Biden Administration leadership at both the Federal Trade Commission (“FTC”) and the Antitrust Division of the Department of Justice (“DOJ”) has signaled the opening of more vigilant and skeptical eyes overseeing mergers, acquisitions, and other private equity transactions. For example, increased scrutiny of certain private equity practices has led to a more stringent review process and additional challenges. Litigating these matters has, thus far, been a mixed bag for the government but antitrust professionals, corporations, buyers, and sellers alike should take notice of the enhanced oversight and adjust their strategies accordingly to minimize additional delays and expenses and maximize the likelihood of approval. An understanding of the relevant laws and the areas ripe for increased enforcement is essential.
The Hart-Scott-Rodino Antitrust Improvements Act
The Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“the HSR Act”) has been law for nearly five decades. Over that time, approaches to enforcement have evolved, though usually incrementally. The new leadership, however, has suggested some rather dramatic changes from past policies.
The HSR Act requires that parties to certain mergers or acquisitions notify the DOJ and FTC before finalizing those proposed acquisitions based on the value of the transaction and potentially the size of the parties involved. While the DOJ and FTC review the proposed transaction, the parties to the transaction are required to wait a specific period of time, usually 30 days but that period can be extended by the FTC or DOJ if further inquiry is necessary.
Also relevant to private equity concerns is Section 8 of the Clayton Act, which prohibits a person or company from simultaneously serving as an officer or director of two competing corporations, creating what is known as an “interlocking directorate.” The interlock can be direct (as when the same individual sits on the board of two competing companies) or indirect (such as when the same private equity firm appoints different representatives to sit on the boards of competing companies).
Targeted Areas for Increased Enforcement
Representatives of both the FTC and the DOJ have made statements critical of certain practices in private equity and have made known their intentions to increase scrutiny and enforcement of antitrust violations. Specifically, the DOJ has identified three main areas for increased enforcement: (1) HSR compliance; (2) interlocking directorates; and (3) “roll-up” strategies that can involve the consolidation of competitors (or, in some cases, potential competitors)1.
DOJ representatives have noted an increasing awareness of deficiencies and “lax methods” of filing in private equity, specifically with respect to HSR premerger notifications.2 The concern that private equity firms “may not be living up to their HSR obligations”3 is certain to lead to increased scrutiny of HSR transactions and filings to ensure and increase compliance under the Act.
The DOJ has also promised to “ramp up” investigations into potential violations of Section 8 of the Clayton Act through interlocking of directorates.4 While the Act refers to an interlocking “person” as being problematic, the FTC and DOJ interpret the prohibition to include different people sitting on different boards, but who also represent the same investment company or private equity firm.
This escalation in enforcement has already been felt in the marketplace, as the DOJ announced in mid-October 2022 that seven directors from five companies had resigned after concerns regarding their roles had raised antitrust red flags, including three individuals who represented investment companies.5 This increased scrutiny and enforcement could lead to aggressive action against violators, including the threat of litigation. Companies and firms should act proactively to review their portfolio companies with this in mind and address any potential interlocks.
Closer monitoring of potential “roll-ups” is also high on the DOJ’s priority list. A “roll-up” occurs where an entity acquires multiple smaller competitors (or complementary companies that may not actually be competitors) in a particular space, resulting in one large, consolidated entity and less competition. This strategy naturally raises concerns of a potential consolidated power (or even what might be dubbed a monopoly) in an industry. Notably, such transactions involving smaller transactions may not be reportable under the HSR Act. Still, a transaction that does not require reporting under the Act may nonetheless be challenged under antitrust laws. The DOJ has vowed to analyze transactions for such “stacks” to establish whether there is a “reasonable probability that the merger will substantially lessen competition”, emphasizing the promotion and importance of innovation and competition in the marketplace.6
It is essential that companies and private equity firms prepare for increased investigation and scrutiny of their board makeup and appointments as well as their transactions, whether filing pursuant to the HSR act or otherwise. Forward-thinking strategies with respect to predicting items and areas that may raise red flags and being proactive in addressing those concerns are increasingly essential. The utilization of corporate and antitrust counsel is imperative to ensure full compliance with the law, prevent potential liability, and steer clear of potential pitfalls in transactions.
1 Deputy Assistant Attorney General Andrew Forman of the Antitrust Division Delivers Remarks to the ABA M&A Committee at the Business Law Section Annual Meeting, JUSTICE.GOV (September 17, 2022), https://www.justice.gov/opa/speech/deputy-assistant-attorney-general-andrew-forman-antitrust-division-delivers-remarks-aba
2 JUSTICE.GOV, supra note 1.
4 Assistant Attorney General Jonathan Kanter Delivers Opening Remarks at 2022 Spring Enforcers Summit, JUSTICE.GOV (April 4, 2022), https://www.justice.gov/opa/speech/assistant-attorney-general-jonathan-kanter-delivers-opening-remarks-2022-spring-enforcers.
5 Directors Resign from the Boards of Five Companies in Response to Justice Department Concerns about Potentially Illegal Interlocking Directorates, JUSTICE.GOV (October 19, 2022), https://www.justice.gov/opa/pr/directors-resign-boards-five-companies-response-justice-department-concerns-about-potentially.
6 Deputy Assistant Attorney General Andrew Forman of the Antitrust Division Delivers Remarks to the ABA M&A Committee at the Business Law Section Annual Meeting, JUSTICE.GOV (September 17, 2022), https://www.justice.gov/opa/speech/deputy-assistant-attorney-general-andrew-forman-antitrust-division-delivers-remarks-aba.