United States: Merger Review Process

In summary

This chapter discusses the competition-related merger review process in the United States. First, it describes the institutions involved in merger review – primarily, the US Department of Justice Antitrust Division (DOJ) and the Federal Trade Commission^[1] (FTC) (collectively, the Agencies). Second, it outlines the legal framework these entities apply. Third, it traces the life cycle of a typical merger review. Lastly, it discusses merger review enforcement under the Biden administration so far.

Discussion points

• The institutions involved in merger review: DOJ, FTC, and State AGs
• Substantive law: Clayton Act Section 7 and the merger guidelines
• The in-depth merger review process
• Merger enforcement under the Biden administration

Referenced in this article

• Clayton Act Section 7
• Hart-Scott-Rodino Antitrust Improvements Act
• Horizontal Merger Guidelines
• Vertical Merger Guidelines

The statutory framework for suspensory merger review in the United States comes from the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the HSR Act).^[2] Under the HSR Act, parties engaging in transactions that meet certain inflation-adjusted thresholds^[3] are required to notify both the DOJ and FTC at least 30 days prior to closing and pay a fee based on the size of the transaction.^[4] Failure to file can result in penalties in excess of US$40,000 per day.^[5] At the end of the 30 days – unless the parties ‘pull and refile’ to allow the Agencies a fresh 30 days to review the transaction^[6] – the parties are free to close unless either of the Agencies ‘require[s] the submission of additional information or documentary material relevant to the proposed acquisition’^[7] (commonly called a Second Request). If a Second Request is issued, then the parties cannot close until 30 days after substantially complying.^[8]

At the end of the process, there are three basic outcomes: (1) the reviewing agency could close its investigation; (2) the reviewing agency and the merging parties could settle to resolve any concerns that the reviewing agency expressed, such as by divesting certain facilities; or (3) the reviewing agency could sue to block the transaction.

Since the HSR filing requirement applies to all transactions over a certain threshold regardless of competitive significance, it sweeps in many transactions that pose no concern. Prior to January 2021, the Agencies would often grant, upon request, ‘early termination’ for competitively insignificant transactions, allowing the parties to close prior to the expiration of the 30-day waiting period. Shortly after President Biden’s inauguration, however, the Agencies ‘paused’ early termination^[9] and, at the time of writing, show no sign of resuming.

Institutions

Structure and organisation

DOJ

As mentioned, two agencies share jurisdiction over merger review: the DOJ and FTC. The Department of Justice is part of the executive branch of the federal government and its leader, the Attorney General, is a member of the President’s cabinet. The DOJ is led by a presidentially appointed, Senate-confirmed Assistant Attorney General (AAG).^[10] The AAG has unilateral decision-making authority over the Antitrust Division, but sits reports to the Attorney General through the Associate Attorney General and Deputy Attorney General. The AAG is assisted by several politically appointed Deputy AAGs, two or three of whom generally oversee civil matters, including merger review, merger litigation and international relations. At the career-staff level, the DOJ has six civil litigating sections that conduct merger review investigations for specific commodities. The six sections are:

1. Healthcare and Consumer Products;
2. Defense, Industrials, and Aerospace;
3. Financial Services, Fintech, and Banking;
4. Media, Entertainment, and Communications;
5. Transportation, Energy, and Agriculture; and
6. Technology and Digital Platforms.

Each is headed by a chief and two assistant chiefs, and staffed by approximately 20 to 25 trial attorneys and 12 paralegals. DOJ leadership has significant flexibility in staffing matters, and, if a particular section is busy, it is not uncommon for merger investigations to be assigned to a different section. Personnel are also frequently detailed to different sections if there is a particular need. On 20 July 2021, President Biden nominated Jonathan Kanter to serve as AAG.^[11]

FTC

In contrast to the DOJ, the FTC is an independent, five-member commission.^[12] Commissioners are presidentially appointed and Senate confirmed, and no more than three commissioners may be members of the same political party. The president designates one commissioner as the chair. The chair sets the agenda, appoints key staff – such as the leadership of the Bureau of Competition (BC) – and oversees the day-to-day work of the FTC, with certain key actions subject to vote by the whole Commission. For its competition function, the FTC’s most relevant bureau is BC, which is headed by a director who is assisted by deputy directors, and controls the legal investigatory function. A Bureau of Economics works with BC to evaluate mergers and provides independent, economic analysis of deals for BC and Commission review and consideration. For merger review, BC is divided into four merger divisions, with the following expertise:

• Mergers I reviews transactions in healthcare-related industries, including branded and generic pharmaceutical manufacturing and distribution, medical devices, and consumer health products. It also handles matters involving defence, scientific, industrial, technology and consumer products.
• Mergers II reviews transactions in a wide variety of industries, including coal mines, chemicals, entertainment, and computer hardware and software.
• Mergers III reviews transactions in a diverse set of industries from razors to online real estate listing services, to title insurance to rooftop aerial measurement products, to oil and gas, to retail gas stations, terminals and pipelines.
• Mergers IV reviews transactions involving hospitals, physicians, office supply distribution, food distribution, supermarkets, speciality retail stores, consumer goods and casinos.

Each merger section is headed by an assistant director and two deputy assistant directors, and staffed by approximately 30 attorneys.^[13]

President Biden inherited four commissioners, Democrats Rebecca Slaughter and Rohit Chopra and Republicans Noah Phillips and Christine Wilson. Shortly after inauguration, President Biden made Commissioner Slaughter acting chairwoman. In March 2021, he nominated Lina Khan as the fifth commissioner, but was silent on selecting a permanent chair.^[14] On June 15, within hours of Khan’s confirmation as a commissioner, President Biden named her as chair of the FTC.^[15] Chair Khan came to prominence as a critic of the bipartisan antitrust consensus of the last 40 years, and is expected to lead the FTC in a left-wing direction.^[16]

Clearance

Although the DOJ and FTC share jurisdiction, the Agencies do not concurrently investigate mergers. Rather, they divide matters between themselves on the basis of expertise as part of the ‘clearance process.’^[17] As a practical matter, when they are notified about a potential merger, each agency conducts an initial evaluation to determine if the transaction warrants further review and falls within the agency’s subject matter expertise. If those conditions are satisfied, the agency will seek clearance from the other agency and open the investigation. The process generally smoothly allocates merger reviews, but occasionally a matter will fall into an area where each agency claims expertise or that cuts across both Agencies’ expertise (eg, a vertical merger where one agency has expertise in the upstream market and the other has expertise in the downstream market), which can result in more protracted negotiations and may delay the launch of the investigation. When this happens, it can put merging parties in a difficult situation because the reviewing agency may lack the time necessary to assess the transaction and may default to issuing a Second Request. To avoid this, it is not uncommon for the merging parties to pull and refile their HSR filing, resetting the 30-day clock to give the investigating agency more time to evaluate the transaction in the preliminary stages.^[18]

International cooperation

Many large transactions require notification in multiple different jurisdictions. If the transaction raises substantive competition concerns, then the Agencies frequently cooperate with foreign competition agencies. This cooperation typically takes the form of periodic calls to share updates on process and timing, as well as to discuss facts and theories. Because of statutory confidentiality requirements, merging parties must waive confidentiality in order for the Agencies to discuss confidential information with foreign enforcers.^[19]

State Attorneys General

Attorneys general from individual US states (State AGs) are increasingly interested in and active on antitrust matters, including merger reviews.^[20] Although most US states have state-specific antitrust laws, State AGs also have parens patriae standing to bring suit under federal antitrust law, allowing them to act as quasi-sovereign enforcers in parallel with the Agencies.^[21] Although no US state has a general mandatory pre-merger notification requirement,^[22] public reports of transactions can attract State AG attention. When there is State AG interest in a merger investigation, the Agencies typically cooperate with the relevant State AGs, sharing procedural and substantive updates and even conducting joint meetings, with the relevant federal agency taking the lead. But there is the potential for divergence between the Agencies and State AGs, and State AGs have challenged mergers that the Agencies have not or obtained remedies in addition to those sought by the Agencies.^[23]

Substantive legal framework

Section 7 of the Clayton Act provides the legal framework for substantive merger review.^[24] Like Sherman Act Sections 1 and 2,^[25] the statutory text gives minimal guidance, providing that mergers where the effect ‘may be substantially to lessen competition, or to tend to create a monopoly’, are prohibited.^[26] Over the years, synthesising judicial precedent and economic analysis, the Agencies have promulgated merger guidelines that reflect how they evaluate mergers, including long-standing Horizontal Merger Guidelines (HMG) and more recently issued Vertical Merger Guidelines (VMG).^[27] In recent decades, these guidelines, particularly the HMG, have been highly influential in how courts apply the federal antitrust laws.^[28]

The 2010 HMG concisely lay out the Agencies’ approach to evaluating horizontal mergers, namely mergers between firms that compete directly. By their nature, horizontal mergers are the most likely type of merger to draw agency interest. The HMG start by addressing evidence of anticompetitive effects. The Agencies consider various types of evidence, ranging from actual effects observed in consummated mergers, to direct comparisons based on experience, to market shares and concentration, to substantial head-to-head competition, and even to the ‘maverick’ status of one of the merging parties. The primary sources of evidence are documents and information from the merging parties, customers, and other industry participants and observers.^[29]

The HMG also cover market definition, including various legal and economic tests the Agencies typically use to define the relevant product and geographic markets.^[30] The HMG explain how the Agencies consider market participants, shares and concentration. Potential entrants can be considered part of the market. Shares are calculated based on the best available information, such as capacity or revenue. The Agencies use the Herfindahl-Hirschman Index (HHI) to measure concentration, and consider mergers that result in certain levels of concentration to be presumptively anticompetitive.^[31]

The HMG discuss two broad theories of harm – unilateral effects and coordinated effects. Unilateral effects stem from the elimination of competition between the merging firms independent of any other market participants. These ‘are most apparent in a merger to monopoly in a relevant market, but are by no means limited to that case’.^[32] Coordinated effects occur when a merger ‘diminish[es] competition by enabling or encouraging post-merger coordinated interaction among firms in the relevant market that harms customers’.^[33]

The HMG also discuss various defences. Powerful buyers may constrain the ability of merging parties to raise prices, potentially reducing harm.^[34] If entry by a new competitor into the relevant market post-merger would be timely, likely and sufficient to counteract potential harmful effects, then the merger may be lawful.^[35] The HMG recognise that ‘a primary benefit of mergers to the economy is their potential to generate significant efficiencies and thus enhance the merged firm’s ability and incentive to compete’, resulting in pro-competitive effects. The Agencies will credit verified and quantified merger-specific efficiencies.^[36] Finally, the Agencies consider the possibility of a failing firm where, absent the merger, the assets would exit the market, rendering an otherwise anticompetitive merger lawful.^[37]

Vertical mergers are combinations between firms operating at different levels in related markets (eg, manufacturer-distributor). Although, as a class, vertical mergers tend to raise fewer competitive concerns than horizontal mergers, they can harm competition under certain circumstances, and the Agencies have challenged vertical mergers consistently, if not frequently, over the past 25 years.^[38]

The VMG were adopted by the Agencies in 2020. Prior to that, the DOJ (but not the FTC) had Non-Horizontal Merger Guidelines from 1984, which were widely considered a dead letter.^[39] The 2020 VMG were the first systematic joint statement by the Agencies explaining their analytical approach to evaluating vertical mergers. The VMG are substantially shorter than the HMG (14 pages versus 37), and explicitly state that they ‘should be read in conjunction with the [HMG]’ and that ‘[m]any of the principles and analytic frameworks used to assess horizontal mergers apply to vertical mergers’.^[40] The VMG address questions that arise specifically in the context of vertical mergers. For instance, the VMG state that the Agencies, in addition to defining a relevant product market, will also specify a ‘related product,’ which could be ‘an input, a means of distribution, access to a set of customers, or a complement’ to the relevant product market.^[41]

Like the HMG, the VMG discuss both unilateral and coordinated effects. The VMG identify two specific categories of unilateral effects. The first is ‘foreclosure and raising rivals’ costs’,^[42] and the VMG provide six illustrative examples. Those examples include straightforward input foreclosure (the merged firm restricting rivals’ access to a critical input), input foreclosure through increased bargaining leverage (a version of this theory was the DOJ’s principal theory of harm in its unsuccessful challenge to AT&T’s acquisition of Time Warner Inc.^[43]), creating the need for two-level entry (post-merger, a new entrant is unlikely to enter successfully, unless it can enter at both levels), and raising rivals’ cost of distribution (limiting access to an important distribution channel).^[44] The second unilateral effect is giving the merged firm access to completely sensitive information. For example, if a downstream rival to the merged firm were a pre-merger customer of the upstream firm, then the merger could give the merged firm access to its rival’s sensitive business information, which could harm competition.^[45]

The VMG’s discussion of coordinated effects is sparse. It incorporates the HMG’s discussion of coordinated effects by reference, and then gives an example of the merged firm’s access to competitively sensitive information better enabling it to coordinate.^[46] Underscoring the fact-intensive nature of the analysis, the VMG add that ‘[s]ome effects of a vertical merger may make the market less vulnerable to coordination.’^[47]

Finally, the VMG acknowledge the potential pro-competitive effects flowing from vertical mergers. Most significantly, vertical mergers can eliminate double marginalization, resulting ‘in the merged firm’s incurring lower costs for the upstream input than the downstream firm would have paid absent the merger,’ which arises directly from the merger itself.^[48] The VMG state that it is ‘incumbent upon the merging firms to provide substantiation for claims that they will benefit from the elimination of double marginalization’, but add that the Agencies will attempt to assess these benefits on their own.^[49]

While the guidelines (especially the HMG) reflect substantial consensus within both the antitrust bar and federal judiciary regarding how to analyse mergers under Clayton Act Section 7, they have come under criticism from both the left and the right.^[50] Lina Khan’s elevation to the chair of the FTC is likely to result in upheaval in the near term and may result in a fundamentally different approach over the long term. Already, President Biden has issued an Executive Order directing the Agencies to reevaluate their merger guidelines,^[51] and the FTC and DOJ issued a joint statement announcing ‘a hard look to determine whether [the guidelines] are overly permissive’ and promising to ‘launch a review of our merger guidelines with the goal of updating them’.^[52] On 15 September 2021, the FTC withdrew from the VMG on a party-line vote. For now, the VMG remain in effect for the DOJ. Additionally, there is pending legislation that, if adopted, could change the substantive legal standard.^[53]

In-depth merger reviews

This chapter has discussed the institutions involved in the merger review process and the legal framework they employ. This next section describes the flow of a typical in-depth merger review. First, however, some context is necessary. US merger review functions like a funnel. The HSR Act filing requirement is the wide mouth, capturing a large number of transactions, the majority of which raise no competitive issues and face no scrutiny beyond a review of the filing itself. As the funnel narrows, a small percentage, about one in 10, trigger a preliminary investigation, in which the Agencies engage in the clearance process. Narrower still on the funnel, a subset of those preliminary investigations draw a Second Request and a lengthy, drawn out investigation. At the very end of the funnel, a handful each year result in some action by the reviewing agency – either a settlement or a challenge.

Statistics published by the Agencies illustrate this point. In 2019, the most recent year for which statistics are available, there were a little more than 2,000 HSR filings.^[54] Nearly three-quarters requested early termination,^[55] and the Agencies granted early termination for more than a thousand filings.^[56] Less than 12 per cent of HSR filings resulted in a preliminary investigation.^[57] Only 3 per cent resulted in a Second Request.^[58]

For those cases that result in a Second Request, the merger review process can be lengthy and expensive. Not infrequently, merging parties subject to a preliminary investigation may pull and refile their HSR filings in order to reset the 30-day clock and give the merging parties additional time to persuade the reviewing agency that a Second Request is unnecessary or can be narrowly drawn.^[59]

Second Requests, once issued, require the merging firms to produce massive amounts of information and data and submit business people for depositions. While any given Second Request is tailored to the given transaction, the Agencies have posted models on their websites.^[60]

One option for parties subject to a Second Request is to comply and certify substantial compliance, triggering 30 days for the reviewing agency to decide whether to sue. This risks, however, alienating the decision-maker and incentivising the reviewing agency to prepare for litigation rather than assessing potential resolutions short of litigation.

Another option is for parties subject to a Second Request to engage with the reviewing agency to enter into a timing agreement, committing to rolling productions of documents and data and giving the agency additional time in exchange for certain process guarantees, including substantive engagement with staff and audiences with decision-makers. The DOJ and FTC have each posted model timing agreements.^[61]

While every investigation is different, most follow the same general pattern. There is an initial back and forth between the parties and the investigating staff on facts and theories. If concerns are not resolved in the course of the investigation, the staff will give the merging parties feedback on the staff’s concerns, which the staff have likely embodied in a recommendation memorandum to the reviewing agency’s decision makers. The staff’s recommendation memoranda are frequently lengthy documents, almost like summary judgment briefs, outlining relevant facts and theories of harm, addressing both strengths and weaknesses. Near the end of the review period, the parties will meet with decision-makers and make their case that the merger should not be challenged.

If the concerns expressed by the agency can be remedied (eg, overlaps in distinct geographic or product markets are commonly addressed by divestitures), then the parties may short circuit this process by offering divestitures and shifting to settlement negotiations. This often happens entirely at the staff level (although the decision makers must, of course, approve any settlement), but is occasionally prompted by concerns underlined by the decision-makers.

If the concerns remain and cannot be remedied, then the reviewing agency may take action to block the deal from closing. Faced with this prospect, merging parties frequently abandon their transactions, but occasionally litigate and sometimes prevail in court.^[62]

Merger enforcement under the Biden administration

Antitrust merger enforcement policy in the Biden administration is beginning to come into focus. It is likely to be a more challenging environment than in the recent past for firms seeking quick, favourable resolutions to pending mergers. President Biden himself has criticised the antitrust consensus for the past 40 years as being too lenient ^[63]and his appointments to key roles portend more aggressive enforcement to come, including actions related to merger review. Shortly after she was confirmed to the FTC and then immediately elevated to chair, Chair Khan held an open meeting and pushed through seven resolutions that identified enforcement priorities and authorised compulsory process for investigations into those areas.^[64] One resolution specifically identified merger investigations as a priority area.^[65] While many of the other resolutions go beyond merger enforcement, they suggest that the FTC will be particularly focused on mergers involving technology platforms, healthcare and pharmaceuticals.^[66]

Already, the Agencies have been more willing to impose higher regulatory costs, for example, ‘pausing’ early termination,^[67] and have been less sympathetic to complaints about process and burden concerns.^[68]

Relatedly, merger enforcement is likely to be less predictable, with the Agencies exploring and even bringing novel theories. Past merger resolutions may not serve as useful predictors of future resolutions. Several recent FTC dispositions illustrate this point.

Pfizer/Mylan

In November 2019, Pfizer Inc and Mylan NV agreed to a transaction that combined some of Pfizer’s assets with Mylan to form a new entity that would have resulted in generic drug product overlaps in 10 markets.^[69] In late 2020, consistent with past pharmaceutical merger settlements, the FTC allowed the transaction to proceed subject to the parties divesting the overlapping products.^[70] But Commissioner Chopra, joined by Commissioner Slaughter, dissented, criticising the FTC’s long-standing approach.^[71] Specifically, Commissioner Chopra argued that ‘the FTC’s record when it comes to reviewing pharmaceutical mergers suggests that the agency will simply never seek to block a merger. Instead, the agency’s approach is to strike narrow settlements. This encourages market actors to propose even more unlawful mergers.’^[72] Commissioner Chopra expressed concern that ‘mergers involving companies competing across a large number of product lines can exacerbate the risk of collusive conspiracies’.^[73] Given that Commissioner Chopra is now in the majority, it is an open question whether future pharmaceutical mergers involving overlaps are likely to be settled.

Illumina/Grail

Another example is the FTC’s challenge to Illumina Inc’s US$7.1 billion proposed acquisition of Grail, Inc.^[74] Illumina and Grail are in a vertical relationship. Illumina is the sole provider of a critical input (DNA sequencing) for Grail’s non-invasive, early detection liquid biopsy test. After a bipartisan vote (4-0), the FTC sued on 30 March 2021, on a vertical theory that Illumina could raise Grail’s rivals’ costs. This represents the FTC’s first litigated vertical merger challenge in a generation, and the first litigated vertical merger since the VMG were published. Although the FTC initially sought a preliminary injunction in federal court, it dismissed its federal complaint without prejudice because ongoing review by the European Commission prevents the parties from closing the transaction.^[75] In a surprise move, the parties consummated the merger notwithstanding the EC’s ongoing review. At the time of writing, the matter is in FTC administrative litigation with an administrative trial that started on 24 August 2021.^[76]

7-Eleven/Speedway

Perhaps the most vivid illustration of lack of predictability in merger review is the FTC’s approach to 7-Eleven, Inc’s acquisition of Speedway, LLC.^[77] In August 2020, 7-Eleven sought to acquire Speedway for US$21 billion, adding over 3,800 stores.^[78] The review appeared to proceed smoothly at the FTC staff level. After four extensions of the timing agreement in February (twice), March, and April 2021, the FTC staff identified overlaps and negotiated a settlement for 7-Eleven to divest 293 fuel outlets.^[79] The FTC staff, including then-BC leadership, recommended that the Commission accept the divestitures and allow the deal to close.^[80]

Then there was a breakdown at the Commission. On 11 May 2021, then-Acting Chairwoman Slaughter and Commissioner Chopra asked for more time to review the settlement. 7-Eleven refused, and closed on 14 May, but stated that it planned to divest the 293 outlets consistent with the settlement it had negotiated with FTC staff.^[81] Then-Acting Chairwoman Slaughter and Commissioner Chopra released a statement criticising the ‘illegal deal’ and promising to continue the investigation.^[82] Commissioner Wilson and Commissioner Phillips issued their own statement:

There is no good reason for the Commission to be in this mess. This deal was announced last August, the better part of a year ago. . . . That left plenty of time for staff – who, since late January, have worked at the direction of the Acting Chairwoman – and the parties to negotiate a resolution. . . . [W]e have been given no information suggesting the parties failed to work constructively with staff to negotiate a timely and effective resolution. Yet the Commission is opting to permit the transaction to close without a remedy in place.^[83]

In late June, the FTC accepted the settlement with minor changes,^[84] but the entire sequence surprised outside observers.

Utah Natural Gas Pipeline

Pfizer/Mylan, Illumina/Grail, and 7-Eleven/Speedway occurred prior to Chair Khan assuming leadership. At the time of writing, the most significant resolution under her leadership related to a proposed natural gas pipeline transaction in Utah. Berkshire Hathaway Energy Company’s Kern River Gas Transmission Pipeline attempted to acquire Dominion Energy, Inc’s Questar Pipeline in Utah.^[85] This acquisition, according to the FTC, would have been a merger to a monopoly.^[86] In 1995, the FTC had blocked the same transaction.^[87] The parties abandoned their deal after an FTC and Utah AG investigation.^[88] In response to the abandonment, Acting BC Director Holly Vedova stated that ‘it is disappointing that the FTC had to expend significant resources to review this transaction when we previously filed suit in 1995 to block the same combination.’ The FTC’s decision to block the transaction was unsurprising, but the rest of Vedova’s statement signalled that additional policy changes may be contemplated by the Commission. She further stated that ‘this is representative of the type of transaction that should not make it out of the boardroom. The Bureau of Competition will be actively exploring its options on how to curtail this type of re-review to better deploy the Commission’s scarce resources.’^[89]

The day before Vedova’s statement, the FTC announced an open meeting that included an agenda item to rescind a 1995 policy statement regarding ‘prior approval’ and ‘prior notice’ remedies in merger cases.^[90] Vedova’s statement appears to lay the ground work for the FTC to require, as a condition to settling merger investigations, that parties submit future transactions for the FTC’s prior approval. On 21 July 2021, by a vote of 3-2, the FTC rescinded the statement.^[91] Although it is too early to opine with certainty, firms that accept a robust ‘prior approval’ clause in settlements with the FTC may find that the burden of proof for future mergers is effectively reversed. The FTC could require that firms demonstrate that any proposed transaction is procompetitive, rather than the FTC being required to prove that the merger is anticompetitive.

Other merger enforcement actions in the first six months of the Biden administration have been more traditional. The most significant is the DOJ’s challenge to Aon plc’s proposed acquisition of Willis Towers Watson plc for about US$30 billion.^[92] Aon and Willis are the second and third largest insurance brokers in the world, and two of the so-called ‘Big Three’. Insurance brokers help to match businesses with the right insurance policies, and the DOJ alleges that large, sophisticated businesses need the Big Three to meet their needs. In mid June, the DOJ sued to block the transaction in federal court in Washington, DC, alleging that the merger will eliminate significant head-to-head competition on price, quality and innovation.^[93] The DOJ defined five product markets, all around large buyers. While the case was set for trial in late 2021,^[94] the merging parties abandoned the transaction on 26 July 2021.^[95]

Notes