DOJ FTC Draft Merger Guidelines
On July 19, 2023, the Department of Justice (“DOJ”) and the Federal Trade Commission (“FTC”) proposed thirteen (13) Draft Merger Guidelines (the “Draft Merger Guidelines”) intended to limit the use of mergers to obtain significant market control by adjusting the criteria for when the agencies view a merger as presumptively anti-competitive. If adopted, the Draft Merger Guidelines will require merger parties to limit any negative impact on employment and labor competition and limit their market share post-merger. Private equity managers, venture capital firms, and independent sponsors will need to place additional emphasis on determining how their acquisition strategies can benefit their ventures without lessening competition in the market.
Under the Draft Merger Guidelines, the agencies have outlined scenarios where they would apply increased scrutiny, including mergers that:
significantly increase concentration in highly concentrated markets;
eliminate competition between merging parties;
increase the risk of coordination;
eliminate potential entrants into a concentrated market;
lessen competition by controlling products or services used by competitors;
create market structures that foreclose competition;
entrench or extend a dominant position;
further a trend toward concentration;
are part of a series of multiple acquisitions;
involve a multi-sided platform;
substantially lessen competition for workers;
have an impact on competition, when involving partial ownership or minority interests; and/or
lessen competition or create a monopoly.
Further, if the Draft Merger Guidelines are adopted, a key component of such guidelines would lower the threshold for when a merger may be deemed anti-competitive, deeming a resulting combined market share of 30% to be highly concentrated. Additionally, the agencies use the Herfindahl-Hirschman Index (HHI), a tool generally used to measure market share, to determine market competitiveness. Currently, the agencies see a highly concentrated market as one in which four (4) firms each have equal 25% control, which would be an HHI of 2,500. The Draft Merger Guidelines, however, would lower this index threshold to 1,800, the equivalent of five (5) or six (6) firms having equal percentage control of a specific market.
While all of the guidelines should be considered in a transaction, certain guidelines could impact acquisition and funding strategies often utilized by traditional private equity firms, venture capital firms, and independent sponsors. For example, in Draft Merger Guidelines, the DOJ and FTC note that they will review prior acquisitions of a firm if there are indications of a serial acquisition practice. Therefore, the use of roll-up strategies would likely lead to heightened scrutiny due to the agencies’ proposal to review such acquisitions collectively if they are part of a firm’s strategy or pattern. This specific guideline is in line with the agencies’ proposed Hart-Scott Rodino (“HSR”) Form changes, which would require producing the details of a firm’s acquisitions over the past ten (10) years, rather than the current requirement of five (5) years. These changes would have a notable impact on venture capital firms and independent sponsors that typically complete multiple related transactions as part of their acquisition strategy.
Further, the Draft Merger Guidelines place additional scrutiny on acquisitions where investors obtain a minority interest in a target company. The DOJ and the FTC have stated that such acquisitions, even when involving nonvoting interests, could provide buyers with enough influence to lead to anti-competitive initiatives or influence decision-making.
Public comments issued in connection with the Draft Merger Guidelines to-date have highlighted some of the issues that may be faced by various firms and businesses seeking to expand through acquisitions.
For example, in comments from the American Investment Council (“AIC”), AIC has noted that the Draft Merger Guidelines would unfairly impact acquisition strategies typically used by private equity and venture capital firms. The AIC has also expressed an additional concern with the Draft Merger Guidelines, specifically that the DOJ and FTC intend to include leveraged buyouts in their analysis of whether a merger leads to or increases undue concentration in a market. Finally, the AIC has stated that incurring debt for the purpose of financing transactions should not, alone, be enough to raise antitrust concerns.
In addition, the National Venture Capital Association (“NVCA”) has also criticized the agencies for cooling M&A opportunities for start-ups by examining mergers that are part of a series of acquisitions, which is expected to significantly increase an acquisition’s timeline and regulatory costs. The NVCA believes that a significant chilling effect could be placed on M&A activity outside of the antitrust threshold, as the limitations could reduce funding and exit opportunities for investors. The NVCA explained that buyers may not want to engage in a series of acquisitions if those acquisitions could be investigated in connection with future deals. The NVCA believes that this (x) impacts the ability of larger companies to use acquisitions for innovation and (y) decreases the chances of small innovative companies of receiving significant funding. Additionally, the NVCA has noted that the Draft Merger Guidelines’ preference for exits through an IPO might not be viable for all entrepreneurs and investors due to the potential costs and operational difficulties.
While it is possible that public comments will persuade the agencies to modify the proposals before publishing the final rules, there has certainly been a notable shift in how the M&A industry is viewed, and will continue to be viewed going forward, by regulators. If you have any questions about this article, please contact Jonathan Bernstein at (212) 573-8030 or jbernstein@sadis.com
