In 2019, the total number of antitrust cases filed against providers dropped to 20 after the 2018 bump (27 cases). In the latest Health Antitrust Litigation Update for Providers, we discuss what kinds of cases were brought over the past two years and how they were decided, and what cases warrant particular attention in 2020.
In the United States, mergers and acquisitions appear to be bouncing back after a muted start to the year due to COVID-19. Hart-Scott-Rodino (HSR) filings in Q3 2020 were up significantly over Q2, but still down from the mergers & acquisitions (M&A) boom we saw in Q3 and Q4 of 2019. Against the backdrop of a pandemic, we also saw significant developments in the approaches taken by the Federal Trade Commission (FTC) and Department of Justice (DOJ) in reviewing proposed acquisitions. The FTC has recently announced an intention to expand its retrospective analysis of consummated mergers; DOJ has restructured its merger review operations to reflect changes in how the economy operates and to allow the regulator to further specialize its review efforts; and the regulators jointly proposed amendments to the HSR premerger notification regulations that are likely to increase the number of filings required for private equity organizations.
In Europe, as a result of the ongoing pandemic, the European Commission (EC) received a lower number of notifications (78) compared to the same period in 2018 and 2019 (106 and 116 respectively). In August, however, the number of notifications made to the EC returned to a level that has been seen in previous years (30). That being said, in September, the number of notifications fell again (24). In terms of key cases, the EC approved the acquisition of Bombardier Transportation by Alstom. With respect to policy and legislative developments, the EC announced a new policy of accepting referrals from national competition authorities in cases where the national thresholds for notification have not been met. This new policy is expected to be implemented by mid-2021. The EC also plans to introduce changes to the merger control procedural rules with a view to bringing more deals within the ambit of the EC’s simplified procedure, and to reduce the amount of information that parties are required to provide.
Non-compete provisions help protect a buyer’s significant investment in an acquired business. Although non-compete clauses often play a vital role in M&A deals, they are not immune from antitrust scrutiny.
Since September 2019, the FTC has challenged noncompete provisions in at least three transactions. These demonstrate that the Commission and other antitrust enforcers are closely scrutinising non-competes and will not hesitate to challenge problematic provisions, even when the underlying transaction raises no substantive antitrust issues or when the provision relates to minority investments.
Parties to a commercial transaction can easily manage this scrutiny by tailoring the scope.
Click here to read the full article in our latest International News.
Proposed HSR Rule Changes Likely to Increase Filings and Information Requirements for Private Equity Firms
- The FTC and DOJ proposed new Hart–Scott–Rodino (HSR) rules that, if issued in final form, will significantly change HSR practice for Private Equity (PE) companies.
- The Proposed Rules are subject to comment for 60 days after they are published in the Code of Federal Regulations (CFR) and will not go into effect until after that comment period, when they could be issued as proposed, modified, or simply not issued.
- Under the current rules, HSR focuses on the Ultimate Parent Entity (UPE). For LLCs and partnerships, that means that each fund in a family is normally its own UPE. Other funds managed by the PE sponsor are deemed “associates” of the UPE, but are not part of the UPE or “Person” making the filing. Only limited information needs to be provided about “associates,” and only if the associate operates in a similar field to the target company. The proposed rules will treat all funds and portfolio companies, as well as the PE sponsor, as part of the same “Person” for purposes of determining the filing requirements, and also for completing the HSR form.
- There is also a proposed exemption for acquisitions of less than 10% of an issuer, regardless of investment intent, if the acquiring person is not in a competitive relationship with the target. This might reduce filing obligations for companies like hedge funds that might take actions that disqualify themselves from the current investment only exemption.
What This Means:
The Proposed Rules change the calculus on whether filings may be required and what needs to be reported if a filing is required as “Associates” would now be deemed part of the same “Person” for the purposes of the HSR Act. Filings are evaluated based on what an “Acquiring Person” will hold. This is not a change, but changing who is deemed to be in the “Person” could affect transactions in a number of ways. Below are some examples of the potential impact.
More transactions are likely to require filings
- For example, if a sponsor manages Fund 1 and Fund 2 and the sponsor arranges a transaction for Fund 1 to acquire USD $80 million of target stock, Fund 2 to acquire $60 million, and co-investors to acquire USD $20 million, currently no filing would be required, while under the Proposed Rules a filing would be required.
- Currently, no HSR filing is required because Fund 1 is its own “Person” and its acquisition does not exceed the transaction filing threshold (USD $94 million). The same would be true for Fund 2’s acquisition of the USD $60 million—also below the threshold.
- Under the Proposed Rules, an HSR filing would be required because the “Person” would include the sponsor, Fund 1 and Fund 2 (altogether). The “Person” would be acquiring USD $140 million in stock and that acquisition would exceed the USD $94 million size of transaction filing threshold.
- Another scenario not currently requiring a filing, but would change under the new approach is if a newco acquisition vehicle is created and is not “controlled” by any single fund. In that case, the newco generally does not have sufficient assets under the HSR rules to meet the size of Person test, and so no filing is required. Under the proposed rules, it is more likely that these newcos which are formed by multiple funds within the same family will be controlled by the fund family, and if so they will likely have sales and assets sufficient to meet the size of person test, thus triggering a filing.
More information will need to be shared in the filing
The proposed change will make HSR filings more burdensome to compile. They also will potentially reveal more substantive overlap information in the HSR form, which appears to be the goal of the modifications.
- Currently, if Fund 1 is its own UPE (no Person has a right to 50% of its profits or assets on dissolution) and Fund 1 makes a reportable acquisition because Fund 1 is the “Acquiring Person,” most of the HSR form information comes from Fund 1 and its holdings. Only limited information is required from related funds if their portfolio company operates in a similar space as the target.
- Under the Proposed rule, the PE sponsor and all of the funds it manages constitute the “Person.” In this situation, every HSR filing by any fund managed by that sponsor needs to report the activities of all of the other funds managed by that sponsor. So, Fund 2’s revenues, holdings, subsidiaries, etc. will now need to be reported if Fund 1 is making an acquisition.
Under current EU merger control rules, whether a concentration has to be notified to the European Commission (“Commission”) depends, among other things, on the level of revenue generated by the parties worldwide and in the European Union. A key question that has sparked considerable debate in recent years is whether the current merger control thresholds cover all transactions that have the potential to harm competition, or whether there is a so-called “enforcement gap”.
On September 11, during the International Bar Association’s 24th Annual Competition Conference, Competition Commissioner Margrethe Vestager announced that the Commission intends to change its approach towards referrals to the EU from national competition authorities. Commissioner Vestager noted that although the current, revenue-based thresholds set out in the EU Merger Regulation generally work well, revenue does not always reflect a company’s significance – particularly in innovative sectors, such as the pharmaceutical and digital sectors. In other words, innovative firms with low revenues may have a significantly out-sized market presence.
This issue is not entirely new, and has been debated in recent years – for example, in connection with possibly amending the thresholds set out in the EU Merger Regulation. On this point, however, Commissioner Vestager pointed out that “changing the merger regulation, to add a new threshold like this, doesn’t seem like the most proportionate solution”.
Instead, as a solution to this shortfall, Commissioner Vestager stated that the Commission intends to broaden its approach to cases referred to it from one or more EU Member States, stating that the Commission will “[…] start accepting referrals from national competition authorities of mergers that are worth reviewing at the EU level – whether or not those authorities had the power to review the case themselves”.
The current referral system set out in the EU Merger Regulation enables the Commission to review concentrations that fall below the EU thresholds. Indeed, in recent years, certain significant transactions have been reviewed by the Commission only after an upward referral, as they did not fulfil the jurisdictional thresholds of the EU Merger Regulation, including for example Apple/Shazam (2018), Microsoft/GitHub (2018) and Facebook/WhatsApp (2014). Under the current rules, the Commission can review transactions which fall below the EU merger control thresholds on the basis of referrals from national competition authorities where:
- the concentration is notifiable in at least three Member States; or
- where the concentration affects trade between Member States and threatens to significantly affect competition within the Member State(s) making the request for a referral.
The Commission has discouraged national competition authorities from referring cases to the Commission in instances when they themselves did not have the power to review because national merger control thresholds were not met.
The proposal announced by Commissioner Vestager would change this approach, and would allow a broader universe of cases – including those which fall below national thresholds – to be referred to the Commission. Ms. Vestager explained that “those referrals could be an excellent way to see the mergers that matter at a European scale, but without bringing a lot of irrelevant cases into the net”.
The new policy will likely come into effect in mid-2021, allowing sufficient time to adjust and for the Commission issue guidance about how and when such referrals will be accepted.
As a practical matter, the impact of this change in policy will mean that transactions falling below the EU, or even national, thresholds for competition review may nevertheless be subject to an upward referral to the European Commission. Companies considering strategic transactions should consider the impact of this policy when conducting an antitrust assessment of their proposed transaction, particularly where the proposed transaction has the potential to impact competition.