The Federal Trade Commission (FTC) has proposed, for comment, significant changes to the information and documents to be submitted with premerger filings—even in transactions that do not raise significant antitrust issues. The changes proposed may not take effect and may be different when finalized. But if promulgated as proposed, every Hart-Scott-Rodino (HSR) filing will be more difficult and time-consuming, and transactions that might raise even marginal antitrust issues will require significant up-front work.
On April 7 and 8, 2022, the American Bar Association’s Antitrust Law Section wrapped up its annual Spring Meeting. The event featured updates and remarks from several antitrust enforcers, including FTC Chair Lina Khan and US Assistant Attorney General for the Antitrust Division Jonathan Kanter. In this post, we share key takeaways from the final two days of the Spring Meeting.
FTC and DOJ Will Stay Focused on Litigation: Top officials at both US antitrust agencies highlighted the agencies’ full dockets and noted that litigation to enforce the antitrust laws will remain a top priority.
- Three Directors from the Federal Trade Commission (FTC)—Holly Vedova, the Director of the Bureau of Competition; Samuel A.A. Levine, Director of Bureau of Consumer Protection; and Elizabeth Wilkins, Director of Office of Policy Planning—all emphasized that the FTC will work as one team and will not hesitate to initiate litigation.
- Vedova noted the FTC’s recent success in several transactions being abandoned after the FTC initiated litigation. She expressed that the Bureau of Competition’s main focus will be litigation, where she believes her bureau will be most effective. Khan echoed these sentiments while speaking on a separate panel, emphasizing that two recently abandoned transactions were in the context of challenges to vertical transactions and that such challenges will continue to be a priority at the FTC.
- Likewise, Kanter noted that the Department of Justice (DOJ) is not afraid to take on big cases or big companies and will not be afraid to litigate. He said the DOJ is just getting started and reiterated that the DOJ has more active cases than it has had in recent years.
Agencies Will Closely Scrutinize Potential Remedies in M&A: Both FTC and DOJ officials emphasized they will continue to examine the effectiveness of remedies and will only pursue strong remedies.
- Kanter said that divestiture remedies will be the rare exception and will no longer be the norm. He further cautioned merging parties to avoid engaging in “regulatory arbitrage” and trying to leverage investigation outcomes in one jurisdiction against another because global cooperation among antitrust enforcers is high.
- Vedova also indicated that the Bureau of Competition has no appetite for weak or uncertain settlements, especially those involving behavioral remedies, which have proven ineffective. The FTC will require meaningful structural relief to resolve competition concerns regarding a transaction.
- Parties should also not expect the FTC to engage in long settlement discussions due to the unprecedented volume of merger reviews. Vedova noted that staff’s time is valuable and is much better spent preparing for litigation rather than negotiating remedies. She further indicated that the FTC will not engage in remedy discussions unless the Hart-Scott-Rodino (HSR) clock is stopped and timing agreements are tolled.
- State attorneys general will similarly evaluate remedies and, if necessary, pursue additional remedies than those sought by federal antitrust enforcers. For example, in a recent dialysis acquisition, the state of Utah sought divestiture of a fourth clinic above the three divestitures required to [...]
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 [...]
On January 21, 2022, the US Federal Trade Commission (FTC) announced increased thresholds for the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR). The thresholds are indexed to changes in the gross national product (GNP).
NOTIFICATION THRESHOLD ADJUSTMENTS
These increased thresholds are scheduled to be published in the Federal Register on January 24, 2022, which would make them become effective on February 23, 2022. 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 the filing of an HSR notification, will increase to $101 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 $403.9 million.
- The statutory size-of-person thresholds will increase to $20.2 million and $202 million.
The adjustments will affect parties contemplating HSR notifications in various ways. Transactions that meet the current “size-of-transaction” threshold (but not the adjusted $101 million threshold) will only need to be filed if they will close before the new thresholds take effect on February 23, 2022.
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 among themselves. Filing fees for HSR-reportable transactions will remain unchanged; however, the size of transactions subject to the filing fee tiers will shift upward because of the GNP-indexing adjustments:Filing Fee Size of Transaction $45,000 $101 million, but less than $202 million $125,000 $202 million, but less than $1.0098 billion $280,000 $1.0098 billion or more
In the United States, aggressive antitrust enforcement is likely to continue with the appointment of Lina Khan as Federal Trade Commission (FTC) Chair and the nomination of Jonathan Kanter to lead the Department of Justice’s (DOJ) Antitrust Division. The premerger notification landscape continues to shift as filings reach another record high. Technology companies remain in the “hot seat” as legislators in the US House of Representatives introduced five antitrust reform bills that would change the enforcement landscape for digital platforms, including seeking to preclude large digital platform companies from acquiring smaller, nascent competitors. And the US Department of Justice is making good on President Biden’s pledge to regulate “Big Ag” by challenging Zen-Noh Grain Corporation’s proposed acquisition of 38 grain elevators from Bunge North America, Inc.
Meanwhile, in Q1 2021, the European Commission (Commission) published its Guidance on Article 22 of the EU Merger Regulation. The Guidance encourages the EU Member States to refer certain transactions to the Commission even if the transaction is not notifiable under the laws of the referring Member State(s). In Q2, not long after the issuance of the Guidance, the Commission received its first referral request to assess the proposed acquisition of GRAIL by Illumina. In light of the growing global debate on the need for more effective merger control, EU Competition Commissioner Margrethe Vestager confirmed that the Commission will not soften EU merger policy going forward. The Commission’s statement was made despite the fact no deals have been blocked by the Commission in about the last two years.
In the United States, despite initial obstacles because of the COVID-19 pandemic, 2020 rounded out to be the busiest year for mergers and acquisitions (M&A) enforcement in nearly two decades. In the fourth quarter, US agencies challenged five transactions. November 2020 saw the most premerger filings in any month since 2001. Mergers and filings in the United States are predicted to remain at high levels into the new year in light of the current economic climate. The antitrust agencies have continued to maintain that their evaluation and investigation of anticompetitive harm will remain rigorous despite the uncertain times.
In Europe, the European Commission (EC) and the UK Competition and Markets Authority (CMA) had a busy last quarter of 2020. The EC completed several in-depth investigations, including the Fiat Chrysler/Peugeot merger. The EC approved this transaction with behavioural remedies. With respect to policy and legislative developments, the EC published the much-anticipated draft of the Digital Markets Act, which is intended to regulate the market behaviour of large online platforms which act as “gatekeepers” in digital markets. Given the end of the transition period for the United Kingdom’s exit from the European Union, the CMA published a guidance paper explaining how it will conduct its work following Brexit.
The US Federal Trade Commission (FTC) yesterday released decreased thresholds for the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR). The thresholds are indexed to changes in the gross national product (GNP). They normally increase year over year but have decreased this year because of the economic impacts of COVID-19. We last saw a decrease in connection with the 2008 recession.
Notification Threshold Adjustments
The FTC announced revised thresholds for the HSR pre-merger notifications on February 1, 2021. These decreased thresholds were published in the Federal Register on February 2, 2021, and will become effective on March 4, 2021. 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 the filing of an HSR notification, will decrease to $92 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 $368 million.
- The statutory size-of-person thresholds will decrease slightly to $18.4 million and $184 million.
The adjustments will affect parties contemplating HSR notifications in various ways. Transactions that do not meet the current “size-of-transaction” threshold, but will meet the revised $92 million threshold, will only need to be filed if they will close after the new thresholds take effect.
The adjustments may affect HSR 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 downward as a result of the GNP-indexing adjustments:Filing Fee Size of Transaction $45,000 $92 million, but less than $184 million $125,000 $184 million, but less than $919.9 million $280,000 $919.9 million or more.
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.
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 [...]
In the United States, despite requesting additional time to review pending mergers, the US antitrust agencies have continued their work through the COVID-19 pandemic. The Department of Justice (DOJ) and Federal Trade Commission (FTC) reached settlements with a number of merging parties during Q2 2020, and the FTC is proceeding to trial in several merger cases. Both the FTC and the DOJ are conducting investigational hearings and depositions via remote videoconferencing technology such as Zoom. The FTC also announced it prevented 12 deals from closing in 2020 despite the COVID-19 pandemic. Five of the transactions were blocked and another seven were abandoned due to antitrust concerns, putting the FTC on pace for one of its busiest years for merger enforcement in the past 20 years.
In Europe, in light of the COVID-19 outbreak, the European Commission (EC) warned that merger control filings would likely not be processed as swiftly as usual. The EC encouraged parties to postpone merger notifications because the EC envisaged difficulties, within the statutory deadlines imposed by the EU Merger Regulation, to elicit relevant information from third parties, such as customers, competitors and suppliers. In addition, the EC foresaw limitations in accessing information on a remote basis. This period thus saw a drop in merger notifications to the EC; however, notifications increased in June and July.