The Federal Trade Commission (“FTC”) on June 27 issued a proposed rule pursuant to which it would amend its Hart-Scott-Rodino Act (“HSR”) form and instructions and in so doing make major “top-to-bottom” changes for the first time in 45 years.
If finalized, the changes will transform the merger review process and significantly impact parties seeking to undertake transactions subject to HSR review, and will almost certainly result in more transactions being subject to investigation and challenged by the FTC and the Department of Justice.
By way of background, the HSR establishes a pre-merger notification scheme for certain transactions.[1] In summary, the regime includes two key requirements: (1) that firms proposing a merger submit an HSR Form providing the FTC and the Antitrust Division of the Justice Department (the “Agencies”) with information to assess preliminarily whether a merger may violate the antitrust laws, and (2) that these firms wait, typically for 30 days, after filing before consummating the merger.
The waiting period is intended to provide the FTC with an opportunity to determine whether the merger is likely to violate the antitrust laws and to open an in-depth investigation.
In issuing the proposed rules, the FTC states that, given the volume of merger transactions and the 30-day waiting period, the form currently used, which has not changed in many years, does not give the Agencies the information they need for their teams to determine in the initial 30 days whether a proposed merger may violate the antitrust laws.
The changes that are being proposed are very extensive and will require parties to a proposed merger to produce in their initial HSR filing much more information and many more documents than are presently required. This in turn will impose on the parties significant additional time and expenses. Undoubtedly, it will also result in many more proposed transactions being subject to fuller review and investigation beyond the 30-day initial waiting period and quite likely to challenge by the Agencies.
While much of the additional information that would be required under the proposed rules is already required to be submitted to the FTC, the request for that information normally comes only after the FTC starts a full investigation prior to the expiration of the 30-day waiting period. But at present and in most instances, the FTC does not open such an investigation because, during the 30-day period, it does not identify competition issues that trigger such a review. In issuing the proposed rule and requiring the provision of the additional information and accompanying documentation, the FTC states that it will be better able to make the determination within the waiting period.
Set forth below is a summary of some of the proposed changes that will impact proposed mergers involving health care systems. Interested parties may submit comments to the FTC concerning the proposed rule on or before August 28, 2023 in the manner set forth in the Notice of Proposed Rulemaking.
Organization Structure
Entities within the Acquiring Person and Acquired Entities
In addition to the information currently required and because the corporate structures of the filing parties have, in the view of the FTC, become much more complex, the parties would be required to provide additional and much more detailed information concerning their corporate structures including information concerning entities that are not part of the transaction.
Officers, Directors, and Board Observers
The parties would be required to identify all of the officers, directors, and board observers of all entities within the acquiring person and acquired entity, as well as any other entities for which these individuals currently serve, or within the two years prior to filing had served, as an officer, director, or board observer. According to the FTC, this information would allow it to know of existing, prior, or potential interlocking directorates and assess the competitive implications of such relationships under both Sections 7 and 8 of the Clayton Act.
According to the FTC, having information about potential interlocking directorates in the initial HSR filing would allow the Agencies to take steps to prevent the sharing of board-level confidential information much more quickly. This information is also relevant to the competition analysis of the transaction, as well as concerns about impermissible potential “gun-jumping” which may violate the Clayton Act or Section 1 of the Sherman Act.
Others Who May Exert Influence
The FTC is concerned about the influence that persons other than voting securities holders (members in the case of a nonprofit corporation) may have on the management or operations of the acquiring person and how they might affect competitive decision-making.
By way of example, the FTC points to credit arrangements that permit the creditor to exercise rights and influence similar to those of “equity” holders; non-equity interests that, while not providing rights to vote for the board of directors, nevertheless provide rights to vote on or influence business practices of the company (e.g., reserved powers), including decisions to expand into new service lines or geographic markets; contractual arrangements allowing individuals or entities to nominate directors or board observers; and third party management arrangements.
Accordingly, the FTC proposes to require parties submitting an HSR filing to identify any and all such interest holders.
Transaction Description
Significant new requirements would follow from a new Transaction Description section of the HSR Form that would both reorganize information currently required and expand the required information, as summarized below.
Business of the Acquiring Person
The FTC proposes requiring the acquiring person to describe its business operations in detail. Currently, the form requires filing persons to briefly describe the transaction, including whether assets, voting securities, or non-corporate interests (or some combination) are to be acquired. Filers would now be required to describe the business operation being acquired or what the assets being acquired comprise. The FTC states that, although the information presently required helps it understand what is proposed to be acquired, it does not provide any insight into the full range of business operations or into the operations of other entities involved in the transaction on the part of the acquiring person.
Transaction Specific Documents
The FTC proposes requiring that all transaction-specific agreements be submitted with the HSR filing. While some are currently required, many others are not.
For example, the production of schedules to agreements is not currently required unless the schedules contain agreements. In the FTC’s experience, the structure of transactions has become increasingly complex, often comprising not only multiple agreements between the filing persons but agreements with third parties. In order to enable it to understand the entirety of the transaction, the FTC would require the filing parties to produce schedules, exhibits and the like, along with any non-competition and non-solicitation agreements and other agreements negotiated with key employees, suppliers, or customers in conjunction with the transaction.
Other Agreements Between the Parties
The FTC proposes requiring filing persons to submit all agreements between any entity within the acquiring person and any entity within the acquired person in effect at the time of filing or within the year prior to the date of filing. According to the FTC, understanding the scope of any existing contractual relationships between the filers would materially assist its review by revealing any business interactions or relationships that exist prior to the transaction and that may be affecting pre-merger competition and by enabling it to assess how the transaction may affect post-merger competition. These might include already existing licensing agreements, supply agreements, non-competition or non- solicitation agreements, purchase agreements, distribution agreements, and franchise agreements, among others.
Transaction Rationale
Importantly, the FTC proposes adding a new requirement that filing persons provide a narrative that would identify and explain each strategic rationale for the transaction. According to the FTC:
“[As] helpful as the documents responsive to current Items 4(c) and 4(d) of the [current HSR Form] can be, they do not always convey each filing person’s cumulative views on the rationale(s) for the transaction. Indeed, such documents (when they are submitted and when they discuss rationale(s) often contain differing, and at times conflicting or mutually exclusive, statements regarding the transaction depending on when they were prepared or by whom.”
By way of example, the FTC notes that different members of a deal team might have different perspectives on the potential motivations for the transaction at different times, and the submitted documents do not resolve the filing person’s ultimate thinking regarding the topic.
The FTC states that “[s]ince documents responsive to Items 4(c) and 4(d) of the HSR Form do not consistently provide an overview of the rationale(s) for the transaction, it would be of immense value for the Agencies to have during the initial waiting period a statement that discusses each of the strategic rationale(s) from the perspective of each filing person.”[2]
The FTC thus proposes that the acquiring and acquired person submit a narrative describing all strategic rationales for the transaction, including, for example, those related to:
- Competition for current or known planned products or services that would or could compete with a current or known planned product or service of the other reporting person,
- Expansion into new markets,
- Hiring the acquired person’s employees,
- Obtaining certain intellectual property, or
- Integrating certain assets into new or existing products, services or offerings.
The FTC also proposes that the filing person identify which documents submitted with the HSR filing support the rationales described in the narrative. It explains that this proposed requirement would help ensure that the provided narrative is grounded in the filers’ ordinary-course documents and not mere advocacy designed to portray a favorable view of the transaction, and that any cited documents that support the narrative would also provide additional context for the Agencies as they assess the parties’ stated rationale(s) in relation to any potential competitive consequences of the transaction.
The FTC emphasizes that its understanding the business reasons for pursuing the transaction can materially affect the course and direction of the Agencies’ antitrust review during the initial waiting period.
Competition and Overlaps
There would be a new Competition and Overlaps section on the HSR Form intended to provide a new source of relevant information related to horizontal overlaps, as well as new information about supply relationships and employees. The FTC states that this would enable it “to quickly identify and assess the potential impact of the transaction across many dimensions of competition.” The proposed changes would include, among others, those relating to: business documents, competition analysis, controlled-entity overlaps, and prior acquisitions.
Business Documents
The proposed business documents section would require the submission of those documents currently required and additional categories of documents. According to the FTC, the proposal for requiring additional documents is informed by a comparison of documents submitted by filing persons with the initial HSR filing and those submitted during the Agencies’ in-depth investigations that are not required by the current form but would have been highly probative to the initial antitrust assessment of the transaction during the initial waiting period.
Documents Prepared by/for Supervisory Deal Team Leaders
The FTC proposes expanding the scope of requested documents evaluating the transaction by adding a requirement to submit such documents prepared by or for any supervisory deal team leaders. Currently, Item 4(c) of the HSR filing requires filing persons to provide all studies, surveys, reports, plans, and analyses prepared by or for officers or directors to evaluate the acquisition with respect to market shares, competition, competitors, markets, potential for sales growth, or expansion into products or geographic markets.
According to the FTC, since the beginning of the pre-merger notification program, Item 4(c) documents have been a key screening tool for it in identifying those transactions that require more than a cursory review during the initial waiting period. The proposed section would retain the same definition of transaction-related documents to be submitted but add supervisory deal team leaders to the list of individuals to whom this item would apply.
The FTC explains that in some companies, an officer may lead the day-to-day activities of the deal team and would be considered the supervisory deal team leader, resulting in no change to the documents currently required as part of Item 4(c). But someone other than an officer or director often functionally leads the deal team. In the FTC’s experience, in these cases, responses to current Item 4(c) often do not contain documents with sufficient information about the filing person’s analysis of the competitive implications of the transaction to enable the Agencies to identify potentially problematic transactions.
Drafts
The FTC proposes requiring the submission of drafts responsive to requests for transaction-related documents. It has been the long-standing position of the FTC’s Pre-Merger Notification Office that the submission of draft versions of documents is not required unless there is no final version, in which case the most recent draft has been required, or unless a draft was sent to the board of directors. As a result, the FTC has not typically received many draft documents as part of HSR filings.
The Agencies routinely ask for and receive draft documents in response to Second Requests (requests after the FTC has started a full investigation). According to the FTC, these drafts often reveal additional information about the transaction that would have been important to the Agencies’ review during the initial waiting period, such as references to specific services and competitors that were removed in subsequent versions.
In addition, according to the FTC, these drafts can contain highly relevant probative or candid statements about the competitive impact that are not reflected in the final version of the document. In some cases, it appears that the draft documents have been edited to remove candid assessments of factors relevant to competition prior to circulation to officers or directors. In others, the dates of the documents suggest that otherwise responsive drafts were not finalized or shared with officers or directors until after making an HSR Filing.
The FTC therefore proposes that drafts of responsive transaction-related documents be submitted if that document was provided to an officer, director, or supervisory deal team leader. According to the FTC this proposed change “would ensure that the Agencies have access to documents that reflect pre-transaction assessments of business realities, as opposed to ‘sanitized’ versions, to aid in their analysis during the initial waiting period.
Synergies and Efficiencies
The FTC proposes a Synergies and Efficiencies section that would collect the information currently required under Item 4(d) of the current HSR Form, but also make clear that any forward-looking analyses need to be submitted. Currently, Item 4(d)(iii) asks for all studies, surveys, analyses and reports evaluating or analyzing synergies and/or efficiencies prepared by or for any officer(s) or director(s) for the purpose of evaluating or analyzing the acquisition but does not specifically mention forward-looking analyses.
The proposed HSR Form would specifically require filers to submit all forward-looking assessments of synergies or efficiencies. The FTC states that this information is especially important for screening the competitive impact of products or services not yet generating revenue but projected to do so.
Periodic Plans and Reports
Filing persons would be required to submit certain high-level strategic business documents that were not created in contemplation of the transaction being reported. These documents are not presently required to be submitted as part of the initial HSR filing notwithstanding that they contain information relevant to the antitrust analysis. According to the FTC, such documents typically include strategic plans and documents that are useful to those negotiating or evaluating the transaction because they discuss general market dynamics, competitors, or other potential mergers and acquisitions, and are collected to provide key transaction decision-makers with the company’s internal assessment of commercial realities of the pre-merger marketplace.
The FTC proposes requiring certain plans and reports created in the ordinary course of business and not prepared solely for the purpose of evaluating the proposed transaction to now be submitted as part of the initial HSR filing. According to the FTC, such periodic plans and reports created in the ordinary course of a company’s business often contain detailed assessments of core business segments, markets, competitors, other acquisition targets, and projections about future competitive dynamics – insights that have direct bearing on the Agencies’ antitrust assessment of the transaction in the initial waiting period.
Competition Analysis
The FTC proposes creating a new Competition Analysis section of the HSR Form. This proposed section would create new requirements for filing persons to provide narratives that would, among other things, describe their basic business lines and provide product or service information for all related entities; identify current and potential future horizontal overlaps and supply relationships between the filing persons; and provide information about their employees and what services these employees provide.
Horizontal Overlap Narrative
The FTC proposes creating a new Horizontal Overlap Narrative section that would require each filing person to provide an overview of its principal categories of products and services (current and planned) as well as information on whether it currently competes with the other filing person. According to the FTC, this information is “core” to the Agencies’ substantive analysis during the initial waiting period and is not readily accessible from sources other than the filers themselves.
As a result, the FTC proposes that within the Horizontal Overlap Narrative, each filing person would be required to list each current or known planned product or service that competes with (or could compete with) a current or known planned product or service of the other filer.
Labor Markets Information
The FTC proposes creating a new Labor Markets section that would require each filing person to provide certain information about its workers in order to screen for potential labor market effects arising from the transaction.
Worker and Workplace Safety Information
The FTC proposes creating a Worker and Workplace Safety Information section that would require filing persons to identify any penalties or findings that were issued against the acquiring person or acquired entity by the U.S. Department of Labor’s Wage and Hour Division, the National Labor Relations Board, or the Occupational Safety and Health Administration during the five-year period before the filing.
Prior Acquisitions
The current HSR Form requires both the acquiring person and the acquired entity to provide information about prior acquisitions. The FTC proposes extending the time frame to report on prior acquisitions from five to ten years and proposes eliminating the threshold for listing prior acquisitions, which currently limits reporting to only acquisitions of entities with annual net sales or total assets greater than $10 million in the year prior to the acquisition.
Request for Comments
As explained above, interested parties may submit comments to the proposed rule on or before August 28, 2023, in the manner set forth in the FTC’s Notice of Proposed Rulemaking
[1] The HSR Act subjects to its requirements various transactions that are not technically mergers but that ultimately involve buyers and sellers. The term “merger” as used here applies to all such transactions.
[2] Item 4(c) of the HSR Form requires parties to include all studies, surveys, analyses and reports which were prepared by or for any officers or directors for the purpose of evaluating or analyzing the transaction with respect to market shares, competition, competitors, markets, and potential expansion into new markets. Item 4(d) requires filers to submit certain documents prepared by or for officers or directors that relate to the acquisition, including confidential information, memoranda, documents prepared by third party advisors, and documents evaluating or analyzing synergies.
