Out Over Their Skis? The New Role of the Proposed New Merger Guidelines
These Guidelines are different. For years, merger guidelines have been a guidepost for both the business community and the courts in reflecting current practice and caselaw. While the recently proposed Merger Guidelines explain the positions articulated or revived by the current generation at the agencies, they are aspirational and seek to drag the courts ahead of the recent consensus view, citing dated caselaw and ignoring newer precedent.
The key question for dealmakers is whether courts will follow the agencies’ revisionist history or stick to their own precedent. Most of the agencies’ recent forays into court have not been successful. Combined with recent amendments to expand the range of information required to kick off the process with an HSR filing, merger investigations will be broad, long and expensive. Most troubling, they will be unpredictable, as the agencies pursue test cases to support their policies. Recent deals have faced a panoply of outcomes, suggesting in many cases companies should plan fix-it-first divestitures, prep for litigation or both.
Communicating the new enforcement approach
Published for comment on July 19, the Proposed Merger Guidelines (PMG) continue to inform the public of the agencies’ enforcement priorities. Reflecting a more aggressive approach, the PMG reset HHI thresholds to stricter levels introduced in the 1982 Merger Guidelines. Markets are considered “highly concentrated” at 1800 and “moderately concentrated” at 1000 (previously, 2500 and 1500, respectively). The PMG also set the HHI increase threshold to 100 points and add a dominance threshold of a 30% share for either party. As a result, market definition and economic analysis will have greater importance, dovetailing with proposed changes to the HSR form.
Similarly, the PMG are now harsher on efficiencies. According to the 2010 Horizontal Merger Guidelines, “a primary benefit of mergers to the economy is their potential to generate significant efficiencies . . . which may result in lower prices, improved quality, enhanced service, or new products.” But the current agency view is that “[t]he Supreme Court has held that ‘possible economies [from a merger] cannot be used as a defense to illegality.’”
The addition of labor considerations is unsurprising. US antitrust enforcers have signaled interest in labor markets since 2016 – for example, through merger investigation questions, criminal prosecutions, and a proposed ban on non-competes – though they have not clearly explained how mergers might impact labor markets or what evidence is relevant.
The PMG’s approach to serial acquisitions risks targeting acquirers for who they are (e.g., private equity) rather than what they do, and may result in inconsistent enforcement by party and industry sector.
The PMG are also notable in what they do not say. First, the PMG mostly omit any discussion of innovation competition in R&D compared to the 2010 Guidelines that focused on how innovation contributes to product entry, product improvement, and efficiencies in R&D. Second, agency leadership has criticized the consumer welfare standard, but the PMG do not suggest skepticism or departure from the standard.
Influencing the courts
Merger Guidelines have historically served as an important reference for the courts. While the Guidelines are non-binding, courts consider them persuasive authority that reflect precedent and legal and economic consensus.
This may change with the PMG. For example, recent court cases have required “a showing of reasonable probability of anticompetitive effect” for violations of Section 7 of the Clayton Act. By contrast, the PMG emphasize “the mandate of Congress that tendencies toward concentration in the industry are to be curbed in their incipiency.” The different framing suggests an attempt to lower the legal standard adopted by courts. Additionally, the PMG rely heavily on older caselaw, omitting recent agency losses.
Courts may also balk at new proposals or departures from past guidance. For example, the PMG’s approach to vertical foreclosure introduces a 50% benchmark that has limited support in caselaw, and omits any discussion of procompetitive effects previously outlined in the 2020 Vertical Merger Guidelines. Such changes will have to stand on their own merits.
Summary of key changes
- Lower HHI thresholds: Thresholds for presumed harm to competition have been lowered substantially, back to 1982 standards.
- New market share thresholds: Dominant (monopoly) position presumed at 30%; vertical foreclosure presumed at 50%.
- Enforcement priorities: Labor effects, serial acquisitions, and “incipient harms to competition.”
- Efficiencies: New requirements to demonstrate benefits will quickly improve competition and do not lead to concentration or vertical integration.
- Out of favor: Innovation competition through R&D.
- Still marching along: Consumer welfare standard.