The Federal Trade Commission and Department of Justice have made quick changes to the merger review process in light of the coronavirus pandemic. With merging parties already facing more scrutiny, Kirkland & Ellis LLP partner Peter McCormack says they now need to expect more uncertainty and longer delays, and consider preparing for litigation.
Even before the emergence of the Covid-19 pandemic, the U.S. antitrust regulatory climate has been increasingly uncertain for merging parties.
Government inter-agency clearance battles, detailed (and sometimes partisan) inquiries into pioneering issues and theories, and heightened scrutiny of divestitures and conduct remedies have become commonplace, contributing to longer and at times less predictable merger investigations.
Reflecting these trends, the number of federal antitrust merger lawsuits accelerated in the second half of 2019 through the first quarter of 2020. Recent examples include the Federal Trade Commission’s suits to block Edgewell’s acquisition of Harry’s and Post’s acquisition of TreeHouse Foods, and to unwind Altria’s investment in JUUL, and the Department of Justice’s suit to block Sabre’s acquisition of FareLogix as well as its successful arbitration of a merger dispute.
Today, with the devastation of Covid-19 creating unprecedented challenges for public officials and business across the globe, the FTC and DOJ have made significant ad hoc changes to the merger review process to remain operating.
They quickly implemented an electronic system for Hart–Scott–Rodino Antitrust Improvements (HSR) Act filings and ordered employees to telecommute and conduct all meetings and depositions by phone or video conference absent “extenuating circumstances.”
Expect More Delays
As the two agencies adjust to these changes, merging parties should expect delays, in some cases causing increased uncertainty, over the next several months.
For transactions raising no antitrust issues, but which require a premerger filing under the HSR Act, any delays should be minimal. Through the beginning of April, HSR-reportable transactions with no issues have continued to clear the HSR Act waiting period. After a brief hiatus, the FTC and DOJ currently are granting early termination of the waiting period, although “in fewer cases, and more slowly, than under normal circumstances.”
For transactions with limited issues, parties should assume the two agencies will not complete any investigation within the initial 30-day waiting period. Despite their best efforts, delays due to teleworking are inevitable. More importantly, obtaining required information from top customers and other third parties—a routine aspect of merger review—likely will take longer than normal.
The FTC and DOJ also may be unable to close some non-complex investigations within the 60-day pull-and-refile period due to a lack of information from third parties. That could result in an incrementally higher percentage of HSR-reportable transactions that receive second requests. (This percentage last peaked toward the end of the Great Recession in FY 2009, so if there is another prolonged recession, the trend could happen anyway.)
But assuming these incremental transactions are competitively benign, one would not necessarily expect the rate of enforcement actions to increase as well; in fact, it could decrease.
For transactions that present material antitrust issues, delays may be substantial, in some cases causing increased risk of termination. The DOJ has said it is asking merging parties in pending and future second request investigations to agree to 30 additional days of regulatory review in timing agreements as a matter of policy.
The FTC has suggested it will make similar requests in appropriate cases, with anecdotal reports of the Commission asking for 60 additional days. Three merger cases where FTC enforcement actions are pending have been delayed until June. Agency leadership has publicly affirmed each agency will continue to enforce the antitrust merger laws vigilantly during the Covid-19 emergency and its aftermath, particularly with respect to divestitures.
Delays and termination risk will be acute for transactions that also require filings and raise substantive antitrust issues outside the U.S. Like the two agencies, merger control jurisdictions outside the U.S. have made sea-change operational adjustments on the fly, creating additional layers of delay and uncertainty for transactions triggering notifications in those jurisdictions. Some jurisdictions have suspended filing and other deadlines, and many regimes—including the European Commission—have asked merging parties to postpone filings where possible.
Recalibrating the Odds and Planning for Litigation
Against this backdrop, parties to any transaction with material U.S. antitrust issues should carefully recalibrate the odds of litigation based on recent developments, and in appropriate situations, plan to litigate.
Litigation is almost never a primary strategy for merger clearance. The rate of success for defendants in merger cases is low, and remedy negotiations are an effective means of dispute resolution. Litigation also may not be practical from a process perspective if the transaction raises material ex-U.S. antitrust or other regulatory issues.
However, the FTC and DOJ are showing no hesitation to litigate (causing several deals to be abandoned), highly skeptical of proposed divestitures and conduct remedies, and promising to add time to already-long review timelines.
And, some of the recent merger challenges have been borderline cases, as recent agency losses in Evonik/PeroxyChem and Sabre/FareLogix demonstrate. Under these conditions, if remedy discussions stall, merging parties may find litigation is the best or only alternative to termination.
In any environment, litigation planning—and, for that matter, remedy planning—requires sufficient time and clear obligations in definitive transaction agreements.
Given anticipated delays at the FTC and DOJ and backlogged court dockets across the country, timelines may extend beyond 18 months for transactions involving litigation and beyond 12 months for those involving remedies. Parties, in consultation with experienced antitrust counsel, should consider appropriate termination date extensions as well as day-for-day extensions during agency or court shutdowns, closures or delays due to Covid-19.
In addition, antitrust covenants should provide a clear path to litigate. A successful litigation strategy requires buy-in from both parties. One approach to achieve this is to have detailed provisions addressing the timing and conditions for litigation. Because merger agreements are submitted with the HSR filings, however, this approach may run the risk of providing the two agencies with a litigation roadmap.
As an alternative, buyers can propose the right to control the antitrust strategy and/or an option to elect whether and when to divest or litigate. Sellers, on the other hand, can propose an antitrust reverse termination fee and/or ticking fees, such as a fee that accrues during divestiture negotiations but not litigation.
Litigation should not be viewed as mutually exclusive with offering remedies. Courts generally are willing to consider remedies proposed by merging parties in litigation, referred to as litigating the fix. Litigating the fix does not confer an inherent advantage; in many cases, such as Sysco/US Foods and Aetna/Humana, courts have sided with the FTC and DOJ in rejecting proposed divestitures. However, Evonik and PeroxyChem just successfully litigated a proposed fix (although the sufficiency of the divestiture was not central to the court’s holding).
Merging parties can credibly threaten to litigate the fix by proposing a remedy that resolves some or all of the competitive concern, consistent with precedent and agency guidance, and having enough time to litigate. Even if litigation is not a desired outcome, being able to litigate the fix can complicate the agencies’ litigation posture. This holds true whether the fix is a divestiture or conduct remedy. Although the agencies may disfavor conduct remedies, a court may find it difficult to grant injunctive relief in the face of a comprehensive conduct remedy proposal that removes the competitive harm.
Finally, where litigation is contemplated, substantive preparations should begin pre-signing and consist of economic analysis and detailed document review. As the merger review unfolds, substantive advocacy made to the agencies often dovetails with litigation work. This applies in particular to advocacy that occurs post-second request compliance, which often takes the form of presentations and white papers citing to documents, data and deposition testimony as well as robust economic analysis.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Peter McCormack is an antitrust & competition partner in Kirkland & Ellis LLP’s New York office. He advises clients on antitrust matters relating to mergers and acquisitions, joint ventures and other business combinations, and represents clients before DOJ’s Antitrust Division, the FTC, and state attorneys general in connection with merger reviews and civil antitrust investigations.