Before reviewing key developments in the antitrust enforcement of M&A in the United States over the past year, it is helpful to begin with some brief background on US antitrust law and process.
Section 7 of the Clayton Act, the primary standard for the competitive review of mergers, acquisitions, joint ventures and other transactions in the United States, is deceptively simple.2 It prohibits M&A where the effect 'may be substantially to lessen competition, or tend to create a monopoly'.3 The more-than-80 years since the Clayton Act was established, however, have given rise to a litany of case law interpreting this very broad standard. While most of those cases remain nominally good law, many decisions arguably are inconsistent with the continually evolving economic and commercial environment. Indeed, there are many newer industries for which there is little applicable case law: only imperfect analogies that can be drawn from more mature industries.
To help address these issues, the Federal Trade Commission (FTC) and the Department of Justice (DOJ) – the two agencies that share responsibility for competitive enforcement in the United States – have issued guidelines to help practitioners more predictably analyse the potential risk that a transaction may be challenged.4 However, here, too, there are limitations: the guidelines are generalised, and may support varying analyses of a given transaction. As a result, many US transactional lawyers take deep, expensive dives into case law and guidelines, only to be inconclusive in predicting the likelihood of government opposition to a proposed transaction.
For this reason, it is often a wiser course of action to begin with the Hart-Scott-Rodino Antitrust Improvements Act (HSR Act)5 rather than case law or guidelines. The HSR Act provides the FTC and DOJ an opportunity to review transactions before the parties close the transaction and the proverbial 'eggs are scrambled'. While the HSR Act introduced some delay due to one or more waiting periods, the result – along with the FTC and DOJ's enforcement – actually has created tremendous transparency and much higher levels of certainty.
The FTC and DOJ annually publish detailed statistics regarding the HSR clearance process.6 Virtually without exception in each year since the passage of the HSR Act, this quantitative analysis demonstrates that the HSR process is fast and almost always results in positive outcomes for parties. As such, while antitrust litigation is no doubt time-consuming and very expensive, it is very rarely necessary. Having said that, there are various ways in which parties can help ensure a positive outcome from the HSR process.
i Numbers trump case law, especially under the current administration
Very generally, a transaction in excess of certain value and party-size thresholds requires that each party make an HSR filing and then observe a 30-day waiting period before consummating the transaction.7 This initial waiting period can be shortened if the parties request and the agencies grant early termination of the waiting period. On the other hand, the waiting period may be lengthened if one of the agencies issues a Second Request, which includes a more extensive production of documents, data and interrogatory responses; depositions of individual representatives of the parties; and interviews and document requests issued to relevant third parties such as customers, suppliers and competitors. A Second Request will typically add months to the approval process.
In a Second Request scenario, there are three potential outcomes after the parties comply: the reviewing agency can clear a transaction; the parties and the agency can enter into a settlement (consent decree), which typically requires the divestiture of one party's businesses to an approved buyer as a condition of allowing the broader transaction to be consummated; or the agencies can seek to block the transaction in federal court for violating Section 7 of the Clayton Act.
Every year, the DOJ and FTC jointly issue statistics covering the HSR process for the prior government fiscal year.8 The most recently released report, for 2017, found the following:
- there were more HSR filings than ever: over 4,000;9
- 97.4 per cent of transactions were cleared without a Second Request, a higher rate than in any year other than 2008, during the Great Recession;10
- most transactions were resolved within the first 30 days, with early termination (typically shortening the period to between 10 to 14 days) granted almost 80 per cent of the time it was requested;11
- of these thousands of filings, the FTC issued 33 Second Requests and the DOJ issued 18; and12
- the agencies issued 15 consent decrees and brought 13 lawsuits.13
ii Strategies to increase transparency and predictability
Focus on the current competitive landscape
Despite the fact that the overwhelming majority of transactions are approved, each transaction presents its own facts and circumstances, and so a positive outcome cannot be assumed. Careful preparation is thus always necessary. Preparation should begin with an assessment of the current competitive landscape gleaned from discussion with the parties, ordinary course documents and public sources. This assessment should include:
- whether and the extent to which the parties compete against one other;
- if the parties compete, for what specific products or services, and in which specific geographies;
- identification of actual and potential competitors and their market shares, as well as the strengths and weaknesses of each;
- whether new competitors recently have entered the market; and
- how likely market entry is in the future.
This assessment of the competitive landscape provides the context to guide the application on past enforcement and case law to the current transaction.
Anticipating customer reactions
After assessing the competitive landscape, counsel should then investigate likely customer reactions. After all, the agencies' first substantive step after reviewing an HSR filing often is to seek out the parties' largest customers to get their perspectives on the transaction. Since these inquiries are not publicly disclosed, and the agencies provide no relevant statistics, it is not possible to precisely gauge the impact of customer reaction on the likelihood of further review.
That said, it is axiomatic that the antitrust laws are designed to protect competition and customers, not competitors. Thus it follows that a lack of customer complaint (or, even more so, favourable customer reaction) will lessen the potential for further review or possible litigation. After all, if no customers are willing to stand up in court and say that the transaction will hurt them, it will be very difficult for the government to prove that competition for customers is likely to be harmed.
In theory, it would be desirable for antitrust counsel to make these inquiries before the underlying transaction agreement is executed so that the parties can make an informed decision regarding what antirust-related commitments they are willing to undertake. The problem, of course, is that a proposed transaction is almost certainly not public at this point. Direct customer outreach is thus not feasible. Nevertheless, counsel should work directly with the parties to gauge customer reactions as best they can. For example, the parties may be able to anticipate likely reactions of key, longstanding customers without asking them directly.
Make informed contractual commitments
While there is no guarantee that any transaction will clear the HSR process, a careful analysis of the competitive landscape and possible customer reaction, followed by analysis of past enforcement and case law, helps maximise the possibility of success. It also helps the parties make informed decisions regarding the contractual commitments they will be willing to undertake.
For example, targets typically request a hell or high water provision, most often at the outset of negotiations. Such provisions require an acquirer to divest any assets or to take any action the agencies require (such as licensing intellectual property) to alleviate their antitrust concerns. If counsel's review has indicated that certain assets may be likely to cause antitrust concerns, and those assets are critical to the underlying economics of the transaction, an acquirer will obviously be less likely to agree to a hell or high water provision. Conversely, if review has indicated that issues are unlikely, an acquirer will be more willing to agree to a hell or high water provision, perhaps in exchange for a concession on a provision not related to antitrust.
There are numerous other potential provisions that may also arise over the course of negotiations, such as divestiture caps (limiting the dollar amount or type of assets the acquirer is willing to divest) and break-up fees (giving the acquirer the right to pay a fee and abandon the transaction if the agencies' demands are too onerous). Understanding the larger context of the transaction will help both sides more clearly determine their positions on these matters.
iii US antitrust enforcement: the year in review
There were two trends that emerged in M&A antitrust enforcement this past year: the continued success of the FTC in obtaining preliminary injunctions in federal district court and attention to deal-specific vertical issues.
In December 2017, the FTC issued an administrative complaint challenging the merger of Tronox Limited and Cristal, two top suppliers of chloride process titanium dioxide, a white pigment used in a wide variety of products including paint, industrial coatings, plastic and paper. The FTC simultaneously asked a federal district court to issue a preliminary injunction preventing the parties from closing the transaction pending the conclusion of FTC administrative proceedings. The District Court for the District of Columbia determined that the FTC was likely to prove that the transaction would substantially reduce competition for chloride process titanium dioxide and granted the preliminary injunction in September 2018. Tronox and Cristal subsequently agreed to settle with the FTC, agreeing to divest chloride process titanium dioxide assets to a multinational chemical manufacturer. The FTC approved its final order in May 2019.
The FTC obtained another significant result when it issued an administrative complaint in April 2018 charging that Wilhelmsen Maritime Services' proposed US$400 million acquisition of Drew Marine Group would significantly reduce competition in the market for marine water chemicals and services used by global fleets. The FTC claimed that if the transaction were consummated, the combined company would control at least 60 per cent of that market. As in the Tronox/Cristal case, the FTC asked the District Court for the District of Columbia to issue a temporary restraining order and preliminary injunction to prevent the parties from consummating the merger pending the administrative proceeding. The Court granted the preliminary injunction, and shortly thereafter, Wilhelmsen and Drew Marine abandoned the transaction.
Last year, the DOJ made clear that while it remains concerned about vertical mergers, case-specific facts are critical when evaluating the likelihood of a challenge. While the DOJ challenged the vertical aspects of the AT&T/Time Warner combination, it allowed the Cigna/Express Scripts and CVS/Aetna transactions, both of which followed the DOJ's loss over AT&T/Time Warner, to close without any remedy, despite vertical concerns. It remains to be seen whether the DOJ's unsuccessful challenge to AT&T/Time Warner will cause the DOJ to be more hesitant in the long term to challenge vertical transactions.
In November 2017, the DOJ challenged AT&T's proposed US$84 billion acquisition of Time Warner. The DOJ alleged that the combined company would 'use its control over Time Warner's valuable and highly popular networks to hinder its rivals by forcing them to pay hundreds of millions of dollars more per year for the right to distribute those networks', and that the combined company would also 'use its increased power to slow the industry's transition to new and exciting video distribution models'.14 In June 2018, however, the District Court for the District of Columbia denied the DOJ's request to enjoin the transaction. The Court held that the DOJ had failed to prove that AT&T's acquisition would substantially lessen competition, explaining that Time Warner's networks were not 'must haves' for a distributor to compete, and that although Time Warner's valuable content theoretically gave it leverage to negotiate, these arguments were insufficient to establish that the merger would result in increased leverage and harm to competition without more evidence of real-world impact. The DOJ appealed the District Court's decision, but in February 2019 the Court of Appeals for the District of Columbia upheld the lower court's ruling.
Following its loss in district court over AT&T/Time Warner, the DOJ closed its investigations into two other mergers with potential vertical concerns. In September 2018, the DOJ closed its six-month investigation into Cigna's acquisition of Express Scripts, a health insurance company and pharmacy benefit manager, respectively. The DOJ analysed whether the merger would substantially lessen competition in the sale of pharmacy benefit manager (PBM) services or raise the cost of those services to Cigna's health insurance rivals. In closing the investigation, the DOJ stated that Cigna's US$67 billion proposed acquisition of Express Scripts was unlikely to result in harm to competition or consumers because Cigna's PBM business nationwide was small, and at least two other large PBM companies and several smaller PBM companies would remain in the market following the merger.
While the DOJ brought a challenge against CVS's proposed US$69 billion acquisition of Aetna, the challenge was based on horizontal rather than vertical concerns. The DOJ alleged that the combination of two of the country's leading sellers of individual prescription drug plans would result in higher premiums, lower service and reduced innovation. It did not, however, include in its complaint any allegations regarding the addition of CVS's pharmacy and PBM business to Aetna's health insurance business, although public commentators expressed concerns with input foreclosure and customer foreclosure. Regarding input foreclosure, the DOJ explained that the evidence showed that it was unlikely that CVS could profitably increase its PBM or retail pharmacy costs following the merger, as doing so would result in CVS losing business to other PBM or retail pharmacies. As for customer foreclosure, the DOJ noted that Aetna occupied only a small share of the market in many commercial health insurance markets, and thus CVS's acquisition of Aetna was unlikely to result in customer foreclosure.
To address the DOJ's horizontal concerns with the CVS/Aetna merger, CVS and Aetna entered into a settlement with the DOJ in which they agreed to divest Aetna's Medicare Part D business to WellCare Health Plans. After reviewing the terms of the settlement, however, the District Court for the District of Columbia decided to hold an unprecedented two-day hearing to assess whether the settlement provided sufficient protection to consumers. The hearing, which concluded on 6 June, included testimony from witnesses who both supported and opposed the proposed remedy.
It remains to be seen if the above trends – the success by the FTC in obtaining preliminary injunctions and the agencies' focus on deal-specific vertical issues – will continue to play a significant role in 2019. That said, practitioners should keep both trends in mind as they guide their clients through the M&A antitrust enforcement process.
1 Richie Falek, Neely Agin and Conor Reidy are partners at Winston & Strawn LLP.
2 Clayton Antitrust Act of 1914, 15 U.S.C.A. § 18 (West 2018).
4 Department of Justice and Federal Trade Commission, Horizontal Merger Guidelines (2010). Note that the guidelines are almost a decade old.
5 Hart-Scott-Rodino Antitrust Improvements Act of 1976, 15 U.S.C. § 18a (West 2018).
6 Federal Trade Commission and Department of Justice, Hart-Scott-Rodino Annual Report Fiscal Year 2017 (2017), https://www.ftc.gov/reports/federal-trade-commission-bureau-competition-department-justice-antitrust-division-hart2. The Report for fiscal year 2018 is not yet available.
7 15 U.S.C.A. § 18a; Premerger Notification Office Staff, HSR Threshold Adjustments and Reportability for 2019, Federal Trade Commission: Blogs – Competition Matters (7 March 2019), https://www.ftc.gov/news-events/blogs/competition-matters/2019/03/hsr-threshold-adjustments-reportability-2019.
8 Hart-Scott-Rodino Annual Report Fiscal Year 2017, footnote 6.
9 Id. at 26.
10 Id. at 6.
12 Id. at 5.
13 Id. at 2. The FTC brought two and the DOJ brought 11, although the DOJ simultaneously filed a proposed settlement in nine of those 11 lawsuits.
14 Department of Justice, Office of Public Affairs, Justice Department Challenges AT&T/DirecTV's Acquisition of Time Warner, 20 November 2017, https://www.justice.gov/opa/pr/justice-department-challenges-attdirectv-s-acquisition-time-warner.