FTC Reinstates and Expands Prior Approval Policy

What Happened: The Federal Trade Commission reinstituted and expanded a policy requiring prior approval for future transactions for companies subject to merger settlements (and challenges).

The Bottom Line: This development could stifle certain M&A activity.  Could it also lead to more litigation against the FTC?

The Full Story:

Last week’s announcement reinstates a prior approval policy abandoned by the Federal Trade Commission (“FTC”) in 1995.  It also broadens the scope of the pre-1995 policy in significant ways.

New Measures

Merging companies can agree to divest assets or otherwise remedy a challenged transaction through consent decree.  Prior to 1995, companies that entered into these consent decrees were required to obtain “prior approval” of any future transaction in at least the same product and geographic market for which the violation was alleged.  In 1995, the FTC ceased seeking prior approval in large part because it overlapped with the Hart-Scott-Rodino (“HSR”) pre-merger notification review process.

The 2021 Policy Statement follows the FTC’s July 2021 vote to rescind the 1995 policy. It also significantly expands the FTC’s enforcement measures.  For example, the policy states that the FTC will “routinely” require prior approval on any future transaction affecting each relevant market for which a violation was alleged for at least 10 years.  Moreover, the FTC also reserves the right to employ “stronger relief” by imposing prior approval provisions that cover “product and geographic markets beyond just the relevant product and geographic markets affected by the merger.”

On the same day that the FTC announced the new policy, it also made public a proposed order limiting DaVita, Inc.’s future transactions.  In the DaVita Inc. v. Total Renal Care, Inc. complaint, the FTC alleged that the merger would harm competition in Provo, Utah, but the consent order requires DaVita, Inc. to obtain prior approval from the FTC before “acquiring any new ownership interest … anywhere in Utah.”

In addition to restrictions for merging parties subject to an order, the FTC also noted that it may seek prior approval commitments from parties that have abandoned their transaction after litigation has commenced — or even in cases where a transaction is abandoned after the parties have substantially complied with a Second Request.  In her dissent on the rescission of the 1995 Policy Statement, Commissioner Wilson noted that the 1995 policy was adopted following the FTC’s pursuit of almost nine years of litigation in connection with Coca-Cola’s proposed acquisition of Dr. Pepper.  After Coca-Cola abandoned the transaction, the FTC continued to seek a prior approval requirement through its administrative proceeding.  The 2021 Policy Statement notes: “[t]his should signal to parties that it is more beneficial to them to abandon an anticompetitive transaction before the Commission staff has to expend significant resources investigating that matter.”

Republican Commissioners Wilson and Phillips issued a dissenting statement calling the new policy “yet another daft attempt by a partisan majority of commissioners to use bureaucratic red tape to weigh down all transactions — not just potentially anticompetitive ones — and to chill M&A activity in the United States.” Republican commissioners were especially critical of requiring divestiture buyers to agree to prior approval.  According to the new policy, in some situations divestiture buyers that step in to buy assets to remedy competitive concerns will be required to agree to prior approval for any future sale of those assets for at least 10 years.

Implications for Future Deals

Paired with the FTC’s increased merger scrutiny, there are several implications:

• Potential divesture buyers may be harder to find. Companies will be wary of having to keep the assets for a minimum of 10 years if the FTC does not approve of their sale.
• Merging companies will face increased uncertainty. While premerger notifications are filed with both the Department of Justice (“DOJ”) and FTC, only one antitrust agency reviews the transaction.  Because the DOJ has not adopted the FTC’s prior approval policy, merging companies may face differing merger settlement obligations depending on which agency reviews their transaction.
• Buyers subject to prior approval obligations may be significantly disadvantaged in future bidding situations. Prior approval brings with it increased closing uncertainty, including no statutory deadline for the FTC to complete its review of a transaction subject to prior approval, and the FTC’s ability to block that deal without having to litigate the merits of the FTC’s anti-competitive view of the transaction.  This could lead to sellers selecting alternative bidders, driving down purchase prices.
• Likewise, buyers that present heightened antitrust risk and are therefore more likely to result in the FTC demanding a prior approval commitment may be viewed even more negatively by sellers who want to avoid protracted negotiations or litigation with the FTC. Transactional planners will also have to address how to address the risk that the FTC will seek a prior approval commitment.
• Companies may choose to “fix-it-first” by selling competing assets prior to filing HSR with the agencies.
• These new developments may also spurn increased litigation as companies choose to litigate rather than limit their long-term M&A strategy.

Parties considering a deal should reach out to antirust counsel early in the process to discuss the competitive landscape, strategy, and next steps.