Prompted by Sweeping Executive Order on Competition, New Leadership at US Antitrust Agencies to Launch Review of Merger Guidelines; Similar Initiatives in Europe and China May Signal Greater Convergence in Enforcement Across Jurisdictions
July 26, 2021
On July 9, 2021, the Federal Trade Commission and the Antitrust Division of the Department of Justice jointly announced that they soon would launch a review of the Agencies’ merger guidelines, noting that the existing guidelines “deserve a hard look to determine whether they are overly permissive.” Just over a week later, on July 20th, President Biden announced that he plans to nominate Jonathan Kanter to be the Assistant Attorney General for the Antitrust Division. With Mr. Kanter and FTC Chair Lina Khan at the helms of the US antitrust agencies, the review is likely to reevaluate fundamental aspects of the agencies’ approach to merger reviews. Mr. Kanter, for example, has previously raised questions about how well the merger guidelines reflect market realities in dynamic industries, urging that “[w]e need better rules of the road, so that we can help spot problems sooner and with greater effect.”
These developments follow a broad Executive Order issued by President Biden that aims to promote competition across the economy, which among other initiatives, directed the agencies to review both the horizontal and the vertical merger guidelines and consider revisions to them.
With respect to mergers, the Executive Order is notable for its focus on market concentration and the structure of markets. In that sense, it signals interest in a shift from the current consumer welfare standard, whereby business conduct and mergers are evaluated to determine whether they harm or will harm consumers in any relevant market. This analysis turns on identifying anticompetitive effects, such as an increase in consumer prices. In remarks at the signing of the Executive Order, President Biden criticized the consumer welfare standard, explaining that “[f]orty years ago, we chose the wrong path, in my view. . .” FTC Chair Lina Khan also has criticized the consumer welfare standard as being too focused on short-term effects on prices, and insufficiently focused on the accumulation of market power.1 In the Agencies’ review of the merger guidelines, a related question they may consider is whether the current approach gives adequate consideration to other concepts that have taken on increasing importance in the digital economy, such as the intersection of competition and privacy issues, and other types of non-price competition like service and quality.
The Agencies’ review of the merger guidelines likely will consider issues that often arise in connection with internet platforms and digital markets. Although the Agencies’ announcement did not indicate the focus of the review, the Executive Order states that the Administration’s policy is to “enforce the antitrust laws to meet the challenges posed by new industries and technologies, including the rise of the dominant Internet platforms.” The Executive Order also identified other sectors of interest, including agriculture, technology, prescription drugs and healthcare, telecommunications, financial services, transportation, and container shipping. Labor markets, and especially non-compete agreements, also are a focus of the Order.
The Executive Order notes that mergers involving digital markets often raise particular issues, specifically referencing “serial mergers, the acquisition of nascent competitors, the aggregation of data, unfair competition in attention markets, the surveillance of users, and the presence of network effects.”
Indeed, many topics that are of particular importance to analyzing mergers in digital markets may be part of the Agencies’ review. For example, these transactions may involve free products (where often the firm is making money elsewhere, either through different products, different consumers, or at a different point in time). Or, understanding the competitive effects of a transaction may depend on its impact on different parts of a multi-sided platform. Or, understanding a market may require considerations of network effects, where the value of the platform increases as the number of users increases. These economic concepts are vital to understanding the competitive impact of many mergers in digital markets, yet the 2010 Horizontal Merger Guidelines do not address any of them at length.
The acquisition of “nascent competitors” also is a likely area of focus for the Agencies when reviewing the current merger guidelines. Many of the acquisitions in the tech space involve firms that are new or not fully developed—so-called “nascent competitors.” The acquisition of nascent competitors presents a dilemma for enforcers because such firms may pose a uniquely potent threat to an entrenched incumbent, making their acquisition potentially anticompetitive. However, the firm’s eventual significance is uncertain, given the environment of rapid technological change in which such threats tend to arise. That uncertainty, along with a lack of present, direct competition, has made courts hesitant to prevent an incumbent from acquiring or excluding a nascent threat under the prevailing legal standard. Recently, however, a number of mergers raising these issues have been abandoned by the merging parties in the wake of agency complaints without reaching litigation.
Finally, consummated transactions may be a focus of the Agencies’ review of the current merger guidelines. As described in a Fact Sheet the Administration issued, the Executive Order urges the Agencies to recognize that “the law allows them to challenge prior bad mergers that past Administrations did not previously challenge.”
Merger guidelines provide important transparency to the business community about how the Agencies will approach merger investigations. However, it is important to recognize that guidelines do not have the force of law. While some courts adjudicating merger challenges have looked to the guidelines as persuasive authority on certain points, courts are not bound to follow them.
Global Trends and Greater Convergence Across Jurisdictions
The themes outlined in the Executive Order have also animated antitrust reforms in Europe and China. The result may be further convergence of antitrust enforcement across jurisdictions.
In Europe, concerns about acquisitions of nascent competitors, the monopolization of data, the regulation of internet platforms, and the interplay between antitrust and privacy laws, are also driving policy initiatives. These initiatives have set the stage for more interventionist enforcement also on that side of the Atlantic. They include: the European Commission’s draft Digital Markets Act and its ‘Article 22 Guidance Paper’ concerning the review of non-reportable transactions; Germany’s recently revised competition law; the UK Competition and Markets Authority’s new merger assessment guidelines; and the establishment of a digital markets taskforce in the UK. As enforcement priorities converge, companies can devise more uniform strategies to respond to merger reviews across jurisdictions.
Like the US and Europe, China and its antitrust regulator, the State Administration for Market Regulation (SAMR), are considering revisions to their antitrust laws and reevaluating their enforcement priorities. For the first time since China enacted its Anti-Monopoly Law (“AML”) in 2008, SAMR has proposed amendments meant to stiffen antitrust penalties and address new threats to competition. First, the draft amendments make explicit that SAMR has the power to investigate proposed transactions falling below the relevant turnover thresholds, a signal that the acquisition of nascent competitors will increasingly be on SAMR’s radar, particularly when the transactions involve Internet platforms or other participants in the digital economy. Second, the amendments clamp down on concentrations involving Variable Interest Entity (VIE) structures, which are commonly used by foreign companies to access sensitive industries—including those related to the Internet—otherwise subject to foreign investment restrictions. SAMR must approve VIE transactions if the transactions satisfy the relevant turnover thresholds. Third, SAMR proposes to increase penalties for anticompetitive agreements and merger clearance violations, while also increasing its investigatory power. Finally, the draft amendments raise gun-jumping fines from RMB500,000 (approx. USD78,000) to 1-10% of a company’s annual turnover. Together, these proposals highlight China’s attempts to meet new antitrust challenges and stiffen enforcement.
While the AML amendments remain pending, the proposals mirror a shift in enforcement against large technology companies. China, for instance, suspended an initial public offering by Ant Group (the world’s highest-valued FinTech company and the owner of Alipay), and later imposed the largest antitrust fine in its history ($2.8 billion) on Internet giant Alibaba for abuse of dominance. Separately, SAMR issued Antitrust Guidelines for the Platform Economy meant to address and curb acquisitions of nascent competitors, transactions in concentrated markets, transactions by firms with low revenues as a result of price subsidizations, and other issues generally associated with large technology companies and the digital economy. Just this month, SAMR relied on these principles to block a proposed merger between two Chinese game live streaming platforms. And since January 2021, SAMR has issued 47 gun-jumping penalties, many of which targeted transactions with VIE structures in the Internet sector.
Together, these recent activities and proposed reforms indicate that there is a strong possibility of greater convergence in merger reviews, and signal the likelihood of increased cooperation among enforcers across jurisdictions. And as the US seems to be trending in the direction of an interventionism more traditionally associated with the EU or China, the days when the US review of an international merger was the least onerous from the company’s perspective may be coming to a close.
1See, e.g., Lina M. Khan, Amazon’s Antitrust Paradox, 126 Yale L.J. 3 (Jan. 2017).
This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Ben Bradshaw, an O’Melveny partner licensed to practice law in California and the District of Columbia, Ian Simmons, an O’Melveny partner licensed to practice law in the District of Columbia and Pennsylvania, Riccardo Celli, an O’Melveny partner licensed to practice law in the Capital Region of Brussels, the Law Society England & Wales, and Roma, Courtney Dyer, an O’Melveny partner licensed to practice law in the District of Columbia and New York, Andrew Frackman, an O’Melveny partner licensed to practice law in New Jersey and New York, Yoji Maeda, an O’Melveny partner licensed to practice law in Japan and New York, Stephen McIntyre, an O'Melveny counsel licensed to practice law in California, Philip Monaghan, an O’Melveny partner licensed to practice law in the Capital Region of Brussels, Hong Kong, the Law Society England & Wales, and the Law Society Ireland, Anna T. Pletcher, an O’Melveny partner licensed to practice law in California, Katrina Robson, an O’Melveny partner licensed to practice law in California and the District of Columbia, Julia Schiller, an O’Melveny partner licensed to practice law in the District of Columbia, New Jersey, and New York, Youngwook Shin, an O’Melveny partner licensed to practice law in California and New York, Michael Tubach, an O’Melveny partner licensed to practice law in California and the District of Columbia, Laura Aronsson, an O’Melveny counsel licensed to practice law in New York and California, Courtney C. Byrd, an O’Melveny counsel licensed to practice law in the District of Columbia and Maryland, Scott Hammack, an O'Melveny counsel licensed to practice law in the District of Columbia and New York, Zhao Liu, an O’Melveny counsel licensed to practice law in California and the District of Columbia, Kelse Moen, an O’Melveny counsel licensed to practice law in the District of Columbia and Massachusetts, Philippe Nogues, an O’Melveny counsel licensed to practice law in France, Avocat à la Cour and Belgium, Avocat, Christian Peeters, an O’Melveny counsel licensed to practice law in Germany, Rechtsanwalt and Belgium, Avocat, Scott Schaeffer, an O’Melveny counsel licensed to practice law in the District of Columbia and California, Evan N. Schlom, an O’Melveny counsel licensed to practice law in the District of Columbia and California, Lining Shan, an O’Melveny senior legal consultant, Jason Yan, an O'Melveny counsel licensed to practice law in the District of Columbia and Virginia, and Sergei Zaslavsky, an O’Melveny counsel licensed to practice law in the District of Columbia and Maryland, contributed to the content of this newsletter.
© 2021 O’Melveny & Myers LLP. All Rights Reserved. Portions of this communication may contain attorney advertising. Prior results do not guarantee a similar outcome. Please direct all inquiries regarding New York’s Rules of Professional Conduct to O’Melveny & Myers LLP, Times Square Tower, 7 Times Square, New York, NY, 10036, T: +1 212 326 2000.