Premerger Notification; Reporting and Waiting Period Requirements

Federal RegisterNov 12, 2024

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FEDERAL TRADE COMMISSION

16 CFR Parts 801 and 803

RIN 3084-AB46

Premerger Notification; Reporting and Waiting Period Requirements

AGENCY:

Federal Trade Commission.

ACTION:

Final rule.

SUMMARY:

The Federal Trade Commission (“FTC” or “Commission”), with the concurrence of the Assistant Attorney General, Antitrust Division, Department of Justice (“Assistant Attorney General” or “Antitrust Division”) (together the “Agencies”), is issuing this final rule and Statement of Basis and Purpose (“SBP”) to amend the Premerger Notification Rules (the “Rules”) that implement the Hart-Scott-Rodino Antitrust Improvement Act (“the HSR Act” or “HSR”), including the Premerger Notification and Report Form for Certain Mergers and Acquisitions (“Form”) and Instructions to the Notification and Report Form for Certain Mergers and Acquisitions (“Instructions”). The final rule requires parties to transactions that are reportable under the HSR Act to provide documentary material and information that are necessary and appropriate for the Agencies to efficiently and effectively conduct an initial assessment to determine whether the transaction may violate the antitrust laws and whether to issue a Request for Additional Information (“Second Request”) as provided by the HSR Act. In addition, the final rule implements certain requirements of the Merger Filing Fee Modernization Act of 2022 (“Merger Modernization Act”) and ministerial changes to the Rules as well as the necessary amendments to the Instructions to effect the final changes.

DATES:

This rule is effective on February 10, 2025.

FOR FURTHER INFORMATION CONTACT:

Robert Jones, Assistant Director, Premerger Notification Office, Bureau of Competition, Federal Trade Commission, 400 7th Street SW, Washington, DC 20024, or by telephone at (202) 326-3100.

SUPPLEMENTARY INFORMATION:

I. Executive Summary

The Commission is amending and reorganizing the documentary material and information requirements for premerger notification required by the HSR Act, 15 U.S.C. 18a, (“notification” or “HSR Filing” or “Filing”) to improve the efficiency and effectiveness of premerger review and to implement changes mandated by the Merger Modernization Act, 15 U.S.C. 18b. The Act and the Rules require parties to certain mergers and acquisitions to submit a notification to the Agencies and to wait a short period of time before consummating the reported transaction. The reporting and waiting period requirements of the HSR Act are intended to enable the Agencies to determine whether a proposed merger or acquisition may violate the antitrust laws, including section 7 of the Clayton Act, 15 U.S.C. 18, if consummated and, when appropriate, to take appropriate law enforcement action prior to consummation to prevent a violation of the antitrust laws.

To advance the Clayton Act's goal of preventing undue consolidation or stopping it in its incipiency,

Congress passed the HSR Act to require mandatory premerger notification of some acquisitions. In particular, it charged the Agencies with reviewing the details of those proposed transactions in advance of consummation. The Agencies rely on information submitted in an HSR Filing to conduct a premerger antitrust risk assessment and to identify those transactions that require additional investigation to determine if they may harm competition, and thus violate the antitrust laws if consummated. The HSR Act requires that the parties not consummate their planned transaction while the Agencies conduct this assessment until the expiration of the statutory waiting period, which for most transactions is 30 days (15 days in the case of a cash tender offer or certain bankruptcy sales). During that short period of time, referred to as the initial waiting period, the Agencies review the information submitted in the parties' HSR Filings to identify those transactions that require a closer look, including through the collection of additional information from the acquiring and acquired persons or from third parties. If either agency determines during the initial waiting period to conduct an in-depth investigation of the transaction, section 7A(e) of the Clayton Act, 15 U.S.C. 18a(e), authorizes the Agencies to request additional information or documents from each party, which is referred to as a Second Request.

Issuing Second Requests extends the waiting period under the HSR Act for another 30 days (ten days in the case of a cash tender offer or certain bankruptcy sales) after the parties have substantially complied with the Second Requests. During this second waiting period, if the reviewing agency believes that a proposed transaction may violate the antitrust laws, it may seek an injunction in Federal district court to prohibit consummation of the transaction.

See, e.g., Brown Shoe Co.

United States,

370 U.S. 294, 318 n.32 (1962).

The FTC and DOJ share responsibility to enforce the antitrust laws and have established a protocol to clear the investigation of a transaction to one agency to avoid confusion and conserve public resources. The agency that receives clearance conducts the investigation and determines whether to issue Second Requests.

The Commission has administered the HSR Act's premerger notification program for over forty-five years, issuing an initial set of HSR Rules that took effect on September 5, 1978.

Since then, it has regularly updated these rules, with the concurrence of the Assistant Attorney General, pursuant to its mandate under 15 U.S.C. 18a(d), to require a premerger notification for each reportable acquisition that contains documentary material and information necessary and appropriate to enable the Agencies to determine whether the transaction is one that may violate the antitrust laws and proceed to an in-depth investigation through the issuance of Second Requests. In this rulemaking, the Commission is responding to several factors that make today's economic reality more challenging for conducting a premerger assessment with the limited information required by the current rules. Simply put, the economy of 2024 is different than it was in 1978 or 2000 and, in the Agencies' experience, the HSR Form has not kept pace with the realities of how businesses compete today. There is a higher degree of interconnectivity of businesses along the supply chain as well as with other companies that provide ancillary services. The focus of competitive interaction is not as obvious when companies that supply goods or services also generate revenues from other sources, such as data sales, and when even businesses in traditional sectors such as manufacturing generate significant revenues from the sale of associated services. The changing nature of competition makes it more difficult for the Agencies to identify existing business relationships that might be affected by the acquisition, including through non-price effects such as innovation competition, and that are not

apparent from simply focusing on sales in output markets. In addition, changes in mergers and acquisition (“M&A”) activity, corporate structures, and investment strategies have rendered the current Form's focus on traditional corporate structures outdated, and often the Agencies are unable to determine which entities or individuals will be making competitive decisions post-merger.

The Commission commenced notice-and-comment rulemaking soon after the passage of the HSR Act and made extensive revisions to its proposed rules before issuing a final rule nearly two years later.

See

41 FR 55488 (Dec. 20, 1976), 42 FR 39040 (Aug. 1, 1977), 43 FR 33450 (July 31, 1978), 43 FR 34443 (Aug. 4, 1978), 43 FR 36053 (Aug. 15, 1978).

See

Fed. Trade Comm'n & U.S. Dep't of Justice, Second Hart-Scott-Rodino Annual Report (FY 1978).

These profound changes that have occurred over time have created or exposed significant gaps in the information generated for premerger review under the current HSR Rules. These gaps curtail the Agencies' ability to efficiently and effectively detect transactions that may violate the antitrust laws. To fill in these gaps and to directly respond to the passage of the Merger Modernization Act, the Commission relied on its experience and expertise to identify specific information that is necessary and appropriate to conduct effective premerger screening.

To initiate this rulemaking, the Agencies conducted a comprehensive review of the premerger notification process, relied on their experience collecting and reviewing data and documents during antitrust investigations, and considered the cumulative effects of changes in deal structure, investment strategies, and the competitive dynamics of the modern economy explained in more detail below. From this review, the Commission identified several information deficiencies in the current HSR Filing that prevent the Agencies from efficiently and effectively conducting a premerger assessment of reportable transactions to identify which ones may violate the antitrust laws. The Agencies compared documentary material and information they have received over the years during in-depth merger investigations with the information collected in HSR Filings and assessed whether having certain types of documentary material and information at the beginning of an investigation would have changed the Agencies' decision whether and how to investigate reportable transactions. These specific categories of information and documents, which are readily available to the merging parties, are not required by the current Rules, but would be highly probative to the initial antitrust screening of a transaction during the initial waiting period and thus are necessary and appropriate for that review. The information identified and required by this final rule will enable the Agencies to detect transactions that may violate the law in light of modern commercial realities and in furtherance of the statutory mandate to arrest trends toward concentration in their incipiency. The final rule also will allow the Agencies to identify potentially unlawful transactions more quickly and with greater accuracy, narrowing the scope of their investigations in some cases, and in others, reducing the need to conduct a more burdensome in-depth investigation by issuing Second Requests.

In June 2023, the Commission proposed amendments to address the information deficiencies under the existing HSR Rules in a Notice of Proposed Rulemaking (“NPRM”).

The Commission received approximately 721 comments.

The majority of commenters were individuals who expressed general support for the rulemaking or for more vigorous antitrust enforcement more broadly. Others opposed certain aspects of the proposed rule and some questioned the Commission's authority to make any adjustments. After careful consideration of the comments and as discussed in more detail below, the Commission has substantially narrowed the information requirements proposed in the NPRM. In the final rule, the Commission is not adopting several proposed requirements outright, including those related to:

On June 29, 2023, the Commission published a Notice of Proposed Rulemaking, Premerger Notification; Reporting and Waiting Period Requirements, 88 FR 42178 (June 29, 2023) (hereinafter NPRM). On August 10, 2023, the Commission extended the comment period to receive public comments through September 27, 2023. 88 FR 54256. The comments on the NPRM (Doc. No. FTC-2023-0040) are available at

https://www.regulations.gov/docket/FTC-2023-0040/comments

The Commission does not rely on any particular individual comment submission for its findings, but rather provides here (and throughout this final rule) examples of comments that were illustrative of themes that spanned many comments. The Commission's findings are based on consideration of the totality of the evidence, including its review of the empirical literature, its review of the full comment record, and its expertise and experience in identifying mergers that violate the antitrust laws.

• a timeline of key dates for closing the proposed transaction;

• creating organization charts for the purpose of filing a notification;

• information about other interest holders;

• drafts of submitted documents;

• information about employees;

• information about board observers;

• geolocation information;

• prior acquisitions involving entities with less than $10 million in sales or revenues, or consummated more than 5 years prior to filing; and

• information about steps taken to preserve documents or use of messaging systems.

For other proposals, the Commission has substantially modified its proposals to minimize where possible the costs to filers and third parties, yet still provide the Agencies with information that is necessary and appropriate for effective and efficient premerger review. Overall, these modifications significantly reduce the effort required to comply with the final rule as compared to the proposed rule and include:

• Creating a new category of “select 801.30 transactions” for which the cost of complying with the information requirements has been limited because of the low risk that the transaction may violate the antitrust laws;

• Eliminating several document requirements to reduce costs;

• Limiting some requirements to materials that already exist;

• Excusing the seller

from certain information requests if it would be duplicative of information received from the buyer;

References to “seller” throughout refer to the acquired person, as defined in 16 CFR 801.2, regardless of whether or not the acquired person is actually a party to the transaction.

• Limiting some requirements to cover only recent information;

• Providing definitions or clarifications to reduce uncertainty and improve filer compliance;

• Creating

de minimis

exceptions to reduce the costs of generating information that has little economic impact; and

• Making the provision of certain information contingent on the identification of a significant business relationship between the filing persons that is critical to assessing whether the transaction may violate the antitrust laws.

As modified, the final rule introduces necessary and appropriate updates to HSR information requirements to allow the Agencies to understand the reported transaction and conduct an initial antitrust assessment within the statutory timeframe and does so in a manner that aligns the associated costs with the likelihood that the transaction is one that presents antitrust risk. With more complete information that is targeted to disclose existing business relationships between the parties, the Agencies can determine whether and how to deploy their resources to further investigate potentially anticompetitive acquisitions prior to consummation. The final rule will also provide transparency for those contemplating a reportable transaction by describing the information the

Agencies rely on to conduct their initial assessment of whether a transaction may violate the antitrust laws. The amendments will also reduce the current burden on third parties (such as customers and competitors of the merging parties) on whom the Agencies often rely to fill in many of the information gaps during the initial review period because of inadequacies in the current Rules.

With this rulemaking the Commission has closely tailored the burden of complying with the HSR Act to align as much as practicable with the risks of a law violation presented by the particular transaction. This alignment is consistent with the statutory purpose of premerger review, which is for the Agencies to determine which reported transactions may violate the antitrust laws during the brief period provided by the Act for an initial antitrust assessment. As a result, the final rule achieves the benefits associated with mandatory premerger review with an overall burden that is reasonable and consistent with the legislative purpose of the HSR Act.

II. Background

A. Premerger Review and the Implications for Merger Enforcement

Section 7 of the Clayton Act is, by its terms, forward-looking and predictive, focused on acquisitions whose effect “may be substantially to lessen competition, or to tend to create a monopoly.”

To better effectuate the Clayton Act's goal of preventing undue consolidation or stopping it in its incipiency, Congress passed the HSR Act to require mandatory premerger notification of some acquisitions, and charged the Agencies with reviewing the details of those proposed transactions in advance of consummation to determine whether they may violate the antitrust laws. In doing so, Congress fundamentally changed the way the Agencies enforce the nation's antitrust laws to prevent harmful consolidation.

15 U.S.C. 18.

See Brown Shoe

United States,

370 U.S. 294, 317-18 (1962) (Congress provided authority for arresting mergers at a time when the trend to a lessening of competition in a line of commerce was still in its incipiency and assure courts had the power to brake the process of concentration at its outset and before it gathered momentum).

See

Peter W. Rodino, Jr., Statement on the 25th Anniversary of Hart-Scott-Rodino (2001),

https://www.ftc.gov/enforcement/premerger-notification-program/hsr-resources/pno-news-archive/statement-peter-w-rodino

(“Hart-Scott-Rodino was intended to give the anti-trust agencies two things: critical information about a proposed merger and time to analyze that information and prepare a case, if necessary. From what I hear, the legislation absolutely has transformed merger enforcement. Competition, as well as the consumer, has benefitted.”).

Congress specifically charged that the Commission engage in rulemaking to require information in the HSR Filing that is necessary and appropriate to detect acquisitions that may violate the antitrust laws. Section 18a(d)(1) of the HSR Act states that the Commission, by rule and in accordance with the Administrative Procedures Act, shall require that the notification contain such documentary material and information to determine whether the acquisition may, if consummated, violate the antitrust laws.

Relying on this explicit rulemaking authority, the Commission has adjusted those requirements over time to carry out the purposes of the Act.

15 U.S.C. 18a(d)(1).

In passing the HSR Act, Congress imposed mandatory premerger review only for certain large transactions, in part to “improve and modernize antitrust investigation and enforcement mechanisms,”

“ease burdens on the courts by forestalling interminable post-consummation divestiture trials . . . [, and] advance the legitimate interests of the business community in planning and predictability.”

The robust legislative history of the HSR Act makes plain that premerger review should focus on the likelihood that a reported transaction may violate the antitrust laws and that the Commission shall collect information to make that determination prior to consummation.

Consistent with Congressional mandate, the Agencies rely on notifications under the HSR Act to target their enforcement efforts to their best use in preventing undue consolidation by seeking to prohibit the consummation of acquisitions that violate the antitrust laws.

S. Rep. No. 94-803, at 1 (1976).

H.R. Rep. No. 94-1373, at 11 (1976). The HSR Act applies to acquisitions that met the statutory thresholds whether they are properly styled “mergers” and even if they do not result in a change of control. The terms “mergers,” “acquisitions,” and “transactions” are used interchangeably to refer to transactions for which an HSR filing is required.

15 U.S.C. 18a(d)(1).

To focus the Agencies' screening and potential enforcement efforts on the mergers that are most likely to harm competition and consumers, Congress required notice in advance for the largest mergers and tasked the Agencies with conducting an assessment of the risk that the proposed acquisition may violate the antitrust laws. To perform this task, the Agencies must review thousands of filings each year and identify which ones should be targeted for an intensive investigation of their potential to violate the antitrust laws. This is a fact-intensive endeavor that requires a deep understanding of precedent and economic analysis. The Agencies employ lawyers, economists, technologists, accountants, and support staff to conduct premerger analyses of reported transactions in order to perform this critical task on behalf of the American public.

Nonetheless, transactions reported under the HSR Act are a small fraction of the total number of mergers and acquisitions that occur each year in the United States. Relying on commercial data on M&A activity and data from the Agencies' annual HSR reports, Table 1 shows that during the five-year period of FY 2018 to 2022, HSR filings represented a small percentage of overall deal activity in the United States, on average 16.5 percent a year.

Using different commercially available data, the U.S. Government Accountability Office recently estimated that HSR filings during this same time frame averaged 15 percent of overall M&A activity.

See

U.S. Gov't Accountability Office, Defense Industrial Base: DOD Needs Better Insight into Risks from Mergers and Acquisitions 8 Fig. 1 (Oct. 2023) (GAO-24-106129),

https://www.gao.gov/assets/d24106129.pdf

(using Bloomberg data).

ER12NO24.032

While the Agencies investigate and ultimately seek to block only a small subset of reportable mergers each year, the challenges of administering mandatory premerger review have expanded and accelerated over time due to the changes in the nature of M&A activity discussed in detail below.

ER12NO24.033

As depicted in Figure 1, there was a recent spike in HSR-reportable transactions: in FY 2021, the Agencies reviewed HSR Filings for 3,520 transactions, over twice the number of the prior year's filings. In FY 2022, the Agencies reviewed 3,152 transactions. Although the pace of HSR Filings has recently moderated somewhat, the recent period of intense merger activity highlighted significant inefficiencies and deficiencies in current notification requirements that must be addressed so that the Agencies can direct their scarce resources to prevent those acquisitions most likely to cause widespread harm.

Contrary to suggestions from some commenters, it is not practical for the Agencies to identify specific illegal transactions that they “missed” during their premerger review, nor is the Commission required to establish that as a predicate for invoking its statutory rulemaking authority under the HSR Act.

See Pharm. Rsch. & Mfrs. Am.

FTC,

790 F.3d 198, 199, 206 (D.C. Cir. 2015) (hereinafter

PhRMA

). Doing so would require a redirection of resources to investigate consummated mergers and away from resources devoted to premerger review. Instead, it is imperative that the Agencies ensure that they have the right information to address deficiencies that have emerged to undermine premerger review as an effective tool for detecting which transactions may violate the nation's antitrust laws.

The Commission is mindful of recent economic research that underscores the importance of adequate detection for effective merger enforcement. For instance, researchers posit that some firms appear to be employing strategies to avoid antitrust scrutiny of their anticompetitive deals, deliberately negotiating and structuring their deals to avoid premerger review (so-called

stealth acquisitions),

or identifying acquisition targets at a nascent stage to buy them before they are valuable enough to require premerger review, sometimes solely for the purpose of preempting future competition (so-called “killer acquisitions”).

One researcher concludes that merger enforcement falls by about 90 percent when transactions are not subject to premerger review.

Because most mergers are not subjected to premerger review, these strategies have contributed to a rise in aggregate concentration by stimulating mergers between competitors, with attendant negative effects on markups, private investment, and the share of output going toward profits.

John Kepler et al., “Stealth Acquisitions and Product Market Competition,” 78 J. Fin. 2837 (2023); John M. Barrios & Thomas G. Wollmann, “A New Era of Midnight Mergers: Antitrust Risk and Investor Disclosures” (Nat'l Bureau of Econ. Rsch., Working Paper No. 29655, Jan. 2022),

https://www.nber.org/papers/w29655

;

See also

Debbie Feinstein, “Un-consummated merger,” Fed. Trade Comm'n Competition Matters blog (Dec. 18, 2013),

https://www.ftc.gov/enforcement/competition-matters/2013/12/un-consummated-merger

Fed. Trade Comm'n, The FTC's Merger Remedies 2006-2012, 18-19 (2017) (report of the Bureaus of Competition and Economics) (less than one-quarter of consummated merger remedies successfully restored competition),

https://www.ftc.gov/system/files/documents/reports/ftcs-merger-remedies-2006-2012-report-bureaus-competition-economics/p143100_ftc_merger_remedies_2006-2012.pdf

To fulfill the Agencies' mandate to conduct quick yet effective premerger review of reported transactions, the Commission must make the best use of the tools Congress gave the Agencies to detect and prevent harmful acquisitions, including by requiring that the notification contain the documents and information that are necessary and appropriate for screening reportable mergers prior to consummation. Because premerger review is critically important to effective merger enforcement, the information contained in an HSR Filing must be fit for the purpose of determining whether a reported transaction may violate the antitrust laws in light of current market realities. Having the information necessary to make that assessment allows the Agencies to decide when and how to expend public resources to investigate and potentially challenge mergers. The final rule will enable the Agencies to engage in efficient and effective detection of illegal mergers that are subject to the HSR Act and thus is a reasonable exercise of the Commission's rulemaking authority under the HSR Act.

B. The Need for the Final Rule

The purpose of this rulemaking is to modernize the premerger review process in light of changing market dynamics, making adjustments that are necessary and appropriate to allow the Agencies to detect and prevent illegal mergers prior to consummation. The final rule also makes the process more efficient for filers, third parties, and the Agencies, shifting some of the burden of information collection and reporting to the merging parties (and away from third parties) and requiring the information needed for a preliminary antitrust assessment to be contained in the HSR Filing so that the Agencies have the full statutory review period to assess and confirm the information. Overall, the final rule addresses significant information gaps and asymmetries that have grown over time and undermined the Agencies' ability to conduct premerger review. In addition, this rulemaking implements requirements Congress imposed by passing the Merger Modernization Act, which broadened the scope of information the Agencies must collect as part of premerger review, including by requiring the collection of information about subsidies from foreign entities and governments of concern.

Due to changing commercial realities referenced above, the existing requirements for an HSR Filing leave significant gaps in the information available to the Agencies for conducting this assessment. Many of these gaps can be filled by information that the filing parties already have and often use in their own assessment of the transaction. Certain deficiencies in the existing reporting requirements prevent the Agencies from spotting problem areas that would justify a more in-depth investigation or, alternatively, from readily obtaining the facts needed to conclude that the transaction does not merit in-depth review prior to consummation. The rulemaking addresses these problems as well.

Based on the Agencies' extensive experience reviewing HSR Filings, transactions that present certain attributes are more likely to violate the antitrust laws and deserve further investigation. For instance, a merger of two firms that compete (or will soon compete) to provide goods or services to

the same set of customers, or a merger involving a manufacturer and its main distributor that also distributes the products of competing manufacturers, may warrant closer scrutiny. On the other hand, if the Agencies can determine from review of an HSR Filing that a transaction does not present such attributes, the Agencies can more quickly and confidently determine that the transaction does not require a more in-depth review and may proceed to consummation.

However, the Agencies cannot make these determinations with confidence in the initial 15- or 30-day waiting period when the HSR Filings lack sufficient information about relevant premerger competitive relationships between the parties. By requiring the submission of such information, the final rule enables effective Agency decision-making during the initial 15- or 30-day waiting period.

The intention of the final rule is to make it possible for the Agencies to identify the most concerning transactions for more in-depth review, including through the issuance of Second Requests, and also to more quickly and confidently complete the review of those transactions that do not merit additional investigation and can proceed to closing at the end of the statutory waiting period.

Until 2020, the Agencies routinely granted early termination of the initial waiting period for certain transactions that did not warrant further action pursuant to 15 U.S.C. 18a(b)(2). In March 2020, in order to transition filers to an e-filing system that permitted the Agencies to continue to process filings during the COVID-19 pandemic, the Agencies temporarily suspended the discretionary granting of early termination. In February 2021, the Agencies once again suspended the granting of early termination in response to an unprecedented volume of transactions.

See

Press Release, Fed. Trade Comm'n, “FTC, DOJ Temporarily Suspend Discretionary Practice of Early Termination” (Feb. 4, 2021),

https://www.ftc.gov/news-events/news/press-releases/2021/02/ftc-doj-temporarily-suspend-discretionary-practice-early-termination

The HSR Act provides for a shortened 15-day initial waiting period for reportable acquisitions by means of a cash tender offer or acquisitions subject to certain Federal bankruptcy provisions. 15 U.S.C. 18a(b)(1)(B); 11 U.S.C. 363(b)(2), as amended (1994). For these transactions, the second waiting period is also shorter, 10 days (as compared to 30 days for most transactions) after appropriate certification of substantial compliance with the Second Request. 15 U.S.C. 18a(e)(2). For convenience, this rulemaking refers to the standard 30-day initial waiting period that applies to most transactions even though the Agencies have even less time to review information provided in the HSR Filing for cash tender or certain bankruptcy transactions.

The consequences of inadequate detection are revealed in a recent analysis of hospital mergers that were reported to the Agencies for premerger review co-authored by two economists from the Commission's Bureau of Economics.

The paper examined a set of consummated hospital mergers and measured the effect of each merger on prices. The study concluded that mergers not reportable under the HSR Act did not result in larger price increases than reportable mergers. In contrast, the authors found different outcomes among mergers that were subject to premerger review based on how much review the transaction received. Of the mergers reported to the Agencies, the largest average percentage price increase occurred for those mergers that received early termination of the initial waiting period. This suggests that the HSR Filings failed to provide sufficient information to trigger additional investigations that could have blocked these harmful mergers before they were consummated; instead, the filings resulted in early termination of the waiting period. While the study was not designed to test the impact of this rulemaking, the study supports the Commission's belief that there are information deficiencies with the current HSR Rules that prevent the Agencies from identifying mergers that may violate the antitrust laws.

Keith Brand et al., “In the Shadow of Antitrust Enforcement: Price Effects of Hospital Mergers from 2009-2016,” 66 J. L. Econ. 639 (2023).

One commenter suggests that this study proves the opposite and provides evidence that the current HSR Form provides Agency staff with sufficient information to identify potentially anticompetitive mergers.

See

Comment of U.S. Chamber of Com., Doc. No. FTC-2023-0040-0684 at 14 n.32. The Commission disagrees with this assessment of the results. Indeed, in their study, the authors suggested that their results should encourage further study of the process of granting early termination to better illuminate why mergers that receive truncated review had higher price effects than those that received a preliminary review but not a Second Request.

See

Brand et al.,

supra

note 24, at 663-64.

Hundreds of individuals submitted public comments to describe their own experiences in the aftermath of mergers and urge the antitrust agencies to do more to prevent the harmful effects of consolidation, including collecting more information in the HSR Filing. Examples of supportive comments from these individuals include the following:

• I was an employee at a mobile gaming company. . . . We went through acquisition after acquisition, to finally end up in a subsidiary of a big gaming multinational company. . . . There was a hiring freeze, there were layoffs in another subsidiary we had been affiliated with and then a month ago they cancelled our project and laid off all California employees. . . . Before the final acquisition, our company had 2 profitable games and was developing a third. After the acquisition there were harsh [Key Performance Indicators] for the new game and investment was cut back. Had our company been able to resist the wave of subsequent acquisitions, it is likely we would still be employed in a profitable and vibrant company that was able to compete on the marketplace.

Anonymous Comment, Doc. No. FTC-2023-0040-0134.

• I am a General Partner at a small Venture Capital firm. I support this proposal as I believe it will lead to increased transparency which benefits us all. . . . We are facing an oligopoly/monopoly crisis in this country/the world and it's important we strive for real competition. I believe this proposal will provide the government more information with which it can make sure our industries thrive.

Anonymous Comment, Doc. No. FTC-2023-0040-0203.

• As a retired person, I have noticed prices going up much more where a small group of suppliers have most of the market share. I see companies using near-monopoly power to stop employees from having unions. The only way the antitrust laws can be adequately enforced, is to insist that anyone proposing a merger provide full accurate information on what they are doing.

Comment of Joan Friedman, Doc. No. FTC-2023-0040-0237.

• I work as a cybersecurity engineer. Leaving aside the economic concerns of monopolies, I want to bring up the security concerns of allowing unchecked mergers. Haphazard, rushed mergers increase the security risk across companies, as the engineering teams must stitch together the environments for disparate organizations quickly. . . . I look forward to these reporting requirements and I hope they cause companies to slow down and think of the knock-on effects of the mergers beyond the influx of cash and increased market power.

Comment of Cybersecurity Engineer, Doc. No. FTC-2023-0040-0238.

• As an investor and financial advisor, I approve of the changes requiring more disclosure about the nature of mergers. The impacts of industry consolidation are important. . . . A thorough understanding of the purpose of mergers should help ensure that deals are not anti-competitive.

Comment of Joseph Cook, Doc. No. FTC-2023-0040-0244.

• As a retired CPA and former business professor, I support these proposed changes to the HSR form. The government needs the additional information and greater clarity in order to carry out its responsibility to oversee and evaluate proposed mergers and acquisitions with a view to protecting

the common good and promoting competition within and across industries.

Comment of Sue Ravenscroft, Doc. No. FTC-2023-0040-0259.

• Capitalism can only work with a robust system of competition, and we are lo[]sing that at an ever-increasing rate. I am in an agricultural business. There is virtually no competition for the dollars I spend, and an equal lack of competition for what I produce. This is stunningly true when looked at over the 40 years I have been in business.

Comment of Jeffrey Bender, Doc. No. FTC-2023-0040-0267.

• Businesses certainly have a right to pursue mergers and acquisitions as a means of improving their market positions, but the public also has a right to know the “five W's” driving these decisions: Who is funding the HSR Action; What are the specifics of the proposed action; When are the HSR Actions taking place; Where are the affected communities/localities; and Why are the stakeholders pursuing the HSR Action (or, what is their business goal)? Another key piece of information that the public has a right to know, is WHO will be affected by the proposed merger or acquisition? The issues at stake here are National Security, fair market competition, supply chain disruptions, and negative impacts on labor markets. . . . I hope the FTC sticks to their plan and implements these common-sense and much needed reporting requirements.

Comment of Thomas Newman, Doc. No. FTC-2023-0040-0325.

• I am a 25-year veteran in an industry (publishing) that has seen both jobs and innovation suffer due to unchecked consolidation by large players. It is very possible some of this consolidation might have been prevented, or at least steered in a direction that encouraged innovation and growth, if regulators had this kind of information available beforehand.

Anonymous Comment, Doc. No. FTC-2023-0040-0332.

• I am a private, sole-practitioner entrepreneur with a vested interest in a diversified economic ecology that supports and sustains vibrant, fair competition. . . . From my perspective, the requirements for getting approval for large mergers should include gathering enough information about the companies involved that the FTC can make a best and rational assessment of the effects of the maneuver on the industries, labor markets, consumer pricing, industry trends, trading markets, etc, that they (mergers) will potentially affect.

Comment of Marla McFadin, Doc. No. FTC-2023-0040-0377.

On the other hand, several commenters stated that the Agencies have not provided any evidence that current information requirements are insufficient, or identified transactions they did not challenge due to shortcomings in the current premerger review process. One commenter suggested that if the Commission intends to expand the information requirements for the HSR Filing, it should lay a stronger legal and evidentiary foundation that would justify its need for the additional information. Another commenter urged the Commission to consider how best to balance the need to determine whether further investigation is warranted against the burden to filing parties.

In response to the comments and to explain further the need for this rulemaking, the Commission discusses below the gaps that exist in current HSR information requirements relating directly to potential violations of the antitrust laws, and identifies the new information requirements in the final rule that will provide a factual basis for the Agencies to determine whether to conduct a more searching review of a transaction based on these concerns. The gaps described below are intended to be illustrative and not exhaustive.

1. Disclosure of Entities and Individuals Within the Acquiring Person

In reviewing a transaction filed under the HSR Act, the Agencies must quickly understand the scope and nature of the buyer's business and business relationships to determine whether the acquisition may harm competition and thus violate the antitrust laws,

which include section 7 of the Clayton Act. The scope of section 7 is broad: it prohibits any acquisition whose effect may be substantially to lessen competition or to tend to create a monopoly, including those that result in a small ownership stake.

In many acquisitions, the buyer gains control of the acquired entities or assets and directs the decision-making at the combined firm post-merger. In addition, if the buyer has a complex corporate or governance structure, an acquisition can bring together individuals or investors within the buyer that control or influence decision-making at a competitively significant business, such as a competitor of the target

of the filed-for transaction.

Indeed, holdings of entities within the acquiring person that do not result in control under the HSR Rules nevertheless can result in the ability to influence competitively important decisions of the acquiring entity, and thus affect the analysis of whether the acquisition of the target may harm competition.

15 U.S.C. 12(a).

15 U.S.C. 18.

See United States

E.I. du Pont de Nemours & Co.,

353 U.S. 586, 592 (1957) (any acquisition is within the reach of section 7 whenever the reasonable likelihood appears that the acquisition will result in a restraint of commerce or the creation of a monopoly in any line of commerce).

To aid the clarity of the Form and Instructions, the Commission defines “target” in the Instructions to include all entities and assets to be acquired by the acquiring person from the acquired person in the reported transaction.

See

section VI.A.1.h.

See, e.g., In re Red Ventures Holdco, LP,

No. C-4627 (F.T.C. Nov. 2, 2017) (complaint) (overlapping limited partnership holdings violated section 7);

In re TC Group, L.L.C.,

No. C-4183 (F.T.C. Mar. 16, 2006) (complaint) (acquisition involving minority stake giving two private equity investors seats on the boards of competitors);

In re Dan L. Duncan,

No. C-4173 (F.T.C. Aug. 18, 2006) (complaint) (acquisition combined general partners of competing energy storage companies under common control). Competition concerns about partial stakes can arise between horizontal competitors;

United States

Dairy Farmers of Am.,

426 F.3d 850, 860 (6th Cir. 2005), or a supply relationship,

du Pont,

353 U.S. at 602-604 (23% interest in General Motors, a key supplier, and a shared board member). Section 7 does not apply to buyers making an acquisition solely for the purpose of investment when the buyer does not intend to use its position to bring about or attempt to bring about a substantial lessening of competition.

United States

Tracinda Inv. Corp.,

477 F. Supp. 1093, 1100 (C.D. Cal. 1979).

See du Pont,

353 U.S. at 607 n.36 (finding the influence of du Pont's 23% stock interest to be greater, due to diffusion of remaining shares);

Denver & Rio Grande W. R.R. Co.

United States,

387 U.S. 485, 504 (1967) (identifying section 7 concerns with a 20% investment).

See also

Steven A. Cohen, et al., “Private Equity in 2023—A Year (Not) to Remember,” Harv. L. Sch. Forum on Corp. Governance (Jan. 13, 2024),

https://corpgov.law.harvard.edu/2024/01/13/private-equity-in-2023-a-year-not-to-remember/

(private equity deal volume declined in 2023 and increasingly focused on smaller deals and minority investments).

See generally

Bob Zider, “How Venture Capital Works,” Harv. Bus. Rev. (Nov.-Dec. 1998),

https://hbr.org/1998/11/how-venture-capital-works

; Thomas Hellman, “The allocation of control rights in venture capital contracts,” 29 RAND J. Econ. 57 (1998).

See, e.g.,

Sec. Exch. Comm'n, “Private Equity Funds,”

Investor.gov

(last visited Sept. 10, 2024),

https://www.investor.gov/introduction-investing/investing-basics/investment-products/private-investment-funds/private-equity

When these private investors take active positions in a wide variety of companies, such holdings can create direct links between competitors or other competitively relevant firms, such as critical suppliers or distributors. Economic research has shown that transactions that lead to cross-ownership of horizontal competitors or other firms in a competitively significant business relationship can create similar incentives and cause similar anticompetitive effects as a full merger.

But when these relationships are not well known or easy to identify, the risk that anticompetitive harm from an unlawful acquisition will go

undetected is greatly increased.

This includes the risk of collusive

or coordinated behavior,

or the risk that cross-ownership of the combined firm will lead to foreclosure of rivals.

Timothy Bresnahan & Steven C. Salop, “Quantifying the competitive effects of production joint ventures,” 4 Int'l J. Indus. Org. 155 (1986).

Daniel P. O'Brien & Steven C. Salop, “Competitive Effects of Partial Ownership: Financial Interest and Corporate Control,” 67 Antitrust L. J. 559, 570 (1999) (overview of the complex corporate financial and governance structures of modern corporations, including different types of shareholding and the relationships to the boards of directors).

Robert J. Reynolds & Bruce R. Snapp, “The competitive effects of partial equity interests and joint ventures,” 4 Int'l J. Indus. Org. 141 (1986); David Flath, “When is it rational for firms to acquire silent interests in rivals?,” 9 Int'l J. Indus. Org. 573 (1991); David Reitman, “Partial Ownership Arrangements and the Potential for Collusion,” 42 J. Indus. Econ. 313 (1994); Sandro Shelegia & Yossi Spiegel, “Bertrand competition when firms hold passive ownership stakes in one another,” 114 Econ. Letters 136 (2012).

Rune Stenbacka & Geert Van Moer, “Cross ownership and divestment incentives,” 201 Econ. Letters 109748 (2021).

Nadav Levy et al., “Partial Vertical Integration, Ownership Structure, and Foreclosure,” 10 a.m. Econ. J.: Microeconomics 132 (2018).

The increasing role of private capital is reflected in the shifting mix of reportable transactions. Using data from the Agencies' Annual HSR Reports for the past 20 years, Figure 2 shows that the number of transactions for which the name of the Ultimate Parent Entity of the acquiring person included “fund” or some variation of “L.P.” has increased from approximately ten percent to nearly 40 percent of all reportable transactions.

The acquiring person for these transactions can be shell companies that have been created by an investment group in order to make a particular acquisition, or an entity that owns a variety of other operating entities (often referred to as “portfolio companies”). In either scenario, the entity is part of the structure of a larger investment company or group.

See

Fed. Trade Comm'n & U.S. Dep't of Justice, Hart-Scott-Rodino Annual Report, Fiscal Year 2010 appendix A (FY 2010) (reporting Adjusted Transactions in which a Second Request could have been issued from years 2001-2010); Fed. Trade Comm'n & U.S. Dep't of Justice, Hart-Scott-Rodino Annual Report, Fiscal Year 2013 appendix A (FY 2013) (reporting Adjusted Transactions in which a Second Request could have been issued from years 2004-2013); Fed. Trade Comm'n & U.S. Dep't of Justice, Hart-Scott-Rodino Annual Report, Fiscal Year 2022 appendix A (FY 2022) (reporting Adjusted Transactions in which a Second Request could have been issued from years 2013-2022).

See also

Fed. Trade Comm'n Annual Reports to Congress Pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976,

https://www.ftc.gov/policy/reports/annual-competition-reports

(collecting reports). The Total Number of Adjusted Transactions omits from the total number of transactions reported all transactions for which the agencies were not authorized to request additional information. These include (1) incomplete transactions (only one party filed a complete notification); (2) transactions reported pursuant to the exemption provisions of sections 7A(c)(6) and 7A(c)(8) of the Act; (3) transactions which were found to be non-reportable; and (4) transactions withdrawn before the waiting period began. In addition, where a party filed more than one notification in the same year to acquire voting securities of the same corporation,

e.g.,

filing for one threshold and later filing for a higher threshold, only a single consolidated transaction has been counted because as a practical matter the agencies do not issue more than one Second Request in such a case. These statistics also omit from the total number of transactions reported secondary acquisitions filed pursuant to § 801.4 of the Premerger Notification rules. Secondary acquisitions have been deducted in order to be consistent with the statistics presented in most of the prior annual reports.

ER12NO24.034

Since the beginning of the premerger program, the Commission has required filers to report certain entities that hold minority interests in the filing parties to alert the Agencies to situations in which the potential antitrust impact of the reported transaction does not result solely or directly from the acquisition, but may arise from direct or indirect shareholder relationships between the parties to the transaction.

As explained in the NPRM, reporting requirements regarding the identification of certain minority holders of the filing persons have been adjusted over time to reflect market realities, including changes in investment activity and the growing role of these intermediaries.

Nonetheless, changes in the investment landscape discussed above have created meaningful gaps in the reporting requirements for a growing number and type of minority holders that have the ability to influence competitive decision-making and to harm competition via acquisitions that violate the antitrust laws.

43 FR 33450, 33531 (July 31, 1978).

NPRM at 42188.

b. Corporate Structure Changes

Several commenters supported the need for additional information that would identify entities holding minority

positions. One commenter stated that investors have shifted strategies since the 1980s, when portfolios consisted of unrelated companies and investors mainly focused on optimizing capital structures and improving corporate governance.

Another commenter stated that without a full picture of the entire corporate structure of the merging parties, it can be difficult or impossible to untangle or understand the potential anticompetitive impacts of a transaction. Several commenters supported the need to adjust information requirements to have a broader view that reflects how firms are organized today. One commenter supported the collection of more comprehensive information related to the merging entities, arguing that a more holistic and systems-level approach would examine the networks of firms involved in a market, which could expose companies that can operate as bottlenecks or supply key resources to other market participants. A group of State antitrust enforcers supported the collection of more information related to corporate control or the degree of financial interest so the Agencies can quickly assess how the resulting ownership structure may change the parties' incentives to compete, enhance the acquirer's ability to influence decision-making through changes in voting interests or governance rights, or facilitate the sharing of competitively sensitive information between rivals.

See also

Aslihan Asil et al., “Misaligned Measures of Control: Private Equity's Antitrust Loophole,” 18 Va. L. & Bus. Rev. 51 (2023). Asil et al. argue that the complicated structure of ownership in the typical private equity acquisition may make some anticompetitive deals technically non-reportable under the HSR act, because the investment structure under-represents the proportion of control actually conferred by the transaction.

Id.

at 53.

Another development that has caused the Commission to reassess its rules is that the particular corporate structure of an entity is now less indicative of its market behavior, and thus distinctions made on that basis may no longer be sound. The decision to form as a corporation, limited liability company, or limited partnership is often influenced more by risk, liability, and tax considerations than by the entity's business operations. Now more than ever, distinctions made based on corporate form have little impact on an assessment of whether and how firms compete. Moreover, corporate governance literature highlights the changing nature of decision-making within even standard organizational structures, such as corporations. Corporate law provides sufficient flexibility to alter traditional roles, including the rights of shareholders and the scope of director liability, by contract

or through modification of bylaws or certificates of incorporation.

The rise of shareholder agreements—private contracts by and among shareholders—has affected who has the ability to direct decisions of the company, separating voting and control, especially for those given veto rights via contract.

These forms of `stealth governance' have implications for how decisions are made within the firm, making it difficult for investors to know who is exercising control within the company.

See

Jill E. Fisch, “Governance by Contract: The Implications for Corporate Bylaws,” 106 Cal. L. Rev. 373, 379 (2018).

Megan Wischmeier Shaner, “Interpreting Organizational `Contracts' and the Private Ordering of Public Company Governance,” 60 Wm. & Mary L. Rev. 985, 988 (2019) (the charter and bylaws of public corporations are being used as tools for restructuring key aspects of corporate governance).

Rauterberg,

supra

note 43.

Jill E. Fisch, “Stealth Governance: Shareholder Agreements and Private Ordering,” 99 Wash. U. L. Rev. 913, 947 (2021) (One investor's capacity to monitor may be limited by an agreement to support director candidates chosen by another investor, or an ownership structure that appears to involve shared power may be undermined by the contractual formation of a control group).

After careful consideration of these points and others raised by commenters, the Commission has determined that the requirements of the current Form and Instructions have not kept pace with market realities and the accompanying changes in ownership structures. In light of these shifts in corporate formation and governance, the current requirements do not provide the Agencies with sufficient information that allow them to understand how decisions are made at the respective companies, let alone whether the acquiring person may have competitively relevant premerger entanglements with the target's industry and minority holders that may have significant rights to direct the acquiring entity's actions.

To keep pace with prior changes in corporate form, the Commission has adjusted the disclosure requirements for minority investors over time and in light of its experience reviewing thousands of filings each year, balancing the need to surface competitively relevant relationships without burdening filers to provide information that would not change the Agencies' premerger screening decisions. Under the current rules, it has become increasingly difficult to screen transactions because deal structures often have minority investors with significant rights that are not disclosed. See Figures 4 through 8 below, section VI.D.1.d.ii. This includes situations where an investor group is, for practical purposes, making the acquisition (or otherwise significantly involved), but the HSR Filing does not alert the Agencies to their role in the acquisition. These relationships are not currently disclosed if the minority investment is not in the UPE or acquiring entity, but rather in an entity (often a shell entity) that sits between these two in the structure of the acquiring person. Even if the minority investment is made in the UPE, if the UPE is an LP, only the name of the general partner is disclosed. For situations where the current information on the HSR Filing is unrelated to the public-facing name of the entity that controls the acquiring person, the HSR Filing does not alert the Agencies to the premerger relationships that exist solely due to that investor's relationship with and role in the buyer.

For example, a fund that operates as Alpha Capital Partners could create an entity named 123ABC, LP to effectuate an acquisition. 123ABC, LP could be its own UPE because Alpha Fund I and Alpha Fund II each hold 49.9% of the 123ABC, LP, with the general partner, 123ABC GP, LP, holding 0.2%. Currently, the Form only requires 123ABC, LP to disclose that 123ABC GP, LP is its general partner. The issue is compounded if Alpha Capital Partners is co-investing with Beta Capital Partners and 123ABC, LP is held 49.9% by Alpha and 49.9% by Beta (or if Beta invests in an entity that is not the UPE or acquiring entity). Disclosure of these relationships are not currently required.

To close this information gap, the Commission has determined that the Agencies need additional information about entities in between the UPE and the acquiring entity. If any of these entities or individuals has a minority stake or other rights that give them the ability to influence decision-making post-merger, then they are functionally “in the deal” and their existing business relationships are relevant to a thorough premerger antitrust assessment of the transaction. As explained in more detail in section VI.D.1.d.ii.a., this information was required of all corporate entities within the acquiring person prior to a rule change in 2011 that limited the requirement in order to exclude entities not related to the transaction. However, as transaction structures have become more complex, application of the 2011 change has eliminated the requirement to provide information about minority entities that are related to the acquiring entity. The final rule addresses this gap in information so that the Agencies can identify existing relationships among individuals and entities that have interests in (1) the acquiring entity (and any entities it controls or are controlled by it) and (2) other entities within the UPE that have competitive relationships

with the target. These minority holders are competitively relevant because they may have the ability to influence decision-making and operations of the target post-merger

but it is difficult for the Agencies to detect these relationships based on information available the current Form.

See United States

Dairy Farmers of Am., Inc.,

426 F.3d 850, 860 (6th Cir. 2005) (district court erred in focusing on control which ignored the possibility that there may be a mechanism that causes anticompetitive behavior other than control, such as leveraging position as financier).

As discussed below in section VI.D.1.d. and VI.D.3.c., the final rule requires additional information for Minority Shareholders or Interest Holders as well as Officers and Directors from the acquiring person. Information about other individuals or entities holding a minority position or rights to serve or appoint members of the governing board will fill an existing gap that has created a blind spot for the Agencies that prevents a thorough premerger screening, especially for transactions involving complex corporate structures and investment vehicles. This information is most relevant from the entity that will be making decisions post-consummation, and so the final rule does not seek this information from the seller, other than the identification of minority interest holders that will “roll over” their investments post-consummation.

This information is necessary to identify additional areas of competitive concern created by minority stakeholders or other influential decision-makers (

i.e.,

officers and directors) that may have a relationship with entities related to the target of the acquisition.

In many transactions, the acquired firm ceases to exist post-consummation. Even when some entity continues to generate revenues, possibly in competition with some aspects of the buyer's business, the Commission has determined to collect additional information about entities within the UPE only from the acquiring person at this time.

However, in light of concerns raised by commenters about the burden and relevancy of providing this information with respect to limited partners, the Commission has modified these requirements to focus only on those limited partners that also have management rights, such as the right to appoint members to the board. Moreover, the final rule does not adopt certain proposed requirements to identify board observers, or creditors, holders of non-voting securities, or entities with management agreements. The Commission has determined not to require this information at this time but will continue to monitor market activity as it implements the final rule.

Similarly, new document requirements contained in the final rule are aimed at providing a more in-depth understanding of the motivation and purpose of the transaction, and how the combined company will be operated post-consummation. In particular, additional transaction-related documents will provide a more complete picture of the buyer's reason for pursuing the transaction, and for companies with complex investment structures, these documents may reveal whether there are other individuals or entities who will be participating in competitive decisions post-merger. The final rule also requires a small set of business plans and reports shared at the highest level of management that discuss market shares, competition, competitors, or markets of any product or service that is provided by both the acquiring person and acquired entity. Together, these documents may reveal whether there are significant investors in either party that also have investments in businesses that compete with the target or if there are any other planned investments in competitively relevant businesses, such as competitors or suppliers, that would impact the Agencies' assessment of whether the transaction may violate the antitrust laws.

2. Identifying Potential Labor Market Effects

The Clayton Act's prohibition on acquisitions that may substantially lessen competition or tend to create a monopoly applies to acquisitions that have these effects on competition to purchase inputs that firms use to produce goods and services just as it does to acquisitions that threaten competition in downstream markets for goods and services themselves,

and the antitrust laws protect competition in markets for labor services.

As evidence of decreasing competition for labor continues to mount,

the Agencies have increasingly recognized the importance of evaluating the effect of mergers and acquisitions on labor markets and have stepped up efforts to identify and investigate potential labor market effects arising from reportable transactions. The Agencies have challenged a few transactions that may result in labor market harms,

and consent agreements have included provisions that stop the use of certain non-compete clauses that limit the ability of potential market entrants to hire key employees.

See United States

Bertlesmann SE & Co.,

646 F.Supp.3d 1 (D.D.C. 2022) (violation of section 7 where merger likely to substantially lessen competition in market for publishing rights to anticipated top-selling books due to harm to targeted sellers—authors of top-selling books);

Boardman

Pac. Seafood Grp.,

822 F.3d 1011, 1022 (9th Cir. 2016) (acquisition may violate section 7 by substantially lessening competition in multiple seafood input markets).

See also

Concurring Statement of Commissioner Slaughter and Chair Khan Regarding FTC and State of Rhode Island v. Lifespan Corporation and Care New England 1-2 (Feb. 17, 2022),

https://www.ftc.gov/system/files/ftc_gov/pdf/public_statement_of_commr_slaughter_chair_khan_re_lifespan-cne_redacted.pdf

(recommending including a count in the complaint that the proposed merger would have violated section 7 of the Clayton Act in a relevant labor market).

Press Release, Fed. Trade Comm'n, “FTC Imposes Strict Limits on DaVita, Inc.'s Future Mergers Following Proposed Acquisition of Utah Dialysis Clinics” (Oct. 25, 2021),

https://www.ftc.gov/news-events/news/press-releases/2021/10/ftc-imposes-strict-limits-davita-incs-future-mergers-following-proposed-acquisition-utah-dialysis.

As stated in the NPRM, current notification requirements under the HSR Act do not require any specific information about employees. And yet virtually every firm competes for labor in at least one labor market and, more commonly, in multiple labor markets, and transactions that involve two firms

that purchase labor from the same labor market(s) may substantially lessen competition between employers for labor services. Merging parties may compete in the same labor market even when they do not compete in the same product market.

The Commission received hundreds of comments from individuals, many of whom are in the entertainment industry, who supported the need for the Agencies to conduct a robust search for potential labor market effects before the acquisition is consummated. Several dozen recounted the effects that prior mergers have had on them. Examples of comments supportive of reviewing transactions for labor market effects include the following:

• I'm a working TV writer at the beginning of my career. I'm afraid for the future—the consolidation of the media companies in this town and their vertical integration has made things so much harder and less competitive, even in the time that I've been in LA and worked within the system. Now that there are so few “shops” in town, salaries are depressed and it's become incredibly difficult to not only demand fair pay, but treatment as well. They know that they don't have to negotiate or budge on whatever terms they set because there are increasingly few alternatives to them.

Anonymous Comment, Doc. No. FTC-2023-0040-0511.

• My background includes Strategy consulting for major transnational Mergers. I think the new rules are very good as they demand greater clarity from the firms before the transaction starts. I have seen a lot of waste and backtracking as executives struggle between their ego and the analytics that do not tell them the story that they want about why the transaction will succeed. And the new labor and financing provisions offer much needed transparency—layoffs are a knee jerk habit and are not really helpful for the firm or the industry.

Comment of Punya Upadhyaya, Doc. No. FTC-2023-0040-0283.

• Please collect data on labor markets. I've been affected by the monopolies in the entertainment industry and likely will lose my livelihood as well as that of my staff due to unchecked mergers within the next month. After starting a successful business 23 years ago, it's heartbreaking to lose it and will be costly to our economy as more and more of us lose our businesses due to these unchecked mergers and the power they wield to save them money.

Comment of Karen Wood, Doc. No. FTC-2023-0040-0271.

• I work in a small accounting firm and I have seen the effects of mergers on consumer satisfaction and worker wellbeing personally. . . . [M]any of the job-searching or hiring firms we'd contract with to seek additional workers are worried about raising the ire of the large firm in the region, as it comprises so much of their client base now[.] . . . As a result, we're forced to go with larger, national firms for hiring, and become part of the problem of sectoral concentration.

Comment of John Kurpierz, Doc. No. FTC-2023-0040-0462.

• As a lifelong union member I also believe the requirement for detailing merger effects on workers and unions to be a vital necessity. Those of us outside the C suites, boardrooms and stockholder meetings are stakeholders too, and our livelihoods and well being should be considerations.

Comment of Chas McClelland, Doc. No. FTC-2023-0040-0273.

• I personally know many folks in entertainment (writers, crew, actors, etc.) who have had such a difficult time surviving in Hollywood that they've simply had to quit or move home. And, frankly, folks who specifically represent cultures that are least visible in society are often the first to go—because they don't necessarily have the resources or didn't face as many obstacles as other artists. It's a terrible cycle, magnified greatly by vertical mergers.

Comment of Alice Stanley, Doc. No. FTC-2023-0040-0508.

Numerous commenters, including State antitrust enforcers and members of Congress, expressed general support for an increasing focus on labor market competition in merger analysis and requiring additional labor market information in the Form to screen for such issues. Some commenters highlighted potential efficiencies in the merger review process from providing the Agencies with labor market information in the earlier stages of review, including a more uniform process that could result in the termination of more merger reviews within the 30-day waiting period and a more efficient use of Agency resources where no labor market issues exist.

The Commission disagrees with a commenter who stated that the analysis under the Clayton Act requires consideration of competition issues, but not labor. Antitrust law, including the Clayton Act, has always been concerned with workers and labor markets.

As noted by the State antitrust enforcers, in the congressional debates on the Clayton Act in 1914, legislators expressed concerns regarding the monopsonist's power to dictate to its labor the wage it will pay for the only commodity labor has to sell.

As recently as 2021, a unanimous Supreme Court in

NCAA

Alston

affirmed that the antitrust laws are designed to prevent harm to competition in labor markets.

As noted in the concurring opinion: “Price-fixing labor is price-fixing labor. And price-fixing labor is ordinarily a textbook antitrust problem because it extinguishes the free market in which individuals can otherwise obtain fair compensation for their work.”

And there is bipartisan agreement among current Federal enforcers and their predecessors that the Agencies are empowered to enforce the Clayton Act to prevent competitive harms in labor markets caused by mergers.

Moreover, recent empirical work demonstrates the impact that mergers have on competition in labor markets.

Anderson

Shipowners Ass'n of the Pac. Coast,

272 U.S. 359, 365 (1926).

Comment of State Atty's Gen., Doc. No. FTC-2023-0040-0695 at 21 n.123 (citing 51 Cong. Rec. 9184 (1914) (statement of Rep. Guy Helvering)).

See also

21 Cong. Rec. 2457 (1890) (statement of Sen. Sherman asserting trusts command the price of labor).

NCAA

Alston,

594 U.S. 69 (2021). The Agencies' approach to evaluating the potential labor market effects of mergers is set forth in the Merger Guidelines. U.S. Dep't of Justice & Fed Trade Comm'n, Merger Guidelines 2.10 (2023).

Alston,

594 U.S. at 109-110 (Kavanaugh, J., concurring).

See generally

FTC Chairman Joseph J. Simons, Prepared Keynote Address at American University Washington College of Law Conference on Themes of Professor Jonathan Baker's New Book,

The Antitrust Paradigm: Restoring a Competitive Economy

9 (Mar. 8, 2019),

https://www.ftc.gov/system/files/documents/public_statements/1515179/simons_-_jon_baker_speech_3-8-19.pdf;

Assistant Attorney General Makan Delrahim, Remarks at the Public Workshop on Competition in Labor Markets 3 (Sept. 23, 2019),

https://www.justice.gov/opa/speech/assistant-attorney-general-makan-delrahim-delivers-remarks-public-workshop-competition

See

Elena Prager & Matt Schmitt, “Employer Consolidation and Wages: Evidence from Hospitals,” 111 a.m. Econ. Rev. 397 (2021); David Arnold, “Mergers and Acquisitions, Local Labor Market Concentration, and Worker Outcomes” (Working Paper, Oct. 27, 2019),

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3476369

One commenter stated that requiring merging parties to provide labor and employment information is at odds with the consumer welfare standard. This is not correct. Judge Easterbrook, writing for the Seventh Circuit, recently rejected an employer's argument that restrictions on the movement of employees could be justified because it expanded the output of consumer products: “One problem with this approach is that it treats benefits to consumers (increased output) as justifying detriments to workers (monopsony pricing). That's not right; it

is equivalent to saying that antitrust is unconcerned with competition in the markets for inputs, and

Alston

establishes otherwise.”

There is a clear consensus that the consumer welfare standard is sufficiently flexible to encompass antitrust enforcement to prevent competitive harms to labor markets.

Because section 7 reaches these concerns, it is appropriate for the Agencies to collect information to determine if the transaction may violate the antitrust laws by substantially lessening competition in any market for labor. The fact that the Commission has not previously required this information to be reported in HSR filings does not mean that the information is not necessary and appropriate to enable the Agencies to determine whether an acquisition, if consummated, may violate the antitrust laws. While not every negative impact on workers reflects a harm to competition, growing evidence about the potential for mergers to cause harm in input markets for labor in violation of the antitrust laws shows that the Agencies have a sound basis to review transactions for potential competitive impacts on labor markets.

Deslandes

McDonald's USA, LLC,

81 F.4th 699, 703-04 (7th Cir. 2023).

See

Herbert Hovenkamp, “Is Antitrust's Consumer Welfare Principle Imperiled?,” 45 J. Corp. L. 65, 78 (2019) (injury that results from the exercise of monopsony power is technically similar to the injury caused by monopoly; in both cases the defendant reduces output); Delrahim,

supra

note 82, at 3-4 (consumer welfare standard is flexible enough to take into account harm to competition that is localized in an upstream labor market, not just a downstream product market); FTC Commissioner Christine S. Wilson, Keynote Address: Welfare Standards Underlying Antitrust Enforcement: What You Measure Is What You Get 7 (Feb. 15, 2019),

https://www.ftc.gov/system/files/documents/public_statements/1455663/welfare_standard_speech_-_cmr-wilson.pdf

(consumer welfare standard does address possible monopsony concerns, and the agencies apply the consumer welfare standard to labor markets).

As discussed below in section VI.I.3., the final rule does not require filers to submit specific information about their employees as suggested in the proposed rule. Instead, the Agencies will rely on other information and documentary materials required in the final rule to conduct a preliminary assessment of whether the transaction may violate the antitrust laws with respect to any affected labor market. The Agencies have been gaining experience analyzing information about employees during ongoing merger reviews and other investigations of conduct that may harm competition for workers, and the Commission relies on this experience to determine which documents and information have been most useful in identifying those transactions that warrant an in-depth review of potential labor market effects through the issuance of Second Requests.

As discussed below in section VI.I.3., the Commission will rely on information contained in the new Overlap and Supply Relationships Descriptions, as well as additional documents required by the final rule to conduct a preliminary assessment of potential labor market effects. In the Agencies' experience, those transactions that are flagged for closer review due to concerns about effects in output markets may also require a closer look at potential impacts in input markets, including labor markets. Because the final rule will allow the Agencies to conduct a more robust screening for potential effects in output markets, it will also permit more robust screening for potential effects in input markets, including those related to labor services. In addition, the final rule requires the submission of certain plans and reports shared at the highest level of management that discuss market shares, competition, competitors, or markets of any product or service that is provided by both the acquiring person and acquired entity. These documents may also indicate whether the parties view themselves as employing similar categories of employees or competing for certain types of labor services. As a result, the final rule will enhance the Agencies' ability to conduct a premerger assessment to determine if the transaction may violate the antitrust laws with respect to competition for labor. Although the Commission has determined not to require specific information about workers or workplace safety information in the HSR Filing at this time, as the Agencies acquire more experience with conducting competition analyses of labor markets, the Commission may revisit the issue in future rulemakings.

3. Identifying Acquisitions That Create a Risk of Foreclosure

Mergers between firms that are not direct competitors can still violate the antitrust laws. As stated in the NPRM, an acquisition may violate the law if it creates opportunities for post-merger foreclosure of rivals arising from vertical or non-horizontal relationships.

The nature and scope of potential non-horizontal competitive concerns can often be complex and unique. To fully account for all the ways in which a proposed transaction may violate the antitrust laws, the Agencies need information to determine whether there are any existing or emerging business relationships between the merging parties that would allow the merged firm to limit access to products or services that its rivals use to compete, referred to as “foreclosure.”

Current information requirements in the Rules do not reveal these existing relationships, which are well known to the parties. Even more than in horizontal mergers, which require an assessment of whether the merger may eliminate existing competition between rivals whose products are viewed as substitutes, non-horizontal concerns arise from distinct facts and industry structure that are not readily available to the Agencies from other sources.

NPRM at 42179.

See Illumina, Inc.

FTC,

88 F.4th 1036, 1055 (5th Cir. 2023) (violation of section 7 where merger will result in the potential foreclosure of key input by the sole supplier).

See also United States

AT&T, Inc.,

916 F.3d 1029, 1045 (D.C. Cir. 2019) (vertical mergers can create harms beyond higher prices for consumers, including decreased product quality and reduced innovation).

In the Agencies' experience, it can be difficult to detect whether current or potential rivals of one merging party are dependent on the other merging party for a key product, service, or route to market necessary to compete. The Agencies currently do not receive sufficient information in the HSR Filing to identify candidate “related products” nor to assess the degree to which rivals may be dependent on the related product.

Accordingly, the Agencies are not well positioned to conduct a robust initial screen for this significant mechanism of competitive harm. Being able to quickly assess whether the transaction presents a risk of foreclosure would permit the Agencies to target their investigative resources most efficiently on those transactions that are most likely to raise this competitive concern.

See

U.S. Dep't of Justice & Fed Trade Comm'n, Merger Guidelines 2.5 (2023).

As discussed in more detail below, the Commission has determined that information that reveals existing supply relationships between the merging parties or their rivals is necessary to fully account for the potential that the transaction may create a firm that could limit rivals' access to key products or services they need to compete in violation of the antitrust laws. The Commission previously required information about vendor-vendee relationships, but eliminated this requirement when the reported information did not provide a sufficient basis for that analysis such that the benefit to the Agencies did not outweigh the burden of providing it.

The Supply Relationships Description in the final rule requires information that is specifically targeted to identifying whether rivals may be dependent on the merged firm for key inputs post-merger. Thus, the information is more relevant to the Agencies' screening for such risks than prior vendor-vendee information.

NPRM at 42196-97.

Additionally, the final rule also contains new document requirements that are intended to reveal any existing or future non-horizontal business relationships that could give rise to risks from foreclosure of rivals. For example, the buyer must indicate whether it has existing contracts with the seller in broad categories that are relevant to an initial antitrust assessment, such as leases, licensing agreements, master service agreements, operating agreements or supply agreements, or

any noncompete or non-solicitation agreements that might be affecting current levels of competition. Filers with an existing business relationship also will submit one year's worth of plans and reports provided to a Chief Executive Officer or the Board of Directors that analyze markets and competition pertaining to any product or service both parties supply (including products or services in development). Based on the Agencies' experience, these types of high-level business documents can reveal whether and how the parties interact in the market today to understand how the merger may affect market conditions more broadly, including any risk of foreclosure that could harm other market participants as well as competition overall. Finally, the expanded set of transaction-related documents ensure that the Agencies receive key documents that have been collected for the purposes of the deal but have not yet been shared with the board of directors. In the Agencies' experience, when there is an existing non-horizontal business relationship between the parties, these documents often reference that relationship and how it might be affected by the transaction, including whether the parties believe that there are synergies or efficiencies that may be gained.

4. Identifying Potential Law Violations Involving Innovation Effects, Future Market Entry, or Nascent Competitive Threats

In markets where concentration is already great or trending in that direction, a merger may be illegal if it eliminates ongoing innovation efforts or the possibility that entry or expansion by one or both firms would have resulted in new or increased competition.

100

Relatedly, the acquisition of a firm that represents a nascent competitive threat—namely, a firm that could grow into a significant rival, facilitate other rivals' growth, or otherwise spur more robust competition in the future—may violate the antitrust laws.

101

Concerns that a transaction may violate the antitrust laws by reducing innovation efforts

102

or eliminating a future competitor

103

are core to section 7's purpose to arrest the anticompetitive effects of market power in their incipiency. Established incumbents may seek to acquire a potential entrant or a nascent competitive threat in order to eliminate beneficial future competition, especially at critical junctures when the acquired firm is poised to introduce a disruptive product.

104

100

United States

Marine Bancorp, Inc.,

418 U.S. 602, 630 (1974).

101

See FTC

Procter & Gamble,

386 U.S. 568, 577-78 (1967).

See also United States

El Paso Nat. Gas Co.,

376 U.S. 651 (1964);

Polypore Int'l

FTC,

686 F.3d 1208 (11th Cir. 2012) (acquisitions that eliminate competitive threats violate section 7). Like the Clayton Act, the Sherman Act bars a firm from gaining or maintaining a monopoly position through anticompetitive conduct, including acquisitions that exclude nascent or potential threats to its dominance.

See, e.g., United States

Grinnell Corp.,

384 U.S. 563 (1966) (acquisitions are among the types of conduct that may violate the Sherman Act). Acquisitions by monopolists of nascent competitive threats violate section 2 of the Sherman Act because they are reasonably capable of contributing significantly to the defendant's monopoly power.

United States

Microsoft Corp.,

253 F.3d 34, 79 (D.C. Cir. 2001) (en banc) (per curiam) (Sherman Act does not allow monopolists free reign to squash nascent, albeit unproven, competitors at will).

102

For a discussion of how mergers may violate section 7 by eliminating on-going innovation competition, see Note by the United States to the OECD, The Role of Innovation in Enforcement Cases (Dec. 5, 2023) (DAF/COMP/WD(2023)84),

https://one.oecd.org/document/DAF/COMP/WD(2023)84/en/pdf

103

See United States

Falstaff Brewing Corp.,

410 U.S. 526, 561-62 (1973) (Marshall, J, concurring).

See also United States

Continental Can Co.,

378 U.S. 441, 465 (1964) (fact that merging parties were not direct competitors for all end uses at the time of the merger may actually enhance the long-run tendency of the merger to lessen competition).

104

See United States

Visa Inc.,

No. 3:20-cv-07810 (N.D. Cal. Nov. 5, 2020) (complaint) (transaction abandoned and case dismissed) and Assoc. Attorney General Vanita Gupta, Remarks at Georgetown Law's 15th Annual Global Antitrust Enforcement Symposium (Sept. 14, 2021),

https://www.justice.gov/opa/speech/associate-attorney-general-vanita-gupta-delivers-remarks-georgetown-law-s-15th-annual

See also

Mark Lemley & Andrew McCreary, “Exit Strategy,” 101 B.U. L. Rev. 1 (2020).

117

See Illumina

FTC,

88 F.4th at 1053.

118

Sai Krishna Kamepalli et al., “Kill Zone” (Nat'l Bureau of Econ. Rsch., Working Paper No. 27146, May 2020 rev. June 2022),

https://www.nber.org/papers/w27146

Comments from State antitrust enforcers supported proposals seeking materials and information regarding potential or nascent entrants. However, other commenters stated that the HSR Filing is not an appropriate vehicle for advancing novel legal theories such as nascent competition or research and development competition, and any related revisions should be postponed until those theories are better established in case law.

The Commission disagrees with commenters who suggested that concerns about innovation competition, potential entrants, and nascent threats are not well-grounded in existing law and economic learning. The importance of scrutinizing mergers for potential effects on innovation is well-documented.

119

Economic evidence supports current legal precedent. Research demonstrates a growing phenomenon of dominant firms—buoyed by acquisitions—taking over industries.

120

This is particularly true in the tech industry, where the markets in which digital platforms compete share several characteristics that tend toward a single dominant firm.

121

Sustained high economic profits suggest that dominant firms in these concentrated sectors possess substantial and durable market power.

122

In addition, insufficient competition and entry result in harms to investment and innovation.

123

For these reasons, economic research supports the current legal framework, and reflects the need to carefully scrutinize proposed transactions involving a dominant incumbent or monopolist seeking to acquire a nascent threat or adjacent complement that could someday challenge the incumbent's position.

124

119

See generally

Carl Shapiro, “Competition and Innovation: Did Arrow Hit the Bull's Eye?,” in The Rate and Direction of Econ. Activity Revisited 389-400 (Josh Lerner & Scott Stern eds., 2012).

120

Carl Shapiro, “Protecting Competition in the American Economy: Merger Control, Tech Titans, Labor Markets,” 33 J. Econ. Perspectives 69 (2019).

121

Stigler Comm. On Digital Platforms, Final Report 7-8 (2019),

https://www.chicagobooth.edu/-/media/research/stigler/pdfs/digital-platforms-committee-report-stigler-center.pdf

(explaining network effects, returns increasing with scale, low marginal costs, high returns on amassing user data, and low distribution costs underlie trend toward monopoly).

122

Shapiro,

supra

note 120, at 70.

123

Stigler Comm. On Digital Platforms,

supra

note 121, at 31.

124

Cunningham et al.,

supra

note 15 (presenting empirical evidence that pipeline drug program is less likely to be developed when acquired by firm with overlapping existing product with significant market power); Stigler Comm. On Digital Platforms,

supra

note 121, at 81, 88; Shapiro,

supra

note 120, at 75; Michael L. Katz, “Big Tech mergers: Innovation, competition for the market, and the acquisition of emerging competitors,” 54 Info. Econ. & Policy 100883 (2021).

Going back many years, the Agencies have successfully challenged several mergers that would have eliminated a potential entrant or nascent competitive threat. These enforcement actions include the acquisition of a pipeline firm or product that, once launched, would compete directly with the incumbent merging party,

125

as well as the acquisition of a firm with products already on the market that, although small, was poised to add features or capabilities in the future that could render it a closer and more formidable competitor than it is today.

126

Other transactions challenged by the Agencies involved the acquisition of a firm whose current market share understated its future competitive significance because it did not account for new innovations, business strategies, or other factors.

127

Mergers that impact future competition between products or services that have not yet been developed can also violate the antitrust laws.

128

125

See, e.g., In re Sanofi Corp.,

No. 9422 (F.T.C. Dec. 11, 2023) (complaint) (transaction abandoned);

United States

Visa Inc.,

No. 3:20-cv-07810 (N.D. Cal. Nov. 5, 2020) (transaction abandoned);

FTC

Mallinckrodt ARD Inc. (f/k/a Questcor Pharms., Inc.),

No. 1:17-cv-120 (D.D.C. Jan. 30, 2017) (consent decree ordered license and $100 million equitable monetary relief);

United States

Westinghouse Air Brake Techs. Corp.,

No.1:16-cv-02147 (D.D.C. Oct. 26, 2016) (consent decree ordered divestiture);

In re Thoratec Corp.,

No. 9339 (F.T.C. July 28, 2009) (transaction abandoned);

In re Inverness Med. Innovations, Inc.,

No. C-4244 (F.T.C. Dec. 23, 2008) (Commission order requiring divestiture and other conditions).

126

FTC

PPG Indus., Inc.,

798 F.2d 1500, 1505-06 (D.C. Cir. 1986) (Bork, J.).

See also United States

Bayer AG,

No. 1:18-

cv-01241 (D.D.C. Feb. 8, 2019) (consent decree ordered divestiture); Press Release, U.S. Dep't of Justice, “Applied Materials Inc. and Tokyo Electron Ltd. Abandon Merger Plans After Justice Department Rejected Their Proposed Remedy” (Apr. 27, 2015),

https://www.justice.gov/opa/pr/applied-materials-inc-and-tokyo-electron-ltd-abandon-merger-plans-after-justice-department

;

In re Nielsen Holdings N.V.,

No. C-4439 (F.T.C. Feb. 28, 2014) (Commission order requiring divestiture).

A number of commenters opposed changes contained in the proposed rule over concerns that they would disproportionally impact small innovation companies and startups, which rely on venture capital and acquisitions to sustain their business model. One commenter stated that preventing such exit strategies would make it difficult for startups to obtain early-stage funding, reducing both the number and vitality of these innovative firms. Several cautioned the Commission to avoid increasing the burden and risk associated with the acquisition of startups, which they stated would damage the dynamic U.S. tech innovation system. Another stated that acquisitions that increase concentration can still be procompetitive and drive dynamic efficiency.

As the discussion above clearly demonstrates, acquisitions involving nascent or potential competitors as well as those that impact innovation competition may violate the antitrust laws. The Commission disagrees with commenters that contend that these types of acquisitions should be subjected to a more permissive standard or that the Agencies are singling them out for closer scrutiny. The Agencies routinely review acquisitions of and by innovative companies and apply the same legal standard to those mergers as any other acquisition. When the Agencies challenge these mergers, they are held to the same liability requirements necessary to establish a violation of section 7. However, as discussed above, there is a gap in the current information requirements that undermines the Agencies' ability to determine whether a transaction would eliminate nascent or future competition. To detect those types of acquisitions and to assess whether they violate the antitrust laws, the Agencies need information regarding these forms of ongoing or emerging competition, even if some commenters disagree with the law as applied by the courts in this area.

The Commission acknowledges that the sale of a business to an incumbent may represent a valuable exit strategy for startups. But when such exits are effectuated by a dominant firm to absorb a future or emerging competitor, the overall effect may be to reduce innovation and violate the law.

129

In fact, antitrust enforcement can drive innovation and growth by ensuring that market outcomes are determined through competition rather than left to the decisions of a dominant incumbent who can on its own determine the fate of innovative companies and the future of competition. The history of U.S. antitrust enforcement contains many examples of how government action was required to unleash the forces of competition and innovation, creating new opportunities for investments and startups.

130

Recent research suggests that existing firms may be acquiring innovative capacity not for the purpose of advancing those discoveries but rather to shelve those discoveries, leading to a reduction in innovative output and eliminating an independent source of future competition.

131

Two individual commenters shared their experiences with acquisitions that have had that effect:

129

See

Lemley & McCreary,

supra

note 116 (exit by acquisition leads to concentration in the tech industry and short-circuits the development of truly disruptive new technologies that have historically displaced incumbents in innovative industries).

130

See

Giovanna Massarotto, “Driving Innovation with Antitrust,” Promarket (Apr. 10, 2024)

https://www.promarket.org/2024/04/10/driving-innovation-with-antitrust/

131

See

Cunningham et al.,

supra

note 15.

See also

Florian Szücs, “M&A and R&D: Asymmetric Effects on acquirers and targets?” 43 Rsch. Pol'y 1264 (2014); Carmine Ornaghi, “Mergers and innovation in big pharma,” 27 Int'l J. Indus. Org. 70 (2009); Justus Haucap et al., “How mergers affect innovation: Theory and evidence,” 63 Int'l J. Indus. Org. 283 (2019) (showing a reduction in innovation competition post-merger).

• I work in the software industry and despite the constant talk of “innovation,” I have seen many mergers that eliminate new product development. Mergers/acquisitions often consist of a company acquiring a product and immediately discontinuing either the acquired product or their own competing product. Most engineers I know want to develop new products and many mergers stop this from happening.

132

Comment of Darryl Pretto, Doc. No. FTC-2023-0040-0434.

• I work in the tech industry for a large technology firm. It's disgusting that our philosophy is now to buy other companies and never grow organic products because it is too hard. There's no innovation anymore it is simply make enough money to buy out the actual innovators in an industry. Any new startup is now faced with a massive hill to climb as getting VC money is paramount, but then the moment you do well your VC's will just sell to the highest bidder. This is stagnating tech, and you won't see the effects for some years down the road when 5 tech companies are left in this country. We need tighter oversight on mergers . . . .

133

Anonymous Comment, Doc. No. FTC-2023-0040-0600.

In light of all these considerations, the Commission believes this rulemaking strikes the right balance that permits the Agencies to evaluate transactions for their potential effects on innovation while not standing in the way of acquisitions and other investments that do not present antitrust risks that need to be addressed prior to consummation. The critical task for the Agencies is to identify which transactions may substantially lessen competition or tend to create a monopoly, prior to consummation and before the possibility of future competition is snuffed out.

134

The Commission is not subjecting acquisitions of startups or innovative firms to heightened scrutiny, as some commenters suggest. Rather, the Agencies are modernizing premerger requirements in light of the changes in M&A activity for all transactions that must be reported under the HSR Act, including those involving innovative firms.

135

However, the final rule has been adjusted to lessen the burden on the targets of acquisitions generally. Moreover, many of the new requirements focus on increasing visibility into complex entities and therefore would not be applicable to the relatively straightforward structures of many startup companies.

134

See

Cristina Caffarra et al., “`How Tech Rolls:' Potential Competition and `Reverse' Killer Acquisitions,” 2 CPI Antitrust Chron. 13, 15 (May 2020).

135

According to a recent study, investment in U.S. startups continues to grow each year, reaching a combined deal value of $165.8 billion for 12,235 such deals in 2020.

See

Gary Dushnitsky & D. Daniel Sokol, “Mergers, Antitrust, and the Interplay of Entrepreneurial Activity and the Investments That Fund It,” 24 Vand. J. Ent. & Tech. L. 255, 271 Table 1 (2022). The authors note that a case-by-case analysis of particular deals allows for a more nuanced approach to address particular potentially problematic deals in such settings.

Id.

at 277-78.

See also

D. Daniel Sokol, “Merger Law for Biotech and Killer Acquisitions,” 72 Fla. L. Rev. Forum 1, 8 (2020) (explaining that innovation effect is fact-dependent).

The Commission notes that many acquisitions of startups and small innovator firms are not reportable and thus are not subject to antitrust scrutiny prior to consummation. In September 2021, the Commission released its findings from an inquiry into past acquisitions by the largest technology platforms that did not require reporting under the HSR Act.

136

Launched in

February 2020, this inquiry analyzed the terms, scope, structure, and purpose of exempted transactions by five large technology companies: Alphabet, Inc., Amazon.com, Inc., Apple Inc., Facebook, Inc., and Microsoft Corp. The study covered ten years of acquisitions (from January 1, 2010 to December 31, 2019) and found that the companies collectively made 819 acquisitions that were not reported under the HSR Act.

137

None of these acquisitions was filed under HSR, although many of them were concentrated in just a few categories of technology, such as mobility, application software, and internet content and commerce.

138

136

See

Press Release, Fed. Trade Comm'n, “FTC Staff Presents Report on Nearly a Decade of Unreported Acquisitions by the Biggest Technology Companies” (Sept. 15, 2021),

https://www.ftc.gov/

news-events/news/press-releases/2021/09/ftc-staff-presents-report-nearly-decade-unreported-acquisitions-biggest-technology-companies

137

See

Fed. Trade Comm'n, Non-HSR Reported Acquisitions by Select Technology Platforms, 2010-2019: An FTC Study 10-11 Fig. 1 (2021),

https://www.ftc.gov/system/files/documents/reports/non-hsr-reported-acquisitions-select-technology-platforms-2010-2019-ftc-study/p201201technologyplatformstudy2021.pdf

(hereinafter “Non-HSR Reported Acquisitions”). Data supplied by commenter Engine confirms that the vast majority of startup acquisitions are valued below $50 million, meaning that they are rarely reported to the Agencies in advance.

See

Comment of Engine, Doc. No. FTC-2023-0040-0681, appendix B at 16.

138

Non-HSR Reported Acquisitions,

supra

note 137, at 27-35.

This study provided other insights into these companies' practices and acquisition strategies, including how they structured acquisitions and how these acquisitions fit into the companies' overall business strategies.

139

For instance, not only were many of the acquisitions “small” in deal value (

i.e.,

under the various HSR reporting thresholds), they were also “young,” with nearly 40 percent of the acquisitions involving target firms that were less than five years old.

140

Most of the acquisitions involved the buyer taking control of the acquired assets or entity, although there were also a significant number of investments that resulted in the large company holding a minority interest in the target firm.

141

Moreover, over three-quarters of the transactions included non-compete clauses for founders and key employees of the acquired entities, with relatively small variation in the percentage of transactions with non-compete clauses across the five respondents.

142

Together, these findings indicate that during the study period, these five companies acquired many small, nascent firms operating in related business lines and their founders and other key employees agreed to refrain from continuing their own efforts to innovate outside the company for some period of time. While the study focused on transactions that were not reportable under the HSR Act, the information collected from these tech companies provided the Commission with insight into information that is available to parties in all types of acquisitions but that is not required by the current Form and Instructions.

139

Other competition enforcement agencies around the world conducted similar studies involving acquisitions of digital platform companies.

Id.

at 2 n.6.

140

Id.

at 23-26.

141

Id.

at 15.

142

Id.

at 21-22.

In light of the benefits to the public from preventing mergers that violate the antitrust laws by reducing innovation competition or eliminating a potential entrant or nascent threat, the Commission has determined that the Agencies need certain additional information with the HSR Filing to conduct an initial antitrust assessment prior to consummation. In the Agencies' experience, it is necessary to obtain this type of information directly from the filing parties because typically their plans regarding future products or business lines are not public.

Several new information requirements in the final rule are aimed at providing the Agencies with sufficient information to determine if the transaction is likely to raise concerns about potential, emerging, or nascent competition. For instance, the new Overlap Description and Supply Relationships Description directly address the scope of existing and emerging competition between the parties. In particular, the Overlap Description requires filers to identify their own products and services, including those that are pre-revenue, that compete with the products and services of the other party that are known to the filer.

143

This information will provide a basis for the Agencies to know that there are areas of emerging and direct competition beyond existing products or services, including important ongoing innovation competition. The Overlap Description also requires filers to produce measurement information for products or services not yet generating revenue, or those whose performance is not measured by revenue, such as projected revenue, estimated volume, or any other applicable performance metric. This change recognizes the importance of capturing the competitive significance of nascent or emerging products and services.

143

As explained in section VI.I., the parties should not exchange information for the purpose of responding to the Competition Descriptions.

The final rule also requires the buyer to indicate whether there are any existing contracts between the parties, including non-compete, non-solicitation, or licensing agreements, which would alert the Agencies to any limits on future competition that are created by these agreements, especially when the buyer is not acquiring all of the acquired entity. The existence of non-compete or non-solicitation agreements can be especially useful in revealing that the parties consider themselves to be `in competition' with one another, now or in the future, such that there is value in contracting away the ability to compete for or solicit business or workers. In addition, the Supply Relationships Description requires information for products, services, or assets (including data) that the other party or any other business uses or could use to compete. This forward-looking assessment, based on each filer's business experience, would reveal whether there are future uses of either party's products that could give rise to concerns about non-horizontal effects from the transaction. The inclusion of data as a potentially key asset is purposeful, given the competitive significance of data access for effective competition in so many modern markets.

144

See FTC

IQVIA Holdings Inc.,

No. 1:23 Civ. 06188 (S.D.N.Y. Dec. 29, 2023) (order granting preliminary injunction on horizontal theories of harm without addressing FTC allegations that the acquisition would allow IQVIA to foreclose other industry participants from accessing its data as a key input for healthcare professional programmatic advertising).

Similarly, new document requirements contained in the final rule are aimed at revealing each firm's assessment of market conditions and horizon-scanning for competitive threats. For instance, the final rule requires a broader search for documents that evaluate or analyze the transaction to include not only those provided to board members but also to the person who has primary responsibility for supervising the deal. These documents, along with certain ordinary course plans and reports shared at the highest level of management described above and in section VI.G.2., will reveal additional information about how each filer views the competitive landscape more broadly, including in ways that may impact current or future competition. Together, these documents may signal whether either party has identified emerging threats to competition—from the other party or from firms not involved in the transaction—that would impact the Agencies' assessment of whether the transaction may violate the antitrust laws.

As discussed above in section II.B.1., new information contained in the

Minority Shareholders or Interest Holders and Officers and Directors sections will provide a basis for the Agencies to identify any existing or potential management relationships between the acquiring person and target, including through entities or individuals who can influence decision-making of the acquiring person post-merger. These relationships can be especially concerning if used to gain access to non-public information about future plans or investments in products-in-development when those same individuals also have interests in competitively relevant businesses.

Finally, the final rule collects additional information about the acquisition rationale of the buyer to assist the Agencies in understanding the purpose of the transaction. For example, the final rule requires the buyer to describe any rationale for the transaction and to indicate any document submitted with the HSR Filing that confirms or discusses that rationale. These answers will provide context for the Agencies' initial antitrust assessment through a deeper understanding of what purpose the buyer has for engaging in a transaction that is large enough to require premerger review. In addition, the final rule for the first time requires the seller to report prior acquisitions in the same or related lines of business, which would provide a basis for the Agencies to better assess whether the transaction implicates emerging, nascent, or potential competition, especially through the combined effects of roll-up or serial acquisition strategies or “killer” acquisitions in which assets were purchased but not used as a means of eliminating a competitor.

5. Disclosing Roll-Up or Serial Acquisition Strategies

Another trend in M&A activity has been the rise of serial acquirers, firms that engage in strategic acquisitions in the same industry, often “rolling up” many small competitors in the same or adjacent markets to establish a large, sometimes dominant, position.

145

Serial acquisition strategies have been subject to antitrust scrutiny for over 100 years.

146

In the seminal merger case,

United States

Philadelphia National Bank,

374 U.S. 321 (1963), the Supreme Court noted that both the buyer and the seller had previously acquired many other independent banks,

147

driving a trend toward concentration that rendered their merger suspect.

148

Given the popularity and prevalence of these serial acquisition strategies in recent years, especially in healthcare and technology markets, this trend has attracted the attention of academics and policymakers alike.

149

A pattern or strategy of buying up smaller competitors or firms in the same or related lines of business can lead to harm of the same magnitude and type as mergers of larger or established firms, but serial acquisitions are less likely to attract the attention of enforcers until the strategy is identified. A series of small acquisitions can lead to consolidation within an industry, often without ever triggering the obligation to report these acquisitions under the HSR Act. This strategy has been particularly prevalent in healthcare markets involving private equity buyers.

150

145

NPRM at 42202 n.62 (citing Gerry Hansell et al., “Lessons from Successful Serial Acquirers: Unlocking Acquisitive Growth,” Boston Consulting Grp. (Oct. 1, 2014),

https://www.bcg.com/publications/2014/mergers-acquisitions-unlocking-acquisitive-growth

); “Stealth Consolidation,”

supra

note 18.

146

See, e.g., United States

Grinnell Corp.,

384 U.S. 563, 576, 578, 580 (1966);

Standard Oil Co.

United States,

221 U.S. 1, 31-42 (1911);

United States

Am. Tobacco Co.,

221 U.S. 106, 157-60 (1911).

See also

Note by the United States to the OECD, Serial Acquisitions and Industry Roll-ups (Dec. 6, 2023) (DAF/COMP/WD(2023)99),

https://one.oecd.org/document/DAF/COMP/WD(2023)99/en/pdf

(discussing the history and roots of antitrust enforcement against anticompetitive serial acquisitions). Serial acquisition strategies may also violate section 2 of the Sherman Act when a firm with monopoly power relies on acquisitions, among other conduct, to acquire or maintain its monopoly.

See Credit Bureau Reps., Inc.

Retail Credit Co.,

358 F. Supp. 780 (S.D. Tex. 1971),

aff'd,

476 F.2d 989 (5th Cir. 1973);

United States

Jerrold Elecs. Corp.,

187 F. Supp. 545 (E.D. Pa. 1960).

147

See United States

Phila. Nat'l Bank,

374 U.S. 321, 331 (1963) (PNB previously acquired nine independent banks while Girard acquired six).

148

Id.

at 367 (evidence of several remaining competitors insufficient to rebut inherently anticompetitive tendencies of high post-merger market shares, in light of strong trend toward mergers, including those of the defendants).

149

See

Investigation of Competition in Digital Markets,

supra

note 106, at 24-25.

150

Richard M. Scheffler et al., Am. Antitrust Inst., “Soaring Private Equity Investment in the Healthcare Sector: Consolidation Accelerated, Competition Undermined, and Patients at Risk” 8-16 (May 18, 2021),

https://publichealth.berkeley.edu/wp-content/uploads/2021/05/Private-Equity-I-Healthcare-Report-FINAL.pdf

. The Commission recently hosted a public workshop to discuss the growing body of economic research examining the role of private equity investment in health care markets. Fed. Trade Comm'n, Private Capital, Public Impact: An FTC Workshop on Private Equity in Health Care (Mar. 5, 2024),

https://www.ftc.gov/news-events/events/2024/03/private-capital-public-impact-ftc-workshop-private-equity-health-care

Often the Agencies are not able to detect these strategies until it is too late, after the serial acquirer has established a dominant position and is able to exercise market power to the detriment of market participants. For instance, in September 2023, the FTC charged U.S. Anesthesia Partners, a for-profit corporation, with a multi-year anticompetitive scheme to consolidate anesthesia practices in Texas.

151

This lawsuit, which is pending in Federal court in Texas, alleges that the company acquired over a dozen anesthesiology practices in Texas to eliminate competition and create a single dominant provider with the power to demand higher prices.

151

FTC

U.S. Anesthesia Partners, Inc.,

No. 4:23cv3560 (S.D. Tex. Sept. 21, 2023) (complaint).

The Commission is aware of the impact of serial acquisitions based on its experience with the dialysis industry, which is an area in which economic research has documented adverse effects from serial acquisitions. Throughout the 2000s, the Commission reviewed a series of large acquisitions by DaVita, the largest U.S. provider of life-sustaining treatments for end stage renal disease patients. In 2006, in conjunction with DaVita's $3.1 billion acquisition of rival Gambro Healthcare, Inc., the Commission required DaVita to divest 69 dialysis clinics in 35 markets across the United States to resolve charges that the acquisition violated section 7. In 2011, DaVita sought to acquire rival DSI for $689 million, and the Commission required divestitures to preserve competition for dialysis services in 22 local markets. Then in 2017, the Commission ordered DaVita to divest seven clinics in New Jersey and Dallas to proceed with its $358 million acquisition of Renal Ventures. During roughly the same period, the Commission also reviewed a series of acquisitions by Fresenius, the other leading U.S. provider of dialysis services, and required significant divestitures to maintain competition.

152

See In re Fresenius AG,

No. C-4159 (F.T.C. July 5, 2006) (decision and order requiring divestiture of ninety-one clinics and financial interests in twelve more);

In re Am. Renal Assocs. Inc.,

No. C-4202 (F.T.C. Oct. 23, 2007) (consent order terminating purchase agreement for five clinics and closure of three additional clinics);

In re Fresenius Med. Care AG,

No. C-4348 (F.T.C. May 25, 2012) (decision and order requiring divestiture of sixty dialysis clinics).

Notwithstanding these enforcement actions, the dialysis industry has experienced growing concentration, mostly as a result of acquisitions that were not reportable under the HSR Act. According to one 2020 study, there were more than 1,200 acquisitions of independent dialysis facilities over a 12-year period, resulting in DaVita and Fresenius operating more than 60 percent of all clinics nationwide.

153

The study concluded that these changes in

ownership resulted in higher prices, lower levels of service, and worse outcomes for patients.

154

One commenter stated that, based on his research, merger enforcement against reportable acquisitions prevented illegal consolidation 95 percent of the time, while the many non-reportable acquisitions of dialysis clinics were blocked only 5 percent of the time. He contended that these `stealth' acquisitions accounted for much of the increase in within-market concentration.

155

153

Paul J. Eliason et al., “How Acquisitions Affect Firm Behavior and Performance: Evidence from the Dialysis Industry,” 135 Q. J. Econ. 221, 222 (2020) (from 1990 to 2020, the share of independent dialysis facilities fell from 86% to 21%).

154

Id.

at 223.

155

See

Comment of Thomas Wollmann, Doc. No. FTC-2023-0040-0680 at 1 n.2 (citing to Thomas G. Wollmann, “Stealth Consolidation: Evidence from an Amendment to the Hart-Scott-Rodino Act,” 1 a.m. Econ. Rev.: Insights 77-94 (2019) and Thomas G. Wollman, “How to Get Away with Merger: Stealth Consolidation and Its Effects on US Healthcare” (Nat'l Bureau of Econ. Rsch., Working Paper No. 27274, May 2020 rev. Mar. 2024),

https://www.nber.org/papers/w27274

In light of the failure of prior interventions to stem the adverse consequences of roll-up acquisitions in this industry, when DaVita in 2022 sought to buy 18 clinics in a non-HSR-reportable transaction, the Commission unanimously voted to require DaVita not only to divest three clinics but also to obtain prior Commission approval before buying any new ownership interest in dialysis clinics in Utah.

156

The Commission determined that imposing a prior approval obligation was appropriate in light of the company's history of attempting anticompetitive transactions that do not trigger a notification under the HSR Act.

157

156

In re DaVita Inc.,

No. C-4677 (F.T.C. Oct. 25, 2021) (decision).

157

See

Fed. Trade Comm'n, Statement of the Commission on Use of Prior Approval Provisions in Merger Orders (Oct. 25, 2021),

https://www.ftc.gov/system/files/documents/public_statements/1597894/p859900priorapprovalstatement.pdf

The Commission has also imposed prior notice or prior approval provisions on another serial acquirer, JAB Consumer Partners, a private equity firm that has made several significant acquisitions in the emergency and specialty veterinary services markets across the United States. JAB is the parent company of two large veterinary clinic chains, Compassion-First Pet Hospitals and National Veterinary Associates Inc., that have been built through a series of acquisitions. In 2020, Compassion-First bought NVA for $5 billion, and the Commission required JAB to divest clinics in three local markets.

158

In June 2022, Compassion-First/NVA acquired Sage Veterinary Partners for $1.1 billion, and the Commission required divestitures in three additional local markets.

159

The Commission also determined that, in light of JAB's ongoing acquisition strategy, it would require prior approval and prior notice requirements on JAB's future acquisitions of specialty and emergency veterinary clinics.

160

Later in 2022, when JAB also sought to acquire another veterinary chain with significant competitive overlap in four geographic markets, the Commission again required divestitures and prior approval requirements in the affected local markets for emergency and specialty veterinary services markets.

161

158

In re Agnaten SE,

No. C-4707 (F.T.C. Apr. 9, 2020) (decision and order).

159

In re JAB Consumer Partners SCA SICAR,

No. C-4766 (F.T.C. Aug. 2, 2022) (decision and order).

160

The Commission's order requires JAB to obtain prior Commission approval before acquiring a specialty or emergency veterinary clinic within twenty-five miles of any JAB clinic in California or Texas, and prior notice to the Commission thirty days prior to a similar acquisition anywhere in the United States that is not required to be reported under the HSR Act.

Id.

(decision and order).

161

In re JAB Consumer Partners SCA SICAR,

No. C-4770 (F.T.C. Oct. 10, 2022) (decision and final order).

But resorting to imposing prior approval obligations after an industry has already experienced significant concentration due to roll-up strategies is suboptimal. A central purpose of the HSR Act is to allow the Agencies to arrest trends toward concentration through effective premerger review. For any reportable transaction under the HSR Act, the Agencies have an obligation to determine whether the transaction is one of a series of acquisitions that could lead to harm in the affected markets. Information about each party's prior acquisitions will provide a basis for the Agencies to assess this risk to competition during their initial antitrust assessment for any reportable transaction.

Several commenters supported the need for more information related to prior acquisitions, including a group of State antitrust enforcers. One commenter noted that the private equity industry pioneered and perfected the serial `roll-up' acquisitions that were too small to attract antitrust agency attention but nonetheless amassed considerable market power over time. The same commenter pointed out that private equity firms use these add-on buyout deals to purchase multiple competitors of an existing portfolio company or expand their geographic reach to create a much bigger player in an industry—and that this strategy can in aggregate substantially lessen competition or tend to create a monopoly. Another commenter raised similar concerns that the business strategy of making a series of small acquisitions—whether an intentional tactic to avoid regulatory scrutiny or not—has become concerningly common in recent decades and led to many consolidated industries. An individual commenter shared their experience with the broader impact of rollup acquisitions on local communities:

• As the wife of a small business owner and member of a community, I'm dismayed at seeing how many small local and regional businesses have disappeared after becoming the target of mergers and rollups. Those businesses—funeral homes, hospice care, newspapers, hardware stores, coffee shops, veterinarians—were [] an important part of the community. Now it is nearly impossible to start local businesses in those sectors and turn any sort of profit while competing with PE backed rollups.

162

Comment of Nora Johnson, Doc. No. FTC-2023-0040-0618.

Other commenters stated that the proposed changes are unnecessary because they lack sufficient justification, are out of step with their view of case law and market realities, and do not seem to have a strong factual basis. One commenter stated that the proposal to expand the lookback period for prior acquisitions would invite the Agencies to scrutinize long-consummated deals, including those that the HSR Act were never intended to capture. Some raised concerns that the proposed changes will substantially increase the burden of reporting on prior acquisitions beyond what is currently required for the HSR Form. Another stated that the costs of the proposed changes regarding prior acquisitions far outweigh the potential benefit that information about immaterial prior transactions could provide to the evaluation of the transaction. One commenter stated that requiring disclosure of non-reported transactions will reduce investments in startups.

The Commission has determined that, to detect whether serial or roll-up acquisition strategies have changed the market dynamics such that the transaction under review could have widespread harmful effects that will be hard to undo, the Agencies need additional information about prior acquisitions, including from the acquired firm. Knowing each party's record of prior acquisitions in the same business lines will allow the Agencies to understand the long-term competitive strategy for the transaction at issue, including whether it is one in a series of prior or planned acquisitions in the same industry and whether the

transaction is a merger of “consolidators.” The additional information would also permit the Agencies to better identify transactions whose effects should not be viewed in isolation but rather as a pattern of consolidation.

163

See Brown Shoe Co.

United States,

370 U.S. 294, 334 (1962).

The Commission has always required information about prior acquisitions in the HSR Filing to help identify strategies aimed at gaining market share through acquisitions rather than internal expansion or more vigorous competition, and the Commission disagrees that it is outside its rulemaking authority under the HSR Act to require filers (including the target) to report prior acquisitions in the same or related business lines even if they were not previously reported to the Agencies for premerger review. The final rule contains modest expansions of this long-standing requirement, to better account for the increased number of firms engaged in roll-up strategies. Nonetheless, the final rule does not conta

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