Cases and Precedents – Mergers: USA

Background on section 7 of the Clayton Act

In the United States, the primary law regarding the substantive legality of mergers, acquisitions and joint ventures is section 7 of the Clayton Act, which prohibits mergers and acquisitions where the effect “may be to substantially lessen competition, or tend to create a monopoly”. The Celler-Kefauver Amendment of 1950 made the Clayton Act applicable to asset acquisitions, vertical mergers and other conglomerate mergers. 

Applying the Clayton Act’s “may substantially lessen competition” standard, the federal courts have substantial leeway to craft a “common law” of mergers. Until 1974, every Supreme Court decision applying section 7 to review a proposed merger found the relevant merger to be unlawful. Mergers invalidated by the Supreme Court in the 1960s and the early 1970s included a vertical merger between a shoe retailer and supplier and a horizontal merger between two local grocery stores.

Chicago School and pre-merger review

Starting in the mid-1970s, an influential group of lawyers and economists, including prominent academics affiliated with the University of Chicago, advocated a reframing of antitrust law around microeconomic principles. In practice, this meant consideration of consumer welfare, as measured by prices and output, as opposed to an approach deeming concentration to be inherently harmful. 

Congress also passed the Hart-Scott-Rodino (HSR) Act in 1976, which established the pre-merger notification system. Under the HSR Act, merging entities must submit a filing to the Federal Trade Commission and the Department of Justice (FTC and DOJ, or the Agencies) that includes the terms of the proposed merger, financial statements and other key documents. A 30-day waiting period ensues after the filing, during which the parties are barred from closing their deal. The Agencies may either bring suit or issue a Second Request – an additional, more detailed request for information about the proposed transaction – during the waiting period.

Together, the Chicago School revolution and the HSR Act dramatically changed the substance and process of US merger law. The pre-merger notification system allows many disputes between merging parties and the Agencies to be resolved in the early phases of litigation or outside of litigation entirely. Specifically, the Agencies may announce to the parties during the HSR process that they require a consent decree or a divestiture to approve the merger. The parties and the Agencies may also negotiate to a settlement if the Agencies threaten to sue. 

In the occasions that litigation proceeds to judgment, the courts have focused on certain key questions, including whether:

• the merged entity could profitably exercise monopoly power;
• the merger increases barriers to entry; and
• the combination achieves verifiable, merger-specific efficiencies that will pass through to customers.

Merger guidelines and ongoing changes

As described above, the Agencies play a particularly important role in US merger law by reviewing HSR filings, negotiating with merging parties and bringing suits to enforce the Clayton Act. Since 1968, the Agencies have issued merger guidelines, which explain the Agencies’ framework for reviewing proposed transactions to merging entities, their counsel and the public at large. The Agencies do not have the authority to promulgate binding regulations under section 7 of the Clayton Act, meaning that, in administrative law parlance, the merger guidelines are non-binding guidance. Nevertheless, given the nature of the pre-merger review system and the fact that the threat of litigation by the Agencies may scuttle a transaction, merging parties tend to consider the contents of the merger guidelines quite closely.

The current version of the merger guidelines is the 2023 Merger Guidelines (the 2023 Guidelines). The 2023 Guidelines were organised around thematic topics such as concentrated markets, vertical integration, acquisition of potential entrants and multi-sided platforms. The 2023 Guidelines are thematically differently from the previous 2010 Horizontal Merger Guidelines and the 2020 Vertical Merger Guidelines and aim to strengthen merger enforcement by presenting an approach that the agencies consider more up-to-date and more consistent with the economic realities and analyses of mergers.

The prior 2010 and 2020 iterations of the merger guidelines adopted a Chicago School approach of weighing pro-competitive and anticompetitive effects from the perspective of consumer welfare.  Critics of this consumer welfare approach – sometimes referred to as the Competitive Process School – felt that by focusing on consumer welfare at a specific point in time, the courts – or the Agencies – could miss longer-term benefits in the form of increased efficiency or innovation. They took the more progressive position that the courts and Agencies should consider the interests of other competitors and workers (as opposed to just consumers) as part of their analysis of competitive effects.

The 2023 Guidelines reflect the influence of the Competitive Process School. The FTC withdrew its support for the 2020 Vertical Merger Guidelines in 2021. In the 2023 Guidelines, the Agencies address both vertical and horizontal mergers, organised around 11 key principles or guidelines. The 2023 Guidelines extensively cite the 1960s and early 1970s Supreme Court case law that predates the Chicago School and the turn towards consumer welfare.

Additionally, in June 2023, the Agencies issued proposed rules that would vastly expand the materials that the merging parties should submit as part of their HSR filings. The Agencies may intend these additional materials to facilitate their more exacting review under the 2023 Guidelines, which may in turn lead to increased merger litigation. In that case, the federal appellate courts may be asked to revisit early Clayton Act case law.

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