A shift in the Federal Trade Commission’s merger review process will add more risk management work for companies hoping to quickly wrap up mergers.
The FTC said this month it will tell some companies that it lacks resources to complete an initial review of their mergers and acquisitions within 30 days, as generally laid out in the Hart-Scott-Rodino (HSR) Act.
The FTC will now send a letter to companies doing deals that can’t be fully reviewed within 30 days that its investigation remains open and their deal may be subsequently declared unlawful.
The agency, which is currently facing a surge of deals, has always had the right to undo mergers even after they’re closed. But until the Aug. 3 notice, companies had assumed the 30-day expiration was a signal that the FTC had generally deemed the deal to be in compliance of antitrust laws and would not immediately challenge it.
The new alert upends decades of M&A precedent where companies expected to close deals upon the conclusion of HSR review period. It also lines up with the Biden Administration’s focus on cracking down on industries operating in heavily concentrated markets with what it deems to be anticompetitive practices
Companies, now without the post-30 day assurance, have to navigate a new landscape that could be dotted with closing delays, amended contracts, and heightened worries about possible enforcement down the road to undo their mergers, attorneys say.
Those pursuing deals that are larger than $92 million—the current FTC threshold that triggers an HSR review—will have to boost their competition analysis and redouble their work in allocating parties’ risks in contracts.
“There is no indication of if and when the FTC will tell you the deal is good to go,” said Steven Siesser, co-chair of the Transactions & Advisory practice at Lowenstein Sandler LLP. “And that leaves you in limbo, which is a real problem because it is an open-ended risk situation.”
A flood of deals this year drove the FTC to issue its change, the agency said. In July, the agency handled 343 HSR merger reviews, more than tripling from 112 a year ago, it said.
The spike isn’t entirely attributable to the economy reopening after the Covid-related shutdown. During a five-month period before the March 2020 shutdown, the number of FTC merger reviews ranged from 140 to 209 per month.
Even before the Aug. 3 alert, the agency had intimated that early assurances for companies pursuing mergers won’t be as forthcoming.
In February, the FTC and the Justice Department’s antitrust division suspended its HSR “early termination” process. The agencies had used the process to let companies know—even before the 30-day review period expiration—that their deals were good to go.
Companies have so far been unsuccessful in their requests to the agencies to restore the early termination process, said Erin Glavich, an associate attorney at Baker & Miller PLLC.
The Aug. 3 alert “is a signal that the FTC is so overloaded, they want to take all the time they can get,” Glavich said.
The FTC’s current merger review process on “second requests” will remain intact. If the FTC does not receive enough information to challenge or approve a deal, the agency could move the deal into a second review period, which lasts another 30 days or another negotiated length of time.
“The FTC asks for an extraordinary amount of information which can cost millions in legal fees, and you’re not allowed to complete the merger unless there is substantial compliance. And that is not defined,” Siesser said.
Companies will have to assess their risk levels based on the FTC’s “move-at-your-own-risk” letters, attorneys say.
That means companies may have to add language into contracts that accommodate for delays due to ongoing investigations, or how the acquiring company can recover money if the court orders an unwind of a consummated deal.
M&A contracts now typically require parties to close once the 30-day waiting period is expired, Siesser said.
But the parties may not be willing to close anymore, and contracts may have to build in language that allocates risks for a possible unwinding down the road, he said.
“That’s a big deal and a matter of meaningful impact to M&A practitioners already looking to close mergers and acquisitions at a time when activity is so robust, and it’s just such volume in the market,” Siesser said.
Pursuing Done Deals
If the FTC wants to undo a deal, it can file for a plenary injunction or review the merger through the administrative process, Glavich said.
The in-house administrative process could result in a consent decree or settlement to divest assets.
Perhaps the most prominent example of the FTC’s attempt to undo a past-approved deal is its challenge of Facebook Inc.'s 2012 acquisition of Instagram and the 2014 takeover of WhatsApp. Facebook said the government wanted a “do over” after the FTC let the acquisitions move forward.
A U.S. district judge dismissed the FTC challenge. The agency has until Aug. 19 to refile its complaint.
M&A attorneys speculate the FTC under Chairman Lina Khan , an outspoken critic of BigTech, will look to be more assertive in undoing more deals that it had approved in the past.
But the agency has been generally reluctant to exercise this power, noted said Alex Okuliar, co-chair of Morrison & Foerster’s Global Antitrust Law Practice.
“Historically, and with some exceptions, they have used this authority somewhat sparingly and where they felt they had evidence of harm or customer complaints,” said Okuliar, who recently served as the deputy assistant attorney general for civil enforcement at the Justice Department.
“Time will tell if these letters actually lead to legal action or if they ultimately do not change the assessment of deal risk materially beyond where it is today,” Okuliar said.