Fix-it-first: navigating a seismic shift in US antitrust agency approaches to merger remedies

August 2023  |  SPECIAL REPORT: COMPETITION & ANTITRUST

Financier Worldwide Magazine

August 2023 Issue

Until recently, the most common way that US antitrust agencies resolved competitive concerns regarding mergers was by agreeing to a consent decree including remedies. The merging parties might sell off overlapping assets or make commitments regarding future conduct to address agency concerns, but the transaction would be allowed to go forward. Businesses developed experience and understanding regarding how to craft remedies that would likely resolve the agency’s concerns. Senior officials at the US Department of Justice (DOJ) Antitrust Division and the US Federal Trade Commission (FTC), however, have made clear that they will no longer entertain or will sharply limit resolutions of merger investigations through consent decrees with remedies, preferring to challenge transactions outright. The agencies’ new positions on remedies have dramatically changed the US merger review landscape for transactions that potentially raise antitrust concerns, leading parties to such transactions to increasingly contemplate ‘fix it first’ strategies. With fix-it-first, the parties modify the transaction to address antitrust concerns, typically by entering an agreement with a third party to sell divested assets, without entering a consent decree with the agency. The agency then can either clear the transaction based on the remedy or litigate over the remedy’s adequacy, and sometimes over whether the transaction may lessen competition in the first place. A fix-it-first strategy may be a good way to navigate the agencies’ current antipathy toward negotiating remedies, but companies considering it should work closely with seasoned antitrust and deal counsel to carefully assess the potential benefits and risks of employing this approach in a particular transaction.

The US antitrust agencies’ antagonism toward negotiated remedies in merger cases is a new phenomenon. Prior agency regimes scrutinised remedy proposals extremely closely to satisfy themselves that the remedy, such as the asset package and proposed buyer for a divestiture, would fully replicate the intensity of pre-transaction competition. The agency remedy review process often led to significant changes in the proposed remedy as a condition to clearing the transaction with a consent decree. Nevertheless, a large proportion of those transactions that the agencies concluded otherwise would violate the antitrust laws were cleared through a negotiated remedy.

The antitrust agencies now have very different postures on merger remedies. In a January 2022 speech, Jonathan Kanter, assistant attorney general for the DOJ’s Antitrust Division, said that he was “concerned that merger remedies short of blocking a transaction too often miss the mark”. He added, “in my view, when the division concludes that a merger is likely to lessen competition, in most situations we should seek a simple injunction to block the transaction”. Since Mr Kanter’s speech, the DOJ has entered only one consent decree to resolve a merger challenge, and that was in the context of an active litigation on the eve of the court’s decision.

FTC leaders have voiced similar views. In a June 2022 interview, Lina Khan, chair of the FTC, said that the pattern of negotiating with merging parties to “fix” their transactions is “not work that the agency should have to do. That’s something that really should be fixed on the front end by parties being on clear notice about what are lawful and unlawful deals”. She added, “We’re going to be focusing our resources on litigating, rather than on settling”. More recently, in February 2023, Holly Vedova, director of the Bureau of Competition at the FTC, said that the FTC was moving “away from remedies with ‘numerous, complicated, and long-standing entanglements’”. Ms Vedova said the Bureau of Competition “will no longer consider remedies where there is a heightened risk of failure. These include proposals of less than standalone business units, or where there are forward-looking entanglements between the buyer and seller, such as supply agreements, or where there is no strong independent buyer”. In practice, if the FTC or the DOJ are unwilling to clear transactions with a consent decree based on a divestiture of less than a standalone business, there will be many circumstances where the parties cannot practicably negotiate a consent decree, which will likely increase the number of transactions for which the parties will need to consider a fix-it-first remedy.

The antitrust agencies’ new approach has important real-world implications for merging parties. Among other things, parties are increasingly contemplating fix-it-first strategies, which can involve divesting assets to an identified buyer with a negotiated transaction agreement during the agency’s review but could also involve consummating a transaction to address potential antitrust objections before submitting a Hart-Scott-Rodino notification. Data from 2022, the first full year the current agency leadership was in place, suggest that the agencies’ new positions on remedies are changing how merger reviews of controversial transactions are resolved in practice. On the one hand, the DOJ and the FTC combined sued to block 10 mergers in 2022, more than in any year since at least 2011. But on the other, only 20 transactions (fewer than in any year since 2018) led to agency litigation, a consent decree or a reported abandonment. This is too small a sample size to draw definitive conclusions, but the data appear to be indicating that, as one would expect, the agencies are litigating more merger cases because they are less willing to resolve antitrust concerns through consent decrees. At the same time, however, fewer transactions are resulting in agency action or abandonment because, with the agencies unwilling or reluctant to enter consent decrees, they seem to be allowing more deals to proceed unchallenged in consideration of a fix-it-first remedy or by determining not to take any action with respect to transactions that previously might have resulted in consent decrees.

The agencies’ apparent unwillingness to rely on traditional merger remedies introduces new variables into pre-transaction planning and antitrust review strategy for parties facing transactions that may raise competition concerns in the US. When there is a remedy that is workable as a business matter and consistent with deal objectives, a fix-it-first strategy can be the keystone for success. A well-considered fix-it-first strategy can bring several potential benefits, and potentially even result in a more favourable outcome than under the traditional approach of negotiating a consent decree with the agency. These benefits include: (i) decreasing the likelihood of prolonged antitrust litigation, on the possibility that the agency may decline to litigate the adequacy of the remedy, thereby shortening the transaction timeline; (ii) providing upfront certainty regarding the scope of the divestiture and avoiding the traditional agency remedy review process, which sometimes can lead to a demand for a broader remedy; (iii) avoiding the (often very significant) compliance burdens of an agency consent decree; and (iv) in some cases, particularly where the divestiture sale process occurs before the primary transaction is announced or relatively early in the agency review process, avoiding a fire sale at depressed prices at the end of the merger review process.

Notwithstanding these potential benefits, a fix-it-first strategy can be difficult to execute. Accordingly, parties should carefully assess the need for and the potential advantages and disadvantages of pursuing a fix-it-first strategy at the earliest stages of deal consideration. Among other things, parties will need to carefully assess the significance of the assets that may have to be divested to the deal objective and practical challenges for a potential divestiture or other remedy, including whether it is feasible to extract selected assets from the rest of a merging parties’ business that enable a divestiture to compete effectively without unduly impairing retained assets and whether there are capable potential buyers that will be interested in the divested assets. The parties should also consider the potential timelines for completing the transaction with and without a fix-it-first remedy and the consequences to, and rights and remedies of the parties if the transaction is blocked, notwithstanding a fix-it-first strategy.

If the parties decide to employ a fix-it-first strategy, timing considerations will be critical. There may well be difficult decisions to make regarding the balance between seeking to persuade the agency – or ultimately a court – that the transaction will not harm competition at all or in a particular market and beginning the sales process to reach agreement with a divestiture buyer, which can take several months, to minimise closing delays or the risk of going past the transaction’s end date. The buyer may have incentives to try to minimise the scope of the divestiture, while the seller likely will be focused on maximising deal certainty and expediting closing. Whether one is the buyer or the seller, it is crucial to give careful attention to these potential tensions in negotiating deal terms, such as regulatory efforts clauses, remedy commitments, the end date and reverse termination fees. The merging parties should ensure that the regulatory provisions in the applicable transaction documents faithfully reflect the parties’ understanding regarding these critical topics.

 

Leon B. Greenfield, Dominic Vote and Jennifer Milici are partners at WilmerHale. Mr Greenfield can be contacted on +1 (202) 663 6972 or by email: leon.greenfield@wilmerhale.com. Mr Vote can be contacted on +1 (202) 663 6045 or by email: dominic.vote@wilmerhale.com. Ms Milici can be contacted on +1 (202) 663 6006 or by email: jennifer.milici@wilmerhale.com.

© Financier Worldwide

BY

Leon B. Greenfield, Dominic Vote and Jennifer Milici

WilmerHale

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