The US Department of Justice’s and the Federal Trade Commission’s losses in three merger challenges in September and a fourth in October demonstrate that merging parties can close difficult transactions if willing to fight the agencies in court. In this Law360 article, McDermott’s Jon B. Dubrow, Joel R. Grosberg and Matt Evola discuss these four cases and what they mean for merging parties.
US antitrust enforcers have signaled that private equity firms are the prime targets for upcoming aggressive antitrust merger enforcement. In a recent interview, US Assistant Attorney General Jonathan Kanter stated that the motive of a private equity firm may be “designed to hollow out or roll up an industry and essentially cash out,” which “is often very much at odds with the law, and very much at odds with the competition we’re trying to protect.” His comment comes after Lina Khan, the current Federal Trade Commission (FTC) Chairwoman, stated that private equity roll-ups would be a focal point for the FTC. It is not entirely unsurprising that progressive antitrust enforcers are focusing on private equity after the industry announced a record 14,730 deals last year globally worth $1.2 trillion, which was nearly double the previous high in 2007. The above comments provide several key takeaways for stakeholders going forward:
- As a general matter, these statements further solidify the notion that antitrust merger enforcement is going to continue to be extremely aggressive and indicate that the US Department of Justice (DOJ) and the FTC may closely scrutinize private equity transactions even if there is no obvious horizontal or vertical issue. For example, the DOJ and the FTC have already started investigating less traditional theories of harm, such as the impact on labor and the environment.
- Private equity firms should expect the potential for heightened scrutiny in instances where a private equity firm has engaged in serial acquisitions within the same industry (known as roll-up transactions), especially in healthcare-related fields. It will be important for stakeholders to not only evaluate the current acquisition for competitive issues, but to also consider the impact of a long-term “roll-up” plan and its influence on pricing, service, and quality.
- Watch for agencies to bring more Clayton Act Section 8 cases, which prohibits interlocking directorates (aka a single firm appointing officers and directors at multiple competitors). Private equity firms often will appoint personnel to the boards of the firm’s portfolio companies, which may consist of horizontal competitors. Going forward, these appointments will require additional attention to avoid running afoul of Section 8.
- The DOJ and the FTC will also have an enhanced focus on the impact of private equity firms acting as divestiture buyers when the agency orders merging parties to divest assets to preserve competition. Assistant Attorney General Kanter stated, “[I]n many instances, divestitures that were supposed to address a competitive problem have ended up fueling additional competitive problems.”
While the degree to which agencies will more closely scrutinize private equity transactions remains unclear, it is crucial for private equity firms to engage antitrust counsel early in the transaction process both to evaluate the transaction at hand, as well as any future transactions that may, together, bring about enhanced regulatory scrutiny.
This week, the American Bar Association’s Antitrust Law Section kicked off its annual Spring Meeting in Washington, DC, which features updates from the antitrust enforcers and substantive discussions on today’s most pressing antitrust issues. In this post, we share key takeaways from the first day of the Spring Meeting.
Agencies Continue to Be Hostile to M&A: Republican Federal Trade Commission (FTC) Commissioners Noah Phillips and Christine Wilson emphasized that the prevailing view under Democratic leadership at the antitrust agencies is that mergers provide no value and only carry costs.
- Progressive leadership wants to “throw sand in the gears” to prevent deals from being proposed altogether. Recent policy changes are aimed at creating uncertainty, heightening risk and raising the transaction costs of doing deals to slow the pace of M&A activity.
- Despite this, there was a precipitous drop in the number of FTC merger enforcement actions in the final year of the Trump administration (31) compared to the first year of the Biden administration (12).
- There is no indication that early termination for Hart-Scott-Rodino (HSR) pre-merger notification filings will be reinstated.
- “Close At Your Peril” letters are another tactic the agencies are using to heighten deal risk and deter parties from pursuing or consummating transactions, even though the antitrust agencies have always had the authority to investigate and challenge consummated transactions.
- Many panelists commented on the lack of transparency between agency staff and merging parties on recent transactions. If the lack of transparency persists, it may create due process issues and problems for timing agreements that merging parties typically negotiate with staff.
- The antitrust agencies are increasingly skeptical of the efficacy of structural and behavioral remedies to resolve competition concerns regarding a transaction. The Department of Justice (DOJ) Antitrust Division’s Principal Deputy Assistant Attorney General Doha Mekki said merging parties should expect the DOJ to reject “risky settlements” more often and instead seek to block transactions outright. Mekki said literature has shown that many merger settlements failed to protect competition.
Increased Antitrust Litigation Is on the Horizon: DOJ officials said companies should expect an increase in antitrust litigation on both civil and criminal matters.
- The DOJ Antitrust Division has more cases in active litigation than it has had at any time in recent history. It currently has six active litigations involving civil matters and 21 ongoing litigations involving criminal matters.
- The Antitrust Division is not considering cost as a gating factor for bringing new cases. Instead, it is bringing cases where it deems necessary to uphold the law and preserve competition. The DOJ is hiring more attorneys and using shared DOJ resources to support the increased rate of litigation.
- The DOJ is also seeking faster access to the courts. Mekki indicated that in cases where potential anticompetitive harm resulting from a transaction is clear, the agency may file suit while an investigation remains pending and before merging parties have certified substantial compliance.
Updated Merger Guidelines Are Coming: Officials from both the FTC and [...]
Kanter Signals DOJ to Follow FTC Lockstep, Calls for Substantial Change to Competition Enforcement Approach
In remarks delivered on January 18, 2022, and January 24, 2022, Jonathan Kanter, the Assistant Attorney General (AAG) for the US Department of Justice (DOJ) Antitrust Division, laid out the areas where he perceives shortcomings in antitrust enforcement. These speeches signaled that the Division, under Kanter’s direction, will take a more aggressive stance toward perceived anticompetitive conduct, echoing the changes in enforcement priorities at the Federal Trade Commission (FTC).
Overview of AAG Kanter’s Remarks
- Kanter intends to shape the regulatory landscape to better reflect dynamic markets. Both speeches featured a cohesive overarching message: Kanter believes that the regulatory and jurisprudential antitrust regime does not reflect and cannot address the market realities that exist today. Kanter believes that the Supreme Court of the United States’ 1992 opinion in Eastman Kodak v. Image Technology Services supports a change in approach because “[l]egal presumptions that rest on formalistic distinctions rather than actual market realities are generally disfavored in antitrust law.” To address widespread increases in market concentration as well as “the economic and transformational technological changes” that define today’s economy, Kanter intends to revise the Division’s approach for analyzing mergers and conduct.
- Kanter seeks to revive dormant areas of antitrust enforcement, in particular monopolization cases with a focus on tech “platform” companies. Kanter stated that the Division has failed to adequately address certain areas of antitrust enforcement. He noted that it has been almost 20 years since the Division’s last major monopolization case. Dominant tech platforms have “extracted private data” and “have few, if any, realistic alternatives,” he said. Shortly after Kanter’s comments about prioritizing monopolization cases, Richard Powers, the deputy for criminal enforcement, stated that the Division will now evaluate Section 2 conduct for criminal charges. Powers’s comments signal a dramatic change in enforcement, reversing decades of policy in which Section 2 charges were only brought in the civil context. These statements from Division leadership mirror those of FTC Chair Lina Khan, who has repeatedly called for more robust antitrust enforcement, and indicate that Kanter intends to reshape the Division, both in terms of resource allocation and approach to anticompetitive conduct, from a civil and criminal perspective.
- Kanter laid out the Division’s overarching priorities clearly in his remarks. The Division intends to take a more aggressive stance on vertical merger enforcement, reformulate the Horizontal and Vertical Merger Guidelines to better reflect market realities (in the government’s view), enter into fewer consent decrees and instead litigate cases to generate judicial opinions and advance the relevant case law, and bring more civil and criminal conduct cases.
Vertical Merger Enforcement to Become a Focal Point for Regulators
- Kanter stated that agency enforcement of vertical mergers has been lacking. Kanter believes that the Division has placed too much value on the potential efficiencies of vertical mergers without identifying the relevant theories of harm presented by such transactions.
- The Division intends to [...]
The US Federal Trade Commission (FTC) voted July 21, 2021, to repeal a 1995 policy statement that eliminated prior approval and prior notice provisions from most merger settlements. In repealing this longstanding policy—and likely insisting on the inclusion of such provisions in future settlements—the FTC will have significantly greater authority to review and block future transactions of companies who enter into consent orders with the FTC. This policy change will have significant implications for the negotiation of antitrust risk provisions in transaction agreements.
- In its 1995 Policy Statement Concerning Prior Approval and Prior Notice Provisions in Merger Cases, the FTC announced that it would no longer routinely require prior approval of certain future acquisitions in consent orders entered in merger cases.
- Prior to this statement, FTC consent orders to settle merger reviews routinely required parties to seek and receive the FTC’s prior approval for future acquisitions in the relevant product and geographic markets at issue in the first challenge/consent order for a 10-year period. In some cases, the FTC also included a prior notice provision obligating companies to notify the FTC of any intended transactions that were not subject to the premerger notification and waiting period of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act).
- On July 21, 2021, the FTC voted 3-2 to rescind its 1995 policy statement, opening the door to requiring prior approval and prior notice provisions in future merger consent orders.
WHAT THIS MEANS:
- This policy change substantially increases the FTC’s merger enforcement authority for companies that settle investigations with a consent order and become subject to prior approval requirements.
- Prior approval provisions place the burden on companies to demonstrate that their transactions are not anticompetitive.
- The FTC can deny approval for these future transactions with very little—if any—limits on its discretion.
- This differs significantly from the enforcement regime under Section 7 of the Clayton Act, where the FTC has the burden of proving that a transaction will substantially lessen competition or tend to create a monopoly.
- Prior notice provisions require companies to provide the FTC with advanced notice of certain transactions—even smaller transactions that typically would fall under the HSR threshold (e.g., transactions valued below $92 million). The notification requirement increases the likelihood of FTC investigation for these transactions.
- By rescinding the 1995 policy statement, the FTC may seek to impose such provisions in its orders as a routine matter. It remains to be seen under what circumstances the FTC will insist on prior approval or prior notice (or how broad they will be crafted). In supporting the repeal, FTC Chair Lina Khan stated that the FTC will employ these provisions based on “facts and circumstances of the proposed transaction.”
- These prior approval and/or notice provisions, when previously employed, generally lasted for the term of the order—typically 10 years.
- Generally, the scope of these provisions was limited to the geographic and product market in which the FTC determined that the [...]
The US Federal Trade Commission (FTC) released a joint statement with the Department of Justice (DOJ) on February 4, 2021, signaling comprehensive changes to the merger review process. In a significant development, the agencies declared a moratorium on the early termination program for merger reviews. This policy shift signals a potential sea change in antitrust enforcement under the Biden administration.
The Hart-Scott-Rodino (HSR) Premerger Notification program imposes an initial 30-day waiting period, prior to merger consummation, during which the enforcement agencies have an opportunity to evaluate the likely effects of the proposed merger and decide whether to investigate further by issuing a Second Request or ending the HSR review by letting the initial 30-day waiting period expire.
A third potential outcome of the initial 30-day waiting period is early termination. The early termination program under the HSR Act was originally established as an exception to an HSR review if the relevant parties demonstrated a “special business reason.” This policy was reversed after Heublein v. FTC (1982) and since that time early termination of the initial 30-day waiting period has become commonplace if the merger does not merit further review (in 2019 early termination was requested in 74.2% of transactions and granted in 73.5% of those instances). Further review would be merited, if the enforcement agencies determined the transaction posed a risk of a substantial lessening of competition under the Clayton Act.
Pursuant to the moratorium on early terminations, merging parties must now refrain from consummating any proposed transaction for the full initial 30-day waiting period—early termination is not a potential outcome.
The joint statement regarding the early termination moratorium provided the following justifications:
- The early termination review was precipitated because of the transition to a new presidential administration as well as an “unprecedented volume” of HSR filings;
- The above factors warrant the use of the full 30-day window to allow the agencies to do “right by competition and consumers;”
- The suspension of the early termination program “will be brief.”
Past pauses in early terminations coincided with extraordinary circumstances such as the move to an e-filing system at the Premerger Notification Office (PNO) at the outset of the COVID-19 pandemic (paused from March 13, 2020, until March 30, 2020) or during periods of government shutdown. However, this current pause appears likely to endure longer than these past instances, given that this pause is driven by the confluence of a number of factors, beyond what was indicated in the joint statement, such as:
- A longstanding agency funding drought resulting in understaffing
- Transitioning to a new presidential administration
- A desire to engage in more expansive investigations under the new Biden administration
- A large influx in HSR filings in recent months (on pace for a 60% increase in 2021)
From the agencies’ point of view, these changes are necessary to meet their mandate of preventing unfair competition and anticompetitive practices. With agency resources stretched thin due to budget constraints, in addition to an increased [...]
Antitrust M&A Snapshot | FTC and DOJ Continue M&A Transaction Investigation While UK CMA Continues Role as Key Jurisdiction in Merger Clearance Process
Antitrust regulators in the United States and Europe were very active in the final quarter of 2019. The FTC and DOJ continue to investigate and challenge M&A transactions in a variety of industries. Events of this quarter highlight the importance of states in merger enforcement. As well, recent FTC activity highlights the regulators’ focus on preventing monopolists from buying nascent competitors.
In Europe, the UK CMA continues to expand its role as a key jurisdiction in the merger clearance process, which will only accelerate with Brexit. The EC agreed to clear, subject to conditions, acquisitions in the aluminum production and battery industries as well as in the wholesale supply and retail distribution of TV channels after conducting Phase II reviews. Moreover, the EC opened new in-depth investigations into transactions in the copper refining and engineering sectors.
The US Federal Trade Commission today announced increased thresholds for the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and for determining whether parties trigger the prohibition against interlocking directors under Section 8 of the Clayton Act.
Notification Threshold Adjustments
The US Federal Trade Commission (FTC) announced revised thresholds for the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR) pre-merger notifications on January 28, 2020. These increased thresholds will become effective on February 27, 2020. These new thresholds apply to any transaction that closes on or after the effective date.
Government contractors should be aware that the Department of Justice (DOJ) is taking new steps to scrutinize public procurement. The DOJ Antitrust Division’s creation of the Procurement Collusion Strike Force (PCSF) means that government procurement enforcement will be a significant focus for the agency moving forward. Although the new strike force builds on past government-wide efforts to detect illegal conduct in public procurement, recent activity from the Antitrust Division has raised the stakes. In light of this, government contractors should broaden their compliance programs to include antitrust so they can avoid heightened monetary penalties and possible prison terms for implicated employees.
I. What Happened
The DOJ’s Antitrust Division took another step to increase its attention on government procurement by focusing resources on a new task force designed to detect anticompetitive behavior amongst government contractors. On October 24, 2019, the Antitrust Division posted a notice in the Federal Register inviting public comment on its implementation of a “Procurement Collusion Strike Force” complaint form. The complaint form will facilitate “reporting by the public of complaints, concerns, and tips regarding potential antitrust crimes affecting government procurement, grants, and program funding.” While the DOJ’s unveiling of the PCSF is significant in itself, the event is just one of several pieces of activity from the Antitrust Division indicating that government contractors must begin to consider antitrust risk much more seriously.
The US Federal Trade Commission recently announced increased thresholds for the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and for determining whether parties trigger the prohibition against interlocking directors under Section 8 of the Clayton Act.Notification Threshold Adjustments
The US Federal Trade Commission (FTC) announced revised thresholds for the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR) pre-merger notifications on February 15, 2019. These increased thresholds will become effective mid-to-late March. These new thresholds apply to any transaction that closes on or after the effective date.
- The base filing threshold, which frequently determines whether a transaction requires filing of an HSR notification, will increase to $90 million.
- The alternative statutory size-of-transaction test, which captures all transactions valued above a certain size (even if the “size-of-person” threshold is not met), will be adjusted to $359.9 million.
- The statutory size-of-person thresholds will increase slightly to $18 million and $180 million.
The adjustments will affect parties contemplating HSR notifications in various ways. Transactions that meet the current “size-of-transaction” threshold, but will not meet the adjusted $90 million threshold, will only need to be filed if they will close before the new thresholds take effect mid-to-late March.
Parties may also realize a benefit of lower notification filing fees for certain transactions. Under the rules, the acquiring person must pay a filing fee, although the parties may allocate that fee amongst themselves. Filing fees for HSR-reportable transactions will remain unchanged; however, the size of transactions subject to the filing fee tiers will shift upward as a result of the gross national product (GNP)-indexing adjustments:Filing Fee Size-of-Transaction $45,000 $90 million, but less than $180 million $125,000 $180 million, but less than $899.8 million $280,000 $899.8 million or more Interlocking Directorate Thresholds Adjustment
The FTC also announced revised thresholds for interlocking directorates. The FTC revises these thresholds annually based on the change in the level of GNP. Section 8 of the Clayton Act prohibits a person from serving as a director or officer of two competing corporations if certain thresholds are met. Pursuant to the recently revised thresholds, Section 8 of the Clayton Act applies to corporations with more than $36,564,000 in capital, surplus and undivided profits, but it does not apply where either interlocked corporation has less than $3,656,400 in competitive sales. These new thresholds are effective immediately upon publication in the Federal Register, expected within the week.