On October 25, 2021, the FTC announced that it will seek to impose prior approval provisions on merging parties in all future consent decrees. These provisions will require parties to merger consent decrees to request formal Commission approval before closing any future transactions in the same market, and potentially adjacent markets, regardless of whether those subsequent transactions are reportable under the HSR Act. This shift reinstates a policy abandoned by the FTC in 1995, and seeks to provide the Commission the unilateral ability to block future transactions it views as problematic, without having to carry the legal burden in court.
In its announcement, the FTC states that such prior approval provisions will protect consumers by preventing “facially anticompetitive” transactions that should have “died in the boardroom” and will detect anticompetitive deals that would have otherwise been unreportable. The FTC also posits that this new policy will preserve FTC resources because, without requiring prior approval for future deals, the FTC must initiate new, time-consuming investigations into the same or similar transactions even after finding a prior iteration of that transaction to be unlawful. Holly Vedova, Director of the FTC’s Bureau of Competition, explained that “[r]estoring the long-standing prior approval policy forces acquisitive firms to think twice before going on a buying binge because the FTC can simply say no.”
This policy change—adopted on a 3-2 party-line vote—follows the FTC’s 3-2 vote (also along party lines) in July to repeal the 1995 policy statement that significantly curtailed the FTC’s use of prior approval and prior notice provisions from most merger settlements, and reflects FTC Chair Kahn’s commitment to reinvigorate U.S. merger control. Prior to the 1995 statement, FTC consent orders settling merger challenges sometimes required parties to notify the FTC of any future non-HSR reportable transaction. Some of those consent orders also contained far more burdensome prior-approval provisions that effectively forced companies to carry the burden of demonstrating that the transaction would not harm competition. The repeal of the 1995 statement and the issuance of the new policy statement indicate that the FTC plans to return to that the pre-1995 approach and regularly seek to include prior approval terms in its consent decrees.
Interestingly, in its announcement of the new policy, the FTC also noted that it may even seek to impose prior approval commitments in certain circumstances in which the parties abandon a proposed transaction and there is no consent decree. In a dissenting statement against the repeal of the 1995 policy statement in July, Commissioner Wilson noted that this very practice led the FTC to abandon its prior approval policy in 1995, following its nine-year effort to impose such a commitment on The Coca-Cola Company after it terminated its proposed acquisition of the Dr. Pepper Company. In her July dissent, Commissioner Wilson noted that the FTC’s 1995 statement recognized that such litigation regarding an abandoned deal “was not good government.”
In its announcement this week, the FTC explained that it will seek to impose prior approval commitments in all markets alleged to be harmed by the merger subject to the consent agreement, and will consider imposing the obligation in other markets as well. The FTC said it will weigh a number of factors in determining the scope of a prior approval provision, including:
- The nature of the transaction;
- The level of market concentration and the degree to which the transaction increases market concentration;
- The degree to which one of the merging parties had pre-merger market power;
- The parties’ history of acquisitiveness; and
- Evidence of anticompetitive market dynamics.
Notably, the policy statement also provides that all divestiture buyers who acquire assets pursuant to a consent order will be required to obtain prior approval of the FTC, for a minimum of ten years, before selling the divestiture assets they acquired. The stated purpose is to ensure that the divested assets are not subsequently sold to an “unsuitable firm.”
On the same day that the Commission announced the new policy, it implemented the policy in a consent order approving a merger. Although the FTC alleged that the merger would harm competition only in Provo, Utah, the consent order requires the acquirer to obtain prior approval from the FTC before “acquiring any new ownership interest … anywhere in Utah for a period of ten years.” According to the FTC, the order expands the geographic coverage of the prior notice requirement beyond the markets directly impacted in part because there was a “history of [ ] market consolidation.”
Paired with the FTC’s recent changes to its second request merger review process, this new policy will increase the burden on merging parties, and may impact long-term M&A strategies. In addition, it raises several practical implications for both companies engaged in transactions and M&A practitioners, including:
- Unless and until the Antitrust Division of the Department of Justice follows suit and adopts a similar policy, this FTC policy adds more burden for transactions reviewed by the FTC compared to the DOJ. This imbalance may impact certain sectors of the economy more than others, including retail and consumer goods companies, healthcare providers, medical device manufactures, pharmaceutical manufacturers, oil and gas producers, and others.
- While some parties may decide to abandon transactions early (prior to certifying substantial compliance) in order to avoid the imposition of a prior approval commitment, the FTC’s policy may also incentivize some parties to aggressively prepare for litigation against the agency – instead of agreeing to a consent decree that could limit their long-term M&A strategy. Alternatively, parties may try to “fix-it-first,” by selling overlapping assets or businesses before notifying their transaction to the FTC.
- This policy may also lead to protracted litigation and appeals regarding the FTC’s preemptive review of transactions covered by such prior approval conditions.
Given the additional transactions that will be subject to prior approval requirements, which the FTC will have to review, and the prospect for litigation over imposition of those terms, it remains to be seen whether this new policy will indeed lessen the workload of FTC staff.