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US merger review process unchanged despite pandemic and recession

August 2020  |  SPECIAL REPORT: COMPETITION & ANTITRUST

Financier Worldwide Magazine

August 2020 Issue

The economic downturn caused by the coronavirus (COVID-19) outbreak has left no sector of the economy untouched. As the economy begins to reopen and firms start picking up the pieces, there may be an increase in the number of mergers and acquisitions (M&A) aimed at helping companies recalibrate and adjust to the ‘new normal’. However, US antitrust authorities, namely the Department of Justice’s Antitrust Division (DOJ) and the Federal Trade Commission (FTC), have made it clear that firms should not expect substantive changes to the merger review process as a result of the pandemic or recession.

Merger review in the US follows a process defined by federal statute. For transactions that meet certain size-of-transaction and size-of-parties’ thresholds, transacting parties begin the process by filing Hart-Scott-Rodino (HSR) premerger notification forms with the antitrust authorities. The HSR submission initiates a 30-day waiting period during which the DOJ and FTC review the filing to determine whether the proposed transaction raises potential harm to competition such that it requires further review and, if so, which of the two agencies will handle the review.

Parties often request ‘early termination’ of the review in their HSR filings; that is, they request that agencies conclude their review before the full 30 days has elapsed and approve the transaction. In cases where agencies do not grant early termination, the reviewing agency either allows the waiting period to expire without raising antitrust concerns, in which case the transaction can close – at least in the US – or the agency initiates a more in-depth and time consuming review process by requiring the production of additional documents and information from parties.

When conducting a more extensive investigation, the reviewing agency will seek to weigh any anticipated anticompetitive effects of the transaction against expected economic benefits, such as efficiencies. Based on this assessment, the agency may either approve the merger, potentially with conditions such as partial asset divestitures, or challenge it in court. In a court challenge, the agency bears the burden of proving that the proposed transaction is, on balance, anticompetitive.

M&A transactions that arise from bankruptcy proceedings are subject to the same review process, substantive evaluation, and resolution as any other transaction with the exception that the waiting period after the HSR filing is shortened to 15 days.

The pandemic and recession notwithstanding, the merger review process remains essentially unchanged, aside from a new and temporary system allowing electronic submission of HSR filings. In the early days of the pandemic, agencies temporarily suspended grants of early termination, but have since resumed the practice. Although agencies have cautioned that grants of early termination could be slower and rarer due to the pandemic, early terminations have been granted for a number of transactions throughout the crisis.

Moreover, the agencies continue to apply the same level of antitrust scrutiny to transactions and continue to impose conditions on mergers to resolve antitrust concerns, including asset divestitures. Since mid-March, the DOJ has required divestiture in three mergers in diverse industries – including dairy, satellite antennae and military technology – and at least two mergers were recently abandoned after the DOJ raised antitrust concerns.

Antitrust agencies have anticipated that during the pandemic and recession, firms might seek merger approval for anticompetitive transactions by invoking the so-called ‘failing firm’ defence. The proposition is that when a firm is failing, a competitor should be allowed to acquire it if the failing firm’s only other alternative is to exit the market. The argument is that exit is the greater competitive evil – it would cause greater market concentration and larger anticompetitive effects than the proposed acquisition. However, parties should not expect to rely on the failing firm defence to secure antitrust approval except in dire circumstances.

One reason is that the defence faces a very high bar. The DOJ and FTC ‘Horizontal Merger Guidelines’ provide that parties must show that the allegedly failing firm would: (i) be unable to meet its financial obligations in the near future; (ii) would not be able to reorganise successfully under Chapter 11 of the Bankruptcy Act; and (iii) has made unsuccessful good-faith efforts to elicit reasonable alternative offers that would keep its tangible and intangible assets in the relevant market and pose a less severe danger to competition than does the proposed merger. Moreover, the DOJ and FTC typically are sceptical that circumstances justify the defence, and they scrutinise parties’ supporting evidence closely. For these reasons, a company in crisis should pursue an anticompetitive merger or acquisition only as a last resort.

The failing firm defence has a cousin known as the ‘flailing firm’ defence. Here the claim is that a firm is so weakened that it cannot compete effectively. Therefore, its acquisition by a competitor would not result in a significant loss of competition, and any loss is more than outweighed by the procompetitive efficiencies of the proposed transaction. Thus, the defence serves to rebut a charge that a transaction is anticompetitive. The requirements of the flailing firm defence are not as stringent as for the failing firm defence, but a firm is still expected to show that it is facing acute hardship, usually in the form of an inability to meet its financial obligations.

Consequently, this defence may become more common in light of the significant revenue loss that many firms have experienced in recent months. Nonetheless, the antitrust agencies are likely to focus on how quickly a firm’s revenues may rebound, and by how much, over the coming months as the pandemic and the recession run their course. They will also demand compelling evidence that no other suitor would acquire the firm, even at a substantial discount.

Antitrust agencies have been clear that neither the pandemic nor the recession has changed their approach to the merger review process. For example, multiple FTC officials have publicly rejected the idea that they should credit the failing firm defence more readily under the current economic conditions.

In a May 2020 blog post, Ian Conner, director of the FTC’s Bureau of Competition, wrote that he viewed the failing firm defence with a deep scepticism which the pandemic had not served to diminish. He cautioned that “parties contemplating such an argument should understand that the Bureau will not relax the stringent conditions that define a genuinely ‘failing’ firm. We will continue to apply the test set out in the Guidelines and reflected in our long-standing practice, and in doing so we will require the same level of substantiation as we required before the COVID pandemic”.

He also noted, with some sarcasm, that a number of firms that foresaw their imminent demise absent a proposed merger in fact made “miraculous” recoveries after abandoning their transaction in light of the agency’s antitrust concerns. Similarly, FTC Commissioner Noah J. Phillips noted in a recent video seminar that the failing firm defence is “a pretty hard test to meet” and “not something that is easy to prove”.

As for the DOJ, it noted in a recent merger review that the dire financial condition of one of the parties justified an expedited review. But it did not go so far as to accept a failing firm defence, and in fact required an asset divestiture before approving the transaction.

In light of these signals from the antitrust agencies, firms should not expect the current merger review process to be any less rigorous than in previous years. Nor should they expect the economic vicissitudes of the pandemic and recession to increase the likelihood that the agencies will approve transactions that they think may be anticompetitive.

Philip Giordano is a partner and James Canfield and Kristin Millay are associates at Hughes Hubbard & Reed. Mr Giordano can be contacted on +1 (202) 721 4776 or by email: philip.giordano@hugheshubbard.com. Mr Canfield can be contacted on +1 (202) 721 4679 or by email: james.canfield@hugheshubbard.com. Ms Millay can be contacted on +1 (202) 721 4629 or by email: kristin.millay@hugheshubbard.com.

© Financier Worldwide

BY

Philip Giordano, James Canfield and Kristin Millay

Hughes Hubbard & Reed

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