Changes mean filers will face significantly increased burden and expense

On June 27, 2023, the Federal Trade Commission (FTC), with the concurrence of the U.S. Department of Justice (USDOJ), released a 133-page Notice of Proposed Rulemaking (NPRM) seeking to overhaul the Hart-Scott-Rodino Act of 1976’s premerger notification process.[1] Under the HSR Act, parties to mergers, acquisitions, joint ventures, and other types of transactions that meet certain jurisdictional tests and are not otherwise exempt from HSR filing requirements must file premerger notification and report forms with the FTC and USDOJ and then wait 30 days (15 days in the case of certain bankruptcy proceedings and cash tender offers) before they may close their transactions.[2] The HSR Act gives regulators an opportunity to review transactions for potential antitrust concerns before they close. Enacted in 1976, the HSR process has remained substantially the same since its implementing rules were adopted in 1978. The NPRM does not propose substantive changes to the HSR Act, so the HSR Act’s jurisdictional tests and exemptions remain unchanged. The NPRM does, however, contemplate an unprecedented overhaul to the HSR premerger notification and report form and instructions, and with that comes substantially greater burden and expense for filing parties. Extensive additional information and significant new categories of information not previously necessary would be required by the proposed form.

This article provides an overview of the proposed changes and their potential impact. The NPRM was published in the Federal Register on June 29, 2023, so interested parties will have until Aug. 28, 2023 to file comments setting forth their views on the proposed changes. We expect numerous comments will be filed with many commenters voicing significant concerns about the breadth of additional information required, whether the information is necessary to evaluate transactions, and the increased burdens on filers. The FTC will then review the comments and decide whether it wishes to change the proposed rule. While we cannot predict the final outcome or its timing, we expect that the agency will implement at least some changes to the HSR process by late 2023 or early 2024.

As discussed below, the time is now for interested persons to file comments on these proposed changes to ensure their views are considered by the FTC before a final rule is implemented.

Why and Why Now?

The seeds for these proposed changes were planted relatively early in the Biden administration with the appointment of Lina M. Khan as Chair of the FTC in June 2021. Chair Khan is a noted critic of mergers and “big tech” in particular. Soon after Chair Khan’s appointment, in July 2021, President Biden issued an Executive Order announcing the administration’s strong interest in more robust antitrust enforcement, asserting that industry consolidation has raised prices, decreased innovation, and harmed American workers.[3] Meanwhile, as the pandemic continued, deal making surged to record levels and the number of HSR filings increased exponentially.[4] The FTC, with support from the USDOJ, announced in February 2021 that it would no longer issue early termination[5] of the HSR waiting period for transactions that appear competitively benign,[6] and it also ceased publishing informal interpretations of the HSR Act and HSR rules on its website.[7] In an August 26, 2021 blog post, the FTC changed its long-standing position on excluding debt from the size of transaction for calculating whether an HSR filing is required.[8] In the same blog post, the FTC also presaged the current proposed overhaul by announcing that it was “currently in the process of working with the DOJ to update its existing merger filing process.”[9]

Almost two years later, the FTC has now released its proposed updates to the merger filing process. The reasons for these proposed changes are multi-faceted but seem to boil down to an overarching concern that under the current filing system, the agencies are not receiving sufficient information to conduct a proper analysis of a transaction in the limited time allowed under the HSR Act. As HSR practitioners know, the existing HSR form is highly complex despite its deceptively simple appearance. The current form, with eight separate items and subparts, requires parties to spend significant time ensuring their filings are thorough and accurate. Depending on the nature and complexity of the transaction, practitioners often spend weeks (and sometimes longer) preparing filings. Files must be thoroughly searched for documents that analyze the transaction with respect to certain topics such as competition, markets, and market shares.[10] The number of files (both hard copy and electronic) to be searched varies, but in general, the search is especially challenging in larger companies and in situations where the notified transaction has been under discussion for an extended time period. HSR practitioners are also keenly aware that failure to submit a complete filing carries significant risks, such as daily civil penalties of $50,120.[11]

The burdens must be considered from the perspective of filers (and their lawyers) and agency staff who must review the filings. As discussed below, the proposed revised form will require significant additional information from filers, which will of course require more filer time and resources to prepare and more agency time and resources to review. But the time in which to conduct the review (30 days for most transactions) is not increasing. The Premerger Notification Office (PNO) of the FTC is primarily responsible for administering the HSR program. Because the current PNO staff is relatively small, the burdens on staff must also be considered.[12] It remains to be seen how staff will be able to review significant additional information in the unchanged, limited statutory time period.[13] One possibility is the increased use of the “pull and refile” procedure, in which the acquiring party withdraws its HSR filing (usually late in the 30 day review period) and then refiles it within two business days in order to restart the 30-day HSR clock without paying an additional filing HSR filing fee.[14] Other potential scenarios include: (1) a statutory change to the HSR Act itself to lengthen the waiting periods; and (2) the increased issuance of Second Requests. While these proposed changes clearly convey that U.S. antitrust regulators want to slow down the pace of M&A, or at least incentivize companies to reconsider their M&A plans, we do not believe that these changes, extensive as they are, will cause companies to forego M&A activity.

The timing of the proposed changes is noteworthy given the approaching 2024 election. Considering it will take at least several months for the proposed changes to go through the administrative rulemaking process, the FTC appears to have given itself sufficient time to implement changes well before the next election.

What Are the Proposed Changes?

The HSR form and instructions will be completely reorganized and overhauled. Here, we briefly highlight some of the proposed changes. This is not a comprehensive list; we focus on those proposed changes that are likely to require additional time and expense.

1. Draft agreements or term sheets: Parties will sometimes file HSR on the basis of preliminary agreements, such as a letter of intent, an indication of interest, or agreement in principle. Parties may, but are not obligated to, provide, draft agreements (such as Asset Purchase Agreements). The FTC proposes to change 16 C.F.R. § 803.5(b) to eliminate the ability to submit an HSR filing on a preliminary agreement without providing a term sheet or draft agreement that reflects sufficient detail about the proposed transaction. This change is intended to allow the agencies to understand a transaction’s scope and confirm that the transaction is more than hypothetical. This may create significant timing considerations and additional expenses, as it clearly takes more time to negotiate a draft purchase agreement than a preliminary document.
2. Translation of Foreign Language Documents: Currently, responsive documents required in HSR filings which are written in a language other than English must be provided in English, but only if such translations already exist. The FTC proposes to revise 16 C.F.R. § 803.8 to require that all documents written in a foreign language must be translated into English. This change may create timing issues for parties because they will need to factor in the time to obtain translations. While parties are free to choose the translation methods, the translations must be understandable, accurate and complete. This task may prove especially challenging if a significant number of 4(c) and (d) documents or foreign securities filings (which are often very lengthy) must be translated into English.
3. More information from private equity: While the proposed changes are not focused on any specific industry, it is clear that private equity was top of mind for regulators in drafting these proposed new rules. The proposed form would require significant additional information from private equity funds about their investment relationships. For example, the proposed form requires an organizational chart for funds and master limited partnerships and an identification of limited partners.
4. Disclosure of labor-related information: It is no secret that federal antitrust regulators are intensely focused on labor issues. In early 2023, the FTC proposed a rule that would abolish substantially all non-compete agreements.[15] The USDOJ has criminally prosecuted several individuals and firms for so-called “no poach” agreements and wage fixing.[16] Consistent with this focus, the revised HSR form would contain a new section devoted to labor markets information. Among other items, the new section would require filers to submit data using the U.S. Department of Agriculture’s Economic Research Commuting Zones for the year 2000. Further, the revised form would require filers to submit information about any penalties or findings that were issued against the filer in the prior five years by the U.S. Department of Labor’s Wage and Hour Division, the National Labor Relations Board, or the Occupational Safety and Health Administration. The FTC reasons that “[i]f a firm has a history of labor law violations, it may be indicative of a concentrated labor market where workers do not have the ability to easily find another job.”[17] We are concerned that these new requirements may lead to otherwise procompetitive deals being scuttled for reasons that are entirely unrelated to their substance.
5. Identification of other types of interest holders that may exert influence: Acquiring persons must identify: (i) their creditors; (ii) individuals and entities that hold non-voting securities, options, or warrants in the acquiring entity; (iii) their board members, board observers, or those who have the right to nominate or appoint a board member or board observer; or (iv) individuals and entities that have an agreement to manage the acquiring entity.
6. More information about officers, directors, and board observers: The FTC also proposes that all filers identify their current officers, directors, and board observers, as well as those who served in those capacities for the prior two years. The form would also require identification of all individuals who will serve as an officer, director, or board observers of an entity within the acquiring person as a result of or as contemplated by the transaction. For each individual identified, filers must also identify any other companies for which those individuals serve or have served during the prior two years as officers, directors, or board observers.
7. Changes to Item 4(c) and 4(d)[18]: Currently, Item 4(c) of the HSR form requires filers to submit all documents created by or for officers or directors that analyze the transaction with respect to discrete subjects: competition, competitors, markets, market shares, potential for sales growth, or expansion into product and geographic markets. The new rule would expand the list of 4(c) custodians to include “supervisory deal team leads.” This term is not defined but would encompass the individual or individuals who functionally lead or coordinate the day-to-day process for the transaction at issue, regardless of job title.[19] The other major change is the production of draft documents. Currently, drafts are not required to be produced, unless the draft is the final version or the draft went to the entire board or an entire board committee. Under the new rule, all drafts of Item 4(c) and Item 4(d) documents must be produced. This could exponentially increase filers’ burden and expense.
8. Production of Periodic Plans and Reports: Currently, filers do not produce market reports or strategic plans that are not specific to the transaction. The new rule would change this. Filers would be required to produce all semi-annual or quarterly plans and reports that were provided to the CEO of the acquiring or acquired entity and any entity that it controls or is controlled by, and the CEO’s direct reports, which analyze market shares, competition, competitors, or markets pertaining to any product or service also produced, sold, or known to be under development by the other party. In addition, all such reports provided to the Board of Directors must also be produced. The time period is within one year prior to the date of filing. This is another change that could considerably increase burden and expense for filers.
9. Competition Analysis: Buyers and sellers that have current or planned products or services that compete or could compete will find this new section especially challenging. Detailed information must be provided such as: sales (in units and dollars) for the past two fiscal years; a description of all categories of customers; contact information for the entity’s top 10 customers; a description of any licensing arrangements; a description of any non-compete or non-solicitation agreements applicable to employees or business units related to the product or service.
10. Supply Relationships Narrative: The proposed new form requires extensive information about filers’ sales and purchases for the past two years.
11. Information about past transactions: Under current rules, only the acquiring party must provide information about certain past transactions for a period of five years. The new proposed form would require disclosures from both the acquiring and acquired parties for a period of ten years. The proposed rule would also eliminate the current $10 million in sales or assets threshold applicable to such disclosures. Private equity roll ups, in which a firm acquires several smaller businesses in the same sector and then merges them into one larger entity, will be impacted by this change.
12. Miscellaneous new requirements: The new form requires identification of subsidies received from any foreign entity or government of concern[20]; whether the filing parties produce any products in any nation covered by 42 U.S.C. § 18741(a)(5)(C) and are subject to countervailing duties or an investigation for countervailing duties; identification of defense or intelligence contracts; identification of communications and messaging systems; and identification of any foreign jurisdiction in which the transaction has been notified or will be notified to a non-U.S. antitrust or competition authority.

What is the Impact of the Proposed Changes?

The impact can be summed up in two words: Time and money. Producing significant additional information will obviously require significantly more time. Some filers may experience months-long filing processes. Time is measured in two ways: (1) the filers’ time collecting potentially responsive information; and (2) the time filers’ outside counsel spends on filings. The PNRM notes that in addition to the estimated 37 hours it takes to complete an HSR filing now, an average of an additional 107 hours will be required to complete the new form, thus bringing the average total number of hours required to 144.[21] Each filer’s experience will vary, but we expect the number of hours to be significantly greater in cases of horizontal overlaps. Even the most frequent HSR filers, such as private equity firms, will find the new requirements challenging, and filers who are relatively inexperienced with HSR may find the process utterly overwhelming. To accomplish all that is required, parties will need to dedicate additional internal and external resources, which means additional expense. The PNRM’s new requirements will also place a premium on advance planning. For example, filers will need to anticipate whether their deals may require translation of foreign documents. The new requirement for more complete transaction documents may mean delays between the time a deal is signed and the HSR filing is submitted. It is difficult to measure precisely how much the additional time will cost (both in terms of client staff and outside counsel time), but we believe the PNRM’s initial estimate of an additional $350 million in labor expense is way too low.

What’s Next?

The comment period opened on June 29, 2023 and will remain open until Aug. 28, 2023. The FTC may decide to extend the comment period, though for now, potential commenters should plan on meeting the Aug. 28 deadline. The FTC is inviting the public to comment on four main areas: (1) whether the proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility; (2) the accuracy of the agency’s estimate of the burden of the proposed collection of information, including the accuracy of the assumptions and methodology used; (3) ways to enhance the quality, utility, and clarity of the information to be collected; and (4) ways to minimize the burden of these information collections on respondents.[22] The comment process is vitally important and is the main way the public can seek to have input into the outcome.

If adopted, these proposed changes will have a dramatic impact on merger filings in the United States. An already robust, time consuming and expensive process will become exponentially more challenging.