How Antitrust Will Shape M&A During the Pandemic
As the pandemic breathes life into some sectors and creates bankruptcies in others, some businesses continue to pursue strategic M&A deals. Some of these deals may receive antitrust scrutiny from the Department of Justice (DOJ) and Federal Trade Commission (FTC). In particular, this article highlights three ways that antitrust will affect M&A amid the pandemic.
As we have explained elsewhere, the pandemic is slowing reviews of mergers under the Hart-Scott-Rodino Antitrust Improvements (HSR) Act. Fortunately, these delays appear minor for many non-problematic deals. In particular, while the DOJ and FTC staffs transitioned to working remotely, the agencies adopted an e-filing system for HSR filings and have resumed the granting of early termination of the HSR waiting period for appropriate cases. The FTC advises that grants of early termination are only being made “as time and resources allow” and thus will be made “in fewer cases, and more slowly, than under normal circumstances.” Nonetheless, for non-problematic deals, HSR clearance is working on a close-to-normal schedule.
For other deals, the pandemic is causing much more substantial delays. When an investigation or enforcement action is already underway, the agencies have requested extensions of waiting periods and deadlines. At the same time, courts and administrative tribunals have stayed matters until they can reopen or make alternative arrangements. Thus, a small number of mergers have been held up indefinitely, with no clear end in sight.
Congress, meanwhile, is considering legislative changes that could create even more delays for M&A. Most notably, on April 28th, Senator Elizabeth Warren and Congresswoman Alexandria Ocasio-Cortez announced plans to introduce legislation that would impose an across-the-board moratorium on mergers involving companies with over $100 million in revenue, among other categories, until the FTC determines that the country has sufficiently recovered from the pandemic. This follows the April 23rd proposal of House Antitrust Subcommittee Chairman David Cicilline to impose a moratorium on M&A activity until the pandemic subsides; Congressman Cicilline’s proposal, unlike Senator Warren’s and Congresswoman Ocasio-Cortez’s, would not apply to companies that are in bankruptcy or otherwise on the verge of failing (more on that below). At the moment, it is unclear whether either of these proposals will find any broader support in the Congress, but they are developments worth following.
Accordingly, parties to strategic transactions should factor the potential for substantial HSR delays into their deal timelines. In particular, parties to strategic transactions may want to address such timing issues in purchase agreements’ “end dates,” and when time is of the essence companies may want to consider filing HSR earlier in the process (e.g., on a letter of intent) than they otherwise would.
The “Failing Firm” Defense
As the economy plunges into a sudden recession, there is a renewed interest in antitrust law’s “failing firm” defense. This defense – which is recognized both by federal case law and in the DOJ and FTC’s Horizontal Merger Guidelines – allows companies to acquire their failing competitors when three conditions are met:
The competitor will be unable to meet its financial obligations in the near future;
The competitor will not be able to reorganize successfully under Chapter 11 of the Bankruptcy Code; and
The competitor has made unsuccessful, good-faith efforts to find another buyer that would keep its assets in the market and would pose less of a danger to competition than the proposed merger.
The DOJ and FTC also recognize a “failing division” defense when a particular business division has a persistently negative operating cash flow that is not economically redeeming for its owner, and the owner has made unsuccessful, good-faith efforts to find another buyer for that division that would keep its assets in the market and would pose less of a danger to competition than the proposed merger.
When the criteria for the “failing firm” or “failing division” defenses are met, they can provide complete antitrust immunity under federal antitrust law to an otherwise-problematic deal. However, the DOJ and FTC interpret these two defenses narrowly and, with occasional exceptions, do not credit them unless all the required elements are proven. Indeed, in the past few days one FTC Commissioner commented publicly that that failing-firm arguments will be met with very careful scrutiny in the current coronavirus environment.
In practical terms, this means that the defenses are best made when the merger is the only realistic long-term option for keeping the relevant assets in the marketplace. But in a severe economic downturn with an uncertain time for the economy to recover, the failing firm and failing division defenses may have a stronger chance of success. However, given the rigor and complexities of these defenses, clients are well advised to involve antitrust counsel early in any transaction for which the defenses may apply.
Even when the failing firm or failing division defenses apply, the transaction can still be reportable under the HSR Act. In fact, even the acquisition of a business that is in bankruptcy can require an HSR filing. In particular, the HSR Act likely requires a filing whenever assets, voting securities, or non-corporate interests valued over $94 million are acquired in a bankruptcy context. There are slightly different procedures for HSR filings in the bankruptcy context – most notably, the initial waiting period is 15 days rather than the usual 30 days – but the HSR Act and other antitrust laws still apply, even in bankruptcy.
Broader Scrutiny of Anticompetitive Effects
Because the pandemic is having unprecedented effects on the economy, antitrust agencies may look at mergers in less traditional ways. For example, the antitrust agencies may increasingly review transactions for “monopsony” concerns – that is, whether the transaction will create a company with anti-competitive buying power. In particular, a growing area of agency focus is whether mergers may give employers the ability to suppress wages or employee benefits. Further, consistent with the FTC and DOJ’s recent issuance of a statement on competition in labor markets during the COVID-19 pandemic, soaring unemployment may lead the agencies to give more focus to mergers that may result in a lessening of wages or employee benefits.
More broadly, right before the pandemic began, the agencies took significant steps towards articulating how, in the eyes of the agencies, a merger can potentially harm competition even when it involves companies that do not compete with each other. In January, the DOJ and FTC released draft “Vertical” Merger Guidelines for public comment, which explain how the agencies may examine these sorts of issues. For example, if one company acquires a key supplier to a competitor of the buyer, then the agencies may consider whether that transaction will give the buyer an incentive to raise its competitors’ costs to a supracompetitive level. Or, if one company acquires a key customer of a competitor, then the agencies may consider whether that transaction will give the buyer insight about the prices that its competitor is charging, potentially reducing the buyer’s incentive to compete. To the extent the pandemic spurs more “vertical” mergers, it bears remembering that the agencies may review or challenge deals even if the merging firms do not directly compete.
Throughout the pandemic, antitrust will continue to shape the timing and scope of M&A. Many deals could take longer—in some cases, significantly longer. There likely will be renewed interest in the “failing firm” defense. And agencies may explore mergers’ competitive effects in less traditional ways.