Under the HSR Act, parties to certain acquisitions of assets, voting securities, or interests in noncorporate entities (such as partnerships or limited liability companies) that meet applicable threshold tests and do not qualify for an exemption must file premerger notifications with the FTC and DOJ, pay a filing fee, and observe a waiting period before closing. The FTC’s Notice proposes amendments to the premerger notification rules, premerger notification form (HSR Form), and HSR Form instructions, which would result in significant changes to the information and documents that are required to be submitted in an HSR filing. The FTC last amended the HSR rules in 2020 and this is the first “top-to-bottom” overhaul of the HSR form in more than 45 years. The Notice is subject to a 60-day public comment period, which ends on 28 August 2023.
The proposed changes – which apply to all transactions whether or not the transaction raises substantive concerns – require parties to provide additional information that the FTC and DOJ believe will help them more effectively screen transactions for potential competition issues and reflect the agencies’ stated enforcement priorities, including private equity acquisitions, non-horizontal transactions, impacts on labor markets, impacts on nascent competition, and interlocking directorates. The proposed new disclosures are more robust and broader in scope than the information that is currently disclosed in an HSR filing. While the proposed changes vastly expand what is required for the filing, it does not change the reportability requirements for determining whether a filing is required (the FTC had previously announced proposed rule changes that would have increased the number of transactions subject to HSR reporting requirements but has not yet released a final rule).
Noteworthy changes and additions include requiring parties to provide the following:
- New narrative responses: Parties will be required to submit a number of narrative responses like those required by several major foreign antitrust authorities, including:
- Additional information about the transaction, including details about the strategic rationale for the transaction (citing to documentary attachments to the HSR filing that support such rationales) and a timeline of key dates and conditions for closing. Parties would also be required to provide a diagram of the transaction structure explaining entities and individuals involved in the transaction.
- More detailed competition and overlap analysis, including narratives describing horizontal overlaps or vertical or supply relationships between the parties (and even certain supply relationships between a filing party and a competitor to the other filing party), granular geographic information for certain overlaps, and information about customers (including contact information) for certain overlapping products or services.
- Information about the filing party’s workers to assess labor market impacts from the transaction (including certain workforce safety information).
- Documents: The Notice expands on a number of types of documents that parties would be required to submit as part of the filing, including:
- A broader set of transaction-related agreements, including all exhibits and schedules to such agreements. Parties could only file on a letter of intent or term sheet if it provides sufficient detail about the scope of the transaction. Parties would also be required to submit all other agreements between the transacting parties, including noncompete or non-solicitation agreements, supply agreements, or licensing agreements within one year of the filing.
- A broader set of documents analyzing competition- and synergy-related issues (in response to Items 4(c) and 4(d)), including draft documents, transaction documents that were created by the supervisory deal team leads (not just officers and directors), and certain strategic documents that do not relate directly to the proposed transaction. Parties would also be required to provide organizational charts for authors and to identity all persons whose files were searched for responsive documents, submit English-language transactions for all foreign-language documents submitted, and identify all communications systems or messaging applications used by the filing party that could store or transmit information or documents related to its business operations.
- The certification for the filing would be amended to require the filing party to affirm that it has taken the necessary steps to prevent the destruction of any documents or information related to the transaction prior to the expiration of the waiting period.
- Past acquisitions: Both parties would be required to provide information about their prior acquisitions with respect to businesses where the parties overlap (currently, this only applies to acquiring persons), the period for reporting would expand from five to ten years, and certain thresholds which limited the reporting requirement would be eliminated.
- Labor markets: Data classifying employees based on Standard Occupational Classification system categories.
- Officers, directors, and board observers: Identification of all officers, directors, and board observers of all entities within the acquiring person or the acquired entity as applicable, as well as the identification of any other entities for which those individuals serve or had service as an officer, director, or board observer within the two years before the HSR filing was submitted. This is explicitly intended to assess interlocking directorates.
- Minority investors: Identification of minority holders (including limited partners) of entities related to the transaction or controlled by entities involved in the transaction (with minority holders on the acquired side limited to those who will retain interests in the acquired entity). This requirement would require significant additional information from investment entities, such as funds and master limited partnerships. This expands on the HSR associate concept, which was introduced in 2011, to provide insight into competitively significant relationships between parties.
- Reporting of pipeline or pre-revenue products: Filers would be required to report NAICS Codes for certain pipeline or pre-revenue products, with the acquiring person required to identify NAICS Codes for any products or services under development that would overlap with existing or pipeline products of the acquired person and the acquired person required to identify NAICS Codes for products or services for which it anticipates having annual revenues of at least $1 million within the following two years.
- Foreign subsidies and defense contracts: Information regarding subsidies (defined as grants, loans, loan guarantees, tax concessions, preferential government procurement policies, and government ownership or control) from certain foreign governments, as required by the Filing Fee Modernization Act of 2022. Filers would also need to identify and describe any pending or existing defense or intelligence procurement contracts.
The Notice did not address whether the FTC would resume grants of early termination, which have been indefinitely suspended since February 2021.
The Notice represents the most recent effort by the current FTC and DOJ to overhaul US competition enforcement. In a statement on the proposed amendments, FTC Chair Lina Khan stated that the information currently collected by the HSR Form is “insufficient for our teams to determine, in the initial 30 days, whether a proposed deal may violate the antitrust laws” and that the “current HSR form fails to capture information about key aspects of competition, such as labor markets or research and development activity.” Khan believes that the proposed changes will address the “shortcomings” of the current HSR Form and fill “key gaps” that FTC and DOJ staff typically encounter. Significantly though, and unlike required notifications in other jurisdictions, much of the proposed new information and documents would be required irrespective of whether the reported transaction has any conceivable competitive issues.
The Notice acknowledges the changes would “impose additional burden” on parties, estimating that the time required to prepare an average HSR filing will increase from 37 hours to 144 hours, but also noting that filings for complex transactions (representing 45% of all filings) could take up to 259 hours to prepare – a seven-fold increase from the current estimated burden. The FTC reasons in its press release that this additional information should enable FTC and DOJ to be more effective and efficient in screening transactions in the first 30 days.
The proposed rule is just that: it has been proposed but is not final. Any changes would not take effect for several months, so filings made for reportable transactions over the next few months will not be impacted. The Notice was published in the Federal Register on 29 June 2023, and the public has 60 days from that date to submit comments (ending 28 August 2023). After receiving comments, the FTC may make changes in response to comments or could finalize the rule as currently drafted. The FTC typically provides at least 30 days after the end of a comment period before a new rule takes effect.
The Notice states that the agencies are developing an electronic filing platform and that the FTC will more clearly lay out the redesign of the HSR Form and how filers will submit information in its Final Rule. The development of an electronic platform may further lengthen the FTC’s timeline to implement any changes that are included in a Final Rule since it could take time to develop this platform.
Despite the FTC’s professed goal of requiring more documents (including certain draft documents) and information to be included in an HSR notification in order to make the initial HSR review process more efficient and effective, it is likely that the proposed rules if enacted would have the opposite effect. The substantial new information and documents that would need to be included in an HSR notification could easily require more review time by the agencies – even for transactions that have no conceivable anticompetitive effects.
If these changes take effect, parties should be mindful of the significant additional time needed to prepare HSR filings and incorporate time for filing preparation into transaction timelines and HSR provisions of deal documents. As the Notice expects, the time and cost burden will increase significantly for all filings, but especially for those involving complex transaction structures or transactions with horizontal overlaps or vertical relationships. Transaction agreements commonly allow for ten business days between the signing of a definitive agreement and submission of the parties’ HSR filings. But going forward, agreements may need to allow for significantly longer time periods given the significantly increased upfront preparation and collection time. Corporate counsel should anticipate that parties would need to begin the HSR process much earlier than in the past – even frequent filers will need significant lead time. In addition, filing parties would also need to budget significantly higher costs to prepare HSR filings.
We will continue to monitor developments during and after the 60-day comment period and are available to answer questions regarding what these changes may mean for your transactions.
Authored by Robert Baldwin, Michele Harrington, and John Hamilton.