Mergers and premerger notifications in the United States
While many times mergers of businesses are beneficial for both the consumers and the society and allow businesses to operate more efficiently by allowing them to reduce prices of their products, many times the case can be different. Several times the purpose of a merger between two or more businesses may be gaining more market power or establishing market dominance. In such a scenario, a merger may increase the prices, cause the quality of goods to fall and also cause innovation to reduce. This is dangerous for the consumers and society as well as the economy. Such mergers and acquisitions that aim to reduce the level of competition substantially or aim to create a monopoly in the market are prohibited by Section 7 of the Clayton Act. The Federal Trade Commission and the Antitrust Division of the Department of Justice are the main agencies tasked with preventing such anticompetitive mergers. The most severe antitrust cases arise in the case of horizontal mergers or mergers that take place between two direct competitors.
FTC and DOJ have developed guidelines for horizontal mergers. The main focus of these guidelines is that mergers should not be permitted to create, enhance, or entrench market power or to facilitate its exercise. In the United States, the merger law is generally forward-looking which implies that the agencies try to prevent any mergers that can harm competition before they can take place. The Hart-Scott-Rodino Act lays out the requirements for premerger notification and allows the antitrust agencies to investigate the likely effects of such mergers and prevent them from happening. The premerger notification is an advanced notice that eliminates all the difficulties that could arise if the merger took place. However, in several cases, the two agencies can also investigate mergers after they have been finalized if they happen to harm consumers.
The two agencies have to deal with more than a thousand such cases every year. While around 95 percent of such cases do not present any anti-competitive issues, the agencies have also developed a set of Merger Best Practices for the cases that may require more in-depth investigation. These best practices save the agencies a lot of time by streamlining the merger review process and identify the deals that may present a competitive issue. Another important benefit is that competitive concerns can often be resolved through consent agreements. The consent agreement eliminates the harmful aspects of the deal and lets the beneficial aspects of the deal go through the tunnel. In some cases, the agency and the involved parties may not be able to agree on a way to fix the competitive problems, and then the agency may need to go to Federal court. The agencies keep all the information they acquire during the investigation confidential and have very strict rules regarding maintaining confidentiality.
Premerger Notification and the merger review process.
Parties to certain larger mergers and acquisitions are required to file a premerger notification and then wait for the government’s review under the Hart-Scott-Rodino Act. The parties will need to wait before they close the deal until the waiting period outlined in the Act has passed. In another case, if the government has granted early termination of the waiting period, the parties may close the deal. The premerger notification is administered by the Federal Trade Commission.
What are the steps in the merger review process?
First Step: Notice of a proposed deal is filed
A premerger filing is not required in the case of every proposed merger and acquisition. Only when the deal is above a certain value and the parties above a minimum size will there be a need to file a premerger notification. The FTC updates these thresholds annually. There are some exemptions also in this case. For example, some stock or asset purchases as well as some real estate property deals. In most cases, the buyer and seller both are required to fill a form and provide the requested information about their businesses and industries. After the filing is completed, the parties are needed to wait for 30 days and in some cases like cases of cash tender offer or bankruptcy for 15 days. Otherwise, they can proceed with the deal if the agencies grant an early termination of the waiting period.
Second Step: Clearance is given to one of the two antitrust agencies
While the parties proposing a deal file with both the antitrust agencies, it is only one of the two agencies that review the proposed merger. Staff from both the agencies consult each other and then the matter is handed over to one or the other for review. This process is called the clearance process. Once clearance has been granted, the investigating agency obtains non-public information from the various sources which include the party to the deals as well as more industry resources.
Third Step: The waiting period is over or the agency issues a second request
Once the preliminary review of the premerger filing is over, the agency can take any of the following steps:
- Terminate the waiting period before it is over and that is to grant early termination.
- Allow the waiting period to expire, or
- Issue a second request to each party and ask for extra information related to the merger.
In case, the waiting period gets over or is terminated, the parties can move ahead to close their deal. If the agency determines that more information will be required to assess the proposed deal, it will send a second request to both the parties. This leads to an extension of the waiting period. It also prohibits the involved parties from closing the deal until they have substantially complied with the second request and observed the second waiting period. Generally, in the second request, the investigating agency asks for information related to documents and data to inform the agency about the company’s products or services, market conditions where the company operates as well as the likely effects of the merger deal on competition in the market. To support its investigation and analysis, the investigating agency also sometimes conducts informal interviews or interviews by the sworn testimony of company personnel or other experts with industry knowledge.
Fourth Parties: Involved parties comply substantially with the second requests.
Once, both the companies involved in the deal have substantially complied with the review, the agency has 30 days to review the materials and take action as necessary. In case, it is a cash tender offer or case of bankruptcy, the agency has 10 days to finish its review. The time period begins as soon as the buyer has substantially complied. In some cases, the length of time for this phase of review may be extended through an agreement between the involved parties and the government. This helps resolve the remaining issues without any litigation.
Fifth and the Last Step: The waiting period is over or the agency challenges the deal.
At this stage,
- The agency can close the investigation and let the deal be completed without being challenged.
- The agency can enter into a negotiated consent agreement with the companies. The consent agreement includes the provisions to restore competition, or
- The agency can seek to stop the entire merger deal by filing for a preliminary injunction in federal court pending an administrative trial on the merits.
If there is no action from the agency to stop the merger like a court order, the involved parties can go ahead with the deal. Sometimes, after learning that the investigating agency might challenge the deal in a court, the involved parties may abandon their plans for the merger.
In several potential mergers, the entire transaction is not anti-competitive but only its certain portions are. For example, a company is seeking to buy another company. The two involved parties are not direct competitors but only in certain lines of products. In such a situation, the anticompetitive concerns can be overcome by selling off the entire overlapping product lines or businesses to any one of the merging parties and proceed with the rest of the merger just as planned. This has a dual benefit. While the procompetitive benefits of the merger can be realized on the one hand, on the other it also eliminates the potential for anti-competitive harms. Many times, the challenges related to a merger are resolved only through a consent agreement between the agency and the merging parties.