The FTC Challenge: The FTC pursued an administrative challenge against Tronox's proposed acquisition of Cristal without also seeking a preliminary injunction. Following an HSR investigation, the FTC normally seeks a preliminary injunction in federal district court, and the future of the merger hinges on the outcome of the federal court action.
The Tactics: The FTC was able to depart from its standard procedure because the Tronox–Cristal deal cannot close until a European Commission deadline has passed. This allows the FTC the option of further delaying the transaction by filing for a preliminary injunction after the EC deadline.
In an unusual move, the Federal Trade Commission ("FTC") pursued only an administrative challenge against the merger of Tronox Corporation ("Tronox") in its acquisition of Cristal, a Saudi Arabia-based company that manufactures titanium dioxide ("TiO2"), without simultaneously seeking a federal preliminary injunction. In its equally unusual response, Tronox first sued the FTC in Mississippi federal district court, before extending its merger deadline by almost a year and withdrawing the complaint. Tronox's actions reflect the procedural perils that parties can face during merger reviews in multiple jurisdictions.
In February 2017, Tronox announced its acquisition of Cristal to create the world's largest producer of TiO2. Following an extended investigation under the Hart-Scott-Rodino ("HSR") Act, the FTC filed an administrative complaint in December 2017, alleging the $2.4 billion deal would harm competition for the supply of chloride-based TiO2. Because the transaction also faced an ongoing (and suspensory) parallel review at the European Commission ("EC"), the FTC did not follow its normal process of seeking a federal preliminary injunction simultaneously with the filing of its administrative complaint. In an effort to preserve the original timing for the transaction, Tronox initially tried to force the FTC into federal court through a declaratory judgment action. When that did not provide relief, Tronox ultimately had to extend the deadline of its merger agreement with Cristal by nearly a full year to 2019.
Curtailing 13(b) Deference. Putting aside the substantive arguments, this case is noteworthy—not because the FTC opposed the merger, but because the FTC departed from its usual practice in merger proceedings. The FTC typically deploys two simultaneous complaints at the conclusion of the HSR investigation: one for a trial-type proceeding before one of the FTC's own administrative law judges, and one filed in federal district court seeking a preliminary injunction under Section 13(b) of the FTC Act to prevent the transaction from closing pending the administrative trial.
As a practical matter, the federal court action usually is determinative. If the FTC wins a preliminary injunction from the district court, parties typically abandon their transaction, because they cannot keep the merger in suspense pending the outcome of an administrative trial, which can last more than a year. If the FTC loses the preliminary injunction, the parties are free to close (as far as U.S. law is concerned). The FTC then typically will dismiss the administrative proceeding, recognizing that an ultimate victory may be both unlikely and pyrrhic if it comes more than a year after the parties have merged. The administrative complaint acts as a placeholder.
But not so here. The FTC is treating the administrative process as a trial on the merits, with no prospect for a rapid resolution. Why? The EC's decision deadline is not until June 2018. And Tronox cannot close the transaction while the EU investigation is pending. In short, the FTC has not yet filed a federal court action seeking a preliminary injunction and might delay doing so before the EU deadline passes, meaning the parties would then face even further delay. This tactic is a complete reversal from other merger cases, where all involved agree to stay the administrative process while they focus on the real action over the preliminary injunction in federal court.
The FTC's new procedural course came as a surprise to Tronox. After the FTC filed an administrative complaint, Tronox took the unusual step of filing a request for injunctive relief and declaratory relief in the U.S. District Court for the Northern District of Mississippi. At the site of Tronox's biggest TiO2 plant, Tronox asked the court to compel agency action and force the FTC to launch a preliminary injunction, enter into a declaratory judgment, or, in the alternative, issue a judicial declaration to conclude that the FTC could not prevail under the FTC Act, and thus has no right to enjoin the transaction.
Tronox's judicial Hail Mary stemmed from a tight merger deadline. The original merger agreement end date was May 21, 2018. Tronox complained that the FTC's usual practice of seeking a simultaneous preliminary injunction would have given Tronox "ample time to litigate the merits of this case before a federal judge." Instead, by delaying its federal court filing, the FTC could have waited until Tronox finished the EU process and only then filed in federal court to stop the closing; this would have meant the transaction could not possibly close before the original end date.
The declaratory judgment effort was short-lived—Tronox recently extended the deadline into March 2019 and then withdrew its declaratory judgment action. Now, the extension gives the parties more than a year to resolve the case. Future litigants should heed Tronox's withdrawal; courts mostly take a dim view of parties using a declaratory judgment action as a tactical device, and the court here made no ruling.
Procedural Quagmire. Timing still is crucial. Tronox believes that the FTC is still attempting to block or delay the transaction without having to prove its case on the merits in court. Tronox may now be on track to get a resolution in the European Union by the end of June 2018, and the FTC administrative process does not prevent the parties from closing, but the FTC posture means that Tronox may risk closing the deal while the administrative process is still pending. More likely, the FTC will seek an injunction only when the EU process is concluded. Whether this results in an effective trial on the merits in federal court or an actual trial on the merits through the FTC's administrative litigation process, Tronox is likely to face several more months of delay before it can get any resolution. Thus, Tronox believes the FTC is attempting to "run out the clock" on the merger without ever having to carry its burden of proof in court.
A New Consideration in Multijurisdictional Reviews. Many transactions need to navigate the complexity of multijurisdictional reviews. Tronox expected the FTC would pursue a federal court action at the conclusion of the HSR review and concurrently with the EU review. Instead, Tronox faces the prospect of sequential review of its transaction by the European Union followed by litigation in the United States. Tronox did not have enough time to resolve both with the time it originally negotiated and found itself forced to extend the end date by nearly another year. Parties with transactions subject to multijurisdictional review will need to develop timing and strategies around the possibility that the FTC (or the DOJ) will not commence a preliminary injunction action until other suspensory reviews are finished.
SMARTER Act Implications. Whether Tronox prevails in federal district court or administrative proceedings, its case may bring renewed attention to the differences in process between the FTC and DOJ. Currently, the FTC can commence administrative litigation to keep the threat of enforcement action in a way that the DOJ cannot. After the HSR investigation, the DOJ can challenge transactions in federal court under the Clayton Act (15 U.S.C. § 25) only on the grounds that the transaction is likely to "substantially lessen competition." Without an administrative trial pending, the DOJ's review may be substantially shorter than the FTC's review.
These differences in timing, and potential outcome, between the antitrust agencies already have been a source of concern for Congress. In April 2017, the House Judiciary Committee voted in favor of the Standard Merger and Acquisition Reviews Through Equal Rules ("SMARTER") Act for the third straight legislative session. The SMARTER Act would require the FTC to litigate mergers in federal court, instead of relying on its usual administrative proceedings, and harmonize the standards between the DOJ and FTC to obtain a preliminary injunction. Now the U.S. Senate has taken a renewed interest in merging the standards. During confirmation hearings in February 2018, Senator Mike Lee (R-Utah) asked FTC commissioner nominees whether the DOJ and FTC should have different preliminary injunction standards. Joe Simons, up for FTC chairman, agreed an agency should get only "one bite at the apple. And if the agency loses [in federal court], they shouldn't be going to administrative trial."
With the support of a GOP-led Congress, and at least one commissioner's apparent willingness to harmonize the standard, the SMARTER Act may very well pass. The FTC will then lose the benefit of using administrative trials to challenge a transaction and be forced to adhere to the DOJ's higher evidentiary standard in federal court. Tronox's case highlights these differences between the FTC and the DOJ, and may renew interest and attention on harmonizing those differences.
The FTC administrative complaint in Tronox can be found on its website.
Three Key Takeaways
- Parties with transactions subject to multijurisdictional review will need to develop timing and strategies around the possibility that the FTC (or the DOJ) will not commence a preliminary injunction action until other suspensory reviews are finished.
- While DOJ's only option for blocking a merger is to challenge the transaction in federal court, the FTC also has the option of commencing administrative litigation. This can lead to a substantially short period of review for the DOJ than the FTC.
- If the proposed SMARTER Act passes, the FTC will also be limited to litigating mergers in federal court. The standards for obtaining a preliminary injunction may also be harmonized between the DOJ and FTC.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.