- The Federal Trade Commission rescinded a policy statement which limited the use of provisions in orders in merger cases requiring parties to provide prior notice or receive prior approval before engaging in future transactions.
- Now, companies that become subject to FTC orders in merger cases (whether by consent or as the result of an adverse ruling) should expect that these orders will very likely contain provisions requiring prior notice and prior approval of future acquisitions, including acquisitions that do not meet HSR reporting thresholds.
On July 21, the Federal Trade Commission (FTC), in a 3-to-2 vote along party lines, rescinded its 1995 Statement Concerning Prior Approval and Prior Notice Provisions in Merger Cases. This action could result in onerous requirements for companies that become subject to orders of the Commission relating to mergers, requiring them – outside of the HSR process – to provide notice to the FTC and seek its approval before engaging in future deal activity. Companies subject to a prior approval provision may face the burden of proving to the FTC that a proposed transaction is not anticompetitive. Under normal circumstances, the FTC has the burden of proving that a proposed transaction may substantially lessen competition.
As the FTC described in the now-rescinded Statement, prior to 1995, “Commission orders entered in merger cases generally . . . contained a requirement that the respondent seek the Commission’s prior approval for any future acquisition over a de minimis threshold within certain markets for a ten-year period.” Additionally, in certain cases, the FTC required notice of transactions not reportable under the Hart-Scott-Rodino (HSR) Act. (The HSR Act requires that parties to transactions meeting certain thresholds must make an HSR filing and observe a waiting period before closing the transaction.)
In 1995, recognizing that “prior approval provisions . . . may impose costs on a company subject to such a requirement” and that the utility of the HSR notification and waiting period framework “has proven to be an effective means of investigating and challenging most anticompetitive transactions before they occur,” the FTC “concluded that a general policy of requiring prior approval is no longer needed.” Instead, the Commission’s 1995 policy limited prior approval requirements to narrow situations where it believed parties to mergers that the FTC found to be anticompetitive would “attempt the same or approximately the same merger” with “essentially the same relevant assets.” And it limited prior notice requirements to situations in which it believed “there is a credible risk that a company that engaged or attempted to engage in an anticompetitive merger would, but for an order, engage in an otherwise unreportable anticompetitive merger.”
In a press release discussing the rescindment, the FTC said that the Statement “made it more difficult and burdensome to deter problematic mergers and acquisitions” and that “the Commission has been forced to re-review the same transaction on numerous occasions at considerable expense.”
The FTC did not provide guidance about when it would seek to include prior notice and approval provisions in orders in merger cases. Nevertheless, with the rescindment of the Statement, companies should expect that if they become subject to FTC orders in merger cases, these orders will very likely contain provisions requiring prior notice and prior approval of future acquisitions (including acquisitions that do not meet HSR reporting thresholds). A prior-approval provision could impose a significant burden on companies to prove that their transaction is not anticompetitive.
The risks and burdens of such provisions on potential future transactions are factors to consider both for cases fully litigated before the Commission as well as cases settled with a consent order. In cases which might be resolved with consent orders, the FTC may be unwilling to agree to a settlement without notice and approval provisions. If so, parties will have to weigh the costs and risks of settling and agreeing to the provisions against the costs and risks of not settling and fully litigating the FTC’s case. In cases headed to litigation, parties will have to weigh the downside of abandoning a transaction and potentially avoiding a final order against the costs and risks of losing the case and being subject to notice and approval provisions for future deals.