Author: Steven J. Cernak
The Federal Trade Commission continues to take subtle steps that, in total, will end up significantly changing the merger review process under the Hart-Scott-Rodino Act. We have already covered some of the earlier actions: withdrawal of the 2020 Vertical Merger Guidelines, withdrawal of one long-standing HSR rule interpretation and threats to the rest, and the routine issuance of threatening letters to parties closing after the end of HSR’s waiting period. This week, the FTC took another such step when it announced that it would now “routinely” require many parties involved in mergers to obtain prior approval from the FTC for many future transactions.
Before 1995, the FTC had often included a “prior approval” provision in any order settling its review of a merger that it had found to be anticompetitive. That provision required the parties to seek FTC approval for any future merger, usually for the next ten years though usually limited to the markets involved in the original merger. In 1995, the FTC issued a Policy Statement explaining that it would no longer routinely require such prior approval provisions and, instead, would simply rely on HSR’s requirement for most large mergers to be reported to the antitrust agencies prior to consummation. Earlier this year, the FTC rescinded that 1995 Policy Statement. This week, the FTC announced its replacement.
To understand the import of the new policy, you must understand how the HSR merger review process has worked in practice. The parties to most mergers and similar transactions above the threshold set by Congress (and automatically updated each year) must file certain forms and documents with both the FTC and the Department of Justice Antitrust Division before closing. The reviewing agency, say, the FTC, then has thirty days to investigate and determine if it will allow the transaction to proceed or seek more information through a “second request.”
If the FTC goes the latter route, the parties then spend months providing the additional documents and information. After the parties certify full compliance with the second request, the FTC must choose to allow the transaction to proceed or sue to enjoin it. By that point months into the investigation, the parties and the FTC often agree to modifications to the transaction — typically, divestiture of certain assets to a buyer — that the FTC thinks will solve any competition concerns.
The details of that agreement are then memorialized. After this week’s statement, that document now will routinely provide that the parties, for future transactions, must seek prior approval from the FTC under terms and timelines set by the FTC, not HSR. Such prior approval requirements certainly will cover future transactions in the markets affected by the original transaction; however, the FTC might also seek broader prior approval provisions in certain cases. Also, the FTC might seek such prior approval requirements even if the parties choose to abandon the proposed transaction, whether prior to or after the FTC sues to enjoin it. Finally, the FTC likely will insist on prior approval before any buyer of divested assets can resell them.
Benefits Expected by the FTC
The FTC sees three main benefits from this new policy. First, it thinks that parties to “facially anticompetitive” transactions will not pursue them in the first place because of fear of imposition of these prior approval requirements for all future transactions. Second, the FTC will be able to preserve its resources by having fewer mergers to review and challenge and, for those subject to prior approval provisions, reviewing them under timelines and rules more FTC-friendly than HSR. Finally, the FTC will be able to review before consummation any deals that would be too small to trigger HSR filing requirements.
Other Likely Effects
The FTC’s assessment of potential effects seems both one-sided and simplistic. Certainly, the new policy will raise the costs to the parties of making HSR submissions on “facially anticompetitive” mergers and so should reduce their number; however, the costs of the risk of prior approval provisions also will fall on other mergers challenged by the FTC, at least some of which reasonable antitrust minds might have found to be not “facially anticompetitive.” Because parties will not be sure that their “good” merger will be mistakenly challenged as a “bad” one, they might hesitate to pursue mergers beneficial to consumers. So, the new policy could reduce both “bad” and “good” mergers. The FTC’s new policy implicitly assumes that the benefit to the FTC from not needing to challenge the bad ones outweighs the costs to consumers from losing the benefits of the good ones never pursued.
Even the narrow benefits to the FTC might not play out as expected. For parties that have fully complied with a second request, the new policy raises the cost of settling with the FTC for a transaction truncated by a divestiture. All other things being equal, that higher cost of settlement will make it more likely that the parties will reject it and instead choose to litigate the FTC’s challenge to the proposed merger. If parties anticipate during compliance with the second request that there is little likelihood of settlement, the usual cooperative compliance of rolling submissions and deadline extensions might change to data dumps at the discovery deadline, just as in other contentious litigation.
Similarly, parties that choose to abandon a transaction earlier in the process that are then faced with an FTC effort to impose prior approval requirements on all subsequent transactions might choose to fight. So an FTC that hopes to save resources from reviewing fewer mergers might find itself using those resources to more frequently litigate its actions. The FTC can change its own actions and policy, but the courts will ultimately decide whether certain mergers violate antitrust law.
All these costs and other effects will fall only on transactions reviewed by the FTC. As noted above, the DOJ also reviews mergers and, at least as of now, has not chosen to follow the FTC’s lead. As a result, parties in those industries whose mergers are subject to FTC review will face higher costs than those subject to DOJ review. Because the dividing line between those industries is based on agency expertise and historic accident, it can seem oddly random: For instance, traditionally the FTC has reviewed transactions involving cars while the DOJ has covered heavier trucks. This further widening of the differences between the two agencies’ merger reviews might increase the calls to correct the situation by consolidating all antitrust review at one agency, which could be DOJ.
Finally, and more generally, the new policy statement continues to dismantle the HSR merger review process established and modified by Congress. Yes, Congress delegated considerable authority to the FTC to implement details of the HSR process. But it was Congress that established the thresholds and other “strictures of the [HSR process]” decried by the statement. While those thresholds now require filings from more than the “150 largest” each year expected by Rep. Rodino, he certainly never expected that all the transactions of a party might require a filing. And the “brinksmanship we encounter during HSR reviews” from the HSR timelines that the FTC wants to avoid are exactly what Rep. Rodino expected when he (incorrectly) predicted that “lengthy delays and extended searches should consequently be rare.”
So, under the new policy statement, some unknown number of companies and industries will be subject to more and longer reviews of their transactions than intended by Congress. That result seems wrong and inconsistent with the policy choices made by elected representatives; however, if you think most mergers are bad and three appointed Commissioners know all that is best for the economy, that result might be a feature and not a bug.