The Federal Trade Commission (FTC) recently announced that concerns raised by its investigation of a proposed transaction led a failing rural hospital to abandon that transaction and find an alternative buyer. The announcement highlights the FTC’s willingness to scrutinize health care transactions involving failing firms and underscores the importance of conducting an adequate “shop” process when asserting a failing-firm defense.
According to the announcement, the FTC’s investigation led to competitive concerns about OhioHealth’s proposed acquisition of Fairfield Medical Center in southeastern Ohio. The FTC also raised concerns about the thoroughness of Fairfield’s search for potential buyers of its struggling hospital system.
Consequently, the FTC “encouraged” Fairfield to seek alternative buyers through a “robust sales process.” That process led to multiple interested buyers, the abandonment of the sale to OhioHealth, and a sale to Adena Health, which the FTC said did not raise competitive concerns.
FTC Enforcement Approach
The FTC emphasized the broader enforcement approach of its action, including its commitment to antitrust enforcement in health care and holding parties to a high bar for establishing a failing-firm defense.
In its press release touting the result, the FTC said that it “remains vigilant in preserving healthcare competition, especially when reviewing deals involving hospitals that serve rural communities.”
The agency also reminded firms making a failing-firm argument that the “standard is demanding, and if you have not searched broadly for a buyer, we will work expeditiously with firms to investigate whether there is a better buyer and, if the Commission deems it necessary, go to court to block a bad deal.”
A key element of the failing-firm defense under the FTC’s Merger Guidelines and case law is that the seller must have conducted an adequate, good-faith search for buyers and no alternative buyer exists that raises fewer competitive concerns.
What the FTC Looks for in a Buyer Search
In an accompanying statement joined by Commissioner Mark Meador, FTC Chair Andrew Ferguson explained that he closely evaluates the process that financially distressed firms undertake to identify potential buyers as well as evidence that good-faith efforts to find a reasonable alternative offer were unsuccessful.
In particular, Chair Ferguson wrote that FTC staff looks for the following:
- Whether the search sought interest from a “full set of potential buyers.”
- Whether potential buyers had sufficient time to evaluate a potential transaction.
- Whether potential buyers received sufficient and equal access to information needed to assess a potential transaction.
- Whether the seller engaged with prospective buyers in good faith.
- Whether the seller “appropriately considered” offers from buyers that did not raise competitive concerns.
Ferguson recommended that a financially distressed seller “document its shop process carefully” and warned that the FTC may insist that a failing firm re-shop itself if the original search was inadequate. He emphasized that “financial distress is not a blank check” for mergers that would substantially reduce competition.
Practical Takeaways
The FTC’s announcement is another reminder that failing-firm arguments can be difficult to sustain before the antitrust agencies, that the agencies closely scrutinize the shop process, in addition to the target’s financial condition, and may push sellers to conduct another search for alternative buyers or risk enforcement action.
Practical steps sellers can take to strengthen a failing-firm defense include:
- Identify and contact a full set of potential buyers, particularly those that raise fewer competitive concerns or none at all.
- Consider engaging a consultant or banker to assist in conducting a robust and defensible search for a buyer.
- Thoughtfully document the search, including the prospective buyers contacted, their participation and responses, the search timeline, information made available, and reasons particular buyers declined to bid.
- Ensure potential buyers receive fair and equal access to diligence materials and seller personnel and adequate time to evaluate a bid.
- Assess antitrust risk associated with each potential buyer before granting exclusivity or agreeing to a transaction.
- Prioritize selecting buyers that present less competitive risk rather than focusing on the highest dollar bid.
- Prepare for agency questions about the target’s financial condition and why there is no alternative buyer that raises fewer competitive concerns.
If you have any questions, or would like additional information, please contact one of the attorneys on our Antitrust team.
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