When an American company wishes to merge with or acquire another company, reaching an agreement that satisfies both firms’ owners and managers is not always enough. For most mergers and acquisitions valued at over roughly $80 million, companies must submit tons of paperwork and pay a sizable fee to the Federal Trade Commission and the Department of Justice before they can finalize any deal. Once these filings are complete, the companies can’t finalize their transaction until a waiting period of up to 30 days has elapsed.
These requirements, imposed by Congress in the Hart–Scott–Rodino Antitrust Improvements Act of 1976, aim to give the federal agencies tasked with enforcing U.S. antitrust laws a chance to examine major business transactions and decide whether they are likely to substantially “lessen competition” or “create a monopoly.” Each transaction is scrutinized by either the FTC or the Justice Department, both of which are authorized to review mergers and seek to block transactions that seem to violate the law.
This cumbersome process needs a serious rethinking, and it’s one of many reasons why the Competitive Enterprise Institute has long questioned whether consumers are really better off when the government dictates that certain voluntary economic agreements are verboten. Although the federal courts have helped curtail some of the most egregious forms of antitrust intervention in recent years, merging or buying another company usually entails spending millions—or sometimes billions—of dollars on top of the cost of the transaction itself. Filing fees are just the tip of the iceberg. Spending millions to hire antitrust lawyers, lobbyists, and public relations gurus is par for the course when a company wishes to make a large acquisition. And the outcome of particularly significant deals is so rife with uncertainty that proposed transactions sometimes include a “breakup fee” if the feds scuttle the deal. In one recent case where a merger fell through due to regulators’ opposition, the breakup fee was a whopping $3 billion.
Fortunately, many lawmakers in Washington realize that the merger approval process is deeply flawed. A modest bill working its way through Congress, the SMARTER Act, aims to tackle one source of regulatory uncertainty for merging firms. The legislation, reported out of the House Judiciary Committee in November 2017, would align the rules that govern how the FTC and the Department of Justice must proceed when they seek to prevent a proposed transaction.
Under current law, when the Justice Department wishes to block a merger or acquisition, it must persuade a federal court that the deal is likely to violate Section 7 of the Clayton Act. This process typically begins with DOJ seeking preliminary and permanent injunctions to prevent a proposed transaction from being consummated. Then, the government and the merging firms each make their case before a federal judge, and the court typically reaches a decision within a matter of months.
But when the FTC wishes to challenge a proposed merger or acquisition, it doesn’t necessarily have to convince a federal court to issue a preliminary injunction to block the deal. Although the FTC usually does seek such an injunction, it may also pursue an administrative complaint against a proposed transaction. These complaints are heard not by a traditional federal court, but by an administrative law judge (ALJ).
Under Article III of the Constitution, federal judges are appointed by the president with the advice and consent of the Senate, and they enjoy life tenure. Administrative law judges, by contrast, are selected by the agencies for which they work. After the FTC votes to send a merger to an ALJ, the ALJ decides whether to approve the merger. Who reviews the ALJ’s decision? The FTC itself—the same body of five commissioners who voted to bring a complaint in the first place. And, unsurprisingly, the FTC usually affirms its original complaint—especially in recent years. Only after the FTC decides whether to affirm or reverse its own ALJ can a merging company obtain true judicial review in a court of appeals, before federal judges appointed pursuant to Article III of the U.S. Constitution.
The SMARTER Act would make the FTC’s review of proposed mergers far less arduous for companies by requiring the agency to litigate merger challenges in Article III federal courts, as opposed to tying up deals for years through administrative litigation before ALJs. Although the bill wouldn’t tackle the root of the antitrust problem—the extremely problematic authority for the government to dictate how private firms may combine their assets—the SMARTER Act would make important, positive changes to the process by which federal regulators at the FTC review major corporate transactions.
Lawmakers in the U.S. Senate should follow in the footsteps of the House of Representatives by passing the SMARTER Act. At a time when companies face considerable regulatory uncertainty as to whether the government will get in the way of potentially beneficial deals, congressional leadership would help spur competitive transactions and ultimately help American consumers.