In early August, the Federal Trade Commission (FTC) announced that, when it has not completed its review of a proposed acquisition during the statutorily prescribed waiting period after receiving a premerger notification under the Hart-Scott-Rodino Antitrust Improvements Act (HSR),¹ the FTC has begun sending the parties letters (Warning Letters) advising them that if they close the deal, they do so at their own risk and that the agency may challenge the transaction post closing.² Previously, the FTC had generally completed its review within the statutory timetables, and parties who had made Hart-Scott filings would almost always know before the Hart-Scott waiting period expired whether the transaction would face a federal antitrust challenge.³ Expiration of the Hart-Scott waiting period is generally a key contractual trigger for the parties’ obligations to close the deal.  Now, in transactions in which the FTC has not completed its review before the waiting period expires, the acquirer may be contractually compelled to close and face an increased risk of FTC litigation, and possibly a compulsory divestiture.  Under such circumstances, divestitures often take place at “fire sale” prices or on other undesirable terms.  

The Antitrust Division of the Department of Justice (Antitrust Division) has not commented on this change in procedure.

Background

The HSR merger review process generally requires the parties to transactions with a fair market value that exceeds annually adjusted thresholds to file premerger notifications with the FTC and the Antitrust Division. The parties must then wait 30 days⁴ (the Initial Waiting Period) before closing.  After the end of the Initial Waiting Period, the FTC or the Antitrust Division may issue a request for further information (the Second Request).  After the parties’ substantially full compliance with the Second Request, the parties must wait an additional 30 days (the Final Waiting Period) before closing the transaction.⁵ The purpose of the HSR notification and its statutory waiting requirements is to allow the antitrust enforcement agencies to challenge anticompetitive transactions before they are consummated and thus to avoid the competitive harm imposed by the consolidation, as well as the problems of “unscrambling the egg” once the transaction has closed and the acquirer is free to control and intermingle or further transfer the assets of both the acquiring and the acquired companies.⁶

Acquisition agreements have often been written in a manner that allows one or both of the acquiring and the acquired parties to abandon the transaction if by the close of the Initial Waiting Period, a Second Request is issued or if, at the end of the Final Waiting Period, it becomes clear that the government is going to mount an antitrust challenge to the deal.  

Effects of New FTC Practice

Throughout the history of the HSR program, it has been possible for the FTC or the Antitrust Division to challenge a transaction post closing, regardless of whether the parties have complied with HSR.  Compliance with HSR and expiration of the waiting period is not a defense to an unlawful merger.⁷ However, both the FTC and the Antitrust Division have, with only a few exceptions, completed their reviews within the statutory waiting period, although parties occasionally have chosen to pull and refile their merger notification to avoid a Second Request when the reviewing agency has not satisfied itself about the transaction during the Initial Waiting Period.⁸

Now, acquiring and acquired parties should consider contractual approaches to a continuing risk of a governmental antitrust challenge following the expiration of the waiting period, although both parties need to be aware that there may or may not be any substantive antitrust risk. K&L Gates is aware of Warning Letters being issued in transactions in which the parties had received no prior investigative communications from the FTC and in which the parties are unaware of any other evidence of any substantive investigation of the transaction. From an antitrust perspective, acquiring parties receiving Warning Letters essentially have three options:  

1. Delay closing until the FTC completes its review (with or without pulling its filing and refiling), although (as noted above) the uncertainty may continue for an indefinite period;
2. Exercise any contractual right to delay closing or terminate the deal; or
3. Proceed to close the deal and face the risk of possible future, expensive litigation and, perhaps, divestiture on unsatisfactory terms.  Indeed, depending upon the circumstances at the time of litigation, the FTC may seek to compel the divestiture of more than the assets of the target, which were acquired in the deal, particularly if some of the acquired assets have been disposed of or have deteriorated since closing.  The objective of the divestiture is to create a viable entity that replaces the competition lost in the challenged transaction.⁹ 

By contrast, sellers will want to consider:

1. Whether the transaction agreement should include terms that explicitly require closing within a short period of time once the HSR waiting period has expired, even if the parties receive an FTC  “Warning Letter”; or
2. Other transaction terms that impose a cap on the virtually unlimited period of time during which the uncertainty regarding the FTC’s position may continue, if the transaction agreement terms do not force the acquirer to close notwithstanding the parties’ receipt of a Warning Letter.

Sellers and acquirers receiving Warning Letters, with the aid of their respective antitrust counsel, will need to make a realistic assessment of the risks of a future challenge and potential outcomes.

Extended Investigations Are Consistent With Other Biden Administration Changes in the Hart-Scott Program

The FTC has stated that this change in HSR procedures is a response to “a recent tidal wave of merger filings that is straining the agency’s capacity to rigorously investigate deals ahead of the statutory deadlines.” FTC Commissioner Christine S. Wilson, however, has indicated that she is “gravely concerned that the carefully crafted HSR framework is suffering death by a thousand cuts.”¹¹

Indeed, any effect that this most recent change has in discouraging mergers would be consistent with the administration’s attitude that mergers have been too frequent and merger review policy has been too accommodating. President Biden’s Executive Order on Promoting Competition in the American Economy (the Executive Order) declared, “[O]ver the last several decades, as industries have consolidated, competition has weakened in too many markets, denying Americans the benefits of an open economy and widening racial, income, and wealth inequality.”¹² Moreover, “Federal Government inaction has contributed to these problems, with workers, farmers, small businesses, and consumers paying the price.”¹³ The president called for corrective action: “We must act now to reverse these dangerous trends, which constrain the growth and dynamism of our economy, impair the creation of high-quality jobs, and threaten Americans’ economic standing in the world.”¹⁴ One of the most important purposes of the federal antitrust laws, he said, is “resisting consolidation and promoting competition within industries through the independent oversight of mergers, acquisitions, and joint ventures.”¹⁵ He called upon the FTC and the Antitrust Division “to enforce the antitrust laws fairly and vigorously” and to consider revising the merger guidelines.¹⁶ 

Recently appointed FTC Chair Lina Khan has similarly declared, “[E]ven as the agency tackles the proliferation of unfair and deceptive practices, the current merger boom threatens to make these worse. Significant market consolidation deprives consumers, workers, and independent businesses of choice, further enabling dominant firms to engage in unfair practices.”¹⁷ She continued, “I am deeply concerned that the current merger boom will further exacerbate deep asymmetries of power across our economy, further enabling abuses.”¹⁸ In the context of a letter to Senator Warren regarding a particular vertical merger in the defense industry, she declared, “While structural remedies generally have a stronger record than behavioral remedies, studies show that divestitures, too, may prove inadequate on the face of an unlawful merger. In light of this, I believe the antitrust agencies should more frequently consider opposing problematic deals outright.”¹⁹ 

Even before the Executive Order, the FTC and DOJ announced the “temporary” and “brief,” but still ongoing, suspension of the long-standing practice of granting early termination of the Initial Waiting Period as soon as a review of a proposed transaction revealed it is not anticompetitive.²⁰ This action, like the Warning Letters, was explained as a response to a shortage of resources to meet the volume of filings. 

Following the Executive Order, the FTC and the Antitrust Division have announced a review of the existing horizontal and vertical merger guidelines.²¹ In July 2021, the FTC also withdrew its 1995 policy statement limiting the use in merger consent orders of provisions requiring the consenting parties to give prior notice of future acquisitions in the affected market (even where the HSR would not require a filing) and requiring the acquirer to obtain prior FTC approval before making further acquisitions in the affected market, thereby shifting the burden of proof to the merging parties.²² Although the FTC has not articulated standards regarding when it will employ such prior-notice and prior-approval provisions in future consent orders, the FTC’s action suggests broader use of such provisions in the future.  

Conclusion

Members of the antitrust bar are debating the purpose and the effect of the Warning Letters. One commonly held view is that the FTC is truly overwhelmed with the number of merger filings and simply intends, when it is able to catch up, to go back and reconsider potentially problematic deals. Of course, the definition of “problematic deals” may be expanded by the revised merger guidelines called for by the Executive Order. Alternatively, the Warning Letters may be part of a comprehensive policy shift to aggressively dampen an overactive merger-and-acquisitions market and confront what the new administration views as undesirable economic or political concentration.