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Proposed Merger Guidelines and Private Equity

September 6, 2023 Download PDF
  • The proposed DOJ-FTC merger guidelines could in certain circumstances lead to challenges to deals that in the past would not have faced agency action.
  • Two of the guidelines – one dealing with serial acquisitions and another dealing with partial ownership acquisitions – could have particular significance for investigations of transactions involving private equity.

The Antitrust Division of the U.S. Department of Justice (DOJ) and Federal Trade Commission (FTC) recently released a draft overhaul of their merger guidelines. The merger guidelines are intended to describe how the agencies evaluate mergers and reach decisions on which deals to challenge. In an earlier client memorandum, we discussed how the proposed guidelines have the potential to impact merger review generally, including exit situations involving strategic acquirers. Here, we discuss several ways in which the proposed guidelines could have particular significance for private-equity sponsored acquisitions.

It bears noting that the guidelines themselves are not the law and ultimately it is for the courts to decide whether an acquisition violates the law. Nevertheless, the guidelines constitute the framework the agencies will use to investigate and challenge transactions. Therefore, it is important to consider them when analyzing and planning for potential deals.

Any of the proposed guidelines could be relevant to a transaction involving private equity, depending on the facts of the particular deal. However, a guideline dealing with serial acquisitions and another dealing with partial ownership acquisitions are of particular interest to those involved in private-equity sponsored dealmaking.

Serial Acquisitions. The draft guidelines state that the agencies may investigate whether a series of “acquisitions in the same or related business lines” may violate the law “even if no single acquisition on its own would risk substantially lessening competition or tending to create a monopoly.” In this analysis, the DOJ and FTC “will consider individual acquisitions in light of the cumulative effect of related patterns or business strategies.”

Notably, the serial acquisitions guideline does not appear to be a standalone basis for challenging a transaction. Rather, “[w]here one or both of the merging parties has engaged in a pattern or strategy of pursuing consolidation through acquisition, the Agencies will examine the impact of the cumulative strategy under any of the other Guidelines to determine if that strategy may substantially lessen competition or tend to create a monopoly.” Very broadly, other guidelines outline the agencies’ views on ways in which transactions might affect competition, including by increasing market concentration, eliminating substantial competition between firms, increasing the risk of coordination among firms, eliminating a potential entrant in a concentrated market, creating a firm that controls inputs necessary for its rivals, entrenching a dominant position or furthering a trend toward concentration.

One significant practical effect of the new serial acquisitions guideline may be to substantially increase the burden on parties to a merger investigation involving such an acquisition. The proposed guidelines call for an expansive investigation in which the agencies say that they may look into “the actual acquisition practices (consummated or not) of the firm, both in the markets at issue and in other markets, to reveal any overall strategic approach to serial acquisitions.” (Emphasis added.) Therefore, companies may be faced with requests to produce material related to prior acquisitions – or at least “acquisition practices” – in markets that have nothing to do with the deal being investigated. This could be in addition to significantly expanded requests to produce material related to prior deals in the relevant market. (Currently, the agencies typically limit the requirement to produce material related to past acquisitions to a few years.)

Partial Ownership and Minority Interests. Under the proposed guidelines, the agencies would examine the acquisition of partial ownership or minority interests. One potential concern arises “when individual investors hold non-controlling interests in firms that have a competitive relationship that could be affected by those joint holdings” (the guidelines refer to this as “common ownership.”) A concern could also arise when a firm directly acquires an interest in a competitor.

The guidelines outline three ways in which acquisitions of partial ownership could raise competitive concerns. First, partial ownership could “influence the competitive conduct of the target firm.” The guidelines state that voting interests and governance rights are potential means of exerting such influence, and even suggest that “a nonvoting interest may, in some instances, provide opportunities to prevent, delay, or discourage important competitive initiatives, or otherwise impact competitive decision making.”

Second, a partial acquisition could reduce “the incentive of the acquiring firm to compete.” The guidelines state that the potential of the acquiring firm “to profit through dividend or other revenue share even when it loses business to the rival” may “blunt the incentive of the partial owner to compete aggressively.”

Third, a partial acquisition could harm competition by allowing the acquiring firm to gain access “to non-public, competitively sensitive information from the target firm.” Access to such information, according to the agencies, could facilitate coordination among firms resulting in anticompetitive effects.

Consistent with the proposed guidelines, the FTC recently required structural remedies in a deal where EQT Corporation, a natural gas producer, acquired certain natural gas assets from Quantum Energy Partners, a private equity firm. According to the FTC, “Quantum and EQT are direct competitors in the production and sale of natural gas in the Appalachian Basin” and Quantum is “an active investor in natural gas production in the region.” The deal was originally structured as a cash-and-stock transaction in which Quantum would have become one of EQT’s largest shareholders and have the right appoint a member of EQT’s board. To resolve the FTC’s concerns, the parties agreed to a consent order requiring Quantum to divest its EQT shares. The order also requires Quantum to give up its EQT board seat, which, the FTC alleges, violates Section 8 of the Clayton Act governing interlocking directorships.


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