Key takeaways
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The Federal Trade Commission (FTC) says that it will now require merging parties to agree to prior approval provisions in all divestiture orders.
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For ten years, prior approval will be required before any acquisition can be concluded in a relevant market for which a violation was alleged. In addition, the FTC may in some circumstances require prior approval for transactions in markets outside of the relevant market in which harm was alleged.
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The FTC suggests it may seek prior approval provisions in remedial orders even if the parties abandon the transaction. (This would require the FTC to continue with administrative litigation, despite the parties’ abandonment, through trial, a Commission appeal, and through appeal to a U.S. Court of Appeals).
FTC votes to reinstate prior approval requirements for future acquisitions
In July 2021, the FTC voted 3-2, along party lines, to rescind its 1995 Policy Statement on Prior Approval and Prior Notices Provisions (“1995 Statement”).1 The 1995 Statement ended the agency’s practice of incorporating prior approval and prior notice provisions into Commission orders on proposed mergers. As explained by the FTC, by rescinding the 1995 Statement, the FTC “returns [] to its prior practice of routinely requiring 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.”2
FTC announces significant increase in use of prior approval provisions in merger divestiture orders
In its Prior Approval Statement issued on 25 October, the FTC announced that going forward, it intends to “includ[e] prior approval provisions in all merger divestiture orders for every relevant market where harm is alleged to occur, for a minimum of ten years.” In some cases, however, the Commission may decide to implement a prior approval provision covering product and geographic markets beyond those affected by the merger. The Prior Approval Statement provides a “non-exhaustive” list of factors the FTC will consider when making this determination. One factor is whether the merging parties are attempting a transaction that is “substantially similar to a transaction that was previously challenged by the Commission,” even if the parties previously abandoned that transaction. The FTC defines a “substantially similar” transaction as a transaction that includes some or all of the assets implicated in the prior challenged transaction. Also relevant is whether either party had been subject to a merger enforcement action in the same relevant market. Additional factors include (1) the level of market concentration; (2) the degree to which the transaction increases concentration; (3) whether one of the parties had market power pre-merger; (4) the parties’ history of prior acquisitions in the same relevant market and related markets (i.e., upstream or downstream firms) or in adjacent or complementary products or geographic areas; and (5) evidence of anticompetitive market dynamics.3 Buyers of divested assets in Commission merger consent orders also must agree to a prior approval for any future sale of assets acquired in the divestiture orders, for a minimum of ten years.
Notably, the Prior Approval Statement suggests the FTC may continue to seek a prior approval order even if the parties abandon the transaction. The agency explains that it is less likely to incorporate a prior approval provision into an order if the merging parties abandon their transaction prior to certifying substantial compliance with a Second Request or Civil Investigative Demand (in the case of non-HSR reportable deals). But if parties abandon after the Commission issues a complaint to block a merger, the Commission will determine on a case-by-case basis whether to continue to seek an order with a prior approval provision.
Analysis
The FTC’s Prior Approval Statement explains that the FTC is hoping that the more liberal use of prior approval provisions will discourage companies from moving ahead with “facially anticompetitive” deals, preserve Commission resources, and flag anticompetitive deals that fall below the Hart-Scott-Rodino (HSR) thresholds and do not trigger federal reporting requirements. Certainly, demanding prior approval provisions—which may extend beyond the relevant markets affected by the merger—will create uncertainty and increase the burden on merging parties. The effect could be that parties take more cases to litigation rather than agree to consent decrees with prior approval provisions that go beyond the scope of the challenged transaction. Moreover, the Commission’s suggestion that it may seek prior approval provisions even when parties abandon a merger would necessarily require the FTC to continue a litigation even after the parties abandoned the deal, using up important Commission resources on expensive litigation that is no longer needed to block the transaction at issue that allegedly has an imminent threat of harming competition. This provision, and others that stretch beyond the transaction at issue, could push more parties to litigate mergers that they would otherwise abandon. After all, if the FTC is going to litigate the issues in the case in order to secure a prior approval provision, then parties may be less willing to abandon the deal in the first place. The Commission appears to hope that these requirements result in less deal activity to begin with, but that is not at all certain.
References
3 The same day it issued its Prior Approval Statement, the FTC issued a proposed order requiring a proposed acquirer—a leading dialysis service provider seeking to acquire a series of dialysis clinics operated by a University—to receive prior approval before acquiring any ownership interest in a dialysis clinic anywhere in the relevant geographic market for a period of ten years. In addition, the FTC’s order “extends the coverage of the prior approval beyond the markets directly impacted by the merger.” The FTC deemed this broad application warranted on the basis of the proposed acquirer’s “history of fueling market consolidation for these life-saving services.” Federal Trade Commission press release, FTC Imposes Strict Limits on DaVita, Inc.’s Future Mergers Following Proposed Acquisition of Utah Dialysis Clinics (25 October 2021) available at https://www.ftc.gov/news-events/press-releases/2021/10/ftc-imposes-strict-limits-davita-incs-future-mergers-following?utm_source=govdelivery.
Authored by Chuck Loughlin and Leigh Oliver.
