Mergers and Acquisitions

Deal environment

With ample capital available to deploy and a low interest rate environment, we expect private equity and other deal makers to continue to do deals with the same fervor we’ve seen in recent years, though it is critically important that the pandemic is brought under control, and election uncertainty may result in some near-term headwinds. The details of these deals may look a little different as adjustments are made to take into account tax and other changes, as well as particular industry developments, but the deals will continue.

Antitrust

The overall level of merger enforcement was as vigorous in the Trump administration as it was in the Obama administration, and while we do not expect a substantial increase under President Biden, different priorities will likely expand the types of issues examined in merger reviews. Merging parties will need to update their risk evaluation and advocacy strategy accordingly. Among the likely changes will be an increased scrutiny of vertical and diagonal mergers, acquisitions of nascent competitors, expansion by dominant firms into adjacent industries, acquisitions of non-controlling interests, and the impact of transactions on employment, wages and small suppliers.

Taxes

We expect President Biden to look to increase the corporate tax rate (and add a minimum tax on book income), the tax rate on offshore earnings and the top individual income tax rate. He will also seek to increase the tax rate on carried interest, at least for high-income taxpayers. While an increase in tax friction may lead some potential sellers to stay on the sidelines, tax impacts are often only one of many factors motivating a transaction. Likewise, although net returns may suffer relative to previous tax environments, it’s likely to change expectations rather than change business models. Moreover, it doesn’t appear there will be the kind of reduction in the deductibility of interest expense that would fundamentally change the leverage buyout model.

Stimulus

President Biden’s spending priorities are focused on infrastructure, the green economy and ensuring U.S. manufacturing and advanced technology capability, with these priorities often overlapping in various proposals (e.g., US$400 billion to “Buy American,” US$300 billion for investment in research and development in “breakthrough technology” such as 5G, artificial intelligence, advanced materials, biotechnology and clean vehicles, and US$2 trillion in green initiatives). Businesses involved in designing, building and supplying materials for construction projects – from roads, utilities and bridges to factories and schools – are likely to see a boost. The same is true for businesses involved in clean energy technology, like batteries, electric cars and trains, and carbon sequestration. However, without Democratic control of Congress, stimulus efforts are likely to be more modest.

Small business

Biden will likely target spending initiatives for medium and small businesses and minority- and woman-owned businesses. Plans include the establishment of a government-sponsored credit facility to supply capital, especially to smaller manufacturers. We will be watching to see whether private equity-backed small- and medium-sized business will be able to participate in these programs, without the uncertainty that hampered access to the Paycheck Protection Program.

Regulatory impact

We expect to see regulatory changes geared toward making it easier for workers to organize a union and bargain collectively with their employers; making it more difficult to classify workers as independent contractors rather than employees; stricter limits on emissions from oil and gas and other activities; and stricter energy efficiency requirements for buildings and appliances as well as banning new oil and gas permits on public lands and waters. The Biden administration may also seek to require public companies to disclose climate risks and the greenhouse gas emissions in their operations and supply chains. On some of these issues, President Biden may have room to act through executive order, but regulatory efforts are likely to be limited without Democratic control of Congress.

Cross border

Despite the change in administration, we expect continued focus on the national security implications of trade and foreign investment, which is likely to continue to dampen cross-border M&A activity, particularly with respect to China and China-related investment.

Antitrust

Finance and real estate

We expect the new administration to take a closer look at how different types of owners and financing impact a company’s competitive incentives. This includes scrutiny of private equity ownership, levels of corporate debt, and minority interests held by institutional investors across multiple competitors in the same sector.

Intellectual property

The Antitrust Division at the DOJ will likely be a less vigorous defender of patent rights and more likely to align itself with the FTC in scrutinizing conduct of patent holders in enforcing, licensing and obtaining patent rights, especially standard-essential patents.

Trade and Regulation

China trade war/tariffs

No one expects Biden to be “soft” on China, or for a “U-turn” in any China policies. Instead, what we may see is an effort to reign in China’s commercial and military advancements that are perceived as a national security threat in a more multilateral way, looking for allied support. The China tariffs will be revisited, but it is too soon to predict the outcome.

Sanctions

We expect economic sanctions to remain a primary tool of U.S. foreign policy under a Biden administration. On Iran, Biden will likely reassess sanctions and consider whether there is a path towards reentering the Joint Comprehensive Plan of Action (the so-called “Iran nuclear deal”). We expect Biden to take a tougher stance against Russia, while continuing to use sanctions against China and Hong Kong to combat alleged human rights abuses and undermining Hong Kong democracy/autonomy. On Cuba, we expect Biden to return to the more open relationship fostered under former President Obama.

Export controls

Biden is expected to take a hard stance against China. He may reinvigorate some of the multilateral regimes that coordinated global controls against products and technology that can be used by terrorists. The Biden administration will almost certainly revisit ongoing initiatives such as artificial intelligence, semiconductor technology and 5G telecommunications.

Enforcement

We anticipate that China will remain a target of enforcement and regulatory efforts under the new administration. A Biden presidency may well prove to be no less aggressive in prosecuting and restricting Chinese interests than the Trump administration. Biden has pledged to “get tough on China” and has described the nation as “a serious competitor.” As the current China Initiative has involved hundreds, if not thousands, of career government officials, we expect this work to continue regardless of who occupies the White House.

CFIUS

Robust U.S. government reviews of foreign direct investment for threats to national security will continue. While the Committee on Foreign Investment in the U.S. (CFIUS) may continue to act aggressively with respect to Chinese investments, we expect its reviews to be less public than under the Trump administration. While Biden may seek opportunities to reduce tensions in U.S.-China relations, we do not anticipate abrupt changes.

Join members of Dechert's International Trade practice and Alexandra Wrage, President of TRACE, a market leader in third-party risk management solutions, on November 18 for a discussion of potential trade policy outcomes following the U.S. elections and how to prepare your business for changes in anticorruption, American competitiveness, sanctions policy and foreign investment.

Litigation

Life Sciences

A Biden-Harris administration, focused on more accessible, affordable and equitable health care, may provide greater opportunities for the OTC and supplement industries. Increased regulatory oversight and litigation risk may accompany those increased opportunities. Pay attention to underserved, minority and otherwise vulnerable populations, as well as broader public health effects.

Product Liability and Mass Torts

Federal court reform

Calls for federal legislation to add justices to the U.S. Supreme Court to balance the anticipated 6-3 conservative majority have garnered a lot of media attention. Biden has neither endorsed nor repudiated this approach. In any event, this approach is likely infeasible if the Senate remains under Republican control. Biden has repeatedly stated that his administration plans to establish a bipartisan commission to study and recommend reforms to the federal court system within 180 days. Though the details of this effort are not defined, Biden has signaled openness to considering measures intended to reduce partisanship and prevent either side from securing a permanent advantage. Most of these reforms would likewise require Congress to pass new legislation.

Judicial nominations

A Biden administration is likely to try to balance the conservative shift in the federal judiciary overall by appointing center-left judges. As a former chairman of the Senate Judiciary Committee, Biden has significant experience in the judicial confirmation process. His campaign has indicated a plan to nominate judges who are viewed as committed to upholding the rule of law and civil rights precedents. His nominees are also likely to be more receptive to positions traditionally advocated by the plaintiffs’ bar on issues affecting tort law, federal preemption and class actions. 

Pharma regulation

FDA oversight is likely to expand, with Biden calling on the agency to take more action to address new risk and safety information that arises with previously approved medications. Biden is also expected to expand efforts to limit and penalize prescription drug marketing and promotional activities, including by supporting legislation to end tax deductions for pharmaceutical marketing spend and ban certain payments to physicians.

Pharma enforcement and litigation

A Biden DOJ is likely to increase False Claims Act and Anti-Kickback Statute enforcement activity against pharmaceutical companies based on claims of off-label or improper marketing. This is likely to spur, in turn, increased litigation by whistleblowers, state and local governments, and private plaintiffs asserting similar claims.

Environmental tort litigation

A Biden administration is expected to be more aggressive in the enforcement of environmental laws. This includes setting safe-level thresholds for various emerging contaminants, determining when and how to remediate contaminated sites, and determining access for petroleum and petrochemical companies in relation to potential environmental impacts. This is likely to have downstream effects in increased environmental tort litigation by private plaintiffs. In addition, Biden’s emphasis on climate change issues and his promise to rejoin the Paris Climate Agreement may lend additional force to a growing wave of litigation by states and municipalities, in partnership with private plaintiffs’ attorneys, seeking to hold fossil fuel companies liable for alleged climate change impacts.

Healthcare

Bidencare

The Biden plan includes several initiatives that could impact the healthcare industry. These include bringing Medicaid expansion to additional states, providing for Medicare to negotiate lower prices with drug companies and providing access to such pricing to private plans participating in the individual market-place, imposing controls on drug price increases above the general inflation rate, allowing consumers to import prescription drugs from other countries and ending the tax deduction for drug advertising expenses.

Antitrust

Healthcare will continue to be a key enforcement priority for the agencies, covering M&A, licensing practices, price-fixing, exclusionary conduct and pricing. When reviewing healthcare mergers, a Democrat-controlled Federal Trade Commission (which may not occur until 2023, see here) is likely to investigate effects on innovation even when transactions do not feature direct overlaps, or when such overlaps are remedied through divestitures. It may also seek to directly regulate competition through the FTC’s rulemaking authority instead of relying solely on enforcement actions.

Drug pricing

Biden is expected to address prescription drug pricing and availability in a number of ways, including permitting Medicare to negotiate lower drug prices from manufacturers and establishing an independent review board to assess the value and recommend prices for new specialized drugs. He has also proposed allowing consumers to purchase prescription drugs from other countries and supports legislative efforts to accelerate the development of generic medications.

Technology

Cybersecurity

We expect more robust federal enforcement under a Biden administration than we’ve seen the past four years. Under Trump, the FTC has been focused more on cases where there was actual, tangible consumer harm. The next four years should see a more expansive view of potential cases, focusing to a greater extent on companies’ adherence to their own policies and overall privacy programs. In addition, there almost certainly will be a more robust and broader program to combat nation-state threat actors against all nations who threaten American companies and government interests.

Antitrust

Scrutiny of “Big Tech” and other e-commerce intermediaries will continue under a Biden administration, but the focus will shift from censorship issues to unfair dealing with rivals that rely on the intermediary’s platform, self-preferencing, predatory pricing, monopoly leveraging, refusals to deal and data portability. Challenges to such conduct can set precedents that have spill-over effects for conduct by firms with large shares in industries other than “Big Tech.”

Other

Taxes

Biden has said he will increase taxes on corporations and individuals earning US$400,000 or more. The Biden tax plan lays out many tax reforms, but the highlights for businesses include raising corporate tax rates to 28%, imposing a new alternative minimum tax on corporations with “book” profits of US$100 million or higher, raising capital gains rates to 39.6% for individuals earning more than US$1 million, raising individual rates to the rates in effect prior to the 2017 Tax Cuts and Jobs Act, and imposing a 12.4% social security tax on wages and self-employment income over US$400,000 (which is not indexed to inflation).

Labor

It would not be surprising if a Biden administration sought to reverse, or at least modify, the recent ERISA rulemaking relating to the definition of fiduciary “investment advice” (see our July 2020 OnPoint), and the recent ERISA regulations relating to “ESG” and other matters under the general prudence rules (see our May 2020 OnPoint) and proxy rules (see our September 2020 OnPoint). In addition, we anticipate the new Biden administration will seek to reverse, or at least modify, the recent Department of Labor regulation on worker classification under the Fair Labor Standards Act (see our September OnPoint). It is possible that an incoming Democratic administration would try to swing the pendulum back and take a less restrictive view of whether non-pecuniary factors may be taken into account in making investment decisions. However, the DOL's approach in finalizing the prudence regulation, and returning it more to the framework that has traditionally been used under ERISA, may make a future administration less interested in trying to reverse the regulation. It is presently unclear how a future administration might approach the pending proxy regulation, which has not yet been finalized.

Commercial real estate debt market

For the latest insight on what’s happening in the commercial real estate debt market (including the impact of the new administration), click here for Dechert’s Crunched Credit team commentary.

Private client

Biden has proposed reducing the current US$11.58 million estate, gift and GST tax exemptions to as low as US$3.5 million per person for estates and US$1 million per person for lifetime gifts. His plan would also increase the tax rate on transfers in excess of these exemption amounts from 40% to 45%. These would bring the exemptions and tax rates back to 2009 levels. In addition, under current law, beneficiaries inheriting assets from a decedent through an estate or from certain trusts receive “stepped-up” basis to date of death FMV in those assets, effectively eliminating all capital gains on appreciation prior to death. Biden’s plan would eliminate this basis “step-up.” It is unclear from his proposal whether unrealized capital gains would be taxed at death automatically (through a deemed sale), or if inherited property would simply retain the same basis that it had in the hands of the decedent. Finally, while not specifically mentioned in Biden’s proposals, there has been discussion in recent years of limiting the use of common estate planning techniques such as GRATs and grantor trusts. However, other than a few modest changes that could be made through regulation, these proposals by Biden would all require legislative action by Congress. Accordingly, the projected makeup of Congress makes it less likely for any of these Biden proposals to be adopted and become law over the next two years.

For more information, please contact the Dechert lawyer with whom you regularly work. Dechert will continue to provide more detailed updates over the coming months as we approach the start of the Biden presidency in mid-January 2021.