Neil Patel

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Compliance with anti-trust laws in M&A deals is crucial in getting approvals from relevant regulatory authorities. The M&A advisor and legal experts guiding the transaction will assist you in learning more about the various applicable laws.

The objective behind these regulations is to promote competition but, at the same time, restrict their market power. Lawmakers need to ensure that specific companies cannot concentrate market power and create monopolies by entering into mergers and acquisitions.

Such deals can form cartels and collaborate to institute unfair practices like fixing unfair prices. Or adopt practices that can potentially prevent competing startups from entering the segment.

Aside from monitoring new M&A transactions, anti-trust laws work to break up corporations that have transformed into monopolies. Anti-trust laws must determine the specific practices that can limit competing businesses from entering the market.

This is why compliance with anti-trust laws in M&A deals has become a distinct legal specialization. These laws encompass three core statutes, such as The Sherman Act, the Federal Trade Commission Act, and the Clayton Act.

The U.S. Department of Justice and the Federal Trade Commission undertake the task of enforcing anti-trust laws. Together, they are called the “Agencies” and can bring lawsuits to prevent illegality or misconduct. They can also prevent or block M&A transactions from taking place.

Individual plaintiffs can also move the courts to prevent unfair M&As from concluding. Read ahead to learn more about how the laws work and how to comply with them during M&A transactions.

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Understanding Anti-Trust Laws in M&A Deals

To understand how anti-trust laws work, know that the word “trust” in anti-trust refers to a group of corporations. These businesses may team up or partner to form a monopoly. This collaboration gives them the power to dictate the pricing in a specific market.

Anti-trust laws are crucial for any commercial segment since they ensure healthy competition among the sellers. This competition encourages them to develop higher-quality products and services and offer more economical prices.

Competition also drives innovation, so customers have a broader array of products to choose from. The industry continues to scale, stay dynamic, and expand operations for higher efficiency.

Anti-trust laws typically have broad connotations and lay down generic rules for M&As. But, courts have the final say in ruling which M&A transactions are illegal depending on the facts of each case.

Specific terms and conditions apply to the deals in different segments according to the type of products they sell. The customer base they cater to, cultural aspects, and location may also dictate compliance with anti-trust laws in M&A deals.

Anti-Trust Laws

As stated earlier, the Sherman Act, the Federal Trade Commission Act, and the Clayton Act are the key laws. Anti-trust regulations are based on these laws. Prior to the Sherman Act, Congress passed the Interstate Commerce Act in 1887. The act was in response to the demand for regulated railroads.

The Interstate Commerce Act had limited jurisdiction and extended primarily to railroads, requiring them to charge travelers fair fees. Posting the fees publicly is also part of its directives. The Sherman Act came in 1890 and specified penalties and fines for violating industries.

The act covered monopolizing companies that were entering into contracts and conspiracies. If these deals stopped competing businesses from conducting operations by fixing prices, rigging bids, or dividing the markets, the act restrained them.

The 1914 Clayton Act rounded off the Sherman Act by covering the specific practices that the latter did not cover. For instance, the Clayton Act disallows corporations from appointing a single decision-maker for competing companies.

The Hart-Scott-Rodino (HSR) Antitrust Improvements Act instituted amendments, and updates were made in 1979. Accordingly, dealmakers must comply with its pre-merger notification systems. The Robinson-Patman Act is another upgrade that regulates specific pricing structures.

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Enforcing Compliance With Anti-Trust Laws in M&A Deals

The Federal Trade Commission Act (FTC) is designed to prevent unfair competition practices and deceptive acts. The FTC oversees segments in the economy where consumers spend high amounts.

These segments may include energy, food, healthcare, medicines, drugs, technology, and any other products and services in digital communication.

The Department of Justice (DOJ) has the sole anti-trust jurisdiction over verticals like airlines, banks, telecommunications, and railroads. This agency can also impose criminal sanctions if needed. Each state has its anti-trust or unfair practices statutes that are usually similar to federal laws.

Several factors can trigger an FTC investigation, such as congressional inquiries, filing a premerger notification, and consumer or corporate communication. Any articles on consumer or economic topics can also prompt an investigation.

If the FTC suspects that a specific practice is violating laws, it will step in to stop the practice. In case the practice is a proposed merger, the agency may require that the anti-competition component be resolved.

If the dealmakers are unable to reach a resolution, the FTC may declare an administrative complaint. Pursuing an injunctive relief in a federal court is also an option. The FTC can also refer the evidence of the criminal antitrust violations to the DOJ.

The Hart-Scott-Rodino (HSR) Antitrust Improvements Act entitles the FTC to review specific mergers before the deal closes. It outlines certain procedural requirements that dealmakers must follow before closing the transaction.

The FTC can also examine completed mergers even if the deal is not subject to the HSR review process. If the transactions are found to be illegal, the Agency can order that the deal be terminated.

FTC and DOJ Key Concerns

The key concern for the FTC and DOJ is to examine and analyze the effects of competition on the industry. Here are the core questions they focus on:

  • What is the extent of market power the merged entity will likely have?
  • Can the marketplace sustain higher prices?
  • What are the effects of the merger on innovation in the sector?
  • What are the effects of the M&A deal on consumers? Are their interests affected?
  • How will other competitors react to the collaboration?

In addition to exploring these concerns, the Agencies also examine the materials dealmakers submit to the government. They also closely monitor the transaction’s timing and regulate the activity level between the participants of the M&A deal.

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How Anti-Trust Requirements Affect M&A Deals

Compliance with anti-trust laws in M&A deals can extend the time taken for the transaction to close. For starters, the Agency can require dealmakers to submit all the related documents for thorough examination. Their objective could be to identify non-merger-related conduct.

If anti-trust laws prohibit the conduct, the Agency may initiate separate investigations that can levy penalties. This factor can be problematic since the parties may want to restrict the data they share during due diligence.

They may also want to secure company secrets during their integration planning processes and not reveal certain information. For instance, the buyer may restrict some of the target’s functions while the merger or negotiations are in progress.

Further, dealmakers wanting to enter into a transaction must file an HSR notification with the relevant agencies. Failure to submit this form can result in fines. Before receiving HSR approval, participants in the M&A deal cannot close, potentially leading to long waiting times.

Agencies accept and understand that M&A deals result in increased coordination and collaboration between the participating companies. However, the parties must be transparent about their activities. The Agency can initiate a long, expensive investigation if it perceives any violations.

Dealmakers will have to consent to decrees that dictate their future conduct. They may also have to pay monetary fines and face criminal sanctions. Mergers, where the parties agree on the product pricing for customers during the integration, can also attract prison sentences.

Horizontal Deals Attract More Anti-Trust Investigations

Compliance with anti-trust laws in M&A deals is more relevant in horizontal mergers. That’s because horizontal mergers typically occur between brands offering similar products. Their objective is to eliminate the competition.

Vertical mergers are more about achieving higher efficiency by integrating components of the supply chain or distribution channels. Since such deals are unlikely to gain an unfair market advantage, they are less likely to damage the industry. This is why, historically, vertical deals haven’t attracted much Agency scrutiny.

If the Agencies encounter any competition concerns, they can suggest that dealmakers conduct some structural or behavioral remedies. Structural remedies can include divestitures or selling off specific business units or product lines. Or selling a minority shareholding in a competitor’s business.

Behavioral remedies may include the commitment to continue doing business with certain clients. The Agencies may also direct companies to provide certain products or services subject to specified conditions.

Maintaining a pre-determined price, refraining from bundling products, and dealing with clients in a non-discriminatory manner can be other directives. The DOJ has recently revisited existing behavioral remedies since they are typically difficult to enforce.

The Agency has also raised concerns that its directives could replace organic market dynamism and progress. Because of the concerns about the downsides of structural and behavioral remedies, the Agencies are instead laying down stricter criteria.

Dealmakers must comply with stringent concessions to get approvals, which can make the M&A deal more complicated. They must litigate against the government or terminate the transaction entirely. As a result, companies may have to reconsider horizontal or vertical deals because of the challenges in navigating Agencies’ guidelines.

Navigating Compliance With Anti-Trust Laws in M&A Deals

Considering the strict Agency approval criteria and monitoring processes, dealmakers must tread cautiously when entering M&As. Most importantly, they should focus on how customers will likely perceive the transaction.

Positive customer views help with future profitability and scalability post-merger. However, any negative feedback can prompt the relevant Agency to investigate the deal thoroughly and possibly raise challenges.

If more customers complain about the fallout of the transaction, like unfair prices or discrimination, participants in the deal may have to deal with the consequences. This situation can also apply to closed deals.

Dealmakers should be aware that the weight customers get from the Agencies is strong leverage they can use. Customers can demand better pricing or other terms and conditions in their contracts and purchases.

Companies participating in an M&A deal should also carefully draw up their documents and financial data. For instance, the documents might say that the collaboration will eliminate the only competition. If this situation results in significantly higher prices and profits, that could attract Agency scrutiny.

With this consideration in mind, dealmakers should avoid such references. They may also want to include information about the efficiencies in operations the merger or acquisition will achieve. Citing how these efficiencies can translate into benefits for consumers in terms of economical pricing or better innovation is advisable.

The Herfindahl-Hirschman Index (HHI) mathematical formula is another factor to consider. This index helps assess the potential concentration of market share after a merger. In certain segments, the market can remain competitive even if there are only a few big players with majority shares.

In others, fragmentation could be crucial to maintain fairness and non-discrimination. While Agencies use the HHI, they are more likely to focus on the possibility of the surviving company capturing bigger market shares.

The Takeaway

The key objective behind anti-trust laws is to protect consumers from the concentration of economic power. They seek to prevent companies from creating monopolies and setting unfair prices for their products and services.

Supporters of these laws state they maintain lower prices and trigger innovation to keep the markets dynamic. However, critics argue that these regulations hamper the free market. They cancel out the potential positives of strategic collaborations by making approvals cumbersome and complex.

Experts opine that a few changes can streamline compliance with anti-trust laws in M&A deals. However, the focus should continue to be on protecting customer welfare, and maintaining a balance with economic growth is advisable.

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Neil Patel

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