Article

New merger guidelines greatly rewrite the framework for reviewing M&A transactions

Published Date
Jul 19, 2023
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On July 19, 2023, the Federal Trade Commission and Department of Justice Antitrust Division announced sweeping changes to how they review deals. The agencies published new “Merger Guidelines” that identify the competition concerns they are targeting, and the analytical framework they will use when reviewing M&A transactions under the antitrust laws. In issuing this new guidance, the agencies have effectively rewritten the standards employed by the two agencies and adopted by courts for decades. 

Key points

  • The FTC and DOJ propose a new agency presumption of illegality for mergers creating or involving a firm with over 30% market share, and other evidence that a merger enables “entrenchment” of a dominant firm.
  • As drafted, the new Guidelines would place vertical and horizontal mergers on the same level, departing from judicial precedent that recognizes consumer-benefits are more likely to flow from the integration of complementary business operations than from a merger of rivals.  
  • Labor markets take center stage. The agencies have shown increasing interest in analyzing the potential for lessened competition for employees, and this agency objective is now firmly articulated as a focus of their merger review.
  • The Guidelines introduce two new areas of focus, notably for serial acquisitions that are not in themselves anticompetitive and for minority interest deals.

The new Merger Guidelines follow the agencies’ June 27, 2023 announcement revamping the HSR notification process and the information required as a part of the notification1. Today’s announced draft Merger Guidelines tie into the procedural changes proposed last month, with a new and very broad-reaching substantive framework for analyzing mergers. 

This alert identifies some of the more significant changes proposed with the new Merger Guidelines.

The frequent changes to the agencies’ merger review guidelines, however, raises a broader question of predictability and credibility. Over the years, courts would often look to the guidelines for persuasive guidance. While the agencies have updated their merger guidelines since they were introduced almost 60 years ago, those changes were largely modest until the FTC and DOJ materially revised the merger guidelines in 2010. While this latest change not only reflects sweeping changes, it is also the third major change in less than 15 years. 

Presumption of illegality adopted for certain deals

The new Merger Guidelines would purport to find that a merger creating a firm with at least 30% market share would substantially lessen concentration. The new Merger Guidelines conclude such a deal would “present an impermissible threat of undue concentration regardless of the overall level of market concentration.”  

Entrenchment theory of harm

The new guidance adopts an “entrenchment doctrine” drawn from judicial opinions from the 1960s and 1970s. In doing so, the FTC and DOJ would also seek to identify deals that risk entrenching or extending a dominant position. The agencies propose to apply this vague concept in “mergers that are neither strictly horizontal nor vertical” with the agencies looking “to identify any connection suggesting the merger may entrench or extend the dominant position” of a merging party.

Single guidance for mergers involving rivals and mergers involving vertical or complementary parties

The Guidelines merge into one document agency guidance as to how they will review mergers, acquisitions and joint ventures that involve both competitors and other firms. As such, the FTC and DOJ issued in draft a replacement for the existing Horizontal and non-Horizontal Merger Guidelines. In doing so, the agencies have put non-horizontal mergers on the same level as deals involving competitors.  

This is in spite of judicial precedent finding that horizontal mergers are more likely than other deals to violate the antitrust laws. The new Merger Guidelines specifically call out mergers that would substantially lessen competition by creating a firm with “control over access to a product, service or customers that its rivals use to compete” with a “focus[] on the risk that the merged firm would have the ability and incentive to make it harder for rivals to compete and thereby harm competition.”  

While this attention reflects the framework articulated in prior guidance, here the agencies purport to find that a firm with “foreclosure” share above 50% poses a presumption of a substantial lessening of competition. In another departure from prior guidance, there is no articulated safe harbor for firms involving a lower market share.

Non-price considerations

The new Merger Guidelines introduce a new test for predicting unlawful mergers. Where prior guidelines have focused on the potential for a small but significant and non-transitory increase in price – the so-called “SSNIP” test, the new guidance extends this test. The agencies would purport to investigate the potential for an increase in price “or other worsening of terms” – naming this the “SSNIPT” test.

The Merger Guidelines appear to intentionally omit any explanation of this new test, explaining not helpfully that “[w]hat constitutes a ‘small but significant’ worsening of terms depends upon the nature of the industry and the merging firms’ positions in it, the ways that firms compete, and the dimension of competition at issue.”

M&A synergies draw heavy skepticism

One of the positive factors in a non-horizontal merger is the greater potential to realize efficiencies that benefit customers.  Analytically, the new Merger Guidelines would apply the same analytical skepticism of these efficiencies without regard to the type of M&A transaction involved. The FTC and DOJ explain, without citation, that the efficiencies cannot be used as a defense to illegality and observe that “Congress and the courts have indicated their preference for internal efficiencies and organic growth.

First guidance to consider labor markets in merger review

The agencies have increasingly requested and considered a merger’s effects on local labor markets. This would be institutionalized with the new Merger Guidelines. Specifically, the agencies purport to view labor markets the way they would other markets, and are looking to assess “the degree to which the merging firms compete for labor.” The June announcement of planned changes to the HSR Notification would provide a mechanism for production of employment market data at the time of the HSR filing.

Serial acquisitions

The previously announced changes to the HSR notification would also provide greater detail on prior deals, including deals that are not otherwise reportable under the Hart-Scott-Rodino Act. The new Merger Guidelines anticipate close scrutiny of these prior deals to evaluate the potential that an acquiring person has engaged in a series of acquisitions or roll-ups that, in the aggregate, harm competition.  

Minority interest deals, or partial acquisitions to get greater attention. The new Merger Guidelines anticipate greater scrutiny of acquisitions involving less than full control over another company. The agencies explain that “[p]artial acquisition that do not result in control may nevertheless present significant competitive concerns.” The focus here is on the influence obtained by a minority investment, by the potential for changed incentives, and by the risk of increased information-sharing.

 
Footnotes

1. Allen & Overy, FTC and DOJ Propose Significant, Burdensome Change to HSR Form for U.S. Merger Review, Allen & Overy Publications (June 30, 2023), https://www.allenovery.com/en-gb/global/news-and-insights/publications/ftc-and-doj-propose-significant-burdensome-changes-to-hsr-for-us-merger-review.

 

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This content was originally published by Allen & Overy before the A&O Shearman merger