We Didn’t Like Your Merger, So Please Come Back: FTC Issues New Prior Approval Policy for Challenged and Aborted M&A Transactions

The US Federal Trade Commission (FTC or Commission) has announced a new policy to dramatically expand its use of prior approval orders in merger transactions. On October 25, the FTC issued a policy statement (Statement) under which it will “routinely require merging parties subject to a Commission order to obtain prior approval from the FTC before closing any future transaction affecting each relevant market for which a violation was alleged,” for “at least 10 years.”¹

The Statement noted that the FTC may impose even broader preapproval provisions—potentially even outside the consent decree context—when parties have abandoned a transaction in the face of an investigation or lost a litigation with the FTC. The Statement also announced that the FTC intends to require all divestiture buyers to receive prior approval before selling divestiture assets for at least 10 years.

The Statement introduces an important new consideration into the antitrust risk assessment for transactions that may draw FTC action. Parties are well advised to consider this additional risk when evaluating the risks and benefits of deals.

The FTC’s New Prior Approval Policy

Parties to FTC consent decrees with prior approval provisions will need to obtain affirmative approval from the FTC before closing any future transactions in the covered product and geographic market. Prior approval requirements have been relatively rare since a 1995 Policy Statement made it a disfavored remedy provision.² On July 21 of this year, the FTC revoked the 1995 Policy Statement.³

Prior approval obligations apply even if a transaction is not reportable under the Hart-Scott-Rodino (HSR) Act. Critically, the FTC will not be constrained by the HSR Act’s timing rules and will likely assert broader discretion to refuse approval than the FTC would have for ordinary HSR-reportable transactions. Under the HSR Act, the FTC must obtain an order from a federal court to prevent a transaction from closing—in part by establishing a substantial probability that the FTC will ultimately prove that the transaction may substantially lessen competition. The FTC, however, does not need to obtain a court order to block a transaction when one of the parties is subject to a prior approval provision.

Moreover, the Commission claims it may even pursue prior approval orders against some parties that abandon transactions, although it is “less likely to pursue a prior approval provision against merging parties that abandon their transaction prior to certifying substantial compliance with [a] Second Request.”⁴ Similarly, the Statement indicates that the FTC intends to pursue prior approval orders against parties that litigate FTC challenges to mergers. The Statement does not reference any source of authority for either of these actions.

Prior Approval Orders Beyond Relevant Markets

The FTC also announced it will, at its discretion, extend prior approval provisions beyond the relevant market, although how far the Commission intends to go is not yet clear. The Statement indicates that whether the Commission exercises this discretion will depend on six factors:⁵

1. Nature of the Transaction: Whether the transaction is similar to a previously challenged transaction or whether the parties were subject to an enforcement action for a prior transaction in the same relevant market.
2. Pre-Merger Market Conditions: The level of concentration in the market and rate of consolidation in the previous 10 years.
3. Effect on Concentration: The degree to which the transaction increases concentration.
4. Pre-Merger Market Power: Whether either of the merging parties had market power pre-merger. This is particularly applicable to acquisitions of nascent competitors.
5. Acquisition History: Whether either party has been active in acquisitions in the relevant or related (upstream or downstream) markets, in adjacent or complementary products, or in specific geographic areas.
6. Anticompetitive Dynamics: Whether the market structures create an ability or incentive for anticompetitive conduct post-transaction.

Prior Approval for Divestiture Buyers

The FTC’s prior approval policy is not limited to the merging parties. The FTC “will also require buyers of divested assets in Commission merger consent orders to agree to a prior approval for any future sale of the assets they acquire in divestiture orders, for a minimum of 10 years.”⁶ While the Commission has occasionally imposed similar requirements in recent years, it has done so only in unusual circumstances. Thus, potential buyers of divested assets will need to consider that they will be subject to a potentially significant impairment of their flexibility to buy assets and then resell them for the foreseeable future.

Implications

The Statement introduces an important new consideration into the antitrust risk assessment for transactions that may draw FTC action, and it is crucial that parties consider these factors when contemplating the risks and benefits of such deals. A prior approval requirement could be a significant impediment to companies that are contemplating additional acquisitions.

When weighing the costs and benefits of a deal that may be challenged, companies should now consider more than the cost of a remedy; they should also evaluate the costs of a 10-year (or more) prior approval requirement. Transactions that may involve a remedy or terminate with abandonment or after litigation will now carry this additional risk. And companies that cannot tolerate operating under a prior approval order will have to consider the additional time, cost, and burden of litigating against the FTC—rather than settling—as part of their risk assessment.

The Statement may chill deal activity, which may be the Commission’s goal. Whether the DOJ will follow suit remains to be seen.

Footnotes -

1. Press Release, FTC, FTC to Restrict Future Acquisitions of Firms that Pursue Anticompetitive Mergers (Oct. 25, 2021), https://www.ftc.gov/news-events/press-releases/2021/10/ftc-restrict-future-acquisitions-firms-pursue-anticompetitive; see also FTC Policy Statement on Use of Prior Approval Provisions in Merger Orders (Oct. 25, 2021), https://www.ftc.gov/system/files/documents/public_statements/1597894/p859900priorapprovalstatement.pdf [hereinafter Policy Statement].
2. See FTC Acts to Reduce Prior-Approval Burden on Companies in Merger Cases, June 22, 1995.
3. See Press Release, FTC, FTC Rescinds 1995 Policy Statement that Limited the Agency’s Ability to Deter Problematic Mergers (July 21, 2021), https://www.ftc.gov/news-events/press-releases/2021/07/ftc-rescinds-1995-policy-statement-limited-agencys-ability-deter.
4. Policy Statement, at 2.
5. Id. at 2-3.
6. Id. at 3.