What is the Celler-Kefauver Act?
The Celler-Kefauver Act is one of several U.S. laws designed to prevent certain mergers and acquisitions (M&A) from creating monopolies or otherwise significantly reducing competition in the United States. It was passed in 1950 to strengthen existing antitrust laws and close loopholes present in the Clayton Act and the Sherman Antitrust Act.
Congress passed the Celler-Kefauver Act in 1950 to close loopholes that allowed monopolistic vertical or conglomerate mergers.
The Act added regulatory and enforcement language to the Sherman and Clayton Antitrust Acts.
It remains one of American’s strongest antitrust laws, arming the government with potent legal sway to prevent M&A that creates monopolies or otherwise significantly reduces competition.
History of the Celler-Kefauver Act
One of the earliest antitrust laws to be passed by the US Congress was the Sherman Antitrust Act of 1890. The Sherman Act marked one of the initial actions to regulate competition among US enterprises. It was introduced at a time when the US economy was growing rapidly, which led to the growth of both new and existing companies.
Large companies took advantage of the economic boom to acquire and merge with their smaller competitors as a way of dominating specific industries and geographical locations. The public argued that the conglomerates amassed too much power, and they called for increased regulation by the government to allow a level playing field for all enterprises. US legislators responded by passing the Sherman Antitrust Act.
Although the Sherman Act marked the beginning of trade regulation, it contained too many loopholes that allowed businesses to continue with their anti-competitive business practices. The law was amended in 1914 with the enactment of the Clayton Antitrust Act.
The Clayton Act attempted to clarify the vague language and inconsistencies in the preceding act by broadening the scope of business practices that were outlawed.
Some of the practices that the Clayton Act focused on included price discrimination, monopolization, and mergers and acquisitions that reduced competition. The US Congress passed the Celler-Kefauver Act in 1950 to strengthen the power of the Clayton Act to regulate mergers and acquisitions that lessen competition. Specifically, the Celler-Kefauver Act prevents vertical and conglomerate mergers that can reduce competition.
What does the Celler-Kefauver Act Do?
A 1950 refinement of the previous antitrust legislation that dealt mainly with mergers. The Act addresses mergers in which companies buy suppliers, including the suppliers of competitors, to guarantee production. This can be an anti-competitive practice if it unduly cuts off supply to competitors. The law intends to regulate mergers that would lead to the creation of a monopoly or otherwise significantly reduce competition.
The Clayton Act already contained a text that addressed horizontal mergers, but the Celler-Kefauver Law added vertical mergers and conglomerate mergers to the growing list of possible antitrust violations. It is important to note that vertical and conglomerate mergers are not illegal under the Celler-Kefauver Actt unless they significantly reduce competition.
Like other antitrust laws, actions that reduce competition are not always easy to classify. The benefit of a vertical merger is that it streamlines production and can stabilize supply. So, as long as there are other supplies in the market that allow other companies to access raw materials, this type of merger is not prohibited.
The old antitrust legislation established controls over certain mergers and acquisitions, but only in the case of the purchase of shares in circulation. Thus, antitrust rules could be largely circumvented by buying only the assets of the target company. The Celler-Kefauver Act prevents this provisional measure, thus reinforcing the antitrust rules in the United States.
Impact of the Celler-Kefauver Act
The Celler-Kefauver Act greatly strengthened provisions of the Clayton Act by prohibiting some of the practices that were left loose in the act. For example, the Clayton Act mainly focused on horizontal mergers, where companies operating in the industry merge to form a single entity. This gives the consolidating companies greater synergies and market share.
The act did not prevent companies from merging vertically along the different stages of the supply chain, leaving space for the act to be abused by unscrupulous businessmen. The Celler-Kefauver Act was enacted to address this loophole by outlawing vertical and conglomerate mergers that were planned to reduce competition.
When public companies are planning a vertical merger or acquisition, they must inform the Department of Justice and the Federal Trade Commission. The government agencies reserve the right to reject or approve such a transaction, depending on its findings.
If the government finds that such a merger is intended to prevent fair access to competitors offering similar products and create barriers to entry, the merger will not be approved. However, if the government finds that an intended vertical merger will not limit access for other companies selling similar products, the merger will be approved.
Example of the Celler-Kefauver Act
An example of a vertical merger that could come under regulatory scrutiny might include a vendor company merging with a customer company. The Celler-Kefauver Act may be invoked on the grounds that the government thinks the transaction creates entry barriers and or prevents potential consumers from fair access to other companies with similar products.
Meanwhile, to challenge a conglomerate merger, the act makes the case that a company is using its success, resources, and money from one market to create a monopoly over another market.
As history has shown, not all vertical and conglomerate mergers were thwarted by the Celler-Kefauver Act. To prevent such transactions from going ahead, it must be proved that the combination of two companies would significantly reduce competition. Even if it appears obvious that this would be the case, a handful of vertical and conglomerate mergers still manage to get green-lighted anyway.
Public companies trading on the stock market are required to inform the Department of Justice (DoJ) and the Federal Trade Commission (FTC) if they plan to execute a merger that falls under one of these two categories. These government agencies then have the power to decide whether to stop a deal from happening.
Sometimes, the DoJ and FTC can be overruled by the courts, though. Judges might disagree that a merger violates the Celler-Kefauver Act and give it permission to go through—as was the case with General Dynamics Corp.’s (GD) acquisition of United Electric in 1974.