New FTC Policy Restricts Future Acquisitions for Some Merging Parties

On October 25, 2021, the Federal Trade Commission (FTC or Commission) adopted a new policy requiring merging parties that enter into settlements to resolve competition concerns to give the FTC veto power over future deals in related areas for at least 10 years. This new policy is the latest of several recent moves by the FTC to intensify merger review.[1] It represents a shift from past practice and introduces important strategic considerations for transactions raising antitrust issues that previously could be addressed through remedies. Although the Commission leadership is currently split 2-2 along party lines, the Prior Approval Policy Statement was adopted with a 3-2 majority on the strength of former Democratic Commissioner Rohit Chopra’s vote, which remained effective under FTC procedural rules even following his departure.[2] The FTC wasted no time in utilizing its broad new authority, imposing a prior approval clause in a merger settlement announced on the same day.

Background

Prior to 1995, FTC orders resolving competition concerns in mergers “generally [] contained a requirement that the respondent seek the Commission’s prior approval for any future acquisition over a de minimis threshold within certain markets for a ten-year period.”[3] The FTC rescinded this policy in 1995 citing, among other factors, the costs it imposed on parties and because “the HSR Act has proven to be an effective means of investigating and challenging most anticompetitive transactions before they occur.”[4] The 1995 policy outlined limited circumstances where the FTC would require a prior approval or prior notice clause.[5] Thus, it has been the long-standing policy of the FTC not to subject parties that settle mergers to prior approval for subsequent transactions.

However, in July 2021, within the first six weeks of FTC Chair Lina Khan’s tenure, a 3-2 Democratic majority of Commissioners voted to withdraw the 1995 policy, signaling an important shift on the horizon.[6] Both Republican Commissioners dissented. Commissioner Noah J. Phillips criticized the withdrawal as “impos[ing] a decade-long M&A tax on anyone who enters into a merger consent” and warned that it will “chill procompetitive deals and hurt consumers.”[7] Commissioner Christine S. Wilson characterized the 1995 policy as an important “guardrail” against questionable exercises of enforcement discretion and further criticized its withdrawal as creating deal uncertainty.[8]

The New Prior Approval Policy

On October 25, 2021, the FTC adopted a new prior approval policy. Although out of step with FTC practice for decades, the FTC characterized the new policy as a return to a longstanding FTC practice. Under the new policy, the FTC will “routinely requir[e] 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.”[9] Moreover, the FTC may require prior approvals that extend beyond the relevant markets subject to the specific settlement. The FTC policy statement lists multiple factors that may influence the scope of prior approvals, including:

• the nature of the transaction;
• the level of market concentration;
• the degree to which the transaction increases concentration;
• the degree to which one of the parties pre-merger likely had market power;
• the parties’ history of acquisitiveness; and
• evidence of anticompetitive market dynamics.[10]

The FTC warned that this list is non-exhaustive, that no factor is dispositive, and that the FTC will take a “holistic view of the circumstances when determining the length and breadth of prior approval provisions.”[11] Moreover, the FTC “may seek prior approvals even when parties abandon a transaction.”[12] Specifically, the policy elaborates that “in matters where the Commission issues a complaint to block a merger and the parties subsequently abandon the transaction,” the FTC may “subsequently pursue an order incorporating a prior approval provision.”[13] The new policy gives the Commission extremely broad discretion in imposing prior approval requirements.

The Commission justified the policy by stating it is important to prevent “facially anticompetitive deals,” preserve FTC resources, and detect anticompetitive deals that fall below the HSR reporting threshold.[14] As Bureau of Competition Director Holly Vedova bluntly put it: “The FTC should not have to waste valuable time and resources investigating clearly anticompetitive deals that should have died in the boardroom.” The effect of the policy, she said, will be to force “acquisitive firms to think twice before going on a buying binge because the FTC can simply say no.”[15]

Neo-Brandeisian Skepticism of Settlements

As explained further below, the new policy will significantly increase the cost to parties of settling mergers, embodying a policy stance of general skepticism of settlements as a way to prevent harm to competition. This “Neo-Brandeisian” approach is best illustrated in a January 2021 report issued by the American Economic Liberties Project that criticized the Obama administration’s approach to antitrust, including merger settlements.[16] It characterized the “‘settlement first’ strategy” as “fail[ing] to enforce the laws against illegal mergers” and preserving competition and criticized both behavioral remedies and structural remedies.[17]

Since being confirmed to the FTC, Chair Khan has echoed these sentiments. In an August letter to Senator Elizabeth Warren (D-MA), Khan stated that “[w]hile structural remedies generally have a stronger track record than behavioral remedies, studies show that divestitures, too, may prove inadequate in the face of an unlawful merger,” concluding that “[i]n light of this, I believe the antitrust agencies should more frequently consider opposing problematic deals outright.”[18] Chair Khan and the Neo-Brandeisians would often prefer to block deals, even deals that are widely regarded as “fixable” with divestitures.

Key Takeaways

The FTC’s new prior approval policy has several important implications for companies undertaking M&A, and for the overall trajectory of merger enforcement in the United States:

• The FTC under Chair Khan’s leadership is more skeptical of mergers and likely comfortable disincentivizing M&A activity, or at least erring on the side of over-enforcement. The deterrent effect that the new policy may have on mergers is likely perceived as an upside from the standpoint of this Commission, not a downside.
• Adopting prior approval as a blanket policy significantly raises the cost of settlement for merging parties. Rather than simply agreeing to a divestiture to eliminate a horizontal overlap, and being subject to limited oversight by the FTC to ensure that the divestiture is accomplished, settlement will require the parties to submit to 10 years (or more) of ongoing FTC supervision of all deal activity within the scope of the specific prior approval clause in the consent order.
• For companies subject to a prior approval clause, the burden of proof effectively will be flipped. For future deals subject to the clause, instead of the FTC being required to prove that the deal is anticompetitive in order to block the transaction, the burden likely will be on the merging parties to prove to the FTC that the deal is procompetitive (or at least competitively benign) in order to proceed.[19]
• More than simply flipping the burden, the prior approval clause will effectively remove any independent arbiter from deciding whether a subsequent deal may proceed. Normally, the FTC must prove that a deal is anticompetitive to a federal judge; for deals subject to the prior approval clause, the parties will have to prove that the deal is procompetitive (or at least competitively benign) to the FTC without recourse to an independent tribunal.
• Merging parties subject to a lawsuit by the FTC challenging a transaction will likely have a strong incentive to litigate to a decision. Settling litigation or even abandoning a deal could raise the specter of a prior approval clause. One strategy that such parties may wish to employ is taking steps to remedy competition concerns and force the FTC to litigate the transaction as remedied rather than as initially proposed.
• For deals with horizontal overlaps where the parties contemplate the possibility of divesting assets in order to clear the merger review process (i.e., “facially anticompetitive acquisitions”), the merging parties may consider preemptively selling off overlapping assets before submitting an HSR filing and triggering the review process. A so-called “fix-it-first” strategy could in some circumstances facilitate clearance without the specter of long-term FTC oversight over the parties’ M&A pipelines.

[1] See, e.g., Alexander Paul Okuliar & David J. Shaw, FTC Meeting Signals Aggressive and Novel Enforcement to Come, Compliance & Enforcement, Program on Corporate Compliance and Enforcement at New York University School of Law (July 19, 2021), https://wp.nyu.edu/compliance_enforcement/2021/07/19/ftc-meeting-signals-aggressive-and-novel-enforcement-to-come/.

[2] In a further twist, it has been reported that the policy was publicized without first giving notice to the minority commissioners, who have yet to issue a written dissent.

[3] Notice and Request for Comment Regarding Statement of Policy Concerning Prior Approval and Prior Notice Provisions in Merger Cases, 60 Fed. Reg. 39,745 (Aug. 3, 1995).

[4] Id.

[5] Id. at 39,746.

[6] Siri Bulusu, FTC Revives Merger Reporting Requirements for Startup Deals, Bloomberg Law (Jul. 21, 2021, 4:46 PM), https://www.bloomberglaw.com/document/QWM4CTDWLU6D.

[7] Dissenting Statement of Commissioner Noah J. Phillips Regarding the Commission’s Withdrawal of the 1995 Policy Statement Concerning Prior Approval and Prior Notice Provisions in Merger Cases at 2–3 (July 21, 2021), https://www.ftc.gov/system/files/documents/public_statements/1592398/dissenting_statement_of_commissioner_phillips_regarding_the_commissions_withdrawal_of_the_1995.pdf.

[8] Oral Remarks of Commissioner Christine S. Wilson, Open Commission Meeting at 8–12 (July 21, 2021), https://www.ftc.gov/system/files/documents/public_statements/1592366/commissioner_christine_s_wilson_oral_remarks_at_open_comm_mtg_final.pdf.

[9] Fed. Trade Comm’n, Statement of the Commission on use of prior approval provisions in merger orders, at 1,

https://www.ftc.gov/system/files/documents/public_statements/1597894/p859900priorapprovalstatement.pdf (last visited Oct. 26, 2021) (emphasis in the original).

[10] Id. at 2-3.

[11] Id. at 2.

[12] Press Release, Fed. Trade Comm’n, FTC to Restrict Future Acquisitions for Firms that Pursue Anticompetitive Mergers (Oct. 25, 2021), https://www.ftc.gov/news-events/press-releases/2021/10/ftc-restrict-future-acquisitions-firms-pursue-anticompetitive.

[13] Fed. Trade Comm’n, Statement of the Commission on use of prior approval provisions in merger orders, at 2,

https://www.ftc.gov/system/files/documents/public_statements/1597894/p859900priorapprovalstatement.pdf (last visited Oct. 26, 2021). Additionally, the new policy requires that divestiture buyers will also be subject to prior approval for the sale of the divested assets. Id. at 3.

[14] Fed. Trade Comm’n, Statement of the Commission on use of prior approval provisions in merger orders, at 1–2, https://www.ftc.gov/system/files/documents/public_statements/1597894/p859900priorapprovalstatement.pdf (last visited Oct. 26, 2021).

[15] Press Release, Fed. Trade Comm’n, FTC to Restrict Future Acquisitions for Firms that Pursue Anticompetitive Mergers (Oct. 25, 2021), https://www.ftc.gov/news-events/press-releases/2021/10/ftc-restrict-future-acquisitions-firms-pursue-anticompetitive.

[16] Krista Brown et al., The Courage to Learn: A Retrospective on Antitrust and Competition Policy During the Obama Administration and Framework for a New, Structuralist Approach, at 48–55, American Economic Liberties Project (Jan. 2021), https://www.economicliberties.us/wp-content/uploads/2021/01/Courage-to-Learn_12.12.pdf. Note that both Chair Khan and AAG-nominee Jonathan Kanter are thanked in the acknowledgments.

[17] Id. at 49–50.

[18] David McLaughlin et al., FTC’s Khan Urges Blocking More M&A as Lockheed Deal Looms, Bloomberg Law (Aug. 12, 2021, 3:13 PM),

https://www.bloomberg.com/news/articles/2021-08-12/ftc-s-khan-calls-for-blocking-more-m-a-as-lockheed-deal-looms.

[19] Neither the new policy statement nor the proposed consent order announced the same day specifies the standard by which the FTC will grant prior approval.