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Law, Policy & Markets
Law, Policy & Markets
The Best of LPM | What's at Stake for Mergers, Antitrust and CFIUS in the US 2024 Presidential Election
Originally broadcast: February 27, 2024
Discover how the 2024 US presidential election could transform the regulatory landscape for mergers, antitrust enforcement, and foreign investment. With the prospect of President Joe Biden facing off against former President Donald Trump, this episode unpacks the economic policies and national security priorities of these political titans. Milbank partners Adam DiVincenzo and John Bain join host Allan Marks to provide a sharp analysis of how both administrations have wielded the Committee on Foreign Investment in the United States (CFIUS), particularly in relation to China, and what that means for foreign investment strategies moving forward.
As we navigate the intricate balance between market power, innovation, and regulation, learn how historical antitrust measures influence modern policies. Our conversation draws on the insights of economists like Schumpeter and Arrow to understand the role of large companies in fostering or stifling innovation. We explore the complex interplay of regulatory bodies like the FTC and DOJ in shaping market competition and how geopolitical considerations can impact merger activities. This episode offers a comprehensive look at how shifting political landscapes and economic strategies are poised to redefine the future of business.
We also delve into the nuances of antitrust laws and market strategies, exploring how proposed bans and historical perspectives like the Sherman Act inform current debates. The discussion reflects on Robert Bork's theory of consumer welfare, questioning its relevance today. Learn how administrations may continue to leverage robust antitrust tools and how geopolitical tensions with countries like Russia and China could impact merger regulations. From ESG initiatives to strategies for navigating CFIUS reviews, we provide the insights you need to understand the forces shaping tomorrow's corporate environment.
For more information and insights, follow us on social media and podcast platforms, including Apple, Spotify, Amazon Music, iHeart, Google and Audible.
Disclaimer
Law policy and markets. I'm Alan Marks. Today, I'm joined by Milbank partners Adam DiVincenzo and John Bain, both based in Washington DC. Together, we'll look at the upcoming US presidential election and what it means for mergers, antitrust and foreign investment. Let's get to it.
Speaker 1:2024 is an election year, not just in the United States, but globally, from Indonesia, india and Taiwan to Mexico, europe and the UK. About half the world's population lives in the 60 or so countries that will hold national elections this year. The results will have broad implications on economies, trade, geopolitics, climate change, war and peace, and democracy itself In the US. Uncertainty about future federal economic policies makes investment decisions this year especially challenging. Two places where this uncertainty is playing out are mergers and acquisitions, and foreign investment. M&a activity is so far charging out of the gate this year, notwithstanding uncertainty about the upcoming US presidential election. Will that last? Taking a wider view, what does the polarizing 2024 election in the United States mean for antitrust or competition policy, cross-border investment, international capital flows and corporate behavior? We have some clues, because the two likely presidential candidates each have a track record on antitrust enforcement and CFIUS policy. President Joe Biden and former President Donald Trump differ sharply on many things, of course, including on economic policy and national security priorities. They differ, too, on whether the administration has discretion to dictate or depart from established rules and norms in enforcing the law and regulating corporate transactions. They also share some surprising similarities, especially on robust enforcement to boost domestic manufacturing, to protect US jobs and to challenge anti-competitive behavior that hurts consumers.
Speaker 1:To help sort out what's at stake, I've asked Adam DiVincenzo and John Bain to join me. Adam is an antitrust litigator who has handled many merger approvals and other cases before the US Department of Justice and the Federal Trade Commission. John focuses on matters related to the Committee on Foreign Investment in the United States, or CFIUS, and on related national security issues. Both John and Adam are partners in Milbank's Washington DC office and have come up to join me here in New York today for what I hope will be a provocative, candid and opinionated discussion. As ever, the views expressed are ours alone. Adam, john, thank you very much for taking the time to get together today.
Speaker 1:A lot of clients of ours are calling and asking what they should be doing as far as investment decisions.
Speaker 1:M&a is a good example.
Speaker 1:Finance and other areas are also implicated, but they're asking what they should do given that we have an election coming up and it's not a normal presidential election in the United States in 2024, in part because of the very strong and stark differences on economic policy, as well as, of course, many other big things, between the two candidates that look like they'll be the nominees President Biden seeking reelection.
Speaker 1:Former President Trump seeking to get back in the White House. It's also different because we know what each of them has already done. We have a track record full four years for Trump and almost four years for President Biden, so we can look, I think, at what they did in two areas in particular where you're experts antitrust and CFIUS national security approvals and see how that might impact, how the election outcome might impact decisions that people are making today about how to invest, in particular, mergers and acquisitions, and what the environment might be and how it might change depending on the outcome of the election. Adam, why don't we start with you and just take a quick look at what we know already about the approaches that the Federal Trade Commission and the Department of Justice have taken with respect to antitrust under each of the candidates?
Speaker 2:Sure, and thank you for having me on this podcast today. I'm very excited about talking about my favorite subject. So, as you pointed out, we have a very unique election here because we have two candidates with a track record in antitrust and in other areas. President Trump, when he came into office, was predicted to be much like his Republican predecessors. So George W Bush, ronald Reagan, george H W Bush those administrations were noticeably less pro-enforcement in antitrust and more trusting of free markets than the Democratic administrations that interceded them. So Obama and Clinton.
Speaker 2:That expectation was quickly upset, in the sense that we had several large cases brought by the Trump administration early on. What we saw over the course of four years were cases being brought, new guidelines being issued, particularly new vertical merger guidelines, a new merger remedy policy. Now, there were certain elements in there of the old Republican free market philosophy, but by the same token, I think it's fair to say that antitrust regulation and enforcement was quite robust under the Trump administration. So fast forward to 2021,. President Biden is sworn into office. Shortly thereafter, he issued an executive order calling for a whole-of-government approach to antitrust, which was not unique in history, but certainly unique in recent history. He has regular meetings that he presides over with various agencies that oversee competition, not just the DOJ antitrust division and the FTC, but the Department of Transportation, the Federal Communications Commission. So President Biden himself is quite serious about antitrust.
Speaker 1:So what's different about Biden versus Trump?
Speaker 2:So what's different? So when Biden was elected, he made a decision early on to give the leadership of the FTC and the DOJ over to what we think of as the progressive Brandeisian movement.
Speaker 1:And that's Lena Kahn.
Speaker 2:Right, that's Chair Kahn and Jonathan Cantor who heads the DOJ's Antitrust Division and, in a nutshell, what their view is is that number one antitrust enforcement over the past 40 years has been too lax and the result has been harm to markets and in consumers and workers. They believe that the antitrust laws were passed not to maximize efficiency or even consumer welfare alone, but to preserve a view of America that Justice Brandeis once had, which was to protect small businesses, ensure that larger corporations were appropriately reined in and that their market power was checked, and so it's a much broader view of what the antitrust laws should address, and ever since then, the Biden administration, at least in terms of their goals, has been trying to pursue that policy and pursuing a broader array of harms or theories of harms when they look at mergers, when they look at business conduct and when they look at other things.
Speaker 1:If you look at the Sherman Act, the Clayton Act, other key pieces of regulation of the economy that are focused on antitrust and competition, in particular, there's this idea that it's not just protection of consumers and small businesses and looking at prices that, in fact, the antitrust laws matter, because there's other things that are going on that lead to concentrations of market power in the hands of relatively few companies, including in the popular mind, especially in big tech.
Speaker 2:Sure, and so there's a lot there. The White House advisor on antitrust, tim Wu, wrote a book called the Curse of Bigness, which became a bestseller, and what he says is what you describe as the larger problem with what he calls bigness. Right, the curse of bigness. And that is, once businesses get too big, they can engage in regulatory capture. They can capture the regulators themselves and, in turn, threaten democracy itself. They become so big that they can manipulate outcomes of political processes in their favor, either through lobbying or election interference or any sort of technology that allows them to have more power than individual voters. Now, that's the theory, but that is underlying what we are seeing going on at most of the antitrust agencies these days.
Speaker 1:Right, All right. So we're going to come back to antitrust in a second. John, I want to pivot over to you because, imagine, I've got a client. They're a company, they want to merge with another company and one of the things they have to do if they're over a certain size I guess the new threshold has been raised to almost $120 million they have to do their HSR, their Hart-Scott-Rodino filing and that's antitrust, right.
Speaker 1:So now we're looking at DOJ and FTC and Adams, busy with them trying to make sure that whatever they're trying to do is not going to be anti-competitive and the way they're doing it is also not anti-competitive in their behavior. But there's another way of looking at this, which is national security, and that's the lens that you focus on with the Committee on Foreign Investment in the United States, or CFIUS, which ultimately reports to the White House and determinations of whether this merger might, especially if it's a sensitive asset, be material and adverse to national security. How do you see the trends between former President Trump and President Biden, what they were trying to accomplish, at least initially, and how that relates to CFIUS approvals?
Speaker 3:Okay, well, first, thanks for having me. I'm very excited to talk about this. So President Trump took a very aggressive approach to national security issues through CFIUS. Unlike prior Republican and Democratic administrations, he really used the CFIUS process for leverage as part of the geopolitical disputes that were occurring with China and others. It was a real tool that the administration aggressively used as part of those discussions, in part to highlight key differences between the United States and its adversaries, but also in part to promote a more kind of America first agenda. In that way the administration really promoted almost economic protectionism through national security. The way that administration viewed it and consistent with how the Obama administration all uses that technological leadership was a key component of national security that America had to maintain and in fact even broaden its technological leadership in a number of key areas as a key aspect of national security strategy. So that is something that the Trump administration really aggressively pursued. And there was a number of pretty high-profile transactions where the Trump administration really did go a little bit out of the lane of CFIUS to try and ensure that American companies were protected, that investments into key industries were not permitted the Biden administration and that was mostly as it relates to China and kind of other rising powers.
Speaker 3:There was a lot of when the Biden administration came in. There was more continuation than differences really, particularly as it relates to China. The Biden administration has followed through on a lot of the Trump priorities as it relates to national security vis-a-vis China and CFIUS is a key component of that. So there hasn't been a huge kind of substantive difference in the way that the Biden administration has approached CFIUS, particularly as it relates to China. What has been different is there has been a little bit more of a trend back to traditional what I would say national security sensitivities and national security issues.
Speaker 3:With the Biden administration there also has been a little bit of a less political interference. There also has been a little bit of a less political interference. Some were critical of the former President Trump that it was too much political kind of issues were driving CFIUS reviews rather than kind of traditional national security sensitivity. So the Biden administration tried as much as they could to bring it back more into the traditional lane of national security so that transactions presented to it they did not have a real nexus to national security issues or national security matters. They would not necessarily create the type of concerns that Trump administration had. So there was some. Unlike antitrust I think that Adam described. There's probably more similarities in the way that the Biden administration has pursued CFIUS and CFIUS policy, as did the prior administration.
Speaker 1:So, essentially, if you look at the numbers, usually before Trump came into office, there's premature notices, and obviously, as economic activity goes up, as there's more M&A activity, you'll get more notices. That's fine. And you look at numbers, and that does actually increase 2016, 2017. Increase 2016, 2017, the number of transactions M&A transactions that were abandoned because of CFIUS related concerns was significantly higher under President Trump. Got the numbers 24 in 2017, 18 in 2018.
Speaker 1:Before that, it had never been more than a few a year, maybe up to eight, and then under Biden that falls off again. You go back to the kind of historic numbers. What does not change, though, are notices withdrawn, right. So is there a difference in communication? Is it wrong or simplistic to think that under President Trump, some of these are national security, some are anti-China, some were just political, and so that left less predictability, so people really didn't know what to notice or how to react, and then, eventually, some of the word is tossed of some of those policies as they relate to national security, but not the kind of I'm going to call it arbitrary political piece. As a result, people are still applying, but there's maybe different communication so that you don't, at the end of the day, have transactions that are actually rejected.
Speaker 3:Yeah, so under prior administrations there was a little bit of a sensitivity to outright rejecting transactions. So the way that, for instance, the Obama administration handled a lot of transactions that had China ties or China nexuses, they wouldn't reject them but they wouldn't approve them. They would leave them in this kind of limbo. And the way the CVS process works, you would have 90 days to try and clear a transaction. If you couldn't, what the administration would say is why don't you pull and refile? We'll keep looking at it. So effectively they were sticking it in a drawer. They didn't want to reject, they didn't want to approve, because they didn't want to create any sort of diplomatic or other kind of international geopolitical tensions with China.
Speaker 3:Obviously, president Trump took a very different tack.
Speaker 3:He was not afraid to confront China, not only through but through a lot of the other bilateral disputes.
Speaker 3:So he almost used it as, as I said earlier, a tool that he would show how muscular he was trying to be in his anti-China or confronting China. So he had no qualms and his administration had no qualms about rejecting transactions that had that created any sort of national security or, as I said, economic protectionist problems. The Biden administration has backed off that a little bit. There is less of an outright need or desire to confront China and our adversaries by rejecting deals wholesale. They will still try to work through matters but they will not clear them as maybe easily as they have in the, as easily as other administrations have in the past. And in that regard the Trump administration really did kind of there was a bit of a fork in the road, particularly as it relates to China, and kind of the current administration has followed through in many respects as it relates to China, and kind of the current administration has followed, in many respects as it relates to China, the process of not clearing these transactions, maybe like others would.
Speaker 2:And it's funny there's a mirror image there between CFIUS and antitrust, in the sense that during the Trump years when we saw tough enforcement, it was largely outside of court settlements. When we shifted to the Biden years in antitrust, we see the DOJ explicitly abandon the use of the consent decree and the FTC, in the last year or so, has also abandoned settlements and we see more court cases as a percentage of all in-depth investigations percentage of all in-depth investigations. And so, in a way, what the antitrust agencies are doing under Biden that they did not do as much under Trump is to use the power of litigation and the power of investigation and what we call FUD fear, uncertainty and doubt to deter M&A. And that is what many critics are saying about the approach being flawed, being that, look, if you don't have predictability in the process, then you're not going to get to the right answer, whether you're a regulator or a merging party.
Speaker 1:Yeah, and parties that want to merge with that kind of uncertainty? Either they will do it less than they otherwise should in an efficient economy, or they will spend more resources just gambling on something where you only know the outcome Exactly.
Speaker 2:Yeah.
Speaker 3:And that was one of the key things that the Biden administration tried to bring to CVS, at least with certainty of the process. There was a lot of unevenness in the way, maybe that some commentators thought that the Trump administration handled CVS, and one of the kind of at least anticipated and they have felt through on this in many respects is to bring a more certain approach, a more certain process, because that's obviously what business leaders most need when they're dealing with a transaction they need to know what the rules of the road are and what's the certainty of an outcome, whereas something that can be very apolitical or uncertain creates a lot of hesitancy to maybe sign transactions because you don't necessarily know what the outcome will be. So I think the Biden administration definitely tried to pursue that and I think they largely achieved that, with some exceptions, and we see that kind of overall.
Speaker 1:I mean, good rules systemically are good, bad rules are not. But not knowing what the rules are correct, even on the micro level, really chills economic activity, chills investment. It scares people. You don't really know what to do. So to create more predictability. One difference, adam I'm struck you mentioned court cases. Now, obviously, in the antitrust area, we're looking at statutes. The agency is complying with them. So say, there's a DOJ criminal investigation or the FTC is looking at maybe a pre-merger application and you're trying to figure out whether there's violations or conditions that should be imposed to maintain competition in healthy free markets and not have abuses of market power or aggregations of market power. If the agency gets it wrong or overreaches, there's judicial recourse because everybody has to live within the law. Now, john Sifias, is a little different right. I mean, this is really much more discretionary because we defer legally in the statute to the White House or the president, ultimately overseeing this committee, to determine whether national security is impacted.
Speaker 3:Yes, it is and it's. The executive branch has significant power under the CFIUS authorizing statute to determine whether a transaction could negatively impact national security and if the administration makes a decision, or an administration makes a decision regarding that, it is not appealable to the courts. Now, the process by which the review is handled could be and there has been a case regarding that the process by which the review is handled could be, and there has been a case regarding that, but the substance of the review is one that cannot necessarily be appealed. So it really does put the burden on the parties to, when you have a transaction that you're going to go through Sipias to ensure that you properly position it for whichever administration you're dealing with Biden or Trump to know what that administration most cares about, what the administration doesn't care about, and to highlight the positives. Your audience is very important in CFIUS because, again, you have to convince those agencies that the deal does not present any securities because, effectively, you do not have any matter of recourse to the courts.
Speaker 1:Adam in the antitrust area. That's different.
Speaker 2:Yeah, very different, and I think what I'm seeing is a difference in behavior by the regulators. Because of that, I would think it seems to me, based on your observations, john, that in CFIUS, the agencies know that they're the judge, the jury and the executioner, whereas the antitrust authorities know that they have to ultimately go to court and prove their case. And the difference might be that in the antitrust authorities know that they have to ultimately go to court and prove their case, and the difference might be that in the antitrust arena, the agencies feel they can be more aggressive in bringing theories of harm to the courts, knowing that a judge might turn them down. In fact, what we see is a lot of rhetoric around. Well, we should be bringing cases, even cases that we lose, because that means that we are pushing the bounds of the law where it should go, and the judges can tell us when we've gone too far. They don't say that part, but that's implicitly what they're saying.
Speaker 1:They're pushing the envelope and seeing if it breaks Exactly the court will tell them.
Speaker 2:Right and they're saying where's the case law going to go? We know where we want it to go, but we have to find out where judges are going to let us, and the only way to do that is to bring the case, Whereas in CFIUS it's obviously a different story and the decision is made and it's final.
Speaker 1:So let's bring in the third branch of government for a second right, because we've talked about the agencies and the administrative action and the president and what the administrations are doing. We've talked about courts, at least in the case of antitrust right, and what they're able to do to make sure that the agencies are not overreaching or misinterpreting the statutes. Congress has not legislated much. Although they've investigated on antitrust and competition issues, especially in the digital and tech domains, they haven't really changed the law in any significant way, probably since the 1970s. In contrast, in CFIUS there actually has been some tightening of it. Can you comment a bit on how that plays out and what it might mean for this upcoming election, not just between the White House but also between the parties, and whether there's prospects for legislative change in either area?
Speaker 3:So on CFIUS, as you mentioned, there was a significant expansion of the CFIUS statute in 2018. Effectively, policymakers decided that the prior set of statutes were not sufficient to address kind of the evolving not only geopolitical but really technology and marketplace developments as to how investors were investing or acquiring US assets. So there was a broad expansion of the authorities in 2018. The implementing regulations went into effect over the subsequent two years, so we've been operating under those regulations now for three or four years.
Speaker 3:I don't think that there's a real appetite to fully reform the process again. I think, if anything, it'll be tinkering around the edges. Do they want to sweep in more types of transactions? Do they want to subject other types of investments to CFIUS reviews? Not all transactions are subject to CFIUS authority. So I think really what you're going to see is kind of updating the statute and tinkering really with the substance, rather than a wholesale review. I think everybody by and large to the extent that they comment on it think that the current authorities and regulations are probably sufficient enough to protect national security but, importantly, not to disincentivize foreign acquisitions, because we really do need foreign capital in this economy and policymakers recognize that trusted sources of capital should not be prohibited and there should not be kind of large impediments to those types of transactions because the country economically really does require it.
Speaker 1:Let me poke on that, though, for a second. So there's this. One strand says we need foreign investment. In fact, capital flows into the US help our balance of payments. They create jobs. They're great, bring it on. And if we believe in free markets and free trade, we probably believe pretty much in free capital flows as well. By the same token, national security matters. We don't want people coming in and causing things that would threaten our way of life and our power in the world.
Speaker 1:Right, and that's certainly a concern. There's a tension there and I think there's the way Congress and the recent statutes and also the Biden executive order on CIFI is kind of reconciled, as they say. Well, there's an alignment Economic security, yes, and national security are part and parcel of the same thing. Is that too simplistic, or are they wrong?
Speaker 3:No, it's not too simplistic, it's fairly accurate. There's an acknowledgment and even the Trump administration recognized the benefits of foreign investment in the United States that foreign capital is one of the many engines of the US economy. So we need to continue it and allow it to grow and expand as much as we can. So there was certain exceptions built into the rules for capital from kind of, again, trusted sources.
Speaker 1:So if it's a trusted source of capital, the US government A country which is designated as like Great Britain or New Zealand.
Speaker 3:There's a handful of countries that are specifically designated by regulation to have certain kind of expedited treatment or exceptions to some of the regulations that are serious. Other countries don't have that, but, based on their interaction with the US government, there's a kind of a broad deal of comfort with them. Other countries, though, however, is really where the tension that you describe arises and certain investments from those countries and investors from those countries can occur. They probably have to be structured differently maybe than others. There's probably more passivity. That is required, less access to US information, less access to US information, less access to US facilities.
Speaker 1:Less proximity to military bases.
Speaker 3:Things of that nature exactly. So there still is a desire to have capital from all sources come, but when it comes from countries with which the US has, I would say, less kind of friendly diplomatic relations, what you'll see is there's ways to get the regulators comfortable with the investment, and those are, as I said, structuring passivity, things of that nature, whereas investors from trusted countries don't have those kind of hurdles to get over.
Speaker 1:So, adam, when you look at it from the antitrust side, there's also sort of this, maybe intellectual tension between not wanting some large companies to be too large to the point where their market power could have anti-competitive effects. But on the international stage, of course, we actually might want to champion. They're the national champions and we want them very much to be dominating their industries so that foreign companies don't do that. Is that relevant to the antitrust analysis, and should it be?
Speaker 2:Yeah. So I think yes in the answer to both questions. As my partner colleague, Rich Parker, likes to say, if Apple were founded and run out of Moscow, we would be having a very different conversation.
Speaker 1:And a very different iPhone.
Speaker 2:Exactly About what antit outside of this country? No-transcript. Now, do we credit or call out antitrust policy as the cause? Hard to say, but I can tell you that in Europe there is a very different debate going on, especially in the UK, about whether regulations including the DMA which was recently passed, including their relatively tougher stance on monopolies and antitrust over the course of the past few decades, have contributed to the reality that the tech economy in Europe has not grown and is not as innovative as the economy here. So, yes, it is relevant and that is something that is heavily debated within antitrust circles.
Speaker 2:There is a school of thought emerging in antitrust called dynamic competition, and I'm putting in a plug for it because I'm helping put together a symposium for the antitrust journal Law Journal on this topic. But the concept is that we shouldn't worry too much about competition within markets. So if a market gets monopolized, there might be some benefits, because even monopolists need to innovate. The competition we really care about is competition for the next market or to create the next market. And if you take a look at Amazon, apple, name your big tech company those are the markets that they're worried about because they're competing with each other for those markets, including startups and big companies from other parts of the world. So I'm not suggesting that that's the correct school of thought. Some might claim that that's just a rebranding of the Chicago school, which the progressive and the Brandeisians would say got us into this mess in the first place. But that's the debate that's going on and, to your point, it will inform how antitrust to keep our international competitiveness up to where it is today.
Speaker 1:So the starting point of that, though, it seems to me, is the idea, which is pretty prevalent you mentioned Chicago School, their approach to antitrust, but also, I think, most of the history of antitrust we assume we have a free market. To the history of antitrust. We assume we have a free market, we assume it's competitive and we're worried about anti-competitive behavior or combinations that would create market power that then limit that competition. One might say today, with some of the concentration of market power in certain companies, yes, it may encourage, because of economies of scale, more innovation, or it may chill it if they're buying their competitors and shutting them down. There's not inherently one or the other.
Speaker 1:What could come from that, though, is if you flip the analysis and you said assume for a second that this sector is not competitive, but we take your dynamic model. Therefore, what should happen? It's not just how do you protect the next entrant or the next sector. It's also a question of is that killing innovation? Is it extracting rents and not being productive in the economy, as opposed to fostering what competition is supposed to foster, which is more innovation, more access, fewer barriers to entry and the benefits that come from competition to producers and consumers?
Speaker 2:Right, right, and I think that's the nub of the debate, because you can point to examples around the world where there are monopolies, some of them state-sponsored. I'll take Pemex in Mexico, where there isn't competition, and I think we can all agree that there isn't very much dynamism in the oil and gas market in Mexico, and that's been an issue that the Mexican government has been trying to address in recent years. Government has been trying to address in recent years. Regulation can calcify markets and there are many examples of this occurring over the years.
Speaker 2:Before there was widespread antitrust regulation in this economy. Most don't remember I certainly might not be old enough to remember but the ICC governed prices and output, which is quite extraordinary when you think about it by today's standards and the types of debates we're having today. And so I think, to get back to your point, I'm not suggesting monopolies are always good and that they always innovate. That's the debate. Joseph Schumpeter and Kenneth Arrow would debate this right. They both had very different theories about whether large companies can do this, but undoubtedly scale is needed to invest in big ideas. At the same time, startups are responsible for many of the big ideas that we have today. So the question is, what is the nature of the market? What is the nature of the technology? When does regulation make sense? How much error tolerance do we have and in which direction? Those are all questions that I don't have answers to.
Speaker 3:Yeah, it's interesting listening to this discussion that lent the focus of national security and ciphius is obviously different and it's not the size of the investment or the size of the company. There could be a company that is developing some next generation technology and it's literally a few people in a garage developing that and our government is very focused on. Policymakers want to ensure that investments in those companies which are creating the next market are only from investors in countries that we can trust. They don't want to lose control or have that next technology be available potentially to our adversaries.
Speaker 3:So the statute the reform statute that you mentioned a few minutes ago was really focused on investments in those types of companies. We call them critical technology companies and it wasn't a. The policymakers didn't say it's a hard no for investments in those companies. It just raised the bar such that when investments like that are make there they could automatically be subject to CFIUS review a mandatory CFIUS review and there's a keener focus from the national security agencies on those industries. So there's been a real shift in the last six or ten years on the types of industries that are subject to higher scrutiny by CFIUS, where before we didn't necessarily have that. It almost went undefined in the statute. National security was something that regulators would interpret themselves, but now it's a clear focus on technology and making sure that next-gen technology, whether it's AI, whether whatever it is, remains in trusted hands with trusted owners. It's very important to our government.
Speaker 1:Yeah, and AI is interesting and of course the European Union is, I will say, ahead of us at the moment, at least procedurally, in coming up with a protocol rubric for how AI should be.
Speaker 1:They're focusing on how it should be used, not so much how it's developed and whether that could cause harm. So I don't know what we'll do on that. But what I think is relevant to what each of you are focusing on is if you look at the industries that are sensitive from a national security standpoint and you look at the division somewhat between DOJ and the FTC and the antitrust space, where regulated industries tend to end up in one bucket, so that could be energy or telecommunications what have you? And maybe transportation, airlines. That's different than more consumer-facing types of things. The divisions are different and I don't know if that regulatory overlay the fact that there's other regulators paying attention even to regulate the monopolies which we need for things like power delivery, how that plays out if that's different, because obviously the election that's coming up will probably change one way or the other the way we regulate certain of those key industries and that change in regulation could spill over, have very big, maybe unintended, effects in both CFIUS reviews and antitrust reviews.
Speaker 3:Yeah, for sure. I think that if there is a change in administrations and the Trump administration returns, I think you're going to see a keener focus on what those next generation technologies are and what could be the next to use Adam's example the next Apple in the world to making sure that those are continued to be innovative in this country, develop in this country and not made available to our adversaries. And that's really what that administration kind of was full-throated in protection of is not just necessarily what are the harms today? What could the harms occur in 10 or 20 years? That's really where they were focused. The Biden administration has been good about that, but I think the Trump administration might be more kind of keenly focused on what those next-gen technologies are, out of foresight or out of fear? Probably both. It's probably two sides of the same coin.
Speaker 2:Yeah, and I want to pick up on one question you had towards the end and that is how how do regulators other regulators other than DOJ and the FTC impact how the DOJ and FTC thinks about markets, because I think this goes to the overall question of the difference between the administrations. So traditionally the antitrust division and the FTC have had different views than their sister agencies, whatever the regulator is about mergers conduct, and they have tended to be a bit more strict in most cases not all cases, but many Regulators, sectoral regulators, in the minds of the DOJ and the FTC, tend to be too lenient because in their view they're either subject to capture or those regulators are heavily reliant on the companies that they're regulating, whereas the DOJ and the FTC are law enforcers, they oversee the entire economy. So when we go to the FTC and I have had this experience many times on pipeline gas, pipeline mergers we make the argument that you have FERC over here regulating everything we do. They regulate interconnection, they regulate the tariff.
Speaker 1:Interest and tariffs are covered by them. Yeah, who gets on?
Speaker 2:Exactly. We cannot prevent another pipeline from connecting to us. We cannot prevent that pipeline from getting a tariff rate. We cannot prevent marketers from going wherever they want and getting whatever volumes they want.
Speaker 2:All of those arguments are made, but the way that the FTC and the DOJ see the world is that, yes, all the other regulators are doing is creating a market within a market. We need to regulate the market that is left over. You might discount below your tariff on a gas pipeline and therefore competition may drive whatever discount you offer, and the FERC can't make anyone build a pipeline. So what the other regulators do is set the limits and set the market. But within the market there is still competition and this goes to the Telecommunications Act with the FCC, every other regulator, and there's a debate going on. There's yet another debate going on within antitrust as to whether we ought to have rules, regulations, whether the FTC ought to pass regulations. It has rulemaking authority. Arguably, it has proposed a ban on all non-competes in the United States with this rulemaking authority. We'll see if it passes muster in the courts, but—.
Speaker 1:You'll turn the whole country into California.
Speaker 2:Exactly, but it will have uniformity right. So what we're trying to figure out as an antitrust community is should we have these rules, like other sectoral regulators, that everyone can follow? Eliminates the fear, uncertainty and doubt, but it might be quite constraining. And then who should decide what those rules are?
Speaker 3:Is it the federal government or is it the states? It's interesting and tiffy is that there's no behavioral rules like that. They do a very transaction-specific review but to the extent a transaction presents national security risks or concerns and they're worried that the behavior of the combined company or the post-transaction company could threaten national security, what they do is they effectively enter into one-off agreements with those companies, very similar to what a consent decree would look like, except there's not a court overseeing it. You sign an agreement with agencies and you agree to certain behavioral commitments to mitigate the national security concerns that are presented by the deal. So it's done in kind of a one-off basis rather than kind of proactive rules to govern kind of actions and behaviors by companies.
Speaker 1:This behavioral piece is really interesting to me and it's different than the harms conversation we had a moment ago. Whether it's harm to national security or harm to markets, what have you? Harm to consumers, harm to others? If you look at behaviors and I want to, adam, maybe look at the origin of some of the antitrust laws we can go back to John Sherman of Ohio, with the Sherman Act coming in which, by the way, was right after Grover Cleveland lost his first bid for reelection and, interestingly, the only other time their president lost reelection, having won the popular vote but he lost the Electoral College. So go back to 1890. John Sherman gets this done. He's from Ohio. Are there any lessons from the history of this that might be relevant to what we're looking at today and as to whether, frankly, our arguments over what the antitrust laws are meant to do, including the ones that came later, in 1914 and so forth, what they're meant to do and actually what we're trying to make them do are consistent with fostering either healthy businesses or healthy consumer markets or anything else?
Speaker 2:Sure. So I'm going to start by fast-forwarding to the 70s and talking about Robert Bork and his then contemporaries. And Robert Bork wrote a very famous book called the Antitrust Paradox. He wrote several law review articles on the origins of the antitrust laws and, based on his study of the legislative history and the origins of the Sherman Act and other antitrust laws, he concluded that the goal that Congress had in mind was something called consumer welfare, which means that if a business practice or a merger leads to consumers being better off than they were before, then in most cases that should be legal under the antitrust laws.
Speaker 1:Let's pause on that. So if we're in a small town and you and I each have a grocery store and we're the only two grocery stores in town, if we divide the market, if we do price fixing, consumers are hurt. So that'd be bad, correct. But there are some things that we might do. Let's say we have an online search company and we do things that maybe aren't very good for the people trying to get listed in the search results, and maybe a discriminatory pricing that's not related to differences in cost. But consumers get this fabulous search engine that has lots of stuff in it, mainly because it dominates the market. We get really reliable results and we don't pay anything for it, so maybe the consumer is not hurt.
Speaker 2:Right, exactly.
Speaker 1:If the consumer is better off in that scenario, then you would have an argument, so Bork would be fine with that second one.
Speaker 2:Oh Bork would be fine with that. Second one. Oh Bork would be fine with it and the court might be fine with it. He would look at it as more of a balancing test. Would the harms outweigh the efficiencies and the benefits to consumers? When you look at the legislative history of the Sherman Act more holistically and not through the Bork lens, I'm not suggesting Bork was necessarily wrong, but there is quite a bit of rhetoric about reining in big business.
Speaker 1:Especially railroads.
Speaker 2:Especially railroads, especially oil and refining, the existing trusts of the day. And that was a grave, concernailing concern that if the government stepped in and passed a wine-raging law banning trusts or reining them in in a blanket way, that you would lose many of the efficiencies that resulted. Certainly, the unifying of railroads and refining carried with it some efficiencies. Massive economies of scale, massive economies of scale and network effects.
Speaker 2:And arguably in the early stages, allowed industries to exist that wouldn't have otherwise exist, and so the question is how far did it go? How did it go too far? Did it create durable and democracy-threatening trusts that couldn't be reined in? If they got too far and if the federal government didn't step in? That debate was going on. It took a while for the Sherman Act to pass, and it had many iterations before it became what we now know it to be, but interesting factoid from that period of time is that there was another important person from Ohio and his name was John.
Speaker 2:Rockefeller, who owned Standard Oil and was the founder of Standard Oil and was a very keen and politically active business person, and John Sherman. Senator Sherman from Ohio, was also from Ohio and I venture to say that they probably knew each other and so had the Sherman Act. Was the Sherman Act passed under Rockefeller's supervision or with his blessing? I can't speculate on that, but what I can say is where the Sherman Act was left was, and the way the courts have interpreted it is. It doesn't ban any and all agreements between companies or competitors or trusts, Even if they're very large.
Speaker 2:Even if they're very large. It looks at the reasonableness of the practice. And what does reasonableness mean? It means is it commercially reasonable? It is. In my view, the law is closer to what Bork sees it than the way that others in the current administration may see it. Now, legislative history is always dangerous. Right, We've had numerous Supreme Court justices that have cautioned against the overuse of it. But here we see we have more than a century of case law which, on balance, favors a reasonableness analysis of a business practice or a merger, and I don't think you can ignore that much case law.
Speaker 1:Let me ask you both something else, which is not just predicting what could happen after the election, but instead between now and then. You're a large corporation. You've got a bunch of cash sitting in your balance sheet. You'd like to go buy somebody else and grow your business through acquisitions, or you're a private equity fund manager and you're trying to decide how to deploy all this capital in a world where, finally, inflation seems to be tamed and maybe interest rates have stopped going up. They may even come down two or three times this year. So you're looking to deploy that capital and between now and the election, you might be a little concerned about the uncertainty of where that's going to go. So how should you approach antitrust, cfius, pre-merger notices, the types of investments you might consider making, so that you're a little insulated from that uncertainty?
Speaker 2:Sure.
Speaker 2:So we think about this quite a bit, and the way that we would approach a merger now, going into an election, is assuming that there's going to be a change, because if you assume continuity, it's a little bit easier.
Speaker 2:Now you can have a contract that allows one or both parties it out At point in time that might approximate when the changeover happens. That's an obvious way to do. It is look, we're going to stop and pause and decide whether we want to keep going with this merger and this alludes to how I was talking about the changing administrations before is that antitrust enforcement is going to be quite tough in the future years. I think there are some policies that have staying power. It's unclear to me that settlements will return, for example. It's unclear to me, and frankly I don't think a new administration under Trump would back away from going after vertical mergers, so mergers between competitor I'm sorry suppliers and their customers, a trend which started under the first Trump administration. I'm not so sure that they're going to throw away the new merger guidelines just because they were drafted under a Biden administration.
Speaker 1:We'll be pausing on that for a second. If a new administration is focused on an ideologically coherent approach to this as a matter of economic theory, that's one thing. If they're looking for tools of executive power, john, to your point about politics in the national security side if you're looking at that, then the Biden administration has just given them a nice gift of all these new tools that they can use.
Speaker 2:Exactly. I think what's happened over the last four years is enforcement is down. There are fewer cases being brought, but the building blocks of much more robust enforcement are in place and if you're a new administration and you're wanting to make your mark, you can pick and choose the cases you bring, but you have a bigger toolbox to work with.
Speaker 3:Yeah, on the CVS side it's interesting to hear Adam talk about a hundred years of precedent and things. Obviously CVS is much more in its infancy. But the thing that we worry about more is not necessarily the change in administration. There will be a slight change in tech. It's geopolitical developments.
Speaker 3:Geopolitical developments can heavily influence the way an administration views a transaction or a transaction party and, given the way the world is today and the never-ending changes that are happening almost on a monthly basis, if there's a transaction, the longer it is unsigned, the longer it's not being reviewed, the more likely it is, the greater the likelihood that there could be some sort of geopolitical development that influences the way a new administration could address that or handle it or want to deal with it. So and again, particularly with the Trump administration, there was never a hesitancy to use the CFIUS process as leverage or as a tool to achieve other kind of objectives, particularly those geopolitically. So to the extent that there's a transaction that is being contemplated, sooner, probably the better. Again, just likely because of those geopolitical developments. Those are kind of the we don't know what can happen in the world and those can greatly influence our defense, can we?
Speaker 1:get more granular, though, on that for a second, Because from a CFIUS standpoint we're looking at foreign investment. That's what's being regulated, if you will, Geopolitics say, with Russia and Ukraine. Maybe not that big a deal, because Russia's not investing in the United States very much. In fact, the economy is too small really to do that anyway, For sure Less than 10% of the world's GDP. China, totally different story.
Speaker 1:Now, if we're on-shoring manufacturing look at, say, the CHIPS Act, which was passed on a bipartisan basis under the Biden administration, meant to cause reinvestment in manufacturing capacity and is very successfully doing that. Now, If we're less dependent, say, on Taiwan in four years than we are today for critical chips that are needed across industry as well as tech, maybe we don't care as much about Chinese capital coming in. And, by the way, the Chinese economy is having some challenges as well, which is limiting its both ability and willingness to invest in the United States. So if the geopolitics are happening Middle East, another good example if they're happening in places where they're not sources of foreign investment in a big material way to the US, it doesn't matter, just from a CFIA standpoint.
Speaker 3:It can from a CFIA standpoint, because a lot of the investors that are active in the US are state-affiliated investors and our government, particularly a new administration, would want to understand are those investors and this is a question that's always focused on in transactions is the investor pursuing a commercial investment? Are they trying to pursue some sort of state-affiliated objective by acquiring an asset, by acquiring a technology, investing in a certain industry? So it's very keen, depending on what's happening and the way you position a transaction for CFIUS is to highlight the commercial benefits and the reason why, particularly a state investor is undertaking an investment, to reduce the concern from an administration that wait a minute, this is a foreign state actor trying to pursue some other objective rather than commercial benefits and commercial profits. So they can and the way Russia is a very good example. China is a very good example certain Mideast countries that there can be an evolution in the way that the US government approaches these transactions based on geopolitical developments.
Speaker 1:Okay, Adam, just kind of to wrap up. So what do you think actually might change then?
Speaker 2:Sure, so they're not completely one and the same, although there'll be some continuity. One thing that we're seeing a lot of on the Republican side, especially from Republican attorneys general, is a focus on ESG, and why would that be an antitrust concern? Esg is good for the world. The concern that has been voiced is that ESG involves companies, sometimes competitors getting together and cooperating to do things that might otherwise be viewed as anti-competitive. So take climate change, for example. What some in Congress and at the state level have said is that the push to address climate change has amounted to, in part, an agreement between investors, between companies, to stop investing in coal, oil and gas development Far from the truth, based on what we see in the market.
Speaker 2:But I think when it goes to ESG practices, we've seen this movie before with the Trump administration when the antitrust division investigated the major car manufacturers for agreeing allegedly to go to the state of California together and negotiate emissions restrictions. Now we can debate about the antitrust merits of that, but I think we're going to see a lot more of that. There are congressional investigations, there are state investigations. It's a hot topic within antitrust, but those types of practices will be looked at. We don't see. We've seen some rhetoric from the current administration, but not a lot of action.
Speaker 1:It's funny about four years ago there was a letter written by Senate Republicans Marco Rubio and others on just that point and it was addressed to whoever nominally they thought was the head of ESG at various law firms.
Speaker 1:I got ours and it's a little chilly, you see this letter with Senate letterhead, signed by all these people you've heard of, and it basically says that it says well, gee, if you're advising clients and you're advising them with respect to ESG and you're counseling them to do things that are anti-competitive, we might like to talk to you about that, right. And I will tell you that, in my personal experience, looking at the business world for the last three decades and looking at government interface, whether that's regulations or what have you the level of coordination that conspiracy theories require just isn't there, right, even if you had intellectual merit around that the theory that somehow antitrust and ESG are conflated. But I think your point is well taken that political trends happen because they happen, and I think you are foolish to turn a blind eye to wherever those trends might go.
Speaker 2:Yeah, I think it's be ready for the investigations. Investigations have power, even if they ultimately don't wind up in court, sure.
Speaker 3:Yeah and Sylvius, I think, as I said at the top, we're going to see a lot of continuation on the substance, particularly as it relates to China and other kind of economic protectionism approach from the administration, a much more populist view of acquisitions of high-profile US assets, well-known brands. The Trump administration would be much less keen on approving those than maybe the Biden administration has. I think, unlike in NHS, you'll probably see less enforcement. The Biden administration has been very keen on enhancing its enforcement of the CFIUS regulations. I think you'll see the Trump administration would back off in that area and then the one thing you would probably see much more of is unevenness and uncertainty in the way that no administration would handle kind of the CFIUS authorities and again using them for leverage and geopolitical disputes, right.
Speaker 3:So more politicized More politicized is very likely, yes, interesting.
Speaker 1:So, nonetheless, it's really interesting If you look at what's happening in the market right now. Despite all this uncertainty, deals are getting done. Is that your experience too?
Speaker 2:It is, and in fact, when you look at the track record of the Biden administration some numbers came out earlier this year reflecting on the first few years of the administration enforcement is actually down by most metrics. There are fewer court cases being brought, there are fewer deals being abandoned, there are fewer significant investigations of mergers and a lot of the rhetoric has not yet panned out into that, into the more enforcement. And part of the reason is the agencies are resource constrained. Bringing a court case takes a lot of resources. You have to pay economists, you have to have dozens of attorneys involved in court time and the agencies don't have the resources to bring them all and Congress hasn't given them more money.
Speaker 1:It could also be self-regulation, where people know that they don't want to be on the private sector side. You don't want litigation either, so you might be bringing deals to maturity that are likely to pass muster. True, because there is actually consistency in how the rules are being interpreted. At least it's articulated.
Speaker 2:Yeah, and there certainly has been more self-selection among clients as to what deals they bring forward. But I can tell you that deals are getting done, including deals that raise antitrust issues lots of them and a lot of it happens behind the scenes, where you present something to the regulator and the regulator blesses that. There's no press release, there's no court case. We don't know the details, but it happens. And I think, as a last word, what we would tell clients who are worried about the fear, uncertainty and doubt that is coming out of the rhetoric is that your deals are still getting done and having experienced counsel at hand is pretty important.
Speaker 3:I would say the same thing on CVS that under either administration and or both administrations, looking back, the overwhelming majority of transactions presented to CVS cleared CVS without much hassle. So in our experience, if there are issues there's ways to. You can still move forward with the deal. You would just have to maybe structure the deal slightly differently to kind of anticipate the concerns that the regulators or an administration would bring. So knowing exactly how the administration, what the administration cares about and the issues that they are concerned with allows you to anticipate those concerns. You can address them in the structuring of the transactions, the assets that may be in the mix, so that when you go to the regulator with the transaction it's best positioned for success. And I think counsel like ourselves are very well positioned to help clients with that.
Speaker 1:Well, I want to thank you both. This has been an absolutely fabulous conversation and I've learned a lot, so thank you, thank you. Thank you. Thank you for joining us on another episode of Law Policy Markets Milbank Conversations. Follow us on your favorite podcast platform and learn more at milbankcom.
