October 28, 2021
On Monday, October 25, 2021, the Federal Trade Commission (FTC) voted along party lines to approve (3-2 with Commissioner Phillips and Commissioner Wilson dissenting) a new Prior Approval Policy Statement (Prior Approval Statement) that restores the FTC’s pre-1995 practice of routinely restricting future acquisitions by companies that pursue mergers the FTC deems to be anticompetitive. Going forward, the FTC intends to include prior approval provisions in all merger divestiture orders, effectively requiring the merging parties to seek FTC approval before closing any future transaction affecting each relevant market for which a violation was alleged (and in some cases, even broader markets) for a minimum of ten years.
Although there are many open questions as to how the policy will operate practically, it marks one of the most significant changes in merger policy by FTC Chair Lina Khan to date and adds significant layers of complexity to future transactions. Companies now need to seriously consider how prior approval provisions might affect their long-term strategic plans. As FTC Competition Bureau Director Holly Vedova said in a statement on the issue: “Restoring the long-standing prior approval policy forces acquisitive firms to think twice before going on a buying binge because the FTC can simply say no.”
Before 1995, all companies that had been found by the FTC to violate antitrust laws in a previous merger were required to obtain prior approval from the FTC for any future transaction during the period of the consent decree involving the same product and geographic market for which a violation had been alleged. In 1995, the FTC amended this policy and instead required companies that had been found by the FTC to violate antitrust laws in a previous merger to provide prior notice and seek prior approval only where there was a credible risk of an unlawful merger, regardless of market conditions or a company’s prior anticompetitive activity. At that time, it was thought that the process prescribed by the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act) provided an effective means of merger control. However, in July 2021, the FTC voted along party lines to rescind the 1995 policy, noting that the 1995 policy has “fueled consolidation by preventing the agency from imposing these merger restrictions”—a problem compounded by what the FTC considers a “tidal wave” of recent filings. Therefore, the new Prior Approval Statement comes as no surprise; yet as described further below, it has an even wider-ranging reach than the long-abandoned practice did, increasing the risk calculus for parties to a deal.
According to the FTC, the policy will assist enforcement in several respects. First, it will help prevent facially anticompetitive deals that “should have died in the boardroom.” The Prior Approval Statement explains that such deals have persisted because parties (particularly acquisitive ones) see few downsides in getting the deal done with minimal divestitures. Second, the new policy reduces the risk that the FTC will fail to detect anticompetitive deals below the HSR reporting thresholds. Third, the policy will help conserve FTC resources by allowing it to avoid the “strictures” of the Hart-Scott Rodino Act, under which merging parties can force the FTC to sue to block a deal. Under a prior approval notice, however, the FTC does not need to sue to block subsequent transactions covered by the notice. It can simply say no, leaving parties with little recourse.
Moreover, the FTC stated in the Prior Approval Statement that it intends to consider imposing prior approval requirements outside of the divestiture context as well—for example, in matters where the parties ultimately abandon a transaction prior to a litigated decision. The FTC indicated that it will be less likely to pursue prior approval provisions where parties have abandoned transactions before FTC staff have expended significant resources investigating the matter.
In cases where the FTC believes that stronger relief is needed, the FTC has indicated that it intends to use prior approval provisions to impose strict limits on future mergers in product and geographic markets beyond the relevant product and geographic markets affected by the merger. In determining whether to do so, the FTC will take a “holistic view of the circumstances” and consider the following “non-exhaustive” list of factors, with no single factor being dispositive: (1) the nature of the transaction (including similarities between the present transaction and previously challenged transactions); (2) the level of market concentration; (3) the degree to which the transaction increases concentration; (4) the degree to which one of the parties pre-merger likely had market power; (5) the parties’ history of acquisitiveness; and (6) evidence of anti-competitive market dynamics.
This is a significant step and, now more than ever, means that parties to transactions need to seriously consider their willingness to be subject to prior notice and approval requirements before proceeding with transactions involving competitive overlaps, as there is a substantial risk that prior approval obligations could be applied on a broader than anticipated basis—potentially even industry-wide—with limited ability to assess the likelihood of broad obligations during deal negotiations.
The new policy affects not just the parties to the transaction in question, but also the buyers of divested assets in merger consent orders, with the FTC announcing that it plans to diverge from the typical past practice and require all divestiture buyers to agree to prior approval for any future sale of the assets they acquire for a minimum of ten years. According to the FTC, this will ensure that divested assets are not later sold to an unsuitable firm in contravention of the purpose of the original order. Previously, buyers of divested assets had been subject to prior approval provisions only on rare occasions. The new policy imposes a significant new burden for any companies purchasing such assets as the company will need to be committed to potentially holding the divested assets on a long-term basis (which may narrow the pool of potential buyers).
Simultaneous to the release of the Prior Approval Statement, the FTC implemented a broad prior approval provision in its proposed order relating to DaVita, Inc.’s (DaVita) acquisition of the University of Utah Health’s dialysis clinics, whereby DaVita must seek prior approval from the FTC before acquiring any new ownership interest in a dialysis clinic anywhere in Utah for ten years rather than anywhere in greater Provo, Utah—the relevant geographic area identified in the FTC’s complaint. This shows that the FTC is serious about imposing restrictions that reach beyond the scope of the relevant geographic or product markets identified in its complaints.
Adding to the uncertainties, the new practice may also lead to further divergence in practice between the FTC and the Antitrust Division of the U.S. Department of Justice (DOJ). These agencies have concurrent jurisdiction to review mergers, but coordinate on each matter to determine which agency will conduct the review. Although the FTC has stated that “nothing in the FTC’s 2021 Statement is intended to change or override the agencies’ long-standing clearance process,” the FTC’s policy statement does not address the DOJ’s position on the prior approval issue and the DOJ has not yet commented. Parties should be aware that there may be substantial differences in how each agency treats provisions of divestiture orders on any particular deal going forward.
For those working in mergers and acquisitions, the FTC’s new Prior Approval Statement is a significant policy shift that raises immediate practical and strategic questions and injects a large degree of complexity into deal-making. Going forward, parties to a strategic merger need to consider not just the likelihood that there will be a consent decree, but that all consent decrees at the FTC will contain burdensome prior approval provisions—further, this is a possibility even when deals are abandoned in the face of competitive concerns from the FTC. Because these provisions will impose restrictions for a minimum of ten years, parties must think seriously about how future transactions and strategic goals could be affected if a prior approval provision is imposed.
Approaches to deal negotiations and drafting of contractual provisions will also need to be revisited as a result. Parties will need to consider how best to bear and allocate the additional risks associated with prior approval provisions and stricter FTC enforcement, even for transactions that fall below the HSR filing threshold.
Please reach out to discuss any questions you have about this development.