On March 20, the California Law Revision Commission (CLRC) held a meeting to discuss draft proposals that would fundamentally reshape the state’s approach to mergers and acquisitions. The proposals aim to establish a California-specific antitrust regime that departs from established federal law, an approach the proposal’s own authors described as a “sea change” meant to be untethered from federal precedent. As the Association for Competitive Technology (ACT) detailed in a follow-up letter submitted to the Commission this week, the consequences for California’s startup ecosystem deserve far more scrutiny than they have received.
Association for Competitive Technology (ACT) addresses the California Law Revision Commission on the risks of the proposed merger statute for California’s startup ecosystem, March 20, 2026.
To understand why this matters, let’s look at how antitrust law currently works. Under the federal framework that has guided the U.S. economy for decades, regulators and courts consider the actual, physical-world effects of a proposed merger to determine the impacts on competition. For example, they ask questions like “Will a transaction genuinely harm consumers by raising prices or stifling innovation?” And for decades this evidence-based approach has guided the U.S. economy to lead the world and to produce the greatest technological advancements in history.
Now compare this to the CLRC’s approach. At its core, the CLRC proposal throws out the evidence-based approach in favor of rigid mathematical shortcuts. Under the revised options being considered, mergers would be presumed illegal automatically if they trigger specific market share or concentration thresholds, without consideration of whether that is good or bad for consumers. A further option would introduce a novel “appreciable risk” standard, which would prohibit mergers that pose even a minimal probability of reducing competition by more than a trivial amount. This standard has never been adopted by any jurisdiction in the world.
For the small software businesses and connected device companies that drive the global app economy, the CLRC’s proposals strike at a critical lifeline. Acquisition is often the most realistic path to getting innovative products to market. Initial public offerings are costly, risky, and inaccessible to most small firms. Being acquired allows startups to combine their innovations with the complementary resources, technical expertise, and distribution networks of larger firms.
Consider a practical example. Imagine a five-person startup in San Jose that builds a breakthrough voice recognition algorithm. The technology is exceptional, but the startup lacks the hardware manufacturing and global distribution networks to get it into consumers’ homes. A major smart home platform company wants to acquire them to integrate the technology into millions of smart speakers. This is how innovation reaches scale.
Under the proposals, once a merger is presumed illegal, the companies involved do not simply get to explain why the deal is good for consumers. Instead, they face a narrow and demanding rebuttal process that would severely constrain this pathway. If that smart home company already holds a significant market share, the merger triggers the structural presumption of illegality. To save the deal, the merging parties would need to prove that procompetitive benefits occur in the exact same relevant market as the alleged harm, and only if the anticompetitive effects are deemed de minimis would the merger be approved.
The problem is this ignores how innovation actually works in the digital economy. Small app developers do not build products that fit neatly into a single, narrowly defined market. A small health app startup, for example, might simultaneously improve patient diagnostics, reduce costs for insurers, and enable better data for wearable device makers. A standard that only counts benefits in one narrow market while disregarding transformative benefits everywhere else penalizes the cross-market innovation that defines the digital economy.
The stakes are especially high in the era of artificial intelligence (AI). Developing AI requires immense computational resources and volumes of capital that startups cannot access on their own. At the same time, the next generation of breakthroughs will come from startups. By partnering with or being acquired by, larger firms capable of providing the necessary infrastructure, a startup’s cutting-edge technology can be commercialized and benefit consumers everywhere. Proposals that make these acquisitions presumptively suspect risk slowing the innovation pipeline at precisely the moment when California, and the United States, should be accelerating it.
Equally concerning are the signals this sends for the broader ecosystem. Even for founders who are not actively seeking an exit, restricting acquisition prospects diminishes enterprise value and weakens their negotiating position with investors. When exits become less viable, early-stage investment declines, startup formation slows, and the competitive landscape narrows rather than broadens. Put differently, a barrier to exit is a barrier to entry.
The California Attorney General is already empowered to independently challenge anticompetitive mergers under the established federal legal framework. Creating a divergent standard risks producing a patchwork of state-level regulations that increase compliance costs and delay transactions, with smaller businesses bearing a disproportionate share of that burden.
California’s policymakers should think carefully before adopting tools that could undermine the innovation economy they are trying to protect.