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Intro: Hello and welcome to Dealmaker Insights, a podcast brought to you by Reed Smith's corporate and finance lawyers from around the globe. In this podcast series, we explore the various legal and financial issues impacting your deals. Should you have any questions on any of the content please contact our speakers.

Anatoliy: Hi, everyone and welcome back to Reed Smith's podcast series, Dealmaker Insights. I'm Anatoliy Rozental, Private Equity M&A partner based in our New York office. With the explosion of developments in the U.S. antitrust space. I’ve teamed up with our antitrust and competition team to chair a three part series where we will be discussing the practical impact of recent developments and key priorities for our clients. Our third and final episode, I'm honored to be joined by my partner Ed Schwartz, who was a member of the global antitrust competition team and who is at the forefront of some of these antitrust battles. Ed, thank you so much for joining me today.

Ed: It's a pleasure to be with you today. Anatoliy.

Anatoliy: Thank you, Ed. So let's dive right in. We've all heard and read so much about the changes in antitrust enforcement under President Biden, especially when it comes to mergers. We've also heard that these changes have made it more difficult to get deals through both the DOJ and the FTC. So do merging parties really need to approach the merger enforcement process differently today than they did even four years ago?

Ed: I think they do Anatoliy. Look, we all know that President Biden came into office with a mandate which I think can more accurately be described as a dictate from the progressive wing of the Democratic party to bolster antitrust enforcement, especially with regard to mergers and beginning with the appointment of Lina Khan to chair the FTC and the appointment of Jonathan Kanter at the antitrust division. We've seen the White House act on that mandate. And each of them Khan and Kanter has implemented changes at their respective agencies that have made getting many deals through the agencies more challenging. Now, the good news is that we have not seen a dramatic increase in the number of cases being investigated through a second request or being challenged in court. And that was expected by many of us. We've seen fewer in fact, particularly at the FTC. And there are a lot of reasons for that, that I don't really have time to get into, but still for parties who are trying to navigate the merger enforcement process deals that potentially raise anti-competitive concerns. And I'm talking about deals where there is a significant horizontal overlap between the parties or maybe because it's a vertical transaction which could be seen as potentially threatening to rivals of either the buyer or the seller. These parties do need to adjust their strategies for dealing with the antitrust agencies to adapt to the changes that we've seen.

Anatoliy: So, what do you think are the biggest changes in merger enforcement that you've witnessed that are impacting parties today? They're trying to navigate the merger enforcement process?

Ed: Well, it's a lot, but maybe I can speak first in broad strokes. Uh I think the changes made by the agencies fall into three broad categories. First, the agencies have broadened the scope of deals that the agencies consider to be potentially anti-competitive. Second, they've implemented changes that couldn't make getting a deal through more difficult and take longer if the agency decides to investigate. And three, the agencies have also made negotiating remedies for a challenge deal in order to win approval more difficult. Now, let me take those one at a time. So with respect to broadening the scope of deals, the agencies may find to be anti-competitive. Let's take a look at the recent revisions to the horizontal merger guidelines, which in a number of ways, they really both broaden the scope of deals that may be subject to investigation and a suit to block and at the same time, lowered the bar for merger challenges. So for example, and really importantly, the revised guidelines state that a proposed transaction will be viewed as presumptively unlawful if it results in a post merger combined fare of 30% that is a market share of 30% by the merge firm or in HHI of 1800. These are significantly lower thresholds than we saw in prior guidelines and they're really much lower than the thresholds the courts have generally viewed as raising anti-competitive concerns. So those are two examples both coming out of the revised horizontal merger guidelines. Um Second, though the agencies have now stated that a vertical merger will be viewed as presumptively illegal if either party has at least a 50% market share. This is new. And it's also consistent with the fact that we have seen notable challenges to vertical mergers in the last few years such as the FTC suit to block the aluminum rail transaction. And that by the way is a case that the FTC lost before the FTC administrative law judge. I think we also have to look beyond what the FTC has said in the revised horizontal merger guidelines because the FTC has issued other notable policy statements including a broad general statement of enforcement policy that addressed merger enforcement policy. And there the commission said that mergers that don't violate Clayton Act Section 7, which is the federal law establishing the standard for merger enforcement, could still violate Section 5 of the FTC Act. That's a radical statement. So what the FTC is saying is that even if under the body of case law that's developed over the last many, many, many decades and under FTC policy, a merger would be deemed to be legal that they still may challenge it under Section 5. The FTC has also said that it is abandon the consumer welfare standard in analyzing mergers even though this has been the touchstone for merger analysis for decades. Now because the FTC hasn't, hasn't provided much in the way of guidance as to just how they analyze deals. We're really left with the commission pretty much saying we can't really tell you what the standards are, but we'll know in anti-competitive merger when we see it and that's really not much of an exaggeration. So let me turn now to getting the deal through once an investigation has been opened. And what we're seeing there is more of a practice than a stated policy by the agency. The investigations that are launched are taking longer and the burdens on merging parties in navigating the investigation process is generally greater. So, put another way what we're seeing in many cases is the agencies using their discretion more often to be less flexible in negotiating the scope of second request and overall taking more time to conduct the investigation. And this of course, can imposed an enormous toll on the parties and in some cases threatened or even kill the deal. Lastly, remedies. Both the FTC and the Antitrust division have expressed deep skepticism about the effectiveness of merger remedies in fixing the problems they see arising from problematic mergers. This is also significant because if the agency isn't willing to negotiate a remedy, the only remaining options are to litigate or abandon the transaction.

Anatoliy: So given all of that, how can merging parties adapt? What, what should they be doing differently today than they were doing four years ago? What, what are we supposed to be telling our clients?

Ed: Well, that's really a $60,000 question, isn't it? And I would highlight three things. The first, I think parties need to take into account the risk of a long investigation. And I'm talking potentially as long as 18 or even 24 months in the parties' deal documents if you would think an investigation is likely. And I'll add that this is especially true if the deal may be investigated in other countries. In which case, the U.S. agency may slow roll the investigation even more. Also, given the greater risk, parties need to be especially thoughtful. And I think even creative in thinking about clearance risk allocation between the parties and possible outcomes when negotiating the deal documents. The second thing that I think parties need to focus on arises from the following reality and that is that the agencies hold most of the cards in a merger investigation. They really do. But there is one card that the parties can play and that is a willingness and ability to litigate. So what that means is that if an agency is jamming the deal up, the most effective thing the parties can do is to when they get to that point, certify substantial compliance with the second request. Now, the agency may say they don't agree. You haven't, you haven't complied. But the parties can say as far as we're concerned, we have complied. Tell them that, tell the agency that the parties plan to close and that they can sue if they want. But, that means the parties have to be prepared to litigate. And that what that means is that they should develop an effective litigation strategy early in the planning process. This is an important change, but it is the reality of navigating the merger clearance process today. Ultimately taking the dispute to a federal court means the agency has to prove its case under the enormous body of merger law that's developed and that's where the parties get leverage, even the threat of litigation and demonstrating a willingness to do it. That's what gives the party much greater leverage in an investigation. Importantly, here, remember the, if the agency sues to block a deal, they bear the burden. Also notable is the fact that the agencies have a string of losses in the courts and merger cases. So again, the parties can and should use what they have. There are only so many cases the agencies can litigate and their track record hasn't been very good. So the key takeaway here is a willingness and ability to litigate is the leverage parties have. They should use it when necessary and be prepared to do so. Third, let me get back to remedies. Um I think what parties need to be doing on that score is to be prepared early on to advise the agency, what the parties are willing to do to get the deal through. So the party should begin this process early in the planning. What is the buyer prepared to give to get the deal through? It is often in the party's interest to consider that up front, especially if you're, if you're representing the buyer. Look, the agencies know that if the parties have put an effective remedy offer on the table, the agency's chances of losing in court has just gone up and it may deter them from simply laying down the gauntlet and saying we're not willing to negotiate, you can walk away or will sue you. And so this is why we've seen the agencies more willing to negotiate remedies than their words would indicate. And also then if litigation ensues the parties are in a much better place, if they can argue to the court that even if the deal does reduce competition, the proposed remedy effectively restores it and that the agency shouldn't and can't get any more than the parties have offered. Now, let me add one last point about strategy in dealing with the new merger world we're in and it's what I wouldn't do. What I wouldn't do is to change the arguments I would make to the agencies in fundamental ways. And that's even before the FTC, despite the policy statements that they've made about abandoning the consumer welfare standard and everything else, and this goes back to my second point, the agencies ultimately need to prove their cases in court if the parties are willing to litigate. So, while the FTC might say we've abandoned the consumer welfare standard and we're doing things completely differently today because the old order doesn't work. They still have to prove their case before a court of law if the parties are willing to litigate and the consumer welfare standard is still the Touchstone for merger analysis in the courts and it probably will be for a long time to come. So I think the bottom line here is that just because the agency have veered left, that doesn't mean that the courts aren't still driving straight down the middle of the road.

Anatoliy: So Ed, and we, we, of course, that's the current state of the world. Of course, we have an election coming up. So I will ask you to look into your crystal ball and tell us what you expect to happen in connection with the election. So do you see changes happening with the type of president that is elected or with an incumbent retaining its seat in office?

Ed: Yeah. Well, that's a very good and timely question. We're not that far away from an election and possibly a change of administration. So the short answer is yes, we will see changes and it of course, depends on what happens in November. Look, I think first if Trump is elected, I think we will see rollbacks of many of the changes we've seen in the last three years. And also just, you know, gazing a little more deeply into my crystal ball, if Trump is elected, I won't be surprised to see merger review with the antitrust division and maybe even at the FTC to become more politicized. And that could be a wild card for merging parties. And you know, if Biden's re-elected, I still think that we're going to see some changes, especially at the FTC. I wouldn't be surprised to see more of an institutionalist at the helm, appointed as chair of the FTC. I think the White House might want to see someone who is viewed as more able to get things done than the current chair. And you know, I think who ends up in control of Congress, both the House and the Senate could also affect merger enforcement, especially if the Democrats lose the Senate and Biden is reelected. Look, you know, he's gonna have to get his, his appointments through his nominees through Senate confirmation and that could have an impact and look if the Republicans control both chambers, they, they control the budget and that could also have an impact as well. So either way we're going to see some changes, I fully expect that exactly what those changes will be. I guess we'll just have to wait and see.

Anatoliy: Thank you, Ed. That's all the time we have for today's episode. And thank you to everyone for tuning in. This is the last episode of the series and we hope that everyone has enjoyed it. If you have any further questions or comments, or like to reach out to any of the speakers. You can please find all of our bios on the Reed Smith website. We look forward to staying in touch about these topics or any future topics until next time. Thank you so much.

Outro: Dealmaker Insights is a Reed Smith production. Our producers are Ali McCardell and Shannon Ryan. For more information about Reed Smith's corporate and financial industry practices, please email dealmakerinsights@reedsmith.com. You can find our podcast on Spotify, Apple Podcasts, Google Podcasts, reedsmith.com and our social media accounts.

Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers.

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