Merger control in the United States: overview
A Q&A guide to merger control in the United States.
The Q&A gives a high level overview of merger control, regulatory framework and regulatory authorities, relevant triggering events and thresholds in the United States. It also covers notification requirements, procedures and timetables, publicity and confidentiality, third party rights, substantive test, remedies, penalties, appeals, joint ventures and proposals for reform.
For information on restraints of trade, monopolies and abuses of market power in the United States, visit Restraints of trade and dominance in the United States: overview.
This Q&A is part of the global guide to competition and cartel leniency. For a full list of jurisdictional Merger Control Q&As visit www.practicallaw.com/mergercontrol-guide. For a full list of jurisdictional Restraints of Trade and Dominance Q&As visit www.practicallaw.com/restraintsoftrade-guide.
For a full list of jurisdictional Cartel Leniency Q&As, which provide a succinct overview of leniency and immunity, the applicable procedure and the regulatory authorities in multiple jurisdictions, visit www.practicallaw.com/leniency-guide.
Mergers are principally governed by section 7 of the Clayton Act, which prohibits transactions where "the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly." In addition, other substantive US antitrust laws can apply to transactions, such as sections 1 and 2 of the Sherman Act (prohibiting agreements in restraint of trade and monopolization respectively) and section 5 of the Federal Trade Commission Act (prohibiting unfair methods of competition).
Section 7A of the Clayton Act (Hart-Scott-Rodino Act (HSR Act)), and associated Rules form the pre-merger notification regime. This requires that parties to transactions meeting certain thresholds file HSR notification forms with the Federal Trade Commission (FTC) and the Department of Justice (DOJ) and observe a statutory waiting period prior to closing the transaction.
At the federal level, mergers are reviewed by the FTC and the Antitrust Division of the DOJ. HSR filings are required to be made with both agencies, which (if not cleared summarily) go through a "clearance" process to allocate matters within the expertise or interest of either agency. In addition, several specialist agencies address competition issues as part of their own reviews, including the Federal Communications Commission and the Federal Reserve Bank.
Although there is no separate notification process, transactions also may be reviewed by state attorneys general, who typically focus on competitive effects within the states.
All types of transactions are potentially subject to merger review. This includes both stock and asset acquisitions, mergers, joint ventures, minority investments and incremental investments. Note that the Hart-Scott-Rodino Act (HSR Act) is not jurisdictional: even if a transaction does not meet the HSR notification thresholds, it can still be reviewed by federal and state regulators.
HSR filings must be made, and the waiting period observed, for transactions meeting both "size of person" and "size of transaction" thresholds. Each year, the Federal Trade Commission adjusts the dollar thresholds in these tests based on changes in the US gross national product. The current thresholds were implemented on 20 February 2015.
Size-of-transaction threshold. Unless otherwise exempt under one of the many transaction type and asset class exemptions, acquisitions of assets or voting securities (or interests in an unincorporated entity) in excess of US$78.2 million may be subject to the HSR Act.
Size-of person threshold.Transactions valued at US$312.6 million or less will be subject to the HSR Act if the parties also meet the size-of-person thresholds. The size-of-person threshold is generally met where a person with annual net sales or total assets of US$156.3 million acquires a person with annual net sales or total assets of US$15.6 million, or vice versa. Transactions valued at more than US$312.6 million or more are subject to the HSR Act without reference to the size of the person, unless otherwise exempt.
Mandatory or voluntary
Where the applicable thresholds are met and the transaction is not otherwise exempt, notification is mandatory. Voluntary notifications are not accepted by the agencies.
Parties can file as soon as they have a signed agreement in the form of a definitive agreement or non-binding letter of intent. There is no mandatory time for making Hart-Scott-Rodino (HSR) filings, so long as notification and observation of the waiting period is made pre-closing.
There is typically no consultation with the agencies in advance of filing. However, this can occur either where:
There is ambiguity in the reporting question; in which case parties engage with the Federal Trade Commission's Premerger Notification Office (PNO).
The parties want to engage the agency substantively as early as possible to start the review faster.
Typically, the agencies engage with parties in these circumstances.
Responsibility for notification
Each party to the transaction must prepare and submit its own notification.
Notification is made to the FTC and the Antitrust Division of the Department of Justice.
Form of notification
The FTC prescribes the form of notification and revises the form from time to time. The FTC publishes the HSR form on its website (see www.ftc.gov/enforcement/premerger-notification-program/form-instructions).
The HSR filing seeks fairly high-level financial and corporate information, as well as copies of the agreement, financial documents, and internal company documents discussing the transaction. Unlike other jurisdictions, the filing does not require the parties to describe the industry or take positions on market definition or competitive effects.
The buyer must pay the filing fee, which ranges from US$45,000 to US$280,000 depending on the size of the transaction, although responsibility for the fee may be allocated differently by agreement between the parties. The current filing fees are as follows:
For transaction values greater than US$78.2 million but less than US$156.3 million: US$45,000.
For transaction values of US$156.3 million or more, greater but less than US$781.5 million: US$125,000.
For transaction values of US$781.5 million or greater: US$280,000.
Obligation to suspend
The transaction cannot be implemented before the HSR Act waiting period expires or is terminated. The agencies interpret "implementation" very broadly and have brought enforcement actions for "gun-jumping" (that is, implementation before clearance) where the parties take actions that prematurely transfer control or beneficial ownership of the target's business activities to the buyer, even where the transaction was not formally closed.
Procedure and timetable
If the Hart-Scott-Rodino (HSR) filing thresholds are met (see Question 2) the parties must observe the applicable waiting period before completing the transaction.
The typical HSR waiting period is 30 days and begins when both parties have filed. The HSR waiting period is shortened to 15 days for certain bankruptcy and cash tender offer transactions. In addition, in some cases the waiting period can be started with just the buyer's filing. This is most typically the case with open market purchases of a publicly traded security. However, it can occur in other types of transactions where there is no agreement with the target.
The agency has the following options during the initial waiting period:
Take no action and allow the waiting period to expire.
Grant early termination if requested by one of the parties and if the agency does not intend to investigate the transaction further.
Open a formal or informal investigation of the transaction.
An investigation in the initial waiting period usually takes the form of a voluntary request for information while the waiting period continues to run. The purpose of the voluntary request is to allow the agencies to conduct an initial investigation to determine whether to allow the waiting period to expire or conduct an in-depth investigation through issuance of a Request for Additional Information and Documentary Material ("Second Request").
In cases where additional time is required, but a full-blown Second Request investigation is not warranted, the parties can withdraw and resubmit the HSR Act filing ("pull and refile") once without payment of an additional filing fee. This procedure restarts the initial waiting period and gives the agency more time to complete its initial investigation.
For tender offers, the new rule deems that a HSR Act filing is automatically withdrawn if either:
A Schedule TO-A is filed with the Securities Exchange Commission (SEC) announcing the expiration or termination of a tender offer.
There is another public filing with the SEC, such as a Form 8-K, announcing the deal's termination.
In such an event, the parties are required to notify the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice (DOJ) of the SEC filing that triggered the automatic withdrawal.
If the reviewing agency issues a Second Request at the end of the initial waiting period, this has the effect of suspending the HSR waiting period until 30 days (ten for certain bankruptcy and tender offer transactions) following substantial compliance with the Second Request. Compliance is an extensive exercise, which can take anywhere from three to six months.
After the parties' compliance with the Second Request and the final waiting period (which may be extended by agreement), the reviewing agency may:
Close the investigation.
Allow the transaction to close subject to a settlement with the parties setting out specified remedies.
Seek a preliminary injunction in US District Court to block the transaction.
In order to suspend a transaction once the HSR waiting period has expired, the reviewing agency must seek a temporary restraining order (TRO) and preliminary injunction from the District Court. Parties typically stipulate to the TRO to allow the preliminary injunction proceedings to move forward on the merits. For FTC transactions, the FTC will simultaneously initiate its own administrative proceeding to rule on the legality of the transaction.
Under the FTC rules, this process, plus issuance of a final order by the Commission, takes at least 12 months from issue of the complaint. Therefore, as a practical matter, if the FTC is successful in obtaining a preliminary injunction, parties often abandon their transaction. For DOJ transactions, the DOJ will seek a final injunction against the transaction at the same time as applying for the preliminary injunction, and these proceedings are often combined. Completion of this process through court order can take anywhere from six to nine months from issue of the complaint.
For an overview of the notification process and investigation process, see flowchart, Merger notification flowchart: United States ( www.practicallaw.com/5-504-6458) .
Publicity and confidentiality
By statute, Hart-Scott-Rodino (HSR) filings are confidential. However, grants of early termination are published. Accordingly, where confidentiality is important parties typically will not request early termination and opt instead to observe the full waiting period.
Where early termination of the waiting period is not granted, no information is or may be made public. This information includes the parties' names and the fact that filings were made.
HSR filings can be made on a letter of intent before a definitive agreement has been executed. The agencies are required to keep the transaction confidential. However, when the reviewing agency conducts its initial investigation, agency market inquiries may result in news about the transaction leaking to the market.
If the transaction is ultimately challenged, there will be a public record of the matter and of the court filings made in the case.
Confidentiality on request
Parties can request confidentiality for additional materials submitted in investigations, and these are not made available to third parties or the public. HSR materials are not subject to Freedom of Information Act requests. In transactions that are litigated, parties can request that court submissions, evidence and even the Court's decision are redacted to protect confidential information.
Rights of third parties
The agencies will often solicit third parties' views as a normal part of the investigation. These can include customers, competitors and others.
Access to documents
Third parties are not given access to documents or information developed in the investigation unless the parties give consent or there are special circumstances, such as court proceedings where evidence compiled in the course of the investigation may be placed into the public record.
Where the agency does not affirmatively request third party representations, views or input, parties can come forward on their own accord to give those views to the agency. The agencies are typically very responsive to these requests and allow the party to be heard. The weight the agency gives third-party views depends on several factors, including who they are. Customer views, for example, are typically given more weight than competitor views.
Section 7 of the Clayton Act prohibits mergers "in any line of commerce or in any activity affecting commerce in any section of the country" where "the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly."
The Federal Trade Commission and Department of Justice have issued Horizontal Merger Guidelines (most recently updated in 2010) that outline the main analytical techniques, practices, and enforcement policies the agencies use to evaluate mergers and acquisitions involving actual or potential competitors (www.ftc.gov/sites/default/files/attachments/merger-review/100819hmg.pdf).
The Guidelines stress that merger analysis is flexible and does not use a single methodology; rather, the agencies will use a variety of tools to analyse the available evidence in determining whether a merger may substantially lessen competition.
Notably, the Guidelines explain that "market definition" is not an end itself or a necessary starting point for a merger analysis, and that market concentration is a tool that is useful to the extent it illuminates the merger's likely competitive effects. When challenging a transaction in court, however, the agencies have continued to allege relevant markets and rely on structural presumptions.
The Guidelines outline the agencies' analysis of competitive effects as "unilateral" (reduction of competition through the merger of two parties alone) or "coordinated" (diminished competition by enabling or encouraging post-merger coordinated interaction among firms in the relevant market). There is also discussion of common defences, such as the presence of powerful buyers in a market, entry, efficiencies and failing firm. The Guidelines do include material on market shares and Herfindahl–Hirschman Index screens, but in practice these tools are less informative of potential outcomes.
There are several substantive arguments that are available to counter competition concerns. These are discussed in the Horizontal Merger Guidelines and include:
Market definition. Based on substitution evidence, parties may argue that markets are broader than alleged, so that additional participants are included in the market and the parties' relative competitive significance is lowered. Conversely, defining the parties' areas of activity by narrower markets may exclude or limit areas of overlap.
Powerful Buyers. The agencies consider the possibility that powerful buyers may constrain the ability of the merging parties to raise prices. This can occur, for example, if powerful buyers have the ability and incentive to vertically integrate upstream or sponsor entry, or if the conduct or presence of large buyers undermines coordinated effects.
Entry. Parties may argue that barriers to entry to the relevant market are low so that entry would be timely, likely to occur, and sufficient to counter any anti-competitive price increases. Such arguments are most effective in industries with a history of entry and low switching costs for customers.
Efficiencies. Competitive effects may be balanced by pro-competitive effects in the form of cost-savings or other efficiencies that will be passed on to customers. In order to be cognizable, efficiencies must be reasonably verifiable and merger-specific. Speculative efficiencies, or efficiencies that could be attained without the transaction, will not be credited. In addition, efficiencies will rarely save a transaction with significant competitive effects.
Failing firm. See Question 9).
A failing firm defence, and to a lesser extent a "flailing firm" defence (in the case of a competitor firm that has become weakened or less effective, but not failing), is available. However, it is a difficult argument to raise successfully. For the agencies to recognise the defence, the evidence must convincingly establish that:
The firm would not be able to meet its financial obligations in the near future.
It would not be able to successfully reorganise in bankruptcy.
The firm made good-faith efforts to elicit alternative offers that would keep the assets in the market and pose less danger to competition than the proposed transaction.
Remedies, penalties and appeal
The agencies recognise that effective merger remedies can include structural remedies, conduct remedies or some combination of each. Each can be used to preserve competition in the appropriate circumstances. However, the agencies have a preference for structural remedies involving the divestiture of assets or the sale or licensing of intellectual property rights, as these are relatively easy to administer and most likely to preserve competition. At a minimum, the divestiture must restore competition lost through the transaction and be a viable business in the hands of the buyer.
Conduct remedies that direct aspects of the merged firm's post-completion business conduct are used less frequently as they are more complicated to administer and monitor. However, they can be appropriate in certain cases, for example, vertical cases.
Agreeing to a remedy and moving to final consent decree is typically a time-consuming process that can add two to three months to the process. In addition, the Federal Trade Commission in particular typically requires that a buyer of the divestiture be identified and approved prior to acceptance of the consent order, which also can impact timing.
Although remedies can be offered at any stage, remedies are most commonly agreed in a settlement and memorialised in a court-ordered consent decree during or after Second Request compliance. Offering robust remedies early in the investigation is a strategy that can expedite the review and settlement in some cases.
Failure to notify correctly
Failure to file notification when required can result in a statutory penalty of up to US$16,000 per day for the time of the violation. However, the extent of the penalty often depends on the circumstances of the case. First-time and inadvertent offenders are likely to be penalised less or sometimes not at all, while intentional or repeat offenders can receive stiff penalties. The agencies are not afraid to impose the maximum penalty in particularly serious cases.
Implementation before approval or after prohibition
Before the transaction has cleared the merger review process, no party to a proposed transaction can, actually or in effect (HSR Act):
Combine any activities of the businesses.
Exercise any attributes of beneficial ownership over either the totality of the businesses or over the other party's business.
That conduct is regarded as either:
Making the acquisition before the date when the HSR Act would permit it.
A violation of either:
section 1 of the Sherman Act, which prohibits agreements that unreasonably restrain trade; or
section 5 of the Federal Trade Commission Act (FTC Act), which prohibits unfair methods of competition.
Premature implementation of a transaction (gun-jumping) even where a filing was properly made can result from a range of activities, including:
Overzealous integration planning activities.
Exercise of approval rights under conduct of business provisions.
Actions of sales people in relation to customers.
The agencies are active in enforcement in this area. In a recent enforcement action, the Department of Justice obtained US$1.9 million penalties from each party (a total of US$3.8 million), as well as disgorgement of profits of US$1.1 million from the party that benefited from the gun-jumping conduct. (See United States v Flakeboard America Limited et al, Case No. 3:14-cv-4949.)
Failure to comply with consent decree
Failure to comply with the terms of a consent decree settlement can constitute an order violation and subject the parties to penalties and other relief under section 5(l) of the FTC Act (for FTC orders) or contempt proceedings (for DOJ consent orders entered by a District Court). In addition, the consent decree itself may include provisions for appointment of monitors, trustees and/or requirements to divest alternative assets ("crown jewels") if the initial divestiture fails.
Rights of appeal
All aspects of orders made by the Federal Trade Commission or by a District Court (in the case of a Department of Justice transaction) are appealable. This includes restrictions relating to implementation of the transaction, divestiture orders and other remedial orders.
Appeals of FTC orders are made to the US Court of Appeals for the District of Columbia. Appeals of Federal District Court orders issued in DOJ cases are also made to the US Court of Appeals for the relevant circuit. Appeals must be made within 30 days of a decision. They can take up to six months or more to complete.
Third party rights of appeal
Third parties do not have standing to intervene or to seek the overturning of a decision on the merger in a challenge brought by the agency. However, they can bring their own case against the transaction.
Automatic clearance of restrictive provisions
Merger review is not a clearance process. The agencies retain jurisdiction to challenge any transaction after completion of the review process. Therefore, any potentially anti-competitive provisions remain subject to challenge. These challenges are most likely in cases where the provisions at issue result in actual anti-competitive effects after the transaction is implemented.
Regulation of specific industries
There are exemptions to the notification requirements for certain banking transactions. Transactions requiring approval under section 1843 of title 12 or section 1464 of title 12 are exempt from notification if copies of information and documentary material filed with the regulatory agency are also filed with the agencies 30 days before closing.
Telecommunications transactions are reviewed concurrently by the Federal Communications Commission.
The agencies jointly issue guidelines relating to their review of horizontal mergers. The latest iteration was issued in 2010. (See Question 7.) The most recent guidelines on vertical mergers were issued in 1997. In addition, the agencies have issued specific guidance relating to transactions in certain industries, such as health care. All guidelines are available on the agencies' websites (see www.justice.gov/atr/public/merger-enforcement.html).
Joint ventures are subject to notification where the Hart-Scott-Rodino (HSR) thresholds are met. HSR analysis of joint venture formation can be complex and depends on the structure, assets being contributed, and resulting ownership of the venture.
Substantively, the agencies examine joint ventures similarly to mergers, though ancillary issues can also arise. These can relate, for example, to ensuring that the joint venture is not utilised as a conduit for the flow of competitively sensitive information from one party to the other.
The US federal anti-trust authorities have several bilateral agreements with anti-trust agencies in other jurisdictions, including Australia, Brazil, Canada, Chile, China, Colombia, Germany, European Union, India, Israel, Japan, Mexico, and Russia. The legal basis for cooperation ranges from memoranda of understanding to formal cooperation agreements. A complete list of agreements with links is available on the agencies' websites (see www.justice.gov/atr/public/international/int-arrangements.html).
In addition, the Federal Trade Commission and Department of Justice participate in the Organization for Economic Co-operation and Development and the International Competition Network, sharing best practices on merger investigation procedure and substance.
Notable recent mergers and proposed mergers reviewed by the regulatory authority include:
Sysco's attempted acquisition of US Foods. This proposed US$3.5 billion merger of two national broadline food distributors was signed in December 2013. After a lengthy investigation, and an offer by Sysco to sell assets to a third party to resolve competitive concerns, the Federal Trade Commission (FTC) brought proceedings challenging the deal in 2015. After a full evidentiary hearing, in June 2015 a District Court judge granted the FTC's preliminary injunction, finding that there was a reasonable probability that the proposed merger will substantially impair competition in the national customer and local broadline markets.
Comcast's attempted acquisition of Time Warner Cable. The proposed US$5.2 billion merger of two of the country's largest cable operators was reviewed concurrently by the Department of Justice (DOJ) and Federal Communications Commission (FCC). Although the parties proposed to sell off cable assets in local geographic markets in which they competed directly, the deal faced considerable concern from providers of content and streaming services, who would face a company controlling nearly 60% of the nation's broadband connections. In the face of the DOJ's decision to challenge the deal, the parties called off the transaction.
Applied Materials and Tokyo Electron. The proposed merger of two producers of semiconductor manufacturing equipment was reviewed by the DOJ. The merger would have combined the two largest competitors with the necessary know-how, resources and ability to develop and supply high-volume non-lithography semiconductor manufacturing equipment. The parties offered a remedy which was rejected, following which the parties called off their deal. During the investigation, the division cooperated with the Korean Fair Trade Commission, China's Ministry of Commerce, Germany's Federal Cartel Office and competition agencies from several other jurisdictions.
Proposals for reform
There has been ongoing discussion concerning the different procedures and standards for Federal Trade Commission and Department of Justice merger challenges, which has resulted in the introduction of the Standard Merger and Acquisition Reviews Through Equal Rules (SMARTER) Bill (H.R. 5402) to Congress. There is no clear timeline for the passage of this legislation.
Federal Trade Commission (FTC)
Description. This is the official website of the FTC Bureau of Competition. It is updated regularly and available in English only.
Department of Justice (DOJ)
Description. This is the official website of the US DOJ, Antitrust Division official website. It is updated regularly and available in English only.
The regulatory authority
United States Department of Justice (US DOJ), Antitrust Division
Head. William J Baer (Presidential Appointee)
Contact details. 950 Pennsylvania Avenue, Washington, DC 20530-0001
T +1 202 514 2558 (Premerger Notification Unit)
F +1 202 514 2363 (Premerger Notification Unit)
Outline structure. The Antitrust Division is organised into several units, each with specific subject area responsibility, including:
- Networks and technology enforcement.
- Telecommunications and media enforcement.
- Transportation, energy and agriculture.
- National criminal enforcement.
- Economic analysis group.
- Appellate section.
- Pre-merger notification.
- Foreign commerce.
- Legal policy.
- Regional offices.
In addition, there are several specialised litigation sections that have primary responsibility for specific industries and commodities. There is some overlap in industry specific expertise between the Federal Trade Commission and the US Department of Justice, Antitrust Division. Therefore, it is not always immediately clear which agency will investigate a particular transaction.
Responsibilities. The mission of the Antitrust Division is to promote economic competition through enforcing and providing guidance on anti-trust laws and principles.
Procedure for obtaining documents. Publicly available documents are available on the agency's website.
Federal Trade Commission (FTC)
Head. The Commission is headed by five commissioners that serve a seven-year term. They are nominated by the President and confirmed by the Senate. No more than three commissioners can be from the same political party. The President chooses one commissioner as chairman. The post is currently held by Chairwoman Edith Ramirez. The other commissioners currently are Julie Brill, Tyrell McSweeney, Maureen K. Ohlhausen and Joshua D. Wright.
Outline structure. The FTC is organised into the following two main units:
- Bureau of Competition.
- Bureau of Consumer Protection.
The Bureau of Competition is responsible for mergers. The bureau is further organised into several smaller units with specific industry area expertise, plus regional offices. There is some overlap in industry specific expertise between the FTC and the US DOJ, Antitrust Division. Therefore, it is not always immediately clear which agency will investigate a particular transaction.
Responsibilities. The FTC's mission is to:
- Prevent business practices that are anti-competitive, deceptive or unfair to consumers.
- Enhance informed consumer choice and public understanding of the competitive process.
- Accomplish this without unduly burdening legitimate business activity.
The Bureau of Competition seeks to prevent anti-competitive mergers and other anti-competitive business practices.
Procedure for obtaining documents. Publicly available documents are available at the agency website.
Lisl Dunlop, Partner
Manatt, Phelps & Phillips, LLP
Professional qualifications. Partner admitted in Supreme Court of the United States; New York; District of Columbia; US District Court, District of Columbia; US District Court, New York, Eastern District; US District Court, New York, Southern District; US Court of Appeals, Second Circuit; Solicitor, England and Wales; Solicitor, New South Wales, Australia
Areas of practice. Antitrust; health care; pharmaceuticals; financial services; media and entertainment; manufacturing.
Non-professional qualifications. Cornell University Law School, LLM; University of Sydney, BSc, LLB
Professional associations/memberships. ABA Section of Antitrust Law; Member, International Task Force; ABA Section of International Law, Chair, International Antitrust Committee, Liaison to Section of Antitrust Law; New York State Bar Association, Antitrust Section, Vice Chair; American Health Lawyers Association.