A new era of antitrust in the U.S.?: FTC and DOJ release draft merger guidelines

In a revamp of the guidance that informs the application of U.S. antitrust laws to mergers and acquisitions, the Federal Trade Commission (FTC) and Antitrust Division of the Department of Justice (DOJ) have published draft Merger Guidelines (the guidelines) that are expected to meaningfully alter the regulatory landscape for U.S. business and foreign entrants alike.

What you need to know

• New presumptions. FTC and DOJ propose to reinstate—and lower—market share thresholds that, when exceeded, will give rise to a presumption that a combination “presents an impermissible threat of undue concentration”. Specifically, the agencies will presume that a combination is anti-competitive in many instances where one party has at least a 30% percent market share.
• New formula for market concentration. The proposal would also alter the agencies’ analysis of market concentration calculated using the Herfindahl-Hirschman Index.
• Focus on “pattern or strategy of serial acquisitions”. The U.S. antitrust agencies advise that they may evaluate a pattern or strategy of serial acquisitions by an acquiring firm (e.g., a private equity roll-up strategy), which would be subject to challenge “even if no single acquisition on its own” is anti-competitive.

A new competitive analysis approach for transactions

The FTC and DOJ have issued a draft of revised Merger Guidelines for how they will review and assess whether M&A transactions may have the effect of substantially lessening competition, which are illegal under Section 7 of the Clayton Act. Reflecting an active agenda for the antitrust agencies, the draft guidelines follow on the heels of a proposed overhaul of the notification requirements for such transactions under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR).

The draft guidelines combine the agencies’ Horizontal Merger Guidelines, last updated in 2010, and the Vertical Merger Guidelines (first issued in June 2020 only to be withdrawn by the FTC a year later in September 2021). The revised guidelines, if and when adopted, will not impose new legal requirements on transaction parties, but will serve as a roadmap to analyze the competitive impact of transactions and whether the agencies are likely to challenge them. The proposed guidelines highlight the Biden Administration’s sustained effort to retool antitrust enforcement and memorialize a number of theories advanced by the government in recent merger challenges (which have been premised on the view that “antitrust laws reflect a preference for internal growth over acquisition”).

How will agencies assess transactions in the draft guidelines?

The key proposals in the draft guidelines include the following:

The agencies will presume that a combination is anti-competitive in many instances where one party has at least a 30% market share. For the first time since 2010, the FTC and DOJ propose to reinstate—and lower—market share thresholds that, when exceeded, will give rise to a presumption that a transaction “presents an impermissible threat of undue concentration regardless of the overall level of market concentration”. Specifically, the agencies threaten to challenge a transaction in which a company with a market share of at least 30% plans to combine with a company with a share as little as 2% of the same market. The anticipated presumption notably contrasts with the Canadian Competition Bureau’s Merger Enforcement Guidelines, according to which it generally will not challenge a merger under the Competition Act where the post-transaction market share is 35% or less.

The agencies will presume that a combination is anti-competitive in less concentrated markets than they do today. The proposal would alter the agencies’ analysis of market concentration calculated using the Herfindahl-Hirschman Index (HHI). In particular, the draft guidelines lower the threshold for what the FTC and DOJ would deem a “highly concentrated” market from 2,500 to 1,800. For comparison, the agencies today do not consider a market with five participants each holding a 20% share—yielding an HHI of 2,000—to be highly concentrated¹, meaning they are less likely to presume that a combination of two market participants would substantially lessen competition. Under the new guidelines, however, a combination of two players in this market likely would be challenged.

The agencies will presume that certain vertical transactions are anti-competitive. The draft guidelines introduce market share thresholds to vertical transactions, despite the recognition that many such transactions have pro-competitive benefits. A transaction is “vertical” when the merging firms operate different levels of the same supply or distribution chain. According to the U.S. antitrust agencies, “[t]he primary vice of a vertical merger . . . is that, by foreclosing the competitors of either party from a segment of the market otherwise open to them, the arrangement may act as a clog on competition, which deprives rivals of a fair opportunity to compete”. If adopted, the agencies will presume that a vertical transaction is anti-competitive when it results in the combined company controlling more than a 50% “foreclosure share”, which is defined to mean “the share of the related market that is controlled by the merged firm, such that it could foreclose rival’s access to the related product on competitive terms”.

The agencies may assess a series of acquisitions in the aggregate. The FTC and DOJ advise that they may evaluate a pattern or strategy of serial acquisitions by an acquiring firm (e.g., a private equity roll-up strategy), which would be subject to challenge “even if no single acquisition on its own” is anti-competitive. In such circumstances, the agencies will consider whether the cumulative effect of the trend or strategy of serial acquisitions may result in a violation of the antitrust laws.

The agencies will consider whether a transaction may reduce competition in labour markets. Additionally, the new principles would, for the first time, reflect the agencies’ intention to consider whether a transaction may reduce competition in labour markets, such that it may “lower wages or slow wage growth, worsen benefits or working conditions, or result in other degradations of workplace quality”.

The agencies continue to acknowledge that transaction parties can rebut presumptions. Although the bulk of the proposal focuses on the agencies’ organizing principles to assess the anti-competitive effects of transactions, the draft guidelines acknowledge categories of evidence that would tend to rebut the presumption of an illegal merger, including: (1) the presence of a “failing firm” in the transaction, (2) the likelihood that the transaction would induce timely and sufficient entry of other participants into the market, (3) pro-competitive efficiencies, and (4) structural barriers to coordination that are unique to an industry or market.

What’s next?

Assuming the recently proposed changes to the HSR filing process are adopted, which will require parties to supply a competitive analysis of the reported transaction in a narrative form, parties will want to give thought to the benefits and pro-competitive effects of their prospective deals well in advance.

The FTC and DOJ are inviting public comments on the draft guidelines until September 18, 2023.