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Antitrust Enforcement Agencies Target Large Shareholders' Roles In Investigations of Public Company Merger and Acquisition Transactions

Client Updates
Antitrust enforcement agencies have taken a new interest in companies’ relationships with their largest shareholders. The agencies have more systematically begun asking companies about the extent of their communications with their biggest shareholders as part of the merger review process.

The HSR notification requirements require parties to identify all shareholders of 5% or more. Now, the agencies are going further and asking specifically for communications with a company’s largest shareholders to understand the extent of their influence over a deal.

In a recent confidential matter before the Federal Trade Commission (“FTC”), the FTC wanted the buyer and seller to identify their largest shareholders, the extent of their influence over the companies, and any communications they had. This new approach will likely have sweeping effects and has the potential to add expense and risk to companies and any shareholder, but in particular, those shareholders above the HSR threshold, whether individuals or entities, activists or passive, hedge funds, venture funds, private equity, or index funds. The FTC’s request shows increasing scrutiny in merger review and could potentially pose as another hurdle to companies during the merger review process.

A little more than a year ago, in December 2018, the FTC held a public hearing to examine the antitrust implications of common ownership. At the time, the FTC staff stated they were uncertain about a common ownership theory of antitrust liability, although it noted a number of academic studies arguing that common ownership reduces competition. For example, a 2014 paper by José Azar, an economist at the University of Navarra in Barcelona, concluded that airline fares are 3% to 7% higher due to common ownership by large institutional investors. The new request from the FTC indicates it may have found a new way to explore the issue.

FTC Commissioner Rohit Chopra has repeatedly raised concerns about the potential outsized influence of large investors. In November 2019, he dissented against approval of Bristol-Myers Squibb Co’s acquisition of Celgene Corp. He wrote of his concern that Bristol-Myers’s “incentives might also be distorted, given overlaps in ownership” between the two companies.

These new requests in merger review show that, as the volume of transactions approaches pre-recession levels, the FTC and Department of Justice (“DOJ”) continue to investigate the antitrust laws creatively and aggressively. That focus may now include thorough scrutiny of communications with every large investor of the buyer and seller when evaluating a potential merger.

As a result of these developments, we reiterate our recommendation that parties to a deal include their investor relations employees in antitrust compliance program, and in particular, in their merger control and “Item 4” Hart Scott Rodino training, because any communications with large shareholders about the transaction may be subject to investigation. These communications should be kept to a minimum and the communications should not show potential influence over the deal. These precautions will maximize the potential for clearance during the merger review process.

Although this is the first request of its kind from the FTC, the European Commission cited common ownership as one reason that two agricultural-chemical companies had to spin off assets in order to merge. Similarly, in 2015, the DOJ Antitrust Division asked major airlines about communications with their biggest shareholders. However, the 2015 request did not result in any enforcement action. In 2016, ValueAct Capital, an activist investment firm, agreed to pay an $11 million fine over the activist ValueAct’s disclosure of two investments. The Antitrust Division alleged ValueAct failed to obtain antitrust clearance for the purchases of about $2.5 billion in shares of Baker Hughes Inc. and Halliburton Co. in 2014. This previous scrutiny combined with the recent FTC request should give pause to big asset managers over their communication with companies.

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