The Celler-Kefauver Act

What Is the Celler-Kefauver Act?

The Celler-Kefauver Act was a law passed by the U.S. Congress in 1950 to prevent certain mergers and acquisitions (M&A) from creating monopolies or otherwise significantly reducing competition in the United States.

Occasionally referred to as the Anti-Merger Act, it served to strengthen existing antitrust laws and close loopholes present in the Clayton and Sherman Antitrust Act.

Understanding the Celler-Kefauver Act

Various statutes have been administered by governments over the years to help protect consumers from predatory business practices. Antitrust laws, as they are known, exist to ensure that fair competition exists in an open-market economy. Their goal is to prevent certain companies from joining forces if it is believed that such a move would reduce the options available to consumers, limiting supply, and potentially resulting in higher prices for goods and services.

The Celler-Kefauver Act marked an important step in stamping out greedy corporate behavior. Introduced shortly after World War II, this particular law built on others that came before it, seeking to close existing antitrust loopholes by making sure that all mergers across industries, and not just horizontal ones within the same sector, would be carefully scrutinized and policed.

Above all, the act targeted the following types of corporate tie-ups:

• Vertical Mergers: Two or more companies that provide different supply chain functions for a common good or service unite. Such mergers can cause an antitrust problem if a company buys its competitors’ suppliers. Doing so could enable the entity to effectively block rivals from accessing raw materials or other essentials.
• Conglomerate Mergers: Companies involved in different sectors or geographic areas merge together to expand their markets and product reach. When two giants combine into one entity, there is a risk that they will use their brand name and financial muscle to eliminate competition, and then, when there’s no one left, jack up prices to the detriment of consumers.

History of the Celler-Kefauver Act

One of the earliest antitrust laws passed by the U.S. Congress was the Sherman Antitrust Act. This legislation, rolled out in 1890, provided controls on certain M&A activity, but only in the case of buying outstanding stock. That, in other words, meant that antitrust rules could largely be circumvented by only purchasing the assets of the target corporation.

Recognizing the Sherman Act's vague language and many loopholes, the U.S. Congress responded in 1914 by amending it. The subsequent Clayton Antitrust Act sought to clarify many interpretation issues by adding specific examples of illegal actions by companies. However, it, too, contained flaws, including ambiguity surrounding price-discrimination, and a failure to address loopholes regarding asset acquisitions and acquisitions involving firms that weren’t direct competitors. 

Once those quandaries became clear several more amendments followed. First, the Robinson-Patman Act of 1936 came along, reinforcing laws against price discrimination practices. Then, in 1950, the Celler-Kefauver Act was passed to tackle the other glaring issues at hand.

The first significant case citing the Celler-Kefauver Act materialized in 1962 when the U.S. court blocked a merger between Brown Shoe Co. and Kinney Company Inc. Judges took note of the “the trend toward vertical integration in the shoe industry” and concluded that the proposed tie-up threatened to substantially eliminate competition in that market.

Special Considerations

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.