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Updates on Recent US Merger Control Developments - May 2020May 22, 2020
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In light of the COVID-19 pandemic and its resulting recession, O’Melveny is helping clients navigate an increasingly complex M&A landscape, providing insight into how antitrust agencies around the world approach merger reviews and deal with failing firms during periods of economic turmoil. As we continue to monitor merger trends in the current climate, this update discusses notable developments in the United States, including:
- A proposed ban on merger activity during the COVID-19 Crisis and the agencies’ responses;
- Recent statements from the Assistant Attorney General for Antitrust on the standards applied to mergers during the current crisis; and
- How the agencies are approaching transactions involving bankrupt firms.
A Moratorium on Mergers?
Senator Elizabeth Warren and Congressional Democrats have proposed a moratorium on mergers and acquisitions during the COVID-19 pandemic. The Pandemic Anti-Monopoly Act—which has not yet been introduced in either Chamber and failed to make into the latest proposed stimulus bill—would stop “large corporations from exploiting the pandemic to engage in harmful mergers” by:
- Prohibiting “risky” mergers and acquisitions until the Federal Trade Commission determines that small businesses, workers, and consumers are no longer in severe financial distress. Qualifying transactions include all those that otherwise would have been reported to the FTC and transactions that involve (1) entities with over $100 million in revenue or market capitalization; (2) private equity companies, hedge funds, or companies owned by them; and (3) companies with an exclusive patent that impacts the COVID-19 pandemic. The proposal does not define “severe financial distress.”
- Pausing all waiting periods and merger clearance deadlines imposed on antitrust agencies.
- Directing the FTC to make rules establishing a legal presumption against mergers and acquisitions that pose a risk to the government’s ability to respond to a national emergency.
Senator Warren’s proposal does not include any exceptions. Representative David Cicilline, chairman of the House Judiciary Subcommittee, has also called for a ban on most mergers during the pandemic, although he would exempt from the prohibition businesses that have declared bankruptcy or are about to fail.
But the US antitrust agencies have generally rejected any suggestion that a merger moratorium is necessary. The Assistant Attorney General of the DOJ’s Antitrust Division, Makan Delrahim, made clear that it would be “misguided to just block all attempts for transactions” in response to the COVID-19 pandemic. He explained that he did not believe that “we should be using the crisis to just block all sorts of pro-competitive and probably some transactions that would be very necessary during this time to make sure that companies have the liquidity to continue on and keep workers employed.”
FTC Commissioner Noah Phillips expressed similar concerns, rejecting the need for an “unprecedented” “blanket ban.” While the antitrust agencies are working from home, he noted that they are not overwhelmed by merger filings or “sacrific[ing] the thoroughness of our investigations.” He further explained that M&A activity “has an important role to play in a moment of economic adjustments” as it “helps allocate assets in an efficient manner.” Commission Phillips concluded, “American consumers stand to gain from pro-competitive mergers, during and after the current crisis. Those benefits would be wiped out with a draconian ‘no mergers’ policy”—it “serves no good, including for competition, to let companies that might live, die.”
Finally, FTC Commissioner Christine Wilson explained, “A broad moratorium on M&A would be unprecedented, unnecessary and ill-advised” because “forbidding private sector investment forces companies in need of cash to struggle without it—putting even more workers’ jobs at risk. Antitrust does not work by simply blocking all merger activity. Instead, it analyzes whether a specific merger is likely to harm consumers.”
Merger Control Standards Remain the Same but Provide Flexibility
As the US economy suffers its most severe slump since the Great Depression, antitrust commentators have speculated that the agencies could alter merger review analysis. Assistant Attorney General Delrahim made clear that the “legal standards” governing merger review remain the same during the COVID-19 pandemic, but added that “what’s great about . . . how antitrust law works is it provides the flexibility to deal with exigent circumstances” like the current crisis.
“I think people can take comfort [in that] we don’t stick our heads in the sand and just assume that we are going to apply blindly a particular standard or get in the way of business. ...I think we’re all challenged to work together to make sure that we are getting out of this and get the fastest recovery for the economy,” he added.
Bankruptcy and Merger Review: The Deans Foods Divestitures
To illustrate his point, Assistant Attorney General Delrahim referenced the DOJ’s recent actions in connection with the bankruptcy sale of Dean Foods Company (Dean Foods)—which filed for Chapter 11 bankruptcy in November 2019. In the March 2020 bankruptcy sale, Dairy Farmers of America Inc. (DFA) won the bid for a substantial portion of Dean Foods’ assets, including 44 of the company’s fluid and frozen milk processing plants. Separately, Prairie Farms Dairy Inc. (Prairie Farms) won the assets, rights, interests, and properties relating to eight Dean Foods’ fluid milk processing plants, two distribution branches, and other assets in the South and Midwest. The Bankruptcy Court approved the sales on April 3, 2020.
On May 1, 2020, the DOJ and the state attorneys general of Massachusetts and Wisconsin jointly filed a challenge to DFA’s proposed acquisition in US District Court for the Northern District of Illinois. At the same time, the DOJ filed a proposed settlement pursuant to which DFA agreed to divest three plants in Illinois, Wisconsin, and Massachusetts to an acquirer or acquirers to be approved by the DOJ. Assistant Attorney General Delrahim noted that, “This is a tumultuous time for the dairy industry, with the two largest fluid milk processors, Dean and Borden Dairy Company, in bankruptcy, and a pandemic causing demand for milk by schools and restaurants to collapse. In the face of these challenges and Dean’s worsening financial condition, the department conducted a fast but comprehensive investigation, and our actions today preserve competition for fluid milk processing in northeastern Illinois, Wisconsin, and in New England.”
He also noted that the DOJ reviewed the Prairie Farms acquisition—even though it was not a reportable transaction under the HSR Act—but closed its investigation because the plants at issue would likely shut down if not purchased by Prairie Farms. The DOJ explained that Dean Foods’ distressed financial condition and the lack of alternate purchasers meant “Prairie Farms’ acquisition will preserve necessary outlets for dairy farmers and keep milk on consumers’ refrigerator shelves by keeping the plants in operation.”
In short, both acquisitions were subject to DOJ investigation in addition to approval by the bankruptcy court—a clear reminder that the HSR Act also applies in the bankruptcy context. Indeed, it appears that the COVID-19 pandemic did not alter the DOJ’s approach or analysis other than potentially speeding up the investigation. Assistant Attorney General Delrahim stated that the dire financial status of Dean Foods required a “fast but comprehensive investigation.” In other words, companies considering an acquisition, including in a bankruptcy sale, must still consider the antitrust implications of the transaction.
As the COVID-19 crisis rages on, US lawmakers are considering a range of responses to aid companies and consumers. None is as far-reaching as the proposed ban on all mergers. For now, at least, there is no indication that a ban is likely, and every indication from the US antitrust agencies suggests it is unnecessary. Companies can proceed with their transactions, but they should be prepared to grapple with traditional antitrust considerations.
At O’Melveny, our antitrust experts have significant experience in assessing and managing mergers, including those involving bankrupt and failing firms. Our in-depth understanding of how antitrust agencies work and our established relationships with those regulators enable us to help our clients navigate the challenges posed by the COVID-19 crisis. If your company is contemplating a transaction, O’Melveny’s global antitrust team is here to help.
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, 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, Anna 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, Ian Simmons, an O'Melveny partner licensed to practice law in the District of Columbia and Pennsylvania, Michael Tubach, an O'Melveny partner licensed to practice law in California and the District of Columbia, Courtney C. Byrd, an O'Melveny counsel licensed to practice law in the District of Columbia and Maryland, Stephen McIntyre, an O'Melveny counsel licensed to practice law in California, Scott Schaeffer, an O'Melveny counsel licensed to practice law in California and the District of Columbia, 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. The views expressed in this newsletter are the views of the authors except as otherwise noted.
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