The Return of Prior Approval
Earlier this week, the Federal Trade Commission officially reinstated the practice of including “prior approval” requirements in consent orders settling merger investigation cases by the Commission (the 2021 Statement), the latest indication that the FTC under Chair Lina M. Khan intends to tighten its grip further on merger control.
Going forward, all FTC merger divestiture orders will purportedly impose on the acquiring party a requirement to obtain prior approval from the FTC for any acquisition, regardless of size, affecting the relevant market(s) for which a violation was alleged in that order, for a minimum of ten years. The 2021 Statement further provides a non-exhaustive list of factors that may lead the Commission to seek prior approval for transactions beyond the relevant product and geographic markets subject to the original order. The guidance was initially issued without allowing the minority commissioners the opportunity to release a simultaneous dissent, as is historical practice—although the FTC claimed this was done in error and subsequently will include the dissent once it is received from the minority commissioners.
Contemporaneous with the release of the 2021 Statement, the FTC also approved the first new consent order containing a prior approval provision under the new policy, In the Matter of DaVita Inc. and Total Renal Care, Inc., File No. 211-0013. Following its investigation into DaVita Inc.’s acquisition of the University of Utah Health’s dialysis business, the FTC issued a proposed order requiring DaVita to divest three of the clinics, in addition to requiring DaVita to “receive prior approval from the FTC before acquiring any new ownership interest in a dialysis clinic anywhere in Utah for a period of ten years.” The commissioners unanimously voted in favor of the proposed order with DaVita, despite a partisan split on the question of whether prior approval should be resurrected more broadly for all future orders.
These developments continue a series of quite significant policy shifts made in just the first three months of Chair Khan’s tenure. The FTC’s return to the practice of requiring prior approval in merger cases injects greater uncertainty for merging parties, further contributing to the potential chilling effect for mergers and acquisition activity from earlier FTC statements and policy pronouncements under Khan. Over time, the prior approval practice also could create a shadow merger review regime completely outside the Hart-Scott-Rodino (HSR) process, in which deals that are “non-reportable” under the HSR Act but that involve certain companies are dealt with in summary fashion by the FTC without the HSR Act’s procedural guardrails.
The Restoration of Prior Approval
In 1995, under a Democratic Chair, the FTC issued a bipartisan policy statement rescinding the practice of broadly incorporating prior approval and prior notice provisions in Commission orders addressing mergers (the 1995 Statement). The FTC explained that the HSR Act had “proven to be an effective means of investigating and challenging most anticompetitive transactions before they occur,” and thus found the HSR process adequately protects “the public interest in effective merger enforcement, without being unduly burdensome.” The Commission, however, preserved the option of requiring prior approval in a narrow set of possible circumstances (e.g., if there was a credible risk that a company would attempt the same merger already reviewed by the agency).
In July 2021, the current Commission voted along party lines to rescind the 1995 Statement and return to the practice of routinely requiring merging parties subject to a Commission order to obtain prior approval from the FTC before closing any future transaction affecting each relevant market for which a violation was alleged. (The two Republican commissioners emphatically opposed the rescission, voicing concern that it would result in increased uncertainty and the chilling of procompetitive deals, as well as a shifting of the burden of proof to the parties which “offends longstanding notions of due process and fairness.”)
In the 2021 Statement, the Commission reasoned that the practice of prior approval is a mechanism that can preserve FTC resources (e.g., limited staff), prevent deals that “should have died in the boardroom,” and detect “anticompetitive” deals which are not HSR reportable. Notably, and in a remarkable break from past practice, the 2021 Statement also sets forth an intention to seek prior approval orders (presumably without the relevant parties’ consent) even in some cases where merging parties abandon a transaction, whether they abandon at some point before compliance with a Second Request (which the Statement describes as “less likely”) or at any subsequent point, including after the filing of a complaint to challenge a transaction. The Commission noted that its intention to seek these orders should signal to merging parties that it is “more beneficial to them to abandon an anticompetitive transaction before the Commission staff has to expend significant resources investigating the matter.” Although parties to transactions that will require consent orders should be aware of the potential for prior notice requirements, it is not clear the extent to which the FTC would actually have the authority to unilaterally impose prior approval orders on parties to abandoned transactions.
Notably, the Department of Justice Antitrust Division takes a narrower approach to transactions involving parties subject to their orders, observing that there are instances where prior notice requirements in orders may be appropriate (i.e., where DOJ has notice and some period to investigate and potentially bring a challenge, but without pre-approval provisions). DOJ policy generally limits this to instances where there are competitors to the parties whose acquisition may not be HSR reportable and there is reason to believe the acquisition of these competitors may be competitively significant. That view more closely tracks with the FTC’s 1995 Statement, as opposed to the sweeping approach set forth in the 2021 Statement—and that creates a gulf in enforcement policy between the two U.S. antitrust agencies. (U.S. Department of Justice, Antitrust Division, Merger Remedies Manual, at VI. F. (Sept. 2020).)
The proposed order and the Commission’s 2021 Statement preview the future of all FTC divestiture orders moving forward.
With the return of prior approval provisions in all FTC merger consent orders, merging parties should consider the following when evaluating the antitrust risk for a potential transaction:
- This development follows the recent trend of shifting the burden from the FTC to merging parties. The very broad FTC guidance on when prior approval will be sought in consent orders portends an extensive use of such provisions and further burdens the merging parties to advocate against the use of such provisions.
- For transactions where a divesture order is likely, a prior approval provision is all but guaranteed, potentially burdening future transactions the acquiring company might enter into for a minimum of 10 years. As noted above, the FTC highlighted its intent to seek prior approval provisions against companies which expend “significant” FTC resources (e.g., as early as a Second Request issuance), regardless of whether the parties abandon the transaction. This makes “fix it first” strategies (which can eliminate the need for entering into a consent order) optimal for such transactions and highlights the potential benefit of engaging antitrust counsel early in the deal process.
- The FTC’s new prior approval policy creates a significant disparity between the potential outcome of an antitrust investigation conducted by the DOJ versus the FTC, and can have an impact on deal strategy, particularly as it relates to settlement negotiations for divestiture orders. This effect should be discussed with antitrust counsel early in the deal process, as deals in certain industries are more likely to be handled by the FTC than by DOJ.
- Because the FTC’s 2021 Statement limits neither the length nor the scope of a prior approval provision, the use of these provisions in divestiture orders eventually could render the idea of non-reportable deals by certain companies obsolete and create a merger control regime parallel to—and completely outside of—the HSR process.
- As with other recent policy shifts, according to the Commission, one of the stated reasons for seeking prior approval is to conserve limited FTC resources. Despite this claim, the reintroduction of prior approval could complicate final order negotiations with the FTC and lead to an increase in merger litigation. It also potentially will require the FTC to review a significantly greater number of deals, further burdening an already taxed FTC staff. This suggests a possibility that the 2021 Statement, together with certain other actions by the FTC, may be designed primarily to chill merger activity overall, without regard to traditional antitrust principles.
- At the very least, a prior approval provision will increase costs for merging companies subject to such requirements and lengthen their timelines for future mergers and acquisitions when a transaction falls outside HSR thresholds. This affects small and large transactions alike and will need to be reflected in outside dates and risk-shifting provisions.