New FTC Leadership Continues to Flex Their Muscles: New Practice of Issuing Warnings Imposes Unnecessary Uncertainty on Merging Parties

Because the saying goes, “the only thing for certain, is nothing is certain.”  With a rash of adjustments since Chairperson Lina Kahn took command, the FTC is actually proving that maxim true.  Searching for to remodel the traditionally sleepy company right into a extra progressive regulator of the U.S. economic system, Kahn’s FTC’s newest salvo targets the merger evaluation course of.

In 1976, Congress established a merger management regime that has turn out to be the envy of the world.  Parties to transactions above sure thresholds should present advance discover to the Federal Commerce Fee and the Division of Justice, and can’t consummate the deal till expiration of the statutory ready interval.  Whereas the delay imposes a burden on the merging events, the events obtain one thing in return too.  If the deal is permitted, they will proceed to closing comforted within the perception that the federal authorities won’t later come knocking.  In fact, even then nothing is completely sure.  The FTC at all times reserves the correct to problem offers if anticompetitive results later manifest, however the danger of a post-clearance problem was traditionally negligible.  Final month, nevertheless, new FTC management upended this rigorously calibrated steadiness. 

Slightly than reserve post-closing challenges for the uncommon deal that slipped by the FTC’s watchful glare, the company has now adopted a brand new observe of issuing warning letters relating to offers it has allowed to shut.  The letters threaten the events with the specter of additional motion in the event that they really do shut.  By asking the events not to shut upon the expiry of the ready interval, the FTC is successfully looking for a de facto extension of deadlines that Congress didn’t see match to give it.  It’s a unusual observe that sparked the Republican Commissioners to strongly dissent.  The added uncertainty created by the FTC’s new coverage, mentioned Commissioner Christine Wilson, will “raise the costs of doing mergers and threaten[s] to chill harmful and beneficial deals alike.”

However what do these letters imply?  Is the risk credible?  Ought to the events cease their transaction in its tracks?  Does a purchaser have the correct to stroll away from the deal if it believes the FTC’s risk is actual?  Or are its palms tied by contractual commitments to shut?  These questions should now be anticipated and addressed within the events’ merger paperwork.  However how?

It’s nonetheless too early to decide the affect of the brand new warning letters.  Up to now, most merging events seem to be ignoring them.  However in the end, the FTC will carry a post-warning-letter enforcement motion to present it has the ability and resolve to achieve this.  When it does, denial might now not be an efficient coping technique, and events might have to take extra discover.  Till then, events ought to no less than think about that their deal will be the one the FTC makes its warning-letter poster little one, and plan accordingly.

A. The Coverage

In saying the brand new coverage, the FTC blamed a “tidal wave of merger filings that is straining the agency’s capacity to rigorously investigate deals ahead of statutory deadlines.”  Its answer was not to adjust to the statutory deadlines, however as a substitute to problem type letters to events after it determined to let the deadlines expire with out motion.   Because the FTC’s Director of the Bureau of Competitors defined:

“For deals that we cannot fully investigate within the [statutory] timelines…, we have begun to send standard form letters alerting companies that the FTC’s investigation remains open and reminding companies that the agency may subsequently determine that the deal was unlawful. Companies that choose to proceed with transactions that have not been fully investigated are doing so at their own risk.” 

The coverage really impacts comparatively few offers, although it might be troublesome for events negotiating potential offers to guess whether or not theirs will fall inside its ambit.  For small offers with no aggressive overlap, there may be nothing to fear about.  And the FTC doesn’t seem to be sending warnings in these circumstances.  For giant offers with apparent issues, the FTC is constant its commonplace observe of issuing second requests, precluding the instant expiration of the statutory ready interval.  Slightly, the warning letters seem to goal Goldilocks offers within the center:  these the place the FTC is worried a few transaction however not sufficiently so to take steps to handle the difficulty. 

Till lately, the quantity of circumstances that match this standards was vanishingly small.  And for good purpose.  If the transaction is dangerous sufficient to elevate considerations, why wouldn’t the FTC problem a second request?  And if the FTC doesn’t have the votes on the Fee to problem the transaction now – when the democratic commissioners have a 3-2 majority – will they actually muster better resolve sooner or later?   In idea, although, the coverage has some sensible attraction.  There might be an anticompetitive deal the FTC desires to put on the again burner till deal movement dies down.  Triage is a tried-and-true technique on the battlefield.  Why not for deal investigations main to courtroom battles? The brand new warning coverage merely services this triage, and alerts to the market that post-waiting-period challenges will now not be a uncommon prevalence.

But when the FTC means to deter the instant closing of these offers – what else might it imply when the FTC says “Please be advised that if the parties consummate this transaction before the Commission has completed its investigation, they would do so at their own risk” – it’ll have to make good on its promise to take motion.  It would have to transfer no less than one deal from the again burner if the coverage is to have any impact in any respect.

B. The Implications of the Coverage

So how ought to events to Goldilocks offers – these most in danger of receiving a warning letter and being tagged with a future enforcement motion – deal with this added uncertainty and danger?  Antitrust danger administration is commonly a fancy endeavor requiring events to anticipate a variety of potential company outcomes.  However prior to now, that danger got here with an expiration date. As soon as the statutory ready interval expires with out motion, the probabilities that the FTC would later problem the deal was negligible.  Of the 60,000-some HSR filings during the last 40 years, the FTC solely challenged one reportable transaction after permitting it to shut on the finish of the ready interval.  This implied a post-closing danger of lower than 0.0002%.  Provided that, patrons might comfortably assume that danger with out a lot ado, and merger paperwork usually require the client to shut after the ready interval expires.

However now, let’s assume the warning letter coverage will increase the danger of post-closure motion from 0.0002% to 10% and even 20%.  What ought to the events do?  Clearly, the FTC desires the merging events to imagine that the danger of a problem has considerably elevated, in any other case it wouldn’t ship the letter.  Must you take the bait, or must you name the FTC’s bluff?  If it seems the FTC was not bluffing, who ought to bear the results?  Ought to the client be obligated to shut, even after the FTC warned it not to achieve this?  Or ought to the vendor bear some accountability, simply as sellers usually do when the FTC raises considerations throughout the relevant ready durations?

Up to now, merging events and the antitrust bar usually have taken the FTC’s new warning letters with a grain of salt.  Mere saber-rattling, they are saying, claiming that the warning letters are “largely superficial” as a result of – in the end – the FTC wants to go to courtroom to problem a deal.  See FTC Merger Warning Letters Seen as Largely Superficial, Law360 (Aug. 18, 2021).   Considered logically, the danger of litigation over a deal the FTC doesn’t even need to totally examine, not to mention problem, throughout the statutory interval (which may lengthen a yr or longer) should be small.

But when the FTC is severe about its warning letters, it’ll want to carry a post-closing case simply to show it could actually and can.  The FTC additionally has a reasonably good monitor report within the merger circumstances it does carry, particularly since any problem will probably be heard within the first occasion by an Administrative Legislation Decide employed by the FTC and whose choices will probably be reviewed de novo by the identical Commissioners who voted to carry the case.  Even when the FTC isn’t profitable, the prices of litigating a merger isn’t small and may simply eat away all of the anticipated synergies of a mid-sized deal.  So the truth that the FTC in the end wants to litigate to unwind a closed transaction might not supply the client a lot solace. 

Given this, for offers on the cusp, it might be prudent for events to make the absence of a warning letter a situation precedent to closing.  Alternatively, the events might agree upfront that, in the event that they obtain a warning letter, they are going to permit the FTC extra time to end its investigation earlier than closing, successfully giving the FTC what it desires.  There are downsides to this, of course, notably on the vendor, so it shouldn’t be anticipated that such provisions will come low cost or can be simply agreed to.  However regardless of whether or not the FTC is flexing its muscular tissues for present or simply warming up for the principle occasion, events ought to think about the implications of the FTC’s new coverage earlier than they ink their deal – in any other case, it might be too late for them to do something apart from proceed at their “own risk.”

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