New premerger filing rules raise costs for no benefit

In late June, the Federal Trade Commission (FTC) and the Department of Justice’s (DOJ) antitrust division proposed a new set of premerger notification rules. Any merger or acquisition over a certain size is currently required by the Hart-Scott-Rodino (HSR) Antitrust Improvements Act to send a Premerger Notification and Report Form to both agencies. Under the rules, the agencies have thirty days to review the requests, decide whether to challenge the deal, request additional materials at the expense of the companies, or let the deal move forward.

The FTC chair, Lina Khan, when asked by the House Judiciary Committee about the new guidelines, stated that the new premerger form, by requiring more information “on the front-end,” would “allow [the FTC] to more efficiently and effectively administer the laws in ways that could create more certainty for businesses on the back-end.”

Longstanding HSR forms asked for straightforward information, such as descriptions of the acquisitions, reports of the assets and securities in question, and company filings to verify that the deal poses no threat to industry competition. But the new rules demand much more, even from actions that raise no substantive antitrust issues. The new form would include:

• Narrative descriptions of the strategic rationales for the transaction and information regarding the key dates and conditions for closing
• Narrative descriptions of the horizontal overlaps and supply relationships between the filing persons
• Information to assess the potential impact of the transaction on labor markets, including questions about the merging parties’ employees and the services employees perform
• Identification of penalties or findings issued against the filer by the Department of Labor, National Labor Relations Board, or the Occupational Safety and Health Administration (OSHA) during the previous five years

The new form, if adopted, will require companies to increase the average time for a business to complete the form from 37 to 144 hours, face additional expenses acquiring the new demanded documentation to complete the larger forms, and spend $350 million more for executive labor and attorney’s fees.

Therefore, the two most important questions are why the FTC and DOJ are dissatisfied with the longstanding original forms and why they imagine the new process will be the best solution.

According to the drafters of the proposed rule, there are two significant reasons why the information currently reported is insufficient,

First, there has been tremendous growth in sectors of the economy that rely on technology and digital platforms to conduct business and, given the dynamic nature of these markets. … In these sectors, some transactions involve firms whose premerger relationship is not clearly horizontal or vertical; rather, merger activity in these sectors increasingly involves firms in related business lines where the Agencies must closely examine the potential for direct competition in the future.

The undergirding belief about the digital marketplace in this rule is identical to Khan’s thesis in her wide-reaching law review article, the Amazon Antitrust Paradox, and therefore is likely the guiding philosophy behind these proposed changes.

Though her belief that digital platforms have a unique opportunity to engage in anticompetitive conduct due to integration across business lines is a problem. Namely, it underappreciates “the extent to which consumers substitute between online and offline channels and the ease of entry into online retailing,” according to Robert Atkinson and Michael Ward from the Information Technology & Innovation Foundation (ITIF).

The agencies also justify the changes by claiming,

the very nature of HSR reportable transactions has become more complex over time. Transaction structures have evolved to include not only the Ultimate Parent Entity (UPE) and its acquiring entity, but also other entities within the acquiring person. For instance, there can be numerous entities between the UPE and acquiring entity, and other investors can have a stake in any one of these entities. As a result, these investors could have a direct role in effectuating the transaction.

While there is no doubt that mergers have become more complex, that is likely due to the increased regulations that dissuade new companies from going public, making acquisition the preferable end goal for a new business. Therefore, increasing the costs of mergers as a solution is like a man trying to pay off his gambling debt by taking his salary to Las Vegas.

Additionally, the proposed rules imply that the 30-day timeline is too narrow for the agency to effectively evaluate a merger’s threat to competition. However, proposing additional requirements seems like an odd solution.

This purported concern seems hollow when historically, the agency granted “early termination,” allowing companies to merge before the 30-day timeline, in 80 to 90 percent of transactions. However, the Biden administration has summarily suspended this common practice since assuming office.

These rules are part of a regulatory trend in antitrust policy. This rule is strikingly similar to the newly proposed ironically-named merger guidelines, which offer no guidelines to merge safely without risking a government crackdown. It instead provides thirteen justifications that the government may use to sue the companies.

As both sweeping regulations march towards final approval, it’s essential to ask, What we are supposedly improving and what costs we will undoubtedly pay for?