October 14, 2021
W. Todd Miller, Donald I. Baker, Erin Glavich, and Lucy S. Clippinger
The past three months have seen a variety of pronouncements from voices throughout the Biden Administration about the need to reform antitrust enforcement and, in particular, the need to reform the framework for assessing mergers and acquisitions. Tim Wu, the special assistant to the president for technology and competition, recently confirmed that President Biden believes that the United States has endured a “failed experiment” in its economic approach to antitrust enforcement, an over-reliance on market forces to correct behavior by those with market power, and an over-emphasis on the “consumer welfare” standard in assessing the impact of transactions and potentially anticompetitive behavior.
Similarly, Lina Khan, chair of the Federal Trade Commission (FTC), recently issued a memorandum setting out her enforcement priorities and explaining that one of her policy priorities is “to address rampant consolidation and the dominance that it has enabled across markets”. To this end, Chair Khan notes that the FTC “need[s] to find ways to deter unlawful transactions”.
Over the past couple of months, the FTC has taken steps to put words into action, including announcing the use of pre-consummation warning letters (for further details please see “FTC changes to merger review process: lifeboat or policy shift?“).
More recently, the FTC implemented additional changes to the merger review process. These changes came by way of a blog post by Holly Vedova, the new director of the bureau of competition, which was posted the same day that she was formally appointed. It was titled “Making the second request process both more streamlined and more rigorous during this unprecedented merger wave” (the Statement) and sets out several changes to the “second request” phase of a merger investigation.
Statement key lessons
It is not clear how the changes will actually streamline the process or otherwise relieve the FTC of the burdens of the tremendous number of filings that it is receiving, especially if the FTC re-examines some prior transactions that should have been challenged or resulted in ineffective relief. While the broadening of investigations may slow down consummation of transactions, it will also tax the FTC’s resources because such an examination will require additional work by FTC investigators.
The Statement and other activities surrounding the merger review process at the FTC reflect the convergence of at least two key factors:
Biden antitrust agenda
President Biden has made no secret of his desire to promote more competition in the economy and aggressively pursue antitrust enforcement. From his early appointment of Professor Timothy Wu to be a special assistant for technology and competition policy, to his appointment of Professor Lina Khan to chair the FTC, to his Executive Order on Promoting Competition in the American Economy (the Order), the President has made antitrust enforcement a central feature of his Administration.
The Order criticizes the level of concentration that has resulted from industry consolidation and argues that the high concentration levels in certain industries have resulted in weakened competition. This in turn has widened “racial, income, and wealth inequality.” The Order lays the blame in part on federal inaction, and notes that this has impacted not just consumers, but also workers, farmers and small businesses. The Order continues and suggests that particular attention needs to be focused on labor, agricultural, healthcare, Internet platforms and repair markets. It also urges vigilance with regard to foreign cartels.
The philosophical approach underpinning the Order can be seen in the memo dated 22 September 2021 that Chair Khan sent to the other commissioners and FTC staff (the Khan Memo). While the Khan Memo covers a lot of ground, a key concern appears to be an overly lax merger policy of prior administrations stemming from the fact that, “[p]rior [merger] guidelines have represented a somewhat narrow and outdated framework for assessing mergers” and the agency needs to set “the foundation for more effective and empirically grounded enforcement work”. Revisions to the merger guidelines will be “undertake[n] in conjunction with [the US Department of Justice (DOJ)]”. Chair Khan offers several “key principles that should animate the agency’s approach across its work”. These include taking a more “holistic approach to identifying harms”, “targeting root causes rather than looking at one-off effects”, “invest[ing] in a more rigorous and empiricism-driven approach to understanding market behaviors and business practices”, being “forward-looking in anticipating problems and taking swift action” and “further democraticiz[ing] the agency”. In conjunction with the circulation of the Khan Memo, the FTC announced that it was withdrawing the Vertical Merger Guidelines, which were issued in conjunction with DOJ in 2020.
Director Vedova wasted no time after her appointment to make her first policy pronouncement with the Statement. The Statement adopts the more “holistic approach” championed by Chair Khan and echoes the “concerning evidence of anticompetitive transactions that either were not challenged by the antitrust agencies or that were resolved through remedies that failed.” The stated purpose of the Statement is to announce, “several changes to how we [the FTC] investigate mergers and acquisitions”. To put these changes in context, a brief review of the merger review process in the United States is in order.
US merger review process
The HSR Act 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 with the FTC and DOJ describing the transaction 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 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.
As those practicing in the area know well, a second request tends to be both broad and detailed and includes both interrogatories and document requests. Responding can take private parties many months and thousands of hours of file searching, interviewing relevant personnel, and organizing data, documents and responsive information.
The Statement is intended to change some of the practices associated with second request investigations, but the changes boil down to three key features:
Parties to a transaction will only be impacted by the first change concerning broader investigations in areas such as labor, cross-market competition and the impact of investment firms. The Statement says the following:
[O]ur second requests may factor in additional facets of market competition that may be impacted. These factors may include, for example, how a proposed merger will affect labor markets, the cross-market effects of a transaction, and how the involvement of investment firms may affect market incentives to compete.
The introduction of labor market considerations into the merger review process follows from the Order and Chair Khan having stressed the need to “recogniz[e] that antitrust…violations harm workers and independent businesses as well as consumers”. Chair Khan provided further details beyond her Memo on the FTC’s increased focus on competitive harm to labor markets in a recent letter to the chairs of a congressional subcommittee. Merging parties can, therefore, expect second requests to focus on non-compete clauses, deferred or contingent compensation, other terms in the parties’ employment contracts, as well as local labor markets and any anticipated reduction in competition in the market for employees. (And the DOJ can be expected to do the same.) Parties should also anticipate that labor unions will more often oppose mergers and that some non-unionized employee representatives may also urge the FTC to reject a transaction where there is an efficiency defense that includes employment cost savings.
As part of this broader examination, the FTC is committed to examining cross-market effects. Cross-market effects refer to the notion that a merger that links two formerly distinct markets may allow the combined entity to raise prices in those markets. This concept is often considered in the analysis of healthcare transactions.
At the same time, the FTC will attempt to assess the impact that private finance and hedge funds may have on incentives to compete. There has been a fascination with this issue for quite some time, but generally limited to the role that simultaneous minority shareholdings in two or more competing companies might have on those competitors’ incentives. The FTC appears to be broadening the scrutiny to include how the private finance and hedge fund firms disinvest and incur substantial debt, all potentially weakening the company acquired. Such an issue was specifically referenced in the Khan memo, where she notes that “the growing role of private equity and other investment vehicles invites us to examine how these business models may distort ordinary incentives in ways that strip productive capacity and may facilitate unfair methods of competition and consumer protection violations”.
The FTC also recently expressed(1) an intent to focus more on the intersection of data privacy and competition – another example of its increased emphasis on cross-disciplinary work.
These changes will require the FTC to revise the “Model second request” that is currently available on the FTC website and the Statement indicates that it will be changed in the near future. While it will take the FTC to work out the practicalities of the reforms, the Statement’s substantive and procedural changes all point to a need for increased and early negotiations between the parties and the FTC.
The Biden Administration is not alone in clamoring for more aggressive antitrust enforcement. It is one of the few areas of bipartisan agreement, particularly as to prominent technology companies. Indeed, some of the changes announced by the FTC seem aimed primarily at technology companies and conglomerate mergers. For example, by expanding investigations to include a deep dive on cross-market effects of nascent and complementary businesses and an investigation of the role of Wall Street hedge funds and private equity, the FTC may hope to deter some merger proposals involving those matters.
Deterrence and leverage may be the FTC’s ultimate goals. As mentioned, it is hard to imagine how expanding enforcement activities is likely to alleviate the pressures of increased merger filings. Furthermore, the FTC does not act alone. Yet its planned enforcement expansion seems potentially myopic, with virtually no reference to the need to allocate merger investigations and cases with the DOJ as well as the necessity to coordinate international enforcement efforts with the European Commission and other major foreign agencies (particularly in relation to the globally dominant digital platforms to which Chair Khan has displayed prior interest).
Moreover, substantive changes will eventually require buy-in from the courts, who will be the ultimate reviewers of the FTC actions. Until the FTC can convince judges to modify the consumer welfare standard and other economic principles underpinning most decisions of the past four plus decades, the FTC risks having much of its expansive agenda stymied.
In the meantime, the FTC under Chair Khan will be an ongoing source of new ideas, changes, uncertainties and risks.
(1) Further information is available here.
This content was originally published on October 14, 2021, via the International Law Office (ILO) newsletter. It can be found here: Merger review: FTC attempts to correct “failed experiment”
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