The Federal Trade Commission (FTC) and the Department of Justice (DOJ) recently issued a joint Notice of Proposed Rulemaking regarding premerger notifications required under the Hart-Scott-Rodino (HSR) Act. If enacted, the amendments will significantly affect the future of merger reviews and associated antitrust enforcement.
The HSR Act, enacted in 1976, mandates that transactions exceeding specified thresholds be reported to the FTC and DOJ for antitrust review prior to their consummation. The associated HSR filing form requires detailed information about the acquiring and acquired parties, as well as the proposed transaction. On June 27, 2023, the FTC and the DOJ issued a joint Notice of Proposed Rulemaking that would amend the current HSR rules, resulting in significantly more information being provided to the agencies for all reportable transactions.
Key Provisions in the Notice of Proposed Rulemaking
The Notice of Proposed Rulemaking outlines several key changes to the HSR filing form aimed at gathering additional information about the potential competitive effects of transactions. If adopted, the changes would dramatically increase the time and cost of notifying the agencies of a merger, adding weeks (and potentially months) to the front end of the process. The new framework would require merging parties to collect and provide a broader set of business documents and data. Further, the parties would be required to prepare explanatory written responses describing the transaction, bringing U.S. merger review more into line with foreign merger control regimes such as the European Union. Notably, the amendments would apply to all HSR filings even though most transactions do not raise competitive concerns.
Under the current filing form, merging parties provide a brief description of the proposed transaction, including the nature of the transaction (e.g., merger, acquisition, or joint venture), the consideration to be received, and the assets or voting securities involved. Parties also provide their most current financial statements and documents prepared for the transaction that discuss competitive aspects such as competitors, market shares, barriers to entry, and pricing strategies.
Some new information that must be provided on the HSR filing form, if the proposed rule is enacted, includes but is not limited to the following:
- Additional Information About the Parties:
- Organizational charts and diagrams
- Identification of any officer or director in the two years prior to the transaction
- Identification of anyone who may exert influence over the acquired business, including significant creditors, holders of non-voting stock (e.g., options, warrants), and board members or board observers with rights to appoint a board member
- Additional Transaction Details:
- Transaction diagram depicting the relationship between all persons involved, such as step plans depicting current and future ownership and organization structure
- Detailed description of the strategic rationale for the transaction
- Details surrounding investment vehicles, including capitalization tables at the private equity fund level
- Competitive Narratives:
- Description of the competitive landscape, identifying areas of actual or potential competition between the buyer and seller, including customer names and contact information
- Description of current supply chain, including existing supply agreements between the parties
- More Item 4(c) Documents:
- Item 4(c) of the current HSR form requires parties to include “studies, surveys, analyses and reports” prepared by or for officers or directors “for the purpose of evaluating or analyzing the acquisition with respect to market shares, competition, competitors, markets, potential for sales growth or expansion into product or geographic markets.” The new rule would also require:
- drafts of Item 4(c) documents—not just final versions as currently required; the FTC expressly stated that this new requirement is designed to prevent filers from submitting “sanitized” versions of Item 4 documents.
- ordinary-course business documents analyzing the competitive landscape, even if not related to the proposed transaction.
- Information Regarding Labor Markets:
- Classification of all employees based on current Standard Occupational Classification system categories
- Disclosure of past penalties or findings issued by the Department of Labor, the National Labor Relations Board, or the Occupational Safety and Health Administration
The proposed amendments also suggest that companies should pay more attention to the antitrust risks posed by transactions that are not reportable under HSR. Such transactions would need to be disclosed in connection with any future HSR-reportable transaction involving a similar line of business. The prior transactions could come under scrutiny at that time and impact the agency’s scrutiny of the larger current transaction under review.
Public Comment and Final Rule
The proposed rulemaking is open for public comment until August 28, 2023 (60 days after the Notice was published in the Federal Register), allowing interested parties to express their views and provide feedback on the potential impact of the proposed changes. The agencies will carefully consider these comments before finalizing the rulemaking, considering various perspectives and attempting to strike a balance between regulatory effectiveness and minimizing burdens on businesses. The final rule will likely take several months to prepare, as the agencies consider the comments received. Therefore, the final rule is not expected to go into effect until late 2023 or early 2024. The final rule also may be subject to court challenges that could further delay its implementation.
Takeaways and Best Practices
It remains to be seen whether the proposed rule will be finalized by the agencies and allowed by the courts to stand. However, should it be enacted, companies should be prepared both for the significant additional burden created by the enhanced filing requirements as well as more rigorous scrutiny. If the proposed rule is finalized, businesses considering transactions should consult with their antitrust counsel early in the deal process to develop appropriate risk mitigation strategies including document creation and retention policies.
Most importantly, transacting parties will need to build in considerably more time to prepare their HSR filings, including setting realistic filing deadlines and “drop dead” dates in negotiated merger agreements. Currently, it is common for parties to commit to making HSR filings in merger agreements within five to ten business days of signing, a timeframe that likely will be challenging under the proposed filing requirements. The FTC itself estimates that the proposed new rules could extend the time required to prepare an HSR filing from about 37 hours to 144 hours, and if the parties are competitors, the FTC estimates that it could take even longer.
Further, due the increased scope of information required, the agencies likely will apply more rigorous scrutiny to proposed transactions than in the past. This will increase the time it takes for the agencies to review the filings and raises the possibility of more transactions receiving further questioning.
The proposed rule also underscores the antitrust agencies’ continuing interest in labor markets and private equity. The amendments would expressly require submission of information to allow the agencies to evaluate the effect of mergers on not just products or services, but also workers. While the agencies have been requesting labor-related information in a small subset of deals already, all transactions will be subject to such review if the new rule is enacted. In addition, private equity firms that historically did not have to provide fund information may now be required to include investor information and information on unreportable roll-up acquisitions.
Stay tuned for updates on this critical development as we continue to closely follow and report on the evolving regulatory landscape. If you have questions about these proposed changes, including submitting comments to the agencies, please contact us.