Antitrust legislation limits the ability to merge with or acquire companies. There are many antitrust laws that help maintain competition in the form of mergers. The intervention of the government on antitrust grounds makes firms not even try to attempt mergers. Other mergers are stopped when it becomes apparent that the government will likely oppose the merger.
Since 1890, the government has made various changes to the antitrust statute consequences of mergers. They have been evolving and are geared towards advocating a free market. The view of the free-market favors a more limited government role in the marketplace. Although many horizontal mergers were opposed during the 1980s, many others proceeded unopposed. This phenomenon is far from the 1960’s situation, where the government interfered. Here, mergers and acquisitions including businesses only remotely similar to the acquiring firm’s business were often conflicting on antitrust grounds. It prompted many conglomerate mergers which were not generally opposed.
Another major change occurred in market conditions. They now offer deals that would have been objectionable in the past. In 1997, a merger between Staples and Office Depot was objected by the Federal Trade Commission. But a few years later, this merger proposal would have been acceptable. For instance, in 2013, competitors such as Amazon, Wal-Mart, and Costco selling office supplies. And taking market share from the large office supply companies. The number-two company, Office Depot, and the number-three, Office Max, were allowed to merge.
Sherman Antitrust Act of 1890
The Sherman Antitrust Act of 1890 is the foundation of all antitrust laws in the US. The most important provisions on this statute are in the first two sections.
Section 1 prohibits all contracts, combinations, and conspiracies in restraint of trade. Meanwhile, Section 2 prohibits any attempts or conspiracies to monopolize a particular industry.
These first two sections already make it obvious that these and the rest of the sections are written and passed to cover all types of uncompetitive activities. Despite this, the first great merger wave still took place when the law was passed.
This act is the core of monopolies and other attempts to restrict trade unlawful and criminal offenses punishable under federal law. Lawsuits can be filed by the government or the injured party under the Sherman Act of 1890. The punishment, on the other hand, will be decided by the court. It can range from an injunction to more severe penalties, including triple damages and imprisonment.
Merger’s Wave
The first wave of mergers occurred from 1897 to 1904 when monopolies were established. The effects of this on industries mixed with the formation of many powerful monopolies. It was revealed that the Sherman Act was not performing the functions it’s first two sections implied. The ineffectiveness was partial because of the law’s wording and other technicalities. Specifically, it said that all contracts that restricted trade was illegal. During the early interpretations. However, the court refused to enforce this part of the law because it implies that all contracts could be illegal, and they can’t find an effective substitute. For instance, the 1895 Supreme Court ruling that the American Sugar Refining Company was not a monopoly in restraint of trade made the law a dead letter for more than a decade after its passage. The government also had a hard time enforcing the law because of the lack of resources.
The law started to evolve and make an impact on industries under President Theodore Roosevelt and his successor, William Howard Taft. They tried to alter and correct their weaknesses in terms of the wording of the law and the lack of enforcement agencies. The states decided to make a more explicit statement of its antitrust position. This effort came with the passage of the Clayton Act.
Clayton Act of 1914
Grounded on the Sherman Act, the Clayton Act specifically proscribes certain business practices. It started to allow activities that were not already illegal under a broad interpretation of the Sherman Act. But the more current act clarified which business practices unfairly restrain trade and reduce competition. It did not solve problems about the lack of enforcement agencies in the Sherman Act with responsibilities for implementing the antitrust laws.
The Clayton Act originally focused only on stock acquisition but was resolved to include asset inquisitions in 1950. In section 7, which is relevant for mergers and acquisitions, it states: “No company shall acquire the entire or any part of the stock, or all or any part of the land, of another company. Where the impact of such an acquisition on any line of trade in any part of the country may be to significantly reduce competition or create a monopoly.”
Federal Trade Commission Act of 1914
As mentioned, one weakness of the Sherman Act was that it did not give the government an effective enforcement agency to investigate and pursue antitrust violations. During that time, the Justice Department did not have adequate resources to be an effective antitrust deterrent.
Thankfully, this Federal Trade Commission Act which was enacted in 1914 tried to address this problem by establishing the FTC. The FTC was charged with enforcing both the Federal Trade Commission Act and the Clayton Act. In particular, the FTC Act was passed in order to make an enforcement agency for the Clayton Act.
Section 6 is an antitrust provision that does not allow unfair practices of competition. Even if the FTC was given the control to initiate antitrust lawsuits, it was not given a role in the criminal enforcement of antitrust abuses. The Act also broadened the range of illegal business activities beyond those mentioned in the Clayton Act.
Celler-Kefauver Act of 1950
Before the passage of this act, firms used the asset loophole mentioned earlier to effect acquisitions without buying stocks from the target. This act prohibited this activity in 1950, not allowing the acquisition of assets of target firms when the effect was to lessen competition.
While the previous antitrust laws were aimed at horizontal mergers, the new act does not also allow vertical mergers and conglomerate mergers when they were shown to reduce competition. Horizontal mergers are combinations of firms producing the same product. The Celler-Kefauver Act set the stage for the aggressive antitrust enforcement of the 1960s.
Hart-Scott-Rodino Improvements Act of 1976
The previous changes in the antitrust laws in the United States were huge, but this one made the most impact. The Hart-Scott-Rodino Antitrust Improvements Act was passed in 1976 and the power of the Justice Department and FTC, two antitrust enforcement agencies, increased.
As mentioned, the enforcement agencies used to not have the authority to require third parties, the competitors of the merging companies, to provide them with their private economic data. This situation led them to drop many investigations because of the lack of data. The act gave the Justice Department the right to issue “Civil Investigative Demands”. The merging companies but also third parties to gather data prior to filing a complaint. It is also worth noting that this statute allowed the government to require the postponement of proposed M&As until the authorities gave their approval of the deal.
This act makes the Bureau of Competition of the FTC and the Justice Department required to be given the opportunity to review the proposed M&As in advance. According to the Act, an acquisition or merger may not be consummated until these authorities have reviewed the transaction. The two enforcement agencies should choose which of them will investigate the transaction. It avoids consummation of a merger until the end of the specified waiting periods. Hence, when they fail to file in a timely manner, the completion of the transaction may be delayed. It was also passed to avoid the consummation of anti-competitions. Thus, the Justice Department would be able to avoid disassembling a company. That had been formed in part through an anticompetitive merger or acquisition, also known as unscrambling eggs.
The 1970 law
The 1970 law is important as the government cannot halt transactions through the granting of injunctive relief while it attempted to rule on the competitive effects of the business combination. Mandated divestiture, designed to restore competition, might not take place for many years when injunctive relief was not obtainable after the original acquisition or merger.
It was enacted to avoid these problems before even occurring. It regulated and made a waiting period for tender offers beyond what was already in place with the Williams Act. The length of time it takes to receive the antitrust green light is a factor to consider on whether antitrust approval slows down a tender offer.
© Image credits to Steve Johnson