FTC Merger Review Changes May Impact Your Next M&A Deal
The Federal Trade Commission (FTC) has made several recent announcements signaling its intention to increase antitrust merger enforcement under the leadership of Chairperson Lina Kahn, appointed by President Biden. Some relate to the Hart-Scott-Rodino (HSR) pre-merger notification requirements, which apply regardless of whether a transaction is substantively reviewed by the FTC or the Department of Justice (DOJ). Others suggest that any substantive review of a transaction by the FTC may take longer and potentially be more burdensome for merging parties. And many have been issued with support from only three of the five Commissioners. Although the announcements concerning how the FTC will review transactions do not apply to transactions reviewed by the DOJ, the DOJ may adopt some or all of these changes once the head of its Antitrust Division is confirmed by the Senate.
What do these changes likely mean for your next M&A deal?First of all, more transactions will require HSR notifications. Secondly, more deals may receive scrutiny and the focus of investigations may be broader, including looking at areas beyond consumer welfare, such as the effect on labor markets. This may make the process of navigating any investigation by the FTC more time-consuming and costly. Finally, there will be a greater degree of uncertainty around the process.
These antitrust risks should be considered as part of deciding how, and perhaps even whether, to proceed with a transaction—including when crafting the antitrust-related terms in your transaction documents. And all of this favors the engagement of antitrust counsel early in the transaction process.
Please reach out toHoward Iwrey, Jim Burns,orCody Rockeyfor assistance in evaluating antitrust risks associated with a potential transaction, as well as to ensure compliance with HSR notification requirements.
Summary of the FTC announcements
Changes to the HSR Pre-Merger Notification Process
- Early terminations of the HSR waiting period have been suspended indefinitely. This means all transactions requiring HSR notification—regardless of their impact on competition—can not close until at least 30 days after the HSR notification is submitted.
- Whether a transaction requires HSR notification is determined, in part, by the value of the transaction, which is often the purchase price. The amount paid to retire certain debt will now be considered part of the purchase price. In particular, “the full or partial retirement of debt should be included in calculating the Acquisition Price in any instance where selling shareholder(s) benefit from the retirement of that debt.” This is a change from previous guidance from the FTC, which will result in more transactions being deemed large enough to trigger the HSR notification requirement.
- Parties often rely upon informal interpretation issued by the FTC’s Premerger Notification Office to understand how the FTC believes HSR rules apply to particular transactions. The FTC is now “reviewing the voluminous log of informal interpretations” and has noted that they “do not carry the force of law.” While these interpretations have never carried the force of law, experienced practitioners have long considered them to be reliable indicators of the FTC policies and practices. This announcement injects some added uncertainty into the HSR notification process and signals that additional changes may be announced in the future.
Changes to the FTC’s Review of Transactions
- When a deal requires HSR notification, the FTC or DOJ may request more information to further investigate a transaction. The parties must comply with these so-called “Second Requests” before closing. The FTC has indicated that it will be more demanding with respect to Second Request compliance going forward —including increasing the showing required to obtain modifications to limit the scope of broad requests, to use certain electronic discovery tools, and/or to reduce the burden of producing privilege logs.
- The FTC has signaled that it may investigate harms not typically the subject of antitrust merger review, such as harm to labor markets. This position echoes other statements made by Chairperson Kahn, to the FTC and to Congress. This too could result in the FTC’s Second Request compliance becoming more onerous as the requests may become even broader in scope.
- Even for HSR reportable transactions where the parties are free to close because the HSR waiting period has expired, the FTC may now send merging parties “warning” letters, stating that the FTC’s investigation continues and the parties consummate the transaction “at their own risk.” While this does not reflect a formal change in any rule or statute—the FTC was always free to investigate or challenge transactions after they close—it signals a possible change in the FTC’s practice of rarely taking action after deals cleared the HSR process. Whether this will actually result in any post-clearance challenges remains to be seen. Nevertheless, these warning letters may result in the parties demanding different antitrust risk sharing provisions in the purchase agreement to account for what they may wish to do should the FTC send such a letter.
- The FTC rescinded the Vertical Merger Guidelines, which provided guidance on how the agency would evaluate mergers between parties at different levels of the distribution chain. The majority of Commissioners thought the Guidelines were too lenient in some cases and failed to account for certain potential harms associated with a merger, including the impact on labor markets. The DOJ has not taken similar steps but has indicated that it is reviewing the Guidelines. So the parties to vertical transactions face greater uncertainty about how vertical transactions are reviewed.
- Finally, the FTC adopted a policy statement that will require parties that settle merger investigations to agree to notify the FTC of, and get prior approval for, future acquisitions, regardless of whether the transactions would otherwise trigger HSR reporting obligations. This marks a change in agency policy that had been in effect for more than 25 years, during which time the use of this “prior approval” provision was used only in limited circumstances, not as a “standard” settlement term. The FTC recently required a company to agree to such a provision as a part of resolving a merger investigation.