Rule2024-25024
Premerger Notification; Reporting and Waiting Period Requirements
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
November 12, 2024
Effective
February 10, 2025
Issuing agencies
Federal Trade Commission
Abstract
The Federal Trade Commission ("FTC" or "Commission"), with the concurrence of the Assistant Attorney General, Antitrust Division, Department of Justice ("Assistant Attorney General" or "Antitrust Division") (together the "Agencies"), is issuing this final rule and Statement of Basis and Purpose ("SBP") to amend the Premerger Notification Rules (the "Rules") that implement the Hart-Scott-Rodino Antitrust Improvement Act ("the HSR Act" or "HSR"), including the Premerger Notification and Report Form for Certain Mergers and Acquisitions ("Form") and Instructions to the Notification and Report Form for Certain Mergers and Acquisitions ("Instructions"). The final rule requires parties to transactions that are reportable under the HSR Act to provide documentary material and information that are necessary and appropriate for the Agencies to efficiently and effectively conduct an initial assessment to determine whether the transaction may violate the antitrust laws and whether to issue a Request for Additional Information ("Second Request") as provided by the HSR Act. In addition, the final rule implements certain requirements of the Merger Filing Fee Modernization Act of 2022 ("Merger Modernization Act") and ministerial changes to the Rules as well as the necessary amendments to the Instructions to effect the final changes.
Full Text
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[Federal Register Volume 89, Number 218 (Tuesday, November 12, 2024)]
[Rules and Regulations]
[Pages 89216-89414]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-25024]
[[Page 89215]]
Vol. 89
Tuesday,
No. 218
November 12, 2024
Part III
Federal Trade Commission
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16 CFR Parts 801 and 803
Premerger Notification; Reporting and Waiting Period Requirements;
Final Rule
Federal Register / Vol. 89, No. 218 / Tuesday, November 12, 2024 /
Rules and Regulations
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FEDERAL TRADE COMMISSION
16 CFR Parts 801 and 803
RIN 3084-AB46
Premerger Notification; Reporting and Waiting Period Requirements
AGENCY: Federal Trade Commission.
ACTION: Final rule.
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SUMMARY: The Federal Trade Commission (``FTC'' or ``Commission''), with
the concurrence of the Assistant Attorney General, Antitrust Division,
Department of Justice (``Assistant Attorney General'' or ``Antitrust
Division'') (together the ``Agencies''), is issuing this final rule and
Statement of Basis and Purpose (``SBP'') to amend the Premerger
Notification Rules (the ``Rules'') that implement the Hart-Scott-Rodino
Antitrust Improvement Act (``the HSR Act'' or ``HSR''), including the
Premerger Notification and Report Form for Certain Mergers and
Acquisitions (``Form'') and Instructions to the Notification and Report
Form for Certain Mergers and Acquisitions (``Instructions''). The final
rule requires parties to transactions that are reportable under the HSR
Act to provide documentary material and information that are necessary
and appropriate for the Agencies to efficiently and effectively conduct
an initial assessment to determine whether the transaction may violate
the antitrust laws and whether to issue a Request for Additional
Information (``Second Request'') as provided by the HSR Act. In
addition, the final rule implements certain requirements of the Merger
Filing Fee Modernization Act of 2022 (``Merger Modernization Act'') and
ministerial changes to the Rules as well as the necessary amendments to
the Instructions to effect the final changes.
DATES: This rule is effective on February 10, 2025.
FOR FURTHER INFORMATION CONTACT: Robert Jones, Assistant Director,
Premerger Notification Office, Bureau of Competition, Federal Trade
Commission, 400 7th Street SW, Washington, DC 20024, or by telephone at
(202) 326-3100.
SUPPLEMENTARY INFORMATION:
I. Executive Summary
The Commission is amending and reorganizing the documentary
material and information requirements for premerger notification
required by the HSR Act, 15 U.S.C. 18a, (``notification'' or ``HSR
Filing'' or ``Filing'') to improve the efficiency and effectiveness of
premerger review and to implement changes mandated by the Merger
Modernization Act, 15 U.S.C. 18b. The Act and the Rules require parties
to certain mergers and acquisitions to submit a notification to the
Agencies and to wait a short period of time before consummating the
reported transaction. The reporting and waiting period requirements of
the HSR Act are intended to enable the Agencies to determine whether a
proposed merger or acquisition may violate the antitrust laws,
including section 7 of the Clayton Act, 15 U.S.C. 18, if consummated
and, when appropriate, to take appropriate law enforcement action prior
to consummation to prevent a violation of the antitrust laws.
To advance the Clayton Act's goal of preventing undue consolidation
or stopping it in its incipiency,\1\ Congress passed the HSR Act to
require mandatory premerger notification of some acquisitions. In
particular, it charged the Agencies with reviewing the details of those
proposed transactions in advance of consummation. The Agencies rely on
information submitted in an HSR Filing to conduct a premerger antitrust
risk assessment and to identify those transactions that require
additional investigation to determine if they may harm competition, and
thus violate the antitrust laws if consummated. The HSR Act requires
that the parties not consummate their planned transaction while the
Agencies conduct this assessment until the expiration of the statutory
waiting period, which for most transactions is 30 days (15 days in the
case of a cash tender offer or certain bankruptcy sales). During that
short period of time, referred to as the initial waiting period, the
Agencies review the information submitted in the parties' HSR Filings
to identify those transactions that require a closer look, including
through the collection of additional information from the acquiring and
acquired persons or from third parties. If either agency determines
during the initial waiting period to conduct an in-depth investigation
of the transaction, section 7A(e) of the Clayton Act, 15 U.S.C. 18a(e),
authorizes the Agencies to request additional information or documents
from each party, which is referred to as a Second Request.\2\ Issuing
Second Requests extends the waiting period under the HSR Act for
another 30 days (ten days in the case of a cash tender offer or certain
bankruptcy sales) after the parties have substantially complied with
the Second Requests. During this second waiting period, if the
reviewing agency believes that a proposed transaction may violate the
antitrust laws, it may seek an injunction in Federal district court to
prohibit consummation of the transaction.
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\1\ See, e.g., Brown Shoe Co. v. United States, 370 U.S. 294,
318 n.32 (1962).
\2\ The FTC and DOJ share responsibility to enforce the
antitrust laws and have established a protocol to clear the
investigation of a transaction to one agency to avoid confusion and
conserve public resources. The agency that receives clearance
conducts the investigation and determines whether to issue Second
Requests.
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The Commission has administered the HSR Act's premerger
notification program for over forty-five years, issuing an initial set
of HSR Rules that took effect on September 5, 1978.\3\ Since then, it
has regularly updated these rules, with the concurrence of the
Assistant Attorney General, pursuant to its mandate under 15 U.S.C.
18a(d), to require a premerger notification for each reportable
acquisition that contains documentary material and information
necessary and appropriate to enable the Agencies to determine whether
the transaction is one that may violate the antitrust laws and proceed
to an in-depth investigation through the issuance of Second Requests.
In this rulemaking, the Commission is responding to several factors
that make today's economic reality more challenging for conducting a
premerger assessment with the limited information required by the
current rules. Simply put, the economy of 2024 is different than it was
in 1978 or 2000 and, in the Agencies' experience, the HSR Form has not
kept pace with the realities of how businesses compete today. There is
a higher degree of interconnectivity of businesses along the supply
chain as well as with other companies that provide ancillary services.
The focus of competitive interaction is not as obvious when companies
that supply goods or services also generate revenues from other
sources, such as data sales, and when even businesses in traditional
sectors such as manufacturing generate significant revenues from the
sale of associated services. The changing nature of competition makes
it more difficult for the Agencies to identify existing business
relationships that might be affected by the acquisition, including
through non-price effects such as innovation competition, and that are
not
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apparent from simply focusing on sales in output markets. In addition,
changes in mergers and acquisition (``M&A'') activity, corporate
structures, and investment strategies have rendered the current Form's
focus on traditional corporate structures outdated, and often the
Agencies are unable to determine which entities or individuals will be
making competitive decisions post-merger.
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\3\ The Commission commenced notice-and-comment rulemaking soon
after the passage of the HSR Act and made extensive revisions to its
proposed rules before issuing a final rule nearly two years later.
See 41 FR 55488 (Dec. 20, 1976), 42 FR 39040 (Aug. 1, 1977), 43 FR
33450 (July 31, 1978), 43 FR 34443 (Aug. 4, 1978), 43 FR 36053 (Aug.
15, 1978). See Fed. Trade Comm'n & U.S. Dep't of Justice, Second
Hart-Scott-Rodino Annual Report (FY 1978).
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These profound changes that have occurred over time have created or
exposed significant gaps in the information generated for premerger
review under the current HSR Rules. These gaps curtail the Agencies'
ability to efficiently and effectively detect transactions that may
violate the antitrust laws. To fill in these gaps and to directly
respond to the passage of the Merger Modernization Act, the Commission
relied on its experience and expertise to identify specific information
that is necessary and appropriate to conduct effective premerger
screening.
To initiate this rulemaking, the Agencies conducted a comprehensive
review of the premerger notification process, relied on their
experience collecting and reviewing data and documents during antitrust
investigations, and considered the cumulative effects of changes in
deal structure, investment strategies, and the competitive dynamics of
the modern economy explained in more detail below. From this review,
the Commission identified several information deficiencies in the
current HSR Filing that prevent the Agencies from efficiently and
effectively conducting a premerger assessment of reportable
transactions to identify which ones may violate the antitrust laws. The
Agencies compared documentary material and information they have
received over the years during in-depth merger investigations with the
information collected in HSR Filings and assessed whether having
certain types of documentary material and information at the beginning
of an investigation would have changed the Agencies' decision whether
and how to investigate reportable transactions. These specific
categories of information and documents, which are readily available to
the merging parties, are not required by the current Rules, but would
be highly probative to the initial antitrust screening of a transaction
during the initial waiting period and thus are necessary and
appropriate for that review. The information identified and required by
this final rule will enable the Agencies to detect transactions that
may violate the law in light of modern commercial realities and in
furtherance of the statutory mandate to arrest trends toward
concentration in their incipiency. The final rule also will allow the
Agencies to identify potentially unlawful transactions more quickly and
with greater accuracy, narrowing the scope of their investigations in
some cases, and in others, reducing the need to conduct a more
burdensome in-depth investigation by issuing Second Requests.
In June 2023, the Commission proposed amendments to address the
information deficiencies under the existing HSR Rules in a Notice of
Proposed Rulemaking (``NPRM'').\4\ The Commission received
approximately 721 comments.\5\ The majority of commenters were
individuals who expressed general support for the rulemaking or for
more vigorous antitrust enforcement more broadly. Others opposed
certain aspects of the proposed rule and some questioned the
Commission's authority to make any adjustments. After careful
consideration of the comments and as discussed in more detail below,
the Commission has substantially narrowed the information requirements
proposed in the NPRM. In the final rule, the Commission is not adopting
several proposed requirements outright, including those related to:
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\4\ On June 29, 2023, the Commission published a Notice of
Proposed Rulemaking, Premerger Notification; Reporting and Waiting
Period Requirements, 88 FR 42178 (June 29, 2023) (hereinafter NPRM).
On August 10, 2023, the Commission extended the comment period to
receive public comments through September 27, 2023. 88 FR 54256. The
comments on the NPRM (Doc. No. FTC-2023-0040) are available at
<a href="https://www.regulations.gov/docket/FTC-2023-0040/comments">https://www.regulations.gov/docket/FTC-2023-0040/comments</a>.
\5\ The Commission does not rely on any particular individual
comment submission for its findings, but rather provides here (and
throughout this final rule) examples of comments that were
illustrative of themes that spanned many comments. The Commission's
findings are based on consideration of the totality of the evidence,
including its review of the empirical literature, its review of the
full comment record, and its expertise and experience in identifying
mergers that violate the antitrust laws.
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<bullet> a timeline of key dates for closing the proposed
transaction;
<bullet> creating organization charts for the purpose of filing a
notification;
<bullet> information about other interest holders;
<bullet> drafts of submitted documents;
<bullet> information about employees;
<bullet> information about board observers;
<bullet> geolocation information;
<bullet> prior acquisitions involving entities with less than $10
million in sales or revenues, or consummated more than 5 years prior to
filing; and
<bullet> information about steps taken to preserve documents or use
of messaging systems.
For other proposals, the Commission has substantially modified its
proposals to minimize where possible the costs to filers and third
parties, yet still provide the Agencies with information that is
necessary and appropriate for effective and efficient premerger review.
Overall, these modifications significantly reduce the effort required
to comply with the final rule as compared to the proposed rule and
include:
<bullet> Creating a new category of ``select 801.30 transactions''
for which the cost of complying with the information requirements has
been limited because of the low risk that the transaction may violate
the antitrust laws;
<bullet> Eliminating several document requirements to reduce costs;
<bullet> Limiting some requirements to materials that already
exist;
<bullet> Excusing the seller \6\ from certain information requests
if it would be duplicative of information received from the buyer;
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\6\ References to ``seller'' throughout refer to the acquired
person, as defined in 16 CFR 801.2, regardless of whether or not the
acquired person is actually a party to the transaction.
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<bullet> Limiting some requirements to cover only recent
information;
<bullet> Providing definitions or clarifications to reduce
uncertainty and improve filer compliance;
<bullet> Creating de minimis exceptions to reduce the costs of
generating information that has little economic impact; and
<bullet> Making the provision of certain information contingent on
the identification of a significant business relationship between the
filing persons that is critical to assessing whether the transaction
may violate the antitrust laws.
As modified, the final rule introduces necessary and appropriate
updates to HSR information requirements to allow the Agencies to
understand the reported transaction and conduct an initial antitrust
assessment within the statutory timeframe and does so in a manner that
aligns the associated costs with the likelihood that the transaction is
one that presents antitrust risk. With more complete information that
is targeted to disclose existing business relationships between the
parties, the Agencies can determine whether and how to deploy their
resources to further investigate potentially anticompetitive
acquisitions prior to consummation. The final rule will also provide
transparency for those contemplating a reportable transaction by
describing the information the
[[Page 89218]]
Agencies rely on to conduct their initial assessment of whether a
transaction may violate the antitrust laws. The amendments will also
reduce the current burden on third parties (such as customers and
competitors of the merging parties) on whom the Agencies often rely to
fill in many of the information gaps during the initial review period
because of inadequacies in the current Rules.
With this rulemaking the Commission has closely tailored the burden
of complying with the HSR Act to align as much as practicable with the
risks of a law violation presented by the particular transaction. This
alignment is consistent with the statutory purpose of premerger review,
which is for the Agencies to determine which reported transactions may
violate the antitrust laws during the brief period provided by the Act
for an initial antitrust assessment. As a result, the final rule
achieves the benefits associated with mandatory premerger review with
an overall burden that is reasonable and consistent with the
legislative purpose of the HSR Act.
II. Background
A. Premerger Review and the Implications for Merger Enforcement
Section 7 of the Clayton Act is, by its terms, forward-looking and
predictive, focused on acquisitions whose effect ``may be substantially
to lessen competition, or to tend to create a monopoly.'' \7\ To better
effectuate the Clayton Act's goal of preventing undue consolidation or
stopping it in its incipiency, Congress passed the HSR Act to require
mandatory premerger notification of some acquisitions, and charged the
Agencies with reviewing the details of those proposed transactions in
advance of consummation to determine whether they may violate the
antitrust laws. In doing so, Congress fundamentally changed the way the
Agencies enforce the nation's antitrust laws to prevent harmful
consolidation.\8\
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\7\ 15 U.S.C. 18. See Brown Shoe v. United States, 370 U.S. 294,
317-18 (1962) (Congress provided authority for arresting mergers at
a time when the trend to a lessening of competition in a line of
commerce was still in its incipiency and assure courts had the power
to brake the process of concentration at its outset and before it
gathered momentum).
\8\ See Peter W. Rodino, Jr., Statement on the 25th Anniversary
of Hart-Scott-Rodino (2001), <a href="https://www.ftc.gov/enforcement/premerger-notification-program/hsr-resources/pno-news-archive/statement-peter-w-rodino">https://www.ftc.gov/enforcement/premerger-notification-program/hsr-resources/pno-news-archive/statement-peter-w-rodino</a> (``Hart-Scott-Rodino was intended to give
the anti-trust agencies two things: critical information about a
proposed merger and time to analyze that information and prepare a
case, if necessary. From what I hear, the legislation absolutely has
transformed merger enforcement. Competition, as well as the
consumer, has benefitted.'').
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Congress specifically charged that the Commission engage in
rulemaking to require information in the HSR Filing that is necessary
and appropriate to detect acquisitions that may violate the antitrust
laws. Section 18a(d)(1) of the HSR Act states that the Commission, by
rule and in accordance with the Administrative Procedures Act, shall
require that the notification contain such documentary material and
information to determine whether the acquisition may, if consummated,
violate the antitrust laws.\9\ Relying on this explicit rulemaking
authority, the Commission has adjusted those requirements over time to
carry out the purposes of the Act.
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\9\ 15 U.S.C. 18a(d)(1).
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In passing the HSR Act, Congress imposed mandatory premerger review
only for certain large transactions, in part to ``improve and modernize
antitrust investigation and enforcement mechanisms,'' \10\ ``ease
burdens on the courts by forestalling interminable post-consummation
divestiture trials . . . [, and] advance the legitimate interests of
the business community in planning and predictability.'' \11\ The
robust legislative history of the HSR Act makes plain that premerger
review should focus on the likelihood that a reported transaction may
violate the antitrust laws and that the Commission shall collect
information to make that determination prior to consummation.\12\
Consistent with Congressional mandate, the Agencies rely on
notifications under the HSR Act to target their enforcement efforts to
their best use in preventing undue consolidation by seeking to prohibit
the consummation of acquisitions that violate the antitrust laws.
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\10\ S. Rep. No. 94-803, at 1 (1976).
\11\ H.R. Rep. No. 94-1373, at 11 (1976). The HSR Act applies to
acquisitions that met the statutory thresholds whether they are
properly styled ``mergers'' and even if they do not result in a
change of control. The terms ``mergers,'' ``acquisitions,'' and
``transactions'' are used interchangeably to refer to transactions
for which an HSR filing is required.
\12\ 15 U.S.C. 18a(d)(1).
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To focus the Agencies' screening and potential enforcement efforts
on the mergers that are most likely to harm competition and consumers,
Congress required notice in advance for the largest mergers and tasked
the Agencies with conducting an assessment of the risk that the
proposed acquisition may violate the antitrust laws. To perform this
task, the Agencies must review thousands of filings each year and
identify which ones should be targeted for an intensive investigation
of their potential to violate the antitrust laws. This is a fact-
intensive endeavor that requires a deep understanding of precedent and
economic analysis. The Agencies employ lawyers, economists,
technologists, accountants, and support staff to conduct premerger
analyses of reported transactions in order to perform this critical
task on behalf of the American public.
Nonetheless, transactions reported under the HSR Act are a small
fraction of the total number of mergers and acquisitions that occur
each year in the United States. Relying on commercial data on M&A
activity and data from the Agencies' annual HSR reports, Table 1 shows
that during the five-year period of FY 2018 to 2022, HSR filings
represented a small percentage of overall deal activity in the United
States, on average 16.5 percent a year.\13\
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\13\ Using different commercially available data, the U.S.
Government Accountability Office recently estimated that HSR filings
during this same time frame averaged 15 percent of overall M&A
activity. See U.S. Gov't Accountability Office, Defense Industrial
Base: DOD Needs Better Insight into Risks from Mergers and
Acquisitions 8 Fig. 1 (Oct. 2023) (GAO-24-106129), <a href="https://www.gao.gov/assets/d24106129.pdf">https://www.gao.gov/assets/d24106129.pdf</a> (using Bloomberg data).
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[GRAPHIC] [TIFF OMITTED] TR12NO24.032
While the Agencies investigate and ultimately seek to block only a
small subset of reportable mergers each year, the challenges of
administering mandatory premerger review have expanded and accelerated
over time due to the changes in the nature of M&A activity discussed in
detail below.
[GRAPHIC] [TIFF OMITTED] TR12NO24.033
As depicted in Figure 1, there was a recent spike in HSR-reportable
transactions: in FY 2021, the Agencies reviewed HSR Filings for 3,520
transactions, over twice the number of the prior year's filings. In FY
2022, the Agencies reviewed 3,152 transactions. Although the pace of
HSR Filings has recently moderated somewhat, the recent period of
intense merger activity highlighted significant inefficiencies and
deficiencies in current notification requirements that must be
addressed so that the Agencies can direct their scarce resources to
prevent those acquisitions most likely to cause widespread harm.\14\
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\14\ Contrary to suggestions from some commenters, it is not
practical for the Agencies to identify specific illegal transactions
that they ``missed'' during their premerger review, nor is the
Commission required to establish that as a predicate for invoking
its statutory rulemaking authority under the HSR Act. See Pharm.
Rsch. & Mfrs. Am. v. FTC, 790 F.3d 198, 199, 206 (D.C. Cir. 2015)
(hereinafter PhRMA). Doing so would require a redirection of
resources to investigate consummated mergers and away from resources
devoted to premerger review. Instead, it is imperative that the
Agencies ensure that they have the right information to address
deficiencies that have emerged to undermine premerger review as an
effective tool for detecting which transactions may violate the
nation's antitrust laws.
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The Commission is mindful of recent economic research that
underscores the importance of adequate detection for effective merger
enforcement. For instance, researchers posit that some firms appear to
be employing strategies to avoid antitrust scrutiny of their
anticompetitive deals, deliberately negotiating and structuring their
deals to avoid premerger review (so-called
[[Page 89220]]
stealth acquisitions),\15\ or identifying acquisition targets at a
nascent stage to buy them before they are valuable enough to require
premerger review, sometimes solely for the purpose of preempting future
competition (so-called ``killer acquisitions'').\16\ One researcher
concludes that merger enforcement falls by about 90 percent when
transactions are not subject to premerger review.\17\ Because most
mergers are not subjected to premerger review, these strategies have
contributed to a rise in aggregate concentration by stimulating mergers
between competitors, with attendant negative effects on markups,
private investment, and the share of output going toward profits.\18\
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\15\ John Kepler et al., ``Stealth Acquisitions and Product
Market Competition,'' 78 J. Fin. 2837 (2023); John M. Barrios &
Thomas G. Wollmann, ``A New Era of Midnight Mergers: Antitrust Risk
and Investor Disclosures'' (Nat'l Bureau of Econ. Rsch., Working
Paper No. 29655, Jan. 2022), <a href="https://www.nber.org/papers/w29655">https://www.nber.org/papers/w29655</a>; see
also Colleen Cunningham et al., ``Killer acquisitions,'' 129 J.
Political Econ. 649, 653 (2021) (killer acquisitions of overlapping
targets bunch just below HSR threshold while there is no such
pattern for non-overlapping acquisitions).
\16\ Cunningham et al., supra note 15, at 653.
\17\ See Comment of Thomas Wollmann, Doc. No. FTC-2023-0040-0680
at 1 n.2 (citing to Thomas G. Wollmann, ``Stealth Consolidation:
Evidence from an Amendment to the Hart-Scott-Rodino Act,'' 1 a.m.
Econ. Rev.: Insights 77-94 (2019) and Thomas G. Wollman, ``How to
Get Away with Merger: Stealth Consolidation and Its Real Effects on
US Healthcare'' (Nat'l Bureau of Econ. Rsch., Working Paper No.
27274, 2021)).
\18\ Thomas G. Wollmann, ``Stealth Consolidation: Evidence from
an Amendment to the Hart-Scott-Rodino Act,'' 1 a.m. Econ. Rev.:
Insights 77-78 (2019) (hereinafter ``Stealth Consolidation'').
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These studies support Congress' determination that premerger review
is essential to effective enforcement of the antitrust laws and that
without effective premerger review, there is inadequate detection of
mergers that violate the law and cause harm.\19\ While the Agencies can
and do challenge acquisitions that are not reported under the HSR Act
as well as consummated reported mergers that have caused harm,
unwinding an illegal merger post-consummation still requires a
significant investment of time and resources, and results in
significant harm to market participants until unwound.\20\ Even after
the Agency succeeds in establishing a law violation, it may be
difficult or impossible to restore the premerger state of competition,
especially if the parties have commingled, sold, or closed assets,
shared confidential information, or terminated key employees.\21\
Moreover, the decision to pursue these time-consuming investigations
involves opportunity costs, pitting the costs and benefits of
challenging a consummated merger against devoting those enforcement
resources to investigations into other potential antitrust violations,
including investigations that may arise from HSR Filings.
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\19\ See id. at 77 (post-2000, enforcement against newly exempt
transactions dropped to nearly zero while mergers between
competitors rose sharply, reflecting an endogenous response to
reduced premerger scrutiny).
\20\ In a recent example, the Commission ordered the unwinding
of an illegal merger three years and two months after consummation.
In December 2020, the Commission approved Otto Bock's divestiture of
the assets of Freedom Innovations to another company to resurrect
competition in the market for microprocessor prosthetic knees. In re
Otto Bock HealthCare N. Am., Inc., No. 9378 (F.T.C. Dec. 1, 2020).
The Commission's effort to unwind Polypore's illegal acquisition of
rival battery separator manufacturer Microporous required five
years, during which an Eleventh Circuit decision upheld the
Commission's divestiture order. See Press Release, Fed. Trade
Comm'n, ``FTC Approves Polypore International's Application to Sell
Microporous to Seven Mile Capital Partners; Sale Will Unwind Illegal
2008 Acquisition'' (Dec. 18, 2013), <a href="https://www.ftc.gov/news-events/news/press-releases/2013/12/ftc-approves-polypore-internationals-application-sell-microporous-seven-mile-capital-partners-sale">https://www.ftc.gov/news-events/news/press-releases/2013/12/ftc-approves-polypore-internationals-application-sell-microporous-seven-mile-capital-partners-sale</a>. See
also Debbie Feinstein, ``Un-consummated merger,'' Fed. Trade Comm'n
Competition Matters blog (Dec. 18, 2013), <a href="https://www.ftc.gov/enforcement/competition-matters/2013/12/un-consummated-merger">https://www.ftc.gov/enforcement/competition-matters/2013/12/un-consummated-merger</a>.
\21\ Fed. Trade Comm'n, The FTC's Merger Remedies 2006-2012, 18-
19 (2017) (report of the Bureaus of Competition and Economics) (less
than one-quarter of consummated merger remedies successfully
restored competition), <a href="https://www.ftc.gov/system/files/documents/reports/ftcs-merger-remedies-2006-2012-report-bureaus-competition-economics/p143100_ftc_merger_remedies_2006-2012.pdf">https://www.ftc.gov/system/files/documents/reports/ftcs-merger-remedies-2006-2012-report-bureaus-competition-economics/p143100_ftc_merger_remedies_2006-2012.pdf</a>.
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To fulfill the Agencies' mandate to conduct quick yet effective
premerger review of reported transactions, the Commission must make the
best use of the tools Congress gave the Agencies to detect and prevent
harmful acquisitions, including by requiring that the notification
contain the documents and information that are necessary and
appropriate for screening reportable mergers prior to consummation.
Because premerger review is critically important to effective merger
enforcement, the information contained in an HSR Filing must be fit for
the purpose of determining whether a reported transaction may violate
the antitrust laws in light of current market realities. Having the
information necessary to make that assessment allows the Agencies to
decide when and how to expend public resources to investigate and
potentially challenge mergers. The final rule will enable the Agencies
to engage in efficient and effective detection of illegal mergers that
are subject to the HSR Act and thus is a reasonable exercise of the
Commission's rulemaking authority under the HSR Act.
B. The Need for the Final Rule
The purpose of this rulemaking is to modernize the premerger review
process in light of changing market dynamics, making adjustments that
are necessary and appropriate to allow the Agencies to detect and
prevent illegal mergers prior to consummation. The final rule also
makes the process more efficient for filers, third parties, and the
Agencies, shifting some of the burden of information collection and
reporting to the merging parties (and away from third parties) and
requiring the information needed for a preliminary antitrust assessment
to be contained in the HSR Filing so that the Agencies have the full
statutory review period to assess and confirm the information. Overall,
the final rule addresses significant information gaps and asymmetries
that have grown over time and undermined the Agencies' ability to
conduct premerger review. In addition, this rulemaking implements
requirements Congress imposed by passing the Merger Modernization Act,
which broadened the scope of information the Agencies must collect as
part of premerger review, including by requiring the collection of
information about subsidies from foreign entities and governments of
concern.
Due to changing commercial realities referenced above, the existing
requirements for an HSR Filing leave significant gaps in the
information available to the Agencies for conducting this assessment.
Many of these gaps can be filled by information that the filing parties
already have and often use in their own assessment of the transaction.
Certain deficiencies in the existing reporting requirements prevent the
Agencies from spotting problem areas that would justify a more in-depth
investigation or, alternatively, from readily obtaining the facts
needed to conclude that the transaction does not merit in-depth review
prior to consummation. The rulemaking addresses these problems as well.
Based on the Agencies' extensive experience reviewing HSR Filings,
transactions that present certain attributes are more likely to violate
the antitrust laws and deserve further investigation. For instance, a
merger of two firms that compete (or will soon compete) to provide
goods or services to
[[Page 89221]]
the same set of customers, or a merger involving a manufacturer and its
main distributor that also distributes the products of competing
manufacturers, may warrant closer scrutiny. On the other hand, if the
Agencies can determine from review of an HSR Filing that a transaction
does not present such attributes, the Agencies can more quickly and
confidently determine that the transaction does not require a more in-
depth review and may proceed to consummation.\22\ However, the Agencies
cannot make these determinations with confidence in the initial 15- or
30-day waiting period when the HSR Filings lack sufficient information
about relevant premerger competitive relationships between the parties.
By requiring the submission of such information, the final rule enables
effective Agency decision-making during the initial 15- or 30-day
waiting period.\23\ The intention of the final rule is to make it
possible for the Agencies to identify the most concerning transactions
for more in-depth review, including through the issuance of Second
Requests, and also to more quickly and confidently complete the review
of those transactions that do not merit additional investigation and
can proceed to closing at the end of the statutory waiting period.
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\22\ Until 2020, the Agencies routinely granted early
termination of the initial waiting period for certain transactions
that did not warrant further action pursuant to 15 U.S.C. 18a(b)(2).
In March 2020, in order to transition filers to an e-filing system
that permitted the Agencies to continue to process filings during
the COVID-19 pandemic, the Agencies temporarily suspended the
discretionary granting of early termination. In February 2021, the
Agencies once again suspended the granting of early termination in
response to an unprecedented volume of transactions. See Press
Release, Fed. Trade Comm'n, ``FTC, DOJ Temporarily Suspend
Discretionary Practice of Early Termination'' (Feb. 4, 2021),
<a href="https://www.ftc.gov/news-events/news/press-releases/2021/02/ftc-doj-temporarily-suspend-discretionary-practice-early-termination">https://www.ftc.gov/news-events/news/press-releases/2021/02/ftc-doj-temporarily-suspend-discretionary-practice-early-termination</a>.
\23\ The HSR Act provides for a shortened 15-day initial waiting
period for reportable acquisitions by means of a cash tender offer
or acquisitions subject to certain Federal bankruptcy provisions. 15
U.S.C. 18a(b)(1)(B); 11 U.S.C. 363(b)(2), as amended (1994). For
these transactions, the second waiting period is also shorter, 10
days (as compared to 30 days for most transactions) after
appropriate certification of substantial compliance with the Second
Request. 15 U.S.C. 18a(e)(2). For convenience, this rulemaking
refers to the standard 30-day initial waiting period that applies to
most transactions even though the Agencies have even less time to
review information provided in the HSR Filing for cash tender or
certain bankruptcy transactions.
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The consequences of inadequate detection are revealed in a recent
analysis of hospital mergers that were reported to the Agencies for
premerger review co-authored by two economists from the Commission's
Bureau of Economics.\24\ The paper examined a set of consummated
hospital mergers and measured the effect of each merger on prices. The
study concluded that mergers not reportable under the HSR Act did not
result in larger price increases than reportable mergers. In contrast,
the authors found different outcomes among mergers that were subject to
premerger review based on how much review the transaction received. Of
the mergers reported to the Agencies, the largest average percentage
price increase occurred for those mergers that received early
termination of the initial waiting period. This suggests that the HSR
Filings failed to provide sufficient information to trigger additional
investigations that could have blocked these harmful mergers before
they were consummated; instead, the filings resulted in early
termination of the waiting period. While the study was not designed to
test the impact of this rulemaking, the study supports the Commission's
belief that there are information deficiencies with the current HSR
Rules that prevent the Agencies from identifying mergers that may
violate the antitrust laws.\25\
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\24\ Keith Brand et al., ``In the Shadow of Antitrust
Enforcement: Price Effects of Hospital Mergers from 2009-2016,'' 66
J. L. Econ. 639 (2023).
\25\ One commenter suggests that this study proves the opposite
and provides evidence that the current HSR Form provides Agency
staff with sufficient information to identify potentially
anticompetitive mergers. See Comment of U.S. Chamber of Com., Doc.
No. FTC-2023-0040-0684 at 14 n.32. The Commission disagrees with
this assessment of the results. Indeed, in their study, the authors
suggested that their results should encourage further study of the
process of granting early termination to better illuminate why
mergers that receive truncated review had higher price effects than
those that received a preliminary review but not a Second Request.
See Brand et al., supra note 24, at 663-64.
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Hundreds of individuals submitted public comments to describe their
own experiences in the aftermath of mergers and urge the antitrust
agencies to do more to prevent the harmful effects of consolidation,
including collecting more information in the HSR Filing. Examples of
supportive comments from these individuals include the following:
<bullet> I was an employee at a mobile gaming company. . . . We
went through acquisition after acquisition, to finally end up in a
subsidiary of a big gaming multinational company. . . . There was a
hiring freeze, there were layoffs in another subsidiary we had been
affiliated with and then a month ago they cancelled our project and
laid off all California employees. . . . Before the final acquisition,
our company had 2 profitable games and was developing a third. After
the acquisition there were harsh [Key Performance Indicators] for the
new game and investment was cut back. Had our company been able to
resist the wave of subsequent acquisitions, it is likely we would still
be employed in a profitable and vibrant company that was able to
compete on the marketplace.\26\
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\26\ Anonymous Comment, Doc. No. FTC-2023-0040-0134.
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<bullet> I am a General Partner at a small Venture Capital firm. I
support this proposal as I believe it will lead to increased
transparency which benefits us all. . . . We are facing an oligopoly/
monopoly crisis in this country/the world and it's important we strive
for real competition. I believe this proposal will provide the
government more information with which it can make sure our industries
thrive.\27\
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\27\ Anonymous Comment, Doc. No. FTC-2023-0040-0203.
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<bullet> As a retired person, I have noticed prices going up much
more where a small group of suppliers have most of the market share. I
see companies using near-monopoly power to stop employees from having
unions. The only way the antitrust laws can be adequately enforced, is
to insist that anyone proposing a merger provide full accurate
information on what they are doing.\28\
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\28\ Comment of Joan Friedman, Doc. No. FTC-2023-0040-0237.
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<bullet> I work as a cybersecurity engineer. Leaving aside the
economic concerns of monopolies, I want to bring up the security
concerns of allowing unchecked mergers. Haphazard, rushed mergers
increase the security risk across companies, as the engineering teams
must stitch together the environments for disparate organizations
quickly. . . . I look forward to these reporting requirements and I
hope they cause companies to slow down and think of the knock-on
effects of the mergers beyond the influx of cash and increased market
power.\29\
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\29\ Comment of Cybersecurity Engineer, Doc. No. FTC-2023-0040-
0238.
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<bullet> As an investor and financial advisor, I approve of the
changes requiring more disclosure about the nature of mergers. The
impacts of industry consolidation are important. . . . A thorough
understanding of the purpose of mergers should help ensure that deals
are not anti-competitive.\30\
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\30\ Comment of Joseph Cook, Doc. No. FTC-2023-0040-0244.
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<bullet> As a retired CPA and former business professor, I support
these proposed changes to the HSR form. The government needs the
additional information and greater clarity in order to carry out its
responsibility to oversee and evaluate proposed mergers and
acquisitions with a view to protecting
[[Page 89222]]
the common good and promoting competition within and across
industries.\31\
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\31\ Comment of Sue Ravenscroft, Doc. No. FTC-2023-0040-0259.
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<bullet> Capitalism can only work with a robust system of
competition, and we are lo[]sing that at an ever-increasing rate. I am
in an agricultural business. There is virtually no competition for the
dollars I spend, and an equal lack of competition for what I produce.
This is stunningly true when looked at over the 40 years I have been in
business.\32\
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\32\ Comment of Jeffrey Bender, Doc. No. FTC-2023-0040-0267.
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<bullet> Businesses certainly have a right to pursue mergers and
acquisitions as a means of improving their market positions, but the
public also has a right to know the ``five W's'' driving these
decisions: Who is funding the HSR Action; What are the specifics of the
proposed action; When are the HSR Actions taking place; Where are the
affected communities/localities; and Why are the stakeholders pursuing
the HSR Action (or, what is their business goal)? Another key piece of
information that the public has a right to know, is WHO will be
affected by the proposed merger or acquisition? The issues at stake
here are National Security, fair market competition, supply chain
disruptions, and negative impacts on labor markets. . . . I hope the
FTC sticks to their plan and implements these common-sense and much
needed reporting requirements.\33\
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\33\ Comment of Thomas Newman, Doc. No. FTC-2023-0040-0325.
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<bullet> I am a 25-year veteran in an industry (publishing) that
has seen both jobs and innovation suffer due to unchecked consolidation
by large players. It is very possible some of this consolidation might
have been prevented, or at least steered in a direction that encouraged
innovation and growth, if regulators had this kind of information
available beforehand.\34\
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\34\ Anonymous Comment, Doc. No. FTC-2023-0040-0332.
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<bullet> I am a private, sole-practitioner entrepreneur with a
vested interest in a diversified economic ecology that supports and
sustains vibrant, fair competition. . . . From my perspective, the
requirements for getting approval for large mergers should include
gathering enough information about the companies involved that the FTC
can make a best and rational assessment of the effects of the maneuver
on the industries, labor markets, consumer pricing, industry trends,
trading markets, etc, that they (mergers) will potentially affect.\35\
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\35\ Comment of Marla McFadin, Doc. No. FTC-2023-0040-0377.
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On the other hand, several commenters stated that the Agencies have
not provided any evidence that current information requirements are
insufficient, or identified transactions they did not challenge due to
shortcomings in the current premerger review process. One commenter
suggested that if the Commission intends to expand the information
requirements for the HSR Filing, it should lay a stronger legal and
evidentiary foundation that would justify its need for the additional
information. Another commenter urged the Commission to consider how
best to balance the need to determine whether further investigation is
warranted against the burden to filing parties.
In response to the comments and to explain further the need for
this rulemaking, the Commission discusses below the gaps that exist in
current HSR information requirements relating directly to potential
violations of the antitrust laws, and identifies the new information
requirements in the final rule that will provide a factual basis for
the Agencies to determine whether to conduct a more searching review of
a transaction based on these concerns. The gaps described below are
intended to be illustrative and not exhaustive.
1. Disclosure of Entities and Individuals Within the Acquiring Person
In reviewing a transaction filed under the HSR Act, the Agencies
must quickly understand the scope and nature of the buyer's business
and business relationships to determine whether the acquisition may
harm competition and thus violate the antitrust laws,\36\ which include
section 7 of the Clayton Act. The scope of section 7 is broad: it
prohibits any acquisition whose effect may be substantially to lessen
competition or to tend to create a monopoly, including those that
result in a small ownership stake.\37\ In many acquisitions, the buyer
gains control of the acquired entities or assets and directs the
decision-making at the combined firm post-merger. In addition, if the
buyer has a complex corporate or governance structure, an acquisition
can bring together individuals or investors within the buyer that
control or influence decision-making at a competitively significant
business, such as a competitor of the target \38\ of the filed-for
transaction.\39\ Indeed, holdings of entities within the acquiring
person that do not result in control under the HSR Rules nevertheless
can result in the ability to influence competitively important
decisions of the acquiring entity, and thus affect the analysis of
whether the acquisition of the target may harm competition.\40\
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\36\ 15 U.S.C. 12(a).
\37\ 15 U.S.C. 18. See United States v. E.I. du Pont de Nemours
& Co., 353 U.S. 586, 592 (1957) (any acquisition is within the reach
of section 7 whenever the reasonable likelihood appears that the
acquisition will result in a restraint of commerce or the creation
of a monopoly in any line of commerce).
\38\ To aid the clarity of the Form and Instructions, the
Commission defines ``target'' in the Instructions to include all
entities and assets to be acquired by the acquiring person from the
acquired person in the reported transaction. See section VI.A.1.h.
\39\ See, e.g., In re Red Ventures Holdco, LP, No. C-4627
(F.T.C. Nov. 2, 2017) (complaint) (overlapping limited partnership
holdings violated section 7); In re TC Group, L.L.C., No. C-4183
(F.T.C. Mar. 16, 2006) (complaint) (acquisition involving minority
stake giving two private equity investors seats on the boards of
competitors); In re Dan L. Duncan, No. C-4173 (F.T.C. Aug. 18, 2006)
(complaint) (acquisition combined general partners of competing
energy storage companies under common control). Competition concerns
about partial stakes can arise between horizontal competitors;
United States v. Dairy Farmers of Am., 426 F.3d 850, 860 (6th Cir.
2005), or a supply relationship, du Pont, 353 U.S. at 602-604 (23%
interest in General Motors, a key supplier, and a shared board
member). Section 7 does not apply to buyers making an acquisition
solely for the purpose of investment when the buyer does not intend
to use its position to bring about or attempt to bring about a
substantial lessening of competition. United States v. Tracinda Inv.
Corp., 477 F. Supp. 1093, 1100 (C.D. Cal. 1979).
\40\ See du Pont, 353 U.S. at 607 n.36 (finding the influence of
du Pont's 23% stock interest to be greater, due to diffusion of
remaining shares); Denver & Rio Grande W. R.R. Co. v. United States,
387 U.S. 485, 504 (1967) (identifying section 7 concerns with a 20%
investment). See also Dairy Farmers of Am., Inc., 426 F.3d at 862
(no voting interest but leverage via its position as financier to
control or influence competitor's decisions).
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The HSR Act states that, unless exempt, no person shall acquire,
directly or indirectly, any voting securities or assets of any other
person without first filing a notification with the Agencies and
waiting for the statutory period to expire.\41\ The HSR Rules require
notification of the transaction from the entity that, pursuant to the
Rules, controls the buyer (or seller), which the Commission has defined
as the Ultimate Parent Entity or ``UPE.'' \42\ But to determine
[[Page 89223]]
whether the transaction may violate the antitrust laws, the Agencies
need to understand the nature of the buyer's holdings pre- and post-
merger, as well as the identities of others who have holdings in the
buyer and thus may have influence, including possible veto power, over
the buyer's decision-making, since that ability affects the evaluation
of the competitive effects of the acquisition of the target.
Increasingly, this includes individuals and entities with significant
management rights that give them a ``seat at the table'' when the buyer
is making competitively important decisions.
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\41\ 15 U.S.C. 18a(a). Congress rejected a proposal to limit
covered acquisitions to those made by corporations, using the term
``person'' instead because the anticompetitive nature of a merger is
not dependent upon the legal form of the acquiring entity. 122 Cong.
Rec. 30876 (1976).
\42\ One of the many initial challenges that the Commission
faced in implementing the HSR Act was how to define ``control'' for
the purposes of determining reportability of transactions. The
Commission immediately understood that no set percentage of
ownership dictated whether an individual or entity had functional
control of or significant influence over a company, which is
critical to the analysis of the competitive effects of a
transaction. In 1976, the Commission originally proposed that
``control'' would include not only ownership of 50% or more of the
voting securities of an entity, but also the power to influence
through a minority stake. 41 FR 55488, 55490 (Dec. 20, 1976).
Commenters objected to such a subjective test for control. See 42 FR
39040, 39043 (Aug. 1, 1977). So, the Commission proposed to include
the contractual power to designate a majority of the directors or
trustees of an entity. Id. This proposal was also criticized for
being overly broad and subjective. In the end, in setting up the
premerger notification program, the Commission adopted the simple
50% or more threshold for control to give prospective filers
certainty as to their reporting obligations. But in doing so, the
Commission did not dismiss the significance of understanding who has
actual or working control of the filing parties. 43 FR 33450, 33457-
58 (July 31, 1978). This definition limited the number of
transactions subject to the filing requirements of the HSR Act, but
the Commission did not minimize the importance of examining who may
have significant influence over the acquiring person while assessing
antitrust risk arising from the transaction.
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Today, the mechanisms of influence are not limited to equity
stakes; the ability to influence corporate decision-making arises from
a variety of interests beyond voting rights.\43\ It may arise from
sharing key decision-makers, such as executives or members of their
respective boards of directors, or from a combination of a significant
minority stake and rights to appoint or nominate members of the
board.\44\ The power of key decision-makers of one competitor to place
members on the board of another competitor or veto financial decisions
can result in substantial influence over the buyer, and thus the target
after the transaction is consummated, rendering an acquisition of a
related target potentially illegal under section 7.\45\ A merger might
also violate the law if it gives individuals and entities of one
competitor access to officers, directors, or employees of another
competitor.\46\ Similarly, the existence of subsidies, among other
means, may subject the buyer to additional pressures from individuals
or entities not directly a party to the reportable transaction.\47\
Beyond voting rights, these interest holders can have similar influence
as holders of minority and non-corporate interests.
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\43\ Gabriel V. Rauterberg, ``The Separation of Voting and
Control: The Role of Contract in Corporate Governance,'' 38 Yale J.
Reg. 1124, 1148-54 (2021) (documenting trend of public companies
being subject to stockholder agreements that provide various species
of control rights to favored investors); Jill E. Fisch, ``Stealth
Governance: Shareholder Agreements and Private Ordering,'' 99 Wash.
U. L. Rev. 913, 930-33, 946-53 (2021) (discussing similar trend in
private companies).
\44\ E.g., United States v. U.S. West, Inc., No. 96-002529, 1997
WL 269482 (D.D.C. Feb. 28, 1997) (acquired firm had 20% stake plus
board seats in a competitor of acquiring firm).
\45\ E.g., United States v. Univision Commc'ns., Inc., No. 1:03-
cv-00758, 2003 WL 23192527 (D.D.C. Dec. 22, 2003) (buyer held
substantial equity stake plus ability to influence certain strategic
decisions through issuance of equity or debt or veto of future
acquisitions). See also Dairy Farmers of Am., 426 F.3d at 862 (buyer
had influence due to role as financier, so that acquired firm is
``locked in'' to a relationship with the buyer, which could lead to
anticompetitive effects).
\46\ E.g., In re Time Warner Inc., No. C-3709 (F.T.C. Sept. 12,
1996) (analysis to aid public comment) (walling off two individuals
and one entity to prevent them from influencing officer, directors,
and employees of competitor and its day-to-day operations).
\47\ As discussed elsewhere, Congress has directed the
Commission to require the reporting of subsidies received from
foreign countries or foreign entities of concern due to concerns
that these entanglements can distort the competitive process by
enabling the subsidized firm to submit a bid higher than other firms
in the market, or otherwise change the incentives of the firm in
ways that undermine competition following an acquisition. Merger
Filing Fee Modernization Act of 2022, 15 U.S.C. 18b. Congress also
enacted the Foreign Investment Risk Review Modernization Act of 2018
(FIRRMA) to expand the jurisdiction of the Committee on Foreign
Investment in the United States (CFIUS) over certain non-controlling
investments and real estate transactions involving foreign persons
that may be a threat to national security. Public Law 115-232, 132
Stat. 2173, Title XVII, Subtitle A (2018). For certain foreign
investments in U.S. businesses operating critical technologies or
infrastructure, or that collect sensitive personal data of U.S.
citizens, FIRRMA regulations require notification of non-controlling
investments, direct or indirect, that afford the foreign investor
(1) access to material non-public technical information; (2)
membership or observer rights on the board directors (or similar) or
the right to nominate an individual to that board; or (3) any
involvement, other than through voting of shares, in substantive
decision-making of the U.S. business. 31 CFR 800.211. Such
relationships are deemed a non-controlling interest in a U.S.
business that afford a foreign investor access to information or
involvement in substantive decision-making. See 85 FR 3112 (Jan. 17,
2020).
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a. Trends in Private Investment
Understanding the operations of the buyer has become more
challenging due to vast changes in M&A activity since the promulgation
of the HSR Rules in 1978. One notable recent trend in M&A activity is
that the role of private investors, including private equity, has
become more pronounced.\48\ In the Agencies' experience, these private
investors often utilize complicated structures of ownership and
managerial control. They also frequently take either majority or
minority stakes in many different operating companies (which may have
competitively significant relationships) and can exercise significant
influence over management and strategic decision-making. In particular,
the percentage of equity interest is often not a good indicator of the
extent to which investors can direct the strategic decisions of the
business.\49\ Investors can participate in the management of companies
by serving on the company's board, selecting or monitoring the
management team, having veto rights, acting as sounding boards for
CEOs, or stepping into management roles themselves.\50\
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\48\ Elisabeth de Fontenay, ``The Deregulation of Private
Capital and the Decline of the Public Company,'' 68 Hastings L. J.
445, 447 (2017). Private equity has accounted for an increasing
share of all merger activity over time, although private equity
activity is highly cyclical. See Michael Mauboussin & Dan Callahan,
``Public to Private Equity in the United States: A Long-Term Look,''
Morgan Stanley Inv. Mgmt., Counterpoint Global Insights 1 (Aug. 2,
2020), <a href="https://www.morganstanley.com/im/publication/insights/articles/articles_publictoprivateequityintheusalongtermlook_us.pdf">https://www.morganstanley.com/im/publication/insights/articles/articles_publictoprivateequityintheusalongtermlook_us.pdf</a>.
Recent estimates suggest that private equity firms managed about 20%
of U.S. corporate equity and that private equity deal-making has
accounted for 40% or more of domestic M&A activity. Rog[eacute]
Karma, ``The Secretive Industry Devouring the U.S. Economy,''
Atlantic (Oct. 30, 2023). See also Steven A. Cohen, et al.,
``Private Equity in 2023--A Year (Not) to Remember,'' Harv. L. Sch.
Forum on Corp. Governance (Jan. 13, 2024), <a href="https://corpgov.law.harvard.edu/2024/01/13/private-equity-in-2023-a-year-not-to-remember/">https://corpgov.law.harvard.edu/2024/01/13/private-equity-in-2023-a-year-not-to-remember/</a> (private equity deal volume declined in 2023 and
increasingly focused on smaller deals and minority investments).
\49\ See generally Bob Zider, ``How Venture Capital Works,''
Harv. Bus. Rev. (Nov.-Dec. 1998), <a href="https://hbr.org/1998/11/how-venture-capital-works">https://hbr.org/1998/11/how-venture-capital-works</a>; Thomas Hellman, ``The allocation of control
rights in venture capital contracts,'' 29 RAND J. Econ. 57 (1998).
\50\ See, e.g., Sec. Exch. Comm'n, ``Private Equity Funds,''
<a href="http://Investor.gov">Investor.gov</a> (last visited Sept. 10, 2024), <a href="https://www.investor.gov/introduction-investing/investing-basics/investment-products/private-investment-funds/private-equity">https://www.investor.gov/introduction-investing/investing-basics/investment-products/private-investment-funds/private-equity</a>.
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When these private investors take active positions in a wide
variety of companies, such holdings can create direct links between
competitors or other competitively relevant firms, such as critical
suppliers or distributors. Economic research has shown that
transactions that lead to cross-ownership of horizontal competitors or
other firms in a competitively significant business relationship can
create similar incentives and cause similar anticompetitive effects as
a full merger.\51\ But when these relationships are not well known or
easy to identify, the risk that anticompetitive harm from an unlawful
acquisition will go
[[Page 89224]]
undetected is greatly increased.\52\ This includes the risk of
collusive \53\ or coordinated behavior,\54\ or the risk that cross-
ownership of the combined firm will lead to foreclosure of rivals.\55\
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\51\ Timothy Bresnahan & Steven C. Salop, ``Quantifying the
competitive effects of production joint ventures,'' 4 Int'l J.
Indus. Org. 155 (1986).
\52\ Daniel P. O'Brien & Steven C. Salop, ``Competitive Effects
of Partial Ownership: Financial Interest and Corporate Control,'' 67
Antitrust L. J. 559, 570 (1999) (overview of the complex corporate
financial and governance structures of modern corporations,
including different types of shareholding and the relationships to
the boards of directors).
\53\ Robert J. Reynolds & Bruce R. Snapp, ``The competitive
effects of partial equity interests and joint ventures,'' 4 Int'l J.
Indus. Org. 141 (1986); David Flath, ``When is it rational for firms
to acquire silent interests in rivals?,'' 9 Int'l J. Indus. Org. 573
(1991); David Reitman, ``Partial Ownership Arrangements and the
Potential for Collusion,'' 42 J. Indus. Econ. 313 (1994); Sandro
Shelegia & Yossi Spiegel, ``Bertrand competition when firms hold
passive ownership stakes in one another,'' 114 Econ. Letters 136
(2012).
\54\ Rune Stenbacka & Geert Van Moer, ``Cross ownership and
divestment incentives,'' 201 Econ. Letters 109748 (2021).
\55\ Nadav Levy et al., ``Partial Vertical Integration,
Ownership Structure, and Foreclosure,'' 10 a.m. Econ. J.:
Microeconomics 132 (2018).
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The increasing role of private capital is reflected in the shifting
mix of reportable transactions. Using data from the Agencies' Annual
HSR Reports for the past 20 years, Figure 2 shows that the number of
transactions for which the name of the Ultimate Parent Entity of the
acquiring person included ``fund'' or some variation of ``L.P.'' has
increased from approximately ten percent to nearly 40 percent of all
reportable transactions.\56\ The acquiring person for these
transactions can be shell companies that have been created by an
investment group in order to make a particular acquisition, or an
entity that owns a variety of other operating entities (often referred
to as ``portfolio companies''). In either scenario, the entity is part
of the structure of a larger investment company or group.
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\56\ See Fed. Trade Comm'n & U.S. Dep't of Justice, Hart-Scott-
Rodino Annual Report, Fiscal Year 2010 appendix A (FY 2010)
(reporting Adjusted Transactions in which a Second Request could
have been issued from years 2001-2010); Fed. Trade Comm'n & U.S.
Dep't of Justice, Hart-Scott-Rodino Annual Report, Fiscal Year 2013
appendix A (FY 2013) (reporting Adjusted Transactions in which a
Second Request could have been issued from years 2004-2013); Fed.
Trade Comm'n & U.S. Dep't of Justice, Hart-Scott-Rodino Annual
Report, Fiscal Year 2022 appendix A (FY 2022) (reporting Adjusted
Transactions in which a Second Request could have been issued from
years 2013-2022). See also Fed. Trade Comm'n Annual Reports to
Congress Pursuant to the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, <a href="https://www.ftc.gov/policy/reports/annual-competition-reports">https://www.ftc.gov/policy/reports/annual-competition-reports</a> (collecting reports). The Total Number of Adjusted
Transactions omits from the total number of transactions reported
all transactions for which the agencies were not authorized to
request additional information. These include (1) incomplete
transactions (only one party filed a complete notification); (2)
transactions reported pursuant to the exemption provisions of
sections 7A(c)(6) and 7A(c)(8) of the Act; (3) transactions which
were found to be non-reportable; and (4) transactions withdrawn
before the waiting period began. In addition, where a party filed
more than one notification in the same year to acquire voting
securities of the same corporation, e.g., filing for one threshold
and later filing for a higher threshold, only a single consolidated
transaction has been counted because as a practical matter the
agencies do not issue more than one Second Request in such a case.
These statistics also omit from the total number of transactions
reported secondary acquisitions filed pursuant to Sec. 801.4 of the
Premerger Notification rules. Secondary acquisitions have been
deducted in order to be consistent with the statistics presented in
most of the prior annual reports.
[GRAPHIC] [TIFF OMITTED] TR12NO24.034
Since the beginning of the premerger program, the Commission has
required filers to report certain entities that hold minority interests
in the filing parties to alert the Agencies to situations in which the
potential antitrust impact of the reported transaction does not result
solely or directly from the acquisition, but may arise from direct or
indirect shareholder relationships between the parties to the
transaction.\57\ As explained in the NPRM, reporting requirements
regarding the identification of certain minority holders of the filing
persons have been adjusted over time to reflect market realities,
including changes in investment activity and the growing role of these
intermediaries.\58\ Nonetheless, changes in the investment landscape
discussed above have created meaningful gaps in the reporting
requirements for a growing number and type of minority holders that
have the ability to influence competitive decision-making and to harm
competition via acquisitions that violate the antitrust laws.
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\57\ 43 FR 33450, 33531 (July 31, 1978).
\58\ NPRM at 42188.
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b. Corporate Structure Changes
Several commenters supported the need for additional information
that would identify entities holding minority
[[Page 89225]]
positions. One commenter stated that investors have shifted strategies
since the 1980s, when portfolios consisted of unrelated companies and
investors mainly focused on optimizing capital structures and improving
corporate governance.\59\ Another commenter stated that without a full
picture of the entire corporate structure of the merging parties, it
can be difficult or impossible to untangle or understand the potential
anticompetitive impacts of a transaction. Several commenters supported
the need to adjust information requirements to have a broader view that
reflects how firms are organized today. One commenter supported the
collection of more comprehensive information related to the merging
entities, arguing that a more holistic and systems-level approach would
examine the networks of firms involved in a market, which could expose
companies that can operate as bottlenecks or supply key resources to
other market participants. A group of State antitrust enforcers
supported the collection of more information related to corporate
control or the degree of financial interest so the Agencies can quickly
assess how the resulting ownership structure may change the parties'
incentives to compete, enhance the acquirer's ability to influence
decision-making through changes in voting interests or governance
rights, or facilitate the sharing of competitively sensitive
information between rivals.
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\59\ See also Aslihan Asil et al., ``Misaligned Measures of
Control: Private Equity's Antitrust Loophole,'' 18 Va. L. & Bus.
Rev. 51 (2023). Asil et al. argue that the complicated structure of
ownership in the typical private equity acquisition may make some
anticompetitive deals technically non-reportable under the HSR act,
because the investment structure under-represents the proportion of
control actually conferred by the transaction. Id. at 53.
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Another development that has caused the Commission to reassess its
rules is that the particular corporate structure of an entity is now
less indicative of its market behavior, and thus distinctions made on
that basis may no longer be sound. The decision to form as a
corporation, limited liability company, or limited partnership is often
influenced more by risk, liability, and tax considerations than by the
entity's business operations. Now more than ever, distinctions made
based on corporate form have little impact on an assessment of whether
and how firms compete. Moreover, corporate governance literature
highlights the changing nature of decision-making within even standard
organizational structures, such as corporations. Corporate law provides
sufficient flexibility to alter traditional roles, including the rights
of shareholders and the scope of director liability, by contract \60\
or through modification of bylaws or certificates of incorporation.\61\
The rise of shareholder agreements--private contracts by and among
shareholders--has affected who has the ability to direct decisions of
the company, separating voting and control, especially for those given
veto rights via contract.\62\ These forms of `stealth governance' have
implications for how decisions are made within the firm, making it
difficult for investors to know who is exercising control within the
company.\63\
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\60\ See Jill E. Fisch, ``Governance by Contract: The
Implications for Corporate Bylaws,'' 106 Cal. L. Rev. 373, 379
(2018).
\61\ Megan Wischmeier Shaner, ``Interpreting Organizational
`Contracts' and the Private Ordering of Public Company Governance,''
60 Wm. & Mary L. Rev. 985, 988 (2019) (the charter and bylaws of
public corporations are being used as tools for restructuring key
aspects of corporate governance).
\62\ Rauterberg, supra note 43.
\63\ Jill E. Fisch, ``Stealth Governance: Shareholder Agreements
and Private Ordering,'' 99 Wash. U. L. Rev. 913, 947 (2021) (One
investor's capacity to monitor may be limited by an agreement to
support director candidates chosen by another investor, or an
ownership structure that appears to involve shared power may be
undermined by the contractual formation of a control group).
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After careful consideration of these points and others raised by
commenters, the Commission has determined that the requirements of the
current Form and Instructions have not kept pace with market realities
and the accompanying changes in ownership structures. In light of these
shifts in corporate formation and governance, the current requirements
do not provide the Agencies with sufficient information that allow them
to understand how decisions are made at the respective companies, let
alone whether the acquiring person may have competitively relevant
premerger entanglements with the target's industry and minority holders
that may have significant rights to direct the acquiring entity's
actions.
To keep pace with prior changes in corporate form, the Commission
has adjusted the disclosure requirements for minority investors over
time and in light of its experience reviewing thousands of filings each
year, balancing the need to surface competitively relevant
relationships without burdening filers to provide information that
would not change the Agencies' premerger screening decisions. Under the
current rules, it has become increasingly difficult to screen
transactions because deal structures often have minority investors with
significant rights that are not disclosed. See Figures 4 through 8
below, section VI.D.1.d.ii. This includes situations where an investor
group is, for practical purposes, making the acquisition (or otherwise
significantly involved), but the HSR Filing does not alert the Agencies
to their role in the acquisition. These relationships are not currently
disclosed if the minority investment is not in the UPE or acquiring
entity, but rather in an entity (often a shell entity) that sits
between these two in the structure of the acquiring person. Even if the
minority investment is made in the UPE, if the UPE is an LP, only the
name of the general partner is disclosed. For situations where the
current information on the HSR Filing is unrelated to the public-facing
name of the entity that controls the acquiring person, the HSR Filing
does not alert the Agencies to the premerger relationships that exist
solely due to that investor's relationship with and role in the
buyer.\64\
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\64\ For example, a fund that operates as Alpha Capital Partners
could create an entity named 123ABC, LP to effectuate an
acquisition. 123ABC, LP could be its own UPE because Alpha Fund I
and Alpha Fund II each hold 49.9% of the 123ABC, LP, with the
general partner, 123ABC GP, LP, holding 0.2%. Currently, the Form
only requires 123ABC, LP to disclose that 123ABC GP, LP is its
general partner. The issue is compounded if Alpha Capital Partners
is co-investing with Beta Capital Partners and 123ABC, LP is held
49.9% by Alpha and 49.9% by Beta (or if Beta invests in an entity
that is not the UPE or acquiring entity). Disclosure of these
relationships are not currently required.
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To close this information gap, the Commission has determined that
the Agencies need additional information about entities in between the
UPE and the acquiring entity. If any of these entities or individuals
has a minority stake or other rights that give them the ability to
influence decision-making post-merger, then they are functionally ``in
the deal'' and their existing business relationships are relevant to a
thorough premerger antitrust assessment of the transaction. As
explained in more detail in section VI.D.1.d.ii.a., this information
was required of all corporate entities within the acquiring person
prior to a rule change in 2011 that limited the requirement in order to
exclude entities not related to the transaction. However, as
transaction structures have become more complex, application of the
2011 change has eliminated the requirement to provide information about
minority entities that are related to the acquiring entity. The final
rule addresses this gap in information so that the Agencies can
identify existing relationships among individuals and entities that
have interests in (1) the acquiring entity (and any entities it
controls or are controlled by it) and (2) other entities within the UPE
that have competitive relationships
[[Page 89226]]
with the target. These minority holders are competitively relevant
because they may have the ability to influence decision-making and
operations of the target post-merger \65\ but it is difficult for the
Agencies to detect these relationships based on information available
the current Form.
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\65\ See United States v. Dairy Farmers of Am., Inc., 426 F.3d
850, 860 (6th Cir. 2005) (district court erred in focusing on
control which ignored the possibility that there may be a mechanism
that causes anticompetitive behavior other than control, such as
leveraging position as financier).
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As discussed below in section VI.D.1.d. and VI.D.3.c., the final
rule requires additional information for Minority Shareholders or
Interest Holders as well as Officers and Directors from the acquiring
person. Information about other individuals or entities holding a
minority position or rights to serve or appoint members of the
governing board will fill an existing gap that has created a blind spot
for the Agencies that prevents a thorough premerger screening,
especially for transactions involving complex corporate structures and
investment vehicles. This information is most relevant from the entity
that will be making decisions post-consummation, and so the final rule
does not seek this information from the seller, other than the
identification of minority interest holders that will ``roll over''
their investments post-consummation.\66\ This information is necessary
to identify additional areas of competitive concern created by minority
stakeholders or other influential decision-makers (i.e., officers and
directors) that may have a relationship with entities related to the
target of the acquisition.
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\66\ In many transactions, the acquired firm ceases to exist
post-consummation. Even when some entity continues to generate
revenues, possibly in competition with some aspects of the buyer's
business, the Commission has determined to collect additional
information about entities within the UPE only from the acquiring
person at this time.
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However, in light of concerns raised by commenters about the burden
and relevancy of providing this information with respect to limited
partners, the Commission has modified these requirements to focus only
on those limited partners that also have management rights, such as the
right to appoint members to the board. Moreover, the final rule does
not adopt certain proposed requirements to identify board observers, or
creditors, holders of non-voting securities, or entities with
management agreements. The Commission has determined not to require
this information at this time but will continue to monitor market
activity as it implements the final rule.
Similarly, new document requirements contained in the final rule
are aimed at providing a more in-depth understanding of the motivation
and purpose of the transaction, and how the combined company will be
operated post-consummation. In particular, additional transaction-
related documents will provide a more complete picture of the buyer's
reason for pursuing the transaction, and for companies with complex
investment structures, these documents may reveal whether there are
other individuals or entities who will be participating in competitive
decisions post-merger. The final rule also requires a small set of
business plans and reports shared at the highest level of management
that discuss market shares, competition, competitors, or markets of any
product or service that is provided by both the acquiring person and
acquired entity. Together, these documents may reveal whether there are
significant investors in either party that also have investments in
businesses that compete with the target or if there are any other
planned investments in competitively relevant businesses, such as
competitors or suppliers, that would impact the Agencies' assessment of
whether the transaction may violate the antitrust laws.
2. Identifying Potential Labor Market Effects
The Clayton Act's prohibition on acquisitions that may
substantially lessen competition or tend to create a monopoly applies
to acquisitions that have these effects on competition to purchase
inputs that firms use to produce goods and services just as it does to
acquisitions that threaten competition in downstream markets for goods
and services themselves,\67\ and the antitrust laws protect competition
in markets for labor services.\68\ As evidence of decreasing
competition for labor continues to mount,\69\ the Agencies have
increasingly recognized the importance of evaluating the effect of
mergers and acquisitions on labor markets and have stepped up efforts
to identify and investigate potential labor market effects arising from
reportable transactions. The Agencies have challenged a few
transactions that may result in labor market harms,\70\ and consent
agreements have included provisions that stop the use of certain non-
compete clauses that limit the ability of potential market entrants to
hire key employees.\71\
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\67\ See United States v. Bertlesmann SE & Co., 646 F.Supp.3d 1
(D.D.C. 2022) (violation of section 7 where merger likely to
substantially lessen competition in market for publishing rights to
anticipated top-selling books due to harm to targeted sellers--
authors of top-selling books); Boardman v. Pac. Seafood Grp., 822
F.3d 1011, 1022 (9th Cir. 2016) (acquisition may violate section 7
by substantially lessening competition in multiple seafood input
markets). See also Mandeville Island Farms, Inc., v. Am. Crystal
Sugar Co., 334 U.S. 219, 235-36 (1948) (antitrust laws protects not
just consumers, purchasers, competitors or sellers but all victims
of illegal practices); Weyerhaeuser Co. v. Ross-Simmons Hardwood
Lumber Co., 549 U.S. 312, 321-22 (2007); United States v. Syufy
Enterprises, 903 F.2d 659, 663 n.4 (9th Cir. 1990); In re Grifols,
S.A., No. C-4654 (F.T.C. Aug. 1, 2018) (order requiring divestitures
to prevent monopsony in three local markets for the collection of
plasma).
\68\ NCAA v. Alston, 594 U.S. 69, 86-87 (2021) (plaintiff
student-athletes need not show harm in seller-side market as well as
buyer-side labor market); Anderson v. Shipowners Ass'n of the Pac.
Coast, 272 U.S. 359, 365 (1926) (Sherman Act protects competition
for labor).
\69\ See e.g., Anna Stansbury & Lawrence H. Summers, ``The
Declining Worker Power Hypothesis: An Explanation for the Recent
Evolution of the American Economy'' (Nat'l Bureau of Econ. Rsch.,
Working Paper No. 27193, 2020), <a href="https://www.nber.org/papers/w27193">https://www.nber.org/papers/w27193</a>;
Orley Ashenfelter et al., ``Labor Market Monopsony,'' 28 J. Lab.
Econ. 203 (2010); V. Bhaskar et al., ``Oligopsony and Monopsonistic
Competition in Labor Markets,'' 16 J. Econ. Perspectives 155 (2002);
William M. Boal & Michael R. Ransom, ``Monopsony in the Labor
Market,'' 35 J. Econ. Lit. 86 (1997); Alan B. Krueger, Luncheon
Address at Kansas City Federal Reserve Bank, Reflections on
Dwindling Worker Bargaining Power and Monetary Policy (Aug. 24,
2018), <a href="https://www.kansascityfed.org/documents/6984/Lunch_JH2018.pdf">https://www.kansascityfed.org/documents/6984/Lunch_JH2018.pdf</a>; Brianna L. Alderman et al., ``Monopsony, wage
discrimination, and public policy,'' 61 Econ. Inquiry 572 (2022);
David Berger et al., ``Labor Market Power,'' 112 a.m. Econ. Rev.
1147 (2022); Chen Yeh at al., ``Monopsony in the US Labor Market,''
112 a.m. Econ. Rev. 2099 (2022); Jos[eacute] Azar et al., ``Labor
Market Concentration,'' 57 J. Hum. Resources S167 (2022).
\70\ Press Release, Fed. Trade Comm'n, ``FTC Challenges Kroger's
Acquisition of Albertsons'' (Feb. 26, 2024), <a href="https://www.ftc.gov/news-events/news/press-releases/2024/02/ftc-challenges-krogers-acquisition-albertsons">https://www.ftc.gov/news-events/news/press-releases/2024/02/ftc-challenges-krogers-acquisition-albertsons</a>; United States v. Anthem et al., 1:16-cv-
01493 ] 71 (D.D.C. filed July 21, 2016) (complaint); United States
v. Aetna, et al., 3-99-CV 1398 ] 27 (N.D. Tex. filed June 21, 1999)
(complaint). See also Concurring Statement of Commissioner Slaughter
and Chair Khan Regarding FTC and State of Rhode Island v. Lifespan
Corporation and Care New England 1-2 (Feb. 17, 2022), <a href="https://www.ftc.gov/system/files/ftc_gov/pdf/public_statement_of_commr_slaughter_chair_khan_re_lifespan-cne_redacted.pdf">https://www.ftc.gov/system/files/ftc_gov/pdf/public_statement_of_commr_slaughter_chair_khan_re_lifespan-cne_redacted.pdf</a> (recommending including a count in the complaint
that the proposed merger would have violated section 7 of the
Clayton Act in a relevant labor market).
\71\ Press Release, Fed. Trade Comm'n, ``FTC Imposes Strict
Limits on DaVita, Inc.'s Future Mergers Following Proposed
Acquisition of Utah Dialysis Clinics'' (Oct. 25, 2021), <a href="https://www.ftc.gov/news-events/news/press-releases/2021/10/ftc-imposes-strict-limits-davita-incs-future-mergers-following-proposed-acquisition-utah-dialysis">https://www.ftc.gov/news-events/news/press-releases/2021/10/ftc-imposes-strict-limits-davita-incs-future-mergers-following-proposed-acquisition-utah-dialysis</a>.
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As stated in the NPRM, current notification requirements under the
HSR Act do not require any specific information about employees. And
yet virtually every firm competes for labor in at least one labor
market and, more commonly, in multiple labor markets, and transactions
that involve two firms
[[Page 89227]]
that purchase labor from the same labor market(s) may substantially
lessen competition between employers for labor services. Merging
parties may compete in the same labor market even when they do not
compete in the same product market.
The Commission received hundreds of comments from individuals, many
of whom are in the entertainment industry, who supported the need for
the Agencies to conduct a robust search for potential labor market
effects before the acquisition is consummated. Several dozen recounted
the effects that prior mergers have had on them. Examples of comments
supportive of reviewing transactions for labor market effects include
the following:
<bullet> I'm a working TV writer at the beginning of my career. I'm
afraid for the future--the consolidation of the media companies in this
town and their vertical integration has made things so much harder and
less competitive, even in the time that I've been in LA and worked
within the system. Now that there are so few ``shops'' in town,
salaries are depressed and it's become incredibly difficult to not only
demand fair pay, but treatment as well. They know that they don't have
to negotiate or budge on whatever terms they set because there are
increasingly few alternatives to them.\72\
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\72\ Anonymous Comment, Doc. No. FTC-2023-0040-0511.
---------------------------------------------------------------------------
<bullet> My background includes Strategy consulting for major
transnational Mergers. I think the new rules are very good as they
demand greater clarity from the firms before the transaction starts. I
have seen a lot of waste and backtracking as executives struggle
between their ego and the analytics that do not tell them the story
that they want about why the transaction will succeed. And the new
labor and financing provisions offer much needed transparency--layoffs
are a knee jerk habit and are not really helpful for the firm or the
industry.\73\
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\73\ Comment of Punya Upadhyaya, Doc. No. FTC-2023-0040-0283.
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<bullet> Please collect data on labor markets. I've been affected
by the monopolies in the entertainment industry and likely will lose my
livelihood as well as that of my staff due to unchecked mergers within
the next month. After starting a successful business 23 years ago, it's
heartbreaking to lose it and will be costly to our economy as more and
more of us lose our businesses due to these unchecked mergers and the
power they wield to save them money.\74\
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\74\ Comment of Karen Wood, Doc. No. FTC-2023-0040-0271.
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<bullet> I work in a small accounting firm and I have seen the
effects of mergers on consumer satisfaction and worker wellbeing
personally. . . . [M]any of the job-searching or hiring firms we'd
contract with to seek additional workers are worried about raising the
ire of the large firm in the region, as it comprises so much of their
client base now[.] . . . As a result, we're forced to go with larger,
national firms for hiring, and become part of the problem of sectoral
concentration.\75\
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\75\ Comment of John Kurpierz, Doc. No. FTC-2023-0040-0462.
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<bullet> As a lifelong union member I also believe the requirement
for detailing merger effects on workers and unions to be a vital
necessity. Those of us outside the C suites, boardrooms and stockholder
meetings are stakeholders too, and our livelihoods and well being
should be considerations.\76\
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\76\ Comment of Chas McClelland, Doc. No. FTC-2023-0040-0273.
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<bullet> I personally know many folks in entertainment (writers,
crew, actors, etc.) who have had such a difficult time surviving in
Hollywood that they've simply had to quit or move home. And, frankly,
folks who specifically represent cultures that are least visible in
society are often the first to go--because they don't necessarily have
the resources or didn't face as many obstacles as other artists. It's a
terrible cycle, magnified greatly by vertical mergers.\77\
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\77\ Comment of Alice Stanley, Doc. No. FTC-2023-0040-0508.
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Numerous commenters, including State antitrust enforcers and
members of Congress, expressed general support for an increasing focus
on labor market competition in merger analysis and requiring additional
labor market information in the Form to screen for such issues. Some
commenters highlighted potential efficiencies in the merger review
process from providing the Agencies with labor market information in
the earlier stages of review, including a more uniform process that
could result in the termination of more merger reviews within the 30-
day waiting period and a more efficient use of Agency resources where
no labor market issues exist.
The Commission disagrees with a commenter who stated that the
analysis under the Clayton Act requires consideration of competition
issues, but not labor. Antitrust law, including the Clayton Act, has
always been concerned with workers and labor markets.\78\ As noted by
the State antitrust enforcers, in the congressional debates on the
Clayton Act in 1914, legislators expressed concerns regarding the
monopsonist's power to dictate to its labor the wage it will pay for
the only commodity labor has to sell.\79\ As recently as 2021, a
unanimous Supreme Court in NCAA v. Alston affirmed that the antitrust
laws are designed to prevent harm to competition in labor markets.\80\
As noted in the concurring opinion: ``Price-fixing labor is price-
fixing labor. And price-fixing labor is ordinarily a textbook antitrust
problem because it extinguishes the free market in which individuals
can otherwise obtain fair compensation for their work.'' \81\ And there
is bipartisan agreement among current Federal enforcers and their
predecessors that the Agencies are empowered to enforce the Clayton Act
to prevent competitive harms in labor markets caused by mergers.\82\
Moreover, recent empirical work demonstrates the impact that mergers
have on competition in labor markets.\83\
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\78\ Anderson v. Shipowners Ass'n of the Pac. Coast, 272 U.S.
359, 365 (1926).
\79\ Comment of State Atty's Gen., Doc. No. FTC-2023-0040-0695
at 21 n.123 (citing 51 Cong. Rec. 9184 (1914) (statement of Rep. Guy
Helvering)). See also 21 Cong. Rec. 2457 (1890) (statement of Sen.
Sherman asserting trusts command the price of labor).
\80\ NCAA v. Alston, 594 U.S. 69 (2021). The Agencies' approach
to evaluating the potential labor market effects of mergers is set
forth in the Merger Guidelines. U.S. Dep't of Justice & Fed Trade
Comm'n, Merger Guidelines 2.10 (2023).
\81\ Alston, 594 U.S. at 109-110 (Kavanaugh, J., concurring).
\82\ See generally FTC Chairman Joseph J. Simons, Prepared
Keynote Address at American University Washington College of Law
Conference on Themes of Professor Jonathan Baker's New Book, The
Antitrust Paradigm: Restoring a Competitive Economy 9 (Mar. 8,
2019), <a href="https://www.ftc.gov/system/files/documents/public_statements/1515179/simons_-_jon_baker_speech_3-8-19.pdf">https://www.ftc.gov/system/files/documents/public_statements/1515179/simons_-_jon_baker_speech_3-8-19.pdf</a>; Assistant Attorney
General Makan Delrahim, Remarks at the Public Workshop on
Competition in Labor Markets 3 (Sept. 23, 2019), <a href="https://www.justice.gov/opa/speech/assistant-attorney-general-makan-delrahim-delivers-remarks-public-workshop-competition">https://www.justice.gov/opa/speech/assistant-attorney-general-makan-delrahim-delivers-remarks-public-workshop-competition</a>.
\83\ See Elena Prager & Matt Schmitt, ``Employer Consolidation
and Wages: Evidence from Hospitals,'' 111 a.m. Econ. Rev. 397
(2021); David Arnold, ``Mergers and Acquisitions, Local Labor Market
Concentration, and Worker Outcomes'' (Working Paper, Oct. 27, 2019),
<a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3476369">https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3476369</a>.
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One commenter stated that requiring merging parties to provide
labor and employment information is at odds with the consumer welfare
standard. This is not correct. Judge Easterbrook, writing for the
Seventh Circuit, recently rejected an employer's argument that
restrictions on the movement of employees could be justified because it
expanded the output of consumer products: ``One problem with this
approach is that it treats benefits to consumers (increased output) as
justifying detriments to workers (monopsony pricing). That's not right;
it
[[Page 89228]]
is equivalent to saying that antitrust is unconcerned with competition
in the markets for inputs, and Alston establishes otherwise.'' \84\
There is a clear consensus that the consumer welfare standard is
sufficiently flexible to encompass antitrust enforcement to prevent
competitive harms to labor markets.\85\ Because section 7 reaches these
concerns, it is appropriate for the Agencies to collect information to
determine if the transaction may violate the antitrust laws by
substantially lessening competition in any market for labor. The fact
that the Commission has not previously required this information to be
reported in HSR filings does not mean that the information is not
necessary and appropriate to enable the Agencies to determine whether
an acquisition, if consummated, may violate the antitrust laws. While
not every negative impact on workers reflects a harm to competition,
growing evidence about the potential for mergers to cause harm in input
markets for labor in violation of the antitrust laws shows that the
Agencies have a sound basis to review transactions for potential
competitive impacts on labor markets.
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\84\ Deslandes v. McDonald's USA, LLC, 81 F.4th 699, 703-04 (7th
Cir. 2023).
\85\ See Herbert Hovenkamp, ``Is Antitrust's Consumer Welfare
Principle Imperiled?,'' 45 J. Corp. L. 65, 78 (2019) (injury that
results from the exercise of monopsony power is technically similar
to the injury caused by monopoly; in both cases the defendant
reduces output); Delrahim, supra note 82, at 3-4 (consumer welfare
standard is flexible enough to take into account harm to competition
that is localized in an upstream labor market, not just a downstream
product market); FTC Commissioner Christine S. Wilson, Keynote
Address: Welfare Standards Underlying Antitrust Enforcement: What
You Measure Is What You Get 7 (Feb. 15, 2019), <a href="https://www.ftc.gov/system/files/documents/public_statements/1455663/welfare_standard_speech_-_cmr-wilson.pdf">https://www.ftc.gov/system/files/documents/public_statements/1455663/welfare_standard_speech_-_cmr-wilson.pdf</a> (consumer welfare standard
does address possible monopsony concerns, and the agencies apply the
consumer welfare standard to labor markets).
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As discussed below in section VI.I.3., the final rule does not
require filers to submit specific information about their employees as
suggested in the proposed rule. Instead, the Agencies will rely on
other information and documentary materials required in the final rule
to conduct a preliminary assessment of whether the transaction may
violate the antitrust laws with respect to any affected labor market.
The Agencies have been gaining experience analyzing information about
employees during ongoing merger reviews and other investigations of
conduct that may harm competition for workers, and the Commission
relies on this experience to determine which documents and information
have been most useful in identifying those transactions that warrant an
in-depth review of potential labor market effects through the issuance
of Second Requests.
As discussed below in section VI.I.3., the Commission will rely on
information contained in the new Overlap and Supply Relationships
Descriptions, as well as additional documents required by the final
rule to conduct a preliminary assessment of potential labor market
effects. In the Agencies' experience, those transactions that are
flagged for closer review due to concerns about effects in output
markets may also require a closer look at potential impacts in input
markets, including labor markets. Because the final rule will allow the
Agencies to conduct a more robust screening for potential effects in
output markets, it will also permit more robust screening for potential
effects in input markets, including those related to labor services. In
addition, the final rule requires the submission of certain plans and
reports shared at the highest level of management that discuss market
shares, competition, competitors, or markets of any product or service
that is provided by both the acquiring person and acquired entity.
These documents may also indicate whether the parties view themselves
as employing similar categories of employees or competing for certain
types of labor services. As a result, the final rule will enhance the
Agencies' ability to conduct a premerger assessment to determine if the
transaction may violate the antitrust laws with respect to competition
for labor. Although the Commission has determined not to require
specific information about workers or workplace safety information in
the HSR Filing at this time, as the Agencies acquire more experience
with conducting competition analyses of labor markets, the Commission
may revisit the issue in future rulemakings.
3. Identifying Acquisitions That Create a Risk of Foreclosure
Mergers between firms that are not direct competitors can still
violate the antitrust laws. As stated in the NPRM, an acquisition may
violate the law if it creates opportunities for post-merger foreclosure
of rivals arising from vertical or non-horizontal relationships.\86\
The nature and scope of potential non-horizontal competitive concerns
can often be complex and unique. To fully account for all the ways in
which a proposed transaction may violate the antitrust laws, the
Agencies need information to determine whether there are any existing
or emerging business relationships between the merging parties that
would allow the merged firm to limit access to products or services
that its rivals use to compete, referred to as ``foreclosure.'' \87\
Current information requirements in the Rules do not reveal these
existing relationships, which are well known to the parties. Even more
than in horizontal mergers, which require an assessment of whether the
merger may eliminate existing competition between rivals whose products
are viewed as substitutes, non-horizontal concerns arise from distinct
facts and industry structure that are not readily available to the
Agencies from other sources.
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\86\ NPRM at 42179.
\87\ See Illumina, Inc. v. FTC, 88 F.4th 1036, 1055 (5th Cir.
2023) (violation of section 7 where merger will result in the
potential foreclosure of key input by the sole supplier). See also
Ford Motor Co. v. United States, 405 U.S. 562 (1972).
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Various commenters, including members of Congress, supported new
information requirements targeting non-horizontal competitive issues. A
comment from State antitrust enforcers underscored the concern about
foreclosure, noting that because mergers may change the firms'
incentives or ability to disadvantage or eliminate rivals at one or
more levels of their supply chains, one of the anticompetitive harms
that may result from a merger--particularly non-horizontal mergers--is
the risk of foreclosure. The comments from a farmer-led advocacy
organization warned that dominant firms have expanded across product
markets--primarily through product-extension and conglomerate mergers--
to insulate against cross-industry competition or to develop product-
tying and other capacities for entrenchment and exclusion.
Other commenters maintained that vertical merger challenges are
uncommon and that antitrust precedent does not sufficiently support
non-horizontal theories of competitive harm to warrant the new
information requirements. For example, commenters stated that the
Agencies challenge very few vertical transactions, and the courts
generally have not been receptive to those challenges. One commenter
stated that an assessment of potential future competitors goes well
beyond what is typically relevant because non-horizontal theories of
harm are rare under section 7. The same commenter reasoned that when
challenging a vertical merger the antitrust agency must prove that one
party has substantial market power and that information regarding the
vendor-vendee relationship is not required to assess this threshold
question. A tech industry trade association stated that
[[Page 89229]]
most vertical mergers promote competition, so filers should not need to
answer detailed questions about vertical relationships.
While in the past non-horizontal challenges were less common than
those involving direct competitors, in recent years the Agencies have
brought a significant number of non-horizontal merger enforcement
actions that have resulted in merger abandonment and ordered
divestitures,\88\ and other mergers were abandoned or restructured
prior to legal action.\89\ The Commission also disagrees that potential
harm from foreclosure is uncommon or does not warrant robust scrutiny.
Empirical economic studies of vertical mergers find no basis to assume
that they are either procompetitive or anticompetitive in general.
Instead, each transaction must be examined on its facts and in the
context of the markets served by the merging parties. A review of
twenty-nine recent studies of vertical integration reports that
fourteen studies found some evidence of competitive harm, while
fourteen found some evidence of benefits.\90\ The same review also
evaluated two frequently cited surveys of vertical integration and
found that the subjects and methods used limit any conclusions that can
be drawn for antitrust policy purposes.\91\
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\88\ Illumina, 88 F.4th at 1048, 1059; FTC v. Tempur Sealy
Int'l, Inc., 4:24-cv-02508 (S.D. Tex. filed July 2, 2024)
(complaint); In re Lockheed Martin Corp., No. 9405 (F.T.C. Jan. 25,
2022) (complaint alleging merger would enable missile systems
manufacturer to use control over missile propulsion systems to harm
rival defense prime contractors) (transaction abandoned); In re
Nvidia Corp., No. 9404 (F.T.C. Dec. 2, 2021) (complaint alleging
merger would give chip manufacturer the ability and incentive to use
control over microprocessor design technology to undermine
competitors) (transaction abandoned). For a compilation of the
Agencies' enforcement actions involving vertical mergers, see Steven
C. Salop & Daniel P. Culley, ``Vertical Merger Enforcement Actions:
1994-April 2020'' (Geo. L. Faculty Pub. & Other Works No. 1529,
2020), <a href="https://scholarship.law.georgetown.edu/facpub/1529/">https://scholarship.law.georgetown.edu/facpub/1529/</a>
(reporting 66 vertical matters over 26 years).
\89\ See, e.g., Press Release, U.S. Dep't of Justice,
``Antitrust AAG Kanter Statement After Adobe and Figma Abandon
Merger'' (Dec. 18, 2023), <a href="https://www.justice.gov/opa/pr/antitrust-aag-kanter-statement-after-adobe-and-figma-abandon-merger">https://www.justice.gov/opa/pr/antitrust-aag-kanter-statement-after-adobe-and-figma-abandon-merger</a>; Cat
Zakrzewski, ``Amazon ends $1.7B iRobot acquisition in rare victory
for tech regulators,'' Wash. Post (Jan. 29, 2024), <a href="https://www.washingtonpost.com/technology/2024/01/29/amazon-irobot-antitrust-europe/">https://www.washingtonpost.com/technology/2024/01/29/amazon-irobot-antitrust-europe/</a>.
\90\ Marissa Beck & Fiona Scott Morton, ``Evaluating the
Evidence on Vertical Mergers,'' 59 Rev. Indus. Org. 273, 274 (2021)
(explaining many of the studies reviewed were not designed to assess
the net effect of vertical integration on welfare).
\91\ Id.
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The Agencies have an obligation to screen transactions for non-
horizontal effects, including the risk of post-merger foreclosure,
because the law clearly requires it. In 1950, Congress amended section
7 of the Clayton Act to expressly reach non-horizontal transactions to
combat ``the rising tide of economic concentration . . . [providing]
authority for arresting mergers at a time when the trend to a lessening
of competition in a line of commerce was still in its incipiency.''
\92\ The Supreme Court subsequently set forth frameworks for analyzing
vertical \93\ and other non-horizontal \94\ mergers to address concerns
about foreclosure.\95\ Relying on these precedents, the Agencies bring
enforcement actions against transactions that create a risk that the
merger will create a firm that may limit access to products or services
rivals use to compete.\96\ Several of these enforcement actions
resulted in the parties abandoning their merger plans in the face of
litigation. Just recently, the U.S. Court of Appeals for the Fifth
Circuit upheld the Commission's finding that Complaint Counsel carried
their initial burden of showing that Illumina's acquisition of Grail
was likely to substantially lessen competition in the U.S. market for
research and development of multi-cancer early detection tests and that
Illumina failed to establish cognizable efficiencies.\97\ The decision
is significant for its application of vertical theories of harm, as
well as its inclusion of products in the relevant market based on
precommercial activity.
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\92\ Brown Shoe Co. v. United States, 370 U.S. 294, 317 (1962);
Celler-Kefauver Antimerger Act of 1950, Pub. L. 81-899, 64 Stat.
1125 (1950).
\93\ Brown Shoe, 370 U.S. 294 (vertical merger violated section
7); see also Ford Motor Co. v. United States, 405 U.S. 562 (1972)
(same).
\94\ See FTC v. Procter & Gamble Co., 386 U.S. 568, 577-578
(1967) (product-extension merger violated section 7). See also
Fruehauf Corp. v. FTC, 603 F.2d 345 (2d Cir. 1979); U.S. Steel Corp.
v. FTC, 426 F.2d 592, 599 (6th Cir. 1970).
\95\ The Agencies' analyses of how vertical and other non-
horizontal transactions may harm competition are set forth in detail
in the recently revised Merger Guidelines. U.S. Dep't of Justice &
Fed Trade Comm'n, Merger Guidelines 5 (2023).
\96\ See, e.g., FTC v. Tempur Sealy Int'l, Inc., 4:24-cv-02508
(S.D. Tex. filed July 2, 2024) (complaint); In re Amgen, Inc, No.
9414 (F.T.C. Dec. 13, 2023) (consent order settling charges that the
acquisition would enable Amgen to leverage its large portfolio of
drugs to pressure insurance companies and PBMs into favoring
Horizon's monopoly products or disadvantaging rivals); In re
Lockheed Martin Corp., No. 9405 (F.T.C. Jan. 25, 2022) (complaint
alleging merger would enable missile systems manufacturer to use
control over missile propulsion systems to harm rival defense prime
contractors) (transaction abandoned); In re Nvidia Corp., No. 9404
(F.T.C. Dec. 2, 2021) (complaint alleging merger would give chip
manufacturer the ability and incentive to use control over
microprocessor design technology to undermine competitors)
(transaction abandoned); In re Microsoft Corp., No. 9412 (F.T.C.
Dec. 8, 2022) (complaint).
\97\ Illumina, Inc. v. FTC, 88 F.4th 1036, 1048, 1059 (5th Cir.
2023) (remanding to Commission to consider whether supply agreement
offered to rivals sufficiently mitigated merger's effect). See also
United States v. AT&T, Inc., 916 F.3d 1029, 1045 (D.C. Cir. 2019)
(vertical mergers can create harms beyond higher prices for
consumers, including decreased product quality and reduced
innovation).
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In the Agencies' experience, it can be difficult to detect whether
current or potential rivals of one merging party are dependent on the
other merging party for a key product, service, or route to market
necessary to compete. The Agencies currently do not receive sufficient
information in the HSR Filing to identify candidate ``related
products'' nor to assess the degree to which rivals may be dependent on
the related product.\98\ Accordingly, the Agencies are not well
positioned to conduct a robust initial screen for this significant
mechanism of competitive harm. Being able to quickly assess whether the
transaction presents a risk of foreclosure would permit the Agencies to
target their investigative resources most efficiently on those
transactions that are most likely to raise this competitive concern.
---------------------------------------------------------------------------
\98\ See U.S. Dep't of Justice & Fed Trade Comm'n, Merger
Guidelines 2.5 (2023).
---------------------------------------------------------------------------
As discussed in more detail below, the Commission has determined
that information that reveals existing supply relationships between the
merging parties or their rivals is necessary to fully account for the
potential that the transaction may create a firm that could limit
rivals' access to key products or services they need to compete in
violation of the antitrust laws. The Commission previously required
information about vendor-vendee relationships, but eliminated this
requirement when the reported information did not provide a sufficient
basis for that analysis such that the benefit to the Agencies did not
outweigh the burden of providing it.\99\ The Supply Relationships
Description in the final rule requires information that is specifically
targeted to identifying whether rivals may be dependent on the merged
firm for key inputs post-merger. Thus, the information is more relevant
to the Agencies' screening for such risks than prior vendor-vendee
information.
---------------------------------------------------------------------------
\99\ NPRM at 42196-97.
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Additionally, the final rule also contains new document
requirements that are intended to reveal any existing or future non-
horizontal business relationships that could give rise to risks from
foreclosure of rivals. For example, the buyer must indicate whether it
has existing contracts with the seller in broad categories that are
relevant to an initial antitrust assessment, such as leases, licensing
agreements, master service agreements, operating agreements or supply
agreements, or
[[Page 89230]]
any noncompete or non-solicitation agreements that might be affecting
current levels of competition. Filers with an existing business
relationship also will submit one year's worth of plans and reports
provided to a Chief Executive Officer or the Board of Directors that
analyze markets and competition pertaining to any product or service
both parties supply (including products or services in development).
Based on the Agencies' experience, these types of high-level business
documents can reveal whether and how the parties interact in the market
today to understand how the merger may affect market conditions more
broadly, including any risk of foreclosure that could harm other market
participants as well as competition overall. Finally, the expanded set
of transaction-related documents ensure that the Agencies receive key
documents that have been collected for the purposes of the deal but
have not yet been shared with the board of directors. In the Agencies'
experience, when there is an existing non-horizontal business
relationship between the parties, these documents often reference that
relationship and how it might be affected by the transaction, including
whether the parties believe that there are synergies or efficiencies
that may be gained.
4. Identifying Potential Law Violations Involving Innovation Effects,
Future Market Entry, or Nascent Competitive Threats
In markets where concentration is already great or trending in that
direction, a merger may be illegal if it eliminates ongoing innovation
efforts or the possibility that entry or expansion by one or both firms
would have resulted in new or increased competition.\100\ Relatedly,
the acquisition of a firm that represents a nascent competitive
threat--namely, a firm that could grow into a significant rival,
facilitate other rivals' growth, or otherwise spur more robust
competition in the future--may violate the antitrust laws.\101\
Concerns that a transaction may violate the antitrust laws by reducing
innovation efforts \102\ or eliminating a future competitor \103\ are
core to section 7's purpose to arrest the anticompetitive effects of
market power in their incipiency. Established incumbents may seek to
acquire a potential entrant or a nascent competitive threat in order to
eliminate beneficial future competition, especially at critical
junctures when the acquired firm is poised to introduce a disruptive
product.\104\
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\100\ United States v. Marine Bancorp, Inc., 418 U.S. 602, 630
(1974).
\101\ See FTC v. Procter & Gamble, 386 U.S. 568, 577-78 (1967).
See also United States v. El Paso Nat. Gas Co., 376 U.S. 651 (1964);
Polypore Int'l v. FTC, 686 F.3d 1208 (11th Cir. 2012) (acquisitions
that eliminate competitive threats violate section 7). Like the
Clayton Act, the Sherman Act bars a firm from gaining or maintaining
a monopoly position through anticompetitive conduct, including
acquisitions that exclude nascent or potential threats to its
dominance. See, e.g., United States v. Grinnell Corp., 384 U.S. 563
(1966) (acquisitions are among the types of conduct that may violate
the Sherman Act). Acquisitions by monopolists of nascent competitive
threats violate section 2 of the Sherman Act because they are
reasonably capable of contributing significantly to the defendant's
monopoly power. United States v. Microsoft Corp., 253 F.3d 34, 79
(D.C. Cir. 2001) (en banc) (per curiam) (Sherman Act does not allow
monopolists free reign to squash nascent, albeit unproven,
competitors at will).
\102\ For a discussion of how mergers may violate section 7 by
eliminating on-going innovation competition, see Note by the United
States to the OECD, The Role of Innovation in Enforcement Cases
(Dec. 5, 2023) (DAF/COMP/WD(2023)84), <a href="https://one.oecd.org/document/DAF/COMP/WD">https://one.oecd.org/document/DAF/COMP/WD</a>(2023)84/en/pdf.
\103\ See United States v. Falstaff Brewing Corp., 410 U.S. 526,
561-62 (1973) (Marshall, J, concurring). See also United States v.
Continental Can Co., 378 U.S. 441, 465 (1964) (fact that merging
parties were not direct competitors for all end uses at the time of
the merger may actually enhance the long-run tendency of the merger
to lessen competition).
\104\ See United States v. Visa Inc., No. 3:20-cv-07810 (N.D.
Cal. Nov. 5, 2020) (complaint) (transaction abandoned and case
dismissed) and Assoc. Attorney General Vanita Gupta, Remarks at
Georgetown Law's 15th Annual Global Antitrust Enforcement Symposium
(Sept. 14, 2021), <a href="https://www.justice.gov/opa/speech/associate-attorney-general-vanita-gupta-delivers-remarks-georgetown-law-s-15th-annual">https://www.justice.gov/opa/speech/associate-attorney-general-vanita-gupta-delivers-remarks-georgetown-law-s-15th-annual</a>. See also supra note 15 (collecting studies).
---------------------------------------------------------------------------
As noted in the NPRM, there has been tremendous growth in sectors
of the economy that rely on technology, such as pharmaceutical, medical
device, and digital markets. Given the dynamic nature of these markets
and the importance of acquisition strategies to success as well as
market growth and penetration, mergers and acquisitions in these
markets present a unique challenge for the Agencies. In particular, the
Agencies must closely examine mergers in these and other rapidly
evolving markets to account for the possibility that the merger may
violate the antitrust laws by eliminating a nascent competitor or
potential entrant, including the acquisition's effects on ongoing
innovation competition.\105\
---------------------------------------------------------------------------
\105\ FTC v. PPG Indus., Inc., 798 F.2d 1500, 1505-06 (D.C. Cir.
1986) (Bork, J.).
---------------------------------------------------------------------------
Competition policy debates in Congress have increasingly focused on
markets that lack sufficient competition, especially in critical
technology sectors.\106\ Concerns about the role of certain dominant
companies have caused the Agencies to deploy additional resources to
counter the economic power of these firms, including through costly and
resource-intensive monopolization suits, some of which focus on the
harmful effects of their prior acquisitions.\107\ Both Agencies have
hired technologists and other experts to build their in-house capacity
to keep pace with developments in dynamic markets that are reliant on
emerging technology.\108\ The Agencies have also invested in better
understanding how dominant firms can use strategic acquisitions as part
of an interrelated course of monopolistic conduct. For example, the
Agencies have brought challenges alleging that firms have engaged in
``buy-or-bury'' strategies against actual or potential rivals.\109\ The
Agencies have also alleged that firms have attempted to buy or exercise
control of adjacent products or services that might be used to steer
customers to their other products or exclude competing platforms.\110\
These strategies can be very hard to detect because merger activity in
these sectors increasingly involves firms in business lines that
currently may not be related in a clearly horizontal or vertical way.
Without information that identifies products in development and the
firms' assessments of where potential competitive threats are likely to
emerge in the future, the Agencies have no basis to identify whether a
transaction may eliminate ongoing innovation competition, a potential
entrant, or a nascent competitive threat.\111\
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\106\ Majority Staff of H.R. Subcomm. on Antitrust, Com. & Admin
L. of the Comm. On the Judiciary, 116th Cong., Majority Staff Rep. &
Recommendations, Investigation of Competition in Digital Mkts. 38
(2020), <a href="https://democrats-judiciary.house.gov/uploadedfiles/competition_in_digital_markets.pdf">https://democrats-judiciary.house.gov/uploadedfiles/competition_in_digital_markets.pdf</a> (hereinafter ``Investigation of
Competition in Digital Markets'').
\107\ FTC v. Facebook, Inc., 581 F. Supp. 3d 34, 40-42 (D.D.C.
2022); United States v. Google LLC, No. 1:23-cv-00108 at 31-35, 65-
68 (E.D. Va. filed Jan. 24, 2023) (complaint); United States v. Live
Nation Entertainment, Inc., No. 1:24-cv-03973 (S.D.N.Y. filed May
23, 2024); see also Klein v. Meta Platforms, Inc., No. 3:20-cv-8570
(N.D. Cal. filed Dec. 3, 2020).
\108\ See Note by the United States to the OECD, Theories of
Harm for Digital Mergers (June 16, 2023) (DAF/COMP/WD(2023)50),
<a href="https://one.oecd.org/document/DAF/COMP/WD">https://one.oecd.org/document/DAF/COMP/WD</a>(2023)50/en/pdf.
\109\ FTC v. Facebook, Inc., 581 F. Supp. 3d at 54.
\110\ United States v. Microsoft Corp., 253 F.3d 34, 73-74 (D.C.
Cir. 2001).
\111\ See United States v. Google LLC, No. 20-cv-3010, 2024 WL
3647498 (D.D.C. Aug. 5, 2024). (loss of nascent competitors is a
clear anticompetitive effect).
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When transactions involve firms whose premerger relationship is not
yet well established in the marketplace and is occurring outside the
public eye through ongoing product development efforts, the Agencies
cannot rely on the reporting of current overlapping revenues to spot
transactions that may
[[Page 89231]]
eliminate areas of emerging or potential competition.\112\ The Agencies
need a reliable factual basis for identifying transactions that create
this risk, which is not provided in the current Form. For instance, the
Agencies need information about products in development that are not
currently generating revenues, but that the filer expects will soon.
Because legal precedent makes clear that a merger that substantially
lessens competition for innovation or research and development violates
the law,\113\ the Agencies need information that will identify areas of
pre-revenue investments and competition. The Agencies also need
information that reveals the rationale for the transaction, including
whether the acquired firm is considered a nascent competitive threat,
and documents that reflect each firm's horizon-scanning for potential
acquisition targets. This information is known only to the parties and
is relevant to an initial assessment of whether the transaction may
violate the antitrust laws by eliminating a potential entrant or
nascent competitive threat.
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\112\ See Illumina, Inc. v. FTC, 88 F.4th 1036, 1049-51 (5th
Cir. 2023) (antitrust markets not limited to products that exist but
may include those that are anticipated or expected or encompass
research, development and commercialization of products in
development); FTC v. PPG Indus., Inc., 798 F.2d, 1500, 1504 (D.C.
Cir. 1986) (merging firms competed in evolving high technology
market at the request-for-proposal stage of product development).
\113\ See United States v. Anthem, Inc., 855 F.3d 345, 361 (D.C.
Cir. 2017) (threat to innovation alone is anticompetitive effect
from acquisition); Illumina, Inc. v. FTC, 88 F.4th 1036, 1051 (5th
Cir. 2023) (``Antitrust law does not countenance such a cramped view
of competition, particularly in a research-and-development
market.'').
---------------------------------------------------------------------------
Failure to account for the merger's potential impact on ongoing
innovation competition can have meaningful implications. Consumers and
businesses reap enormous benefits from the efficiency and convenience
brought about by significant innovations. According to Nobel Prize
winner Robert Solow: ``Technological progress, very broadly defined to
include improvements in the human factor, was necessary to allow long-
run growth in real wages and the standard of living.'' \114\ Courts,
academic literature and commenters confirm the importance of innovation
to growth in the economy and as a source of dynamism that can shake
loose entrenched incumbents.\115\ Acquisitions of innovator firms may
also deny the public the benefits of those investments in innovation,
including any future competition those investments may have unleashed,
if the acquirer does not make use of the discoveries \116\ or is able
to crowd out nascent competitors by foreclosing access to a key
input.\117\ The stakes are also high for innovators: startups may find
fewer investors and lower acquisition prices in sectors where the
expectation is that incumbents will ultimately identify and acquire any
promising innovation.\118\
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\114\ Robert Solow, ``Growth Theory and After,'' 78 Am. Econ.
Rev. 307, 313 (1988).
\115\ See Giulio Federico et al., ``Antitrust and Innovation:
Welcoming and Protecting Disruption,'' 20 Innovation Pol'y & Econ.
125, 128-29 (2020); C. Scott Hemphill & Tim Wu, ``Nascent
Competitors,'' 168 U. Pa. L. Rev. 1879, 1886 (2020).
\116\ See Hemphill & Wu, supra note 115, at 1893. See also Mark
Lemley & Andrew McCreary, ``Exit Strategy,'' 101 B.U. L. Rev. 1
(2020).
\117\ See Illumina v. FTC, 88 F.4th at 1053.
\118\ Sai Krishna Kamepalli et al., ``Kill Zone'' (Nat'l Bureau
of Econ. Rsch., Working Paper No. 27146, May 2020 rev. June 2022),
<a href="https://www.nber.org/papers/w27146">https://www.nber.org/papers/w27146</a>.
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Comments from State antitrust enforcers supported proposals seeking
materials and information regarding potential or nascent entrants.
However, other commenters stated that the HSR Filing is not an
appropriate vehicle for advancing novel legal theories such as nascent
competition or research and development competition, and any related
revisions should be postponed until those theories are better
established in case law.
The Commission disagrees with commenters who suggested that
concerns about innovation competition, potential entrants, and nascent
threats are not well-grounded in existing law and economic learning.
The importance of scrutinizing mergers for potential effects on
innovation is well-documented.\119\ Economic evidence supports current
legal precedent. Research demonstrates a growing phenomenon of dominant
firms--buoyed by acquisitions--taking over industries.\120\ This is
particularly true in the tech industry, where the markets in which
digital platforms compete share several characteristics that tend
toward a single dominant firm.\121\ Sustained high economic profits
suggest that dominant firms in these concentrated sectors possess
substantial and durable market power.\122\ In addition, insufficient
competition and entry result in harms to investment and
innovation.\123\ For these reasons, economic research supports the
current legal framework, and reflects the need to carefully scrutinize
proposed transactions involving a dominant incumbent or monopolist
seeking to acquire a nascent threat or adjacent complement that could
someday challenge the incumbent's position.\124\
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\119\ See generally Carl Shapiro, ``Competition and Innovation:
Did Arrow Hit the Bull's Eye?,'' in The Rate and Direction of Econ.
Activity Revisited 389-400 (Josh Lerner & Scott Stern eds., 2012).
\120\ Carl Shapiro, ``Protecting Competition in the American
Economy: Merger Control, Tech Titans, Labor Markets,'' 33 J. Econ.
Perspectives 69 (2019).
\121\ Stigler Comm. On Digital Platforms, Final Report 7-8
(2019), <a href="https://www.chicagobooth.edu/-/media/research/stigler/pdfs/digital-platforms-committee-report-stigler-center.pdf">https://www.chicagobooth.edu/-/media/research/stigler/pdfs/digital-platforms-committee-report-stigler-center.pdf</a> (explaining
network effects, returns increasing with scale, low marginal costs,
high returns on amassing user data, and low distribution costs
underlie trend toward monopoly).
\122\ Shapiro, supra note 120, at 70.
\123\ Stigler Comm. On Digital Platforms, supra note 121, at 31.
\124\ Cunningham et al., supra note 15 (presenting empirical
evidence that pipeline drug program is less likely to be developed
when acquired by firm with overlapping existing product with
significant market power); Stigler Comm. On Digital Platforms, supra
note 121, at 81, 88; Shapiro, supra note 120, at 75; Michael L.
Katz, ``Big Tech mergers: Innovation, competition for the market,
and the acquisition of emerging competitors,'' 54 Info. Econ. &
Policy 100883 (2021).
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Going back many years, the Agencies have successfully challenged
several mergers that would have eliminated a potential entrant or
nascent competitive threat. These enforcement actions include the
acquisition of a pipeline firm or product that, once launched, would
compete directly with the incumbent merging party,\125\ as well as the
acquisition of a firm with products already on the market that,
although small, was poised to add features or capabilities in the
future that could render it a closer and more formidable competitor
than it is today.\126\ Other transactions challenged by the Agencies
involved the acquisition of a firm whose current market share
understated its future competitive significance because it did not
account for new innovations, business strategies, or other
factors.\127\ Mergers that impact future competition between products
or services that have not yet been developed can also violate the
antitrust laws.\128\
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\125\ See, e.g., In re Sanofi Corp., No. 9422 (F.T.C. Dec. 11,
2023) (complaint) (transaction abandoned); United States v. Visa
Inc., No. 3:20-cv-07810 (N.D. Cal. Nov. 5, 2020) (transaction
abandoned); FTC v. Mallinckrodt ARD Inc. (f/k/a Questcor Pharms.,
Inc.), No. 1:17-cv-120 (D.D.C. Jan. 30, 2017) (consent decree
ordered license and $100 million equitable monetary relief); United
States v. Westinghouse Air Brake Techs. Corp., No.1:16-cv-02147
(D.D.C. Oct. 26, 2016) (consent decree ordered divestiture); In re
Thoratec Corp., No. 9339 (F.T.C. July 28, 2009) (transaction
abandoned); In re Inverness Med. Innovations, Inc., No. C-4244
(F.T.C. Dec. 23, 2008) (Commission order requiring divestiture and
other conditions).
\126\ FTC v. PPG Indus., Inc., 798 F.2d 1500, 1505-06 (D.C. Cir.
1986) (Bork, J.). See also In re Illumina, Inc., No. 9387 (F.T.C.
Dec. 17, 2019) (complaint) (transaction abandoned).
\127\ United States v. Novelis, Inc., No. 1:19-cv-02033 (N.D.
Ohio Aug. 26, 2020) (arbitration-ordered divestiture); In re The
Procter & Gamble Co., No. 9400 (F.T.C. Dec. 8, 2020) (complaint)
(transaction abandoned); In re CDK Global, Inc., No. 9382 (F.T.C.
Mar. 19, 2018) (complaint) (transaction abandoned).
\128\ See, e.g., PPG Indus., Inc., 798 F.2d at 1505-06. See also
United States v. Bayer AG, No. 1:18-cv-01241 (D.D.C. Feb. 8, 2019)
(consent decree ordered divestiture); Press Release, U.S. Dep't of
Justice, ``Applied Materials Inc. and Tokyo Electron Ltd. Abandon
Merger Plans After Justice Department Rejected Their Proposed
Remedy'' (Apr. 27, 2015), <a href="https://www.justice.gov/opa/pr/applied-materials-inc-and-tokyo-electron-ltd-abandon-merger-plans-after-justice-department">https://www.justice.gov/opa/pr/applied-materials-inc-and-tokyo-electron-ltd-abandon-merger-plans-after-justice-department</a>; In re Nielsen Holdings N.V., No. C-4439 (F.T.C.
Feb. 28, 2014) (Commission order requiring divestiture).
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[[Page 89232]]
A number of commenters opposed changes contained in the proposed
rule over concerns that they would disproportionally impact small
innovation companies and startups, which rely on venture capital and
acquisitions to sustain their business model. One commenter stated that
preventing such exit strategies would make it difficult for startups to
obtain early-stage funding, reducing both the number and vitality of
these innovative firms. Several cautioned the Commission to avoid
increasing the burden and risk associated with the acquisition of
startups, which they stated would damage the dynamic U.S. tech
innovation system. Another stated that acquisitions that increase
concentration can still be procompetitive and drive dynamic efficiency.
As the discussion above clearly demonstrates, acquisitions
involving nascent or potential competitors as well as those that impact
innovation competition may violate the antitrust laws. The Commission
disagrees with commenters that contend that these types of acquisitions
should be subjected to a more permissive standard or that the Agencies
are singling them out for closer scrutiny. The Agencies routinely
review acquisitions of and by innovative companies and apply the same
legal standard to those mergers as any other acquisition. When the
Agencies challenge these mergers, they are held to the same liability
requirements necessary to establish a violation of section 7. However,
as discussed above, there is a gap in the current information
requirements that undermines the Agencies' ability to determine whether
a transaction would eliminate nascent or future competition. To detect
those types of acquisitions and to assess whether they violate the
antitrust laws, the Agencies need information regarding these forms of
ongoing or emerging competition, even if some commenters disagree with
the law as applied by the courts in this area.
The Commission acknowledges that the sale of a business to an
incumbent may represent a valuable exit strategy for startups. But when
such exits are effectuated by a dominant firm to absorb a future or
emerging competitor, the overall effect may be to reduce innovation and
violate the law.\129\ In fact, antitrust enforcement can drive
innovation and growth by ensuring that market outcomes are determined
through competition rather than left to the decisions of a dominant
incumbent who can on its own determine the fate of innovative companies
and the future of competition. The history of U.S. antitrust
enforcement contains many examples of how government action was
required to unleash the forces of competition and innovation, creating
new opportunities for investments and startups.\130\ Recent research
suggests that existing firms may be acquiring innovative capacity not
for the purpose of advancing those discoveries but rather to shelve
those discoveries, leading to a reduction in innovative output and
eliminating an independent source of future competition.\131\ Two
individual commenters shared their experiences with acquisitions that
have had that effect:
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\129\ See Lemley & McCreary, supra note 116 (exit by acquisition
leads to concentration in the tech industry and short-circuits the
development of truly disruptive new technologies that have
historically displaced incumbents in innovative industries).
\130\ See Giovanna Massarotto, ``Driving Innovation with
Antitrust,'' Promarket (Apr. 10, 2024) <a href="https://www.promarket.org/2024/04/10/driving-innovation-with-antitrust/">https://www.promarket.org/2024/04/10/driving-innovation-with-antitrust/</a>.
\131\ See Cunningham et al., supra note 15. See also Florian
Sz[uuml]cs, ``M&A and R&D: Asymmetric Effects on acquirers and
targets?'' 43 Rsch. Pol'y 1264 (2014); Carmine Ornaghi, ``Mergers
and innovation in big pharma,'' 27 Int'l J. Indus. Org. 70 (2009);
Justus Haucap et al., ``How mergers affect innovation: Theory and
evidence,'' 63 Int'l J. Indus. Org. 283 (2019) (showing a reduction
in innovation competition post-merger).
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<bullet> I work in the software industry and despite the constant
talk of ``innovation,'' I have seen many mergers that eliminate new
product development. Mergers/acquisitions often consist of a company
acquiring a product and immediately discontinuing either the acquired
product or their own competing product. Most engineers I know want to
develop new products and many mergers stop this from happening.\132\
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\132\ Comment of Darryl Pretto, Doc. No. FTC-2023-0040-0434.
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<bullet> I work in the tech industry for a large technology firm.
It's disgusting that our philosophy is now to buy other companies and
never grow organic products because it is too hard. There's no
innovation anymore it is simply make enough money to buy out the actual
innovators in an industry. Any new startup is now faced with a massive
hill to climb as getting VC money is paramount, but then the moment you
do well your VC's will just sell to the highest bidder. This is
stagnating tech, and you won't see the effects for some years down the
road when 5 tech companies are left in this country. We need tighter
oversight on mergers . . . .\133\
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\133\ Anonymous Comment, Doc. No. FTC-2023-0040-0600.
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In light of all these considerations, the Commission believes this
rulemaking strikes the right balance that permits the Agencies to
evaluate transactions for their potential effects on innovation while
not standing in the way of acquisitions and other investments that do
not present antitrust risks that need to be addressed prior to
consummation. The critical task for the Agencies is to identify which
transactions may substantially lessen competition or tend to create a
monopoly, prior to consummation and before the possibility of future
competition is snuffed out.\134\ The Commission is not subjecting
acquisitions of startups or innovative firms to heightened scrutiny, as
some commenters suggest. Rather, the Agencies are modernizing premerger
requirements in light of the changes in M&A activity for all
transactions that must be reported under the HSR Act, including those
involving innovative firms.\135\ However, the final rule has been
adjusted to lessen the burden on the targets of acquisitions generally.
Moreover, many of the new requirements focus on increasing visibility
into complex entities and therefore would not be applicable to the
relatively straightforward structures of many startup companies.
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\134\ See Cristina Caffarra et al., ```How Tech Rolls:'
Potential Competition and `Reverse' Killer Acquisitions,'' 2 CPI
Antitrust Chron. 13, 15 (May 2020).
\135\ According to a recent study, investment in U.S. startups
continues to grow each year, reaching a combined deal value of
$165.8 billion for 12,235 such deals in 2020. See Gary Dushnitsky &
D. Daniel Sokol, ``Mergers, Antitrust, and the Interplay of
Entrepreneurial Activity and the Investments That Fund It,'' 24
Vand. J. Ent. & Tech. L. 255, 271 Table 1 (2022). The authors note
that a case-by-case analysis of particular deals allows for a more
nuanced approach to address particular potentially problematic deals
in such settings. Id. at 277-78. See also D. Daniel Sokol, ``Merger
Law for Biotech and Killer Acquisitions,'' 72 Fla. L. Rev. Forum 1,
8 (2020) (explaining that innovation effect is fact-dependent).
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The Commission notes that many acquisitions of startups and small
innovator firms are not reportable and thus are not subject to
antitrust scrutiny prior to consummation. In September 2021, the
Commission released its findings from an inquiry into past acquisitions
by the largest technology platforms that did not require reporting
under the HSR Act.\136\ Launched in
[[Page 89233]]
February 2020, this inquiry analyzed the terms, scope, structure, and
purpose of exempted transactions by five large technology companies:
Alphabet, Inc., <a href="http://Amazon.com">Amazon.com</a>, Inc., Apple Inc., Facebook, Inc., and
Microsoft Corp. The study covered ten years of acquisitions (from
January 1, 2010 to December 31, 2019) and found that the companies
collectively made 819 acquisitions that were not reported under the HSR
Act.\137\ None of these acquisitions was filed under HSR, although many
of them were concentrated in just a few categories of technology, such
as mobility, application software, and internet content and
commerce.\138\
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\136\ See Press Release, Fed. Trade Comm'n, ``FTC Staff Presents
Report on Nearly a Decade of Unreported Acquisitions by the Biggest
Technology Companies'' (Sept. 15, 2021), <a href="https://www.ftc.gov/news-events/news/press-releases/2021/09/ftc-staff-presents-report-nearly-decade-unreported-acquisitions-biggest-technology-companies">https://www.ftc.gov/news-events/news/press-releases/2021/09/ftc-staff-presents-report-nearly-decade-unreported-acquisitions-biggest-technology-companies</a>.
\137\ See Fed. Trade Comm'n, Non-HSR Reported Acquisitions by
Select Technology Platforms, 2010-2019: An FTC Study 10-11 Fig. 1
(2021), <a href="https://www.ftc.gov/system/files/documents/reports/non-hsr-reported-acquisitions-select-technology-platforms-2010-2019-ftc-study/p201201technologyplatformstudy2021.pdf">https://www.ftc.gov/system/files/documents/reports/non-hsr-reported-acquisitions-select-technology-platforms-2010-2019-ftc-study/p201201technologyplatformstudy2021.pdf</a> (hereinafter ``Non-HSR
Reported Acquisitions''). Data supplied by commenter Engine confirms
that the vast majority of startup acquisitions are valued below $50
million, meaning that they are rarely reported to the Agencies in
advance. See Comment of Engine, Doc. No. FTC-2023-0040-0681,
appendix B at 16.
\138\ Non-HSR Reported Acquisitions, supra note 137, at 27-35.
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This study provided other insights into these companies' practices
and acquisition strategies, including how they structured acquisitions
and how these acquisitions fit into the companies' overall business
strategies.\139\ For instance, not only were many of the acquisitions
``small'' in deal value (i.e., under the various HSR reporting
thresholds), they were also ``young,'' with nearly 40 percent of the
acquisitions involving target firms that were less than five years
old.\140\ Most of the acquisitions involved the buyer taking control of
the acquired assets or entity, although there were also a significant
number of investments that resulted in the large company holding a
minority interest in the target firm.\141\ Moreover, over three-
quarters of the transactions included non-compete clauses for founders
and key employees of the acquired entities, with relatively small
variation in the percentage of transactions with non-compete clauses
across the five respondents. \142\ Together, these findings indicate
that during the study period, these five companies acquired many small,
nascent firms operating in related business lines and their founders
and other key employees agreed to refrain from continuing their own
efforts to innovate outside the company for some period of time. While
the study focused on transactions that were not reportable under the
HSR Act, the information collected from these tech companies provided
the Commission with insight into information that is available to
parties in all types of acquisitions but that is not required by the
current Form and Instructions.
---------------------------------------------------------------------------
\139\ Other competition enforcement agencies around the world
conducted similar studies involving acquisitions of digital platform
companies. Id. at 2 n.6.
\140\ Id. at 23-26.
\141\ Id. at 15.
\142\ Id. at 21-22.
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In light of the benefits to the public from preventing mergers that
violate the antitrust laws by reducing innovation competition or
eliminating a potential entrant or nascent threat, the Commission has
determined that the Agencies need certain additional information with
the HSR Filing to conduct an initial antitrust assessment prior to
consummation. In the Agencies' experience, it is necessary to obtain
this type of information directly from the filing parties because
typically their plans regarding future products or business lines are
not public.
Several new information requirements in the final rule are aimed at
providing the Agencies with sufficient information to determine if the
transaction is likely to raise concerns about potential, emerging, or
nascent competition. For instance, the new Overlap Description and
Supply Relationships Description directly address the scope of existing
and emerging competition between the parties. In particular, the
Overlap Description requires filers to identify their own products and
services, including those that are pre-revenue, that compete with the
products and services of the other party that are known to the
filer.\143\ This information will provide a basis for the Agencies to
know that there are areas of emerging and direct competition beyond
existing products or services, including important ongoing innovation
competition. The Overlap Description also requires filers to produce
measurement information for products or services not yet generating
revenue, or those whose performance is not measured by revenue, such as
projected revenue, estimated volume, or any other applicable
performance metric. This change recognizes the importance of capturing
the competitive significance of nascent or emerging products and
services.
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\143\ As explained in section VI.I., the parties should not
exchange information for the purpose of responding to the
Competition Descriptions.
---------------------------------------------------------------------------
The final rule also requires the buyer to indicate whether there
are any existing contracts between the parties, including non-compete,
non-solicitation, or licensing agreements, which would alert the
Agencies to any limits on future competition that are created by these
agreements, especially when the buyer is not acquiring all of the
acquired entity. The existence of non-compete or non-solicitation
agreements can be especially useful in revealing that the parties
consider themselves to be `in competition' with one another, now or in
the future, such that there is value in contracting away the ability to
compete for or solicit business or workers. In addition, the Supply
Relationships Description requires information for products, services,
or assets (including data) that the other party or any other business
uses or could use to compete. This forward-looking assessment, based on
each filer's business experience, would reveal whether there are future
uses of either party's products that could give rise to concerns about
non-horizontal effects from the transaction. The inclusion of data as a
potentially key asset is purposeful, given the competitive significance
of data access for effective competition in so many modern
markets.\144\
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\144\ See FTC v. IQVIA Holdings Inc., No. 1:23 Civ. 06188
(S.D.N.Y. Dec. 29, 2023) (order granting preliminary injunction on
horizontal theories of harm without addressing FTC allegations that
the acquisition would allow IQVIA to foreclose other industry
participants from accessing its data as a key input for healthcare
professional programmatic advertising).
---------------------------------------------------------------------------
Similarly, new document requirements contained in the final rule
are aimed at revealing each firm's assessment of market conditions and
horizon-scanning for competitive threats. For instance, the final rule
requires a broader search for documents that evaluate or analyze the
transaction to include not only those provided to board members but
also to the person who has primary responsibility for supervising the
deal. These documents, along with certain ordinary course plans and
reports shared at the highest level of management described above and
in section VI.G.2., will reveal additional information about how each
filer views the competitive landscape more broadly, including in ways
that may impact current or future competition. Together, these
documents may signal whether either party has identified emerging
threats to competition--from the other party or from firms not involved
in the transaction--that would impact the Agencies' assessment of
whether the transaction may violate the antitrust laws.
As discussed above in section II.B.1., new information contained in
the
[[Page 89234]]
Minority Shareholders or Interest Holders and Officers and Directors
sections will provide a basis for the Agencies to identify any existing
or potential management relationships between the acquiring person and
target, including through entities or individuals who can influence
decision-making of the acquiring person post-merger. These
relationships can be especially concerning if used to gain access to
non-public information about future plans or investments in products-
in-development when those same individuals also have interests in
competitively relevant businesses.
Finally, the final rule collects additional information about the
acquisition rationale of the buyer to assist the Agencies in
understanding the purpose of the transaction. For example, the final
rule requires the buyer to describe any rationale for the transaction
and to indicate any document submitted with the HSR Filing that
confirms or discusses that rationale. These answers will provide
context for the Agencies' initial antitrust assessment through a deeper
understanding of what purpose the buyer has for engaging in a
transaction that is large enough to require premerger review. In
addition, the final rule for the first time requires the seller to
report prior acquisitions in the same or related lines of business,
which would provide a basis for the Agencies to better assess whether
the transaction implicates emerging, nascent, or potential competition,
especially through the combined effects of roll-up or serial
acquisition strategies or ``killer'' acquisitions in which assets were
purchased but not used as a means of eliminating a competitor.
5. Disclosing Roll-Up or Serial Acquisition Strategies
Another trend in M&A activity has been the rise of serial
acquirers, firms that engage in strategic acquisitions in the same
industry, often ``rolling up'' many small competitors in the same or
adjacent markets to establish a large, sometimes dominant,
position.\145\ Serial acquisition strategies have been subject to
antitrust scrutiny for over 100 years.\146\ In the seminal merger case,
United States v. Philadelphia National Bank, 374 U.S. 321 (1963), the
Supreme Court noted that both the buyer and the seller had previously
acquired many other independent banks,\147\ driving a trend toward
concentration that rendered their merger suspect.\148\ Given the
popularity and prevalence of these serial acquisition strategies in
recent years, especially in healthcare and technology markets, this
trend has attracted the attention of academics and policymakers
alike.\149\ A pattern or strategy of buying up smaller competitors or
firms in the same or related lines of business can lead to harm of the
same magnitude and type as mergers of larger or established firms, but
serial acquisitions are less likely to attract the attention of
enforcers until the strategy is identified. A series of small
acquisitions can lead to consolidation within an industry, often
without ever triggering the obligation to report these acquisitions
under the HSR Act. This strategy has been particularly prevalent in
healthcare markets involving private equity buyers.\150\
---------------------------------------------------------------------------
\145\ NPRM at 42202 n.62 (citing Gerry Hansell et al., ``Lessons
from Successful Serial Acquirers: Unlocking Acquisitive Growth,''
Boston Consulting Grp. (Oct. 1, 2014), <a href="https://www.bcg.com/publications/2014/mergers-acquisitions-unlocking-acquisitive-growth">https://www.bcg.com/publications/2014/mergers-acquisitions-unlocking-acquisitive-growth</a>); ``Stealth Consolidation,'' supra note 18.
\146\ See, e.g., United States v. Grinnell Corp., 384 U.S. 563,
576, 578, 580 (1966); Standard Oil Co. v. United States, 221 U.S. 1,
31-42 (1911); United States v. Am. Tobacco Co., 221 U.S. 106, 157-60
(1911). See also Note by the United States to the OECD, Serial
Acquisitions and Industry Roll-ups (Dec. 6, 2023) (DAF/COMP/
WD(2023)99), <a href="https://one.oecd.org/document/DAF/COMP/WD">https://one.oecd.org/document/DAF/COMP/WD</a>(2023)99/en/
pdf (discussing the history and roots of antitrust enforcement
against anticompetitive serial acquisitions). Serial acquisition
strategies may also violate section 2 of the Sherman Act when a firm
with monopoly power relies on acquisitions, among other conduct, to
acquire or maintain its monopoly. See Credit Bureau Reps., Inc. v.
Retail Credit Co., 358 F. Supp. 780 (S.D. Tex. 1971), aff'd, 476
F.2d 989 (5th Cir. 1973); United States v. Jerrold Elecs. Corp., 187
F. Supp. 545 (E.D. Pa. 1960).
\147\ See United States v. Phila. Nat'l Bank, 374 U.S. 321, 331
(1963) (PNB previously acquired nine independent banks while Girard
acquired six).
\148\ Id. at 367 (evidence of several remaining competitors
insufficient to rebut inherently anticompetitive tendencies of high
post-merger market shares, in light of strong trend toward mergers,
including those of the defendants).
\149\ See Investigation of Competition in Digital Markets, supra
note 106, at 24-25.
\150\ Richard M. Scheffler et al., Am. Antitrust Inst.,
``Soaring Private Equity Investment in the Healthcare Sector:
Consolidation Accelerated, Competition Undermined, and Patients at
Risk'' 8-16 (May 18, 2021), <a href="https://publichealth.berkeley.edu/wp-content/uploads/2021/05/Private-Equity-I-Healthcare-Report-FINAL.pdf">https://publichealth.berkeley.edu/wp-content/uploads/2021/05/Private-Equity-I-Healthcare-Report-FINAL.pdf</a>. The Commission recently hosted a public workshop to
discuss the growing body of economic research examining the role of
private equity investment in health care markets. Fed. Trade Comm'n,
Private Capital, Public Impact: An FTC Workshop on Private Equity in
Health Care (Mar. 5, 2024), <a href="https://www.ftc.gov/news-events/events/2024/03/private-capital-public-impact-ftc-workshop-private-equity-health-care">https://www.ftc.gov/news-events/events/2024/03/private-capital-public-impact-ftc-workshop-private-equity-health-care</a>.
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Often the Agencies are not able to detect these strategies until it
is too late, after the serial acquirer has established a dominant
position and is able to exercise market power to the detriment of
market participants. For instance, in September 2023, the FTC charged
U.S. Anesthesia Partners, a for-profit corporation, with a multi-year
anticompetitive scheme to consolidate anesthesia practices in
Texas.\151\ This lawsuit, which is pending in Federal court in Texas,
alleges that the company acquired over a dozen anesthesiology practices
in Texas to eliminate competition and create a single dominant provider
with the power to demand higher prices.
---------------------------------------------------------------------------
\151\ FTC v. U.S. Anesthesia Partners, Inc., No. 4:23cv3560
(S.D. Tex. Sept. 21, 2023) (complaint).
---------------------------------------------------------------------------
The Commission is aware of the impact of serial acquisitions based
on its experience with the dialysis industry, which is an area in which
economic research has documented adverse effects from serial
acquisitions. Throughout the 2000s, the Commission reviewed a series of
large acquisitions by DaVita, the largest U.S. provider of life-
sustaining treatments for end stage renal disease patients. In 2006, in
conjunction with DaVita's $3.1 billion acquisition of rival Gambro
Healthcare, Inc., the Commission required DaVita to divest 69 dialysis
clinics in 35 markets across the United States to resolve charges that
the acquisition violated section 7. In 2011, DaVita sought to acquire
rival DSI for $689 million, and the Commission required divestitures to
preserve competition for dialysis services in 22 local markets. Then in
2017, the Commission ordered DaVita to divest seven clinics in New
Jersey and Dallas to proceed with its $358 million acquisition of Renal
Ventures. During roughly the same period, the Commission also reviewed
a series of acquisitions by Fresenius, the other leading U.S. provider
of dialysis services, and required significant divestitures to maintain
competition.\152\
---------------------------------------------------------------------------
\152\ See In re Fresenius AG, No. C-4159 (F.T.C. July 5, 2006)
(decision and order requiring divestiture of ninety-one clinics and
financial interests in twelve more); In re Am. Renal Assocs. Inc.,
No. C-4202 (F.T.C. Oct. 23, 2007) (consent order terminating
purchase agreement for five clinics and closure of three additional
clinics); In re Fresenius Med. Care AG, No. C-4348 (F.T.C. May 25,
2012) (decision and order requiring divestiture of sixty dialysis
clinics).
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Notwithstanding these enforcement actions, the dialysis industry
has experienced growing concentration, mostly as a result of
acquisitions that were not reportable under the HSR Act. According to
one 2020 study, there were more than 1,200 acquisitions of independent
dialysis facilities over a 12-year period, resulting in DaVita and
Fresenius operating more than 60 percent of all clinics
nationwide.\153\ The study concluded that these changes in
[[Page 89235]]
ownership resulted in higher prices, lower levels of service, and worse
outcomes for patients.\154\ One commenter stated that, based on his
research, merger enforcement against reportable acquisitions prevented
illegal consolidation 95 percent of the time, while the many non-
reportable acquisitions of dialysis clinics were blocked only 5 percent
of the time. He contended that these `stealth' acquisitions accounted
for much of the increase in within-market concentration.\155\
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\153\ Paul J. Eliason et al., ``How Acquisitions Affect Firm
Behavior and Performance: Evidence from the Dialysis Industry,'' 135
Q. J. Econ. 221, 222 (2020) (from 1990 to 2020, the share of
independent dialysis facilities fell from 86% to 21%).
\154\ Id. at 223.
\155\ See Comment of Thomas Wollmann, Doc. No. FTC-2023-0040-
0680 at 1 n.2 (citing to Thomas G. Wollmann, ``Stealth
Consolidation: Evidence from an Amendment to the Hart-Scott-Rodino
Act,'' 1 a.m. Econ. Rev.: Insights 77-94 (2019) and Thomas G.
Wollman, ``How to Get Away with Merger: Stealth Consolidation and
Its Effects on US Healthcare'' (Nat'l Bureau of Econ. Rsch., Working
Paper No. 27274, May 2020 rev. Mar. 2024), <a href="https://www.nber.org/papers/w27274">https://www.nber.org/papers/w27274</a>).
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In light of the failure of prior interventions to stem the adverse
consequences of roll-up acquisitions in this industry, when DaVita in
2022 sought to buy 18 clinics in a non-HSR-reportable transaction, the
Commission unanimously voted to require DaVita not only to divest three
clinics but also to obtain prior Commission approval before buying any
new ownership interest in dialysis clinics in Utah.\156\ The Commission
determined that imposing a prior approval obligation was appropriate in
light of the company's history of attempting anticompetitive
transactions that do not trigger a notification under the HSR Act.\157\
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\156\ In re DaVita Inc., No. C-4677 (F.T.C. Oct. 25, 2021)
(decision).
\157\ See Fed. Trade Comm'n, Statement of the Commission on Use
of Prior Approval Provisions in Merger Orders (Oct. 25, 2021),
<a href="https://www.ftc.gov/system/files/documents/public_statements/1597894/p859900priorapprovalstatement.pdf">https://www.ftc.gov/system/files/documents/public_statements/1597894/p859900priorapprovalstatement.pdf</a>.
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The Commission has also imposed prior notice or prior approval
provisions on another serial acquirer, JAB Consumer Partners, a private
equity firm that has made several significant acquisitions in the
emergency and specialty veterinary services markets across the United
States. JAB is the parent company of two large veterinary clinic
chains, Compassion-First Pet Hospitals and National Veterinary
Associates Inc., that have been built through a series of acquisitions.
In 2020, Compassion-First bought NVA for $5 billion, and the Commission
required JAB to divest clinics in three local markets.\158\ In June
2022, Compassion-First/NVA acquired Sage Veterinary Partners for $1.1
billion, and the Commission required divestitures in three additional
local markets.\159\ The Commission also determined that, in light of
JAB's ongoing acquisition strategy, it would require prior approval and
prior notice requirements on JAB's future acquisitions of specialty and
emergency veterinary clinics.\160\ Later in 2022, when JAB also sought
to acquire another veterinary chain with significant competitive
overlap in four geographic markets, the Commission again required
divestitures and prior approval requirements in the affected local
markets for emergency and specialty veterinary services markets.\161\
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\158\ In re Agnaten SE, No. C-4707 (F.T.C. Apr. 9, 2020)
(decision and order).
\159\ In re JAB Consumer Partners SCA SICAR, No. C-4766 (F.T.C.
Aug. 2, 2022) (decision and order).
\160\ The Commission's order requires JAB to obtain prior
Commission approval before acquiring a specialty or emergency
veterinary clinic within twenty-five miles of any JAB clinic in
California or Texas, and prior notice to the Commission thirty days
prior to a similar acquisition anywhere in the United States that is
not required to be reported under the HSR Act. Id. (decision and
order).
\161\ In re JAB Consumer Partners SCA SICAR, No. C-4770 (F.T.C.
Oct. 10, 2022) (decision and final order).
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But resorting to imposing prior approval obligations after an
industry has already experienced significant concentration due to roll-
up strategies is suboptimal. A central purpose of the HSR Act is to
allow the Agencies to arrest trends toward concentration through
effective premerger review. For any reportable transaction under the
HSR Act, the Agencies have an obligation to determine whether the
transaction is one of a series of acquisitions that could lead to harm
in the affected markets. Information about each party's prior
acquisitions will provide a basis for the Agencies to assess this risk
to competition during their initial antitrust assessment for any
reportable transaction.
Several commenters supported the need for more information related
to prior acquisitions, including a group of State antitrust enforcers.
One commenter noted that the private equity industry pioneered and
perfected the serial `roll-up' acquisitions that were too small to
attract antitrust agency attention but nonetheless amassed considerable
market power over time. The same commenter pointed out that private
equity firms use these add-on buyout deals to purchase multiple
competitors of an existing portfolio company or expand their geographic
reach to create a much bigger player in an industry--and that this
strategy can in aggregate substantially lessen competition or tend to
create a monopoly. Another commenter raised similar concerns that the
business strategy of making a series of small acquisitions--whether an
intentional tactic to avoid regulatory scrutiny or not--has become
concerningly common in recent decades and led to many consolidated
industries. An individual commenter shared their experience with the
broader impact of rollup acquisitions on local communities:
<bullet> As the wife of a small business owner and member of a
community, I'm dismayed at seeing how many small local and regional
businesses have disappeared after becoming the target of mergers and
rollups. Those businesses--funeral homes, hospice care, newspapers,
hardware stores, coffee shops, veterinarians--were [] an important part
of the community. Now it is nearly impossible to start local businesses
in those sectors and turn any sort of profit while competing with PE
backed rollups.\162\
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\162\ Comment of Nora Johnson, Doc. No. FTC-2023-0040-0618.
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Other commenters stated that the proposed changes are unnecessary
because they lack sufficient justification, are out of step with their
view of case law and market realities, and do not seem to have a strong
factual basis. One commenter stated that the proposal to expand the
lookback period for prior acquisitions would invite the Agencies to
scrutinize long-consummated deals, including those that the HSR Act
were never intended to capture. Some raised concerns that the proposed
changes will substantially increase the burden of reporting on prior
acquisitions beyond what is currently required for the HSR Form.
Another stated that the costs of the proposed changes regarding prior
acquisitions far outweigh the potential benefit that information about
immaterial prior transactions could provide to the evaluation of the
transaction. One commenter stated that requiring disclosure of non-
reported transactions will reduce investments in startups.
The Commission has determined that, to detect whether serial or
roll-up acquisition strategies have changed the market dynamics such
that the transaction under review could have widespread harmful effects
that will be hard to undo, the Agencies need additional information
about prior acquisitions, including from the acquired firm. Knowing
each party's record of prior acquisitions in the same business lines
will allow the Agencies to understand the long-term competitive
strategy for the transaction at issue, including whether it is one in a
series of prior or planned acquisitions in the same industry and
whether the
[[Page 89236]]
transaction is a merger of ``consolidators.'' The additional
information would also permit the Agencies to better identify
transactions whose effects should not be viewed in isolation but rather
as a pattern of consolidation.\163\
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\163\ See Brown Shoe Co. v. United States, 370 U.S. 294, 334
(1962).
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The Commission has always required information about prior
acquisitions in the HSR Filing to help identify strategies aimed at
gaining market share through acquisitions rather than internal
expansion or more vigorous competition, and the Commission disagrees
that it is outside its rulemaking authority under the HSR Act to
require filers (including the target) to report prior acquisitions in
the same or related business lines even if they were not previously
reported to the Agencies for premerger review. The final rule contains
modest expansions of this long-standing requirement, to better account
for the increased number of firms engaged in roll-up strategies.
Nonetheless, the final rule does not contain certain expansions
suggested in the proposed rule, such as eliminating the $10 million
exception or expanding the lookback period from 5 to 10 years in
response to comments that providing this level of information about
prior acquisitions would be costly and burdensome. The modest expansion
of this information requirement should provide the Agencies with a more
complete record of consolidation in the relevant business lines that
has been driven by the merging parties in order to identify when a
reported transaction is the latest in a series of acquisitions, and
thus one that may violate the antitrust laws.
As noted elsewhere, the Agencies remain committed to identifying
consummated mergers that have resulted in harm and to take steps to
unwind them as resources permit. But regardless of the legality or
reportability of any particular prior acquisition, the fact that it
occurred and involved the same business lines under review is directly
relevant to whether the reported transaction may violate the antitrust
laws, including through a series of mergers that ``convert an industry
from one of intense competition among many enterprises to one in which
three or four large concerns produce the entire supply.'' \164\ For
these reasons, the Commission has determined there is a need to collect
information about prior acquisitions from the seller as well as the
buyer. The cost of complying with this requirement should be minimal
except in instances where the seller has made many acquisitions in the
same or related business lines, in which case the information may prove
highly relevant to Agency review.
---------------------------------------------------------------------------
\164\ Id. (quoting S. Rep. 81-1775, at 5 (1950) and citing H.R.
No. Rep. 81-1191, at 8 (1949)).
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Other new requirements in the final rule will also help the
Agencies identify these roll-up strategies. In particular, the Overlap
Description will provide an alternative basis for identifying product
or service market overlaps for which prior acquisitions should be
reported. Information about the buyer's acquisition rationale will
reveal the purpose of the transaction, including whether is it part of
a strategy of pursuing transactions in similar business lines. The new
requirement to submit a small set of business plans and reports shared
with the highest levels of management that discuss market shares,
competition, competitors, or markets of any product or service that is
provided by both the acquiring person and acquired entity may reveal
whether there are other acquisition targets identified by either the
acquiring or acquired person.
III. Statutory Authority and Economic Analysis
The HSR Act directs the Commission, with the concurrence of the
Assistant Attorney General and consistent with the purposes of the Act,
to issue rules requiring the submission of documentary material and
information relevant to a proposed acquisition as is ``necessary and
appropriate to enable [the Agencies] to determine whether such
acquisition may, if consummated, violate the antitrust laws.'' \165\
The HSR Act was enacted to assist the Agencies in enforcing other
provisions of the Clayton Act, and to give the FTC and the Department
of Justice a tool--premerger notification--to identify problematic
mergers and acquisitions before they are consummated and a short period
of time to complete their analysis.\166\ The statute grants the
Commission explicit authority to require the submission of documents
and information the Agencies determine are necessary and appropriate to
identify proposed acquisitions that may result in an antitrust
violation.\167\
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\165\ 15 U.S.C. 18a(d)(1).
\166\ PhRMA, 790 F.3d at 199, 206.
\167\ Id. at 199, 201, 205.
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In the administrative law context, the Supreme Court has held that
Congress' use of terms such as ``appropriate'' or ``reasonable'' in a
statute authorizing agency rulemaking gives the agency ``flexibility''
to regulate.\168\ As the Supreme Court has explained, ``[o]ne does not
need to open up a dictionary in order to realize the capaciousness of
this phrase. In particular, `appropriate' is the classic broad and all-
encompassing term that naturally and traditionally includes
consideration of all the relevant factors.'' \169\ The phrase ``leaves
agencies with flexibility,'' although ``an agency may not entirely fail
to consider an important aspect of the problem.'' \170\ In at least
some contexts, courts have held that ``necessary and appropriate''
requires consideration of a rule's costs and benefits.\171\
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\168\ Loper Bright Enterprises v. Raimondo, 144 S.Ct. 2244
(2024).
\169\ Michigan v. EPA, 576 U.S. 743, 752 (2015) (citation and
internal quotation marks omitted).
\170\ Id. (citation and internal quotation marks omitted).
\171\ See id.; Mex. Gulf Fishing Co. v. U.S. Dep't of Commerce,
60 F.4th 956, 965 (5th Cir. 2023) (finding that the necessary and
appropriate standard at a minimum requires that a rule's benefits
reasonably outweigh its costs).
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The Commission is not convinced that Congress intended the words
``necessary and appropriate'' to require a cost-benefit analysis in
this context. Had Congress intended to require the Commission to
consider costs and benefits, it could easily have done so.\172\
Instead, it gave the Commission broad authority to establish
requirements it deems necessary and appropriate for determining whether
a proposed acquisition may violate the antitrust laws during premerger
review, and even gave the Commission express authority to define
statutory terms. Nonetheless, in the particular circumstances of this
rule, the Commission has considered the reasonableness of requiring
additional information in the HSR Filing in light of the statutory
scheme established by Congress to more effectively prevent undue
consolidation that violates the antitrust laws, including the costs and
the benefits of the final rule. The Commission has evaluated, on the
one hand, the benefits to the Agencies, the parties, third parties and
the public in making premerger review more efficient and effective by
obtaining information necessary to properly assess the competitive
effects of proposed acquisitions; and on the other hand, the need to
reduce unnecessary burden, costs, and delay on filers and the
transactions they hope to pursue in a manner consistent with the
[[Page 89237]]
mandatory premerger notification regime of the HSR Act.
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\172\ See Chamber of Com v. Sec. Exch. Comm'n., 412 F.3d 133,
142 (D.C. Cir. 2005) (statute requires SEC to consider whether rule
will promote efficiency, competition, and capital formation which
requires a consideration of the costs of the conditions imposed by
the rule).
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In determining what information is necessary and appropriate to
determine whether a reported transaction merits the issuance of Second
Requests, the Commission also draws on the Agencies' decades of
experience reviewing filings and responding to informal requests for
guidance.\173\ This operational experience informs the Commission's
assessment of the existing rules' shortcomings and supports its
decision that it is necessary and appropriate--and consistent with the
text and purpose of the HSR Act--for the Agencies to require the
merging parties to provide sufficient information to enable the
Agencies to conduct a preliminary assessment of the risk that the
filed-for transaction may violate the antitrust laws, particularly
where some information is available only from the parties.
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\173\ See PhRMA, 790 F.3d at 210 (the Commission may provide the
factual predicate for a finding through its cumulative experience
and resulting expertise).
---------------------------------------------------------------------------
After careful consideration of the public comments as well as the
costs and benefits of the proposed changes, the Commission has
determined to adopt a modified version of the information requirements
proposed in the NPRM. As modified, the final rule will facilitate the
provision of relevant documentary materials and information that allow
the Agencies to assess whether a proposed acquisition may violate the
law within the statutory period available for their initial review
while minimizing the cost and burden of producing such materials as
much as practicable.
The following analysis considers the potential economic effects
that may result from the final rule consistent with the Commission's
statutory power to obtain information necessary and appropriate to
conduct an effective premerger review, including the benefits and costs
to market participants. In conducting this assessment, the Commission
has identified existing costs to filers, the Agencies, and third
parties that could be avoided by adjusting the information requirements
for HSR Filings. Avoiding such costs would generate benefits for
filers, the Agencies, and third parties in addition to broader public
benefits of effective premerger screening to identify potentially
unlawful mergers prior to consummation.
The Commission believes that the final rule will improve the
efficiency of the premerger review process and help the Agencies
identify transactions that may violate the antitrust laws along all
parameters of potential harm, but not all of these benefits can be
quantified. Wherever possible, the Commission quantifies the likely
economic effects of its final rule. However, some economic effects are
inherently less conducive to sound quantification either due to the
lack of reliable data or the lack of a well-established economic
methodology that would provide estimates or ranges of costs. For
example, producing quantitative estimates of certain costs and benefits
would require numerous assumptions to generate a behavioral forecast of
how parties contemplating an acquisition and other affected third
parties would respond to the rule, and how those behavioral responses
would in turn affect the overall cost of compliance and the merger
review process. In addition, some factors determining certain economic
effects of the rule are transaction-, firm- and industry-specific and
thus inherently difficult to quantify. Even if it were possible to
calculate a range of potential quantitative estimates for these
effects, the range would be so wide as to not be informative about the
magnitude of the associated benefits or costs. Where sound economic
methodology is not available to measure particular benefits or costs,
the Commission addresses those qualitatively.\174\ In sum, to show the
connection between the facts found and the agency's decision, the
Commission provides, where feasible and appropriate, a quantified
estimate of the economic effects of the final rule, and a qualitative
description of the benefits and costs.
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\174\ See Chamber of Com v. Sec. Exch. Comm'n., 85 F.4th 760,
768 (5th Cir. 2023) (quoting Motor Vehicle Mfrs. Ass'n of U.S., Inc.
v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)). See also
id. at 773-74 (explaining that securities law provisions providing
rulemaking authority do not require the agency to conduct a
quantitative inquiry to ascertain the economic effects of a rule,
that the agency could instead rely on a qualitative assessment of
the rule's economic implications, and that the agency can determine
the analysis that most effectively reflects the economic
consequences of its rule) (citation omitted); All. For Fair Bd.
Recruitment v. Sec. Exch. Comm'n., 85 F.4th 226, 263 (5th Cir. 2023)
(agency's analysis of unquantifiable benefits sufficiently supports
a rule as long as it provides an adequate explanation for its
determination, and agency need not support its analysis with hard
data where it reasonably relied on intangible benefits that were
difficult to quantify) (citations omitted); Mex. Gulf Fishing., 60
F.4th at 965-66 (a necessary-and-appropriate condition does not
require applying a strict cost-benefit analysis but simply a showing
that expected benefits are reasonably related to anticipated costs)
(citations omitted).
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A. Statutory Authority and Congressional Intent
The HSR Act provides that the Commission ``shall require'' that
premerger notifications be in such form and contain such documentary
material and information relevant to a proposed acquisition as is
necessary and appropriate to enable the Agencies to determine whether
such acquisition may, if consummated, violate the antitrust laws.\175\
Thus, the HSR Act explicitly requires the Commission, with the
concurrence of the Assistant Attorney General, to determine what types
of documents and information are required to conduct an initial
assessment of antitrust risk. Mandatory premerger review strengthens
merger enforcement by giving the Agencies a fair and reasonable
opportunity to detect and investigate large mergers before
consummation.\176\ The ability to spot ``problem areas'' during the
initial screen is the key feature of the HSR Act that converts merger
enforcement from ineffective ex-post litigation to expeditious and
effective premerger proceedings.\177\
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\175\ 15 U.S.C. 18a(d)(1).
\176\ H.R. Rep. No. 94-1373, at 5 (1976).
\177\ Id. at 10-11 (chief virtue of the Act is to help eliminate
endless post-merger proceedings and replace them with far more
expeditious and effective premerger review generating considerable
savings; if the initial notification form reveals `problem areas,'
the government can request additional data during the initial 30-day
period).
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To that end, Congress passed the HSR Act to provide the Agencies
with advance notice of planned acquisitions and an opportunity to
challenge such acquisitions as unlawful prior to consummation. The
overall intent was to avoid lengthy, costly post-consummation
enforcement that is ineffective at preventing undue concentration and
permits an illegal acquisition to cause harm until unwound:
The problem this bill cures is startlingly simple, but it goes
to the very foundations of our merger law. Under present law,
companies need not give advance notification of a planned merger to
the Federal Trade Commission and the Department of Justice. But if
the merger is later judged to be anticompetitive, and divestiture is
ordered, that remedy is usually a costly exercise in futility--
untangling the merged assets and management of the two firms is like
trying to unscramble an omelet.\178\
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\178\ 122 Cong. Rec. 25051 (1976) (remarks of Rep. Rodino).
Premerger review was not the only tool given the Agencies to rectify
the inadequacy of post-consummation merger enforcement. In 1973,
Congress amended the FTC Act to authorize the Commission to seek
injunctions in Federal court in recognition of the inadequacy of
post-consummation divestitures. See FTC v. H.J. Heinz Co., 246 F.3d
708, 726 (D.C. Cir. 2001) (Section 13(b) of the FTC Act reflects
congressional recognition that divestiture is an inadequate and
unsatisfactory remedy in a merger case, citing 119 Cong. Rec. 36612
(1973)). The inability of the Commission to obtain injunctive relief
sooner to prevent widespread harm from mergers was a widely
acknowledged shortcoming of its agency design. See, e.g., FTC v.
Dean Foods Co., 384 U.S. 597, 606 n.5 (1966) (experience shows that
the Commission's inability to unscramble merged assets frequently
prevents entry of an effective order of divestiture).
[[Page 89238]]
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As noted by the Antitrust Modernization Commission (AMC)--a special
body commissioned by Congress in 2002 to conduct a comprehensive review
and make recommendations for revisions to U.S. antitrust laws--the HSR
Act addressed the defects of post-consummation merger enforcement,
which ``could neither fully compensate society for the interim loss of
competition, nor fully restore a competitive market structure,
particularly if the companies had already integrated their productive
assets, or `scrambled the eggs.' '' \179\ Congress also intended to
avoid deterring or impeding the consummation of the vast majority of
acquisitions and therefore fashioned a regime that reflected ``a
careful balancing of the need to detect and prevent illegal mergers and
acquisitions prior to consummation without unduly burdening business
with unnecessary paperwork or delays.'' \180\
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\179\ Antitrust Modernization Comm'n, Rep. & Recommendations 155
& n.21 (2007), <a href="https://govinfo.library.unt.edu/amc/report_recommendation/toc.htm">https://govinfo.library.unt.edu/amc/report_recommendation/toc.htm</a> (citing H.R. Rep. No. 94-1373 at 7-11)
(hereinafter ``AMC Report''). The Antitrust Modernization Commission
was created pursuant to the Antitrust Modernization Commission Act
of 2002, Pub. L. 107-273, 116 Stat. 1856, Div. C., Title I, Subtitle
D (2002). The AMC was charged with examining whether there was a
need to modernize the antitrust laws and to identify and study
related issues; to solicit views; and to evaluate proposals for
change. The AMC provided its Report and Recommendations to Congress
and the President on April 2, 2007, and was terminated on May 31,
2007, having completed its statutory duties.
\180\ S. Rep. No. 94-803, at 65 (1976).
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The Agencies have administered the premerger notification program
required by the HSR Act for more than 45 years, and the Commission has
engaged in numerous rulemakings to change the information requirements
for premerger notification in response to changes in market realities.
Although many commenters object in whole or in part to the proposals
contained in the NPRM, several conceded that some updates to the Rules
are reasonable or justified by increasingly complex markets. Others
commended the Commission for undertaking a periodic review of its
rules. Even so, some argue that the Commission lacks the authority to
make any changes to its current process that would increase the burden
or delay HSR-reportable transactions, asserting that Congress intended
to reduce costs and delay and to focus the Agencies' scrutiny on only
the largest corporate transactions. The Commission disagrees with
certain commenters that the Commission lacks the authority to adjust
information requirements over time to make premerger review efficient
and effective for the purpose of detecting potentially illegal mergers
in light of changing market conditions.
Given the number of comments that assert that the proposed rule
violated the intent of the HSR Act, the Commission responds first to
these broad objections. The Commission also responds to assertions that
it has failed to properly weigh the benefits and costs of changing the
notification requirements in light of the statutory premerger scheme.
As an initial matter, the Commission disagrees that avoiding
potential cost or delay to those involved in dealmaking is the primary
focus of the HSR Act. The legislative history and plain text of the HSR
Act make clear that the goal of establishing a premerger review regime
was not to minimize the number of transactions that are reviewed by the
Agencies or to reduce the delay for reported transactions below the
statutory obligations.\181\ In fact, it is clear that Congress
explicitly contemplated that a mandatory premerger notification regime
would impose burdens on merging parties. Prior to the passage of the
HSR Act, parties were free to merge without providing any notification
and without any delay, which led to concerns that the Agencies were
practically unable to block or unwind illegal transactions.\182\
Congress determined that new and meaningful requirements were necessary
to achieve the overarching Congressional goal of promoting vigorous and
effective enforcement of the antitrust laws:
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\181\ Efforts to require premerger notification date back to
1908. Leading up to the passage of the HSR Act, the Commission
regularly urged Congress to pass legislation that would require
advance notice for acquisitions. For a short time, the Commission
relied on its authority under section 6 of the FTC Act to require
merging parties to file special reports 60 days prior to
consummation in certain industries, such as food distribution and
cement. None of these programs required the parties to stay their
merger plans. After passage of the HSR Act, the Commission
discontinued reliance on special reports for prior notice of pending
mergers. See Kelly Signs, ``Milestones in FTC History: HSR Act
launches effective premerger review,'' Fed. Trade Comm'n Competition
Matters blog (Mar. 16, 2015), <a href="https://www.ftc.gov/enforcement/competition-matters/2015/03/milestones-ftc-history-hsr-act-launches-effective-premerger-review">https://www.ftc.gov/enforcement/competition-matters/2015/03/milestones-ftc-history-hsr-act-launches-effective-premerger-review</a>.
\182\ See S. Rep. No. 94-803, at 64 (1976).
Amended Section 7 has failed to achieve its objectives--not
because of its substantive standards, but because of the lack of an
effective mechanism to detect and prevent illegal mergers prior to
consummation. . . . The Committee believes that [premerger
notification] represents a careful balancing of the need to detect
and prevent illegal mergers and acquisitions prior to consummation
without unduly burdening business with unnecessary paperwork or
delays . . . Complex mergers or acquisitions of the kind encompassed
within this subsection generally require a great deal of prior
planning, and this provision will provide the Government appropriate
opportunity to evaluate the legality of significant business
behavior at the most propitious moment for all parties, w
[…truncated; see source link]Indexed from Federal Register on November 12, 2024.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.