"FTC Increasingly Accepts Consent Agreements Without Upfront Buyers"
On November 15, the Federal Trade Commission (FTC) announced a proposed consent agreement to address the agency’s allegations that the $3.1 billion acquisition of Psychiatric Solutions, Inc. by Universal Health Services, Inc. (UHS) would reduce competition in the provision of acute inpatient psychiatric services in three local markets. According to the FTC, the proposed decision and order will preserve competition by requiring the parties to divest psychiatric facilities in each of the local markets to an FTC-approved buyer (or buyers). Notably, the decision and order does not designate a buyer that the agency already has approved – a so-called “upfront buyer.” This continues a trend in FTC merger enforcement over the past few months that suggests a departure from the agency’s traditional preference for upfront buyers. This apparent shift may offer merging parties an opportunity to eliminate the delay associated with locating and entering into a divestiture agreement with an upfront buyer, allowing them to close their transactions more quickly.
Unlike the Department of Justice’s Antitrust Division1 the FTC historically has required merging parties to identify buyers of assets to be divested before the agency will accept a consent agreement. This approach, as outlined in the FTC’s 2003 Policy Statement on Negotiating Merger Remedies, requires the acquiring firm to execute a divestiture agreement and all ancillary agreements with a divestiture buyer before the parties formally present that buyer to the FTC for approval. The FTC staff then reviews the qualifications of the upfront buyer and the definitive divestiture agreement and, once satisfied (sometimes after demanding changes in the definitive agreement), submits the identity of the buyer and agreement along with the consent agreement and decision and order to the Commissioners, who must vote whether to approve the package. Generally, the FTC requests parties to delay the closing of their transaction until the Commission has approved the package.2 Upfront buyer divestitures typically must be completed within a short period of time (10 days is common) after the merging parties close their transaction.
The FTC posits that the upfront buyer requirement minimizes the risk that a remedy will fail to preserve competition in cases where the agency is concerned about the adequacy of the divestiture package, the lack of acceptable buyers or the deterioration of the assets pending divestiture. As emphasized in the 2003 Policy Statement, an upfront buyer is likely to be required when the “parties seek to divest a package of assets comprising less than an autonomous, ongoing business.”
However, particularly in recent months, the FTC increasingly has been willing to accept consent agreements without upfront buyers. In this alternative structure, the acquiring firm commits to sell a package of assets to a to-be-approved buyer (unidentified at the time the consent agreement is approved by the Commission) within a defined time period after the transaction is completed or the decision and order becomes final.3 For example, the UHS decision and order requires certain assets to be sold within six months after the decision and order becomes final, while others must be divested within nine months. Prior to the completion of the divestitures, UHS must hold the divestiture assets separate and apart from its remaining operations. If UHS fails to complete the divestitures within the specified time periods, the FTC may appoint a trustee to divest the assets, a common provision in divestiture orders.
Since August of this year, the UHS consent agreement is one of four proposed consents the FTC has accepted without upfront buyers. Others include consent agreements signed in connection with: Simon Property Group’s proposed acquisition of Prime Outlets Acquisition (retail outlet centers), Air Products’ proposed acquisition of Airgas (industrial chemicals), and Tops Markets’ acquisition of Penn Traffic (supermarkets). In contrast, the FTC accepted only three consent agreements without upfront buyers in all of 2009 and a total of three in 2008 and 2007 combined.
This trend does not mean that the FTC has abandoned its upfront buyer policy. The FTC’s descriptions of some of the above-referenced divestitures indicate that the usual concerns animating the upfront buyer policy were absent. For example, the FTC explained that the UHS divestitures involved stand-alone businesses, while the agency noted that a number of qualified buyers had expressed interest in the assets that Air Products would be required to divest.4
Of course, some merging parties may prefer the certainty associated with upfront buyers. Others, however, may now have an opportunity to avoid the delays5 associated with that process, particularly if the assets they are willing to divest are easily segregated (e.g., a stand-alone business unit) and easily saleable (i.e., will attract interest from several potential purchasers).
1 The Antitrust Division generally believes that “an acceptable buyer should be forthcoming” if the Division has properly specified “in the decree the appropriate set of assets to be divested quickly” after the transaction closes. See U.S. Dep’t of Justice, Antitrust Div., Antitrust Division Policy Guide to Merger Remedies, Part IV.D n.42 (Oct. 2004), http://www.justice.gov/atr/public/guidelines/205108.htm. It has, however, required upfront buyers in a few cases. For example, the decree the DOJ accepted in connection with the 2010 merger between Ticketmaster Entertainment, Inc. and Live Nation, Inc. featured upfront buyers.
2 Parties, of course, are free to refuse to accede to these requests and to seek to complete the transaction once the HSR Act waiting period expires. However, in such instances, the FTC staff generally shifts its focus and energies from discussing potential remedies with the parties so that it may use the time remaining during the HSR Act waiting period to prepare to seek a court order enjoining the transaction.
3 A proposed decision and order must be placed on the public record for 30 days after first being approved by the Commission. After the public comment period has elapsed, the Commission considers and addresses any comments received, considers whether the decision and order should be changed (which happens rarely) and then votes whether to make the decision and order “final.” See Fed. Trade Comm’n, Bureau of Competition, Statement of the Federal Trade Commission’s Bureau of Competition on Negotiating Merger Remedies (Apr. 2003), http://www.ftc.gov/bc/bestpractices/bestpractices030401.shtm.
4 In addition, exceptional circumstances impacted the FTC’s review of Tops Markets’ acquisition of Penn Traffic. Since Penn Traffic was in bankruptcy at the time the proposed acquisition was announced, the FTC stated that it would allow the acquisition to close immediately, while continuing its investigation post-closing, in order to prevent the target’s assets from being liquidated. See Press Release, Fed. Trade Comm’n, FTC Order Requires Tops Markets to Sell Seven Penn Traffic Supermarkets (Aug. 4, 2010), http://www.ftc.gov/opa/2010/08/tops.shtm.
5 The FTC’s upfront buyer policy may contribute to the fact that the average duration of a merger investigation culminating in a consent agreement appears to be longer when the FTC, rather than the Antitrust Division, is the reviewing agency. See Steven C. Sunshine & David P. Wales, Testimony Before the Antitrust Modernization Commission: The Hart-Scott-Rodino Pre-Merger Review Process (Nov. 17, 2005), http://govinfo.library.unt.edu/amc/commission_hearings/pdf/Sunshine_Statement.pdf.
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