The Biden Administration is proposing revisions to the procedural rules governing pre-merger filings as well as the substantive framework for analyzing antitrust implications of U.S. M&A deals. Once implemented—potentially as soon as summer 2024—the changes will act in tandem to add complexity, length and burden to U.S. antitrust reviews. Dealmakers should be aware of these changes and their impact on deal terms, timing, and ultimate success in closing U.S. deals.
The changes affect two core areas: (1) the up-front, mandatory Hart-Scott-Rodino (“HSR”) pre-merger notification information requirements that initiate the antitrust review process and (2) the joint Merger Guidelines issued by the U.S. antitrust agencies—the Antitrust Division of the Department of Justice (“DOJ”) and the Federal Trade Commission (the “FTC”)—that provide the analytical framework that the agencies employ in conducting the reviews.
These changes do not occur in a vacuum; rather, they follow the Administration’s efforts to reform the role of antitrust regulatory enforcement as a whole.
Biden Administration Focus on Antitrust Enforcement
Antitrust has increasingly been in the political spotlight. Less than six months after taking office, President Biden issued Executive Order 14036, titled “Executive Order on Promoting Competition in the American Economy” (July 9, 2021, the “EO”). It established a “whole-of-government effort” to addressing competition concerns, and directed federal agencies to commit to stronger and more vigorous enforcement of the federal antitrust laws. The EO expressed an expansive view of the importance of antitrust, opining that a perceived “excessive market concentration threatens basic economic liberties, democratic accountability, and the welfare of workers, farmers, small businesses, startups, and consumers.”
Consistent with the EO, the FTC and the DOJ have recently taken a more aggressive course with respect to M&A. Officials made clear in speeches shortly after the EO that they considered past antitrust enforcement (including enforcement in prior Democratic administrations) to be “weak;” they signaled a strong preference for litigation to block deals instead of entering into settlements with divestitures; they did away with “early terminations” that previously allowed deals subject to HSR filing to clear prior to the 30-day statutory waiting period, and they issued more “second requests” in order to conduct in-depth investigations of transactions.
The U.S. antitrust agencies cannot on their own force companies to abandon or change a merger. Instead, they have to negotiate an agreed-upon settlement with the parties or litigate in court to persuade an independent judge to take action. Keeping with the messaging in their speeches and statements, the agencies litigated. Both the DOJ & the FTC have in the past few years filed many court challenges to block deals, spanning industries such as airlines, agriculture, healthcare, pharma, tech, book publishing, and consumer products and services. At the same time, the number of negotiated settlements with divestitures (i.e., consent decrees—the traditional way that the government most often had resolved competition concerns) that the agencies entered into with merging parties dwindled to near-zero.
The courts, however, have more often than not disagreed with the government. While the DOJ prevailed in blocking two deals (a book publisher merger—the Penguin/Simon & Schuster transaction and an airline joint venture—the American/Jet Blue transaction), the government has lost every other M&A challenge that went to decision.1 Moreover, courts have sent a strong message that traditional remedies continue to have value in antitrust cases, as judges have endorsed remedies offered by parties directly to the court (sometimes called “litigating the fix”) and encouraged the government to settle merger cases by agreeing to divestitures.2 That message is perhaps finally resonating, as the FTC has recently settled two litigated merger challenges with remedies that are similar to the types of remedies that prior administrations had used.3
The Proposed Changes to Antitrust Rules
Litigating in court is not the only tool at the Administration’s disposal to affect antitrust enforcement. The Administration is now seeking to implement changes to antitrust rules and practices that would have a broad impact on all U.S. M&A.
1. HSR Overhaul
On June 27, 2023, the FTC—which administers the HSR program—issued a proposed rulemaking that would dramatically overhaul the information that parties must provide upfront to the government before they can close certain transactions.
The proposed rule would apply to all “reportable” transactions—those that exceed the statutory threshold for “size of transaction” (currently, $111.4 million but increases on an annual basis) and other tests—regardless of whether the deals actually raise any competition concerns.
In essence, the revisions will convert the U.S. system from an objective “notice” filing protocol to more of a subjective framework that will require parties to provide up-front disclosures on multiple subjects and copious amounts of internal documents and data.
The new requirements are far-reaching. (For a detailed discussion of all the requirements, see our Legal Update, “FTC’s Proposed HSR Changes Will Complicate Merger Filings”.) Several aspects are particularly important for U.S. dealmakers to appreciate, including that parties to all reportable deals will have to provide:
- Details about the structure of the transaction, its business rationale, and the entities involved in it, including significant information on minority and private equity investors and “entities or individuals that may have material influence on the management or operations” of the acquirer, such as certain creditors, board observers, and management service providers;
- Narrative descriptions of the parties’ products and services, the markets in which they are offered, and up-front assessments of competitive overlaps and other interactions between the parties, such as supply agreements;
- A vastly expanded set of the “Item 4(c) and (d)” deal-related documents covering competition topics that must be submitted, including all draft documents (instead of just the final version) and documents prepared by or for the supervisory deal team leads, as well as ordinary-course strategic plans and reports, regardless of whether they were created in connection with the deal; and
- Disclosure of information that screens for labor market issues by classifying employees based on certain job categories and geographic market information (“commuting zones” in which both parties employ workers in such categories), as well as information on any past worker and workplace safety violations.
The changes will require significant additional work, with the FTC predicting that conformity to the proposed rules would result in approximately 12 to 222 additional hours per filing. Many practitioners believe that the time required to comply will be much greater. On a more positive note for dealmakers, the FTC Chair, Lina Khan, stated on September 22, 2023 that the antitrust enforcement agency drafters of these new HSR rules will be looking closely at the comments submitted to the draft form, including being open to evaluating the filing burden on companies whose transactions are the least “risky” from an anticompetition standpoint.
2. Merger Guidelines Revisions
While the HSR revisions govern the process of merger review, the proposed changes to the Merger Guidelines relate to the substantive analytical framework the agencies use to answer the question of whether a transaction “may substantially lessen competition or tend to create a monopoly” in violation of Section 7 of the Clayton Act.
The DOJ and the FTC have for decades issued Merger Guidelines, with the initial version dating back to 1968 and the most recent revision in 2010. The intent of the Guidelines is to provide transparency to stakeholders (e.g., merging parties, the courts and the public) as to the analytical factors the antitrust agencies consider when reviewing mergers. Indeed, lower courts have applied the Guidelines in deciding litigated antitrust challenges to mergers (which is important as the U.S. Supreme Court has not issued a decision related to an antitrust challenge to a merger in decades).
The agencies promulgated their proposed draft revisions to the Merger Guidelines on July 19, 2023, about three weeks after the proposed HSR rules. Like the proposed changes to the HSR rules, the draft Guidelines are in a public notice-and-comment period, after which the agencies will presumably issue the final version.
The draft Guidelines list thirteen different concepts (each a separate individual “guideline”) that the government may rely upon to determine that a merger is problematic. This expands on the 2010 version; indeed, the 2010 Guidelines are 34 pages while the 2023 draft Guidelines and appendices come in at a whopping 51 pages. Further, 47 of those pages are devoted to ways in which a merger could cause harm, while only four cover potential “rebuttal evidence” (much of which the draft Guidelines discount).
The Administration has emphasized several areas that differentiate the proposed revisions from the current (2010) Guidelines, namely:
- Concentration Levels: The 2010 revisions to the Guidelines had increased the thresholds at which the government would consider a market “highly concentrated” as well as the changes in concentration levels that would raise concern. The draft Guidelines would restore both value to pre-2010 levels.
- “Context” of Acquisitions: The draft Guidelines emphasize the need to look at the broader “context” of a merger instead of simply examining the specific effects of the deal under review. Accordingly, the draft makes it clear that the agencies will consider patterns of serial acquisitions (“roll-ups”) or acquisitions by a dominant firm of potential future competitors.
- Platform Competition: The draft Guidelines specifically focus on “platform” competition, where a firm operates in a two-sided market by facilitating transactions between two parties (e.g., Uber connecting drivers and riders). The draft calls-out whether mergers could allow such platforms to “entrench” themselves.
- Labor Markets: Consistent with the Administration’s overall emphasis in applying antitrust laws in general to protect workers, the draft Guidelines make clear that they will examine whether a merger could result in “monopsony” power that would allow the combined firm to lower wages to workers. This emphases dovetails with the changes in the HSR form that would require up-front employee-related data. (The antitrust agencies, however, have never, to date, brought a merger case based on an impact to employees.)
- Nomenclature: Antitrust typically distinguishes between “horizontal” (firms competing against each other) and “vertical” (firms at different levels of the supply chain) theories of harm for mergers. The draft Guidelines reject such nomenclature, preferring to broadly ask “How does competition present itself in this market and might this merger risk lessening that competition substantially now or in the future?”
- Legal Citations: In an unprecedented move, the draft Guidelines cite to legal precedent. As mentioned, the Supreme Court has not heard a merger case in decades. Accordingly, most of the citations are to cases from the 1960s and 1970s, an era that predated modern economics. By citing cases, the draft Guidelines read more like a legal brief designed to advocate before a court, rather than a set of principles designed to provide merging parties and the public with meaningful insight into agency thinking.
The Impact on Dealmakers
Once adopted in their final forms, the new HSR filing rules and the Merger Guidelines will make the antitrust review process more challenging for U.S. deals, providing further evidence that the Administration is biased toward organic growth over strategic M&A. Despite the reoccurring headlines in the press, however, competition concerns should not necessarily be seen as a barrier to U.S. dealmaking, particularly for dealmakers who are already ahead of the new rules and are strategic-minded.
1. Deals are Still Getting Through
The most recent detailed data available from the government shows that the overwhelming majority of deals are still getting through, even ones that raise competition issues. The Agencies submit “Annual Competition Reports” to Congress with detailed data on HSR filings.4 Fiscal year 2021 (October 1, 2020 through September 30, 2021) was a high-water mark for HSR-reportable transactions, with 3,413 transactions filed that year. Of those, the agencies opened initial investigations (referred to as seeking “clearance”) into just 270 (7.9%) transactions. In other words, the agencies had no interest in over 92% of all deals. But, what about the 270 that at least triggered a competition review? Notwithstanding the Biden Administration’s rhetoric about needing to stop problematic mergers, they issued second requests (i.e., conducted an in-depth review) in only 65 deals, and, ultimately, only 32 deals were stopped (less than 0.1% of all reportable transactions).5 In short, U.S. antitrust review, even in the current climate, does not bar U.S. deals.
2. Possible Retrenchment?
Could the agencies be pulling back from their publicly stated aggressive enforcement position? As mentioned above, the agencies have faced tough sledding in court, where government losses have far outnumbered the wins. In addition, importantly, the courts have endorsed the traditionalist approach of favoring settlements that address competition concerns without necessarily blocking a deal outright. While it is too early to tell, the FTC’s recent settlements of ICE/Black Knight and Amgen/Horizon through more traditionalist-style remedies could signal a less confrontational approach to antitrust review going forward.
There are other signs that the agencies may be tempering their views. For example, a FTC official recently discussed the draft Merger Guidelines and suggested that the final version will be amended to make clear that the agencies will consider merging parties’ arguments that a transaction’s increase in concentration will not necessarily harm competition.
Finally, the Merger Guidelines are just what their title states – guidelines, not law. Courts do not have to follow the agencies’ pronouncements on how the agencies review mergers. Courts will follow the law and facts, and, as made evident by the agencies’ recent losses, courts do not mechanically defer to the government’s position.
3. Deal Terms
The Administration’s antitrust enforcement efforts have led parties to anticipate longer merger review timelines, more frequent second requests and a higher likelihood that litigation against the government will be needed to get deals closed. The proposed HSR revisions will further complicate deal timelines for the merger review process.6 As a result, the negotiation of deal terms addressing antitrust risk take on added importance. Such terms include:
- Longer outside dates;
- Reverse termination fees;
- Use of ticking fees and other creative tools to lessen sell-side risk;
- Negotiating remedies into the acquisition agreement; and
- Efforts covenant (although “hell or high water” provisions are rare).
For a detailed discussion on how these terms are used and scale with antitrust risk, see our Legal Update, “M&A Lawyers Adapt to New Era of Antitrust Enforcement: How Contractual Provisions Are Evolving”.
The unequivocal result of the changes to the HSR requirements and to the Merger Guidelines will be increased burden, more risk and less certainty for parties looking to do U.S. M&A transactions. Even simple no-issues transactions will require a substantial investment in filing preparation and will add extra time and cost to the merger clearance process. It will be incumbent on deal teams to think through how the current regulatory environment impacts their transactions and take appropriate steps to address (and streamline data collection processes) and, where possible, minimize the risk. The increased antitrust risk, while important to assess, does not have to be determinative of whether deals move forward; as the data shows, the vast majority of transactions are still getting to the finish line even in this period of aggressive antitrust enforcement.
1 E.g., Microsoft/Activision; Meta/Within; Booz Allen/EverWatch; UnitedHealth Group/Change HealthCare; U.S. Sugar/Imperial Sugar; Illumina/Grail (currently on appeal); Altria/Juul (ALJ decision); Jefferson Health/Einstein Healthcare.
2 E.g., Assa Abloy/Spectrum (court on record pressing parties to settle; DOJ eventually agreed to a divestiture); United Health/Change & Microsoft/Activision (courts endorsing remedies offered by parties).
4 Available at https://www.ftc.gov/policy/reports/annual-competition-reports.
5 FTC & DOJ, “Annual Competition Report FY 2021” at Exh. A, Table 1 (“Data Profiling Hart-Scott-Rodino Premerger Notification Filings and Enforcement Interests”), available at https://www.ftc.gov/system/files/ftc_gov/pdf/p110014fy2021hsrannualreport.pdf.
6 The HSR statute provides that the initial waiting period is 30 days; the FTC cannot change that requirement. However, could the FTC “bounce” filings that they deem deficient for failure to meet the subjective requirements of the new rules, such as overlap descriptions and deal rationale? If so, the U.S. risks becoming more of an EU-like system where the parties engage in significant pre-filing “consultations” with the government, providing iterative drafts of the filing until the agency is satisfied and little predictability for when the 30-day clock would start.