With a rash of changes since Chair Lina Khan took command, the Federal Trade Commission is proving the maxim that the only certainty is uncertainty.

Its new policy of issuing warning letters to deals that have successfully navigated the Hart-Scott-Rodino premerger review process — announced in an FTC “Competition Matters” blog post Aug. 3 — is injecting new and unnecessary uncertainty on parties just trying to get the deal done.

A look behind and into the FTC’s new practice and its early and likely impacts on mergers and acquisitions reveals some potentially unintended consequences.

This article discusses those consequences and offers several practice tips for M&A lawyers on how to manage new levels of risk and uncertainty in the merger review process.

In 1976, Congress established a merger control system 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 U.S. Department of Justice, and cannot close 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. If the deal is approved, they can proceed to closing knowing that the federal government will not come knocking at a later date.

The FTC, of course, always reserved the right to challenge deals if anti- competitive effects later manifest, but the risk of a post-clearance challenge was historically negligible. In fact, 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.

That’s less than 0.0002% of deals. Given that, buyers could comfortably assume that risk without much ado.

The FTC upended this carefully calibrated balance with a new practice of issuing warning letters regarding deals it has allowed to close and threatening the parties with the specter of further action if they actually do close. As the FTC’s director of the Bureau of Competition warned, “companies that choose to proceed with transactions that have not been fully investigated are doing so at their own risk.”

Every involved party — especially those most at risk of receiving a warning letter and being tagged with a future enforcement action — must think about how to handle this new uncertainty and risk, and the questions the changes raise, including:

  • Whether or not the threat is credible;
  • Whether or not the parties that receive a letter will stop a transaction in its tracks;
  • Whether or not the buyer has the right to walk away from the deal, if the buyer believes the FTC’s threat is real; or
  • Whether or not the buyer’s hands are tied by contractual commitments to

Evaluating the Risk

By telling recipients of warning letters they close at their own risk, 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.”

Still, the warning letters will likely impact relatively few deals. For small deals with no competitive overlap, the FTC does not appear to be sending warning letters. 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.

Therefore, the warning letters appear to target those deals where the FTC is concerned about a transaction but not sufficiently so address the issue.

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.

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.

If the FTC is serious about its warning letters, though, it will need to bring a post-closing case just to prove it can and will. And the agency has a fairly good track record in the merger cases it brings, 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 were not successful, the costs of litigating a merger are significant 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 much solace.

Practice Tips

Build it into deal documents.

For deals on the cusp, buyers may want to consider making the absence of a warning letter a condition precedent to closing.

Alternatively, 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.

Evaluate the risk.

Not every deal gets a warning letter. Divining which are most likely to receive a letter can help parties build in better and more precise risk shifting provisions.

This requires a thorough assessment of potential antitrust risk, along with a good read on the current temper of the agency on the issues presented by the transaction.

Ensure a solid understanding.

The new level of uncertainty imposes on practical implications, and not just potential or theoretical outcomes. An understanding of the levers available both to the agency and the parties, and their relative and likely impact, is required.

Conclusion

Whether the FTC is flexing its muscles or just getting warmed up, parties on both sides of deals need to consider the implications of the FTC’s new warning letter policy.

Consider what additional antitrust conditions and efforts provisions are appropriate before putting ink to paper — otherwise, it may be too late to do anything other than proceed at his own risk. Sooner or later, the FTC will bring a post-warning-letter enforcement action to show it has the power and resolve to do so. And when it does, denial may no longer be an effective coping strategy.

Reproduced with permission. Originally published November 3, 2021, “Preparing For The New FTC Warning-Letter Process In M&A,’ Law360.

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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 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 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