This Article is written by Deepanshi, a Third-Year Law Student of Indian Institute of Management Rohtak

Relation between Antitrust Laws and Mergers & Acquisitions

Antitrust laws are enacted to enhance competition through the restraint on the dominance of the market of a single business enterprise. Often, these regulations involve preventing mergers or acquisitions that will serve as a basis for excessive market concentration or even the establishment of a monopoly. Sometimes, it involves the breakup of already monopolized enterprises.

Moreover, it prevents firms from merging to restrain competition; and other issues include price fixing. Due to the factors involved in ascertaining which practices restrain competition, antitrust law has become a specialization within the practice of law.

History of antitrust

The Sherman Act, which came up in 1890 was the first ever antitrust law.[1] Critics called it a "comprehensive charter of economic liberty," an attempt that envisioned the preservation of open and free competition as very well being the very basis of commerce.[2]. Two other antitrust laws came into force in 1914:'the Clayton Act' [3] and 'the Federal Trade Commission (FTC) Act'[4], which created the FTC. Today, these three landmark federal antitrust laws are still enforced and have considerably altered since their enactment.[5]

Generally, antitrust laws prohibit mergers and business practices that are unlawful, though their application to a particular action depends on the specific circumstances of that case.[6] From horse-carriages days to high-tech digital days, courts have applied these laws to multiple industries and technologies.[7] A century-long core mission of antitrust laws has remained constant: “to protect the competitive process for the benefit of consumers by encouraging businesses to operate efficiently, keep prices low, and uphold high standards of quality”.[8]

'The Sherman Act' prohibits contracts, conspiracies, or agreements that have the effect of substantially hindering trade and monopolization or attempts to monopolize[9]. Not all restraint on trade is illegal but practices that significantly harm competition such as 'price-fixing', 'market allocation', or 'bid-rigging' are strictly prohibited.[10] Violations of the 'Sherman Act' carry harsh penalties, including imprisonment for not more than 10 years and a fine of up to $100 million for corporations or up to $1 million for individuals.[11] Such fines can be enhanced if the profits obtained from illegal conduct or loss suffered by victims are above that amount.[12]

“The Federal Trade Commission Act prohibits unfair competition methods and deceptive trade practices.[13] Although the FTC does not actively enforce the Sherman Act directly, violations of the Sherman Act also violate the FTC Act.[14]. The FTC can file antitrust cases independently under its legal provisions.[15]”

‘The Clayton Act deals with matters that are not covered by the scope of Sherman Act provisions on mergers and interlocking directorates.[16]. It prohibits mergers that will likely result in substantially lessening competition and tend to create a monopoly in Section 7.[17] This act also addresses discriminatory business practices and allows private parties to file damage suits for antitrust violations.[18] The Hart-Scott-Rodino Act complements the Clayton Act by making it mandatory for companies to provide advance notice to the government concerning major mergers or acquisitions.[19]’

Present legislation in India

The Competition Act of 2002, as amended, reflects modern international frameworks of competition law, and seeks to promote competition while protecting Indian markets against anti-competitive business practices.[20]. The Act forbids anti-competitive agreements and abuse of dominant positions and regulates combinations like mergers acquisitions and amalgamation so as not to create problems that would adversely affect the competition in Indian markets.[21]

‘Any arrangement or any determinations of an appreciable adverse effect on competition, within Indian markets declared to be void.[22]. All other agreements are either horizontal involving enterprises or individuals engaged in the same trade or service or vertical where parties carry out activities at different stages in the production or distribution chain across different markets. Section 3 of the Act has held that cartelization is one of those forms of horizontal agreement that could cause grave injury to competition. [23]’

Anti-Competitive Agreements (Section 3)

An "agreement" under competition law refers to any form of arrangement, coordination, or understanding between parties, whether formal or informal. Anti-competitive agreements are classified into two types: horizontal and vertical.[24]

1. Anti-Competitive Horizontal Agreements (Section 3(3)):

• Horizontal agreements involve enterprises engaged in identical or closely related trades of goods or services.

• These agreements are presumed to have a considerable adverse effect on competition when businesses conspire to disrupt market dynamics, making them invalid under the law.

• The following types of horizontal agreements are believed to cause an "Appreciable Adverse Effect on Competition" (AAEC):

  • Price-fixing agreements.

  • Agreements to limit production or supply.

  • Market allocation agreements.

  • Bid-rigging or collusive bidding.

• However, this presumption can be challenged and overturned with sufficient evidence.

2. Anti-Competitive Vertical Agreements (Section 3(4)):

• Vertical agreements occur between enterprises operating at different stages of the supply chain, such as production, distribution, and storage.

• Common forms of vertical restraints include:

  • Tie-in arrangements.

  • Exclusive supply or distribution agreements.

  • Refusal to deal.

  • Resale price maintenance.

• An exception is provided under Section 3(5) of the Act for conditions necessary to protect Intellectual Property Rights (IPR). However, these conditions must be reasonable and are subject to scrutiny by the Competition Commission of India (CCI) to determine whether they are essential for IPR protection.
  

Abuse of Dominant Position (Section 4)

‘Dominance is the market power position that allows an enterprise to act independently of the competitive pressures, or to influence its competitors and consumers for its benefit.[32] Dominating by itself is not illegal but abuse of such dominance in the relevant market is illegal. [33] Abuse of such dominance can distort fair competition, harm consumers, and constitute a barrier to other businesses from entering the market.[34]’

Abuses of a dominant position include:

• Unfair terms or prices, which include predatory pricing;

• Suppression of manufacturing, markets, or technologies;

• Blocking market access for other players;

• Linking contracts to irrelevant conditions; and

• Using dominance in one market to extract benefits in another market.[35]

Need for Antitrust Laws

"A merger may diminish competition even if it does not lead to an increased likelihood of successful coordinated interaction, because merging firms may find it profitable to alter their behavior unilaterally following the acquisition by elevating price and suppressing output.”[36]

Hospital Corporation of America v. FTC[37]

Judge Posner stated:

“Should the leading hospitals in Chattanooga collude, a natural consequence would be the creation of excess hospital capacity, for the higher prices resulting from collusion would drive some patients to shorten their hospital stays and others to postpone or reject elective surgery. If a non-colluding hospital wanted to expand its capacity so that it could serve patients driven off by the high prices charged by the colluding hospitals, the colluders would have not only a strong incentive to oppose the grant of a certificate of need but also substantial evidence with which to oppose it - the excess capacity (in the market considered as a whole) created by their collusive efforts. At least the certificate of need law would enable them to delay any competitive sally by a non-colluding competitor”[38]

Judge Posner's statement describes a situation where collusion among leading hospitals in Chattanooga leads to surplus capacity due to elevated prices, which drives patients to either cut short their hospital stays or delay elective procedures.[39]. If a non-colluding rival hospital sought to expand its capacity to take in patients priced out of the market, the colluding hospitals would have a powerful incentive to resist this expansion.[40]. They could then point to the additional supply that they created as a justification for employing resistance to a certificate of need, thereby banning new entry.[41] This certificate of need law would permit the colluding hospitals to hinder or retard new entry, and therefore ensure that the hospitals' price stickiness would continue. [42]

This is, therefore, a pointer to why antitrust regulations are necessary. Without such laws, colluding entities can distort the market dynamics, artificially limit resources, inflate costs, and exploit legal frameworks with the intent of suppressing competition.[43] Antitrust measures help rein in these anti-competitive practices, create a level playing field, safeguard consumer interests, and prevent the industrial aspect from being dominated by dominant players through collusion.[44]

Goal of Antitrust Laws

1. Legal Compliance and Risk Mitigation

Adhering to antitrust laws and regulations is crucial for businesses engaged in mergers and acquisitions (M&A).[45] Understanding antitrust intricacies is highly vital for any company as it will guide the firms on how to set their deal structures to avoid as much legal exposure as possible and minimize the chances of intervention by the antitrust regulators[46]. To ensure that these mergers and acquisitions deals are below the limit of the law, are valid, and will be enforceable, ensuring compliance is essential[47]. One significant aspect of M&A activities involves ensuring that merger and acquisition activities meet statutory standards and minimize associated risks. Organizations should ensure that their merger and acquisition efforts adhere strictly to all relevant laws, regulations, and contractual obligations. ‘ Failure to do so will risk severe consequences for such non-compliance, such as penalties arising from laws, tangible losses, and reputational damage.[48] Therefore, at every step of the M&A process, it is important to be aware of legal compliance and risk management in depth.[49]

2. Market Stability and Consumer Well-being

Evaluating the antitrust effects helps preserve market stability and foster healthy competition.[50]. . It further enforces laws that curb anti-competitive behaviors, supporting consumer welfare and ensuring access to adequate goods and services available at reasonable prices. Determining how mergers and acquisitions affect markets allows regulators to institute policies to balance corporate growth with the needs of consumers and the general economy.[51].

3. Compliance with Global Regulations

Mergers and acquisitions are often cross-border operations, placing them squarely within the coverage of multiple jurisdictions' antitrust laws and regulatory structures. International compliance with regulation is an absolute necessity to ensure that the transaction goes through without a hitch and does not run over legal boundaries. For the efficient navigation of countries' antitrust regulations and legal regimes, there always is a critical need for international legal environment comprehension[52]. The research in this field helps multinational companies expand their operations while abiding by numerous regulatory requirements.[53] The role of global business operations is crucial in mergers and acquisitions (M&A), particularly when dealing with cross-border transactions.[54]

4. Protecting Shareholder Interests

Non-compliance with antitrust regulations may have adverse implications in terms of company reputation, market standing, and even value for the shareholders. [55]. Monitoring proactively will help to safeguard the interests of both stakeholders and shareholders.[56]

Antitrust considerations play an important role in the feasibility analysis of any merger or acquisition. Knowing antitrust problems helps firms study the viability of the transaction and design suitable remedies or strategies that can be adopted to address the potential issues effectively. The evaluation of the antitrust implications greatly deepens the investigation of the competitive landscapes and provides many meaningful insights. Examining possible effects on competitors and market dynamics and trends can help organizations make strategic decisions based on a more informed approach.

Protection of consumers from such monopolistic practices, and ensuring that they receive fair prices and choices, is one of the basic objectives of the antitrust law. Confidence and trust in the market increase with compliance with such regulations. Adherence to the ethical norms of antitrust laws ensures fair business practices, promoting a market environment that fosters equitable and ethical conduct by all participants involved.

Balancing Competition and Efficacy: Tradeoff between Consumer Welfare and Business Good

At the very heart of the debate over antitrust are the questions of consumer welfare versus business autonomy. While antitrust policy is ostensibly aimed at creating or strengthening competition and, through this mechanism, giving way to consumer welfare, it can severely constrain business freedom by constraining business opportunities in mergers and acquisitions. More on these trade-offs in the following:

Balancing Consumer Welfare with Business Freedom

It has been argued that antitrust enforcement has yielded minimal benefits for consumer welfare and might have even disadvantaged consumers by constraining firms' ability to realize economies of scale and scope. The authors prioritize business efficiency above the protection of individual competitors in advocating antitrust policies.[57]

In a similar vein, it is proposed that antitrust laws should be applied solely to prevent explicit harm to consumer welfare, such as through price-fixing cartels, rather than to limit mergers or business activities that could boost efficiency. For them, antitrust enforcement often plays favorites by side-lining consumers.[58]

The Uncertainty of the Consumer Welfare Standard

A consumer welfare standard is ambiguous and leaves much to extrapolation, hence antitrust enforcement predictably becomes inconsistent. This standard calls for the improvement of antitrust laws to rely solely on consumer welfare maximization by providing economic efficiency rather than the protection of individual players in the market.[59]

Many scholars criticize' the consumer welfare standard, which they believe cannot be measured and is often misapplied by the courts. Ideally, antitrust laws should favor business practices and mergers that improve efficiency, even if they entail a bit of potential harmful effect on competition.[60]

Prioritizing Business Freedom

Overzealous enforcement of antitrust laws is likely to strangle the very activities that, if antitrust laws are to be enforced at all, should be protected-that is, genuinely legitimate business activities. Overuse of antitrust enforcement is believed to happen because enforcement tends to overreach, preventing companies from following through on lines of endeavor that could potentially enhance efficiency and hence serve consumers.[61]

To be of value the antitrust law must seek a balance between consumer welfare protection and rights to engage in legitimate competitive conduct by businesses. Enforcement should focus on obvious harms to competition, for instance price-fixing or monopolistic mergers, yet should permit practices that could improve efficiency and provide consumer benefits.[62]

Consumer welfare and business freedom are probably two of the most contentious and complex issues in antitrust policy. Although antitrust laws are instituted to promote competition and protect the consumer, they tend to stifle business flexibility, especially concerning the freedom to merge and acquire. Such ambiguity in the consumer welfare standard and what it might say about a business's purported need for autonomy might keep this debate alive for the time being.

Conclusion

As markets continue to evolve and mature, particularly in the oligopolistic market, various antitrust laws need to evolve to encompass the intricacies of merging and corporate behavior. Antitrust laws, as such have, through years and decades evolved with historical developments. Sherman Act to the Competition Act of 2002 in India changes and amendments show how important these laws are for maintaining consumer welfare as well as the overall integrity of the marketplace.

However, the challenge is preventing anti-competitive practices from burgeoning without being excessively detrimental to innovation and corporate growth. Too rigid a regulatory framework can kill business initiatives and reduce competition. Hence, an intermediate regulatory framework that promotes healthy market dynamics yet leaves ample room for firms to innovate and grow could be just what's needed.

This continuous dialogue on consumer welfare standards and business freedom calls for ongoing research and reform in antitrust policies. Antitrust law is important not just to safeguard consumers but to facilitate and promote an environment for businesses to prosper while being at a competitive market edge, which is of mutual benefit to all parties involved. The balance in the achievement of sustainable economic growth in an increasingly interdependent global economy relates directly to this balance.

[1] Sherman Anti-Trust Act 1980 (SATA 1980)

[2] Federal Trade Commission, ‘The Antitrust Laws’ < https://www.ftc.gov/advice-guidance/competition-guidance/guide-antitrust-laws/antitrust-laws> accessed on 23 September 2024.

[3] Clayton Antitrust Act 1914 (CAA 1914).

[4] Federal Trade Commission Act 1914 (FTCA 1914).

[5] ibid 2.

[6] ibid 2.

[7] ibid 2.

[8] ibid 2.

[9] ibid 3.

[10] Sherman Anti-Trust Act 1980, s 1.

[11] Sherman Anti-Trust Act 1980, s 3.

[12] ibid.

[13] ibid 4.

[14] ibid 4.

[15] ibid 4.

[16] ibid 3.

[17] Clayton Antitrust Act 1914, s 7.

[18] ibid

[19] Hart-Scott-Rodino Act 1976 (HSRA 1976)

[20] The Competition Act 2002

[21] ibid.

[22] Competition Act 2002, s 3

[23] ibid.

[24] ibid.

[25] Competition Act 2002, s 3(3).

[26] ibid.

[27] ibid.

[28] Competition Act 2002, s 3(4).

[29] ibid.

[30] Competition Act 2002, s 3(5).

[31] ibid.

[32] Competition Act 2002, s 4

[33] ibid.

[34] ibid.

[35] ibid.

[36] The Merger Guidelines 2023 US

[37] William E. Kovacic, ‘QUANTITATIVE ANALYSIS OF COORDINATED EFFECTS’ (2009) 76(2) ALR < https://www.jstor.org/stable/40843716> accessed on 22 September 2024.

[38] Hospital Corporation of America v. FTC 1986 807 F.2d 1381

[39] ibid.

[40] ibid.

[41] ibid.

[42] ibid.

[43] ibid.

[44] ibid.

[45] Antitrust Division US Department of Justice, Antitrust Enforcement Guidelines for International Implementation, <https://www.justice.gov/atr/antitrust-enforcement-and-clayton-act> accessed on 21 September 2024

[46] Ashraf Tarek,‘ Mergers and Acquisitions: Analyzing Antitrust Implications and Regulatory Compliance

’(2023) < https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4518461> accessed on 21 September 2024

[47] ibid

[48] Daines, R., & Kozenieski, T, ‘Mergers and Acquisitions in the Digital Age: Antitrust Challenges’ (2019) 27(2) Stanford Technology Law Review, 128-145.

[49] ibid

[50] ibid 46.

[51] ibid 46.

[52] ibid 46.

[53] ibid 46.

[54] Competition and Markets Authority , ‘Competition and Markets Authority cases and projects’ <https://www.gov.uk/cma-cases> accessed on 21 September 2024.

[55] ibid 46.

[56] ibid 46.

[57] Robert W. Crandall, ‘Does Antitrust Policy Improve Consumer Welfare? Assessing the Evidence’ (2003) 17(4) JSTOR <https://www.jstor.org/stable/3216929 > accessed on 20 September 2024.

[58] Keith N. Hylton, ‘Antitrust Law Economic Theory and Common Law Evolution’ (2003) Cambridge University Press < https://assets.cambridge.org/97805217/93780/frontmatter/9780521793780_frontmatter.pdf > accessed on 20 September 2024.

[59] Robert H. Bork, ‘The Antitrust Paradox’ (1979) 13(1) The International Lawyer <https://www.jstor.org/stable/40705928 > accessed on 20 September 2024.

[60] Frank H. Easterbrook, ‘The Limits of Antitrust’ Competition Policy International < https://www.competitionpolicyinternational.com/assets/0d358061e11f2708ad9d62634c6c40ad/Easterbrook%20(Apr.%202005).pdf > accessed on 20 September 2024.

[61] Richard A. Posner, Antitrust Law, Second Edition (published in 2009, University of Chicago Press) <https://books.google.co.in/books/about/Antitrust_Law_Second_Edition.html?id=vV3i8XCzc8cC&redir_esc=y > accessed on 20 September 2024.

[62] Richard A. Posner , ‘Posner's Antitrust Law: An Economic Perspective ‘ (1977) 8(2) RAND Corporation < https://www.jstor.org/stable/pdf/3003310.pdf > accessed on 20 September 2024.