Prior Approval and Prior Notice Antitrust Risk-Shifting Provisions | Practical Law

Prior Approval and Prior Notice Antitrust Risk-Shifting Provisions | Practical Law

An Article discussing risk-shifting provisions negotiated in private acquisition and public merger agreements following the Federal Trade Commission's (FTC) renewed practice of requiring prior approval provisions in all merger enforcement consent orders for future transactions involving the same relevant markets. This Article also discusses prior notice provisions, which require the parties to notify the FTC or the Department of Justice (DOJ) about future transactions in the same relevant markets even if ordinarily not reportable under the Hart-Scott-Rodino Act. This Article discusses the use of prior approval and prior notice provisions in FTC and DOJ merger consent decrees since the FTC renewed its prior approval practice. It provides examples from Practical Law's Antitrust Risk-Shifting Database and from its Federal Merger Enforcement Action Database.

Prior Approval and Prior Notice Antitrust Risk-Shifting Provisions

Practical Law Article w-036-7623 (Approx. 9 pages)

Prior Approval and Prior Notice Antitrust Risk-Shifting Provisions

by Practical Law Antitrust
Law stated as of 01 Feb 2024 • USA (National/Federal)
An Article discussing risk-shifting provisions negotiated in private acquisition and public merger agreements following the Federal Trade Commission's (FTC) renewed practice of requiring prior approval provisions in all merger enforcement consent orders for future transactions involving the same relevant markets. This Article also discusses prior notice provisions, which require the parties to notify the FTC or the Department of Justice (DOJ) about future transactions in the same relevant markets even if ordinarily not reportable under the Hart-Scott-Rodino Act. This Article discusses the use of prior approval and prior notice provisions in FTC and DOJ merger consent decrees since the FTC renewed its prior approval practice. It provides examples from Practical Law's Antitrust Risk-Shifting Database and from its Federal Merger Enforcement Action Database.
The Federal Trade Commission (FTC) recently reinstated its practice of regularly requiring prior approval provisions in merger enforcement orders (see FTC, Statement of the Commission on Use of Prior Approval Provisions in Merger Orders (2021 Statement)). As a result of the policy change described in the 2021 Statement, some merging parties now include risk-shifting provisions stating they are not obligated to agree to a prior approval provision in a consent order or addressing obligations to provide prior notice of future transactions to the agencies.
This Article discusses risk-shifting provisions that merging parties have drafted since the FTC adopted this policy change in October 25, 2021, that address the buyer's or target's obligation to agree to a prior approval provision, as well as to a prior notice provision.

Prior Approval and Prior Notice Provisions

An antitrust agency often settles substantive antitrust concerns in a transaction with an enforcement order, which frequently contains both structural remedies, like a divestiture, and behavioral remedies, which may include obligations or restrictions on future activity, including a prior approval or prior notice provision (see Practice Note, Merger Remedies: Other Remedy Terms).
A prior approval provision is a clause in an enforcement order that requires the merging parties to obtain agency approval before closing any future transaction that affects a relevant market that was the subject of the order. The provisions typically last for ten years and also cover acquisitions not reportable under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act). In some cases, the FTC may require prior approval for future transactions in product and geographic markets beyond the relevant markets affected by the merger (see Practice Note, FTC Consent Orders).
Unlike transactions reported under the HSR Act, transactions subject to prior approval are not reviewed by the antitrust agencies on a statutory timetable. While the HSR Act provides the antitrust agencies a statutory waiting period for an investigation, after which they must allow the transaction to close or sue to block it, the FTC can block transactions subject to a prior approval order without having to go to court simply by withholding their approval (see Practice Note, Hart-Scott-Rodino Act: Overview).

Agency Use of Prior Notice and Prior Approval Provisions

2021 Policy Change

In July 2021, the FTC rescinded its 1995 Policy Statement on Prior Approval and Prior Notice Provisions, which had limited the agency's use of both prior approval and prior notice provisions. The 2021 Statement reinstated the FTC's pre-1995 policy of regularly requiring prior approval provisions in merger enforcement orders, explaining that it was to:
  • Prevent deals that are anticompetitive on their face.
  • Preserve FTC resources.
  • Detect anticompetitive deals below the HSR reporting thresholds.
(See Legal Update, FTC Reinstates Regular Use of Prior Approval Provisions and Imposes Strict Limits on DaVita's Future Merger Activity.)
The FTC also announced that it may even seek prior approval orders when parties abandon a transaction after the FTC issues a complaint to block it, considering various factors, such as market concentration or the parties' prior acquisition activity.
In some cases, the FTC may identify a need for stronger restrictions, including those that cover product or geographic markets beyond those affected by the present merger. The non-exhaustive list of factors the FTC considers in making those determinations includes whether:
  • The merging parties are attempting a transaction similar to one that has been previously challenged by the agency.
  • The relevant market is already concentrated or has seen significant consolidation in the past ten years.
  • The merger significantly increases concentration.
  • One of the parties, pre-merger, likely had market power.
  • Either party has a history of or has indicated an interest in additional acquisitions in:
    • the same relevant market;
    • related markets; or
    • adjacent or complementary products or geographic areas.
  • Market characteristics create an ability or incentive for post-merger anticompetitive market dynamics.
The FTC also now requires all buyers of divested assets in merger consent orders to agree to prior approval provisions for any future sale of those assets.

Use of Prior Approval and Prior Notice Provisions Since the 2021 Statement

Between July 2021, when the policy change was announced, and October 2022:
  • All 12 FTC consent orders included prior approval provisions.
  • Neither of the two DOJ consent decrees included a prior approval provision.
The FTC required additional prior notice provisions expressly in only two of its merger consent orders. Only one of the two DOJ merger consent orders contained a prior notice provision (see U.S. v. B.S.A. S.A., LAG Holding, Inc., and The Kraft Heinz Company (consent decree)). However, because requiring parties to obtain prior transaction approval inherently requires prior notice, prior notice provisions are not necessary where a prior approval provision covers the same type of transaction.
In the 12 FTC consent orders, the prior approval provisions in:
To identify these enforcement actions and sort and filter by other helpful metrics, visit Practical Law's What's Market Analytics, Federal Merger Enforcement Actions database, accessible from the Tools menu on the top right corner of any Practical Law webpage (access may vary by subscription).

Risk-Shifting Provisions Addressing Prior Approval or Prior Notice Requirements

Merging parties concerned that a potential government antitrust investigation or enforcement action may jeopardize their transaction often allocate that risk using provisions in the purchase or merger agreement (see Practice Note, Antitrust Risk-Shifting Provisions: Overview). The agreement generally contains an antitrust efforts provision, setting out the parties' obligations to obtain antitrust approval, such as their obligations to divest assets or engage in litigation to defend the transaction (see Standard Clause, Purchase Agreement: Antitrust Cooperation Provision).
Risk-shifting provisions in a deal agreement can address the parties' obligation to agree to a prior approval provision in a consent order or to provide prior notice of future transactions to the agencies. Parties may want to limit their obligation to agree to a government consent order that includes a prior approval provision because:
  • These provisions may disadvantage them in future transactions relative to other potential buyers that can take advantage of the statutory HSR approval process, which has the benefit of:
    • a potentially shorter statutory timeline; and
    • requiring the FTC to prove its case in federal district or administrative court before it can block the transaction rather than merely exercising its discretion not to approve it.
  • Purchasers of the merging parties' divested assets are also subject to prior approval provisions for later sales of those assets, which may make it more difficult to find a buyer for divested assets.
Merging parties including provisions in the agreement that address prior approval also often address prior notice. A prior notice provision in a government consent order requires the parties to notify the agencies about future transactions in the relevant markets even if not otherwise reportable under the HSR Act.

Overall Trends

An analysis of the transactions found in the What's Market Antitrust Risk-Shifting Database shows that most transactions so far do not include language specifically addressing FTC prior approval and prior notice provisions. However, some merging parties have included several types of provisions since October 25, 2021, in the general antitrust efforts covenant detailing their obligation to agree to a prior notice and prior approval provision, including those:

No Obligation to Agree to Prior Notice or Prior Approval Provisions

Several M&A agreements since October 25, 2021, contained provisions completely prohibiting the buyer from entering into agreements with a governmental authority requiring prior notice or prior approval. These provisions stated that the buyer was not required to agree to provide prior notice to or seek prior approval from any governmental authority relating to any future transactions, including in:
Other provisions specified that the buyer was not required to agree to obtain prior approval from any governmental authority relating to any future transactions (see the AbbVie Inc./Cerevel Therapeutics Holdings, Inc. merger agreement (no obligation to obtain prior approval (Section 6.2(a)) (Dec. 6, 2023))).

Limitation on Prior Notice or Prior Approval Provisions

Other agreements contained provisions that stated the buyer was not required to agree to any requirement to provide prior notice to or obtain prior approval from a governmental authority with certain limitations, including that the buyer was not obligated to:
  • Provide prior notice to or obtain prior approval from any governmental authority relating to the merger, if that requirement was material to the buyer (see What's Market, The Chevron Corporation/Renewable Energy Group, Inc. Merger Agreement (Section 6.1(c) (Feb. 27, 2022))).
  • Agree to any provision requiring the prior approval of a governmental authority unless:
    • doing so was required by the FTC or DOJ to obtain HSR Act approval; and
    • the provision applied to future transactions to acquire businesses primarily selling products in the same product markets as those in which the buyer was required to divest assets to gain antitrust approval under the antitrust efforts covenant of the merger agreement.
    (See What's Market, Antitrust Risk-Shifting Provisions in The Broadcom Inc./VMware, Inc. Merger Agreement (Section 7.2(c) (May 26, 2022)).)
  • Agree to prior approval restrictions relating to its or the target's businesses, product lines, or assets except for those that:
    • impose or provide an obligation to comply with laws of general applicability or are provided for in any material contract to which the target was a party as of the signing date; or
    • are regularly and routinely agreed to by similarly situated companies in the target's industry in connection with obtaining consents or approvals similar to those required from governmental authorities as set out in a schedule to the merger agreement and would not reasonably be expected to be material to either party's business or operations.
    (See What's Market, Shenandoah Telecommunications Company/Horizon Acquisition Parent LLC Merger Agreement (Section 5.3(g)) (Oct. 24, 2023)).

Affirmative Obligation to Agree to a Prior Notice and Prior Approval Provision

One agreement contained a provision that stated that relating to HSR Act approval, the buyer was required to propose, negotiate, and agree to any commitment to notify, or seek prior approval from, any governmental authority with respect to any future merger or acquisition by the buyer (see RWE Renewables Americas, LLC/Con Edison Clean Energy Businesses, Inc. purchase agreement (Section 6.5(c) (Oct. 1, 2022))).

Target's Obligation to Agree to a Prior Notice or Prior Approval Provision

One agreement contained a provision that stated that, if requested to do so by the buyer, the target was obligated agree to a requirement to provide prior notice to or obtain prior approval from a governmental authority only if the obligation was only binding on the target from and after the closing of the merger (see What's Market, Antitrust Risk-Shifting Provisions in Amazon.com, Inc./iRobot Corporation Merger Agreement (Section 6.5(d) (August 4, 2022))).