The Federal Trade Commission (FTC) and US Department of Justice (DOJ), on July 19, 2023, announced the release of proposed Merger Guidelines that may result in a wider range of mergers and acquisitions facing antitrust challenges in the US. The proposed Guidelines reflect a reversion to enforcement standards that have been out of favor for several decades and are generally more hostile to business combinations. This comes on the heels of the FTC’s recent proposal to dramatically change the requirements for pre-merger filings under the Hart-Scott-Rodino (HSR) Act. Together, these proposals represent a significant ratcheting-up of antitrust scrutiny of mergers in the US. Israeli companies engaged in or planning mergers or acquisitions in the US should pay close attention to these Guidelines.
The proposed document consists primarily of 13 Guidelines that the Agencies will consider when they evaluate the competitive effects of proposed mergers. Per the Agencies’ announcement, the purpose of the draft Guidelines is to clarify “several frameworks that the Agencies use to assess the risk that a merger’s effect may be substantially to lessen competition or tend to create a monopoly,” “explain issues that often arise when the Agencies apply those frameworks in several common settings,” and address “how the Agencies consider mergers and acquisitions that raise competitive concerns not addressed by other Guidelines.” Most critically for businesses considering merger and acquisition activity, the new Guidelines represent a marked break from recent practice, indicating a reorientation of US antitrust authorities towards a more aggressive, less merger-friendly enforcement posture.
The proposed Merger Guidelines differ from the current Guidelines and recent prior versions in a number of important ways:
Market concentration. The proposed Guidelines lower the thresholds at which the Agencies will view markets as highly concentrated. US antitrust enforcers utilize a measure of market concentration called the Herfindahl-Hirschman Index (“HHI”) as a datapoint in evaluating the potential for a horizontal merger to impact competition. The draft Guidelines continue the use of this measure, but greatly reduce the threshold for a presumptively anticompetitive merger. Under the draft Guidelines, a horizontal merger will be presumptively anticompetitive if (1) the post-merger HHI for the market for their products is greater than 1,800 – a reduction of seven hundred points from the threshold in previous Guidelines – and the merger results in a HHI change greater than 100; or (2) the merger results in a combined entity with 30% or more market share and a HHI change greater than 100.
Multiple and minority-stake transactions. The Guidelines bolster the Agencies’ recent efforts to challenge private equity transactions by expressly treating as relevant not just individual transactions, but also the cumulative effect of a pattern or strategy of acquisitions. The draft Guidelines also reflect the Agencies’ intent to closely scrutinize partial or minority ownership deals.
Probabilities. The revised Guidelines emphasize the Agencies’ enforcement authority to neutralize what they perceive to be future threats to competition. Section 7 of the Clayton Act prohibits combinations where “the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.” Although this language has long been the law, in the revised Guidelines, the Agencies now intend to rely heavily on it to justify their increased skepticism of the potential long-term effects of mergers and to grant themselves wide discretion to challenge mergers where the threat to competition may not materialize for years to come.
Theories of harm. Previously, the Agencies distinguished between competition concerns raised in the horizontal and vertical merger contexts, going so far as to issue separate guidelines for each type of transaction. The draft Guidelines blur these analyses, and greatly expand scrutiny of vertical mergers (ie, mergers between companies operating at different points in the supply chain).
Conglomerate/portfolio effects. The revised Guidelines incorporate the conglomerate or portfolio effects theory, which reverses long-standing views of mergers between suppliers of complementary products. In recent decades, such mergers have generally been seen as favorable to consumers when the combination would allow the merged company to bundle complementary products or broaden its offerings. The conglomerate effects theory – which is incorporated into the revised Guidelines – rejects that position and, instead, views the bundling of complementary products and the expansion of the gamut of a single firm’s offerings as potentially harmful to competition in the separate markets for those products.
Platform mergers. Reflecting the current administration’s heightened interest in the high-tech industry, the Guidelines specifically address the analysis of mergers that involve a “platform,” which they define as providing “different products or services to two or more different groups or ‘sides’ who may benefit from each other’s participation.” The Guidelines call for the agencies to analyze such a merger’s effects on competition between platforms, competition on a platform, and competition to displace a platform, calling attention in particular to the importance of considering network effects and conflicts of interest that may arise when a platform operator is also a participant on the platform.
Labor markets. Much has been written about the Agencies’ recent attempts to challenge what they consider to be antitrust abuses in labor markets (including by bringing criminal wage-fixing cases). The draft Guidelines reflect this priority in several ways, but most prominently in draft Guideline 11, which states that the Agencies will examine whether a potential merger involves competing buyers in the labor market (ie, employers) and if so, whether the merger will substantially lessen competition for employees.
“Flailing firm” defense. The law has long recognized the “failing firm” defense, which would allow for a merger to proceed even when it might harm competition, if the acquired firm faces the strong likelihood of failure, bankruptcy or reorganization would not save the business, and there are no buyers other than the available purchaser. Given the difficulty of each of these showings, the Agencies had sometimes allowed mergers to proceed based on a so-called flailing firm defense, which allowed parties to merge where the acquirer showed that, in the absence of the merger, the target’s competitive strength would sharply diminish. The draft Guidelines expressly reject this line of argument.
The draft Guidelines represent a break from the FTC’s and DOJ’s past practice and reflect regulators’ expansive view of their own enforcement authority as well as their enforcement priorities. The Guidelines are currently subject to a 60-day public comment period, which may or may not result in material changes.
Companies considering mergers and acquisitions should be aware of these Guidelines and sensitive to the new regulatory risks they pose in terms of transaction timelines and, potentially, ultimate outcomes. It is equally important to consider, however, that even when they go into effect, the Guidelines themselves do not carry the force of law. They are a reflection of the Agencies’ current priorities and approach – whether those are consistent with applicable laws is an open question to be resolved by the courts.
Learn more about the implications of the Guidelines by contacting any of the authors or your usual DLA Piper relationship attorney.