Getting Private Equity Deals Done in the Current Antitrust Environment

November 2021

Given that deal flow is the lifeblood of private equity firms, the heightened scrutiny toward mergers from regulators is a matter of serious concern. On November 4, Ted Hassi, Timothy McIver, Michael Schaper, Kevin Schmidt, Erica Weisgerber and Anne-Mette Heemsoth from the Debevoise Antitrust and M&A teams hosted a webinar for private equity leaders to assess today’s highly dynamic antitrust environment. Highlights included the following:

At the FTC, PE is in the crosshairs. Under the leadership of new Chair Lina Khan, the Federal Trade Commission (FTC) is exercising enhanced scrutiny of PE firms in the M&A space. Recent communications from the FTC’s leaders include little if any acknowledgement of the positive role that PE firms can play in providing capital, expertise and synergy; instead, PE firms are seen to “distort ordinary incentives,” “strip productive capacity,” and “prey on [marginalized] communities.”

Second Requests: more common, broader, tougher. The harder line taken by the FTC can be seen in the agency’s Second Requests. Observers report that Second Requests (i.e., discovery procedures by which the FTC investigates transactions which may have anticompetitive consequences) are more frequent, probe a wider variety of issues (such as ESG factors and effects on unions and employees) and are more frequently backed up with threated legal action around compliance with the requests.

Investments and strategies are under scrutiny. Importantly for private equity firms, some Second Requests are now reaching beyond the portfolio company involved in the deal to include the sponsor itself. PE firms are being asked about their acquisition pipelines, plans for tuck-ins and add-ons, and industry track record. While this level of scrutiny was previously found in regulated industries, it is now becoming commonplace across the board. In addition, the agency has proposed (but not finalized) a rule requiring buyers to disclose information on their parent companies and subsidiaries, which could increase the burden for private-equity making premerger HSR filings.

The gloves come off for vertical mergers. The FTC recently withdrew its approval of the Vertical Merger Guidelines issued jointly with the Department of Justice in 2020, as well as the agency’s commentary to those guidelines, suggesting the agency intends to step up enforcement against vertical mergers.

Warning letters signal no new law, but a big shift in attitude. The FTC has always had the right to challenge transactions after closing. To this end, the agency’s new practice of more frequently sending “warning letters” reminding parties of this fact represents nothing new from a statutory perspective. Nonetheless, the warning letters do represent a stark difference from the antitrust agency's typical HSR review process for the past several decades; the letters suggest that parties to reportable transactions should not assume they are in the clear once the 30-day preliminary review period has passed. While it is too early to tell whether the FTC will more aggressively challenge post-close transactions, the agency’s pointed reminder of its post-closing reach suggests that parties should be mindful of new transaction risks.

A new point of negotiation between buyers and sellers. Some parties have responded to “warning letter risk” by including provisions in their PSAs tied to the receipt of such a letter. While this has been the exception and not the rule, the provisions used so far have ranged from the ability of the buyer to delay the closing for a short period of time to being able to delay closing indefinitely. Eventually, other methods of risk allocation may emerge as well, such as an adjustment to the purchase price if a divestiture or other constraint is imposed post-closing. Whatever the conditions are, buyers and sellers will want to closely scrutinize antitrust contract provisions that address who leads antitrust strategy, contacts with regulators, and access to communications with regulators.

The return of “prior approval” casts a shadow over divestiture deals for a decade—or longer. The FTC has announced that it will resume its earlier practice of requiring parties to mergers the FTC deems anticompetitive to seek the FTC’s approval for a minimum of 10 years for future acquisitions affecting the relevant markets for which a violation was alleged. This prior approval requirement will also require buyers of divestiture assets sold pursuant to a merger consent order to obtain prior approval on any subsequent sale of those assets for a period of at least 10 years—essentially giving the FTC veto power over exit strategies. The collateral consequences on the M&A deal space of discouraging private equity firms from acquiring assets that need to be divested for deals to go through remains to be seen. For more detail on this recent change, please see our recent client alert, “Buyer Beware: The FTC’s Revived and Expanded Prior Approval Policy.”

Antitrust is tougher everywhere. Around the world, antitrust enforcement agencies are increasingly conducting more rigorous merger control reviews, even for non-strategic transactions that do not raise any immediate and substantive competition issues. Another recent trend is the notable creativity in establishing jurisdiction; for example, the EU Commission has now started accepting referrals from national competition authorities to review transactions even if the transaction falls below the EU Merger Regulation thresholds and the referring authority itself does not have jurisdiction to review the case. The EU Commission is also considering revising its merger review thresholds so that more transactions involving early-stage, high-growth tech companies will be covered.

No letup in the EU’s strict procedural enforcement. In the current environment, even deals that seem to be following the book can find themselves in regulatory hot water for procedural missteps. The Altice Europe/PT Portugal merger provides a cautionary tale: Although the merger got the go-ahead from the EU, the EU Commission later held that conduct of business covenants in the agreement and the ongoing exchange of information between the parties without “clean team” procedures constituted “gun jumping,” resulting in a fine of €124.5 million.

Global investment is now a national security issue. From the United States to the EU to China, more and more countries are introducing foreign investment regimes, or revising existing ones by widening the scope of application to include sectors not previously considered ‘sensitive.’ Foreign investment regimes are typically triggered by the target’s lines of business, or the nationality or identity of the acquirer or investors. It is therefore possible that deals which trigger no merger control filings or issues can still be subject to close regulatory scrutiny and a lengthy sign-to-close timeline under foreign investment regimes. This development can also create significant compliance complications for PE firms, given the amount and detail of information that can be requested by the relevant authorities, which increasingly also includes information on the limited partners of PE backed deals, including passive, minority and fund-of-funds investors.