Legal Landscape: Regulation of Corporate Mergers
This report outlines the laws relevant to U.S. government regulation of corporate mergers.
Check out Landscapes Explained, so you can understand why we organized the information this way.
Antitrust: corporate mergers
The federal government started regulating against monopolies in the late 1800s. During the 1900s, with the support of a landmark Supreme court decision, the government stepped up its efforts. The federal legal scheme controlling anticompetitive actions is now vast.
This report shows how the different levels of government (Constitution, federal branches and state governments) contributed to that history and how they each play a role today.
The Legislative Powers part of the Constitution (Article I) gives Congress the power to make laws relating to certain “federal” issues, or issues of national concern. Those powers are listed/enumerated in Article 1 (at Section 8) (and called the “Enumerated Powers”).
That list includes the power to regulate “interstate” commerce (the “Commerce Clause”). Federal antitrust laws fall within this power. Regulating commerce between the states is a federal responsibility, but what constitutes “interstate” was not always clear. See the Judicial column for two early Supreme Court cases that decided the breadth of the federal government’s commerce power.
Limits to Legislation Related to Antitrust:
The First Amendment contains the Right to Petition Government clause. It gives people the right to raise issues to members of Congress or federal agency officials to try to get the government's attention or to get the government to act. This right has been used by companies to try to get the government to restrain trade against their competitors. See Eastern Railroad Conference v. Noerr Motor Freight in the Judicial column.
The Constitution is sprinkled with the concept of Federalism. Federalism is the right of the state governments to control themselves. Relying on this concept, the Supreme Court has created a rule that limits the liability of state governments to federal antitrust laws. See Parker v. Brown in the Judicial column.
Title 15 of the United States Code contains laws relating to Commerce and Trade. Title 15 includes the following laws relating to antitrust:
The Sherman Antitrust Act of 1890 banned contracts and conspiracies that restrain trade. It also banned monopolies of trade or commerce. It gives the Department of Justice (DOJ) the right to sue to prevent them. The DOJ can file in federal court seeking to prevent (“enjoin”) parties from taking actions that restrain trade. Individuals or other private parties can also sue under certain conditions.
The Federal Trade Commission Act of 1914 created the Federal Trade Commission (FTC) and gave the agency a general power to regulate against unfair methods of competition and unfair or deceptive acts and practices in or affecting commerce. It allows the FTC to sue in federal court for injunctive relief if it believes a law is being violated or is about to be violated.
The Clayton Antitrust Act of 1914 strengthened federal antitrust law of the Sherman act. After seeing that companies found ways to avoid restrictions of the Sherman Antitrust Act (for example, merging together so they could control the market), Congress passed the Clayton Act. Among its provisions, it bans mergers and acquisitions (acquiring of stock or capital share) that may have the effect of lessening competition or tending to create a monopoly. It allows the FTC and the DOJ concurrently to make rules to enforce the Act. If the FTC or the DOJ has reason to believe a merger will violate the Clayton Act, it can take enforcement action. See Executive column for their processes. Individuals or other private parties can also sue under certain conditions. State attorneys general can also sue on behalf of their citizens to enforce the Act.
The Hart-Scott-Rodino Act of 1976 established the Premerger Notification Program as part of the Clayton Act. Parties to major corporate mergers and acquisitions must file a “notification and report form” with the federal government providing information about the companies and the merger. The government uses this information to review how the merger will affect competition in the market. A merger may not proceed until either a span of time has passed or the government has issued approval. The threshold value that determines whether filing is required changes yearly corresponding to the gross national product.
Limits to Federal Agency Power:
The laws above give the DOJ and the FTC rulemaking and adjudicatory powers. These roles traditionally belong to the other branches of government. The legislative branch is the rule-maker and the judicial branch is the adjudicator. Delegations of power like these (from Congress to executive agencies) are very common, and there is a law that keeps the agencies in proper boundaries.
The Administrative Procedure Act (APA) controls federal agency actions. The APA is almost always the basis for a case that challenges a regulatory action. It limits federal agencies from abuse of power by establishing rules that agencies must follow. Agencies must follow proper procedures when they make rules or decisions, and they cannot overstep the boundaries of their power. Agency actions must not be “arbitrary and capricious.” The Administrative Procedure Act also gives citizens, companies, or other groups the right to sue if the procedures are not followed causing that citizen (or entity) harm. This is called a “private right of action” (right to sue).
Other Laws Relevant to Mergers:
The Act to Establish the Department of Justice of 1870 created the Department of Justice to enforce the laws of the United States. Before this, the Attorney General existed but was the sole person responsible for all prosecution involving the United States. The DOJ became the legal arm of the government, tasked with all criminal prosecution and in representing the United States government in legal matters. Other agencies have their own legal departments, but the DOJ is the chief enforcement authority. That is why the Department of Justice is involved with merger enforcement.
The Federal Communications Commission (FCC) also has some power in antitrust issues. Its authority comes from these laws:
The Communications Act of 1934 created the Federal Communications Commission (FCC) to regulate the telephone services market. The Act created rules to ensure good public access to wire and radio communications. The Telecommunications Act of 1996 amended the Communications Act of 1934 and broadened the powers of the FCC to regulate cable providers and potentially internet providers. The two acts may allow the FCC to take actions that relate to companies’ desire or ability to merge. For example, one provision limits the percentage of households that a given broadcasting company can reach. Any one company cannot reach more than 39% of households. A recent FCC action relating to this rule has been challenged by a private organization representing television viewers. To read about this lawsuit against FCC action, see Free Press v. FCC in the Judicial column (right).
president and Executive agencies
The President can influence antitrust policy by making appointments in federal agencies of individuals that support a particular view or philosophy. The President's appointments in the FTC and the DOJ can affect regulation of corporate mergers by making enforcement more lenient or stricter.
Federal agencies can do only what federal laws say they can do. The Legislative column lists the laws empowering the federal agencies to enforce antitrust laws. This includes creating rules and bringing enforcement actions. The Administrative Procedure Act makes sure the agencies do not act outside of authority.
FTC and DOJ Jurisdiction Under the Premerger Notification Program
The Federal Trade Commission (FTC) and the Department of Justice (DOJ) are responsible for enforcing the Clayton Act’s ban on mergers that may have anticompetitive effects. These agencies work concurrently because they are both granted powers, some of which overlap.
The Premerger Notification Program (of the Clayton Act) requires parties to a merger valued over $80.8 million to file information relevant to a market analysis. Both the FTC and the DOJ receive the information, and they decide which agency will take action based on the expertise of the agency. In certain industries, the DOJ has sole jurisdiction (telecommunications, banks, railroads, and airlines). The DOJ also is the only agency that deals with criminal sanctions.
The FTC and the DOJ (Antitrust Division) work together to issue Merger Review Rules. These are rules on how they will determine whether a merger violates antitrust laws. See them on the DOJ site here. For example, see the Horizontal Merger Guidelines.
First and Second Reviews by FTC and DOJ:
After receiving a filing under the Premerger Notification Program, the FTC or the DOJ conducts a preliminary review. It can either let the merger proceed or it can request more information. After receiving more information, the agency will decide whether it has reason to believe the merger will violate the Clayton Act. If so, the agency will seek to get the parties to agree to change the terms of the merger so that it does not violate federal law, or to abandon the merger all together. If the parties do not agree, the agency may take enforcement action.
The Federal Trade Commission (FTC) Enforcement Action Process:
The FTC may decide to litigate the issue in its own administrative tribunal or in federal court. The Clayton Act gives the FTC the power to conduct judicial hearings, outside of the federal court system. Often in antitrust cases, this is where the FTC starts the litigation process of blocking a merger. Here is an example of an FTC complaint in the FTC tribunal (FTC v. Staples and Office Depot). The FTC may concurrently sue in federal court to place a temporary hold on the merger while the FTC tribunal makes its decision. Here is an example of an FTC complaint in federal court (same case). This page explains generally the FTC review process for the Premerger Notification Program.
The Department of Justice (DOJ) Enforcement Action Process:
If the DOJ does not get the parties to agree to change the terms of the merger or to abandon the merger, the DOJ may decide to go directly to federal court. See the Judicial column for examples of DOJ federal court actions asking the court to block a merger.
Other Enforcement Actions
The FTC and the DOJ may use similar enforcement processes to prevent anticompetitive conduct outside of the Premerger Notification Program.
The FTC may take action against any actions that violate the FTC Act. The FTC Act gives the agency power to seek “Cease and Desist Orders” from parties “using unfair methods of competition in or affecting commerce and unfair or deceptive acts or practices in or affecting commerce.” A party can challenge an FTC order against it in a federal Court of Appeals. Under the FTC Act, the agency also may file for injunctive relief in federal court.
The DOJ has a general power to litigate in federal court if the laws of the country are not being followed. The DOJ has broad litigation powers. Here is a list of all the federal laws relating to antitrust and potential DOJ action.
History of Federal Government Power to Regulate Commerce:
The federal government did not always regulate so vastly. The federal government only can make laws under the Legislative Powers specified in the Constitution (the states control the rest). Federal antitrust laws fall under the power of Congress to regulate “interstate” commerce.
Here are two cases showing how the Supreme Court broadened the interpretation of “regulating interstate commerce.” The second case opened the federal government to regulate more broadly against monopoly power.
In United States v. E.C. Knight Co. (1895), the Supreme Court decided the Sherman Act did not apply to acquisitions of manufacturing facilities. The Court admitted that American Sugar, in purchasing more sugar manufacturing plants, would have a monopoly over manufacturing of sugar, but that the Constitution limited federal regulatory power to issues affecting commerce (see the Commerce Clause in the Constitution Section).
In Standard Oil v. United States (1911), the Supreme Court abandoned E.C. Knight’s limitation of the federal government’s lawmaking powers. In the second half of the 1800s, John D. Rockefeller founded Standard Oil Company, began purchasing its competitors, and created a trust agreement to keep competitors out of the market. The Company eventually controlled 90 percent of oil production in the country. In 1907, the Department of Justice sued the conglomerate for conspiring to constrain trade in violation of the Sherman Antitrust Act. Despite the ruling in E.C. Knight, the Supreme Court ruled that in this case, the federal government does have the power to regulate manufacturing operations that attempt to dominate an industry. The court ordered Standard Oil to separate the combination of assets that constituted the monopoly. The ruling expanded the Legislature’s power to regulate under the Commerce Clause and paved the way for the Clayton Act.
Other Decisions on the Boundaries of Federal Antitrust Law:
Parties can make political campaigns or petitions to try to make the government block competitors.
In Eastern Railroad Conference v. Noerr Motor Freight (1961), the Supreme Court created a rule protecting parties from what could have been considered abuse of the government process. A group of railroads had gotten together with a public relations firm and started trash-talking truckers. The railroads even aimed to get lawmakers and executive officials to distrust truckers, to keep the truckers from interfering with the railroad’s long-distance transport market. The truckers sued under federal antitrust law, saying the railroads were trying to monopolize. The Supreme Court ruled that the Constitutional right to Petition the Government (in the First Amendment; see Constitution section above) allows the railroads’ actions. The Court said you can’t violate the Sherman Act just because you are attempting to “influence the passage or enforcement of laws.” “[T]he whole concept of representation depends upon the ability of the people to make their wishes known to their representatives.”
States can displace competition and be exempt from federal antitrust laws.
In Parker v. Brown (1943), the Supreme Court established a rule called the “state action” doctrine. California, in attempting to “conserve the agricultural wealth of the State” and to “prevent economic waste in the marketing of agricultural crops” created a marketing program that limited competition among raisin growers and controlled prices. A raisin grower that stood to be pushed out of the market as a result of the state law sued, claiming the state law violated federal antitrust laws. The Supreme Court disagreed. Under the concept of federalism (see Constitution section above), the states have the power to regulate matters of local concern. Unless the federal law specifically intended to displace state control (which the existing antitrust laws do not do), the state can regulate its own markets without federal interference if it clearly intends to.
In FTC v. Phoebe Putney Health System, Inc. (2013), the Supreme Court limited the state action doctrine. In this case, a state-established hospital authority attempted to acquire a hospital with a huge market share. Together the merged parties would have 86% of the market for acute-care hospital services. The hospitals claimed to be immune from federal antitrust liability because the acquiring hospital authority was established by state law. However the Supreme Court ruled that in this case, the law did not “clearly articulate” an intent to displace competition in the market, nor was that a “foreseeable result.” The state law created the hospital authority merely with general corporate powers, not with the intent to control the market.
Modern Day Merger Regulation:
The Clayton Act now gives the federal government authority to block mergers before they happen. The DOJ and the FTC may file for “injunctive relief” in federal district court if they have reason to believe a merger will violate the Clayton Act. Injunctive relief is non-monetary relief, often a request to stop an illegal action.
DOJ Suits to Block Mergers:
In a case decided this year, United States v. Aetna, et al. (2017), the Department of Justice sued to block a merger between two large health insurance providers, Aetna and Humana. The court ruled for the DOJ that the merger has a “probable anticompetitive effect,” which is good enough to allow the government to stop it. Here is the court’s decision. The analysis first defines the market, then determines if control of the market will be too concentrated after the merger. If the merging parties cannot identify additional competitive factors that can outweigh the negatives, the court blocks it.
See also United States v. H&R Block, et al. (2011). In this case, DOJ sued H&R Block and TaxAct, and the D.C. federal district court blocked the merger.
A Suit Challenging an Agency Action:
A private group representing individuals’ rights to diversity in media broadcasting has just filed suit against the Federal Communications Commission. In Free Press v. FCC, the D.C. Court of Appeals will review a recent FCC decision to allow television broadcasters a cheap form of compliance with a provision of the Telecommunications Act. The provision places a limit on the market control of TV broadcasters. The group argues that the FCC action was “arbitrary and capricious” and that the action exceeded the FTC’s authority in violation of the Administrative Procedure Act. The case shows how the Administrative Procedure Act may be used to constrain agency power.
State Attorney General Enforcement
States may enforce antitrust laws through their state attorneys general. Under the Clayton Act (and the Sherman Antitrust Act), they have a special status in bringing litigation (which means the standards of the case are different than when other private parties bring suits). When the state sues to protect its own citizens, it is called a "parens patriae" suit. The state may also sue on its own behalf as a party doing business.
State Antitrust Laws
States have their own laws on antitrust. These can be more restrictive on price fixing or on capturing trust agreements, for example, but they must not conflict with federal law. State law also governs mergers because it is state law that defines the qualities and transactional characteristics of corporate entities. This site provides a compilation of state antitrust laws. And here is a discussion of mergers and acquisitions generally that discusses state laws.
State Potential to be Sued
In certain circumstances, state actions are exempt from federal antitrust laws. If the state is pursuing a regulatory goal for the good of the citizens, it may act to restrict competition in trade. For an example, see Parker v. Brown in the Judicial column. This is a court-made rule, based on the Constitutional concept of federalism. Without explicit statement in the statute that a law controls a state’s power to regulate, the courts have said the state can create its own regulatory goals.
The state action exemption has limits. For example, states cannot empower private parties to evade federal antitrust laws. The state must have a regulatory goal justifying the action as one for the welfare of the state’s citizens. Further, local governments do not have the same immunity. Local governments engaged in commerce as a participant are held accountable by federal antitrust laws. The state must “actively supervise” a local government if it is engaged in business and wants to take advantage of state action immunity.