Merger Control in the USA

Cooley LLP - Sharon Connaughton, Jacqueline Grise, Tanisha James and Howard Morse

How would you describe the current merger control climate, including any trends in particular industry sectors?

A year and half into the Trump administration, new leadership is in place at both the Antitrust Division of the Department of Justice and the Federal Trade Commission (FTC) – together, the federal antitrust agencies – which are charged with antitrust enforcement and review of proposed mergers and other acquisitions in the United States. Appointees have years of antitrust experience and service in senior antitrust positions.

The individuals appointed to head the federal antitrust agencies – Makan Delrahim as assistant attorney general of the Antitrust Division and Joseph Simons as chair of the FTC – are both Republicans, which would typically point to a less interventionist approach to enforcement. However, recent enforcement actions and public statements indicate that the Antitrust Division and the FTC may be more aggressive than past Republican administrations. The Antitrust Division has been active, and its challenge to the proposed AT&T/Time Warner merger was the division’s first effort to block a significant vertical merger – rather than merely obtaining a behavioural order against certain conduct – in several decades. 

There is also speculation in some quarters that the new slate of FTC commissioners – all appointed by President Trump – might embrace the populist agenda of the Trump administration and go beyond traditional concerns regarding the effect of mergers on consumer welfare to address social issues (eg, employment and wage stagnation).

In considering the types of case likely to be brought, it is clear that the FTC – the agency responsible for handling pharmaceutical transactions and hospital mergers – will continue to actively investigate transactions in those industries. Healthcare enforcement in both merger and non-merger contexts has accounted for approximately 50% of the FTC’s enforcement actions in recent years, and this trend is expected to continue.

In addition, representatives from both ends of the political spectrum have expressed concern that technology transactions have not been sufficiently vetted for competitive concerns as enforcers are forced to grapple with concepts like innovation markets, platforms, multi-sided markets, network effects, algorithmic pricing and other automated systems when evaluating high-tech deals. Accordingly, technology enforcement actions are likely to be a major focus for the both the Antitrust Division and the FTC in coming years.

Are there are any proposals to reform or amend the existing merger control regime?

For years, certain policy makers have advocated passage of the Standard Merger and Acquisition Reviews Through Equal Rules (SMARTER) Act to align the FTC’s and Antitrust Division’s merger-litigation processes and standards. At present, the FTC can seek preliminary injunctions in federal courts to block mergers pending an administrative trial. The Antitrust Division can only obtain injunctive relief in federal court. Some have argued that the standard that the FTC faces for preliminary injunctive relief is lower than that imposed on the Antitrust Division. Policymakers have argued that because of the disparity between these standards, the success or failure of a merger may depend on which agency reviews the transaction. The SMARTER Act would require the FTC to adhere to the same process and standard as the Antitrust Division.

The SMARTER Act has been before Congress in various forms since 2014. In 2016 a version of the bill passed the House but failed to pass the Senate. A new version of the bill is under consideration. With Republican control of the White House and Congress, antitrust practitioners and others in the business community have predicted an increased likelihood that the SMARTER Act will once again come before the full Congress for a vote. On the other hand, it is uncertain whether Congress will pass any legislation before the November elections and whether Republicans will retain control of both the House and Senate in those elections.

Legislation, triggers and thresholds

What legislation applies to the control of mergers?

The primary antitrust law governing the substantive review of mergers and acquisitions is the Clayton Act 1914. Section 7 of the Clayton Act (15 USC Section 18) makes unlawful acquisitions that may substantially lessen competition or tend to create a monopoly in any line of commerce in any section of the country.

The Hart-Scott-Rodino (HSR) Act (15 USC Section 18a) and the rules promulgated thereunder (HSR rules) govern the procedural aspects of the federal antitrust agencies’ review of M&A, requiring that the Antitrust Division of the Department of Justice and the Federal Trade Commission (FTC) be notified of certain transactions before consummation.

The 50 US states – typically the state attorneys general – may also seek to block M&A and will often review proposed transactions, either separately or in coordination with the review conducted by the Antitrust Division or the FTC.

What is the relevant authority?

The Antitrust Division and the FTC both have authority to enforce the Clayton Act, and the agencies allocate matters between them so that only one agency investigates any transaction. That allocation is based on agency expertise from past investigations.

State attorneys general may investigate proposed transactions under state investigative authority and file suit under the Clayton Act.

Under what circumstances is a transaction caught by the legislation?

Transactions such as mergers, consolidations, tender offers, joint ventures and acquisitions of voting securities, non-corporate interests or assets and even certain IP licences are potentially subject to the HSR Act. Such transactions are subject to the act if both the acquiring and acquired persons are engaged in commerce or activities affecting commerce in the United States, and they meet the jurisdictional thresholds set forth in the act (described below).

What constitutes a voting security, non-corporate interest or asset subject to the HSR Act varies from common usage of those terms. The HSR Rules and Regulations and the antitrust agencies offer the following guidance regarding the meaning of those terms under the HSR rules:

• ‘Voting securities’ are defined as any securities that grant the holder the right to vote in the election of directors of the issuer or an entity included within the same person as the issuer. Securities that have the present right to vote for certain matters but do not vote in the election of board directors are considered ‘non-voting’ securities for HSR purposes. In addition, convertible securities, options and warrants or other instruments that do not have the present right to vote in the election of the board are exempt from the filing requirements at the time of their acquisition. If the conversion of these financial instruments results in the holder meeting the HSR Act thresholds, notification may be required before converting or exercising the financial instruments. Acquisitions of voting securities are subject to the HSR Act regardless of whether the transaction involves the transfer of control (defined in the act as holding 50% or more of the voting securities of an entity, or the contractual right to appoint 50% or more of the directors).
• ‘Non-corporate interests’ are interests in a limited liability company, partnership or other non-corporate entity. For transactions involving non-corporate interests, the HSR Act applies only to transactions that confer ‘control’ of the target entity. For non-corporate entities, ‘control’ is defined as having the right to 50% or more of the entity’s profits, or 50% or more of the entity’s assets on dissolution.
• While ‘assets’ is not defined in the HSR Act or the rules, the antitrust agencies have defined it to include both tangible and intangible goods. The acquisition of exclusive patent licences, for example, may require a HSR Act filing.

Importantly, transactions that do not meet the jurisdictional thresholds of the HSR Act can still be reviewed and challenged by the antitrust agencies under the Clayton Act or the Sherman Act.

Do thresholds apply to determine when a transaction is caught by the legislation?

The HSR Act applies two principal jurisdictional thresholds: the ‘size-of-person’ test and the ‘size-of-transaction’ test. These thresholds are adjusted annually based on changes in the gross national product. The current thresholds are as follows:

• Transactions valued at $84.4 million or less are not subject to the HSR Act (though valuation often requires aggregation of voting securities already held and assets recently acquired);
• Transactions valued at more than $337.6 million are subject to the HSR Act regardless of the size of persons; and
• Transactions valued at more than $84.4 million but not exceeding $337.6 million are reportable only if the size-of-person test is met.

To meet the size-of-person test, one party to the transaction must have at least $16.9 million in annual net sales or total assets and the other party must have at least $168.8 million in annual net sales or total assets. If the acquired person is not engaged in manufacturing, it must have at least $16.8 million in assets or $168.8 million in annual net sales or total sales in order to meet the size-of-person threshold. Annual net sales are based on the party’s last fiscal year and asset value is based on the party’s most recent regularly prepared balance sheet.

Is it possible to seek informal guidance from the authority on a possible merger from either a jurisdictional or a substantive perspective?

Parties may anonymously seek informal guidance from the FTC’s Pre-merger Notification Office (PNO) to determine whether a filing is required under the HSR Act. The PNO is typically responsive to such inquiries, answering most within one or two days. The FTC website also maintains a database of past requests for informal guidance, as well as the FTC’s responses.

The antitrust agencies do not usually allocate resources to the substantive review of hypothetical transactions until the merging parties have expressed the requisite intent to merge in a transaction that is reportable under the HSR Act. In certain circumstances, parties may request a business review letter from the Antitrust Division to determine how the agency may respond to a proposed joint venture or other business conduct such as the collection and dissemination of business information. However, business review letters often take a long time to obtain and are rarely sought with respect to proposed M&A.

Are foreign-to-foreign mergers caught by the regime? Is a ‘local impact’ test applicable under the legislation?

Foreign-to-foreign mergers are subject to the requirements of the HSR Act if both the acquiring person and the acquired person are engaged either in commerce or in activities affecting commerce in the United States, and if the requisite HSR jurisdictional thresholds are met. However, there are certain exemptions potentially available for such transactions. An exemption’s applicability to a particular transaction should be evaluated on a case-by-case basis.

Acquisitions of assets located outside the United States, for example, are exempt from the HSR Act unless those assets generated sales of $84.4 million or more, in or into the United States in the acquired person’s most recent fiscal year.

Acquisitions of voting securities of a foreign issuer by a US person are exempt unless the acquired person (issuer) and all entities that it controls holds assets in the United States with an aggregate total value of $84.4 million or more, or made aggregate sales of $84.4 million or more in, or into, the United States. If the acquiring person is a foreign person, the transaction also must confer control over the foreign issuer in order to be reportable.

Finally, if the acquisition of foreign assets or of voting securities of a foreign issuer by a foreign person does not come within either of the above exemptions, the transaction is nevertheless exempt if all of the following conditions are present:

• The acquiring and acquired persons are both foreign;
• The aggregate sales of the parties in or into the United States were less than $185.7 million in their respective most recent fiscal years;
• The parties’ aggregate total assets in the United States are less than $185.7 million; and
• The size of the transaction is less than $843.9 million.

What types of joint venture are caught by the legislation?

The formation of a newly incorporated entity that involves the acquisition of voting securities by joint venture partners is potentially reportable under the HSR Act. However, the formation of a non-corporate business entity is not usually subject to notification under the act, regardless of whether the parties call it or regard it as a joint venture, or whether it would generally be known as one. Nevertheless, the acquisition of a controlling stake in the non-corporate entity is potentially reportable if the requisite HSR thresholds are met.

Notification

Is the notification process voluntary or mandatory?

Notification under the Hart-Scott-Rodino (HSR) Act is mandatory for transactions that meet the jurisdictional thresholds and do not qualify for an exemption.

What timing requirements apply when filing a notification?

If the parties meet the HSR Act thresholds, all acquiring and acquired persons must file a notification and report form with the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice. There is no deadline for filing. However, the HSR Act imposes a 30-day waiting period (or 15 days in the case of cash tender offers and acquisitions in bankruptcy) after filing before a notified transaction can be consummated, unless early termination of the waiting period is granted.

If either agency requests additional information (in what is known as a ‘second request’), the initial waiting period is extended to 30 days (or 10 days in the case of cash tender offers and bankruptcy matters) after the date on which the parties comply with the second request.

The waiting periods generally begin when all parties have filed and complied with second requests, but in the case of a cash tender offer they run from when the acquiring party files and complies with the second request.

Can a merger be implemented before clearance is obtained?

No. If notification under the HSR Act is required, the act prohibits the closure of the transaction until the expiration or early termination of the HSR waiting period.

What guidance is available from the authorities?

As noted above, the parties may anonymously seek informal guidance from the FTC’s Pre-merger Notification Office (PNO) to determine whether a filing is required under the HSR Act. The PNO is responsive to such inquiries and answers most within one or two days.

Additional sources of information available to parties assessing whether their transaction requires a filing – and what analysis may be relevant in assessing the competitive impact of their transaction – include published informal interpretations available on the FTC website, as well as the 2010 Horizontal Merger Guidelines, published jointly by the Antitrust Division and FTC and available on their websites. The Horizontal Merger Guidelines provide details regarding the analytical framework employed by the federal antitrust agencies. Also useful are the press releases, complaints and consent orders relating to transactions previously challenged by the antitrust agencies and speeches by senior agency officials, available on their respective websites.

What fees are payable to the authority for filing a notification?

Unless the parties agree otherwise, the acquiring person is responsible for paying the HSR filing fee, which is based on the value of the transaction (generally the acquisition price or fair market value, whichever is greater). There are three fee levels. While the fees remain the same, the transaction value associated with each fee level is adjusted annually for changes in gross national product. The current fee levels are:

• $45,000 if the transaction value is more than $84.4 million but less than $168.8 million;
• $125,000 if the transaction value is between $168.8 million and $843.9 million; and
• $280,000 if the transaction value is $843.9 million or more.

What form should the notification take? What content is required?

The notification and report form which the parties must submit and the instructions regarding its completion are available on the FTC’s website. The form requires the disclosure of specified information by each party and the production of certain types of document.

Information requested in the form includes:

• the identity of the specific entities or persons that are making the acquisition or being acquired;
• the identity of the acquiring and acquired persons’ ultimate parent entities;
• the identity of the parties’ subsidiaries;
• the identity of the shareholders or interest holders holding 5% or more of the party or its subsidiaries;
• revenue information for each party for its most recent fiscal year, broken down by the North American Industry Classification System (NAICS) code; and
• a general description of the transaction.

Further, if the buyer and seller derive revenue from the same NAICS code, the parties must provide additional geographical information relating to the location where the revenues were generated and additional information regarding their minority holdings.

Among the documents that the parties must provide are a copy of the executed agreement or letter of intent – including any non-competes and side letters that relate to competition – and the parties’ most recent annual reports or annual audit reports.

The most challenging and time-consuming part of the HSR filing tends to be the collection and review of the so-called Item 4(c) and 4(d) documents, named after the portions of the form that require their submission.

Item 4(c) requires copies of documents prepared by or for an officer or director (or persons exercising similar functions in an unincorporated entity) analysing the transaction with respect to competition-related issues (ie, markets, market shares, competitors, competition and the potential for expansion into product or geographic markets). Item 4(d) requires the submission of a confidential information memoranda (or the equivalent, if none exists). It also requires the production of studies, surveys, analyses and reports similar to those required under 4(c), prepared by third-party advisers (eg, investment bankers or consultants) if they were for any officer or director of the acquiring or acquired entity or its ultimate parent for the purpose of analysing market shares, competition, competitors, markets, potential for sales growth or expansion into product or geographic markets. Item 4(d) further requires certain material evaluating or analysing synergies or efficiencies prepared by or for any officer or director (or persons exercising similar functions in unincorporated entities) for the purpose of evaluating or analysing the acquisition.

Is there a pre-notification process before formal notification, and if so, what does this involve?

There is no pre-notification process.

What provisions apply regarding publicity and confidentiality?

By law, the FTC and the Antitrust Division may not disclose HSR filings or confidential information provided in an investigation, nor may they disclose that a filing has been made. However, the reviewing agency may contact customers and competitors in conducting its investigation, and there is no restriction on such persons disclosing such contact.

Transactions for which early termination of the initial waiting period has been requested and granted are published in the Federal Register and on the FTC’s website. Only the names of the parties and the date the waiting period was terminated, however, are released.

HSR forms, their contents and accompanying attachments are protected against disclosure and are exempt from the Freedom of Information Act. They may be disclosed at the request of Congress or in administrative or judicial proceedings.

Are there any penalties for failing to notify a merger?

Yes. Failure to file the HSR form, provide all required documents and observe the waiting period before closing a transaction exposes the parties to a fine of up to $41,484 for each day for which they are not in compliance. In practice, the federal antitrust agencies will not impose penalties the first time that a person fails to submit a HSR filing, provided that the failure was inadvertent.

Procedure and test

What procedures are followed by the authority? What is the timetable for the merger investigation?

During the initial waiting period prescribed by the Hart-Scott-Rodino (HSR) Act, the agency conducts a preliminary analysis to identify potential competitive issues. If, at the end of the initial waiting period, the agency believes that the proposed transaction poses competitive concern, it issues a request for additional information and documentary material – known as a ‘second request’ – to each party. A second request requires the submission of documents from the parties’ files and responses to detailed interrogatories and data requests. Responding to a second request can take from several weeks to several months and can cost hundreds of thousands or even several million dollars. The HSR waiting period is extended as a result of issuance of a second request until 30 days (or 10 days in the case of a cash tender offer or bankruptcy matter) after the parties have complied with the second request. Following the issuance of a second request, the agency will often conduct investigational hearings (similar to depositions) of officers and employees of the merging parties. The antitrust agencies also typically obtain documents and sworn testimony from customers and other industry participants (eg, competitors and suppliers). The parties may agree not to close the proposed transaction for an additional period of time after the expiration of the statutory HSR waiting period in order to allow the antitrust authorities additional time to conclude their investigation. Extensions are common in transactions that raise significant and complex competition issues.

If, at any time, the reviewing agency is persuaded that the transaction will not substantially reduce competition, the agency can grant early termination of the waiting period if the parties have requested it, and allow the parties to close the transaction. If the agency instead concludes that the transaction is likely to substantially lessen competition, the parties and the agency may use the waiting period (and extensions thereof) to negotiate possible ‘fixes’ (eg, divestitures or licensing arrangements) to address the competitive concerns. Alternatively, if the agency determines that there is no fix available, or that the fix offered does not sufficiently address the competitive problems, it will seek a preliminary injunction in federal court to enjoin the transaction. Court proceedings typically add three to six months to the review process.

What obligations are imposed on the parties during the process?

During the initial waiting period, the reviewing agency may submit voluntary questions and requests for documents and information to the parties. Although parties are not required to respond to such requests, failure to do so will increase the likelihood of a second request. In cases where parties expect the agencies to have questions regarding the transaction, the parties may choose to contact the agency on a proactive basis, providing arguments, documents and data which demonstrate that the transaction does not pose competitive concern. If a transaction involves significant competitive overlap, it is not uncommon to have one or more meetings with lawyers and economists at the reviewing agency during the initial review period. Executives from the merging companies often attend such meetings to provide information and answer questions.

If, at the end of the initial waiting period, the agency believes that the proposed transaction poses competitive concerns, it will issue a second request to each party. Each party must respond to the second request before the transaction can be consummated (except in the case of a cash tender offer, in which only the acquirer must respond before the transaction can be consummated).

During the waiting period, parties are obligated to refrain from ‘gun jumping’ – that is, the premature transfer of beneficial ownership, whereby one party begins to direct or influence the normal-course business decisions of the other, or the integration of the parties’ operations before the expiration or termination of the waiting period.

What role can third parties play in the process?

The reviewing agency will often contact the parties’ customers to elicit their views on the potential competitive effects of the transaction, and customer opinions can have a significant effect on the agency’s assessment of the transaction. The agency may also consider information provided by other industry participants, including competitors of the merging parties. While facts provided by competitors may influence the agencies, competitor complaints often carry less weight and credibility than customers’ views.

What is the substantive test applied by the authority?

The 2010 Department of Justice and Federal Trade Commission Horizontal Merger Guidelines set forth the agencies’ framework for analysing mergers between competitors, to determine whether the effect of a transaction may be to substantially lessen competition, which is the statutory standard. Their analysis entails:

• assessing whether the merger is likely to result in anti-competitive effects in a market (eg, higher prices, reduced output and diminished product innovation or variety) or reduced service quality, from the unilateral exercise of market power or coordinated interaction;     
• assessing whether entry into or repositioning in the market by other firms would prevent any competitive concerns identified;
• considering whether the merger would generate efficiencies that the parties could not reasonably achieve through other means that would enhance competition;
• analysing whether powerful customers would constrain the merging parties’ ability to raise prices; and
• assessing whether, were it not for the merger, either of the merging firms would imminently fail, causing their productive assets to exit the market.

The ultimate question in this analysis is whether the merger is likely to harm consumers by creating or enhancing market power or facilitating its exercise, or whether the transaction would benefit consumers by enhancing competition, creating efficiencies or facilitating innovation.

Does the legislation allow carve-out agreements in order to avoid delaying the global closing?

The HSR Act does not expressly permit the parties to ‘carve out’ portions of the transaction for closing before the expiration or early termination of the waiting period. However, as discussed above, certain portions of the transaction may be exempt from the act altogether.

Is a special substantive test applied for joint ventures?

The substantive test for determining whether a potential joint venture violates the antitrust laws is essentially the same as the test applied for M&A. The federal antitrust agencies have issued Antitrust Guidelines for Competitor Collaborations, which may also be applicable to joint ventures.

Remedies

What are the potential outcomes of the merger investigation? Please include reference to potential remedies, conditions and undertakings.

Both the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice have the authority to seek to enjoin or unwind a merger that is likely to substantially lessen competition. A merger investigation has four potential outcomes:

• No action is taken by the reviewing agency, in which case the parties are free to close the transaction at the expiration or termination of the waiting period prescribed by the Hart-Scott-Rodino (HSR) Act;
• The parties are allowed to close the transaction based on negotiated structural (eg, divestiture) or behavioral remedies that resolve the reviewing agency’s antitrust concerns, typically subject to a consent decree;
• The reviewing agency may seek to block the merger through litigation in federal court. Both the Antitrust Division and the FTC may seek a preliminary injunction in federal court to prevent the parties from closing the transaction. The FTC may also seek relief through administrative litigation before an administrative law judge; and
• The parties may abandon the transaction at any time during the HSR review process.

Appeals

Is there a right of appeal?

The federal antitrust agencies must sue to block a transaction by filing a complaint in federal court. The Federal Trade Commission (FTC) may also seek a cease and desist order through an administrative proceeding.

If the reviewing agency is granted a preliminary injunction in federal court prohibiting the parties from closing the transaction, the parties may appeal the court’s decision to a federal circuit court of appeals. If the relevant agency sues to enjoin the transaction in federal court, the parties or the agency can also appeal the court’s decision on the merits to the relevant federal circuit court of appeals.

If the transaction is challenged by the FTC in an administrative process, the parties may appeal the decision of the administrative law judge to the full FTC Commission. After the full commission renders a decision, the parties may appeal that decision to a federal circuit court in any circuit in which the company resides or does business.

Parties may petition the Supreme Court to review a decision of a court of appeals, although the Supreme Court reviews only a small proportion of cases for which appeals are sought.

Do third parties have a right of appeal?

Only the parties to the decision have standing to appeal the decision of a federal court or administrative law judge. However, if a third party brings a private suit under the Clayton Act, that party may appeal a federal district court’s decision to the relevant federal circuit court of appeals.

What is the time limit for any appeal?

Typically, an appeal to a federal circuit court must be filed within 30 days. If one of the parties is the United States or a US agency, as is common in merger cases, the notice of appeal may be filed by any party within 60 days of entry of the judgment or order being appealed. For administrative cases before the FTC, an administrative law judge’s decision may be appealed to the commission by either party within 30 days.

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