On October 25, 2021, a deeply divided FTC voted 3-2 to enact a major policy change relevant to every party involved in settling a merger investigation with the FTC. Earlier this year, the FTC signaled its intent to bring back an old practice of mandatory prior approval and notice provisions in consent orders, a policy that was suspended over 25 years ago during the Clinton administration, and expand it in several ways.
The new FTC policy means that parties settling a merger investigation with the FTC can expect (at minimum) a ten-year post-settlement period, during which the parties must seek the FTC's prior approval to pursue a transaction in a directly affected market (or even an indirectly affected market) from the transaction covered by the FTC order. The same prior approval requirements also will apply to any divestiture buyers of a business or assets looking to sell them within ten years of the FTC consent order.
Back to the Future – Overturning a Decades-Long Practice
Before 1995, it was routine for the FTC to use prior approval provisions broadly in consent agreements with merging parties. These provisions "required all companies that had violated the law in a previous merger to obtain prior approval by the FTC for any future transaction in at least the same product and geographic market for which a violation was alleged."1
In 1995, the FTC suspended this broad practice via its 1995 Policy Statement on Prior Approval and Prior Notice Provisions2 because the FTC found that requiring prior approval in every consent order was costly for companies subject to the requirements, and the notification requirement of HSR would suffice to adequately prevent anticompetitive harm.3 The 1995 policy statement left some room for the use of prior approval provisions "if the Commission determines there is a 'credible risk' that the respondent might 'engage in an otherwise unreportable  anticompetitive merger.'"4
Fast forward to July 21, 2021 when the FTC's longstanding practice of narrowly imposing prior approval provisions was rescinded in a public meeting by a 3-2 vote along party lines.5 FTC Chair Lina M. Khan justified the action on repeat offenders attempting to engage in problematic deals in similar markets, and noted that FTC Staff were significantly under sourced amidst a surge of merger filings.6 The two dissenting Republican Commissioners expressed strong disapproval of the majority's repeal of the 1995 policy. Commissioner Wilson saw the policy change as unnecessary and seemingly vindictive, and noted that the FTC already used prior approval provisions with some frequency.7 Commissioner Phillips also dissented and likened the rescission to the creation of an "M&A tax on anyone who enters into a merger consent" and worried that it would deter parties from entering into consents with the agency in the first place.8
The FTC officially announced its policy change of course on prior approval provisions with its October 25, 2021 Statement of the Commission on the Use of Prior Approval Provisions in Merger Orders, advising the public that prior approval (and/or notice) provisions will be required in all future consent orders.9 Similar to Chair Khan's comments in July, the FTC claimed that this policy shift would help the agency prevent facially anticompetitive deals, preserve Commission resources, and detect anticompetitive deals below the HSR reporting threshold.10 Similar to the pre-1995 practice, the minimum period for the prior approval provisions will be ten years.11
Boldly Going Where None Have Gone Before – Greatly Expanding Prior Approval Beyond the 1995 Requirements
The FTC's new policy, however, goes far beyond merely reviving old practices in three key ways.
First, the FTC reserves the right to seek a "prior approval" order even if parties to a challenged transaction abandon the deal. The Statement indicates that the FTC could seek such an order even where the parties abandon a deal after the issuance of Second Request, but before the staff has recommended any enforcement action. Such decisions will be made on a case-by-case basis taking into account the timing of the parties' abandonment of the deal and amount of work done by the FTC.
Second, if the FTC determines that stronger relief is needed, it "may decide to seek a prior approval provision that covers product and geographic markets beyond just the relevant product and geographic markets affected by the merger."12 In making these determinations, the FTC will focus on the following six factors:
- Nature of the transaction. Whether the merging parties are attempting a transaction that is substantially similar to a previously challenged transaction.
- Level of market concentration. Whether the relevant market alleged is already concentrated, or has seen significant concentration in the past ten years.
- The degree to which the transaction increases concentration. Whether the transaction significantly increases concentration (note that "significantly increases" is left undefined).
- The degree to which one of the parties pre-merger likely had market power. Whether, pre-merger, one of the parties likely had market power.
- Parties' history of acquisitiveness. Whether either party to the transaction has a history of, or has indicated a desire to enter into, acquisitions in the same relevant market in related markets (i.e., upstream or downstream firms), or in adjacent or complementary products or geographic areas.
- Evidence of anticompetitive market dynamics. Whether the market characteristics create an ability or incentive for anticompetitive market dynamics post-transaction.13
Finally, the FTC's new prior approval policy goes beyond just the actual parties entering into consent agreements, but also extends to third-party buyers of divested businesses or assets. The FTC policy will require divestiture buyers to agree to a prior approval for any future sale of the divested business or assets for a minimum of ten years.14
A Zombie Vote and Bonkers Crazy – The Minority's Dissent
Notably, the FTC's policy announcement was made without notice to the two Republican Commissioners in the minority, whose dissent was made public on October 29, 2021, and needless to say, they were not happy with the new policy or the partisan gamesmanship from the other Commissioners:
"The 2021 Policy Statement represents yet another daft attempt by a partisan majority of commissioners to use bureaucratic red tape to weight down all transactions – not just potentially anticompetitive ones – and to chill M&A activity in the United States."15
Commissioners Wilson and Phillips were particularly upset by the majority Commissioners' maneuvers to avoid a stalemate on issuing the policy because of the recent departure of Commissioner Chopra.
"Today, two sitting commissioners join forces with a zombie vote cast weeks ago by the sitting Director of the Consumer Financial Protection Bureau (CFPB) to launch yet another broadside at the market for corporate control in the United States."16
Commissioners Wilson and Phillips expressed concern both with the substance of the policy as well as the procedure for promulgating it, pointing out that "[t]he policy at issue was announced without [two Commissioners] participation," nor the American public's participation, as the public was denied the opportunity to provide notice and comment to the new policy.17 Regarding the substance, they noted, "prior approval flips the burden of proof on its head" and "place[s] it on the merging parties rather than on the government," in addition to freeing the government from the HSR statutory timeframe, allowing the FTC to "take as long as it likes."18
As a result of this policy, Commissioners Wilson and Phillips "anticipate lengthy delays in deal review" and "more litigation."19 They further noted that the policy is punitive in nature, and meant to discourage mergers in the first place.20 Effectively, in their view, "[t]he Commission is thus raising the cost of solving problems for the purpose of stopping deals it has no reason to believe are illegal. That is bonkers crazy."21
The FTC recently flexed its new enforcement tool in In the Matter of DaVita, Inc. and Total Renal Care, Inc.22 Beyond ordering divestitures for dialysis clinics in Provo, Utah, transitional services support, and other typical consent provisions, the FTC imposed a requirement for DaVita to obtain prior approval from the Commission for any future acquisition of any ownership interests in any dialysis clinic in Utah,23 which "extends the coverage of the prior approval beyond the markets directly impacted by this merger."24
It should be noted that the DOJ Antitrust Division's most recent 2020 Merger Remedies Manual recognizes the utility of prior approval (and/or notice) provisions in certain situations, but its policy is more in line with FTC practice under the rescinded 1995 policy. The DOJ's position is that "[p]rior notice provisions may be required when there are competitors to the parties whose acquisition would not be reportable under the [HSR Act], and when market conditions indicate that there is reason to believe their acquisition may be competitively significant in the wake of the transaction."25 It remains to be seen, however, if the DOJ will follow the FTC's policy shift to a more aggressive use of prior approval provisions.
The Ripple Effect on Future Transactions
The FTC's recent move to restore and expand the prior approval policy "forces acquisitive firms to think twice before going on a buying binge because the FTC can simply say no."26 This new policy can alter merging parties' incentives for entering into a transaction in the first place, or agreeing to a consent agreement to settle with the FTC. In some cases, the FTC could achieve its goal of keeping merging parties from pursing transactions that the FTC sees as "clearly anticompetitive deals," but as Commissioner Phillips noted, the new policy could lead to an opposite effect—parties may be unwilling to enter into a settlement with the FTC, thereby leading to more merger litigation.27
It is more important than ever for companies to engage with antitrust counsel early and often in their deal planning process if they believe substantive issues may arise from a proposed transaction. In light of this drastic development, here are some takeaways for future deal-planning:
- Be Prepared for Even Longer Settlement Negotiations. Both buyers and sellers will need to account for additional deal uncertainty during negotiations. If substantive issues could arise with a proposed transaction, parties will need to be prepared to potentially factor in additional time to negotiate a remedy with the FTC, including time to find an adequate divestiture buyer who is willing to accept a ten year-constraint on its ability to sell the divested business or assets. Both parties also will be incentivized to take additional time to show the FTC that any prior approval provision should be restricted to only the relevant markets in the consent decree, and not beyond the relevant products and geographic markets affected by the merger.
- Finding a Divestiture Buyer May Be More Difficult. A party looking to acquire a business or assets as a divestiture buyer also needs to be aware that its ability to resell or dispose of the business or assets will be subject to a prior approval provision. This extension of prior approval to divestiture buyers likely will make an already difficult divestiture buyer approval process more arduous and make it more difficult for merging parties to find and locate a divestiture buyer in the first place.
- Be Prepared to Potentially Litigate. In a similar vein to building time into the merger agreement, parties may need to be more prepared at the outset to potentially litigate their deal. Litigation between private parties and the FTC may become more common.
- Fix-First Deals May Increase. Parties may be more likely to offer divestiture remedies at the outset to have a clearer picture of what prior approval provisions they may be agreeing to with the FTC.
- Carving Out Prior Approvals from Efforts Obligations. Private parties should consider carving out acceptance of prior approval provisions from the agencies from efforts obligations in the merger agreement.
- No Right to the HSR Process. If a party agrees to a prior approval provision in a consent order, any future transactions covered by the provision will not be entitled to the due process and timing afforded under normal HSR review. As illustrated in the DaVita matter, this could extend to future transactions even in indirectly affected markets beyond those directly affected in the initial transaction's consent order and to transactions that normally would not be reportable under the HSR Act. Parties looking to grow by acquisition will need to understand these risks and potential restrictions on future transactions if the transaction could be reviewed by the FTC and potentially subject to a consent order.
- Pro-Competitive Deals May Be Chilled. As a result of the FTC's policy, deal activity may be chilled, including ones that have pro-competitive benefits, like bringing new products to market.
The FTC's new prior approval policy upsets over twenty-five years of practice, and its likely effect will be to lengthen merger investigations and the time needed to settle with the FTC. Parties contemplating a transaction possibly subject to an FTC investigation will need to plan for and understand the potential implications of entering into an FTC consent order with prior approval provisions. Further, the discord among the FTC Commissioners is another troubling aspect of the new policy signaling that important shifts in FTC policy are being made without the benefit of careful debate by the full Commission.
1 Fed. Trade Comm'n, FTC Rescinds 1995 Policy Statement that Limited the Agency's Ability to Deter Problematic Mergers (July 21, 2021), https://www.ftc.gov/news-events/press-releases/2021/07/ftc-rescinds-1995-policy-statement-limited-agencys-ability-deter.
2 Fed. Trade Comm'n, Statement of Federal Trade Commission Concerning Prior Approval and Prior Notice Provisions (Policy Statement), issued June 21, 1995, 60 Fed. Reg. 39,745-47 (Aug. 3, 1995), http://ftc.gov/os/fedreg/1995/august/950803noticeandrequest.pdf.
3 Id. at 39,746.
4 Id.; see also Fed. Trade Comm'n, Frequently Asked Questions About Merger Consent Order Provisions, at Q.44–45 (last accessed on Nov. 10, 2021), https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/mergers/merger-faq#Prior%20Notice/Approval.
5 Fed. Trade Comm'n, FTC Rescinds 1995 Policy Statement that Limited the Agency's Ability to Deter Problematic Mergers (July 21, 2021), https://www.ftc.gov/news-events/press-releases/2021/07/ftc-rescinds-1995-policy-statement-limited-agencys-ability-deter.
7 Commissioner Christine S. Wilson, Oral Remarks at the Open Commission Meeting on July 21, 2021, at 8–11 (July 21, 2021), https://www.ftc.gov/system/files/documents/public_statements/1592366/commissioner_christine_s_wilson_oral_remarks_at_open_comm_mtg_final.pdf.
8 Commissioner Noah Joshua Phillips, Dissenting Statement of Commissioner Noah Joshua Phillips Regarding the Commission's Withdrawal of the 1995 Policy Statement Concerning Prior Approval and Prior Notice Provisions in Merger Cases, at 2 (July 21, 2021), https://www.ftc.gov/system/files/documents/public_statements/1592398/dissenting_statement_of_commissioner_phillips_regarding_the_commissions_withdrawal_of_the_1995.pdf. For example, a company under an FTC order may have to either bid higher to compensate the seller for uncertainty and/or a longer lead-time for approval, or be excluded from the bidding process altogether, which may end up chilling pro-competitive deals. Id. at 3
9 See generally Fed. Trade Comm'n, Statement of the Commission on the Use of Prior Approval Provisions in Merger Orders, (Oct. 25, 2021), https://www.ftc.gov/system/files/documents/public_statements/1597894/p859900priorapprovalstatement.pdf.
10 Id. at 1–2.
11 Id. at 2.
13 Id. at 2–3.
14 Id. at 3.
15 Commissioners Christine S. Wilson and Noah Joshua Phillips, Dissenting Statement of Commissioners Christine S. Wilson and Noah Joshua Phillips Regarding the Statement of the Commission on Use of Prior Approval Provisions in Merger Orders, at 2 (Oct. 29, 2021), https://www.ftc.gov/system/files/documents/public_statements/1598095/wilson_phillips_prior_approval_dissenting_statement_102921.pdf.
16 Id. at 1.
17 Id. at 1 n. 1, 2.
18 Id. at 3.
19 Id. at 3, 7.
20 Id. at 3–4.
21 Id. at 6.
22 See generally Complaint, In the Matter of DaVita, Inc., and Total Renal Care, Inc., FTC File No. 2110013, (Oct. 25, 2021).
23 Analysis of Agreement Containing Consent Orders to Aid Public Comment, In the Matter of DaVita, Inc., and Total Renal Care, Inc., FTC File No. 2110013, at 3 (Oct. 25, 2021),).
24 Fed. Trade Comm'n, FTC Imposes Strict Limits on DaVita, Inc.'s Future Mergers Following Proposed Acquisition of Utah Dialysis Clinics, (Oct. 25, 2021), https://www.ftc.gov/news-events/press-releases/2021/10/ftc-imposes-strict-limits-davita-incs-future-mergers-following.
25 U.S. Dep't of Justice, Merger Remedies Manual (Sept. 2020), https://www.justice.gov/atr/page/file/1312416/download (dedicating an entire section of the guide to the applicability of prior notice provisions); cf. U.S. Dep't of Justice, Antitrust Division Policy Guide to Merger Remedies (June 2011), https://www.justice.gov/atr/page/file/1312416/download (mentioning prior notice provisions only once in passing along with other potential conduct remedies).
26 Fed. Trade Comm'n, FTC to Restrict Future Acquisitions for Firms that Pursue Anticompetitive Mergers, Press Release (Oct 25, 2021), https://www.ftc.gov/news-events/press-releases/2021/10/ftc-restrict-future-acquisitions-firms-pursue-anticompetitive.
27 See Commissioner Noah Joshua Phillips, Dissenting Statement of Commissioner Noah Joshua Phillips Regarding the Commission's Withdrawal of the 1995 Policy Statement Concerning Prior Approval and Prior Notice Provisions in Merger Cases, at 2 (July 21, 2021), https://www.ftc.gov/system/files/documents/public_statements/1592398/dissenting_statement_of_commissioner_phillips_regarding_the_commissions_withdrawal_of_the_1995.pdf.
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