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New Merger Guidelines Increase Risks for PE, Mid-Market Deals

PE firms should not assume that a transaction will fly under the radar simply because of a relatively low value

Michael G. Dashefsky, Lucas Ross Smith and Patrick Zinck
New Merger Guidelines Increase Risks for PE, Mid-Market Deals

Last December, the Department of Justice (DOJ) and the Federal Trade Commission (FTC) issued the 2023 Merger Guidelines, which describe the framework that the DOJ and FTC use when evaluating whether a proposed merger should be investigated or challenged under the antitrust laws. The new Merger Guidelines replace two prior guidance documents, the 2010 Horizontal Merger Guidelines and the 2020 Vertical Merger Guidelines.

The 2023 Merger Guidelines lower the bar for determining that a transaction is likely anti-competitive while also expanding the types of transactions that the DOJ and FTC will consider anti-competitive. In the six months since the new Merger Guidelines were issued, we have already started to see the effects, with transactions being investigated, and even challenged, under the new standards set out in the Merger Guidelines.

The new guidelines provide several new rationales for challenging mergers and demonstrate the current aggressive posture of the DOJ and FTC toward antitrust enforcement in the deal context.

Notable Changes in the New Merger Guidelines
“Roll-Up” Strategies in the Crosshairs

The DOJ and FTC will now consider the total impact of a series of prior acquisitions or consolidation in the market generally, when examining a merger, including the strategy behind the series of transactions. This means that roll-up acquisitions, a common strategy for private equity firms, will face increased scrutiny. Parties should be prepared to answer questions about their prior transactions in the same industry, even if they appear unrelated to the transaction at issue. Similarly, parties should be prepared to discuss how prior rounds of industry consolidation affected competition and to demonstrate that competition remained robust.

In April, the FTC moved to block Tapestry, the owner of fashion brands including Coach and Kate Spade, from acquiring Capri, the owner of fashion brand Michael Kors, based in part on Tapestry’s alleged pattern of serial acquisitions in the accessible luxury handbag market. This marks the first major application of the serial acquisition/roll up standard in new Merger Guidelines, and may prove to be a key test of whether the novel legal theory will hold water in federal court.

Many More Mergers of Competitors Will Be Viewed as Presumptively Anticompetitive

The 2023 Merger Guidelines update numerical thresholds that have long been used to measure whether a merger of competitors is deemed anticompetitive. These changes lower the bar for the DOJ or FTC to find that a transaction is presumed to be illegal. Specifically, the DOJ and FTC will now consider any merger that increases the Herfindahl-Hirschman Index (HHI), a measure of market concentration, by 100 points or more and results in a post-merger market with an HHI of 1,800 points or more to be illegal. The prior post-merger HHI threshold at which a merger was deemed anticompetitive was 2,500, with a change of at least 200 points. This means that many more markets will be considered concentrated, and many more transactions will be viewed as presumptively anticompetitive.

In addition, the 2023 Merger Guidelines contain a new presumption of illegality for any deal that creates a firm with a post-merger market share of at least 30%, provided HHI increases by more than 100 points. Mathematically, this standard deems any transaction creating a firm with a 30% market share as anticompetitive unless one party is contributing only a very small market share (less than 1.8%). As a result, firms may have a more challenging time selling to competitors.

Skepticism Regarding Vertical Integration

Transactions involving vertical integration will face increased scrutiny from the DOJ and FTC under the new Merger Guidelines. Transactions may be viewed as illegal if the transaction allows a company to limit access to a product or service required for competitors to compete. Notably, the DOJ and FTC will now infer that transactions involving vertical integration are anticompetitive if one of the parties has a 50% or more share in its market, even if the other party is only a minor player in its respective market. Previously, such transactions received relatively little enforcement attention. Companies that compete in relatively small geographic markets—such as many healthcare providers—often have surprisingly high market shares. The 2023 Merger Guidelines demonstrate that vertical integration involving such companies will no longer receive a near free pass from regulators, even if the deal value is relatively low.

Related content: For Private Equity, the New Year Rings in New Regulatory Pressures

Minority Acquisitions May Be Subject to Agency Review

The new Merger Guidelines make clear that the DOJ and FTC are not just interested in transactions that involve change of control. They also will review transactions where a buyer acquires some decision-making influence (or even just a board observer), even if not acquiring complete control. This may complicate private equity investments, especially if the private equity sponsor has multiple investments in the same industry.

Changes to Premerger Notification Rules Expected Imminently

In addition to the new Merger Guidelines, the FTC has proposed changes to the Hart-Scott-Rodino (HSR) premerger notification rules which would increase the time, effort and expense associated with an HSR filing. In April, DOJ officials indicated that the new HSR rules are likely to be finalized within a matter of weeks.

The proposed changes include intrusive disclosures for private equity funds regarding their structure and the identity of their limited partners, financing sources and creditors, as well as the mandatory disclosure of prior transactions for the past ten years, regardless of size, which could result in investigations of long-closed transactions. Additionally, under the proposed rules, parties will be required to produce draft documents and various ordinary course business documents unrelated to the deal. As a result, filing within 5-10 business days of signing, which transaction agreements typically require, will not be possible without significant pre-signing preparation.

It is unclear how many of the proposed changes will become part of the final rule; however, DOJ officials stated in April that the final rule will be materially different from the proposed rule and may be less burdensome than anticipated. Nonetheless, dealmakers should anticipate that the burden and expense required for a premerger notification will increase, perhaps significantly.

Takeaways for Dealmakers

Firms should anticipate that transactions will carry higher burdens, costs and risks. Firms also should not assume that a transaction will fly under the radar simply because of a relatively low value.

The 2023 Merger Guidelines and the proposed HSR premerger notification rules indicate that the DOJ and FTC are expanding their enforcement priorities to focus more on middle-market and private equity deals while continuing to scrutinize large firms. Firms should anticipate that transactions will carry higher burdens, costs and risks. Firms also should not assume that a transaction will fly under the radar simply because of a relatively low value. The DOJ and FTC have significant power to deter and delay transactions by forcing parties to undergo lengthy investigations before the transaction can be brought before a court.

Importantly, the new Merger Guidelines are just that—guidelines—and do not change the law. The DOJ and FTC ultimately will have to convince courts that challenged transactions are illegal under existing law (or convince courts to change their interpretation of the law). The DOJ and FTC have had an uneven track record in court in recent years, and litigation may be a plausible path forward when a deal is challenged under some of the more aggressive theories in the new Merger Guidelines. Dealmakers should consult with antitrust counsel to understand how the new Merger Guidelines may impact deal timing and the likelihood of being forced to litigate before reaching the closing.



Michael G. Dashefsky is a member at Bass, Berry & Sims PLC and currently leads the firm’s Antitrust & Trade Practices group. For more than two decades, Michael has counseled clients on a wide array of antitrust matters, including investigations by the DOJ, the FTC and antitrust agencies outside the United States; domestic and international antitrust litigation, including multidistrict class actions; and regulatory inquiries before U.S. and foreign regulators. He can be reached at Michael.Dashefsky@bassberry.com.

Lucas Ross Smith is a member at Bass, Berry & Sims PLC, where he represents companies across the nation in complex litigation and antitrust compliance. He provides antitrust counseling and analysis in proposed mergers and acquisitions, including Hart-Scott Rodino Act (HSR) pre-merger filing notifications. Lucas can be reached at LSmith@bassberry.com.

Patrick Zinck is an associate at Bass, Berry & Sims PLC. He represents companies on a range of antitrust matters, including merger reviews conducted by the DOJ and the FTC, domestic and international antitrust litigation and government investigations. Patrick can be reached at Patrick.Zinck@bassberry.com.



Middle Market Growth is produced by the Association for Corporate Growth. To learn more about the organization and how to become a member, visit www.acg.org.