On July 9, 2021, President Biden signed an “Executive Order on Promoting Competition in the American Economy” (EO) directing, among other things, that the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice (DOJ), the federal agencies charged with enforcing antitrust laws, reevaluate the federal government’s approach to and review of mergers and acquisitions subject to federal oversight.
The directives in the EO applicable to review of mergers foretell the most significant changes to the federal government’s approach to merger review and enforcement of federal antitrust laws in decades, and its effects are already being seen and felt throughout the U.S. merger and acquisition world.
To fully appreciate the magnitude of the EO’s proposed changes to merger antitrust review, we must briefly visit and understand how the FTC and DOJ have approached this review for the past several decades. Since the late 1970s, the prevailing philosophy guiding federal regulators when reviewing mergers for anticompetitive conduct is known as the “Chicago School,” earning its name from the laissez-faire approach to antitrust regulation espoused by a group of University of Chicago professors. The Chicago School views mergers as inherently pro-competitive, as they create economic efficiencies and facilitate growth, innovation and lower prices (bigger is not necessarily bad), and vertical mergers (e.g., between participants in the same supply chain for a common product or service) are rarely challenged. Under the Chicago School, the “consumer welfare” standard is used to gauge whether a merger is anticompetitive to the point of being unlawful under federal antitrust laws. The consumer welfare standard focuses almost exclusively on the impact a merger has on consumer prices – lower prices mean competition is thriving, at least as the theory goes. Further, not every price increase as a result of an acquisition is unlawful under the consumer welfare doctrine – only the most egregious conduct impacting consumer prices is unlawful, such as price-fixing, market division, price discrimination or other conduct with the intent to negatively distort consumer prices.
President Biden has been critical of the Chicago School since his days in the Senate and views the Chicago School as a failed experiment in hands-off regulation of the market- place. According to its critics, the Chicago School has led to unprecedented market consolidation, which harms consumers, employees, small businesses, nascent competitors and other impacted constituencies. President Biden has appointed a number of regulators critical of the Chicago School and issued the EO approximately six months into his first term in office, reflecting the high importance he places on the issue of improving competition in the U.S. economy and revamping the antitrust regulatory enforcement environment. The thrust of the EO is to abandon the Chicago School and consumer welfare doctrine, in favor of a more proactive and aggressive approach to merger review and enforcement of antitrust laws.
The EO contains 72 discrete directives effecting more than 12 federal agencies and their respective regulatory environments, including many beyond antitrust regulation. It identifies four industries that have seen significant market consolidation for particular antitrust and anti-competition scrutiny – agriculture and food, information technology (e.g., Big Tech), healthcare and telecommunications. Companies in these industries can expect to see, and in some cases have already experienced, a more aggressive review of proposed mergers from the FTC and DOJ. Since the EO was signed, the FTC and DOJ have begun to implement some of the changes directed by the EO, notably the following:
- The FTC has begun issuing “close at your own risk” or warning letters to merger parties. These letters inform parties that, although the 30-day statutory merger review period has expired, the agency has not completed its review and the parties may proceed with closing at their own risk. While these letters have caused some additional consternation for practitioners and their clients, they don’t reflect any real change to policy as the FTC already has the right to challenge a transaction at any time, including after consummation.
- On January 18, 2022, the FTC and DOJ announced a comprehensive review of their jointly issued horizontal and vertical merger guidelines. These guide- lines, initially issued in 1968 and 1984 respectively and updated several times since, are meant to provide practitioners and parties insight into the merger review process and analysis undertaken by the FTC and DOJ and are heavily relied on by practitioners to structure mergers, draft deal documents and advise clients on antitrust law compliance. The FTC opened a public comment period on changes to the merger guidelines and has embarked on a “listening tour” to hear from interested constituencies in each of the four specifically identified industries about the impact of market consolidation and the need for changes to the merger guide- lines. Although the existing guidelines have not yet been replaced, the FTC’s actions to date indicate the likelihood of significant changes to the guidelines lines in the future and are causing considerable uncertainty for merger parties and practitioners.
- The FTC and DOJ are engaging in more “tire kicking” of mergers that involve any horizontal over- lap or near-horizontal overlap, and vertical mergers are receiving more attention than in the past. The agencies have been contacting parties that fall within the foregoing merger categories to informally gather more information short of issuing a formal “second request” for information – an indication of increased scrutiny and a potential challenge to a merger.
- The FTC has suspended the practice of granting requests for the early termination of the statutory 30-day waiting period for the FTC or DOJ to review a merger – requests that were regularly granted prior to their suspension.
- The FTC appears to have suspended the practice of issuing informal interpretations of the guidelines and regulations to parties as no such interpretations have been issued since the fall of 2021. Prior to this time, the FTC’s Premerger Notification Office (PNO) would provide informal guidance to practitioners on unusual merger structures or fact patterns to assist parties in determining whether a premerger notification filing (often referred to as an HSR filing) is required. The FTC advised parties to make premerger notification filings if there is any question as to whether filings are required by the subject merger.
- In August 2021, the PNO announced that debt payoffs (a target’s debts paid off at closing) need to be included in the calculation of the transaction price for purposes of determining whether a merger triggers premerger notification filing obligations. Historically, debt pay offs were deducted from the transaction price, meaning this will result in more mergers reaching the transaction price threshold for HSR filings. The transaction price threshold for 2022 has been set at $101 million and is updated by the FTC annually.
Although it remains to be seen when and the extent to which the FTC and DOJ will formally alter the merger guidelines or make other permanent changes to their antitrust enforcement approach, the combination of the EO and foregoing actions certainly seem to indicate that a major overhaul is in the works. Practitioners and merger parties should expect to see continued increase in the scrutiny of mergers beyond those typically targeted for review or challenges. Practitioners should also take a closer look at mergers that appear to be on the cusp of triggering HSR filings, and parties should consider consulting with experienced antitrust counsel early in a transaction to aid in identifying potential antitrust issues and help navigate the evolving enforcement landscape.