Why Has California Waited So Long to Enact Its Own Merger Review Law?
| Publication year | 2023 |
| Author | By Abiel Garcia |
By Abiel Garcia1
While there is debate whether mergers and acquisitions ("M&A") benefit or harm the ultimate consumers, M&A activities are common practice in today's world.2 On the one hand, they can offer businesses the opportunity to expand their operations, achieve economies of scale, and increase productivity through technological and "back-office" synergies, which in theory results in lower prices and better products to consumers. On the other, M&A activities can negatively impact an economy by reducing competition in the marketplace—thereby raising prices on existing products or slowing innovation—or by eliminating jobs when streamlining a merged entity's operations.
Over the past decade, mergers and acquisitions have exploded, both through traditional horizontal and vertical mergers, as well as private equity firm acquisitions.3 The Federal Trade Commission ("FTC") and Department of Justice ("DOJ") (together the "Antitrust Agencies") reported that in 2021, more than 3,520 M&A transactions were reported pursuant to the Hart-Scott-Rodino Act ("HSR") guidelines,4 almost 67% higher than the next highest year in the past decade.5 This does not account for the additional thousands of non-HSR reportable mergers and acquisitions that take place each year.6
As of today, the Antitrust Agencies are the only two U.S. competition entities that consistently receive and review premerger notifications and filings under the federal HSR guidelines.7 But it is no secret that the Antitrust Agencies are understaffed and are scratching the surface of potentially problematic mergers.8 Out of the 3,520 HSR-reported transactions documented in 2021, the Antitrust Agencies investigated less than 2% of them.9 This could be due to a variety of reasons such as resource constraints, political agendas, or the growing complexity and size of transactions that require scrutiny. Regardless of the reason, the Antitrust Agencies are limited in their ability to review a majority of the HSR-reported mergers.
In California, there is no state-law equivalent of an HSR Act, or any law containing the requirements set forth within the HSR Act that delineate how and when to file premerger notifications. While the California Attorney General and/or private parties can bring a merger challenge under federal law, such as section 7 of the Clayton Act,10 California
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should adopt its own state law equivalent—a law that empowers the California Attorney General to review and challenge mergers, while also granting California citizens the right to challenge mergers. As one of the top five economies in the world with progressive antitrust laws, a reputation for innovation, and a prohibition on noncompete clauses, California's economy is prevalent with potential and nascent competitors that need a unique merger law. A state law that would allow the California Attorney General to review transactions that are under the federal HSR standards, that would allow the California Attorney General to review acquisitions of potential or nascent competitors by dominant incumbents, and that would reflect California courts' broad interpretation of existing state law.
"[T]he Cartwright Act is broader in range and deeper in reach than the Sherman Act."11 "States have regulated monopolies and unfair competition for longer than the federal government, and federal law is intended only 'to supplement, not displace, state antitrust remedies.'"12 These California Supreme Court declarations, made 30 years apart, demonstrate California's unwavering commitment to state antitrust law and California's unique interpretation of it. Whether it be reverse payment analysis, resale price maintenance, or price gouging, California's antitrust history is unique as "interpretations of federal antitrust law are at most instructive, not conclusive, when construing the Cartwright Act."13
Yet, for years, California and its state agencies have not had the independent ability to review mergers under California's antitrust laws due, in part, to the California Supreme Court's opinion in Texaco.14 In Texaco, the court stated that California's Legislature "failed to include the latest invention of the evolving antitrust statues-an antimerger provision."15 The "Legislature's inaction on this subject for the past 80 years is significant."16 The California Legislature's failure to act for the 80 years leading up to Texaco and the 35 years since Texaco has hindered California—and its antitrust enforcers—in its mission to protect California from "threats to competition in their incipiency-much like section 7 of the Clayton Act."17
Though this is not without trying. I n reaction to Texaco, the Legislature attempted to course correct with Assembly Bill No. 671. AB 671 was introduced in February 1989 and outlawed monopolization and provided authority to review mergers. The bill ultimately failed, more than likely due to the skepticism in state merger authority reflected in Texaco. But while the bill was working through the California Legislature, in July of 1989, the FTC wrote to the California Senate and stated that "[s]tate law enforcement can play a valuable role in restraining anticompetitive conduct, particularly when competitive effects are limited to markets in the state."18 The letter, while criticizing some individual parts of AB 671, supported the idea that state law enforcement was valuable in protecting competition.
Some may argue that California does not need a state-specific merger law because the California Attorney General, or its citizens, can use section 7 of the Clayton Act as the predicate act for a Business and Professions Code section 17200 claim.19 But, in practice, parties are constrained in being able to effectively challenge mergers under section 17200 given Proposition 64's amendments to section 17204.20 While Section 17200—also known as the Unfair Competition Law—is powerful, it is ineffective in preventing mergers and is ineffective in preventing "conduct that threatens an incipient violation of an antitrust law."21
One consistent theme emerging from a review of the scant California-specific merger caselaw is the focus on protecting competition. As early as 1985, the California Supreme Court recognized that California's antitrust laws reached beyond "clear-cut menaces to competition" in order to deal with merely "ephemeral possibilities" and "threats to competition in their incipiency."22 This is further reinforced by recent California Supreme Court language stating that effectively paying to avoid competition is a
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violation of the Cartwright Act.23 And there is a reason for this: California is a hot bed for innovation and for competitors that represent a threat to a dominant, incumbent company.
California is home to many of the largest companies in the United States and is one of the top five largest economies in the world.24 It is home to three "Big Tech" companies: Google, Apple, and Facebook.25California attracts top tech skilled laborers and employees due to the plethora of Fortune 100 companies headquartered in California. Additionally, California does not enforce noncompete clauses in employment contracts, thereby fostering a culture of innovation, which drives California's start-up culture.26 In 2022, San Francisco ranked number one in the United States for incubating startups, with 14,000 of them calling San Francisco home.27Los Angeles was close behind, coming in at number three in the United States, with about 6,000 startups calling Los Angeles home.28 Many of these companies are started with private investment funds or venture capitalist funds with aims to become acquired—turning equity into cash.29
"Who buys startups? The answer, increasingly, is dominant incumbent players."30 In California, Big Tech companies are the dominant incumbent players. They have significant market power, whether it be in defined product markets or more generally given their market cap and size.31Recent reports have shown that Big Tech acquires companies at an astonishing pace, acquiring over 70 companies in 2019 and 2020.32 Only a fraction of the acquisitions are reportable to the Antitrust Agencies under the HSR Act because many do not meet the reporting thresholds and requirements.33 That means that the vast majority of the recent Big Tech transactions face limited antitrust scrutiny, at best, since they are nonreportable transactions.34
Why should we care about nonreported transactions? Well, some of these acquisitions that fly under the radar are potentially transactions between a large, entrenched player and a nascent or potential competitor. These types of competitors have a variety of definitions but a seemingly applicable one in this situation is "a firm whose prospective innovation represents a serious threat to an incumbent."35
Scholars point to a few classic examples of nascent competitor acquisition.36 Facebook's acquisitions of Instagram and WhatsApp usually appear as examples of an incumbent buying a nascent competitor. Ultimately, the acquisitions helped entrench what is now known as Meta as a dominant market player. Explicit evidence uncovered during post-merger investigations revealed the true intent behind the deals. Meta's CEO stated that while Instagram had "a small team (10-25 employees) and no revenue," "the brand[] [is] already meaningful and if they grow to a large scale they could be very disruptive to us."37 When asked by then Facebook's CFO about the reason for potential acquisition of Instagram, and others, Mr. Zuckerberg responded stating that "what we're really buying is time. Even if some new competitors spring up, . . . [the acquisitions] will give us a year or more to integrate their dynamics before anyone can get close to their scale again."38 Mr. Zuckerberg...
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