Key Takeaways:

• The Federal Trade Commission (FTC) and the Department of Justice (DOJ) proposed new horizontal and vertical merger guidelines that are open to public comment for 60 days.
• If the guidelines are adopted, there would be increased antitrust scrutiny of mergers and acquisitions and likely more challenges than in the past.
• The FTC and the DOJ may not find a friendly audience in the courts with respect to many proposals in the guidelines, given several decades of precedent.
• Corporate counsel should consider engaging antitrust counsel earlier in the deal process for all Hart-Scott-Rodino-reportable transactions.

On July 19, 2023, the FTC and the DOJ (collectively, the agencies) jointly released new draft merger guidelines.[1] The agencies assert that the proposed guidelines will help them better assess the impact of proposed mergers based on “competition in the modern economy.”

According to FTC Chair Lina Khan, based on thousands of comments received from interested parties, the proposed guidelines “reflect the realities of how firms do business in the modern economy.” Khan added that the guidelines give “fidelity” to the agencies’ mandates under existing legislation. Attorney General Merrick Garland offered a similar perspective, as did Assistant Attorney General for the Antitrust Division Jonathan Kanter, who noted the proposed guidelines reflect how law enforcement agencies can adapt to meet changing market realities.

There are 13 proposed guidelines that, if adopted, will guide merger reviews. The agencies describe the guidelines as “principles” that are not mutually exclusive. The draft guidelines incorporate three core goals: (1) to reflect the law as written by Congress and as interpreted by courts, (2) to create accessibility and transparency, and (3) to provide a framework to address mergers given the “realities of our modern economy.” Although the agencies assert that the guidelines emanate from existing law, it remains to be seen whether courts will endorse the positions the agencies take in the proposed guidelines.

The proposed guidelines are as follows:[2]

1. Mergers should not significantly increase concentration in highly concentrated markets.
2. Mergers should not eliminate substantial competition between firms.
3. Mergers should not increase the risk of coordination.
4. Mergers should not eliminate a potential entrant in a concentrated market.
5. Mergers should not substantially lessen competition by creating a firm that controls products or services that its rivals may use to compete.
6. Vertical mergers should not create market structures that foreclose competition.
7. Mergers should not entrench or extend a dominant position.
8. Mergers should not further a trend toward concentration.
9. When a merger is part of a series of multiple acquisitions, the agencies may examine the whole series.
10. When a merger involves a multisided platform, the agencies examine competition between platforms, on a platform or to displace a platform.
11. When a merger involves competing buyers, the agencies examine whether it may substantially lessen competition for workers or other sellers.
12. When an acquisition involves partial ownership or minority interests, the agencies examine its impact on competition.
13. Mergers should not otherwise substantially lessen competition or tend to create a monopoly.

In their publication releasing the draft proposed guidelines, the agencies further classify 13 guidelines. Guidelines 1-8 are the “frameworks” the agencies will use to assess anticompetitive risk from proposed transactions. Guidelines 9-12 explain “issues” that the agencies frequently identify when applying the frameworks. Guideline 13 is a catchall provision, addressing competition concerns that the other 12 proposed guidelines do not expressly consider. The draft guidelines, if adopted, would not limit the agencies’ discretion or judgment in analyzing proposed transactions.

In addition to the 13 guidelines, the proposal contemplates expanding the methodology used to define antitrust markets and reducing the concentration thresholds for challenging an acquisition. The guidelines propose using four “tools to define markets”: (1) an assessment of direct competition between the parties, (2) evidence of market power, (3) “practical indicia” of a market or industry or public recognition of the market and (4) the hypothetical monopolist test (whether a hypothetical monopolist of all the assets in the provisional market could raise prices profitably). As for concentration, the guidelines propose lowering the threshold of concern back to levels set out in the merger guidelines of the 1980s. In the present Horizontal Merger Guidelines, the threshold for a highly concentrated market is the equivalent of a four-firm market with each firm having a 25 percent share. In the proposal, a five-firm market with each competitor having a 20 percent share is well within the definition of a highly concentrated market.

Finally, the proposed guidelines provide four means of rebutting the tentative conclusion that a proposed transaction would substantially lessen competition: (1) one of the parties to the transaction is so financially weak – i.e., “failing firm” – that the acquisition of the party would not result in a lessening of competition; (2) any reduction of competition would attract the entry of additional firms, restoring competition that existed before the transaction; (3) the transaction would result in efficiencies that would offset the anticompetitive effect; or (4) structural barriers exist in the market that would prevent increased coordination (if the anticompetitive theory is that the acquisition would increase coordination).

Conclusion

If the proposed guidelines are adopted in their present form, they will result in increased scrutiny and FTC and DOJ challenges to proposed mergers. Consistent with the FTC’s recent proposed changes to HSR reporting, the guidelines are sensitive to the potential adverse impact of mergers on labor.

The courts have relied on the merger guidelines for decades in deciding whether a merger is unlawful under the antitrust laws. These decisions, however, have created precedents that may diverge from some of the methodologies in the present proposal. The courts could very well rely on these past precedents rather than the proposed methodologies.

Upon publication of the guidelines in the Federal Register, there will be a 60-day notice and comment period. If you or your organization wishes to submit a comment, please visit regulations.gov.

Appendix: Additional Information Concerning Each Proposed Guideline

The draft guidelines include substantial details beyond the top-line principles and offer additional insights into the agencies’ new priorities in analyzing proposed transactions.

1. Market Concentration. The agencies propose to continue using the Herfindahl-Hirschman Index (HHI) to assess market concentration and changes in concentration resulting from the transaction. However, the proposed guidelines reduce the threshold for what constitutes a “highly concentrated” market from the current 2,500 down to 1,800 and a change in HHI of greater than 100 (instead of 200). In addition, a post-transaction market share of 30 percent by any one party with a change in HHI greater than 100 will be considered “an impermissible threat of undue concentration regardless of the overall level of market concentration.” That is, the government would find it impermissible for a firm with a 30 percent share to buy a competitor with a 2 percent share.
2. Elimination of Competition. The proposed guidelines look to several factors to determine whether the merging firms are competitors and whether the transaction would “substantially lessen” competition. These factors include whether the merging firms engage in deliberation concerning competition between themselves and the effect of relevant previous mergers, customer substitution, impact of the combination on other competitors, and price or wage impacts that result from the elimination of competition.
3. Risk of Coordination. The proposed guidelines contemplate blocking transactions that would increase coordination on price, quality, allocation of customers or labor. The primary factors considered include whether a market is highly concentrated and whether there was prior actual or attempted coordination. Secondary factors include market transparency, the competitive responsiveness of the market, whether the incentives of the market participants are aligned and whether the coordination would be profitable for the remaining market participants.
4. Elimination of Potential Entrants. The proposed guidelines posit that elimination of entrants leads to creation of monopoly power, and they posit that the antitrust laws prefer internal growth to growth by acquisition. To assess this guideline, the agencies would look at the actual future entry that could result in more competition and lower prices and perceived future entry that deters competitors from raising prices even before the entry occurs.
5. Control of Rivals’ Access to Resources Used to Compete. The proposed guidelines assert that acquisition of control over inputs, distribution services or customers may give a firm an undue competitive advantage, which would tend to increase the firm’s monopoly power. The agencies will assess whether the combined firm would have the ability and incentive to use its newly acquired advantages to weaken its rivals.
6. Vertical Mergers. The agencies will look at various levels of supply chains to determine a foreclosure rate – the degree to which a competitor is restricted in its access to goods or services in a related market. The analysis will also look at trends toward vertical integration, the nature and rationale of the transaction, whether the market is highly concentrated, and whether it would increase barriers to entry.
7. Entrenchment of Dominant Position. The agencies will analyze a market to determine whether the parties to the transaction already hold a dominant market position and whether the transaction would work to maintain the combined entity’s dominant position in the market. The agencies would conclude that a transaction entrenches dominant position where one of the merging firms has pricing power or where one of the parties to the transaction has 30 percent or higher market share. Such a firm may be able to entrench its dominant position by increasing barriers to entry, increasing the cost of switching among alternatives, interfering with use of alternatives, depriving competitors of economies of scale or network effects, and eliminating nascent competitive threats. This guideline also proposes preventing the extension of a dominant position into a related market.
8. Trends Toward Concentration. This guideline also proposes assessing horizontal and vertical concentration trends. The analysis would focus on trends where the HHI is approaching 1,800 and the acquisition would increase the HHI by more than 200.
9. Roll-Up Transactions. The proposed guidelines would cause the agencies to analyze a pattern of transactions in the same market. Although a single transaction may not cause alarm, the proposed guidelines express a concern with serial small acquisitions, resulting in heavily concentrated markets.
10. Multisided Platforms. “Platforms” in the proposed guidelines likely refer to social media platforms or other types of platforms where a platform participant benefits from the participation of others on the platform. The guidelines propose assessing how a transaction might adversely affect competition between platforms, competitive behavior on platforms and the ability to displace a platform from a dominant position.
11. Competing Buyers. This guideline proposes evaluating the competitive impact of a merger between competing buyers, including the effect on labor – the impact on both wages and working conditions.
12. Minority Interests. Minority and nonvoting interests will now be analyzed. The proposed guideline presumes nontraditional controlling parties can exert influence in ways that distort markets.
13. The Catchall. Finally, the last proposed guideline serves as a catchall for other effects of a transaction that “substantially lessen competition.”

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