The Biden Administration has sent strong signals of its desire to ramp up aggressiveness in merger enforcement, but a recent flood of filings has caused the Federal Trade Commission (FTC) to announce a couple of changes to its usual merger review process even before it could truly implement any such increased enforcement. While the changes to the merger review process are more modifications of form than substance, they seem partially aimed at emphasizing the agency’s need for additional funding and staff. They may also be an attempt to gain more time to contemplate and implement new policies to invigorate merger enforcement and perhaps realign merger law towards a more progressive view.

Earlier this year, the FTC suspended the grant of “early terminations” of the statutory waiting period, a move that seems unlikely to improve efficiencies or reduce burdens for FTC staff. More recently, the FTC announced that it would notify parties to certain transactions that the FTC has not been able to complete its investigation and therefore consummation of the transaction is at the risk of a later FTC challenge. But post-consummation challenges have always been a risk under US law to companies making acquisitions or entering into joint ventures, as is evidenced by cases recently pursued by the FTC. While the announcement does not have much substantive significance, it may signal an uptick in the number of post-consummation FTC challenges.

Furthermore, the FTC is simultaneously facing challenges to its existence, both in the courts through a constitutional challenge, as well as in the court of public opinion. The FTC’s actions, and those moving against the FTC, bring an element of chaos and unpredictability to the process beyond the normal uncertainties of merger review.

Key lessons

The current merger review situation at the FTC suggests several takeaways:

• The increase in transaction filings will keep the FTC overwhelmed and unable to fully investigate all transactions that may raise competitive concerns even if it is able to increase its staffing levels as it has requested of Congress. And a change in enforcement philosophy towards a more aggressive and/or progressive agenda will only exacerbate the problem. Delaying full investigations until after consummation will not alleviate the problem, indeed it will arguably make things worse as the FTC will lose the ability to take full advantage of the Hart-Scott-Rodino (HSR) Antitrust Improvements Act investigatory procedures and timing.
• The FTC can still delay transactions that raise apparent concerns by issuing a second request (discussed below) which will put the onus on the parties to the transaction to comply with that request at substantial cost and burden in order to get the waiting period restarted. Significant pressure from the FTC to enter into an agreement to define the timing for such investigations may also be anticipated.
• While the nominal number of transactions that are subject to a full-blown second request investigation will undoubtedly increase, it will be difficult for the FTC to increase the percentage of transactions investigated with its current staffing limitations. The FTC is already committed to substantial post-consummation litigation including its recently refiled Facebook case and the Illumina/Grail administrative trial that is underway.
• All of this portends a serious threat to the more activist enforcement agenda. The FTC will need to spend significant intellectual capital on case selection and on improving the efficiency of the merger screening process if it hopes to have an impact on merger review law and process as a whole.
• In the meantime, the FTC’s merger review changes have caused confusion and uncertainty in the legal and business worlds through its signaling of a potential increased risk of post-consummation investigations and challenges. This may chill merger activity, and one cannot rule out that such a result is a desired outcome by the FTC. If true (which is unlikely), it would be a ham-fisted attempt. Potential merging companies may be advised that the time is ripe to attempt more risky transactions because the FTC is overwhelmed, and post-consummation investigations tend to be lengthier and more difficult for the agency. Post-consummation challenges have the additional practical problem of figuring out how to restore the competition that was allegedly lost through the challenged transaction.

Background

The HSR Act of 1976 (as amended) created pre-merger notification in the United States. It requires parties contemplating certain types of transactions that meet prescribed size of party and transaction thresholds to file a notification form describing the transaction with the FTC and the United States Department of Justice (DOJ) and to wait a prescribed waiting period before consummating the transaction.

After the filing, the HSR Act contemplates an initial waiting period (generally 30 days) to allow the agencies to determine whether the DOJ or the FTC wants to investigate the proposed acquisition more thoroughly. If one of the agencies decides that it does wish to investigate, it will issue a so-called “second request” seeking a substantial amount of data, information, and documents from the parties to the transaction. The waiting period does not expire in such a case until both parties have “substantially complied” with the second request. However, the parties can request that the initial waiting period be shortened. These “early terminations” are granted when neither agency sees a need for further investigation or when the inquiry to be undertaken can be completed very promptly.

In the last year, premerger filings appear to have increased substantially. For the current fiscal year (October 2020 to July 2021), there have been 2,916 transactions filed. This compares to pre-pandemic figures of 2,111 filed transactions in the 2018 full fiscal year and 2,089 filed during fiscal year 2019. There were only 1,701 transactions filed during the pandemic-affected 2020 fiscal year.

A large percentage of transactions are traditionally granted early termination. In the 2019 fiscal year, 72% of transactions were accompanied by a request for early termination, and for those transactions, early termination was granted about 73.5% of the time, slightly lower than in previous years. This is compared to cases that require additional review: historically, under 4% of transactions are subject to a more fulsome investigation under the so-called second request process by either the FTC or the US Department of Justice.

Long-term suspension of early terminations

Earlier this year, the FTC announced it was suspending the grant of early terminations under the HSR Act because of the increase in premerger filings. While it was explained at that time that the suspension was intended as a short-term solution, it appears that the suspension is still in effect. Only five grants of early termination have been made since mid-January 2021.

The ongoing suspension is somewhat puzzling from a practical standpoint. There are generally two types of transactions for which early termination may be granted:

• those that do not appear to raise any competitive concern; and
• those that raise some questions meriting further inquiry, but which can be resolved during the initial waiting period. Presumably, early termination could still be granted for those transactions in the first category – where there is no apparent competitive concern – while denying requests for early terminations for those transactions that require further preliminary investigatory work.

FTC’s blog posting

In a curious policy pronouncement by blog post, the FTC announced on August 3, 2021, that it would “adjust” its merger review process to address the surge in premerger filings under the HSR Act. The FTC indicated that it was inundated with premerger filings, and it suggests that it has not been able to complete its investigations within the statutory timeframes. It has therefore begun sending letters to the parties to certain proposed mergers advising them that the FTC has not completed its non-public investigation of the proposed transaction and that the parties close at the risk of the FTC taking later action.

The blog post falls far short of providing answers to the obvious questions. For instance, how do the letters help the FTC manage the transaction upturn? The FTC has always been able to challenge consummated transactions. Clearance during the HSR Act process is not an approval of a transaction conferring immunity from government or private action, nor is it the same as a “no action” letter or similar assurance that the government would not pursue a case.

The FTC has not been shy about pursuing post-consummation transactions. A couple of the most notorious in relatively recent times involved the acquisition of Highland Park Hospital by Evanston Northwestern Healthcare and the acquisition of Pitt-Des Moines by Chicago Bridge & Iron Company. In the first instance, the FTC challenged that transaction four years after the acquisition had closed and it resulted in three and a half years of administrative litigation. In the latter, the FTC challenged the transaction in an administrative proceeding shortly after it was consummated. Importantly, the parties had closed the transaction while the FTC investigation was pending. The Chicago Bridge matter resulted in five years of administrative litigation, followed by an appeal upholding the FTC’s divestiture order.

Without more information about the circumstances in which the letters will be issued, it is hard to determine what purpose the blog notice served. Is the FTC signaling that it will be seeking fewer preliminary injunctions? Is it a thinly veiled plea for additional funding and staffing? Perhaps both the blog post and the suspension of early terminations reflect an FTC that has yet to determine how the Biden Administration’s desire to have a more aggressive and progressive antitrust policy will impact merger review.

However, if the blog post is simply meant to serve as a warning that merging parties should anticipate more post-consummation merger challenges, the FTC’s recent case against Facebook may serve the same purpose. And in Illumina/Grail, the FTC’s reasonable but ultimately thwarted reliance on a European investigation seems to have forced the FTC’s hand into another post-consummation challenge.

FTC v Facebook

On August 19, 2021, the FTC filed an amended complaint in its action against Facebook, attempting to cure the pleading defects that led to a dismissal of the FTC’s first complaint. The action is notable because it is essentially a reconsideration of the FTC’s long-ago clearance of Facebook acquisitions of Instagram, which occurred in 2021, and WhatsApp, which occurred in 2014 – two competitors that Facebook acquired while they were still nascent threats.

While there is no doubt that the FTC has the power to seek divestitures in consummated transactions, the Facebook challenge is notable because of the length of time that has passed since the acquisitions were consummated. In fact, one commissioner⁽¹⁾ pointed to this lengthy period, as well as Facebook’s intervening investment in Instagram and WhatsApp, as the reason that he voted against filing the original complaint against Facebook. That commissioner’s position appears consistent with the FTC’s position in the earlier Evanston case where the FTC decided not to pursue divestiture because of the four-year period between consummation and the commencement of the FTC challenge during which time the two entities had been operating as one.

However, a lengthy merged period creating concerns about making a distinction between the two entities is not an issue in another case detailed below, in which the FTC will be challenging a consummated merger. But in this case, the FTC did not vote to pursue a consummated merger – its hand was forced by parties that chose to consummate their transaction during the FTC’s challenge.

FTC v Illumina

The FTC is now engaged in post-consummation litigation over Illumina’s acquisition of Grail. That acquisition was subject to federal court and administrative challenge by the FTC, but the FTC had dropped its federal court litigation in light of actions by the European Commission and was proceeding with administrative litigation that began on August 24, 2021.

As the parties were preparing for that trial, Illumina abruptly announced on August 18, 2021, that it had consummated the transaction with Grail, subject to holding Grail separate and apart from Illumina’s other operations. The news was surprising to most because, under the European Commission’s merger control regulations, parties to a merger investigation have “standstill obligations”, prohibiting the consummation of the transaction before it has been cleared by the European Commission. The FTC had explained in seeking dismissal of its preliminary injunction case that, given the pendency of the European Commission investigation, Illumina and Grail were prohibited from closing, obviating the need for an injunction. In fact, the FTC explained that in a previous case, a US federal judge opined that seeking a preliminary injunction to halt a merger while a European Commission merger control investigation was pending would likely be improper, as there would be no imminent risk of the transaction closing justifying the injunction even though the statutory waiting periods in the United States had expired.

Illumina’s surprise announcement explains that it believes the European Commission lacks jurisdiction to investigate the merger, leaving no lawful bar to complete the acquisition. On this point, Illumina had filed an action in the European General Court challenging the European Commission’s jurisdiction. The European Commission had taken jurisdiction under Article 22 by referral from one or more member states, and Illumina asserts that was improper because Grail does not do business in the European Union. The action follows a similar challenge by Illumina in the Dutch courts to the Dutch referral to the European Commission; the Dutch court rejected Illumina’s position. The European General Court has yet to rule and Illumina appears to be playing with fire, risking that the Court might disagree with its position. In a similar circumstance in 2018, the European Commission fined a French telecommunications company €125 million after it closed on a challenged merger without regulatory approval.

Given the ongoing standstill obligation and the risk of hefty fines, Illumina’s decision to move forward with the merger likely caught both the European Commission and the FTC by surprise, even though Illumina had communicated to the FTC that it did not believe that the European Commission action prohibited consummation. Indeed, the European Commission has announced that it will investigate whether Illumina’s action breached its standstill obligations. Regardless, Illumina’s move appears to have forced the FTC’s hand and changed the nature of the FTC’s current administrative case – following the merger announcement, the FTC suddenly has an additional post-consummation merger challenge on its hands.

Comment

The FTC is not hiding the fact that it needs more resources to do the job that the Biden Administration has tasked it. Yet, its current moves seem mismatched to the end goal of more and/or better enforcement. One could argue, if anything, it may encourage parties to take a chance that the FTC will not have the time or capacity to catch everything. Companies would be prudent, however, to proceed with mergers and acquisitions mindful that transactions may provoke a challenge before or after consummation. This may put some additional pressure on the parties during the negotiations over any transaction to capture and allocate the apparent risk in the transaction-relation documents.

Endnotes

(1) Further details are available here.

This content was originally published on August 26, 2021, via the International Law Office (ILO) newsletter. It can be found here: FTC changes to merger review process: lifeboat or policy shift?

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