive Effects, the Final Judgment Must

Order Pro Rata Voting by the Trustee

In order to avoid the anticompetitive effects discussed above, the

Final Judgment must require the trustee to vote the Sprint PCS Stock

held in the trust pro rata in accordance with the proportion of the

votes of the other Sprint PCS shareholders. Under this proposal, the

trustee would exercise no discretion in voting the stock, but the views

of the other Sprint PCS shareholders would not be frustrated in those

situations requiring a majority of all shares entitled to vote.

For all votes in which the PCS shares held by the trust are

eligible to vote, the trustee should be instructed to vote the shares

in the same proportion as the other shares of PCS Stock are voted.

Specifically, the proportion voted in favor and the proportion voting

against (or, where shareholders are not provided the opportunity to

vote against, the proportion of votes not voted in favor) should be

equal to these respective proportions in light of all votes cast by the

other holders of Series 2 PCS Stock, the holders of Series 1 PCS Stock,

the holders of Series 3 PCS Stock, and the PCS Stock votes that are

attributed to the shares of Class A Common Stock held by France Telecom

S.A. and Deutsche telekom AG.

Because the Sprint PCS Stock held by TCI has low voting power in

most situations, the Department concluded that any concerns that AT&T

would influence or control Sprint's competitive behavior are minimal.

See Competitive Impact Statement Sec. II.C n.8, 64 FR 2506, 2511.

Nevertheless, according to the Competitive Impact Statement filed by

the Department, the voting prohibition embodied in Sec. VI.D. is meant

to further address the concern that AT&T might ``influence [] the

competitive behavior of [Sprint] in ways that reduce competition.'' See

Id. By ordering the trustee to vote the PCS Stock held by the trust pro

rata, the Final Judgment will eliminate completely any influence or

control AT&T or the trustee has over Sprint's competitive behavior and

avoids the anticompetitive effect of constraining Sprint's strategic

flexibility caused by the no vote approach.

Dated: March 11, 1999.

Respectfully submitted,

Sprint Corporation by its attorneys

Kevin R. Sullivan (D.C. Bar No. 411718),

Peter M. Todaro (D.C. Bar No. 455430),

King & Spalding, 1730 Pennsylvania Avenue, NW., Washington, DC 20006,

(202) 737-0500.

Bruce N. Hawthorne,

Andrew M. Tebbe,

King & Spalding, 191 Peachtree Street, Atlanta, Georgia 30303, (404)

572-4600.

[FR Doc. 99-11075 Filed 5-3-99; 8:45 am]

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