Articles Posted in Mergers & Acquisitions

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Authors: Luis Blanquez and Steven Cernak

Strong winds of change keep blowing in the antitrust world. In the past weeks we’ve witnessed two new major developments in the U.S.: (i) President Biden’s Executive Order to increase antitrust enforcement, and (ii) six antitrust bills issued by the House Judiciary Committee. That’s a lot to summarize in one article, so we’ve decided to just unwrap them below for you to decide how deep you want to keep digging.

  1. President’s Biden Executive Order on Promoting Competition in the American Economy

This month President Biden issued the Executive Order on Promoting Competition in the American Economy (the “Order”). The Order aims to reduce the trend of corporate consolidation, drive down prices for consumers, increase wages for workers and facilitate innovation. It establishes a Whole-of-Government effort to promote competition in the American economy by including 72 initiatives to enforce existing antitrust laws and other laws that may impact competition to combat what it sees as excessive concentration of industry and abuses of market power, as well as to address challenges posed by new industries and technologies.

The Fact Sheet further explains how the Order (i) encourages the leading antitrust agencies to focus enforcement efforts on problems in key markets and (ii) coordinates other agencies’ ongoing response to corporate consolidation.

Calling the DOJ and FTC to enforce the antitrust laws vigorously

The Order calls on the federal antitrust agencies, the Department of Justice (DOJ) and Federal Trade Commission (FTC), to enforce the antitrust laws vigorously. The Order acknowledges the overlapping jurisdiction of both agencies and encourages them to cooperate fully, both with each other and with other departments and agencies, in the exercise of their oversight authority.

In particular, the Order encourages the Chair of the FTC to exercise the FTC’s statutory rulemaking authority in areas such as (i) unfair data collection and surveillance practices that may damage competition, consumer autonomy, and consumer privacy, (ii) unfair anticompetitive restrictions on third-party repair or self-repair of items, such as the restrictions imposed by powerful manufacturers that prevent farmers from repairing their own equipment; (iii) unfair anticompetitive conduct or agreements in the prescription drug industries, such as agreements to delay the market entry of generic drugs or biosimilar; (iv) unfair competition in major Internet marketplaces; (v) unfair occupational licensing restrictions; (vi) unfair tying practices or exclusionary practices in the brokerage or listing of real estate; and (vii) any other unfair industry-specific practices that substantially inhibit competition.

Also, the Order specifically addresses merger review by (i) encouraging antitrust agencies to revisit and update the Merger Guidelines (both horizonal and vertical) and (ii) challenge bad mergers previously cleared by past Administrations. Immediately after the publication of the Order, FTC and DOJ also issued a joint statement highlighting the fact that the current guidelines deserve a hard look to determine whether they are overly permissive, and how they will jointly launch a review of the merger guidelines with the goal of updating them to reflect a rigorous analytical approach consistent with applicable law.

In parallel, FTC has also passed this month some new resolutions updating its rulemaking procedures to set stage for stronger deterrence of corporate misconduct, and authorizing investigations into key law enforcement priorities for the next decade. As FTC’s chair Lina M. Khan stressed in a recent statement, priority targets include repeat offenders; technology companies and digital platforms; and healthcare businesses such as pharmaceutical companies, pharmacy benefits managers, and hospitals. Last but not least, FTC recently voted to rescind a 1995 policy statement that made it more difficult and burdensome to deter problematic mergers and acquisitions. The 1995 Policy Statement on Prior Approval and Prior Notice Provisions made it less likely that the Commission would require parties that proposed mergers that the Commission had determined would be anticompetitive to obtain prior approval and give prior notice for future transactions. By rescinding this policy statement, the FTC will be more likely to obtain prior notice of future transactions by those parties even beyond HSR notice requirements.

Grab your popcorn. Following President Joe Biden’s recent nomination of Jonathan Kanter as the new AAG for U.S. Department of Justice Antitrust Division, it is likely we will see some important antitrust enforcement action from both agencies very soon aimed at corporate concentration, especially the big tech sector.

New White House Competition Council

The Order establishes a new White House Competition Council, led by the Director of the National Economic Council, to monitor progress on finalizing the initiatives in the Order and to coordinate the federal government’s response to what it sees as the rising power of large corporations in the economy.

The Council will meet on a semi-annual basis––unless the Chair determines that a meeting is unnecessary––and will work across agencies to provide a coordinated response to overconcentration, monopolization, and unfair competition. The FTC and other independent agencies are welcome and expected to participate in this process.

Granted patents and the protection of standard setting processes

To avoid the potential for anticompetitive extension of market power beyond the scope of granted patents, and to protect standard-setting processes from abuse, the Order encourages the Attorney General and the Secretary of Commerce to consider whether to revise their position on the intersection of the intellectual property and antitrust laws, including by considering whether to revise the Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments issued jointly by the Department of Justice, the United States Patent and Trademark Office, and the National Institute of Standards and Technology on December 19, 2019.

Specific Industry Sectors addressed in the Order

Labor Markets

The Order encourages the FTC to: (i) ban or limit non-compete agreements, (ii) ban unnecessary occupational licensing restrictions that impede economic mobility, and (iii) along with DOJ, strengthen antitrust guidance to prevent employers from collaborating to suppress wages or reduce benefits by sharing wage and benefit information with one another.

The Order directs the Treasury Department to submit a report on the impact of what it sees as the current lack of competition on labor markets within 180 days and encourages the FTC and DOJ to revise the Antitrust Guidance for HR Professionals.

Healthcare

The Order (i) directs the Food and Drug Administration (FDA) to work with states and tribes to safely import prescription drugs from Canada, pursuant to the Medicare Modernization Act of 2003; (ii) directs the Health and Human Services Administration (HHS) to increase support for generic and biosimilar drugs, which can provide low-cost options for patients; (iii) directs HHS to issue a comprehensive plan within 45 days to combat high prescription drug prices and price gouging, (iv) encourages the FTC to ban “pay for delay” and similar agreements by rule; (v) encourages HHS to consider issuing proposed rules within 120 days for allowing hearing aids to be sold over the counter, (vi) underscores that hospital mergers can be harmful to patients and encourages the DOJ and FTC to review and revise their merger guidelines to ensure patients are not harmed by such mergers; (vii) and directs HHS to support existing hospital price transparency rules and to finish implementing bipartisan federal legislation to address surprise hospital billing.

Transportation

The Order directs the Department of Transportation (DOT) to consider (i) issuing clear rules requiring the refund of fees when baggage is delayed or when service isn’t actually provided—like when the plane’s WiFi or in-flight entertainment system is broken and (ii) issuing rules that require baggage, change, and cancellation fees to be clearly disclosed to the customer.

The Order further encourages (i) the Surface Transportation Board to require railroad track owners to provide rights of way to passenger rail and to strengthen their obligations to treat other freight companies fairly, and (ii) the Federal Maritime Commission to ensure vigorous enforcement against shippers charging American exporters exorbitant charges.

Agriculture

The Order expresses a concern on market concentration and helps ensure that the intellectual property system, while incentivizing innovation, does not also unnecessarily reduce competition in seed and other input markets beyond that reasonably contemplated by other laws.

In particular the Order directs the U.S. Department of Education (USDA) to consider issuing (i) new rules under the Packers and Stockyards Act making it easier for farmers to bring and win claims, stopping chicken processors from exploiting and underpaying chicken farmers, and adopting anti-retaliation protections for farmers who speak out about bad practices; (ii) new rules defining when meat can bear “Product of USA” labels, so that consumers have accurate, transparent labels that enable them to choose products made here; and (iii) a plan to increase opportunities for farmers to access markets and receive a fair return, including supporting alternative food distribution systems like farmers’ markets and developing standards and labels so that consumers can choose to buy products that treat farmers fairly.

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Author:  Steven J. Cernak

Submitting the form and documents required under the Hart-Scott-Rodino premerger notification system can be complicated. If only the initial submission must be made, however, the pain and expense can be short-lived. If, on the other hand, the parties receive a “second request” for information at the end of the thirty-day waiting period, the parties and their executives are in for months of discovery, questioning, and plenty of quality time with antitrust lawyers instead of  their customers. To give themselves a chance to avoid that fate, parties should consider taking a few basic steps before and immediately after the initial HSR filing.

HSR Basics

As we discussed in prior posts, HSR requires the parties to certain large mergers and similar transactions to submit a form and certain documents to the two U.S. antitrust agencies prior to closing the transaction.  If the antitrust agencies fear the transaction will cause antitrust problems, they can sue to stop it; if not, they allow the transaction to move forward. After the parties complete their submission, the agencies have thirty days to decide if they need more information to make that determination.

HSR was the first premerger notification scheme when it was passed in 1976. Since then, dozens of other jurisdictions have passed similar, but far from identical, schemes. HSR remains simpler (not simple) in two key-ways. First, the HSR form does not require any market, share, or similar information that would go into an antitrust analysis; instead, the parties must merely describe themselves and the transaction. Second, the HSR process does not require any pre-filing consultation with the agency to ensure the submission is complete; instead, the parties can just upload the submission and wait to be told if anything is missing.

That is not to say that submitting the HSR form and documents is simple. Like most tax forms, the form itself is only a few pages long but the instructions, definitions, rules, and interpretations necessary to correctly fill in the blanks run to hundreds of pages. And some of the information required can be obscure—for instance, many companies do not have ready their U.S. revenues classified by North American Industry Classification System codes. (Those of us who have been filing for decades appreciate that the FTC has simplified the form. For example, it no longer requires a base year of revenues or a list of added and deleted products since that base year.)

HSR Second Requests

Most parties submit the filing, let out a sigh of relief, and try not to think of HSR again. Usually that course of action is correct.  After all, the vast majority of all HSR filings are cleared in the first thirty days. If the reviewing antitrust agency believes it needs more information to decide the transaction’s likely effects, however, it will issue a “second request” for information.

A second request is a long list of document requests and interrogatories that can take months to fulfill. In the meantime, the parties and their lawyers, executives, and expert economists will debate the meaning of all that information. At the end of the process (often about a year later), the agency will decide if it should sue to stop the transaction from closing. If the agency challenges the transaction, the parties must then decide to either abandon the transaction or spend several more months, at least, defending it in court.

An HSR Second Request—Will You Get One?

Therefore, parties to an HSR filing need to predict if their filing will be one of the minority that receive a second request. If so, they must then decide which steps, if any, to take to try to head it off.

There is no set of questions to ask that will unfailingly predict the receipt of a second request; however, a positive response to several of the following questions makes it much more likely that the reviewing agency will want more information than is contained in the initial HSR submission:

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Author:  Steven J. Cernak

Hart-Scott-Rodino or HSR, the U.S. premerger notification program, has undergone several major changes since the beginning of the pandemic. Some FTC Commissioners have suggested even more changes. HSR filers, both frequent and infrequent, need to understand these current developments.

As this blog has discussed frequently (see here, here, and here), the US was the pioneer among  global competition law regimes in requiring parties to most large mergers and similar transactions to obtain approval from the jurisdiction’s enforcer before closing. Under HSR’s latest thresholds, both buyers and sellers for most transactions whose value exceeds $92M must submit a form and certain documents relating to the parties and the transaction and then wait for 30 days. The FTC and DOJ use that time to decide whether to ask for more information or allow the transaction to close. While those basics have not changed, some of the details are new.

Until the pandemic hit, the HSR system essentially had no way for parties to electronically submit forms and documents; instead, parties or their lawyers printed out paper copies and shipped them in by local couriers or overnight delivery services. Once the pandemic hit and government staffers started working from home, the FTC Premerger Notification Office, which oversees HSR submissions, had to develop a new system.

The resulting system requires parties to email the PNO and request a link that can then be used to upload the form and required documentary attachments. As with any system in which many large documents must be transferred, the time to upload the materials can vary by the size of the documents and the strength of the filer’s connection. While parties save the time and expense of delivery services, they should not count on instant uploads. Also, the PNO updated its instructions on the system several times in 2020 so that even filers who successfully submitted materials several months ago should look for revisions as recently as December. For instance, the materials must be submitted in pdf format with searchable text. As a result of these changes, frequent filers have had to adjust processes used for years to comply with the new procedures.

Parties have figured out those new processes, as evidenced by the huge number of filings over the last several months. While the number of HSR filings was down considerable early in the pandemic, that number increased until November 2020 had more than twice the number of filings of the same month in the previous year. February and March of 2021 also had increases of more than 100% year-over-year, disproving the guess by some observers, this author included, that the November figure was a blip caused by the end of the year and presidential administration.

The agencies continue to process all the filings, though not quite with the usual speed. To help the situation, the FTC suspended the early termination program by which the agencies affirmatively clear the most routine transactions in less than 30 days and allowed them to close.  Now, all parties, even those to transactions that raise no antitrust issues, need to plan to wait the entire 30 days before closing.

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Author: Luis Blanquez

Interesting times to be an attorney; especially an antitrust attorney. If you work in private practice, you are likely witnessing the most significant transformation in the legal sector in the past 20 years. If you are an in-house lawyer, you are probably dealing with a new set of legal and commercial issues you couldn’t even imagine a few years ago. And if you are an in-house antitrust attorney in one of the Big Tech companies, then you are currently involved in the perfect storm.

During the past years, competition authorities all over the world have been closely monitoring the steady acquisition of power by Big Tech companies in the new digital economy. That’s the main reason why they have recently initiated antitrust investigations on both sides of the Atlantic. As Senator Mike Lee (R., Utah), recently mentioned: “antitrust enforcers were asleep at the wheel while Silicon Valley transformed from a center of innovation into a center of acquisition. Instead of competing to be the next Google, Apple, Facebook, or Amazon, today’s tech startups are pushed by their private-equity backers to sell out to Google, Apple, Facebook, or Amazon.”

At the same time, in the U.S. the Antitrust Subcommittee of the House Judiciary Committee issued last year its long-anticipated Majority Report of its Investigation of Competition in Digital Markets. The Report detailed its findings from its investigation of Google, Apple, Facebook, and Amazon along with recommendations for actions for Congress to consider regarding those firms. In addition, the Report included recommendations for some general legislative changes to the antitrust laws.

You can read more about it in our previous article: Classic Antitrust Cases: Trinko, linkLine and the House Report on Big Tech. Now, Senator Klobuchar, who chairs the Senate Judiciary Committee’s Subcommittee on Antitrust, Competition Policy and Consumer Rights, in a keynote addressed at the annual State of the Net Conference, announced her antitrust reform legislation, the Competition and Antitrust Law Enforcement Act.

Meanwhile, in the European Union the European Commission is proposing new “ex ante” regulation to increase contestability and fairness in the digital markets, which includes: (i) The Digital Services Act (DSA)––addressed to protect end users and their fundamental rights online; and (ii) the Digital Markets Act (DMA)––which prohibits unfair conditions imposed by online platforms that have become or are expected to become what is called “gatekeepers” to foster innovation, growth and competitiveness.

So yes, Big Tech companies have too many irons in the fire. Let’s try to briefly summarize them here.

The New Proposed Competition and Antitrust Law Enforcement Act from Sen. Amy Klobuchar (D-MN) in the U.S.

In January 2021, Sen. Klobuchar, released her antitrust reform legislation, the Competition and Antitrust Law Enforcement Act, highlighting that “with a new administration, new leadership at the antitrust agencies, and Democratic majorities in the Senate and the House, we’re well positioned to make competition policy a priority for the first time in decades.” She also mentioned that current antitrust laws are inadequate for regulating companies like Amazon, Apple, Facebook and Google.

In a nutshell, the new proposed Act includes the following changes:

New Legal Standards To Determine Whether a Merger is Anticompetitive

The is the first attempt to change the existing standard relating to mergers that substantially lessen competition, to a new one that prohibits mergers that create an appreciable risk of materially lessening competition. The exact meaning of this new standard remains unclear, to say the least.

The new rules would also shift, in certain scenarios, the burden of proof of certain mergers from the government to private parties. These include (i) the acquisition of a competitor or nascent competitor by a company with market power or a market share of 50% or more; (ii) the acquisition of what is called a “disruptor”, (iii) and transactions valued at more than $5 billion, or the buyer is worth at least $100 billion.

Broader Scope To Prohibit Exclusionary Conduct

The proposed Act expands the concept of exclusionary conduct and defines it as any conduct that materially disadvantages competitors or limits their opportunity to compete. It creates a presumption of illegality in those scenarios where exclusionary conduct presents an appreciable risk of harming competition.

This is when a firm with market power, or a market share higher than 50%, engages in conduct that materially disadvantages actual or potential competitors or tends to foreclose or limit the ability or incentive of actual or potential competitors to compete.

Private parties will be still able to rebut such presumption by showing pro-competitive effects that eliminate the risk of harming competition.

Increase of Resources for Antitrust Authorities, More Civil Penalties and New Whistleblower Protections

The proposed Act includes an important funding increase of $300 million for both the FTC and DOJ.

It also increases civil monetary penalties, by imposing on private parties fines the greater of either: (i) 15% of the undertaking’s U.S. revenues in the prior calendar year, or (ii) 30% of the undertaking’s U.S. revenues in any business line affected or targeted by the unlawful conduct during the period of such conduct.

The new rules also provide further incentives to report potential antitrust violations. For instance, they extend anti-retaliation protections to civil whistleblowers, and in certain cases, even include an award up to 30% of the criminal fines.

In the meantime, Representative David Cicilline (Democrat – Rhode Island), who led the House’s investigation into Big Tech, and Senator Mike Lee, Senator (R., Utah), have also agreed to keep this momentum and discuss future changes to the antitrust laws, although with significant differences on their approach.

The Digital Services Act and the Digital Markets Act: A proposal to upgrade the rules governing digital services in the European Union

In the European Union things have not been quiet either.

As part of the European Digital Strategy, last December the European Commission finally published its proposals to regulate the digital sector. These include (i) Digital Services Act (DSA)––addressed to protect end users and their fundamental rights online; and (ii) the Digital Markets Act (DMA)––which imposes new ex-ante rules and prohibits unfair conditions imposed by online platforms that have become or are expected to become what are called “gatekeepers” to foster innovation, growth and competitiveness.

These proposals will now go to the European Parliament and European Parliament for discussion, to be adopted into law and enter into force at some point during 2022.

The DSA

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Global Antitrust

Author: Jarod Bona

Just because your company isn’t based in the United States doesn’t mean it can ignore US antitrust law. In this interconnected world, there is a good chance that if you produce something, the United States is a market that matters to your company.

For that reason, I offer five points below that attorneys and business leaders for non-U.S. companies should understand about US antitrust law.

But maybe you aren’t from a foreign company? Does that mean you can click away? No. Keep reading. Most of the insights below matter to anyone within the web of US antitrust law.

This original version of this article is cross-posted in both English and French at Thibault Schrepel’s outstanding competition blog Le Concurrentialiste

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Antitrust Superhero

Author: Jarod Bona

Some lawyers focus on litigation. Other attorneys spend their time on transactions or mergers & acquisitions. Many lawyers offer some sort of legal counseling. Another group—often in Washington, DC or Brussels—spend their time close to the government, usually either administrative agencies or the legislature. And perhaps the most interesting attorneys try to keep their clients out of jail.

But your friendly antitrust attorneys—the superheroes of lawyers—do all of this. That is part of what makes practicing antitrust so fun. We are here to solve competition problems; whether they arise from transactions, disputes, or the government, we are here to help. Or perhaps you just want some basic advice. We do that too—all the time. We can even help train your employees on antitrust law as part of compliance programs.

Perhaps you are a new attorney, or a law student, and you are considering what area to practice? Try antitrust and competition law. Not only is this arena challenging and in flux—which adds to the excitement—but you also don’t pigeonhole yourself into a particular type of practice. You get to do it all—your job is to understand the essence of markets and competition and to help clients solve competition problems. And in the world of big tech, antitrust is kind of a big deal.

For those of you that aren’t antitrust attorneys, I thought it might be useful if I explained what it is that we do.

Antitrust and Business Litigation

Although much of our litigation is, in fact, antitrust litigation, much of it is not. In the business v. business litigation especially, even in cases that involve an antitrust claim, there are typically several other types of claims that are not antitrust. As an example, we explain here how we see a lot of Lanham Act False Advertising claims in our antitrust and competition practice.

Businesses compete in the marketplace, but they also compete in the courtroom, for better or worse. And when they do, their big weapon is often a federal antitrust claim (with accompanying treble damages and attorneys’ fees), but they may also be armed with other claims, including trade secret statutes, Lanham Act (both false advertising and trademark), intellectual propertytortuous interference (particularly popular in business disputes), unfair competition, unfair and deceptive trade practices, and others.

In many instances, in fact, we will receive a call from a client that thinks they may have an antitrust claim. Perhaps they read this blog post. Sometimes they do, indeed, have a potential antitrust claim. But in other instances, an antitrust claim probably won’t work, but another claim might fit, perhaps a Lanham Act claim for false advertising, or tortuous interference with contract, or some sort of state unfair trade practice claim.

Antitrust lawyers study markets and competition and are the warriors of courtroom competition between competitors. If you have a legal dispute with a competitor, you should call your friendly antitrust attorney.

Antitrust litigation itself is great fun. The cases are usually significant, document heavy, with difficult legal questions and an emphasis on economic testimony. Some of them even involve class actions or multi-district litigation.

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Author: Steven J. Cernak

It happens all the time.  You read about a merger in your industry, maybe between two suppliers or competitors.  If the merger involves suppliers, maybe your sales rep makes a courtesy call.  You then get back to your business, preparing to adjust as necessary.  A short time later, you get a call.  Some attorney from the Federal Trade Commission or Department of Justice Antitrust Division is “conducting a non-public investigation” in your industry and you deduce that it is about the merger.  Is this normal?  What can — or should — you do next?

Relax.  That attorney most likely is just doing her job as part of the Hart-Scott-Rodino merger review process.  She is asking you to play a role in that process.  Most times, your role will be small as you act as a good corporate citizen and, perhaps, learn something about what is going on in your industry.  Still, you will want to seek assistance and take the right steps to ensure that your actions do not distract you from your daily business.

HSR Basics

To determine if a merger is good or bad for competition, the FTC and DOJ need information about the merging parties and the relevant industries.  For most large mergers, they gather that information through the Hart-Scott-Rodino (HSR) process.

HSR requires the parties to submit certain information and documents and then wait for approval before closing the transaction.  The FTC and DOJ then have 30 days to determine if they will allow the merger to proceed or seek much more detail through a “second request” for information.  A second request can take months, often over a year, to play out.  If the agency still has competition concerns at the end of the process, it can sue to block the merger.

Throughout the process, the reviewing agency will reach out to third parties — suppliers, experts, and, especially, customers — for relevant information to help the agency predict the potential effect of the proposed merger on competition.  That is where you come in.

Immediate Next Steps

After you get that call from the reviewing agency, it is a good idea to get with your friendly, neighborhood antitrust attorney.  That attorney can guide you through the process, saving you time in dealing with the agency attorney and helping you understand the specialized language of merger review.  (While covering hundreds of these matters in-house at General Motors, I often said that my role was to use my “automotive to antitrust” decoder ring for the good of both sides.)

At this point in the process, responding substantively to the agency call is voluntary; however, both the FTC and DOJ have processes that they can tap to compel cooperation if they think your information is key to their investigation.  As you will see below, cooperating with the request usually is not too burdensome and can be the better long-term decision.

If it is not obvious from the initial request, you should obtain assurances that this really is a third-party request and you are not the subject of the investigation.  Because HSR filings are confidential, the agency might not be able to explicitly confirm that they are investigating the merger; however, they can confirm if you are a subject of the investigation or merely a witness.

Then, you should do a quick check with the right people in your organization to ensure that there is no reason why the investigation might suddenly turn on you.  Did you recently try and fail to negotiate a merger with one of the companies?  Did you just finish some acrimonious negotiations where one of the companies accused you of acting anticompetitively?

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Author: Steven Cernak

As we detailed in earlier posts (see here and here, for instance), the system established by the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR) was designed to get sufficient information about impending mergers to the federal antitrust agencies so they could attempt to block anti-competitive ones before consummation.  The system has grown into a complex set of rules and interpretations.  Earlier this month, the antitrust agencies proposed two changes to those rules, one that would require more information from some acquiring parties and another that would eliminate the filing requirement for certain transactions deemed unlikely to be anti-competitive.

“Associates” Would Become “Persons”

HSR requires a buyer — “Acquiring Person,” in HSR parlance — to provide certain information about the entities it controls and its prior acquisitions for transactions that meet HSR’s reportability standards.  Under the definition of Persons, however, separate private equity investment funds under the same parent fund usually are considered separate Persons because the parent fund did not “control” them.  Therefore, until recently, an investment fund making an acquisition did not need to provide information, including information regarding acquisitions or holdings, about other investment funds under the same parent fund.  Also, currently, an investment fund does not need to aggregate its holdings with those of other funds under the same parent to determine HSR reportability.

In such scenarios, the agencies might not realize that another investment fund under the same parent fund holds interests in competitors of the target entity.  The agencies partially corrected this situation in 2011 by defining such related investment funds as “associates” and requiring the Acquiring Person to disclose holdings of its associates in other entities that generated revenues in the same industries as the target entity.

The proposed rule would go a step further and change the definition of “Person” to include “associates.”  The intended effect of such a change is to require Acquiring Persons to provide even more information about their associates when completing the HSR form.  (Again in HSR parlance, such an Acquiring Person would need to disclose additional information about its associates in Items 4 through 8 of the form.)  In addition, all the holdings of the Acquiring Person in the target entity, even those held by an associate, would need to be aggregated to determine if the most recent acquisition is reportable.

As a result, the agencies should have more complete information to assess the potential competitive impact of the proposed transaction.  For private equity funds structured in this way, the result likely will be additional HSR filings plus the burden to collect, track, and provide additional information in each filing.

Small Transactions Would Be Exempt Regardless of Intent

While the agencies have an incentive to receive filings for all transaction that could pose competitive issues, they also have an incentive to conserve resources and avoid the review of filings for transactions that almost certainly pose no competitive threat.  As a result, the HSR statute and rules have numerous exemptions for transaction types that raise few if any competitive issues.

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Authors: Steven Cernak and Jarod Bona

In big antitrust news, the Federal Trade Commission and Department of Justice Antitrust Division released a draft of an update to the 1984 Vertical Merger Guidelines (VMG) on January 10, 2020.  Only three of the five FTC commissioners voted to release the draft with Democratic Commissioners Rebecca Kelly Slaughter and Rohit Chopra abstaining but issuing separate statements. The agency will accept public comments on the draft through February 11, 2020.

These vertical merger guidelines make extensive references to the Horizontal Merger Guidelines, most recently issued in 2010 (HMG). Like the HMG, the VMG are guidelines only, not law, and are meant to provide the merging parties some understanding of the analysis the reviewing agency will use. Because nearly all merger reviews begin and end with these agencies, however, the HMG have become both influential and persuasive for courts. The VMG rely on the HMG for much of the analysis and so, at nine pages, are much shorter and seem to break little new ground besides updating the outdated 1984 version.

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The FTC Headquarters in Washington, DC. The cornerstone to the building was laid in 1937 by Franklin Roosevelt, reportedly using the same trowel George Washington used to lay the cornership of the U.S. Capital in 1793. In the spirit of competition, the National Gallery of Art has set its sights on expanding into the FTC building, and in 2016, the General Services Adminsitration has been investigating the proposal. The FTC has strongly resisted this form of competition for its space.

Author: Steven Levitsky

Under US antitrust Law, parties to certain mergers and acquisitions must prepare what is called a Hart-Scott-Rodino (HSR) filing for the antitrust agencies.

In an earlier article, we mentioned that HSR filings, at least for voting securities and LLC interests, are not triggered by the literal “size-of-transaction” amount.

Instead, they are triggered by a combination of (1) all existing holdings in a target plus (2) what you intend to buy in that target. (In HSR lingo, this is called “aggregation.”) Plus, you need to calculate the total existing holdings across the entire control group. (In HSR lingo, this means all the entities controlled by the “ultimate parent entity.”) When you don’t, you run the risk of being fined $40,654 per day.

Here’s a great example, based on a real-life case. Alpha Fund owns $84 million of Bravo Ltd’s voting securities. Alpha Fund is controlled by Mr. Smith. Because of this control, Mr. Smith is the hedge fund’s “ultimate parent entity,” and he is deemed to “hold” everything in his control group.

Based on his fund’s holdings, Mr. Smith was appointed to the Board of Bravo Ltd. As a board member, he was given stock options for 10,000 voting shares and exercised them. Let’s assume that those shares were worth $50 each, so that the entire option acquisition was only $500,000. This is 0.0059% of the HSR threshold of $84.4 million. But that’s not the way the HSR system works.

What Mr. Smith should have done (or rather, what his lawyers should have done) was combine, or “aggregate,” all his existing holdings ($84,000,000) with the options he was about to convert $500,000). In other words, as a result of his option transaction, Mr. Smith now “held” $85,000,000 of voting securities in Bravo Ltd. But he never made an HSR filing. In this case, the FTC fined him $250,000.

This is actually a simplified version of the real story. In fact, Alpha Fund had previously failed to make an mandatory HSR filing, and had made a corrective filing only later, only proving that it is hard to keep track of acquisitions across a control group. As part of the settlement of the corrective (after-the fact) filing, the FTC always imposes an obligation to create and maintain a compliance program for future acquisitions. The FTC takes the position that a second failure to file proves that the compliance program was not complied with.

By the way, there was absolutely no competitive issue involved in this violation. The control group’s collective holdings in Bravo Ltd. were too low for it to be able to exert any control. Furthermore, Bravo Ltd. granted the options with one single day to exercise them. There was no possibility for Mr. Smith to have made an HSR filing. Despite all these mitigating factors, the fine was imposed simply because there had been an acquisition that required an HSR filing, and no filing was made.

Here’s another complication from the same story. Let’s assume that Alpha Fund bought the shares at $50,000,000, and that over time they appreciated in value to $84,000,000. It’s not clear, but it seems possible that Alpha and Mr. Smith had considered the original acquisition cost of the stock ($50,000,000 plus $500,000). That was another serious mistake, because the HSR rules require you to calculate the current value of your existing holdings. In other words, if your original $50,000,000 investment grows to $85,000,000 through appreciation, you don’t need to do a thing. But you can’t acquire a single dollar more of stock in the same target without making a filing.

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