July 20, 2023

DOJ and FTC Propose Dramatic Overhaul of Merger Guidelines

At a Glance

  • The draft guidelines are a dramatic shift from its prior iterations. We analyze some of the more significant changes below.
  • If courts agree with the agencies’ new positions, it is likely that more mergers will be challenged (or abandoned during regulatory review). If courts do not follow these proposed thresholds and standards, however, these guidelines may carry less weight overall and, in particular, with merging parties knowing that if DOJ and FTC overreach during regulatory review, the parties may obtain relief in the courts.
  • Even if the final Merger Guidelines change, given the breadth of the changes, the draft guidelines highlight the need for companies to plan carefully for M&A activity and anticipate an increased likelihood of additional regulatory scrutiny and litigation.

On July 19, 2023, the U.S. Department of Justice (DOJ) and Federal Trade Commission (FTC) jointly announced anticipated changes to the Horizontal Merger Guidelines and Vertical Merger Guidelines. The proposed changes represent the most dramatic and substantial changes to these guidelines since 1992.

The proposed guidelines, which are not law but issued by the agencies to inform industry how they analyze mergers and acquisitions, reflect the Biden administration’s continued skepticism of merger activity and its concern for increased market consolidation. The proposed overhaul is not unexpected; the agencies announced in January 2022 that they intended to revise both the horizontal and vertical guidelines (last revised in 2010 and 2020, respectively), which would now be consolidated into one set of guidelines.

The sweeping changes would dramatically change how the DOJ and FTC analyze and review mergers. As summarized below, if adopted, the guidelines would find more mergers presumptively unlawful, under lower concentration thresholds and a new 30% market share test; the agencies would conduct more thorough investigations of those transactions; and more time would be needed for regulatory review before transactions can close.

These changes closely follow the wide-ranging changes DOJ and FTC jointly announced last month to the HSR filing and notification form for HSR-reportable transactions, which would substantially expand the amount of information and documents merging parties will have to submit with the HSR filing and thereby add time and burden to HSR notification, as we earlier explained.

One critical unknown about these proposed merger guidelines is the courts. Because the guidelines are not law and generally are treated as only persuasive authority, DOJ and FTC will need to convince the courts that mergers with such lower concentrations or lower market shares are also unlawful under the expansive body of Clayton Act case law. It is noteworthy that for the first time, the agencies have cited case law to support their guidance, even though the vast majority of the cases relied upon are decades old, predate the 2010 Horizontal Merger Guidelines, and do not include more recent cases addressing mergers in our modern economy.

If courts agree with the agencies’ new positions, it is likely that more mergers will be challenged (or abandoned during regulatory review). If courts do not follow these proposed thresholds and standards, however, these guidelines may carry less weight overall and, in particular, with merging parties knowing that if DOJ and FTC overreach during regulatory review, the parties may obtain relief in the courts.

The draft sets out 13 separate “Guidelines” the agencies will apply to determine the competitive effects of a merger; and more than one “Guideline” may apply to a particular transaction. Below, we summarize some of the more significant changes that can be found in the draft Merger Guidelines.

1. Lower Thresholds at Which a Merger Is Presumed Unlawful

Two of the most significant proposed changes from the current 2010 Horizontal Merger Guidelines are the lowering of post-merger market concentration levels and the addition of an alternative 30% market share test at which a merger “triggers a structural presumption that the merger may substantially lessen competition or tend to create a monopoly.” In particular, the draft guidelines would:

  • lower from 2,500 to 1,800 the market concentration level (as measured by the Herfindahl-Hirschman Index (HHI)) at which the agencies believe mergers create highly concentrated markets that prompt heightened agency scrutiny. This revised concentration level, which would require a post-merger change of only 100, is only 300 points higher than the level the agencies view under the current guidelines as “unlikely to have adverse competitive effects.”
  • introduce a new market share threshold in which the agencies can assess whether a merger “presents an impermissible threat of undue concentration regardless of the overall level of market concentration.” As proposed, any merger resulting in a combined market share greater than 30%, with an HHI increase of 100 points, would be considered presumptively unlawful.

Both threshold changes reflect the agencies’ harkening back to older standards. The lower 1,800 concentration threshold dates back to when market concentration was first introduced into the merger guidelines in 1982 as a screening measure. In going back to these historical thresholds, the agencies argue that the lower thresholds “better reflect both the law and the risk of competitive harm;” but the agencies do not cite to courts that have relied on the higher thresholds in the 2010 guidelines and do not address the agencies’ reasons for increasing the thresholds in 2010. Likewise, the agencies rely on the U.S. Supreme Court’s 1963 decision in Philadelphia National Bank to justify the 30% market share threshold, but they do not mention subsequent precedent applying higher market shares in the context of anticompetitive consolidation.

While these new thresholds may represent the agencies’ attempt to offset what they believe has been decades of underenforcement, it remains to be seen whether courts will rely on this lower standard as persuasive authority. Setting aside whether courts will accept them, at a minimum, if these thresholds are adopted, parties can expect more transactions will meet the agencies’ structural presumption of competitive harm, triggering more investigations and lengthier agency reviews.

2. A Continued Emphasis on a Structural Approach

The draft guidelines’ retention of a structural presumption to show anticompetitive harm, albeit with a lower HHI threshold and a new market share threshold, signals that the agencies intend to continue to use a structural approach to determine which mergers may warrant heightened scrutiny. As noted in the draft guidelines, “[i]n the Agencies’ experience, this type of structural presumption provides a highly administrable and useful tool for identifying mergers that may substantially lessen competition.” Both the DOJ and FTC have had success challenging and blocking mergers in court when they can put forth a structural case showing high shares and market concentration in a properly defined market.

Going forward, in assessing antitrust risk for a proposed transaction, parties should be aware that a transaction that results in a post-merger HHI above 1,800 or market shares above 30%, which previously faced little or moderate risk of agency antitrust scrutiny, could prompt an extended and costly investigation and potentially a subsequent challenge.

3. A Flexible Approach to Market Definition

In addition, the market definition section of the draft guidelines has been streamlined and implicitly recognizes that the Horizontal Monopolist Test is not the only tool to define a relevant antitrust market. In addition to the Hypothetical Monopolist Test, direct evidence of substantial competition between the merging parties or the exercise of market power, as well as observed market characteristics or practical indicia, can be examined to demonstrate that a relevant market exists. These tools give the agencies the flexibility to define relevant markets in multiple different ways, including narrow markets that exclude significant competitors or competing products.

However, there remain many analytical similarities between the draft guidelines and their prior iterations on market definition. The draft reinforces the point that a relevant market need not have “precise metes and bounds” and can exclude significant competitors to the merging firms. The draft also notes that a market definition exercise helps identify the line of commerce and section of the country in which competitive concerns may arise, and explicitly references the Clayton Act as the backdrop for this exercise.

4. Express Focus on Mergers by Firms With “Dominant Positions”

The draft guidelines also reinvigorate the Clayton Act’s application not only to mergers that substantially lessen competition, but also to those that “tend to create a monopoly.” In particular, the draft Merger Guidelines focus on mergers involving firms with a “dominant position.”

Although the concept of a “dominant position” or “dominant firm” is common in European antitrust law, it has largely been absent from U.S. antitrust law until now. Under the draft guidelines, the agencies will consider:

  • whether one of the merged firms already has a dominant position; and
  • whether and the extent to which the merger may entrench a firm’s dominant position or extend it into a new market.

Firms that possess at least 30% share in a relevant market are automatically considered to have a dominant position—a relatively low bar. And any acquisition by a firm that “has or is approaching monopoly power” and that “may tend to preserve its dominant position” will likely be challenged. The lack of a meaningful limiting principle here is notable.

Be mindful that, in addition to the Clayton Act, mergers involving dominant firms that “tend to create a monopoly” may also violate the Sherman Act, which proscribes the acquisition or maintenance of monopoly power. The draft guidelines expressly state that the agencies will “assess whether the merger is reasonably capable of contributing significantly to the preservation of monopoly power in violation of Section 2” of the Sherman Act.

5. Express Scrutiny of Serial Acquisitions

In addition to acquisitions by dominant firms, the draft guidelines also address situations where a firm engages in multiple acquisitions in the same or related business lines (e.g., roll-up strategies). The agencies’ concern is where the cumulative effect of these serial acquisitions is to harm competition, “even if no single acquisition on its own” would cause harm. The agencies will examine the parties’ acquisition history (whether consummated or not) and their current or future strategic incentives and strategies.

While the draft guidelines are not targeted towards any particular industry, this change is consistent with the agencies’ recent scrutiny of private equity M&A activity across a variety of markets. In particular, the agencies have been vocal in their concern over firms’ use of serial acquisitions or roll-ups (e.g., from the FTC, and from the DOJ). As we recently reported, the agencies have also proposed substantial revisions to the HSR filing form that would require more extensive disclosures about prior acquisitions (on both the buy and sell sides) and investors. Together, the proposed revisions to the guidelines and the HSR form reflect the agencies’ priority to closely scrutinize and challenge acquisitions by private equity firms.

6. Additional Burdens on Establishing Procompetitive Efficiencies

When  a transaction is under review, merging parties often present evidence to demonstrate that efficiencies, benefits and cost-savings generated by the merger will offset any potential harm. The agencies have historically been highly skeptical of this evidence, and parties have been largely unsuccessful in the courts at overcoming the agency’s evidence of likely anticompetitive effects with offsetting evidence of efficiencies and benefits. The draft guidelines maintain the basic overall structure for consideration of procompetitive efficiencies from the 2010 guidelines (i.e., they must be shown to be verifiable and merger specific), but the draft now begins the Efficiencies section with a citation to two 1960s Supreme Court decisions that emphasized the protection of competition and seeks to set new limits on merging parties receiving credit for procompetitive efficiencies.

Among other things, the draft now advises that the agencies:

  • will not credit benefits outside the relevant market or that “reflect or require a decrease in competition in a separate market,” such as an increase in monopsony power;
  • will consider alternative ways of achieving the claimed benefits, with newly included examples of such alternatives as “organic growth of one of the merging firms,” mergers with other firms, and a “partial merger involving only those assets that give rise to the procompetitive efficiencies;” and
  • will deem as not cognizable any efficiencies that “merely benefit the merging parties,” result from “worsening of terms for the merged firm’s trading partners,” or “accelerate a trend toward concentration.”

The draft also omits several significant statements that appear in the 2010 guidelines, such as the agencies advising that they “do not insist upon a less restrictive alternative that is merely theoretical” and examples of efficiencies that will be credited. These changes reflect the draft’s overall focus on targeting dominant firms and the perceived threats such firms pose in and beyond the market analyzed. Overall, the draft will likely make it even more difficult for merging firms to overcome presumptions of illegality with evidence of significant procompetitive efficiencies.

7. Equal Application to Vertical Mergers and Consolidation

As evident from the name itself, the new draft Merger Guidelines apply equally to both vertical and horizontal transactions, and the agencies will no longer apply separate guidelines to vertical mergers. As the Commissioners remarked, many transactions no longer “fit cleanly into one of those buckets or the other” and many transactions involve components of both.

Consistent with the now-rescinded 2020 Vertical Merger Guidelines, the draft guidelines specifically address vertical transactions that may serve to raise the costs to the buyer’s competitors at any level (i.e., raising rivals’ costs). What is new, however, is yet another structural presumption based on the degree to which a vertical merger harms competition in a related market. As proposed, if the merged firm’s share of the related market is above 50%, that “alone is a sufficient basis to conclude that the effect of the merger may be to substantially lessen competition.” Where the foreclosure share is less than 50%, the agencies will still consider a variety of other “plus factors” to evaluate the merger’s potential harms, including factors that overlap with the analysis of a dominant firm discussed above.

8. The Biden Administration’s Continued Focus on Labor Markets

Like prior versions, the draft guidelines address transactions between competing buyers that may reduce competition on the buy side (monopsony power). New to the proposed guidelines is an express recognition that labor markets are critical buyer markets. This is another reflection of the Biden administration’s and the agencies’ laser focus on competition in labor markets over the past few years.

In the revisions, the agencies recognize that labor markets “frequently have characteristics that can exacerbate the competitive effects” of a merger between competing employers. While the analysis applied to a labor market (like other buyer markets) is similar to that applied to sell-side mergers, the agencies make clear that labor markets will likely be defined more narrowly and that the level of concentration at which competitive concerns arise will likely be lower.

What’s Next?

FTC and DOJ are seeking public comments until September 18, 2023. It is highly likely that trade and industry groups will weigh in with how these changes will impact merger and acquisition activity and how those activities should be judged by the agencies and the courts.

Even if the final Merger Guidelines change, given the breadth of the changes, the draft guidelines highlight the need for companies to plan carefully for M&A activity and anticipate an increased likelihood of additional regulatory scrutiny and litigation.

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