As the saying goes, “the only thing for certain, is nothing is certain.”  With a rash of changes since Chairperson Lina Kahn took command, the FTC is certainly proving that maxim true.  Seeking to transform the historically sleepy agency into a more progressive regulator of the U.S. economy, Kahn’s FTC’s latest salvo targets the merger review process.

In 1976, Congress established a merger control regime that has become the envy of the world.  Parties to transactions above certain thresholds must provide advance notice to the Federal Trade Commission and the Department of Justice, and cannot consummate the deal until expiration of the statutory waiting period.  While the delay imposes a burden on the merging parties, the parties receive something in return too.  If the deal is approved, they can proceed to closing comforted in the belief that the federal government will not later come knocking.  Of course, even then nothing is absolutely certain.  The FTC always reserves the right to challenge deals if anticompetitive effects later manifest, but the risk of a post-clearance challenge was historically negligible.  Last month, however, new FTC leadership upended this carefully calibrated balance. 

Rather than reserve post-closing challenges for the rare deal that slipped by the FTC’s watchful glare, the agency has now adopted a new practice of issuing warning letters regarding deals it has allowed to close.  The letters threaten the parties with the specter of further action if they actually do close.  By asking the parties not to close upon the expiry of the waiting period, the FTC is effectively seeking a de facto extension of deadlines that Congress did not see fit to give it.  It is a strange practice that sparked the Republican Commissioners to strongly dissent.  The added uncertainty created by the FTC’s new policy, said Commissioner Christine Wilson, will “raise the costs of doing mergers and threaten[s] to chill harmful and beneficial deals alike.”

But what do these letters mean?  Is the threat credible?  Should the parties stop their transaction in its tracks?  Does a buyer have the right to walk away from the deal if it believes the FTC’s threat is real?  Or are its hands tied by contractual commitments to close?  These questions must now be anticipated and addressed in the parties’ merger documents.  But how?

It is still too early to determine the impact of the new warning letters.  So far, most merging parties appear to be ignoring them.  But sooner or later, the FTC will bring a post-warning-letter enforcement action to show it has the power and resolve to do so.  When it does, denial may no longer be an effective coping strategy, and parties may need to take more notice.  Until then, parties should at least consider that their deal may be the one the FTC makes its warning-letter poster child, and plan accordingly.

A. The Policy

In announcing the new policy, the FTC blamed a “tidal wave of merger filings that is straining the agency’s capacity to rigorously investigate deals ahead of statutory deadlines.”  Its solution was not to comply with the statutory deadlines, but instead to issue form letters to parties after it decided to let the deadlines expire without action.   As the FTC’s Director of the Bureau of Competition explained:

“For deals that we cannot fully investigate within the [statutory] timelines…, we have begun to send standard form letters alerting companies that the FTC’s investigation remains open and reminding companies that the agency may subsequently determine that the deal was unlawful. Companies that choose to proceed with transactions that have not been fully investigated are doing so at their own risk.” 

The policy actually impacts relatively few deals, though it may be difficult for parties negotiating potential deals to guess whether theirs will fall within its ambit.  For small deals with no competitive overlap, there is nothing to worry about.  And the FTC does not appear to be sending warnings in these cases.  For large deals with obvious problems, the FTC is continuing its standard practice of issuing second requests, precluding the immediate expiration of the statutory waiting period.  Rather, the warning letters appear to target Goldilocks deals in the middle:  those where the FTC is concerned about a transaction but not sufficiently so to take steps to address the issue. 

Until recently, the number of cases that fit this criteria was vanishingly small.  And for good reason.  If the transaction is bad enough to raise concerns, why wouldn’t the FTC issue a second request?  And if the FTC doesn’t have the votes on the Commission to challenge the transaction now – when the democratic commissioners have a 3-2 majority – will they really muster greater resolve in the future?   In theory, though, the policy has some practical appeal.  There could be an anticompetitive deal the FTC wants to put on the back burner until deal flow dies down.  Triage is a tried-and-true strategy on the battlefield.  Why not for deal investigations leading to courtroom battles? The new warning policy simply facilities this triage, and signals to the market that post-waiting-period challenges will no longer be a rare occurrence.

But if the FTC means to deter the immediate closing of these deals – what else could it mean when the FTC says “Please be advised that if the parties consummate this transaction before the Commission has completed its investigation, they would do so at their own risk” – it will have to make good on its promise to take action.  It will have to move at least one deal from the back burner if the policy is to have any effect at all.

B. The Implications of the Policy

So how should parties to Goldilocks deals – those most at risk of receiving a warning letter and being tagged with a future enforcement action – handle this added uncertainty and risk?  Antitrust risk management is often a complex endeavor requiring parties to anticipate a wide range of potential agency outcomes.  But in the past, that risk came with an expiration date. Once the statutory waiting period expires without action, the chances that the FTC would later challenge the deal was negligible.  Of the 60,000-some HSR filings over the last 40 years, the FTC only challenged one reportable transaction after allowing it to close at the end of the waiting period.  This implied a post-closing risk of less than 0.0002%.  Given that, buyers could comfortably assume that risk without much ado, and merger documents typically require the buyer to close after the waiting period expires.

But now, let’s assume the warning letter policy increases the risk of post-closure action from 0.0002% to 10% or even 20%.  What should the parties do?  Clearly, the FTC wants the merging parties to believe that the risk of a challenge has significantly increased, otherwise it wouldn’t send the letter.  Should you take the bait, or should you call the FTC’s bluff?  If it turns out the FTC was not bluffing, who should bear the consequences?  Should the buyer be obligated to close, even after the FTC warned it not to do so?  Or should the seller bear some responsibility, just as sellers often do when the FTC raises concerns during the applicable waiting periods?

So far, merging parties and the antitrust bar generally have taken the FTC’s new warning letters with a grain of salt.  Mere saber-rattling, they say, claiming that the warning letters are “largely superficial” because – ultimately – the FTC needs to go to court to challenge a deal.  See FTC Merger Warning Letters Seen as Largely Superficial, Law360 (Aug. 18, 2021).   Viewed logically, the risk of litigation over a deal the FTC does not even want to fully investigate, let alone challenge, during the statutory period (which can extend a year or longer) must be small.

But if the FTC is serious about its warning letters, it will need to bring a post-closing case just to prove it can and will.  The FTC also has a fairly good track record in the merger cases it does bring, especially since any challenge will be heard in the first instance by an Administrative Law Judge employed by the FTC and whose decisions will be reviewed de novo by the same Commissioners who voted to bring the case.  Even if the FTC is not successful, the costs of litigating a merger is not small and can easily eat away all the expected synergies of a mid-sized deal.  So the fact that the FTC ultimately needs to litigate to unwind a closed transaction may not offer the buyer much solace. 

Given this, for deals on the cusp, it may be prudent for parties to make the absence of a warning letter a condition precedent to closing.  Alternatively, the parties could agree upfront that, if they receive a warning letter, they will allow the FTC more time to finish its investigation before closing, effectively giving the FTC what it wants.  There are downsides to this, of course, particularly on the seller, so it should not be expected that such provisions will come cheap or would be easily agreed to.  But regardless of whether the FTC is flexing its muscles for show or just warming up for the main event, parties should consider the implications of the FTC’s new policy before they ink their deal – otherwise, it may be too late for them to do anything other than proceed at their “own risk.”

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Photo of John R. Ingrassia John R. Ingrassia

John is a partner at the Firm, advising on the full range of foreign investment and antitrust matters across industries, including chemicals, pharmaceutical, medical devices, telecommunications, financial services consumer goods and health care. He is the first call clients make in matters relating…

John is a partner at the Firm, advising on the full range of foreign investment and antitrust matters across industries, including chemicals, pharmaceutical, medical devices, telecommunications, financial services consumer goods and health care. He is the first call clients make in matters relating to competition and antitrust, CFIUS or foreign investment issues.

For more than 25 years, John has counselled businesses facing the most challenging antitrust issues and helped them stay out of the crosshairs — whether its distribution, pricing, channel management, mergers, acquisitions, joint ventures, or price gouging compliance.

John’s practice focuses on the analysis and resolution of CFIUS and antitrust issues related to mergers, acquisitions, and joint ventures, and the analysis and assessment of pre-merger CFIUS and HSR notification requirements. He advises clients on issues related to CFIUS national security reviews, and on CFIUS submissions when non-U.S. buyers seek to acquire U.S. businesses that have national security sensitivities.  He also regularly advises clients on international antitrust issues arising in proposed acquisitions and joint ventures, including reportability under the EC Merger Regulation and numerous other foreign merger control regimes.

His knowledge, reputation and extensive experience with the legal, practical, and technical requirements of merger clearance make him a recognized authority on Hart-Scott-Rodino antitrust merger review. John is regularly invited to participate in Federal Trade Commission and bar association meetings and takes on the issues of the day.

Photo of Colin Kass Colin Kass

Colin Kass is a partner in the Litigation Department and co-chair of the Antitrust Group, and a member of the Firm’s cross-disciplinary, cross-jurisdictional Coronavirus Response Team. An experienced antitrust and commercial litigation lawyer, Colin has litigated cases before federal and state courts throughout…

Colin Kass is a partner in the Litigation Department and co-chair of the Antitrust Group, and a member of the Firm’s cross-disciplinary, cross-jurisdictional Coronavirus Response Team. An experienced antitrust and commercial litigation lawyer, Colin has litigated cases before federal and state courts throughout the United States and before administrative agencies. His practice involves a wide range of industries and spans the full-range of antitrust and unfair competition-related litigation, including class actions, competitor suits, dealer/distributor termination suits, price discrimination cases, criminal price-fixing investigations, and merger injunctions.

Colin also has extensive experience dealing with the Federal Trade Commission and Department of Justice in obtaining clearance for competitively-sensitive transactions and handling anticompetitive practices investigations. His practice also includes counseling clients on their sales, distribution, and marketing practices, strategic ventures, and general antitrust compliance.

Photo of David Munkittrick David Munkittrick

David Munkittrick is a litigator and trial attorney. His practice focuses on complex and large-scale antitrust, copyright and entertainment matters in all forms of dispute resolution and litigation, from complaint through appeal.

David has been involved in some of the most significant antitrust…

David Munkittrick is a litigator and trial attorney. His practice focuses on complex and large-scale antitrust, copyright and entertainment matters in all forms of dispute resolution and litigation, from complaint through appeal.

David has been involved in some of the most significant antitrust matters over the past few years, obtaining favorable results for Fortune 500 companies and other clients in bench and jury trials involving price discrimination and group boycott claims. His practice includes the full range of antitrust matters and disputes: from class actions to competitor suits and merger review. David advises antitrust clients in a range of industries, including entertainment, automotive, pharmaceutical, healthcare, agriculture, hospitality, financial services, and sports.

David also advises music, publishing, medical device, sports, and technology clients in navigating complex copyright issues and compliance. He has represented some of the most recognized names in entertainment, including Sony Music Entertainment, Lady Gaga, U2, Madonna, Daft Punk, RCA Records, BMG Music Publishing, Live Nation, the National Academy of Recording Arts and Sciences, Universal Music Group and Warner/Chappell.

David maintains an active pro bono practice, supporting clients in the arts and in immigration proceedings. He has been repeatedly recognized as Empire State Counsel by the New York State Bar Association for his pro bono service, and is a recipient of Proskauer’s Golden Gavel Award for excellence in pro bono work.

When not practicing law, David spends time practicing piano. He recently made his Carnegie Hall debut at Weill Recital Hall with a piano trio and accompanying a Schubert lieder.

David frequently speaks on antitrust and copyright issues, and has authored or co-authored numerous articles and treatise chapters, including:

  • Causation and Remoteness, the U.S. Perspective, in GCR Private Litigation Guide.
  • Data Breach Litigation Involving Consumer Class Actions, in Proskauer on Privacy: A Guide to Privacy and Data Security Law in the Information Age.
  • Location Privacy: Technology and the Law, in Proskauer on Privacy: A Guide to Privacy and Data Security Law in the Information Age.
  • FTC Enforcement of Privacy, in Proskauer on Privacy: A Guide to Privacy and Data Security Law in the Information Age.
  • The Role of Experts in Music Copyright Cases, Intellectual Property Magazine.
  • Nonprofit Education: A Historical Basis for Tax Exemption in the Arts, 21 NYSBA Ent., Arts, & Sports L.J. 67
  • A Founding Father of Modern Music Education: The Thought and Philosophy of Karl W. Gehrkens, Journal of Historical Research in Music Education
  • Jackson Family Wines, Inc. v. Diageo North America, Inc. Represented Diageo in trademark infringement litigation