In a memorandum issued to the Federal Trade Commission (FTC) staff last week, Lina Khan, the new Chair of the FTC, indicated that the agency's priorities and approaches in reviewing proposed M&A deals will differ from those in the past. Kahn stated that the FTC, rather than viewing its work in two "silos" relating to antitrust and consumer protection, will be reviewing deals "holistically" and taking an "integrated approach" to the harms that "Americans are facing in their daily lives." She explained, for example, that the agency will focus on whether there are "power asymmetries" leading to "harms across markets, including those directed at marginalized communities," and whether the business models and structures used will "incentivize or enable" unlawful conduct. Further, she stated that, given "the growing role of private equity and other investment vehicles," the agency will "examine how these business models may distort ordinary incentives in ways that strip productive capacity and may facilitate unfair methods of competition and consumer protection violations," particularly when "these abuses target marginalized communities ...."1

It remains to be seen to what extent the FTC will be adopting the fundamental changes suggested in the Khan memorandum, and thus will be reviewing M&A transactions based not only on a conventional horizontal and vertical market-based antitrust analysis but also on the broader societal impacts. Over the past few months, we understand that in some deals the FTC has been seeking information during the second request stage of its investigations about topics such as unions, wages, the environment, corporate governance, franchising, diversity, and noncompete agreements. Unlike the Department of Justice, Antitrust Division (DOJ), which resides within the Executive Branch, the FTC is an independent agency, with two Republican Commissioners who have already expressed concerns regarding the changes under Khan's leadership. Nevertheless, the Khan memorandum is but one in a series of recent developments that suggest that there already has been a rapid, significant shift to increased enforcement of the antitrust laws and, in that effort, the use of broader, novel theories of harm to competition and/or consumer protection. Accordingly, M&A deals now face prolonged timelines and more risk on the regulatory front--including, it appears, even for those deals that do not present significant competitive overlap or risk of harm from vertical integration, but may raise issues relating to other social impacts.

In addition to the Khan memorandum, other notable antitrust-related developments this year have included the following:

  • Suspension of HSR early termination. Within weeks after President Biden's inauguration in January, the FTC announced a "temporary" suspension--which remains in effect--of early termination of the 30-day waiting period under the Hart-Scott-Rodino Antitrust Improvements Act (HSR Act) for transactions presenting no competitive concerns.2 The FTC has cited an unprecedented number of filings as the reason for its suspending early termination.
  • "Whole-of-government" antitrust effort. In July, President Biden issued an Executive Order that established 72 initiatives by more than a dozen federal agencies for more "vigorous" enforcement of the antitrust laws as part of a "whole-of-government" effort to "take decisive action to reduce the trend of corporate consolidation." The Order promised executive branch support for "aggressive legislative reforms"; established a White House Competition Council; and confirmed that certain mergers will be subject to longer review periods, greater scrutiny, and the government's advancement of novel theories of harm. Notably, the Order expressly reaffirmed that the antitrust agencies have the authority to challenge even transactions that have already closed. 3
  • "Pre-Consummation Warning Letters." In early August, the new head of the FTC's Bureau of Competition issued a memorandum stating that, in light of what was described as a "tidal wave" volume of merger filings under the HSR Act this year, the FTC has adopted a new practice of issuing "Pre-Consummation Warning Letters." These form letters are being issued to the parties in deals as to which the FTC has not been able to conduct or complete its investigation within the deadlines imposed by statute.4 The letter alerts the deal parties that the FTC's investigation remains open, and reminds them that, as the agency may subsequently determine that the deal was unlawful, if they "choose to proceed with [their] transaction that ha[s] not been fully investigated [they] are doing so at their own risk."5
  • New prioritization of "populist" issues. This month, the FTC announced that it has approved compulsory process rules (which allow the agency to collect extensive documents and witness testimony) in connection with its reviews in certain areas it is prioritizing. While Big Tech, oil and gas, healthcare, and "dominant" companies continue to be prioritized, there has been a notable shift in tone to emphasize more populist-type pocketbook issues (e.g., practices affecting labor markets or small business operations).6 For M&A deals, the new rules permit a single Commissioner to issue compulsory process in the form of a Second Request for HSR-reportable transactions and a Civil Investigative Demand for consummated transactions; whereas, previously, a majority vote was needed.
  • Withdrawal of Vertical Merger Guidelines. At a mid-September public meeting, the FTC Commissioners voted 3-2 along party lines to withdraw the joint FTC/DOJ Vertical Merger Guidelines that were issued just last year. In voting for the withdrawal, the majority harshly criticized the guidelines as being based on "unsound economic theories that are unsupported by the law or market realities."7 The FTC has stated that the agency will be working with the DOJ to update merger guidance to better reflect market realities. The same day, the DOJ issued a statement that it is conducting a careful review of the guidelines (both vertical and horizontal), but indicated that the Vertical Merger Guidelines remain in place at the DOJ.8
  • Continued focus on acquisitions of startups. At the same mid-September public meeting, the FTC Commissioners released the results of a study undertaken by the prior Administration of non-reportable M&A transactions involving large technology companies acquiring start-up companies. An outgoing FTC Commissioner proposed that Congress should reduce the HSR filing thresholds9 so that the agency will be apprised of and can review the potential anticompetitive effects of these types of acquisitions before they are consummated. He also stated that avoidance techniques that purportedly have been used to evade the thresholds (such as disguising the "real" purchase price through grants of deferred or contingent compensation to founders and employees) should be prohibited. Another FTC Commissioner commented that, while there may not appear to be antitrust concerns when such acquisitions are viewed individually, the agency should consider the anticompetitive effects of a steady stream of such acquisitions.10 It is possible that the Administration's concerns will spill over to concentrated industries beyond Big Tech.
  • Aggressive state antitrust enforcement. The incoming head of the national task force that coordinates competition enforcement by the states has emphasized that state attorneys general will continue to bring antitrust cases under state laws even if Congress does not pass legislation specifically granting states equal footing with the federal government in enforcing antitrust laws.11

We would note that, notwithstanding these developments, it is still uncertain to what extent the government actually will pursue and press this apparently social policy-oriented approach in connection with its antitrust reviews of mergers. There is also uncertainty as to which specific issues the agencies will devote their attention beyond the traditional antitrust merits, although labor-related issues appear at least initially to be an area of focus. Finally, it remains to be seen whether the new approach, if challenged, would be judicially upheld.

Practice Points

  • Merger parties should expect a longer antitrust review period and a changed focus in the investigation, especially if before the FTC. Participants in M&A deals, including in private equity deals, should be prepared for questions by the antitrust agencies on topics not previously considered of major relevance--such as the impact of the proposed transaction on labor, privacy, the environment, climate change, diversity, marginalized communities, production capacity, and others. The agencies may determine to focus generally on certain topics, or may raise different issues in individual deals.
  • Merger parties should consider, at the earliest stages of a transaction:
    • whether, in addition to the traditional antitrust issues, there are other issues that create potential vulnerabilities for the deal based on the agencies' new approach;
    • whether proactively to address these issues (such as by making certain social policy-related changes or commitments), and, if not, how any agency concerns about such issues might later be "remediated" if that becomes required; and
    • whether the likelihood of a longer regulatory process and/or the increased risk of an adverse result in the regulatory process affects the parties' deal terms.
  • Early engagement of antitrust counsel will be critical for vigilant management of the HSR process--even for deals that present a low level of competitive overlap or vertical concerns. Antitrust counsel can help to make the threshold determination whether the transaction is likely to pass muster with the antitrust agencies, and on what timetable and terms; to identify and frame the competitive issues, and now the other issues, the agencies may consider; and to review management, board and banker materials and presentations so that the deal can be presented to the antitrust regulators in the best possible light, without problematic documentation that could delay or reduce the likelihood of, or increase the conditions for, successful completion of the antitrust review process.
  • In our view, it is unlikely that the antitrust agencies will significantly increase their use of postclosing challenges. While the Pre-Consummation Warning Letters serve as a reminder of the potential for post-closing challenges, it is not necessarily likely that more post-closing challenges actually will be brought. First, it seems to us unlikely that the agency would, in any widespread way, entangle itself in the complexities and burdens of investigating and "unscrambling" already-closed transactions. Also, it seems to us unlikely in general that the agency would choose to forego the leverage it has, pre-closing, to encourage parties to provide information and take remedial actions so that their closing can occur without the risks of a still-open investigation.
  • In light of longer, more expansive antitrust reviews, as well as a greater risk of (i) closing in the face of a still-open antitrust investigation, (ii) broader remedial packages, (iii) litigation being brought by the antitrust agencies, and (iv) post-closing challenge by the antitrust agencies, drafters of merger agreements should consider whether to:
    • require parties to close if an antitrust agency investigation is still open after expiration of the HSR period;
    • provide for a longer period for the "End Date" than would have been typical previously;
    • provide for a "reverse termination fee" to be paid by the buyer to the target (or the seller) if the antitrust investigations were not completed and the deal was terminated (and, if so, whether at a different amount than would have been typical previously); and
    • alter the approach to the antitrust efforts and divestiture covenants (or other provisions, such as the covenant to operate in the ordinary course of business pending closing).