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Shifting Regulatory Market Clouds US Deal Certainty In 2020

Savvy dealmakers can pave the way for mergers and acquisitions even in times of heightened regulatory scrutiny, but shifting U.S. regulations and enforcement in areas like foreign investment and antitrust are set to cloud deal certainty in the coming year. 

The year 2020 is shaping up to be one of change, as the Committee on Foreign Investment in the United States adopts a new review framework for overseeing U.S. inbound transactions, a U.S. presidential election opens the door for a new administration to take the reins, and antitrust regulators mull the best way to approach reviews of vertical mergers.

Here, Law360 looks at the major M&A-related regulatory changes on tap for 2020.

New Rules for Oversight for U.S. Inbound Deals Are Coming

CFIUS, which reviews certain U.S. inbound deals for national security concerns, will see its reach greatly expanded by a set of new rules expected to be adopted around February. The new rules are poised to spur some uncertainty as dealmakers digest their implications and how they might apply to foreign investment in the U.S.

“We’re expecting the final regulations to be issued in early 2020. This is a major overhaul of the CFIUS landscape and will become more and more of a gating item for transactions that involve foreign investment in the United States,” said Jeanine McGuinness, an Orrick Herrington & Sutcliffe LLP international trade and compliance partner. 

The U.S. Department of the Treasury released a draft version of the much-anticipated regulations in September, a little over a year after the Foreign Risk Review Modernization Act of 2018 was signed into law. 

The draft rules sought to clearly depict which foreign investments and acquisitions are of interest to the committee and introduce a few new ideas to the CFIUS realm. The comment period has since come to a close, and dealmakers are now waiting to see what adjustments will be made before the final rules are put into place in February. 

The new rules — some of which were implemented during a 2019 pilot program — are anticipated to have a dampening effect on U.S.-targeted deals as companies and investors digest how the playing field has changed. 

Recently released data on CFIUS enforcement shows that even before FIRRMA was signed into law, the committee was ramping up its investigation efforts. A report covering reviews conducted during the 2016 and 2017 calendar years shows a steep increase in deals being submitted for review and deals being abandoned during the process. 

There are some concerns that the added level of scrutiny and a further increase to CFIUS’ already large workload could slow the process, especially in the early months of the new rules being in place. 

“I do think that the case volume is expected to rise, and I think one of the concerns about having more transactions be subject to the CFIUS regime is that the parties will be concerned about having extended review processes that can affect deal timing,” McGuinness said.

Deputy Secretary of the Treasury Justin Muzinich tried to assuage concerns that the new rules meant the government was cracking down or somehow limiting foreign investment into the U.S., emphasizing in a November speech that CFIUS has been reviewing transactions more efficiently and focusing only on deals with actual risks.

“It is worth noting that along with strengthening CFIUS, we have been running the review process more efficiently,” he said in the speech. “When there are no national security risks, we are letting the parties know quickly, so that they can proceed with their transactions. The United States remains very much open to foreign investment.” 

There is certainly a hope that as the new rules are firmed up, they will allow CFIUS to drill down on inbound deals in sensitive industries while more quickly clearing ones that do not present a national security risk. 

“I do think there is going to be an interesting CFIUS environment, which will be characterized by the desire to show they are not trying to chill foreign investment, so approval or quick approval in non-strategic industries,” said Howard Shelanski, a Davis Polk & Wardwell LLP partner.

“But they are going to want to be firm and show these new rules have bite by enforcing in those strategic industries, particularly in regard to certain countries,” he added.

Antitrust Enforcement Is Difficult to Predict as Elections Approach

The antitrust climate in the U.S. is also difficult to predict, given not only the unexpectedly active review environment established by the current Republican administration but also the fact that a U.S. presidential election is approaching. 

Dechert LLP’s quarterly Dechert Antitrust Merger Investigation Timing Tracker found that 20 “significant merger investigations” were resolved by the U.S. Department of Justice and Federal Trade Commission in 2019 through September. That compares to 15 probes that were wrapped up in the first nine months of 2018. 

According to Dechert, the pace of the Trump administration is in line with the activity seen under the Obama administration from 2011 to 2014, although the final two years of the Obama administration were more active. 

The competition watchdogs are expected to continue to search for deals that they can challenge in the coming year as well. 

“I do think it’s going to be active. The FTC and the DOJ are both still being aggressive, appropriately aggressive they would say, and taking a long look at [deals] they think warrant a longer look,” said Matt Reilly, a Kirkland & Ellis LLP antitrust litigation partner. 

And although dealmakers have had the last three years to get accustomed to the DOJ and FTC under the Trump administration, the upcoming presidential election in the U.S. could usher in new leadership.

“I think that there is uncertainty going into an election year, particularly one where firm size and large mergers have received a fair bit of political attention, especially in the tech sector. We can see a situation where there is some desire to get deals done in advance of the election because the sense [is] the antitrust environment could become quite politicized and there could be heightened scrutiny going forward in a new administration,” Shelanski said. 

Adding to the normal level of uncertainty generally derived from a presidential election year is also the fact that the Democratic pool of potential party nominees represents a broad range of policy positions that make it even harder for buyers and sellers to guess what sort of regime their deal might be reviewed under.

“If you look at some of the Democratic nominees — in particular Sen. [Elizabeth] Warren — they’ve been rather vocal on their views on the need for antitrust enforcement and the proposals to change antitrust law for increased enforcement,” said Ian John, a Kirkland antitrust and competition partner. 

Dealmakers will also be on the lookout for any potential updates to how the agencies plan to approach vertical mergers. Any clarity on the matter would come at a time when it seems like more large industry players are eyeing vertical, rather than horizontal, tie-ups and after a year that saw some divergence on how best to approach such reviews.

“While a lot of people thought there was going to be a sea change in vertical mergers based on the DOJ’s decision to go after the AT&T-Time Warner merger, I think empirically we haven’t seen much of an enhanced focus,” Shelanski said.

“We should just keep our eyes open for the possibility of vertical merger guidance. Those could bring some clarity to vertical transactions,” he said.