U.S. Laws Governing M&A

This past August, the Justice Department made a motion to block the proposed merger of AT&T and T-Mobile, who are the nation’s second- and fourth-largest cell phone carriers. Its motion stated that the $39 billion merger would result in higher prices and less innovative products and keeping the two companies separate would preserve competition and save American jobs.

While it will take years for this suit to play out, it’s an example of how various antitrust laws can prevent or hinder deals between companies such as the proposed merger between the two cell phone giants.

Federal Antitrust Laws

The law states: “Every agreement concerning trade, every regulation of trade, restrains. The true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition.”

Antitrust laws were established as a reaction against the proliferation of big business during the 1890‘s and 1900‘s. The intent of antitrust laws such as the Sherman Act, Clayton Act and Federal Trade and Commission Act is to prevent monopolies and encourage a free, competitive marketplace.

Sherman Act

Enacted in 1890, the Sherman Act was one of the first laws to regulate mergers and acquisitions. It was the first federal statute to limit monopolies and still forms the basis for most antitrust litigation by the U.S. federal government. The purpose of the Sherman Act was to oppose the combination of companies that could potentially harm competition in the marketplace.

Clayton Act

The Clayton Act built further onto the Sherman Act. Its Section 7a requires that companies notify the Federal Trade Commission (FTC) and the Assistant Attorney General of the United States Department of Justice Antitrust Division of any contemplated mergers and acquisitions that meet or exceed certain thresholds. Section 7 also restricts the practice of companies "whose primary purpose is to hold stocks of other companies."

Federal Trade Commission Act

This act granted the FTC the power to “(a) prevent unfair methods of competition and unfair practices affecting commerce; (b) seek monetary redress and other relief for conduct injurious to consumers; (c) prescribe trade regulation rules defining with specificity acts or practices that are unfair or deceptive, and establishing requirements designed to prevent such acts or practices; (d) conduct investigations relating to the organization, business, practices, and management of entities engaged in commerce; and (e) make reports and legislative recommendations to Congress.”

Essentially this is the law that gave the FTC the ability to govern M&A’s to make sure they did not adversely affect commerce, competition, the marketplace and consumers.

Hart-Scott-Rodino Antitrust Improvements Act of 1976

This Act amended the Clayton Act by requiring companies to file premerger notifications with the FTC and the Antitrust Division of the Justice Department. It established that waiting periods must elapse before certain acquisitions may be completed and the companies must provide certain information about the proposed M&A .

The interpretation of these laws can vary according to the current administration. For example, President George W. Bush’s administration favored defendants against antitrust claims by the Justice Department. During Bush’s administration, the Justice Department failed to file a suit citing antitrust laws. In contrast, President Barack Obama’s administration is taking a more vigilant stance against monopolies and big business, as exemplified by the current suit blocking the AT&T and T-Mobile merger.

Do you have a question concerning business mergers and acquisitions? Learn from your peers and other professionals by getting involved in Proformative.com’s finance, accounting and treasury-related groups and forums.