Mergers, Acquisitions and Divestitures

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    Late-Night Negotiating Frenzy Left First Republic in JPMorgan’s Control

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    The resolution of First Republic Bank came after a frantic night of deal making by government officials and executives at the country’s biggest bank.Lawmakers and regulators have spent years erecting laws and rules meant to limit the power and size of the largest U.S. banks. But those efforts were cast aside in a frantic late-night effort by government officials to contain a banking crisis by seizing and selling First Republic Bank to the country’s biggest bank, JPMorgan Chase.At about 1 a.m. Monday, hours after the Federal Deposit Insurance Corporation had been expected to announce a buyer for the troubled regional lender, government officials informed JPMorgan executives that they had won the right to take over First Republic and the accounts of its well-heeled customers, most of them in wealthy coastal cities and suburbs.The F.D.I.C.’s decision appears, for now, to have quelled nearly two months of simmering turmoil in the banking sector that followed the sudden collapse of Silicon Valley Bank and Signature Bank in early March. “This part of the crisis is over,” Jamie Dimon, JPMorgan’s chief executive, told analysts on Monday in a conference call to discuss the acquisition.For Mr. Dimon, it was a reprise of his role in the 2008 financial crisis when JPMorgan acquired Bear Stearns and Washington Mutual at the behest of federal regulators.But the resolution of First Republic has also brought to the fore long-running debates about whether some banks have become too big too fail partly because regulators have allowed or even encouraged them to acquire smaller financial institutions, especially during crises.“Regulators view them as adults and business partners,” said Tyler Gellasch, president of Healthy Markets Association, a Washington-based group that advocates greater transparency in the financial system, referring to big banks like JPMorgan. “They are too big to fail and they are afforded the privilege of being so.”He added that JPMorgan was likely to make a lot of money from the acquisition. JPMorgan said on Monday that it expected the deal to raise its profits this year by $500 million.JPMorgan will pay the F.D.I.C. $10.6 billion to acquire First Republic. The government agency expects to cover a loss of about $13 billion on First Republic’s assets.`Normally a bank cannot acquire another bank if doing so would allow it to control more than 10 percent of the nation’s bank deposits — a threshold JPMorgan had already reached before buying First Republic. But the law includes an exception for the acquisition of a failing bank.The F.D.I.C. sounded out banks to see if they would be willing to take First Republic’s uninsured deposits and if their primary regulator would allow them to do so, according to two people familiar with the process. On Friday afternoon, the regulator invited the banks into a virtual data room to look at First Republic’s financials, the two people said. The government agency, which was working with the investment bank Guggenheim Securities, had plenty of time to prepare for the auction. First Republic had been struggling since the failure of Silicon Valley Bank, despite receiving a $30 billion lifeline in March from 11 of the country’s largest banks, an effort led by Mr. Dimon of JPMorgan.By the afternoon of April 24, it had became increasingly clear that First Republic couldn’t stand on its own. That day, the bank revealed in its quarterly earnings report that it had lost $102 billion in customer deposits in the last weeks of March, or more than half what it had at the end of December.Ahead of the earnings release, First Republic’s lawyers and other advisers told the bank’s senior executives not to answer any questions on the company’s conference call, according to a person briefed on the matter, because of the bank’s dire situation.The revelations in the report and the executives’ silence spooked investors, who dumped its already beaten-down stock.When the F.D.I.C. began the process to sell First Republic, several bidders including PNC Financial Services, Fifth Third Bancorp, Citizens Financial Group and JPMorgan expressed an interest. Analysts and executives at those banks began going through First Republic’s data to figure out how much they would be willing to bid and submitted bids by early afternoon Sunday.Regulators and Guggenheim then returned to the four bidders, asking them for their best and final offers by 7 p.m. E.T. Each bank, including JPMorgan Chase, improved its offer, two of the people said.Regulators had indicated that they planned to announce a winner by 8 p.m., before markets in Asia opened. PNC executives had spent much of the weekend at the bank’s Pittsburgh headquarters putting together its bid. Executives at Citizens, which is based in Providence, R.I., gathered in offices in Connecticut and Massachusetts. But 8 p.m. rolled by with no word from the F.D.I.C. Several hours of silence followed.For the three smaller banks, the deal would have been transformative, giving them a much bigger presence in wealthy places like the San Francisco Bay Area and New York City. PNC, which is the sixth-largest U.S. bank, would have bolstered its position to challenge the nation’s four large commercial lenders — JPMorgan, Bank of America, Citigroup and Wells Fargo.Ultimately, JPMorgan not only offered more money than others and agreed to buy the vast majority of the bank, two people familiar with the process said. Regulators also were more inclined to accept the bank’s offer because JPMorgan was likely to have an easier time integrating First Republic’s branches into its business and managing the smaller bank’s loans and mortgages either by holding onto them or selling them, the two people said.As the executives at the smaller banks waited for their phones to ring, the F.D.I.C. and its advisers continued to negotiate with Mr. Dimon and his team, who were seeking assurances that the government would safeguard JPMorgan against losses, according to one of the people.At around 3 a.m., the F.D.I.C. announced that JPMorgan would acquire First Republic.An F.D.I.C. spokesman declined to comment on other bidders. In its statement, the agency said, “The resolution of First Republic Bank involved a highly competitive bidding process and resulted in a transaction consistent with the least-cost requirements of the Federal Deposit Insurance Act.” The announcement was widely praised in the financial industry. Robin Vince, the president and chief executive of Bank of New York Mellon, said in an interview that it felt “like a cloud has been lifted.”Some financial analysts cautioned that the celebrations might be overdone.Many banks still have hundreds of billions of dollars in unrealized losses on Treasury bonds and mortgage-backed securities purchased when interest rates were very low. Some of those bond investments are now worth much less because the Federal Reserve has sharply raised rates to bring down inflation.Christopher Whalen of Whalen Global Advisors said the Fed fueled some of the problems at banks like First Republic with an easy money policy that led them to load up on bonds that are now performing poorly. “This problem will not go away until the Fed drops interest rates,” he said. “Otherwise, we’ll see more banks fail.”But Mr. Whalen’s view is a minority opinion. The growing consensus is that the failures of Silicon Valley, Signature and now First Republic will not lead to a repeat of the 2008 financial crisis that brought down Bear Stearns, Lehman Brothers and Washington Mutual.The assets of the three banks that failed this year are greater than of the 25 banks that failed in 2008 after adjusting for inflation. But 465 banks failed in total from 2008 to 2012.One unresolved issue is how to deal with banks that still have a high percentage of uninsured deposits — money from customers well in excess of the $250,000 federally insured cap on deposits. The F.D.I.C. on Monday recommended that Congress consider expanding its ability to protect deposits.Many investors and depositors are already assuming that the government will step in to protect all deposits at any failing institution by invoking a systemic risk exception — something they did with Silicon Valley Bank and Signature Bank. But that’s easy to do when it is just a few banks that run into trouble and more difficult if many banks have problems.Another looming concern is that midsize banks will pull back on lending to preserve capital if they are subject to the kind of bank runs that took place at Silicon Valley Bank and First Republic. Depositors might also move their savings to money market funds, which tend to offer higher returns than savings or checking accounts.Midsize banks also need to brace for more exacting oversight from the Fed and the F.D.I.C., which criticized themselves in reports released last week about the bank failures in March.Regional and community banks are the main source of financing for the commercial real estate industry, which encompasses office buildings, apartment complexes and shopping centers. An unwillingness by banks to lend to developers could stymie plans for new construction.Any pullback in lending could lead to a slowdown in economic growth or a recession.Some experts said that despite those challenges and concerns about big banks getting bigger, regulators have done an admirable job in restoring stability to the financial system.“It was an extremely difficult situation, and given how difficult it was, I think it was well done,” said Sheila Bair, who was chair of the F.D.I.C. during the 2008 financial crisis. “It means that big banks becoming bigger when smaller banks begin to fail is inevitable,” she added.Reporting was contributed by More

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    A Timeline of How the Banking Crisis Has Unfolded

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    First Republic’s downfall was just the latest in a series of problems affecting midsize banks.First Republic Bank was seized by regulators and sold to JPMorgan Chase on Monday, the latest casualty of a banking crisis that has seen other troubled lenders collapse in March.Silicon Valley Bank, one of the most prominent lenders to technology start-ups and venture capital firms, was the first to implode on March 10. Regulators seized Silicon Valley Bank, and later, Signature Bank, a New York financial institution with a large real estate lending business. The panic also led to Wall Street’s biggest banks stepping in to give $30 billion to First Republic and UBS’s takeover of its rival, the Swiss bank Credit Suisse.As investors and bank customers have fretted over the stability of the financial system, federal officials have tried to ease concerns, taking steps to protect depositors and reassuring them they could access all their money.Here is a timeline of events related to the global financial turmoil.March 8In a letter to stakeholders, Silicon Valley Bank said it needed to shore up its finances, announcing a roughly $1.8 billion loss and a plan to raise $2.25 billion in capital to handle increasing withdrawal requests amid a dim economic environment for tech companies.Moody’s, a credit ratings firm, downgraded the bank’s bonds rating.Silvergate, a California-based bank that made loans to cryptocurrency companies, separately announced that it would cease operations and liquidate its assets after suffering heavy losses.March 9Gregory Becker, the chief executive of Silicon Valley Bank, urged venture capital firms to remain calm on a conference call. But panic spread on social media and some investors advised companies to move their money away from the bank.A Silicon Valley Bank executive wrote in a note to clients that it had “been a tough day” but the bank was “actually quite sound, and it’s disappointing to see so many smart investors tweet otherwise.”The bank’s stock plummeted 60 percent and clients pulled out about $40 billion of their money.March 10In the biggest bank failure since the 2008 financial crisis, Silicon Valley Bank collapsed after a run on deposits. The Federal Deposit Insurance Corporation announced that it would take over the 40-year-old institution.Investors began to dump stocks of the bank’s peers, including First Republic, Signature Bank and Western Alliance, which had similar investment portfolios. The nation’s largest banks were more insulated from the fallout, with shares of JPMorgan, Wells Fargo and Citigroup generally flat.Treasury Secretary Janet L. Yellen reassured investors that the banking system was resilient, expressing “full confidence in banking regulators.”Signature Bank, a 24-year-old institution that provided lending services for real estate companies and law firms, saw a torrent of deposits leaving its coffers after customers began panicking.March 12New York regulators shut down Signature Bank, just two days after Silicon Valley Bank failed, over concerns that keeping the bank open could threaten the stability of the financial system. Signature was one of the few banks that had recently opened its doors to cryptocurrency deposits.The Federal Reserve, the Treasury Department and the F.D.I.C. announced that “depositors will have access to all of their money” and that no losses from either bank’s failure would be “borne by the taxpayer.”The Fed said it would set up an emergency lending program, with approval from the Treasury, to provide additional funding to eligible banks and help ensure they could “meet the needs of all their depositors.”March 13President Biden said in a speech that the U.S. banking system was safe and insisted that taxpayers would not pay for any bailouts in an attempt to ward off a crisis of confidence in the financial system.Regional bank stocks plunged after the unexpected seizure of Silicon Valley Bank and Signature Bank, with shares of First Republic tumbling 60 percent.The Bank of England announced that banking giant HSBC would buy Silicon Valley Bank’s British subsidiary.March 14Bank stocks recouped some of their losses as investor fears began to ease.The Justice Department and the Securities and Exchange Commission reportedly opened investigations into Silicon Valley Bank’s collapse.March 15Credit Suisse shares tumbled after investors started to fear that the bank would run out of money. Officials at Switzerland’s central bank said it would step in and provide support to Credit Suisse if necessary.March 16Eleven of the largest U.S. banks came together to inject $30 billion into First Republic, which was teetering on the brink of collapse. The plan was hatched by Ms. Yellen and Jamie Dimon, the chief executive of JPMorgan Chase. The Treasury secretary believed the actions by the private sector would help underscore confidence in the stability of the banking system. Shares of the bank rallied on the announcement.Credit Suisse said it planned to borrow as much as $54 billion from the Swiss National Bank to stave off concerns about its financial health.Ms. Yellen testified before the Senate Finance Committee and sought to reassure the public that U.S. banks were “sound” and deposits were safe.March 17The shares of many banks continued to slide, wiping out the previous day’s gains as investors continued to worry about the financial turmoil.One day after the $30 billion lifeline was announced, First Republic’s stock plummeted again and it was in talks to sell a piece of itself to other banks or private equity firms.March 19UBS, Switzerland’s largest bank, agreed to buy its smaller rival, Credit Suisse, for about $3.2 billion. The Swiss National Bank agreed to lend up to 100 billion Swiss francs to UBS to help close the deal. The Swiss financial regulatory agency also wiped out $17 billion worth of Credit Suisse’s bonds and eliminated the need for UBS shareholders to vote on the deal.The Fed and five other global central banks took steps to ensure that dollars would remain readily available in a move intended to ease pressure on the global financial system.The F.D.I.C. said it had entered into an agreement to sell the 40 former branches of Signature Bank to New York Community Bancorp.March 26First Citizens BancShares agreed to acquire Silicon Valley Bank in a government-backed deal that included the purchase of about $72 billion in loans at a discount of $16.5 billion. It also included the transfer of all the bank’s deposits, which were worth $56 billion. About $90 billion in the bank’s securities and other assets were not included in the sale and remained in the F.D.I.C.’s control.March 30Mr. Biden called on financial regulators to strengthen oversight of midsize banks that faced reduced scrutiny after the Trump administration weakened some regulations. The president proposed requiring banks to protect themselves against potential losses and maintain enough access to cash so they could better endure a crisis, among other things.March 28While testifying before Congress, officials at the Fed, the F.D.I.C. and the Treasury Department faced tough questions from lawmakers about the factors that led to the failures of Silicon Valley Bank and Signature Bank.Michael S. Barr, the Fed’s vice chair for supervision, blamed bank executives and said the Fed was examining what went wrong, but provided little explanation as to why supervisors did not prevent the collapse.April 14The country’s largest banks — including JPMorgan Chase, Citigroup and Wells Fargo — reported robust first-quarter earnings, signaling that many customers had developed a strong preference for larger institutions they viewed as safer.April 24First Republic’s latest earnings report showed that the bank lost $102 billion in customer deposits during the first quarter — well over half the $176 billion it held at the end of last year — not including the temporary $30 billion lifeline. The bank said it would cut up to a quarter of its work force and reduce executive compensation by an unspecified amount.In a conference call with Wall Street analysts, the bank’s executives said little and declined to take questions.The bank’s stock dropped about 20 percent in extended trading after rising more than 10 percent before the report’s release.April 25First Republic’s stock closed down 50 percent after the troubling earnings report.April 26First Republic’s stock continued its tumble, dropping about 30 percent and closing the day at just $5.69, a decline from about $150 a year earlier.April 28The Fed released a report faulting itself for failing to “take forceful enough action” ahead of Silicon Valley Bank’s collapse. The F.D.I.C. released a separate report that criticized Signature Bank’s “poor management” and insufficient risk policing practices.May 1First Republic was taken over by the F.D.I.C. and immediately sold to JPMorgan Chase, making it the second biggest U.S. bank by assets to collapse after Washington Mutual in 2008. More

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    JetBlue Expects U.S. Move to Block Merger With Spirit

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    JetBlue said it saw a “high likelihood” of an antitrust suit by the Justice Department this week, but declared that the deal would foster competition.JetBlue Airways said Monday that it saw a “high likelihood” that the Justice Department would sue the company this week over its planned acquisition of Spirit Airlines. The $3.8 billion deal could create a new challenger to the nation’s four dominant carriers, but would add to industry consolidation.JetBlue said that it had long prepared for such a lawsuit and that its timeline for closing the deal was unchanged, provided it overcomes the expected challenge in court.“We believe there is a high likelihood of a complaint from D.O.J. this week, and we have always accounted for that in our timeline to close the transaction in the first half of 2024,” the company said.Critics of the deal say removing Spirit from the market would limit competition and further consolidate an already concentrated industry. While JetBlue is known for affordable fares, Spirit offers even lower prices, charging extra for everything from printing boarding passes at airport kiosks to selecting seats in advance. After the deal, JetBlue would reconfigure Spirit’s densely packed planes, removing seats, increasing legroom and adjusting the economics of each flight.According to two people familiar with the Justice Department’s plans, a government lawsuit will contend that after removing seats from Spirit planes, the combined airline would not be able to increase revenue per passenger without raising prices.Buying Spirit would allow JetBlue to accelerate its plans for growth. Today, JetBlue controls more than 5 percent of the U.S. airline market. After the acquisition, it would have a 10 percent share, making it the fifth-largest airline in the country. United Airlines, the fourth-largest carrier, has a 15 percent market share. Southwest Airlines, Delta Air Lines and American Airlines each have a more than 17 percent share.“JetBlue’s combination with Spirit allows it to create a compelling national challenger to these dominant airlines,” JetBlue said in a news release on Monday describing some of its arguments in favor of the deal.The acquisition would benefit consumers and disrupt the industry, it said, allowing JetBlue to bring low fares to new markets and forcing those large airlines to match its lower prices. JetBlue also said it had committed to giving up some of Spirit’s holdings in markets such as Boston, New York and Fort Lauderdale, Fla., where the combined airline would have an outsize presence.But the two people familiar with the Justice Department’s plans said its suit would assert that there was no guarantee that other airlines, with different cost structures from Spirit’s, would pick up Spirit slots that JetBlue might offer to shed.In addition to the Justice Department, the Transportation Department could also stand in the way of the deal by blocking the transfer of operating certificates, opponents of the sale have argued.After the expectation of a federal move to block the acquisition was reported on Monday, Spirit shares fell more than 8 percent. JetBlue shares were up about 1 percent.Unions representing workers at both airlines are divided on whether the merger should proceed. Last month, the Association of Flight Attendants-C.W.A., which represents 5,600 flight attendants at Spirit, wrote to Attorney General Merrick B. Garland and Transportation Secretary Pete Buttigieg to express support for the deal.“The JetBlue-Spirit merger will help to correct conditions in the industry with demonstrable improvements and protections for workers along with greater competition that benefits workers and consumers alike,” the union’s president, Sara Nelson, said in the letter. “This is the anti-merger, merger.”In a separate letter, the head of the Transport Workers Union, which represents 6,800 JetBlue flight attendants, asked Mr. Garland and Mr. Buttigieg to prevent the acquisition, arguing that it would violate antitrust laws and undermine competition and workers.In a letter in September, Senator Elizabeth Warren, a Massachusetts Democrat, asked Mr. Buttigieg to use his department’s “historically underutilized” authorities to intervene.JetBlue is also awaiting the outcome of a Justice Department antitrust lawsuit over the airline’s partnership with American in Boston and New York. A federal judge in Boston is expected to issue a decision in that case imminently.Lauren Hirsch More

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    When Private Equity Came for the Toddler Gyms

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    Tiffany Cianci spends most of her days in socks, padding around the fitness studio she operates in Frederick, Md., about an hour outside Washington. Her clients are young: kids ranging from 4 months to 12 years old. They come to learn somersaults, try the monkey bars, sing some songs. (“Little Red Caboose,” complete with a train whistle accompaniment, is one of her favorites.)Ms. Cianci, 41, spent the first part of her career as a sommelier, specializing in sake. In 2017, wanting to leave the hospitality industry for something that allowed her to spend more time at home, she and her husband bought their facility as part of a franchise chain called The Little Gym. Its slogan: “Serious fun.”They got what generations of franchise owners have gotten out of similar deals, with brands like McDonald’s or Jiffy Lube: a known brand name and detailed business plans in exchange for an initial fee and a cut of the revenue. For Ms. Cianci, it was more than just a business.“I love it. I really love it,” said Ms. Cianci, a mother of three who studied dance. “I love my students, and I love that it lets me make a difference.”In the last year and a half, since The Little Gym was acquired by a private equity-backed firm called Unleashed Brands, her work has felt far less idyllic.According to legal filings, internal documents, and interviews with more than half a dozen other franchisees — most of whom requested anonymity so as to avoid retaliation — Unleashed began to demand higher fees and institute more stringent requirements, which the independent owners thought would threaten their profits. The day after Ms. Cianci organized her fellow franchise owners into an association to push back against the changes, the corporate office told her it was terminating her license on the grounds that she was chronically late in paying her fees. Given the timing, Ms. Cianci maintains in the legal filings that it constituted retaliation.Tiffany Cianci, the owner of Teeter Tots, is fighting a court battle against Unleashed Brands, which bought the company that originally franchised her business.Lexey Swall for The New York TimesAlong the way, Unleashed Brands surveilled Ms. Cianci’s business with undercover shoppers, met with her landlord and disparaged her to fellow franchisees. When she tried to salvage her business under a new name — it’s now called Teeter Tots Music n Motion — the company sued, accusing her of violating its trademarks and a noncompete clause in her franchise agreement.The episode has plunged Ms. Cianci about $300,000 into debt and enmeshed Unleashed in a nasty court battle not long after it acquired multiple new brands. The outcome will be a test of just how much a franchisor can unilaterally change the rules of a business relationship that has served as an on-ramp to entrepreneurship for hundreds of thousands of people.The legal fight — along with two others Unleashed has faced with franchisees at its other brands — also reveals the challenges of applying the private equity playbook to the unique world of franchises.Private equity has notched decades of high returns for investors by following a well-worn strategy: acquire distressed or undervalued companies or real estate, increase profits and then sell them. Greatest hits include foreclosed homes, highway rest stops and coal mines bought out of bankruptcy.Franchising has become one of private equity’s targets du jour. According to the research firm FRANdata, the number of franchise brands acquired by private equity firms and other investors rose from 52 in 2019 to 149 in 2021 and was on track to nearly equal that total in 2022.Private equity firms tout their ability to bring new ideas, technologies and efficiencies, and franchises, financially weakened by the pandemic, appeared ripe for those kinds of changes.But the reality is not so straightforward. The nation’s franchisees — 237,619, according to FRANdata — like Ms. Cianci, think of themselves as independent small businesses, who have often sunk their life savings into the enterprise. That’s why Little Gym owners are resisting Unleashed’s attempts to squeeze their profits to pad its own.Unlike, say, factory workers, who can be laid off at will, franchisees are supposed to be protected by legal documents that prescribe a certain business model for years at a time. Moreover, Unleashed — and its investors — need franchisees to stay motivated so they can keep generating revenue and recruit others to keep expanding the franchise system.Ms. Cianci, who is now in arbitration with Unleashed Brands, has been working to change state laws to better protect franchisees who might find themselves in her position down the line. The Federal Trade Commission, meanwhile, is reconsidering federal regulations on franchisors, which haven’t changed for more than a decade.Direct inquiries to Michael Browning Jr., Unleashed’s chief executive and founder, and other executives were not returned. Instead, a public relations firm answered detailed questions via email, saying the company’s changes have improved business across the board. “The financial impact and franchisee benefit of these efforts is undeniable,” the spokesman wrote.Many of the changes, however, are simply not what franchisees say they’d signed up for.“What this reflects is a conflict between the private equity firm that bought this and what they actually bought,” said Francine Lafontaine, an economist at the University of Michigan who specializes in franchise relationships. “In their due diligence, they didn’t seem to think too much about who they were going to be working with once they owned this chain.”‘Candy Land board of life’Ms. Cianci helps Mariah Strawley move her daughter, Brynlee Strawley, 19 months, through an obstacle course during a class.Lexey Swall for The New York TimesMr. Browning, the son of a real estate developer with a background in health care investing, viewed The Little Gym as a perfect part of his vision: He was building a conveyor belt of activities for kids.Mr. Browning spent the 2010s building a franchise called Urban Air, a chain of trampoline parks where parents could spend $700 on a birthday party to remember for their seventh grader. The venture was staked by Mr. Browning and his father and eventually Urban Air formed Unleashed.Private equity was also interested in the Brownings’ growing business. While a company spokesman did not clarify the company’s relationship with private equity, on the websites of the private equity firms AHR Growth Partners, Mantucket Capital and MPK Equity Partners, Unleashed or its brands are listed among their current or recent investments.In 2021, Mr. Browning decided to scale up, following a hot new trend in private equity: building “platforms” to consolidate several brands in a similar industry that could then cross-sell a range of services to their customers, as well as sell more franchises to their existing franchisees. Mr. Browning would often mention Neighborly, a roll-up of home services offerings that had been bought by the private equity giant KKR, as his model.“If I have five home services brands, I can pitch all those services to the same customer,” said Ritwik Donde, senior research analyst at FRANdata, which helps investors vet potential acquisitions. “Those complementary systems lower the cost of customer acquisition. ”Mr. Browning’s company, Unleashed Brands, began buying other youth enrichment chains. Parents — always moms, in Mr. Browning’s conception — could then spend money at his companies from the birth of their kids through high school graduation.Ms. Cianci was immediately skeptical of Mr. Browning’s vision for rapidly collecting children’s services and integrating their sales, operations and marketing.“That might be OK when you’re cleaning a dryer vent, but it’s not when you’re throwing around a 4-month-old and you need them to be safe,” Ms. Cianci said. “He was moving faster than he would need to get to know the business.”Ms. Cianci helped organize a group of Little Gym franchisees to contest some new requirements imposed by Unleashed Brands.Lexey Swall for The New York TimesTo kick off the new program, Unleashed invited all of its newly acquired franchisees to a conference in Orlando in October 2021, including Little Gym’s approximately 175 owners. The company rented out the Wizarding World of Harry Potter and held a fireworks show. And Mr. Browning treated attendees to a speech he called “vision casting,” in which he articulated his plans for building a family of children’s brands that families could spend money on from birth to age 18.The “Candy Land board of life,” he called it. He promised new tech tools that would make their lives easier. “Auto-magic,” he called it.Changes didn’t take long. Within weeks, long-tenured headquarters employees started leaving. In conversations with franchisees across the country, numerous owners expressed frustration that the support they depended on had evaporated; instead of calling a trusted adviser whenever they wanted, they had to file an online ticket. (Unleashed said that it “never sought to cut access” to its staff and that the ticket system was instituted to make sure they were responding in a timely fashion.)The company tried to impose a new payroll vendor that caused unending headaches. Certain activities, such as karate, were eliminated as Unleashed acquired businesses with similar programming; the company said it trimmed services with low enrollment to “streamline” the offerings. The company also outlined a process by which franchisees could lose their licenses if they failed to meet brand standards, which set a sour tone among some of the operators. To people who’d just made it through a pandemic and operated on thin margins even in good times, the changes felt unnecessary and destabilizing.In the fall of 2021, the company required all franchisees to sign a new agreement allowing Unleashed to automatically debit their bank accounts. Ms. Cianci noticed that it also contained broad language allowing the company to extract any other fees that might be owed, which she believed went beyond her franchise agreement.Under the advice of a lawyer, she refused to sign it and started to send her royalty payments via paper check. But she worried that most franchisees would simply accept the new arrangement, along with another requiring them to use — and pay for — a shared call center.To sound the alarm to others, Ms. Cianci held conference calls, often with a lawyer present. As concerns spread, in May a group of Little Gym franchisees formed the Happy Handstands Franchisee Association, which ultimately reached more than 90 percent participation from across the system. Ms. Cianci was elected president. The company started sending warning notices to franchisees who hadn’t signed the new agreements.On May 19, 2022, Happy Handstands’ lawyers sent Unleashed a cease-and-desist letter on behalf of the membership. The very next evening, an email popped up saying Ms. Cianci’s franchise had been terminated. When she tried to check it, her email account was gone, too. Unleashed said the company didn’t know she was the association’s president when they decided to terminate her. Ms. Cianci said it was widely known across the system and mentioned in a Facebook group visible to lower-level corporate executives.To save her business, Ms. Cianci went before an arbitrator and filed for a preliminary injunction decrying the termination as retaliatory; the arbitrator ruled that she hadn’t cleared the high legal bar necessary to stop the process. After that, she started tearing down all her Little Gym branding and adapting her curriculum so as not to violate the company’s trademarks. She paused when Unleashed’s lawyers wanted to discuss a settlement, which she said she rejected over its harsh terms. When they demanded she finish the process of “de-identifying” as a Little Gym immediately, she had difficulty getting started again because she had surgery on a broken foot.In June and July, the company sent undercover shoppers, including one who was a licensed private investigator, who posed as parents and asked Ms. Cianci’s employees what kinds of lessons they offered and whether they overlapped with The Little Gym’s programming. In early July, Unleashed, with the help of outside counsel DLA Piper, sued her in the superior court of Arizona for Maricopa County, where The Little Gym is based. The company accused her of failing to eliminate all branding fast enough, offering declarations from the investigators as evidence — the color scheme looked the same, for example, and a Wi-Fi network was still “TheLittleGym,” password “SeriousFun.”Soon after, the company’s lawyers also visited her landlord in Frederick, which Unleashed said was “part of a standard process to inquire as to the status of the lease.” According to Ms. Cianci’s notes from her subsequent conversation with the landlord, the lawyers told him that she was in legal trouble and wouldn’t be able to keep paying rent.Her landlord then sent her a letter, which was filed as evidence in court, declining to renew her lease and demanding more than $275,000 in back rent, including real estate taxes, most of which Ms. Cianci thought had been forgiven during the pandemic. Unleashed then exercised its option to take over the lease, although the building remains empty. (Her landlord declined to comment.)In mid-July, Unleashed Brands’ chief legal officer, Stephen Polozola, sent all Little Gym franchisees an email titled “Friendly Reminder on Confidentiality.” In it, without naming Ms. Cianci, he warned them not to share any information with a certain former franchisee, who he said had been terminated for not paying royalty fees on time.Further, he wrote that the company had received reports from “no less than seven” former employees who said that the unnamed franchisee had underpaid them and created a hostile work environment. The email finished with a grainy screenshot of a Facebook post containing a vulgar message that Mr. Polozola said had come from that same franchisee but didn’t have her name attached.The battle has put Ms. Cianci about $300,000 in debt and enmeshed Unleashed in a nasty court battle just as it tries to get its investment strategy off the ground.Lexey Swall for The New York TimesMs. Cianci, who had taken her son to a water park for his birthday, immediately started getting messages from other franchisees. None of it was true, she told them. As she would detail in court documents, the company allowed late payments for nearly all franchisees during the pandemic, and her gym had been closed by local ordinance for longer than most. She had continued to send her royalties in the mail, even after she refused to sign Unleashed’s new payment form, she said, and she was current on all her accounts when she was terminated. And the inappropriate Facebook post? She said she hadn’t written it.The allegations by Ms. Cianci’s former employees that Mr. Polozola referred to in his “friendly reminder” email sprang from messages that were sent by the workers in April 2021, before the Little Gym changed hands. After an investigation, no action was taken. The Unleashed spokesman said the company had relied on Ms. Cianci’s assurance that she would resolve the matter with the Maryland Department of Labor. Ms. Cianci said she made no such assurance.In response to an inquiry from The New York Times, the Department of Labor provided records showing a total of five complaints against Ms. Cianci for unpaid wages since 2017, two of which she resolved by paying her former employees; two were dropped; and one is still pending.But the emails from the former employees, which Unleashed supplied to The Times in unredacted form, detail complaints other than unpaid wages — such as dealing pills and mistreating children — that would seem to merit more immediate action by corporate headquarters, and which Ms. Cianci strongly denies.In late summer of 2021, when one of the former employees contacted Unleashed again, Mr. Polozola told Ms. Cianci to ignore it, according to an email exchange she provided — until he brought the complaints back up to discredit her nearly a year later.Arguing that such tactics seemed far outside the norms of legal practice, in September Ms. Cianci’s team filed a defense of so-called unclean hands, making the case that Unleashed Brands’ conduct had so tainted the proceedings that the judge should rule in their favor.But their motion never went anywhere. Before the judge could rule on it, Unleashed filed to dismiss its own case, arguing that its complaint that Ms. Cianci was essentially operating an unauthorized Little Gym was moot because her landlord had evicted her.The upshot of all this legal wrangling is that the fight between Ms. Cianci and Unleashed continues in arbitration in Arizona. In arbitration, potential damages are more limited, proceedings are sealed, and no precedent is created for other cases.Unleashed is fighting to stop Ms. Cianci from running what it says is a competing gym. Ms. Cianci is fighting for the chance to keep her new business and recoup the hundreds of thousands of dollars she has now spent on lawyers.One of them, Peter Lagarias, began his career at the F.T.C., enforcing the agency’s then-new franchise rule in the late 1970s, and spent most of his career advocating for franchisees both in the courtroom and the California statehouse. He took her case for a low rate, but arbitrators, whose cost must be split by both parties, can run tens of thousands of dollars, too.“They don’t want money,” Ms. Cianci said of Unleashed. “They want to destroy my life.”‘You can’t treat every business the same’Bill Walenda, 55, also got into running Little Gyms as a second career. After years as a financial planner, he wanted to buy a franchise — maybe a McDonald’s or a Dunkin’ Donuts — and his wife suggested The Little Gym, since he loved working with children. He opened a gym in New Jersey in 2002 and bought another in Illinois in 2009.After Ms. Cianci’s franchise was terminated, the Happy Handstands Franchisee Association fractured over strategy. Another group of owners started an association with a different approach: working “collaboratively” with the corporate office to provide feedback on changes. Mr. Walenda was elected president, and he has had limited success.He has been fighting a new point-of-sale system with a credit card processor controlled by Unleashed, which franchisees say is keeping customer payments for more than a week before sending them to gym owners, creating a cash flow crunch for owners. (Unleashed said the system keeps money for only two or three days.)The company also continues to try to make everyone use its new shared call center, which Mr. Walenda said would “take us out of the equation of dealing with our customers” — something that might work for a business like Urban Air, which processes thousands of people a week, but not the familial relationships on which The Little Gym operated for decades.“You can’t treat every business the same,” Mr. Walenda said. “And that’s really what’s causing all of this strife.”In November, Unleashed introduced a revised operations manual that lays out new rules and fees. It specifies the hours the businesses must be open, how quickly they must return customer calls, which architect they must use and what company meetings they must attend. Staff salaries were only supposed to make up 30 percent of revenue. The technology fee can rise to $399 from $119.The national advertising fee can rise to 5 percent of gross sales from 1 percent; part of that will go to a fund that supports other Unleashed properties. New fees appeared, including a $30,000 fee to renew the franchise agreement, and a fee of about $15,000 to relocate the facility. For some owners, the changes seem to mean that they can no longer operate profitably and will have to sell rather than renew.Unleashed said the changes only apply to new franchisees, and Mr. Walenda said his group has been able to negotiate away some of the fees even for them. But other fees remain, including a $100,000 payment if the franchise is terminated, and Mr. Walenda said the company continues to try to force everyone to use its call center and point-of-sale system. As much as he believes in the collaborative approach, he’s willing to litigate to stop the attempts to extract more money.“That’s all private equity cares about, as far as I’m concerned,” Mr. Walenda said. His business is doing well, which he credits to the postpandemic desperation for children’s activities; he said Unleashed’s new systems have mostly just taken more time for his managers to deal with.“We’re not people, we’re not businesses, we’re just numbers to them,” Mr. Walenda said. “And that’s a problem. Because ‘Let’s just keep squeezing everything we can out of them until we can’t squeeze anymore’ — it’s a good way of making money. It’s not a very good way to run a business.”Ms. Cianci says she hopes to prove that it’s possible to resist a franchiser’s efforts to impose its will outside what are supposed to be legally binding agreements.Lexey Swall for The New York TimesAfter a year of owning The Little Gym, Unleashed Brands says that average gym revenue rose 36.8 percent in 2022 over 2019. And its franchisee recruitment has focused on people who want to open multiple units, such as Cody Herndon, whom Unleashed provided as an example of a Little Gym owner with a more positive view of management.An Urban Air operator who sold one of his two parks to another private equity investor, Mr. Herndon bought the rights to open three Little Gyms in Texas last year. He said he was drawn by the opportunity to have longer-term relationships with families and thought the new systems Unleashed was pushing would work out in the end.“There are going to be so many massive benefits to any change that’s been asked,” Mr. Herndon said.While disclosing few other metrics, the company told Axios in May that it expected to generate $160 million in revenue in 2022 and was shopping for a buyer. It appears to have found one.Unleashed’s current private equity investors are selling their stakes in the company imminently, according to a company spokesman. But the company declined to disclose the buyer or the terms of the deal.Whoever the buyer may be, they’ve got significant franchisee rancor on their hands — even beyond the Little Gym.At Mr. Browning’s original chain, Urban Air, a franchisee association representing more than 50 owners tried to bring a lawsuit in 2020 over what it viewed as unfair changes that had revealed the “terms and provisions of the franchise agreements upon which investment decisions were made to be illusory and meaningless.” But a Texas court threw the case out on technical grounds, and with individual arbitration the only path forward, the effort fell apart.In late 2022, Unleashed was also sued by 54 franchisees of its Premier Martial Arts brand who said in legal filings that the franchisor gave them an unrealistic impression of the cost of running a martial arts studio, leaving them with dead-end businesses and debt.Michelle and Peter Silberman of Wexford, Pa., depleted their retirement savings, maxed out their credit cards and took out a home-equity loan to acquire three Premier Martial Arts territories in 2020.Ross Mantle for The New York TimesMichelle and Peter Silberman depleted their retirement savings, maxed out their credit cards and took out a home-equity loan to acquire three Premier Martial Arts territories in March 2020, before Unleashed owned the franchisor. The first opened near their home in the Pittsburgh area in May 2022. Mr. Silberman said Premier Martial Arts told them that they could expect profit margins as high as 48 percent, while running the studios as “semi-absentee” owners who had to run the business as little as 10 hours a week.The couple was charging parents $138 a month, which included two classes a week. The Silbermans, who had no experience with martial arts, said they relied on the company’s assurances that it would help them manage the business.But when attendance began to decline and expenses were piling up — the couple spent $370,000 acquiring the territories and operating the one facility — Mr. Silberman said Premier Martial Arts offered little additional help. Their studio closed this past fall. Although the trouble began long before Unleashed announced that it had bought Premier Martial Arts in early 2022, the lawsuit states that after the acquisition, “the same false statements were still made and the same bogus model was pitched.”In response, the Unleashed spokesman said the company is “not a party to any contract” with a Premier Martial Arts franchisee.As for the Silbermans, they have been trying to pay down their debts.“We are, hopefully, going to avoid bankruptcy by the skin of our teeth,” said Mr. Silberman.New rules for franchisesMs. Cianci’s case is winding its way through arbitration. Her new gym in a suburban mall next to Macy’s has only about 74 members, compared with the 275 she had before her termination by Unleashed. She said her husband, a federal trademark attorney, is working long hours to support them.In the meantime, she’s trying to prevent future franchisees from being put in the situation she found herself in.As the F.T.C. reviews the rules governing franchising, advocates have urged the commission to add stronger protections, such as more disclosure of how the average franchise location performs. The International Franchise Association — whose board Mr. Browning recently joined — has lobbied hard to avert those changes.In Congress, Senator Catherine Cortez Masto, a Democrat from Nevada, has done extensive research on problems with the franchise system and introduced two bills seeking to give franchisees more leverage. But their fate is uncertain.That’s why Ms. Cianci is focused on the states. Specifically Arizona, where The Little Gym headquarters is based. Lawmakers have introduced a bill that would protect franchisees’ right to form associations, require changes to their agreements to be presented in contractual form, and limit the circumstances under which their licenses could be terminated.At the very least, she hopes her case will ultimately prove that it’s possible to resist a franchisor’s efforts to impose its will outside what are supposed to be legally binding agreements, whether it’s how many birthday parties to offer or which insurance company to use.“That’s exactly what went wrong here,” Ms. Cianci said. “He’s buying companies where people had rights.” More

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    Japan’s Business Owners Can’t Find Successors. This Man Is Giving His Away.

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    Hidekazu Yokoyama has spent three decades building a thriving logistics business on Japan’s snowy northern island of Hokkaido, an area that provides much of the country’s milk.Last year, he decided to give it all away.It was a radical solution for a problem that has become increasingly common in Japan, the world’s grayest society. As the country’s birthrate has plummeted and its population has grown older, the average age of business owners has risen to around 62. Nearly 60 percent of the country’s businesses report that they have no plan for what comes next.While Mr. Yokoyama, 73, felt too old to carry on much longer, quitting wasn’t an option: Too many farmers had come to depend on his company. “I definitely couldn’t abandon the business,” he said. But his children weren’t interested in running it. Neither were his employees. And few potential owners wanted to move to the remote, frozen north.So he placed a notice with a service that helps small-business owners in far-flung locales find someone to take over. The advertised sale price: zero yen.Mr. Yokoyama’s struggle symbolizes one of the most potentially devastating economic impacts of Japan’s aging society. It is inevitable that many small- and medium-size companies will go out of business as the population shrinks, but policymakers fear that the country could be hit by a surge in closures as aging owners retire en masse.In an apocalyptic 2019 presentation, Japan’s trade ministry projected that by 2025, around 630,000 profitable businesses could close up shop, costing the economy $165 billion and as many as 6.5 million jobs.Economic growth is already anemic, and the Japanese authorities have sprung into action in hopes of averting a catastrophe. Government offices have embarked on public relations campaigns to educate aging owners about options for continuing their businesses beyond their retirements and have set up service centers to help them find buyers. To sweeten the pot, the authorities have introduced large subsidies and tax breaks for new owners.Still, the challenges remain formidable. One of the biggest obstacles to finding a successor has been tradition, said Tsuneo Watanabe, a director of Nihon M&A Center, a company that specializes in finding buyers for valuable small- and medium-size enterprises. The company, founded in 1991, has become enormously lucrative, recording $359 million in revenue last year.Mr. Yokoyama plans to give away his land and equipment to a successor he has chosen.Noriko Hayashi for The New York TimesOne of Mr. Yokoyama’s workers.Noriko Hayashi for The New York TimesBut building that business has been a long process. In years past, small-business owners, particularly those who ran the country’s many decades- or even centuries-old companies, assumed that their children or a trusted employee would take over. They had no interest in selling their life’s work to a stranger, much less a competitor.More on Social Security and RetirementEarning Income After Retiring: Collecting Social Security while working can get complicated. Here are some key things to remember.An Uptick in Elder Poverty: Older Americans didn’t fare as well through the pandemic. But longer-term trends aren’t moving in their favor, either.Medicare Costs: Low-income Americans on Medicare can get assistance paying their premiums and other expenses. This is how to apply.Claiming Social Security: Looking to make the most of this benefit? These online tools can help you figure out your income needs and when to file.Mergers and acquisitions “weren’t well regarded. A lot of people felt that it was better to shut the company down than sell it,” Mr. Watanabe said. Perceptions of the industry have improved over the years, but there are “still many businesspeople who aren’t even aware that M&A is an option,” he added.While the market has found buyers for the businesses most ripe for the picking, it can seem nearly impossible for many small but economically vital companies to find someone to take over.In 2021, government help centers and the top five merger-and-acquisitions services found buyers for only 2,413 businesses, according to Japan’s trade ministry. Another 44,000 were abandoned. Over 55 percent of those were still profitable when they closed.Many of those businesses were in small towns and cities, where the succession problem is a potentially existential threat. The collapse of a business, whether a major local employer or a village’s only grocery store, can make it even harder for those places to survive the constant attrition of aging populations and urban flight that is hollowing out the countryside.After a government-run matching program failed to find someone to take over for Mr. Yokoyama, a bank suggested that he turn to Relay, a company based in Kyushu, Japan’s southernmost main island.Hay stored in a warehouse on the Yokoyama land.Noriko Hayashi for The New York TimesAn abandoned cowshed.Noriko Hayashi for The New York TimesRelay has differentiated itself by appealing to potential buyers’ sense of community and purpose. Its listings, featuring beaming proprietors in front of sushi shops and bucolic fields, are engineered to appeal to harried urbanites dreaming of a different lifestyle.The company’s task in Mr. Yokoyama’s case wasn’t easy. For most Japanese, the town where his business is situated, Monbetsu, which has around 20,000 people and is shrinking, might as well be the North Pole. The only industries are fishing and farming, and they largely go into hibernation as the days grow short and snow piles up to roof eaves. In deep winter, some tourists come to eat salmon roe and scallops and see the ice floes that lock in the city’s modest port.A street full of 1980s-era cabarets and restaurants is a snapshot of a more prosperous time when young fishermen gathered to let off steam and spend big paychecks. Today, faded posters peel off abandoned storefronts. The town’s biggest building is a new hospital.In 2001, Monbetsu constructed a new elementary school building just around the corner from Mr. Yokoyama’s company. It closed after just 10 years.In times past, the classrooms would have been filled with the grandchildren of local dairy farmers. But their own children have now mostly moved to cities in search of higher-paying, less onerous work.With no obvious successors, the farms have folded one after another. Decades-high inflation brought on by the pandemic and Russia’s war in Ukraine has pushed dozens of holdouts into early retirement.Mr. Yokoyama’s employees are skeptical about his succession plan.Noriko Hayashi for The New York TimesThe workers are mostly in their 50s and 60s.Noriko Hayashi for The New York TimesAs local farmers have aged and their profits thinned, more of them have come to depend on Mr. Yokoyama for tasks like harvesting hay and clearing snow. His days start at 4 a.m. and end at 7 in the evening. He sleeps in a small room behind his office.It would be “extremely difficult” if his business folded, said Isao Ikeno, the manager of a nearby dairy cooperative that has turned heavily to automation as workers have become harder to find.On the cooperative’s farm, 17 employees tend to 3,000 head of cattle, and Mr. Yokoyama’s company fills in the gaps. No other area businesses can provide the services, Mr. Ikeno said.Mr. Yokoyama began contemplating retirement about six years ago. But it wasn’t clear what would happen to the business.While he had taken on a little over half a million dollars in debt, years of generous economic stimulus policies have kept interest rates at rock bottom, easing the burden, and the company’s annual profit margin was around 30 percent.The ad he placed on Relay acknowledged that the job was hard, but it said that no experience was needed. The best candidate would be “young and ready to work.”Whoever was chosen would take over the debts, but also inherit all of the business’s equipment and nearly 150 acres of prime farmland and forest. Mr. Yokoyama’s children will get nothing.“I told them that if you want to take it over, I’d leave it to you, but if you don’t want to do it, I’m giving it all to the next guy,” he said.Thirty inquiries poured in. Among those who expressed interest were a couple and a representative of a company that planned to expand. Mr. Yokoyama settled on a dark horse, 26-year-old Kai Fujisawa.A friend had showed Mr. Fujisawa the ad on Relay, and Mr. Fujisawa immediately jumped in a car and showed up on Mr. Yokoyama’s doorstep, impressing him with his youth and enthusiasm.Kai Fujisawa, Mr. Yokoyama’s potential successor.Noriko Hayashi for The New York TimesStill, the transition hasn’t been smooth. Mr. Yokoyama is not entirely convinced that Mr. Fujisawa is the right person for the job. The learning curve is steeper than either of them had imagined, and Mr. Yokoyama’s grizzled, chain-smoking employees are skeptical that Mr. Fujisawa will be able to live up to the boss’s reputation.Most of the company’s 17 employees are in their 50s and 60s, and it’s not clear where Mr. Fujisawa will find people to replace them as they retire.“There’s a lot of pressure,” Mr. Fujisawa said. But “when I came here, I was prepared to do this for the rest of my life.” More

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    Elon Musk Begins Layoffs at Twitter

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    The social media company’s 7,500 employees have been bracing for job cuts since Mr. Musk took it over last week.SAN FRANCISCO — Elon Musk will begin laying off Twitter employees on Friday, culling the social media company’s 7,500-person work force a little over a week after completing his blockbuster buyout.Twitter employees were notified in a company-wide email that the layoffs were set to begin, according to a copy of the message seen by The New York Times. About half the company’s workers appeared set to lose their jobs, according to internal messages and an investor, though the final count may take time to become clear. The email instructed Twitter employees to go home and not return to the offices on Friday as the cuts proceeded. Mr. Musk completed his $44 billion purchase of Twitter on Oct. 27 and immediately fired its chief executive and other top managers. More executives have since resigned or were let go, while managers were asked to draw up lists of high- and low-performing employees, likely with an eye toward job cuts.Mr. Musk, the world’s richest man, faces pressure to make Twitter work financially. The deal was the largest leveraged buyout of a technology company in history. The billionaire also loaded about $13 billion in debt on Twitter for the acquisition and is on the hook to pay about $1 billion a year in interest payments. But Twitter has often lost money, and its cash flow is not robust. Mr. Musk may benefit from cutting costs so the company is less expensive to operate.Twitter’s layoffs are unlikely to be the largest in the tech industry by total number. The computer manufacturer HP cut 24,600 of its employees, about 7.5 percent, in 2008. It later cut tens of thousands more, reaching about 30 percent of its work force.Elon Musk’s Acquisition of TwitterCard 1 of 8A blockbuster deal. More

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    U.S. Details How It Plans to Police Foreign Firms

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    A government committee issued new guidelines for how it determines penalties for foreign companies that break agreements to protect U.S. national security.WASHINGTON — The federal government on Thursday laid out for the first time how it will determine penalties for foreign companies that break agreements to protect American national security.When some foreign companies buy American firms, they sign agreements with the Committee on Foreign Investment in the United States, a group of federal agencies, in order to mitigate national security concerns about the new ownership. The committee, known as CFIUS, has the ability to levy fines, some of them very large, on companies that break those agreements.The new guidelines issued on Thursday give insight into how the committee, which wields considerable power over foreign transactions but is often seen as a black box, makes its decisions. In recent years, CFIUS has forced a Chinese company to sell the dating app Grindr and has made another Chinese firm divest an American maker of hotel management software. The committee is currently negotiating an agreement with TikTok, the popular video app, to resolve concerns posed by its Chinese ownership.According to the new guidelines, the committee could consider more serious penalties when a foreign company’s failure to follow an agreement causes an especially grave risk to national security. CFIUS would also consider whether it took a long time for the committee to learn of a foreign company’s failure to comply with an agreement. And it would take into account whether a company’s failings had been intentional or simply negligent, according to the new guidelines, which are not binding.President Biden has been trying to limit the sway that China and other adversaries have over American companies and consumers. Lawmakers and regulators have grown increasingly concerned that China could use its proximity to major computer chip manufacturers in Asia to influence the supply of a device that is central to a vast array of products, including appliances and automobiles. Many are also worried that Chinese-owned apps like TikTok and WeChat might hand over Americans’ data to Beijing under Chinese laws.This month, the Biden administration issued restrictions that stop Americans from working with Chinese chip companies. Last month, Mr. Biden signed an executive order directing CFIUS to closely scrutinize whether corporate deals involving foreign companies, including from China, would expose the personal data of Americans or involve crucial emerging technologies.The guidelines issued on Thursday do not name any specific foreign country.Paul Rosen, the assistant secretary for investment security at the Treasury Department, which oversees CFIUS, said in a statement that most foreign companies abided by their agreements on national security. But, he said, “those who fail to comply with CFIUS mitigation agreements or other legal obligations will be held accountable.”The committee has been busy in recent years, reviewing hundreds of corporate deal filings in 2021, according to the reports it sends to Congress. In some of those cases, the committee agreed to approve a deal only if the foreign company agreed to carry out measures designed to reduce its concerns.Mr. Rosen said in his statement that the guidelines sent a “clear message” that it was “not optional” for companies to follow their agreements with the government.Under federal law, the government can fine companies that violate their agreements with the committee. The fines can be significant, reaching as high as the total value of the corporate deal in question.The guidelines also publicly explain how companies can challenge a penalty from the government, and they shed more light on how the committee monitors for violations. According to the memo, the government learns of possible violations from “across the U.S. government, publicly available information, third-party service providers (e.g., auditors and monitors), tips” and participants in the deal itself. More

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    F.T.C. Chair Lina Khan Upends Antitrust Standards by Suing Meta

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    Lina Khan may set off a shift in how Washington regulates competition by filing cases in tech areas before they mature. She faces an uphill climb.WASHINGTON — Early in her tenure as chair of the Federal Trade Commission, Lina Khan declared that she would rein in the power of the largest technology companies in a dramatically new way.“We’re trying to be forward looking, anticipating problems and taking fast action,’’ Ms. Khan said in an interview last month. She promised to focus on “next-generation technologies,” and not just on areas where tech behemoths were already well established.This week, Ms. Khan took her first step toward stopping the tech monopolies of the future when she sued to block a small acquisition by Meta, the company formerly known as Facebook, of the virtual-reality fitness start-up Within. The deal was significant for Meta’s development of the so-called metaverse, which is a nascent technology and far from mainstream.In doing so, Ms. Khan upended decades of antitrust standards, potentially setting off a wholesale shift in the way Washington enforces competition across corporate America. At the heart of the F.T.C.’s lawsuit is the idea that regulators can apply antitrust law without waiting for a market to mature to the point where it is clear which companies hold the most power. The F.T.C. said such early action was justified because Meta’s deal would probably eliminate competition in the young virtual-reality market.Since the late 1970s, most federal challenges to mergers have been in large, well-established markets and aim to prevent already clear monopolies. Regulators have mostly rubber-stamped the purchases of start-ups by tech giants, such as Google’s 2006 deal to buy YouTube and Facebook’s 2012 acquisition of Instagram, because those markets were still emerging.As a result, Ms. Khan faces an uphill climb. Regulators have been reluctant to try to stop corporate mergers by relying on the theory that competition and consumers will be harmed in the future. The federal government lost at least two cases that used this strategy in the past decade, including an attempt to block a $1.9 billion merger in 2015 among X-ray sterilization providers that the F.T.C. had predicted would harm future competition in regional markets.The F.T.C.’s lawsuit against Meta in the budding virtual-reality market is a “deliberately experimental case that seeks to extend the boundaries of merger enforcement,” said William Kovacic, a former chair of the agency. “Such cases are certainly harder to win.”The F.T.C.’s action immediately caused a ruckus within antitrust circles and across the tech industry. Silicon Valley tech executives said that moving to block a deal in an embryonic area of technology might stifle innovation and spook technologists from taking bold leaps in new areas.“Regulators predicting future markets is a very, very dangerous precedent and position,” said Aaron Levie, the chief executive of the cloud storage company Box. He warned that venture capitalists and entrepreneurs would become wary of going into new markets if regulators cut off the ability of companies like Meta to buy start-ups.Adam Kovacevich, the president of the trade group Chamber of Progress, which represents Meta, Amazon and Alphabet, also said the lawsuit would have a chilling effect on innovation.Read More on Facebook and MetaA New Name: In 2021, Mark Zuckerberg announced that Facebook would change its name to Meta, as part of a wider strategy shift toward the so-called metaverse that aims at introducing people to shared virtual worlds.Morphing Into Meta: Mr. Zuckerberg is setting a relentless pace as he leads the company into the next phase. But the pivot  is causing internal disruption and uncertainty.Zuckerberg’s No. 2: In June, Sheryl Sandberg, the company’s chief financing officer announced she would step down from Meta, depriving Mr. Zuckerberg of his top deputy.Tough Times Ahead: After years of financial strength, the company is now grappling with upheaval in the global economy, a blow to its advertising business and a Federal Trade Commission lawsuit.“This is such an extreme and unfounded reaction to a small deal that many tech industry leaders are already worrying about what an F.T.C. win would mean for start-ups,” he said.For Ms. Khan, winning the lawsuit may be less of a priority than showing it’s possible to file against a tech deal while it is still early. She has said regulators were too cautious in the past about intervening in mergers for fear of harming innovation, allowing a wave of deals between tech giants and start-ups that eventually cemented their dominance.“What we can see is that inaction after inaction after inaction can have severe costs,” she said in an interview with The New York Times and CNBC in January. “And that’s what we’re really trying to reverse.”Ms. Khan declined requests for an interview for this article, and the F.T.C. declined to comment on Thursday.Mark Zuckerberg, Meta’s chief executive, testifying on Capitol Hill in 2019. He has bet the company on the metaverse, a technology frontier.Pete Marovich for The New York TimesMeta said the F.T.C. was applying antitrust law incorrectly. The lawsuit focuses on how the merger with Within would remove competition, but Meta said the agency was ignoring the large number of companies that also had health and fitness apps.“The F.T.C. has no answer to the most basic question — how could Meta’s acquisition of a single fitness app in a dynamic space with many existing and future players possibly harm competition?” Nikhil Shanbhag, Meta’s vice president and associate general counsel, wrote in a blog post.The company added that it hadn’t decided on whether to challenge the lawsuit, which was filed on Wednesday in U.S. District Court for the Northern District of California.The F.T.C. accused Meta of building a virtual reality “empire,” beginning in 2014 with its purchase of Oculus, the maker of the Quest virtual-reality headset. Since then, Meta has acquired around 10 virtual-reality app makers, such as the maker of a Viking combat game, Asgard’s Wrath, and several first-person shooter and sports games.By buying Within and its Supernatural virtual-reality fitness app, the F.T.C. said, Meta wouldn’t create its own app to compete and would scare potential rivals from trying to create alternative apps. That would hobble competition and consumers, the agency said.“This acquisition poses a reasonable probability of eliminating both present and future competition,” according to the lawsuit. “And Meta would be one step closer to its ultimate goal of owning the entire ‘Metaverse.’”Rebecca Haw Allensworth, a professor of antitrust law at Vanderbilt University, said the F.T.C.’s arguments would face tough scrutiny because Meta and Within did not compete with each other and because the virtual-reality market was fledgling.“The way that merger analysis has stood for at least 40 years is about what kind of head-to-head competition does this merger take out of the picture,” she said.The onus will now be on the agency to convince a judge that its predictions about the metaverse and Meta’s purchase would harm competition.“The burden is on the F.T.C. to show, among other things, reasonable probability that Meta would have entered the V.R.-dedicated fitness apps market, absent its acquisition of Within,” said Diana Moss, president of the American Antitrust Institute.If the court dismisses the case, Ms. Khan may have created a precedent that would make it harder to pursue nascent competition cases, antitrust experts cautioned. That could then embolden tech giants to acquire their way into new lines of businesses.“This is a precedential system which goes both ways — if you win or lose — and sends a signal to the market,” Ms. Allensworth said.The F.T.C. is reviewing other tech deals, including Microsoft’s $70 billion acquisition of the gaming company Activision and Amazon’s $3.9 billion merger with One Medical, a national chain of primary care clinics. In addition, the agency has been investigating Amazon on claims of monopoly abuses in its marketplace of third-party sellers.Ms. Khan appears to be prepared for long legal battles with the tech giants even if the cases do not end up going the F.T.C.’s way.In her earlier interview with The Times and CNBC, she said, “Even if it’s not a slam-dunk case, even if there is a risk you might lose, there can be enormous benefits from taking that risk.” More