IN THIS JULY 2023 ISSUE

UNITED STATES

• Federal Trade Commission Unveils Proposal Detailing Significant Changes to Hart-Scott-Rodino Act Merger Notifications

On June 27, 2023, the Federal Trade Commission (FTC) issued its previously signalled proposal to overhaul the Hart-Scott-Rodino (HSR) Act merger notification regime. If the notice of proposed rulemaking (NPRM) is implemented in its current form, the changes stand to dramatically increase the burden on merging parties when making HSR filings. It is important to note that the final rules may differ in scope following the public comment period and will likely not take effect until at least Q1 2024.

Some key takeaways from the NPRM are as follows:

1. Merging parties will be required to submit substantially more documents along with their filing. The revised rules call for the production of (1) key transaction documents from deal team leaders even if such documents were not provided to officers and directors; (2) drafts of any responsive final documents prepared by or for an officer, director or supervisory deal team leader; (3) a broader range of transaction-related documents; (4) ordinary-course-of-business and strategic plans (if the parties have a competitive overlap); (5) data on the parties’ labor forces; (6) information on investors, limited partners and financiers; (7) all board memberships; (8) all prior acquisitions within the prior 10 years (if the parties have a competitive overlap); (9) information on subsidies received from certain entities or countries of concern; and (10) data on any current defense and intelligence contracts valued at more than $10 million.

2. The HSR process, from the preparation of the filing to the end of the statutory waiting period, will be substantially longer. Given the increased size of the filings, the FTC may request parties to pull and refile their notification to allow for more review time. Additionally, filings can no longer be made on letters of intent that do not describe the transaction in sufficient detail, which means that parties will be required to produce a quasi-definitive agreement before filing. Based on these changes, the FTC estimates that it will take close to 144 hours to complete a filing, a substantial increase from the previous 37 hours per filing—and this may underestimate the burden.

• Assa Abloy Settlement Raises Questions on Litigating the Fix and DOJ Consent Decrees

On May 5, 2023, in the midst of trial, the US Department of Justice (DOJ) agreed to a proposed consent order, clearing the way for Assa Abloy to complete its proposed $4.3 billion acquisition of Spectrum Brands’ hardware and home improvement business.

The parties and the DOJ had been “litigating the fix” proposed by Assa Abloy to divest to Fortune Brands the Emtek and Smart Residential divisions of Assa Abloy’s smart-lock business. The government has had some success challenging transactions despite parties’ proposed divestitures, including blocking the 2015 Sysco-US Foods transaction and the 2017 Aetna-Humana merger. More recent cases, such as UnitedHealth-Change Health, have favored defendants who placed robust divestiture packages before the courts. The Assa Abloy settlement came before the judge weighed in on the burden-shifting framework that had become a contentious issue for the parties, but—based on the judge’s comments—the court appeared to have issues with the legal standard proposed by the DOJ. The DOJ’s position was that it could prove its prima facie case based on concentration levels that existed if there were no fix, thus proving a violation unless the defendants could demonstrate that competition was entirely restored by the proposed divestiture. The consent order essentially adopted the divestiture proposal offered by Assa Abloy before the start of the trial, with some relatively minor modifications.

This is the first instance of the DOJ accepting a settlement offer from merging parties since Assistant Attorney General Jonathan Kanter’s pronouncement that the DOJ would view consent decrees as the “exception, not the rule” and instead pursue structural remedies or injunctions to block alleged anticompetitive mergers. In explaining its acceptance of the settlement, the DOJ stated that the settlement offers more effectively maintained competition in the relevant markets than previous offers because it expanded the smart-lock intellectual property being divested, strengthened the supply agreement with one of the mechanical door brands businesses, minimized entanglements between Assa Abloy and the divested businesses and left the door open for the DOJ to challenge the merger again within five years if competition is materially diminished. After accepting the remedy package, the DOJ maintained that it would continue to seek “complete divestitures of all relevant standalone business units” to ensure that divested assets are able to compete effectively.

• Pharmaceutical Industry Remains in Regulators’ Crosshairs

The FTC’s suit to block Amgen, Inc.’s (Amgen) proposed acquisition of Horizon Therapeutics plc (Horizon) is the latest salvo directed at the pharmaceutical industry. This transaction does not involve horizontal competition or a vertical theory of harm. Instead, the FTC’s case relies on a conglomerate effects theory of harm, a theory that has not been used as the basis to block a merger since the 1960s. The FTC alleges that the transaction would allow Amgen to leverage its portfolio of “blockbuster drugs to entrench the monopoly positions” of two of Horizon’s drugs. The FTC may have difficulty with this theory given that (1) Amgen has committed to not bundle its products and (2) Horizon does not face any current competition for its two drugs at issue.

This aggressive enforcement aligns with the FTC’s continued scrutiny of the industry. In July 2022, the FTC initiated an industry study of pharmaceutical benefit managers (PBMs) under Section 6(b) of the FTC Act (which empowers the FTC to compel the production of information from industry participants for the purpose of studying industry practices). The FTC has since expanded the study to also include three group-purchasing organizations that negotiate pharmaceutical rebates on behalf of PBMs.

• “Whole of Government” Competition Mandate Can Impact Deals the FTC and DOJ Do Not Challenge

President Biden issued Executive Order 14036 on July 9, 2021, calling for a “whole of government” approach to antitrust regulation whereby all executive agencies collaborate to strengthen regulatory guardrails to promote competition. The effects of this executive order have come into view as transactions are being challenged or investigated by non-competition agencies.

Most recently, Standard General abandoned its proposed $8.6 billion acquisition of Tegna. Despite clearing the HSR statutory waiting period without challenge from the DOJ, the Federal Communications Commission (FCC) engaged in a merger review, under its public-interest authority, that delayed the closure of the deal to such a degree that the parties abandoned the transaction. The FCC based its challenge on the concern that the merger would result in higher prices in retransmission contracts. In another example of the whole-of-government approach resulting in increased scrutiny on merging parties, the US Department of Transportation recently voiced its support for the DOJ’s lawsuit against the Jet Blue and Spirit merger and launched its own investigation of the deal under its public interest and unfair methods of competition authority. These recent actions delaying or effectively blocking mergers serve as reminders that merging parties must account for threats from non-competition executive branch agencies when evaluating antitrust deal risk.

• FTC’s Constitutionality Comes Under Fire—Again

Illumina Inc.’s (Illumina) opening brief, filed with the US Court of Appeals for the Fifth Circuit on June 5, 2023, attempts to overturn the FTC’s decision ordering the unwinding of Illumina’s repurchase of GRAIL, Inc. Illumina’s filing raises, in part, constitutional arguments that (1) the FTC’s in-house administrative process is unconstitutional because it violates due process and equal protection rights, and (2) the FTC’s agency structure is unconstitutional due to improper removal protection for FTC commissioners.

Similarly, Intercontinental Exchange, Inc. (ICE), and Black Night, Inc. (as well as Amgen/Horizon), are arguing constitutional affirmative defenses in their merger challenge by the FTC. The parties allege that the FTC’s administrative process violates equal protection rights, due process rights and is an unconstitutional delegation of legislative power, among other violations of the Fifth and Seventh Amendments and Article III of the Constitution.

These constitutional challenges follow Axon’s unanimous victory at the US Supreme Court in arguing that the FTC’s administrative process and agency composition are unconstitutional. The Court held that the statutory review schemes at the FTC and Securities and Exchange Commission (SEC) do not “displace a district court’s federal-question jurisdiction over claims challenging as unconstitutional the structure or existence of the SEC or FTC.” This ruling allows parties to challenge the constitutionality of the FTC’s administrative proceedings in federal court prior to the conclusion of any administrative proceeding. At the end of June, the Supreme Court agreed to hear a case challenging the constitutionality of the SEC’s administrative trial process on similar grounds, and that case will likely decide the fate of the FTC’s administrative trial process.

Also, in June, the FTC modified its rules for its in-house proceedings so that administrative law judges will now issue “recommended” decisions that are reviewed automatically by the FTC commissioners, rather than “initial” decisions that can be appealed to the FTC commissioners. This change appears designed to address some of the constitutional issues raised in Axon, but it also creates some additional constitutional issues.

It appears that merging parties will continue to bring constitutional challenges if subjected to the FTC’s administrative process. In response, the FTC may bring more cases in district court to avoid parallel constitutional challenges.

EUROPEAN UNION

• Divergent Viewpoints in Video Games Sector: Microsoft’s Takeover of Activision Blizzard

The European Commission (EC) and the UK Competition and Markets Authority (CMA) reached different conclusions regarding Microsoft’s proposed takeover of Activision Blizzard, leading to contrasting decisions.

On May 15, 2023, following an in-depth investigation, the EC adopted a conditional clearance decision. To address the Commission’s concerns that the deal could harm competition in the distribution of games via cloud game streaming services and that its position in the market for PC operating systems would be strengthened, Microsoft committed, for a 10-year duration, to offer (1) a free license to consumers in the European Economic Area (EEA) that would allow them to stream all current and future Activision Blizzard PC and console games for which they have a license, via any cloud game streaming services of their choice, and (2) a corresponding free license to cloud game streaming service providers to allow EEA-based gamers to stream any of Activision Blizzard’s PC and console games.

In contrast, the UK CMA disapproved the deal in April 2023. The UK CMA concluded that the merger would result in a substantial lessening of competition within the UK cloud gaming market, considering that Microsoft’s proposed behavioral remedy failed to effectively address its concerns. In particular, the CMA was concerned that the combined entity would have an overwhelming market share and could potentially harm competition, innovation and consumer choice. Microsoft has appealed the CMA decision to the Competition Appeal Tribunal, but the CMA and Microsoft agreed in July to stay the appeal while they discuss a potential settlement.

The contrasting decisions between the EC and CMA show the possible different assessments of the potential impact of a merger on competition and consumers by regulatory bodies. This is an ongoing trend, as demonstrated by the divergent EC and CMA decisions in Konecranes/Terex and Facebook/Kustomer. Such variances can arise when parties have different competitive strengths in distinct jurisdictions. Differences also can arise from disparate approaches between jurisdictions—in the United Kingdom, the CMA appears to be taking an aggressive approach. In particular, the Activision matter demonstrates the EC’s continuing willingness to accept behavioral remedies while the CMA continues to be skeptical of behavioral remedies.

• New Merger Simplification Package from the EC

On April 20, 2023, the EC adopted a new package to further simplify its procedure for reviewing mergers under the EU Merger Regulation. This package is designed to reduce the administrative burden and provide greater clarity to businesses engaging in transactions within the European Union. It includes (1) a revised merger implementing regulation, (2) a notice on simplified procedure and (3) a communication on the transmission of documents.

The key objectives of the package are to facilitate the assessment of unproblematic transactions, reduce the amount of information required for notifying transactions and optimize the transmission of documents.

One significant change is that two new categories of transactions can both benefit from the simplified procedure:

1. Where the individual or combined upstream market share of the merging parties is below 30% and their combined purchasing share is below 30%

2. Where the individual or combined upstream and downstream market shares of the merging parties are below 50%, the market concentration index (HHI delta) is below 150, and the company with the smallest market share is the same in the upstream and downstream markets.

The new package also introduces flexibility clauses that give the EC the discretion to treat additional cases under the simplified procedure in certain circumstances. Additionally, the regulation introduces a new notification form for simplified cases and introduces electronic notifications by default.

ENFORCEMENT IN KEY INDUSTRIES

SNAPSHOT OF SELECTED ENFORCEMENT ACTIONS

NOTABLE US CASES

NOTABLE EUROPEAN & UK CASES