- An FTC merger settlement in the $5.2 billion transaction between EQT and Quantum, two producers of natural gas in the Appalachian Basin, signals the antitrust agencies' new approach to analyzing the potential for coordination by examining touchpoints between merging parties and competitors.
- Importantly the FTC conducted a full-scale investigation of the transaction's potential substantive impact on direct competition between the parties and cleared the transaction. Yet the FTC obtained a settlement to resolve concerns about ongoing entanglements between the two companies.
- The FTC settlement has three key features, each of which stakes out aggressive positions that may not have held up had the merging parties litigated them in court. The FTC settlement: (1) alleged a violation of Section 8 of the Clayton Act's prohibition against interlocking directorates that extends beyond existing precedent; (2) advanced an untested theory that Quantum—which was to receive an 11% equity stake in EQT—could, by virtue of its equity stake only, obtain competitively sensitive information from EQT and influence EQT's behavior; and (3) forced EQT and Quantum to terminate a pre-existing joint venture based on concerns that the joint venture provided another opportunity to share competitively sensitive information.
- The FTC's settlement here contributes to a growing body of evidence that the antitrust agencies intend to use the merger review process to investigate all manners of entanglements across the supply chain, regardless of whether the proposed transaction specifically creates the entanglement.
- At bottom, the FTC's action in EQT/Quantum would seem to justify virtually limitless investigation and enforcement about the potential for coordination through the exchange of competitively sensitive information in segments that are unaffected by the transaction.
Summary of the EQT/Quantum Transaction
In September 2022, natural gas producer EQT Corporation (EQT) announced that it agreed to acquire certain Appalachian Basin natural gas assets from rival Quantum Energy Partners (Quantum) for $5.2 billion in cash and stock. After an eleven-month Federal Trade Commission (FTC) antitrust investigation, in August 2023, the FTC announced that it had resolved its concerns through a settlement with EQT and Quantum that conditionally cleared the transaction to proceed.1 Notably, the FTC investigated whether EQT's acquisition of the Quantum assets would harm competition in the sale of natural gas in the Appalachian Basin by combining the largest U.S. natural gas producer with another significant natural gas producer but did not allege any concerns on this basis. Instead, the FTC alleged that certain deal terms and pre-existing relationships between EQT and Quantum created impermissible entanglements between the two companies that could facilitate an exchange of confidential, competitively sensitive information, and thus facilitate coordination between the parties and other market participants.
The FTC Consent Order
There are three key terms of the consent order: (1) it eliminated a prospective interlocking directorate, (2) it required Quantum to sell all of the shares in EQT that it was to receive as consideration for the transaction, and (3) it required EQT and Quantum to terminate a pre-existing but unrelated joint venture. As discussed further below, the FTC staked out aggressive positions, which do not have clear precedential support and, thus, may not have held up in court if EQT and Quantum had challenged them.
Elimination of Prospective Interlocking Directorate
Post-acquisition, as the largest but minority shareholder (11% equity stake) in EQT, Quantum was to receive one seat on EQT's board. The FTC alleged that this board position would violate the Section 8 of the Clayton Act's prohibition on interlocking directorates2— which prohibits a "person" from simultaneously serving as an officer or director of two competing corporations—and required Quantum to give up the EQT board seat. Although the original intent was for Quantum's CEO to sit on EQT's board, the restriction was not limited to him or to Quantum employees; instead, the FTC required Quantum to relinquish its board appointment rights completely, even for potential independent board representatives (i.e., individuals not affiliated with Quantum).
Importantly, the FTC's complaint purports to extend the bounds of Section 8 in two ways:
- First, the FTC attempted to extend the "deputization" theory of Section 8 liability (e., where a firm appoints two different directors of its own firm to competing boards) to any individual that a firm appoints to a board even if unaffiliated with the firm. As the FTC explained, any such director would be considered an "agent of [the appointing firm] and under its control."3 While there is some case law support for the proposition that employees of an appointing firm are considered agents of the appointing firm for Section 8 purposes,4 there is no precedent that supports the FTC's proposition that any appointee—even an independent director who is not charged with representing the interests of the appointing firm—would likewise be considered an agent of the appointing firm.
- Second, the FTC alleged that Section 8 prohibits interlocks involving non-corporate entities such as limited partnerships (LPs) and limited liability companies (LLCs). The plain language of Section 8 states that the interlock must involve two "corporations," yet the interlock here involved a corporation (EQT) and a limited partnership (Quantum). Although this distinction between corporate and non-corporate entities may seem nitpicky, it is significant because no court has addressed the issue even though non-corporate entities emerged decades ago, other antitrust statutes have been updated to account for the proliferation of non-corporate entities5whereas Section 8 was not, and even the three sitting FTC Commissioners acknowledged in their statement supporting the settlement that "Section 8's specific prohibition of interlocks among competitor 'corporations' pre-dates the development of other commonly used corporate structures, such as limited liability companies."6
Quantum's Sale of its EQT Shares
As consideration for the deal, Quantum was to receive up to 55 million shares in EQT, which would have made Quantum the biggest EQT shareholder but resulted in only an 11% minority interest EQT.
The FTC claimed that the mechanism for coordination was the equity ownership itself (even after Quantum had abdicated its board seat in EQT). Specifically, the FTC alleged that this "shareholder position would provide Quantum with the ability to sway or influence EQT's competitive decision-making and to access EQT's competitively sensitive information."7 The FTC also claimed that "Quantum would have the opportunity to communicate directly with EQT and could discuss confidential business information or direct or otherwise influence EQT's competitive actions or strategies. Knowledge gained through its relationship with EQT could also influence Quantum's own competitive decisions or development of new businesses involved in the production and sale of natural gas."8 To resolve its concerns, the FTC required Quantum to sell its EQT shares by a date certain, hold its shares in a voting trust that would vote proportionally to all other EQT shareholders (until such time as its shares were sold), and not acquire additional EQT shares.
It bears repeating that Quantum's willingness to abandon its board seat in EQT (to address the interlock) did not resolve the FTC's concerns because the FTC's concerns stemmed from Quantum's minority ownership in EQT even though its ownership no longer provided a specific mechanism for information to be exchanged. Applying the FTC's logic, the FTC seems to be saying that minority investments, by themselves, provide opportunities for impermissible information exchange even where there is no interlock, board observer, or other mechanism to provide confidential information.
Termination of a Joint Venture Between EQT and Quantum
EQT and Quantum also had an existing joint venture called The Mineral Company (TMC), a collaboration that enabled the parties to purchase mineral rights in the Appalachian Basin for EQT's use with financial support from Quantum. The FTC alleged that EQT and Quantum used (and could use going forward) TMC as a vehicle to share competitively sensitive information about their mineral rights procurement and development plans, including prospects for mineral rights investments and future drilling plans. According to the FTC, TMC had the "purpose, tendency, and capacity" to facilitate coordination and posed an "incipient threat" that competitors could use the joint venture to exchange competitively sensitive information to harm competition for the purchase of mineral rights.9 As a result, the FTC required the parties to unwind the TMC joint venture and eliminate all non-compete agreements associated with the joint venture.
Importantly, the FTC's complaint does not explain how the EQT/Quantum transaction would exacerbate its concerns. In other words, the FTC is signaling that it will investigate pre-existing relationships that are unrelated to and unaffected by the transaction but did not articulate a framework or limiting principle for the business community to understand when these types of relationships may create antitrust risks.
The Broader Implications of EQT/Quantum on Future Deals
Traditionally, the antitrust agencies focused on examining horizontal (i.e., those involving competitors) and vertical (i.e., those involving buyers and sellers in the supply chain) transactions for their potential to harm competition. As we have seen, the current administration has taken a broader view by, for example, claiming competitive harms from conglomerate mergers (i.e., deals where there is no direct horizontal or vertical linkage between the merging firms) and transactions that may reduce the ability of workers to obtain competitive wages.
EQT/Quantum goes one step further and signals that the antitrust agencies will use the merger investigation process to assess whether the merging parties have any problematic entanglements with competitors, regardless of whether the entanglement results from the transaction or is pre-existing and regardless of whether the entanglement is between the merging parties or between one of the merging parties and another participant in the supply chain. Such entanglements may arise from minority holdings in competitors, board observers, joint ventures, or other competitor collaborations (such as benchmarking studies). Given the antitrust agencies' recent proposed changes to the Hart-Scott-Rodino (HSR) premerger notification rules, which seek information about "other types of interest holders that may exert influence" over companies, such as creditors, holders of non-voting securities such as preferred stock or options, or those with rights to nominate directors or board observers, the agencies almost certainly will scrutinize these relationships in the future (for more information about the proposed HSR rules, see our client alert here).
For its part, the Department of Justice, Antitrust Division (DOJ) also has taken an interest in competitor entanglements. Last year, DOJ cleared the Wayne Farms/Sanderson Farms chicken processing merger and only a few days later announced an $85 million settlement with the merging parties that resolved allegations that they conspired to suppress salaries for poultry plant workers by secretly sharing wage and benefit information in violation of the Sherman Act (for more information and analysis of this case, see our client alert here). DOJ alleged that the parties used the cover of a benchmarking exercise to share competitively sensitive information with each other directly and separately through a third-party consultant.
This newfound focus on competitor entanglements is important because the antitrust agencies can leverage these ancillary issues to hold up transactions and obtain concessions that they might not be able to obtain outside of the merger review context. Indeed, in both EQT/Quantum and Wayne Farms/Sanderson Farms, the antitrust agencies obtained highly favorable settlement terms (and created associated agency precedent) in exchange for allowing the underlying transaction to clear antitrust review. But parties to other transactions may not have this kind of flexibility. Parties may confront the uncomfortable position whether to abandon a transaction in the face of lengthy investigation or brace for the cost and burden of litigation to overcome concerns over entanglements, including entanglements unrelated to the transaction itself.
1 See Complaint, In the Matter of EQT Corp., FTC No. 2210212 (Aug. 16, 2023) ("Complaint").
2 "No person shall, at the same time, serve as a director or officer in any two corporations (other than banks, banking associations, and trust companies) that are (A) engaged in whole or in part in commerce; and (B) by virtue of their business and location of operation, competitors, so that the elimination of competition by agreement between them would constitute a violation of any of the antitrust laws." 15 U.S.C. § 19. The FTC also alleged that the interlock violated Section 5 of the FTC Act, which prohibits "unfair methods of competition." The FTC has interpreted Section 5 more broadly than other antitrust statutes, including the Clayton Act and the Sherman Act. See Fed. Trade Comm'n, Policy Statement Regarding the Scope of Unfair Methods of Competition, Under Section 5 of the FTC Act, Commission File No. P221202 (Nov. 10, 2022).
3 Complaint at ¶ 39.
4 See Reading Intern., Inc. v. Oaktree Capital Management LLC, 317 F. Supp. 2d 301, 331 (finding an interlock where a single firm appointed its President to one board and another individual, a principal in the firm, to another board).
5See, e.g., 15 U.S.C. § 18a(a) (HSR statute using the broader "person" rather than "corporation"); 16 C.F.R. § 801.1(f)(1)(ii) (HSR rules defining "non-corporate interest" and "unincorporated entity").
6 Fed. Trade Comm'n, Statement of Chair Lina M. Khan Joined by Commissioner Rebecca Kelly Slaughter and Commissioner Alvaro Bedoya, In the Matter of EQT Corp., FTC No. 2210212 (Aug. 16, 2023) (the Commissioners then go on to say that this decision "update[s] our application of the law to match the realities of how firms do business in the modern economy," which further suggests that they are embracing an expansive approach towards statutory interpretation that is inconsistent with the plain language of the statute).
7 Analysis of Agreement Containing Consent Order to Aid Public Comment, In the Matter of EQT Corp., FTC No. 2210212 (Aug. 16, 2023).
9 Complaint at ¶ 47.
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