In April, we reported on the federal government’s plan to increase scrutiny of M&A deals to preserve competition in the marketplace. The targets are not only global behemoths like Apple, Facebook, and Amazon, but also smaller deals not subject to Hart-Scott-Rodino Act reporting.
This month, the feds moved from planning to execution.
In two orders issued this month, the Federal Trade Commission (FTC) resolved lawsuits aimed squarely at preserving competition in local markets and reducing the scope of tag-along non-compete agreements.
The FTC’s first order involved a private equity company’s (JAB Consumer) proposed $1.1 billion acquisition of specialty and emergency veterinary clinics from SAGE Veterinary Partners. The FTC asserted the transaction would result “in a merger to monopoly” in three geographic areas (Austin, San Francisco, and Oakland) and allow the buyer to “unilaterally exercise market power and cause customers to pay higher prices for, or receive lower quality, relevant services.” The resulting combination would result in JAB Consumer operating the only veterinary providers in certain geographies. In other areas, consumers would have only one alternative.
To remedy the problem, the FTC required JAB Consumer to divest three facilities in Austin, Texas and three facilities in the Bay Area to a national competitor without any presence in those markets. The FTC also required the buyer to provide “guaranteed retention bonuses” to veterinarians and staff working at those divested facilities to encourage those employees to stay. And in a remarkable addition, the FTC also mandated (a) “statewide prior approval” in Texas and California before JAB Consumer could acquire future clinics (many of which would likely be non-HSR reportable), and (b) “nationwide prior notice” for any acquisitions by JAB Consumer of competitors near its existing facilities.
In a statement issued by three FTC commissioners, they touted the notice and approval requirements as a “first of its kind” order. “Provisions like the ones in this matter will also allow the FTC to better address stealth roll-ups by private equity firms like [JAB Consumer] and serial acquisitions by other corporations.”
One day later, the FTC issued a second noteworthy order. The transaction involved GPM Petroleum’s unreportable $94 million purchase of 60 Express Stop gas stations in Michigan and Ohio from Corrigan. GPM is the sixth largest convenience store chain in the U.S., with 3,000 locations in 33 states. As part of the sale, Corrigan agreed not to compete for a period of time and within a specified radius around both the 60 acquired gas stations and an additional 190 GPM-owned stations. The FTC alleged the deal “substantially lessen[ed] competition for the retail sale of gasoline in five local markets in Michigan.”
By Consent Order, GPM agreed to release back to Corrigan five gas stations in Michigan. More notably, the FTC also took a “blue pencil” to GPM’s non-compete agreements with Corrigan. The FTC eliminated entirely the restrictions against competing against the 190 GPM-owned stations. And it significantly cut back on the non-compete agreements’ geographic scope and duration relating to the acquired Corrigan stations, reducing them to a three-year and three-mile radius around the 55 acquired stations.
- The FTC’s JAB Consumer order was targeted directly at private equity firms. In their accompanying statement, three commissioners noted: “Antitrust enforcers must be attentive to how private equity firms’ business models may in some instances distort incentives in ways that strip productive capacity, degrade the quality of goods and services, and hinder competition.” The FTC specifically referenced transactions in health care as likely to be subject to enhanced scrutiny: “Private equity firms have been particularly active in health care, including anesthesiology, emergency medicine, hospice care, air ambulances, and opioid treatment centers.” PE firms can expect increased oversight of deals and, potentially, terms similar to those imposed on JAB Consumer.
- Restrictive covenants in M&A deals (even modest deals below the HSR-reporting threshold) are now clearly a focus of regulators. As the commissioner’s statement detailed: “[F]irms may not use a merger as an excuse to impose overbroad restrictions on competition or competitors. The Commission will evaluate agreements not to compete in merger agreements with a critical eye.” Expect heightened review and scrutiny of non-compete agreements that accompany M&A deals. When they’re necessary, be sure to craft non-competes in reasonable terms – duration, scope, and prohibited activity.
M&A Litigation Webinar: Insights on Recent Cases
Join Taft and Stout on July 19 from 12-1 p.m. EDT for a webinar highlighting significant corporate and M&A decisions from the first half of 2022. For more information, or to register for this event, click here.