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Antitrust Acts

Laws that prohibit businesses from engaging in anticompetitive practices

What are Antitrust Acts?

Antitrust acts are laws that prohibit businesses from engaging in certain practices that are deemed anticompetitive and that restrain trade. Some of the anticompetitive practices may include price discrimination, price fixing, market segmentation, hostile takeovers, etc. Engaging in such practices benefits only the large companies while disadvantaging the small enterprises and consumers who depend on the products offered in the market.

 

 Antitrust Acts

 

Antitrust laws apply to all industries such as transportation, manufacturing, technology, service, distribution, etc. The United States Congress has passed various antitrust laws since the 1890s. The laws aim to promote fair competition, protect consumers and small businesses, and prevent anti-competitive business practices.

 

Popular Antitrust Acts in the United States

Various antitrust statutes have been formulated and passed by the US Congress in a bid to protect consumers and small businesses from anticompetitive business practices. Small businesses form the majority of enterprises in the United States. They get affected the most when large companies are allowed to continue with their predatory business practices. Over the years, antitrust laws have continually evolved to keep up with market disruptions and guard against would-be monopolies. Some of these antitrust laws include:

 

1. Sherman Antitrust Act

The Sherman Antitrust Act is the oldest legislation to curtail the powers of monopolies and cartels. The law was proposed in 1890 by Senator John Sherman of Ohio, who was an expert in trade regulation. The law was aimed at addressing the issue of interstate commerce by regulating trusts that concentrated power in the hands of a few entities.

The bill was proposed during the “Gilded Age” when the United States experienced rapid economic growth, which gave rise to monopolies in key industries. For example, companies such as Standard Oil were blamed for monopolizing the energy industry and pushing out small competitors.

The Sherman Act comprises three sections. Section One of the act outlaws anticompetitive practices that restrain trade. Some of these practices include agreements to fix prices, combinations to form conglomerates, agreement to exclude other competitors from certain segments of the market, etc.

The second section of the Sherman Antitrust Act outlaws monopolization or attempts to monopolize, and it regulates mergers and acquisitions that concentrate too much power in the hands of a few entities. Companies must get approval from the Federal Trade Commission and Department of Justice before completing a mergers and acquisition transaction. The last section of the Sherman Act extends the provisions in the first and second sections to the District of Columbia and US Territories.

 

2. Clayton Antitrust Act

The Clayton Antitrust Act was enacted as an improvement of the Sherman Act of 1890. American lawmaker Henry De Lamar Clayton of Alabama proposed the bill. He sought to expand the list of outlawed anticompetitive practices to allow a level playing field for all businesses. The bill was passed in June 1914 and signed into law in October 1914 by President Woodrow Wilson.

Some of the anticompetitive practices that the Clayton Antitrust Act banned include price discrimination, exclusive sales contracts, anti-competitive mergers, and local price cutting. Unlike the Sherman Act, the Clayton Act made activities of trade unions legal. It meant that practices such as picketing, boycotts, agricultural strikes, and peaceful demonstration would not be considered anticompetitive in a court of law. The legislation comprises a total of 26 sections, with some sections being more popular than others.

 

3. Hart-Scott-Rodino Act

The Hart-Scott-Rodino Act, also known as the HSR Act, was enacted into law in 1976 during the tenure of President Gerald Ford. The HSR Act requires companies to file a pre-merger notification report with the Federal Trade Commission (FTC) and the Department of Justice (DOJ) before completing a mergers and acquisitions transaction.

The report notifies the FTC and the DOJ of their intention to merge so that the agencies can review the transaction and deliver a verdict. The two federal institutions review the transaction with the goal of determining if the transaction breaks any of the existing antitrust laws. The two offices can approve or reject the transaction depending on the findings of their review. If the regulators identify an anti-competitive issue with the merger, they may seek more information from the entities involved, or seek a court injunction to stop the merger process.

 

4. Celler-Kefauver Act

The Celler-Kefauver Act was enacted in 1950 as an improvement of the Clayton Act of 1914. It was introduced to prevent mergers that were carried out with the goal of reducing competition among US enterprises. The Clayton Act specifically outlawed horizontal mergers that reduced competition or that took place to create a monopoly. However, the law did not specifically bar vertical mergers. As a result, large companies manipulated the loophole to acquire their suppliers and other companies along the supply chain.

The Celler-Kefauver Act targeted vertical mergers, as well as conglomerate mergers that significantly reduced competition, and thereby disadvantaging small enterprises in the US. The act gave FTC and the DOJ the authority to review these transactions to decide if they are intended to limit competition.

 

5. Williams Act

The Williams Act of 1968 was introduced by Senator Harrison Williams of New Jersey, and it targeted mergers and acquisitions using cash tender offers. At the time, there was an increase in the number of corporate raiders carrying out hostile takeovers. The corporate raiders were using cash tender offers to force stockholders to sell their shareholding in the target company.

Cash tender offers propose to acquire the shares of stock from the stockholders of the target company for cash. The offers were given on short timelines, which threatened to destroy the value of stocks held by stockholders by forcing them to sell their shareholding on short notice. The Williams Act required acquirers to provide important information such as the source of funds and terms of the tender offer to the Securities Exchange Commission and the stockholders of the target entity.

 

Additional Resources

CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

  • Cornering the Market
  • M&A Process
  • Oligopoly
  • Price Fixing

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