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August 30, 2021 – New leadership at the Federal Trade Commission and the Department of Justice have expressed strong concerns that prior administrations did not vigorously enforce the antitrust laws and failed to prevent widespread consolidation in many industries. They believe this lack of enforcement has led to higher prices for consumers and reduced wages for workers, curbed economic growth and innovation, and curtailed opportunities for small and independent companies.
These views are also reflected in President Biden’s recent Executive Order on Promoting Competition that asks the antitrust agencies to step up their enforcement of the antitrust laws and reduce corporate consolidation.
What does all this mean for companies considering growth through strategic acquisitions? They should plan for a broader range of outcomes — in types of questions to be ready to address, in timing, and in divestitures needed to assure a closing — before entering into a merger agreement.
At a minimum, a government review of proposed mergers is likely to take longer and to cover a broader array of issues. The current administration is also more likely to pursue enforcement actions against proposed mergers, especially for mergers in Big Tech, health care, and agriculture, industries targeted by the President as areas of concern.
The first announced salvo regarding heightened review of proposed mergers occurred in early February when the Acting Chair of the FTC announced that the agency would be reassessing its long-established internal processes and procedures for reviewing merger filings. At the same time, the FTC “temporarily” suspended its power to grant early termination to the required 30-day waiting period for transactions that pose no credible antitrust concern. More than six months later, this temporary suspension remains in effect with no end in sight even for proposed mergers that do not even remotely raise competitive issues.
The FTC and DOJ, which share responsibility for enforcing the antitrust laws, also announced immediately after the President’s Executive Order in July that they are rewriting their joint merger guidelines that they use to investigate and challenge mergers. These bipartisan guidelines, last revised in 2010 under President Obama for horizontal mergers (mergers among current and potential competitors) and in 2020 under President Trump for vertical mergers (mergers among firms that provide different supply chain functions), are the government’s well-established playbook for determining whether a merger is illegal.
The FTC Chair and acting head of the DOJ’s Antitrust Division stated that they plan to revise the merger guidelines to counter years of “overly permissive” merger enforcement as part of a broader effort to vigorously enforce the antitrust laws. Lina Khan, the new Chair of the FTC, and Merrick Garland, the Attorney General, have each stated their intention to ramp up merger enforcement.
The revised merger guidelines are likely to include new areas of concern such as the impact of a merger on workers’ wages, whether small and independent companies may be adversely affected, and whether underrepresented groups may be disadvantaged. These issues will be in addition to bedrock antitrust issues that include higher prices or reduced quality for consumers. The staff at the FTC and DOJ, under guidance from the new leaders, are already broadening their typical in-depth investigations to cover the new playbook of issues.
The revised merger guidelines are also likely to capture mergers with lower combined market shares than the standards in the current set of merger guidelines. For example, mergers with a combined market share below 30% will likely face a more in-depth investigation than in the past and a higher likelihood of being challenged by the government.
The guidelines are also likely to offer clearer guidance regarding acquisitions of potential or nascent competitors and “killer acquisitions” of up-start companies that could independently develop into meaningful competitors. The FTC and DOJ more recently have been focusing on these types of acquisitions in the high technology and life sciences sectors, and the revised guidelines may specifically address the conditions under which these mergers will be challenged.
The agencies, however, are not waiting to issue revised merger guidelines before increasing their enforcement actions. When Aon attempted its $30 billion acquisition of Willis Towers Watson, their agreement to divest certain assets satisfied concerns expressed by the European Commission, which subsequently approved the merger. The Department of Justice, however, rejected the parties’ divestiture offer to resolve issues in the United States and in June sued to block the merger. The parties subsequently terminated the merger and Aon had to pay a $1 billion reverse break fee to Willis Towers Watson pursuant to the merger agreement.
The FTC also announced in early August a new and unprecedented policy of issuing letters warning companies that their mergers will remain under continuous scrutiny. Under this new policy, the FTC is informing these companies that due to the “tidal wave” of merger filings, the agency can no longer fully investigate all deals during the required statutory deadlines by issuing standard requests for additional information. Although the companies can merge due to the expiration of the required waiting period, the continuous-scrutiny letter states they are doing so “at their own risk” because the FTC may later challenge the merger after its consummation.
This new FTC policy may not prevent companies from closing their mergers, especially those where the companies are contractually obligated to close after the expiration of the required waiting period, but it does add uncertainty to the 40-year merger review process. The FTC has provided no further guidance on its new policy. At this time, no one knows how many companies are receiving warning letters, how long these ongoing investigations may last, and if in fact the FTC is going to sue to challenge any of these mergers.
The FTC and DOJ, however, cannot unilaterally stop a proposed merger or order companies to unwind a consummated merger. To stop a proposed merger, the agencies must seek injunctive relief in federal court where there are many precedents that provide strong guard rails against overly aggressive merger enforcement. Likewise, the FTC and DOJ cannot block or unwind a merger absent a trial at which the government has the burden to demonstrate that the merger is unlawful. Companies seeking mergers may need to consider more seriously the prospects of litigation to ultimately close their mergers or potentially the need for additional or unexpected divestitures.
Companies should also be mindful of their obligations in their merger agreements, which cover both buyers’ and sellers’ required efforts to close a merger, including divestiture and litigation commitments, timing for the outside closing date, and prospects for a reverse break fee in the event the merger does not close. It will be important to plan in advance to address quickly the full playbook of new questions that may arise. Strategic growth through M&A will continue but will require more advanced planning to ensure closing under conditions that are commercially acceptable.
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