In an August 3 blog post, the Federal Trade Commission (FTC) announced a change to the FTC’s merger review process with potentially far-reaching effects. Emphasizing the agency’s constrained capacity resulting from a “tidal wave” of merger notifications, Acting Bureau of Competition Director Holly Vedova explained that for transactions that FTC staff cannot fully investigate in the initial 30-day Hart-Scott-Rodino (HSR) waiting period but believes may raise competitive concerns, the staff will issue a warning letter before the waiting period expires. Those letters will inform merging parties that the FTC’s investigation remains open, and that if the parties choose to close their transaction, they do so at their own risk of a post-closing investigation. The blog post specifies that issuance of such a letter does not mean that the FTC has determined that the deal is unlawful.

Implications of the FTC’s New Policy

The new policy comes while the agencies are seeing a surge in merger notifications. In the first three quarters of the government’s fiscal year 2021, the “antitrust agencies have processed over 2,400 transactions” reportable under the HSR Act, already more than the total number of transactions received in any year since 2000, when the HSR thresholds were adjusted.¹ Between January and July of calendar year 2021, there were 2,067 HSR filings, suggesting total filings for the calendar year could be as high as 3,500.² The policy change also occurs against the backdrop of the FTC’s request to Congress for additional enforcement resources,³ and the Biden – Harris Administration’s call for more aggressive antitrust enforcement.⁴

Under the HSR Act, companies are required to notify the FTC and the Antitrust Division of the Department of Justice (DOJ) of transactions meeting certain thresholds. Currently, transactions over $92 million are potentially reportable, assuming no exemptions apply. Once an HSR notification is made, the agencies have an initial 30 days, during which the parties are prohibited from closing, to investigate and determine whether additional information is required in order to assess whether the transaction may substantially lessen competition. If the reviewing agency determines that there are grounds for a more extensive review, it issues a request for additional information (Second Request) or, in some cases, the parties “pull and refile” their notification to give the agency another 30 days for the review and try to avoid or narrow a Second Request, a typically enormous call for documents and data.

The FTC staff’s new policy represents a potentially significant change in the merger review process. Until now, in the vast majority of HSR reviewable mergers, the FTC determined its level of concern about a merger during the initial waiting period: it would either terminate or allow the waiting period to expire, or it would issue a Second Request. When the staff was not ready to allow the waiting period to expire but a full-blown Second Request investigation might not be necessary, parties were given the opportunity to withdraw and refile their HSR notification, opening a second 30-day waiting period. In each scenario, the review was intended to analyze every reportable transaction only once—before closing.

Although the antitrust agencies have always been free to reinvestigate reportable transactions where they took no action during the initial waiting period, such investigations have been extraordinarily rare.⁵ As a result, parties to notified transactions that did not receive a Second Request could rest assured that—barring extraordinary circumstances—they could close their transaction free from a significant threat of a post-closing investigation or challenge. Parties receiving a warning letter, however, will not get the benefit of this near certainty. They will be put in a position of either closing their deal under the shadow of a post-closing investigation⁶ or delaying closing their deal, without the discipline on the FTC of a defined time limit for its investigation (since the initial waiting period has expired).

Practical Considerations for Future Merger Review

The FTC’s new policy represents a marked departure from tradition and has significant practical implications for the merger review process going forward.

• Greater uncertainty. Traditionally, in the United States, if a deal was reviewed and the 30-day waiting period expired, the parties could close with very little likelihood of future challenge. Although the enforcement agencies have the authority to reopen investigations after the HSR waiting period has expired, post-HSR review challenges have been very uncommon.⁷ Now, the FTC staff is explicitly warning that it may continue to investigate specific transactions that were notified and reviewed.

  The FTC staff’s new policy is in keeping with a broader trend toward less certainty in merger review processes. For example, under the European Commission’s (EC) new Guidance on Article 22 of the EU Merger Regulation, the EC will accept case referrals from Member States even for transactions that are not reportable in that Member State under its national law. Thus, a transaction can be reviewed by the EC even though it was not reportable to the EC or any Member State. The new guidance has already led to an EC review of Illumina’s proposed acquisition of Grail, even though the transaction did not meet the EC Merger Regulation’s revenue thresholds and was not reportable in several Member States that sought a referral to the EC.⁸ Here again, a policy change has created additional uncertainty because merging parties can no longer rely on the fact that an unreportable transaction will not ultimately be reviewed by the EC.

• Delays in review. Given the sheer volume of filings, a transaction may not be thoroughly reviewed during the initial waiting period and parties may not have significant agency engagement before the issuance of a warning letter or a Second Request. A warning letter will delay closing where parties are unwilling to risk consummation in the face of an explicit warning about a possible continuing investigation. Therefore, parties to transactions should:
  
  • Be prepared for the potential for a longer review timeline, even for transactions that raise no substantive antitrust concerns.
  • Consider the possibility of receiving an unexpected, eleventh-hour warning letter or Second Request in deciding whether to affirmatively reach out to FTC staff to engage before the expiration of the initial waiting period. Early engagement may increase the likelihood that FTC staff will focus on the transaction and reach a conclusion during the initial review period.
• Renewed focus on antitrust-related deal terms. Parties should also review their transaction agreements—including the closing conditions—and consider whether a warning letter may implicate a seller’s ability to force closing or the buyer’s ability to suspend it. Ultimately, whether a party will want to affirmatively address this possibility in a transaction agreement will depend on the circumstances, including deal risk and negotiation leverage. For example, in a matter raising no substantive antitrust concern, the buyer may be comfortable with committing to close over a warning letter, whereas in a matter raising potential concern, the buyer likely will have greater interest in retaining flexibility to postpone closing until the trajectory of the ongoing FTC investigation becomes clearer.

Conclusion

The new FTC warning letter is a significant change from prior practice, with potentially far-reaching implications for certainty in an FTC merger review. Procedural predictability and repose have long been strengths of the US merger review process, and it is therefore unsurprising that some observers have raised concern that the FTC’s new policy, together with other HSR-related changes such as the ongoing suspension of grants of early termination and introduction of “advance notice” provisions in consent decrees,⁹ will gradually weaken the pillars of an HSR merger review framework that has generally worked well.¹⁰

Whether these concerns are realized will depend on how frequently the FTC issues warning letters, how often the FTC takes enforcement actions in matters where warning letters have been issued, and how transparently the FTC deals with parties both before and after issuing warning letters. It also remains to be seen whether the DOJ will implement a similar policy for mergers it reviews. In the meantime, merging parties should consider early in transaction planning how they would respond to a warning letter, whether that expected response should be reflected in the deal agreement, and whether the possibility of a warning letter changes the calculus for early engagement with FTC staff.