On Tuesday, October 26, 2021, the Federal Trade Commission (FTC) issued a policy statement announcing its intent to “routinely” require merging parties subject to Commission orders to obtain the FTC’s approval before closing certain future transactions. This announcement resurrects and expands a policy the Commission eliminated a quarter century ago—shifting the burden of proof onto parties who have engaged in prior M&A that the FTC has deemed problematic. The policy statement was voted out in a 3-2 party-line vote, with Democrat Commissioner Rohit Chopra, casting a deciding vote despite having stepped down from the Commission weeks prior. The two dissenting Commissioners (both Republicans) published a scathing, multi-layered dissent noting that that the policy also allows the FTC to avoid the procedural limitations of the Hart-Scott-Rodino Act (HSR).
Be Prepared: The 2021 Prior Approval Policy Statement
The prior approval policy statement explains that the FTC will “routinely requir[e] merging parties subject to a Commission order to obtain prior approval from the FTC before closing any future transaction affecting each relevant market for which a violation was alleged” and that the prior approval requirements be in place for a minimum of 10 years. The prior approval requirements will apply not only to the companies making the divestitures, but also to all buyers of divestiture assets.
The Policy ostensibly has three objectives:
- Deterring “deals that should have died in the boardroom,” especially by “acquisitive” firms.
- Preserving FTC resources by allowing the agency to avoid the timeframes required by the HSR Act, for instance, encouraging merging parties to abandon transactions midway through review.
- Detecting anticompetitive transactions that are not obligated to be reported pursuant to the HSR Act.
The policy reaches even further, noting that the Commission may elect to pursue a prior approval order against parties that do not unilaterally abandon a transaction until after the FTC has filed a complaint to challenge the transaction, and that if the Commission believes that stronger relief is necessary, it reserves the right to seek a prior approval provision that covers product and geographic markets beyond those directly implicated by the merger. In assessing whether to require prior approval of transactions affecting other markets, FTC stated that it will consider the following factors:
- Nature of the transaction, such as its similarity to other previously challenged transactions involving the same assets or parties;
- Level of market concentration, including increased concentration over the previous 10-year period;
- Degree to which the transaction increases concentration;
- Degree to which one of the parties pre-merger likely had market power, noting that there may be transactions raising competitive concerns where the target is a nascent or fringe competitor with low or no market share;
- Parties’ history of acquisitiveness, meaning whether either party has a history of, or a desire to enter into acquisitions in the same, related, or adjacent markets; and
- Evidence of anticompetitive market dynamics, referring to market structures that facilitate anticompetitive conduct.
The policy statement also specifically states that the statutory timing limitations of the HSR Act would not apply to the FTC’s review of transactions requiring the FTC’s prior approval.
Into the Unknown: Practical Implications of the New Policy for Companies Considering Transactions
The policy statement appears to be a direct response to criticism from some quarters that the US antitrust agencies have historically underenforced antitrust laws. Going forward, merging parties should anticipate that prior approval provisions will be the FTC’s default position for merger consent orders—at least during the terms of the sitting Democratic Commissioners.
While the FTC normally cannot obtain an order blocking a transaction until it can prove that the transaction is anticompetitive, the new policy shifts the burden of proof so that the merging parties must establish that future transactions are not anticompetitive. Moreover, the policy statement creates significant uncertainty as to the legal standards the FTC will apply in determining whether to grant or deny approval of a transaction or how long the FTC will take to make its determination. Indeed, the FTC considers it a feature of its new approach that the agency will not be constrained by the waiting periods outlined by the HSR Act.
In addition, the FTC is not necessarily bound by the substantive standards of Section 7 of the Clayton Act. Failure to adhere to a prior approval provision of a consent order—for instance, by closing a transaction subject to the provision before Commission approval is obtained—would violate the existing consent order regardless of whether the transaction is deemed anticompetitive.
Going forward, companies considering transactions that may be investigated by the FTC are well advised to engage antitrust counsel early in order to build a legal strategy to minimize the potential negative implications of prior approval provisions. Additionally, companies will want to consider how the policy’s incentives for walking away from transactions will impact the contractual provisions they are will to agree with respect to US merger control obligations.