On June 27, 2023, the Federal Trade Commission (“FTC”) and the Department of Justice (“DOJ”) released proposed changes to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR” or the “Act”) premerger notification filing requirements. These expansive changes come following the first top-to-bottom review of the HSR filing documents since the Act was adopted. If adopted, the proposed changes will dramatically increase the time and effort required to prepare HSR filings. The FTC estimates that the proposed changes will result in an additional 12 to 222 hours to complete an HSR filing, with the average estimated hours per filing rising to 144 hours from the current estimate of 37 hours. The FTC also projects an additional $350 million in labor costs to complete the more complex revised HSR notification and report form.

If the new rules are adopted, parties to a reportable transaction and their counsel should plan for significantly more time to prepare the HSR filing. Currently, parties to a transaction often require that an HSR filing be made within seven to ten days after the execution of definitive agreements. Under the new rules, parties should expect a minimum of four to six weeks before a filing will be ready for submission irrespective of whether the transaction poses any substantive anti-competitive issues.

The proposed rules also significantly increase the document submission requirements as discussed below. Consequently, document creation and retention policies of filers will become more critical than ever. Potential filers should institutionalize best practices for document creation and collection early in the transaction process.

The 60-day public notice and comment period lasts until August 28, 2023. The new rules could go into effect as early as Q4 2023.

Key Changes

If implemented, the proposed rules would require parties to transactions that exceed the HSR thresholds to provide drastically more information about their transactions in their HSR filings. Parties would be required to submit details relating to deal rationale, horizontal and vertical relationships between the parties, and the structure and management of the parties, including their subsidiaries and affiliates.

Key points of the proposed rules include:

• Competitive Analysis Narratives: The proposed rules would require parties to disclose top customer information, as well as the rationale behind the deal in a narrative format. This competitive analysis would also require the identification of vertical overlaps (such as existing suppliers), horizontal overlaps (such as overlapping business lines), including overlaps involving pipeline products and a detailed timeline of the transaction.
• Labor Information: Parties would be required to classify workers based on the Standard Occupational Classification (“SOC”) system and provide worker and workplace safety records. Filers also would need to provide their five largest SOC classifications. Additional labor information, such as geographic location, may be required if the parties have employees in the same classification codes. (These changes likely reflect the FTC’s use of the antitrust laws to address perceived labor market imbalances.)
• Expanded Item 4(c)/4(d) Documents: The proposed changes would significantly increase the documents filers must disclose under items 4(c) and 4(d) of the current HSR filing form. Currently, documents that mention topics such as competition, market share, sales growth, geographic and product expansion and synergies that are prepared by or for any officer or director are required to be submitted with the HSR form. The proposed rules broaden the universe of 4(c)/4(d) documents to include such documents that are also prepared by or for supervisory deal team leads, who are those individuals that “functionally lead or coordinate the day-to-day process for the transaction at issue”. Further, the proposed rules require the provision of draft versions of the 4(c)/4(d) documents prepared by or for officers, directors, and supervisory deal team leads and certain ordinary course of business documents.
• Detailed Transaction Agreement: Under current HSR rules, filing parties may submit a signed letter of intent or term sheet describing the transaction as a basis for the filing. The proposed rules would require submission of a more detailed term sheet, or draft transaction agreement, which includes “sufficient detail” to confirm the transaction is “more than hypothetical.” The proposed rules also require that the parties produce all portions of the acquisition agreement, including schedules and exhibits, and all side agreements that are part of the transaction documents, including non-competition agreements. In addition, if the parties to the transaction have an existing contractual relationship, such as licensing or supply agreements, those agreements must also be produced, including such agreements that have expired or terminated within one year of the filing.
• Additional Disclosures about Filing Parties: The proposed rules would require disclosure of investment vehicles and corporate relationships involved in the transaction, as well as information on acquisitions made by the acquiring party in the previous 10 years (rather than 5 years as per the current rules). Both parties would be required to disclose the jurisdictions where foreign merger control filings would be made and report whether any foreign subsidies are received from governments that are “strategic or economic threats to the United States.” In an effort to discover existing or potential interlocking directorates, parties will also be required to identify officers, directors, or board observers of all entities within both parties and identify any other entities for which those individuals currently or previously served as an officer, director, or board observer. Lastly, the changes would require the disclosure of additional minority interest holders, creditors and holders of non-voting securities who may exert influence over either party. The additional disclosure requirements may be especially onerous for private equity and venture capital firms.
• Additional Certifications: In addition to the current certification requirements in the HSR rules, under the proposed rules filing parties will need to certify that they have taken necessary steps to prevent the destruction of documents and information related to the transaction and the certification includes language acknowledging that there are criminal penalties involved for failure to do so. Filers will also have to provide a list of all messaging systems that employees may use in the ordinary course which could be used to store or transmit documents related to the business operations.

The final rule may deviate from the proposed changes and adjustments may be made following the comment period.

Smith Anderson will continue to monitor the rulemaking process and provide updates on significant developments.