With COVID-19-related closures rolling in daily, you may have questions about the operating status of the federal government’s antitrust enforcement agencies. Currently, the HSR review process does not seem to be significantly impacted, although the agencies will not grant a request for early termination during this period (as noted in our recent update, the FTC will again process early termination requests as of March 30, though on a more limited basis and later in the process than historically provided). Unlike the government shutdowns in 2013 and 2018, all FTC and DOJ staff are working full time. In addition, the agencies have implemented a mandatory e-filing system for all HSRs.
Given that the agencies will continue to work full-time and that an e-filing system is in place, we think it is unlikely that there will be significant impact on timing for the vast majority of transactions, particularly where there is no competitive overlap between the transacting companies.
The Department of Justice Antitrust Division (DOJ) was active in 2019. At the beginning of 2019, the DOJ was preparing for trial in six matters and had 91 pending grand jury investigations. Throughout 2019, the DOJ made public several new investigations, including in the commercial flooring industry, online auctions for surplus government equipment, the insulation installation industry and suspension assemblies used in hard disk drives. The DOJ also announced developments in other ongoing investigations.
Meanwhile, the European Commission (Commission) entered into settlements with parties in three cartel cases: Occupant Safety Equipment, FOREX and Canned Vegetables. The Commission imposed total fines of €1,469 million in 2019. In March 2019, the Commission launched an online tool to submit documents and information in the context of leniency and settlement proceedings.
The potential for government investigation increases during periods of rapid and extreme movement in price. The US Department of Justice (DOJ) recently reiterated its focus on prosecuting violations of antitrust laws, especially in areas affected by the coronavirus outbreak. On March 9, 2020, the DOJ announced that individuals or companies engaging in price fixing, bid-rigging, customer or region allocation, or other antitrust violations could face criminal prosecution. Government scrutiny is likely to be even higher on companies that produce items for sale to federal, state or local governments, as the DOJ’s Procurement Collusion Strike Force acts as a dedicated watchdog over government contractors to prevent bid-rigging in government contracts. More information on the Strike Force is available here.
On March 3, 2020, the American Bar Association (ABA) hosted a Q&A with two members of the Procurement Collusion Strike Force (PCSF)—Mark Grundvig, the Assistant Chief of the DOJ Antitrust Division’s Criminal II section, and Marcus Mills, Special Agent, Major Fraud Investigations Division, USPS Office of Inspector General.
During the course of the Q&A, Mr. Grundvig and Mr. Mills provided their perspective on the goals and progress of the PCSF.
Last month, the Department of Justice Antitrust Division (DOJ) and Federal Trade Commission (FTC) released updated Vertical Merger Guidelines in draft form. These guidelines provide a useful resource for aerospace and defense contractors involved in M&A transactions. Vertical competition issues frequently arise in this industry given the nature of the supply base and contracting and supply relationships between companies operating at different levels of the supply chain.
This is the first time the antitrust agencies have released updated guidelines for analyzing vertical mergers since 1984. Although the agencies have updated the Horizontal Merger Guidelines several times since then (most recently in 2010), they have not provided similar updated guidance to businesses regarding vertical merger enforcement until now. The new guidelines summarize the practices, standards, and theories the agencies have used in evaluating vertical mergers for a number of years. Although the guidelines do not signal any shifts in current agency practice, they do provide the business community greater transparency about how the agencies analyze vertical mergers. This is helpful for the aerospace and defense industry, which is particularly susceptible to vertical competition issues given the heavy reliance on contracting out important elements at different levels of the supply chain.
Antitrust regulators in the United States and Europe were very active in the final quarter of 2019. The FTC and DOJ continue to investigate and challenge M&A transactions in a variety of industries. Events of this quarter highlight the importance of states in merger enforcement. As well, recent FTC activity highlights the regulators’ focus on preventing monopolists from buying nascent competitors.
In Europe, the UK CMA continues to expand its role as a key jurisdiction in the merger clearance process, which will only accelerate with Brexit. The EC agreed to clear, subject to conditions, acquisitions in the aluminum production and battery industries as well as in the wholesale supply and retail distribution of TV channels after conducting Phase II reviews. Moreover, the EC opened new in-depth investigations into transactions in the copper refining and engineering sectors.
The US Federal Trade Commission today announced increased thresholds for the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and for determining whether parties trigger the prohibition against interlocking directors under Section 8 of the Clayton Act.
Notification Threshold Adjustments
The US Federal Trade Commission (FTC) announced revised thresholds for the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR) pre-merger notifications on January 28, 2020. These increased thresholds will become effective on February 27, 2020. These new thresholds apply to any transaction that closes on or after the effective date.
For the first time since the Department of Justice Antitrust Division (DOJ) published non-horizontal merger guidelines in 1984, the DOJ and Federal Trade Commission (FTC) issued updated Vertical Merger Guidelines to explain how the antitrust agencies analyze vertical mergers. The guidelines were published in draft on January 10, 2020, and are now open for a 30-day public comment period.
WHAT HAPPENED:
The DOJ and FTC released draft guidelines outlining the principal analytical techniques, practices and enforcement policies the antitrust agencies will use to analyze vertical mergers and acquisitions. Vertical mergers combine firms or assets that operate at different stages of the same supply chain. For example, vertical mergers or acquisitions could combine companies such as:
a satellite maker and a payload provider;
an automaker and an aluminum supplier;
an automaker and an automotive retailer;
a filmmaker and a cable television company; or
a pharmaceutical company and a chemical company making active pharmaceutical ingredients.
The merging companies do not compete with each other, but rather work with each other through the supply of inputs, distribution or other business services. The draft guidelines are relatively limited in scope and do not significantly expand the theories and issues that US antitrust regulators have been applying to vertical mergers for several years. That said, having these theories on paper will provide helpful guideposts in assessing potential transactions. At the FTC, the two Democratic Commissioners abstained from voting to release the guidelines, issuing Dissenting Statements instead.
The draft guidelines rely on the well-established principles in the Horizontal Merger Guidelines on how to define product markets and measure concentration levels. The guidelines establish a safe harbor if the companies have a share of less than 20% in the relevant market(s), but set no presumption of anticompetitive harm if market shares are higher than that. The focus of these new draft vertical merger guidelines is on the competitive effects analysis and not on shares or any formulaic assessment. The basic concern is whether combining two companies at different levels in a supply chain will enable the combined company to lessen competition at one of the levels.
Unilateral Effects
First, the guidelines discuss potential unilateral anticompetitive effects from vertical mergers under two theories: (1) foreclosure/raising rivals’ costs and (2) access to competitively sensitive information.
Raising rivals costs / foreclosure. The first theory suggests that “[a] vertical merger may diminish competition by allowing the merged firm to profitably weaken . . . one or more of its actual or potential rivals in the relevant market by changing the terms of those rivals’ access to one or more related products.” Alternatively, the merged firm could refuse to supply rivals altogether, foreclosing their access to a necessary product or service. The guidelines lay out the following key conditions for a foreclosure theory:
The foreclosure makes it more difficult for the company that is foreclosed to compete effectively.
The newly merged firm is likely to win more business if it denies or disadvantages the [...]
Three recent antitrust merger reviews involving nascent competition demonstrate enforcers are paying close attention to acquisitions by industry leaders of emerging, but early-stage competitors. The US antitrust agencies have been criticized for allowing leading technology companies to extend their entrenched positions to multiple markets or technologies through acquisitions. We are now seeing regulators increasing their scrutiny of acquisitions of nascent competitors that were positioning themselves to challenge an entrenched, strong rival.
There was significant antitrust activity in the third quarter of 2019. In the United States, the Federal Trade Commission (FTC) and Department of Justice (DOJ) continued an active docket challenging M&A transactions. DOJ is resolving antitrust reviews significantly faster than the FTC, following DOJ’s 2018 policy establishing a six-month target. The DOJ also made use, for the first time, of its authority to arbitrate a market definition dispute, potentially opening the door for a new tool the DOJ could employ to resolve challenges more rapidly.
In the European Union, the European Commission (EC) agreed to clear, subject to conditions, the acquisition of broadband and energy networks following lengthy Phase 2 investigations. Meanwhile, the national European regulators opened new in-depth investigations into commercial radio advertising, software as a service for airlines, autonomous sea surface vehicles and the promotion of live music events (all in the UK) and prohibited the merger of two recyclers (Germany).
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