Sweeping New FTC Rules Could Chill Healthcare Mergers and Acquisitions
Proposed rule would require businesses to undergo even more stringent review to secure regulatory approval for such deals.
Soon after it took office, the Biden administration pointed out that mergers, acquisitions, and consolidation are stifling competition, particularly within the healthcare industry.1 On June 27, the federal government’s antitrust watchdogs, the US Federal Trade Commission (FTC) and the Antitrust Division of the U.S. Department of Justice (DOJ), revealed a new initiative to curb M&A activity by proposing a rule requiring even more stringent review for businesses to secure regulatory approval for such deals.2 Here’s a look at the proposed rule and its likely impact on strategic dealmaking.
The Hart-Scott-Rodino Pre-Merger Requirements
Concerns about the anticompetitive ramifications of large corporate mergers and acquisitions are centuries old. In 1890, during the presidency of Theodore Roosevelt, Congress passed antitrust legislation establishing the federal government’s right to review these deals and head off potentially anticompetitive combinations before they come to fruition.3 In 1976, a landmark law called the Hart-Scott-Rodino Antitrust Improvements Act (HSR) came into being, creating a process for pre-merger notification and review.
Under the act, companies that want to enter into mergers must file an HSR form (Notification and Report Form for Certain Mergers and Acquisitions) with the FTC and DOJ, listing certain information about the deal, so that the agencies can review the proposed transaction and its potential effects on competition.4 The parties must then wait 30 days or until the agencies grant early termination of the waiting period before they can close the deal, although waiting periods may vary depending on the size of the deal and the principals involved.
Other than a few tweaks, the HSR form and process haven’t changed much in over four decades. What has evolved significantly during this time are the number and complexity of deals. “Transactions are increasingly complex, in both deal structure and potential competitive impact,” noted FTC chair Lina Khan and commissioners Rebecca Kelly Slaughter and Alvaro Bedoya in a written statement issued on the date the proposed rule was published. They further explained that the information the current HSR form collects “is insufficient for our teams to determine, in the initial 30 days, whether a proposed deal may violate the antitrust laws.”5
Six Key New HSR Information Requirements in the Proposed Rule
Across 133 pages, the proposed rule totally overhauls the HSR form, requiring companies to provide much more extensive information about the proposed deal. It includes six new disclosure requirements:
1. Transaction Information
If the proposed rule is adopted, companies that want to make merger deals will have to furnish more detailed information about the proposed transaction, including:
- a transaction diagram
- a detailed transaction and closing timeline
- details about the transaction’s rationale and investment vehicles or corporate relationships involved, including any existing agreements between the parties within the past year
Most significantly, companies will have to submit drafts of their so-called Item 4(c) documents analyzing the competitive effects of the proposed transaction if they provided such drafts to an officer, director, or deal team lead or supervisor. According to the FTC, the new rule aims to ensure that companies don’t submit only “sanitized” versions of their Item 4 documents.2
2. Narrative Information about Competition
Under the proposed rule, companies will have to provide not just data and numbers but also narratives describing:
- the current competitive landscape
- their supply agreements and other horizontal and non-horizontal business relationships
- geographic regions of overlaps
- customer information
3. Labor and Employee Information
The proposed rule also requires companies to include in their HSR forms certain information about their employees and labor markets, including workplace safety details, labor law violations committed within the past five years, and employee classifications by Standard Occupational Classification system categories.
4. Information about Prior Acquisitions
The proposed rule requires the acquiring and target companies to identify all prior acquisitions in the past 10 years in any line of business that may overlap, regardless of the size of those transactions. The FTC states that the purpose of the new requirements is to reduce the risks of anticompetitive “roll-up strategies,” referring to the process of acquiring and merging multiple smaller companies within the same industry and consolidating them into one large company to thwart competition.2
5. Periodic Plans and Reports
Current HSR disclosure rules require companies to submit reports and strategic documents related to the proposed transaction. The FTC wants to broaden that requirement by extending it to materials that companies create in the ordinary course of their business without regard to the transaction under review, including semi-annual and quarterly plans addressing markets and competition that were shared with certain senior executives or board members.
6. Organizational Structure
Under the proposed rules, companies will have to identify any individuals and entities who may have influence over their business decisions or access to their confidential business information, including:
- organizational charts for funds and limited partnerships involved
- identification of officers, directors, board observers, significant creditors, and holders of non-voting securities
- expanded information about minority shareholders
European Commission Slaps Illumina with Record Antitrust Fine
Speaking of healthcare acquisitions frowned upon by government regulators, on July 12, the European Commission (EC) announced that it was hitting Illumina with a €432 million ($479 million) fine for closing its acquisition of GRAIL without first securing the required regulatory approval. At 10 percent of Illumina’s 2022 revenues, the fine is the maximum the EC can impose. As a symbolic gesture, the EC also fined GRAIL €1,000 for its role in the violation. “If companies merge before our clearance, they breach our rules,” noted Margrethe Vestager, EC executive vice president in charge of competition policy, in a statement.7
The fiasco began in August 2021 when Illumina decided to go forward with the $8 billion acquisition of its former liquid biopsy spinout in defiance of the standstill issued by the EC, which purported to delay the transaction pending an investigation of its competitive impacts on the multicancer early detection testing market. Illumina disputes the EC’s jurisdiction over the transaction.8
But the company is fighting this war on two fronts. The FTC has also expressed concerns that allowing a leading developer of new MCED assays to be owned by the dominant provider of next-generation sequencing platforms would thwart MCED test competition and innovation and ordered Illumina to sell GRAIL.9 Illumina has gone to federal court to challenge the FTC order.10
Though not unexpected—Illumina recorded a $453 million loss in its third quarter 2022 earnings to cover the fine—the EC action represents another serious blow to Illumina’s defiance strategy.11 Now, many in the industry believe it’s only a matter of time before the San Diego genetic testing giant accepts the inevitable and divests GRAIL, which it has been holding as a separate entity since the acquisition.
Impact of the Proposed Rule
It will become much harder for labs and other providers to enter into strategic merger and acquisition deals if the new HSR rules are finalized. The FTC and DOJ acknowledge that assembling and furnishing all these extra materials will take a lot of time, effort, and money; in fact, they estimate that the time to prepare an average HSR notification will increase from 37 to 144 hours.2
In addition to extending the HSR process, the new rules will likely make securing regulatory clearance for proposed deals difficult. Once review becomes more comprehensive, the government will be able to dig deeper and have greater opportunity to unearth some anticompetitive impact or other basis for not approving the deal. The resulting increased costs and risks are likely to make labs and other providers more reluctant to pursue such deals.
Of course, the FTC and DOJ are keenly aware of this and may have proposed the new HSR rules specifically to chill what they deem harmful consolidation. This is not a new policy. Less than six months after taking office, President Biden issued an Executive Order instructing the FTC, DOJ, and other federal agencies to rigorously enforce antitrust laws, especially in the healthcare markets, noting that the nation’s 10 biggest healthcare systems now make up about a quarter of the market.1
In December 2022, the DOJ Antitrust Division signed a memorandum of understanding (MOU) with the U.S. Department of Health and Human Services Office of Inspector General to collaboratively enforce antitrust laws in healthcare markets. Under the MOU, the agencies promised to share data, refer potentially illegal activity to each other, and coordinate enforcement efforts to rein in healthcare M&A deals that threaten competition.6
However, the proposed HSR rules take the Biden anti-consolidation policy to another level. Rather than a mere enforcement directive and coordination initiative, the rules are a dramatic rewriting of the antitrust regulations and process that companies must navigate to consummate strategic mergers and acquisitions. And because they’re such a potential game changer, healthcare and other industries are likely to fight the proposed rules with every weapon at their disposal, starting with the public comments and rulemaking process and, if necessary, escalating to litigation.
Subscribe to view Essential
Start a Free Trial for immediate access to this article