Key Takeaways:

• FTC proposes to increase complexity of HSR filings.
• HSR filings would become more burdensome and expensive to prepare.
• HSR filings would require much more coordination between M&A counsel and antitrust counsel.
• Interested parties will have an opportunity to comment on the proposed rule.

On June 27, the Federal Trade Commission (FTC) issued a press release[1] announcing proposed changes to reporting requirements under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the HSR Act). Under the HSR Act, parties to transactions that are large enough to trigger filing requirements must submit HSR forms, pay a filing fee and observe a waiting period before consummating the transaction. The FTC now proposes requiring such parties to submit information that is well beyond what is required today. Preparation of HSR filings – even those where the transaction presents no realistic risk of harm to competition – will be more burdensome, time-consuming and expensive to prepare.

In its press release and frequently asked questions[2] publication, the FTC insists that these changes are intended to improve the efficiency of premerger reviews within the antitrust agencies. The FTC claims that it does not have sufficient resources to address the “surge” of HSR filings it has been experiencing, and it claims that requiring substantial additional information will allow it to identify problematic transactions with greater ease. And the FTC further asserts that these changes to the reporting requirements will better capture competition issues that arise from transactions, including in “non-horizontal ways.”

The forthcoming Notice of Proposed Rulemaking will be published in the Federal Register. There will be a 60-day notice and comment period following its publication.

What is slated to change?

Currently, the HSR form requires the filers to identify themselves and describe the transaction. The parties also must include their financial statements and certain existing documents that discuss the competitive effect of the transaction. The parties report the industry codes in which they derive revenues, and if there are overlapping revenues, they must provide geographic information concerning the overlap. The FTC and Department of Justice (DOJ) no longer believe that the competitive impact of a transaction can be assessed efficiently with only this information.

Accordingly, the proposed rule requires that filers report many additional pieces of information with an HSR filing. These changes include, but are not limited to:

• Additional Information About the Parties to the Transaction. In addition to identifying the parties and providing financial statements, parties will be required to submit narrative responses identifying additional information about the parties to the transaction, including a description of others that “may exert influence” yet are not traditional equity holders in the corporate structure. These types of parties include creditors, holders of nonvoting securities, board members, board observers, or a person who has the right to appoint directors, related entities and management entities. The proposal also substantially expands reporting of minority holders and their holdings.
• More Robust Transaction Description Requirements. In addition to a transaction description, the proposal would require parties to explain the rationale for the transaction. They will also be required to submit a transaction timeline and a transaction diagram showing the relationships among all the parties to the transaction.
• Competition Narratives. If there are overlapping revenues, the parties will be required to prepare narratives about the horizontal overlap and the supply relationships. The horizontal overlap narrative must describe current products and services offered, sales and/or usage volumes for the past two years, a description of the customers for each type of product/service, contact information for the top 10 customers, and a description of licensing agreements and existing noncompete agreements. The supply relationship narrative must provide a similar level of detail concerning related sales and purchases in the two years preceding the filing.
• Labor Market Information. Parties will be required to submit six-digit Standard Occupational Classification codes for the five largest occupational categories represented by the employees within each party. For each overlap, parties will be required to provide geographic information. The proposed rule changes would also require reporting of certain workplace safety and conditions data.
• Expansion of Reporting re Prior Acquisitions. Currently, the buyer must report prior acquisitions in overlapping North American Industry Classification System codes for the past five years that exceed $10 million. Under the proposed rule, prior transactions in the overlap must be reported within the past 10 years, by both buyer and seller. The rule change would also eliminate the size threshold for reportability of prior acquisitions as well as deem certain asset sales prior acquisitions.
• Foreign Information. The rule change would require reporting of any subsidies received from foreign governments, among other information.

Less than 1 percent of HSR filings result in an FTC or DOJ challenge to the proposed transaction. Nevertheless, the other 99 percent of HSR filers will also have to supply substantial additional information, which will take additional time at an additional cost and require more coordination between M&A counsel and antitrust counsel. There is little if any silver lining here for most HSR filers. But there is one small group of filers that may benefit: those filers who get caught in a “second-request” investigation they might have avoided if they had better prepared. For those few filers, the additional preparation required by the proposed rule may be a blessing in disguise.

Once the Notice of Proposed Rulemaking is published, the public will have 60 days to comment. If you or your organization wishes to submit a comment, visit https://www.regulations.gov/.

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