The Federal Trade Commission is taking an increasingly stringent approach to antitrust investigations

The first shift began in February 2021 when the FTC announced a temporary suspension of the early termination process under the HSR (Hart-Scott-Rodino Antitrust Act) waiting period. While early termination was never guaranteed on any particular deal, that process allowed deals without competitive concerns to be cleared within approximately ten to 15 days. Now, all deals are subject to the initial 30-day waiting period. There is little evidence that this temporary suspension will be removed any time soon, and the practical result is that dealmakers are making their HSR filings at an earlier stage—sometimes based on letters of intent or term sheets—to kick-start the waiting period.

Warning! Warning letters

Faced with a significant rise in filings (see chart), the FTC also announced that it may send "warning letters" to companies when the FTC is unable to complete investigations within the 30-day HSR period, or even at the end of an investigation following substantial compliance with a second request.

These co-called "pre-consummation warning letters" advise merging parties that, while they can legally proceed with the transaction, they do so "at their own risk" because the FTC's investigation is ongoing. The FTC also announced that these warning letters could be sent on the basis of not just competition or consumer welfare concerns, but rather on an extended scope of issues, including where it perceives that a merger may harm workers or "honest business."

It is unclear at this stage how much risk these warning letters actually pose to closed transactions, but we are watching closely to see how substantive they prove to be and the extent to which the FTC or DOJ challenge completed mergers.

These letters have so far had little effect on deal closings, although it is possible that more cautious buyers may reconsider their involvement in a deal if it triggers a warning letter with a plausible risk of a meaningful investigation (and subject to agreement covenants).

US merger notifications spiked to new record high in 2021 (PDF)

Longer clearance periods, greater uncertainty

The FTC has also reinvigorated a policy requiring companies that have entered into a consent agreement to obtain the FTC's prior approval before pursuing a future transaction in a directly or indirectly affected market. This reverses a policy change made in 1995 and could have far-reaching implications for a company's future acquisitions. Yet the biggest impact is likely to be on divestitures because, not only would the FTC need to approve the deal, but the buyer of the business would also become subject to the 10-year prior notice and approval period. This could narrow the universe of buyers for a business, since a divestiture buyer must be willing to commit to a prior approval process for unknown, future transactions.

Private equity buyers in the spotlight

While a PE buyer often presents no directly competitive issues in any particular transaction, in January 2022, PE was highlighted in a joint agency public inquiry. As part of the FTC and DOJ's planned revamping of their Merger Guidelines, the internal standards by which they review the competitive effects of transactions, the agencies are polling the public to see if stronger enforcement measures against PE firms should be taken.

Underlying this inquiry, the FTC Chair has expressed a focus on "rollup plays" by PE buyers, i.e., when a firm acquires several small players to combine them later, but the initial investments are not HSR reportable, thus potentially flying under the government's radar.

DOJ signals a preference for litigation over remedies

The FTC is not the only agency signalling an aggressive enforcement stance. On January 24, 2022, the DOJ Assistant Attorney General remarked that in most situations, the agency should seek an injunction to block the transaction, rather than negotiating a remedy with the parties to fix the issue. The Assistant AG also criticized the use of "partial divestitures" (i.e., buying less than what the agency considers a full-functioning business unit) as effective at maintaining competition.

Conclusion

Overall, the agencies' more aggressive stance on antitrust means that dealmakers will need to factor in longer timelines and the potential for agency involvement or investigations post-transaction. As recently as January 24, 2022, the FTC Chair asked Congress to consider an increase in funding, an increase in HSR filing fees, and additional time beyond the 30-day window to review deals. Further, the agency's policy changes have not so far had a major impact—if any—on M&A activity, though they may change the structure and scope of some deals. One potential future development, as a result of the 10-year prior notice and approval period, may be that parties consider a "fix-it first" option with assets carved out of a business before a transaction is filed, to limit the FTC's oversight of the transaction in its entirety. It also remains to be seen whether parties in front of the DOJ will have less success in negotiating remedies, and instead should prepare for an increased possibility of litigation.

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