August 10, 2023
Big changes could be coming to the rules that govern the US premerger notification program. Recently proposed rules dramatically expand the information required for filings and substantially increase the burden and time required to make a filing. The impact could alter the manner and timeline of how businesses make deals and seek US antitrust clearance.
The Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act), as amended, governs the necessity of premerger filings under US law. Under the HSR Act, the Federal Trade Commission (FTC) is responsible for administering the Act and has promulgated rules for that purpose. For further details on basic reporting requirements and the filing fee thresholds, please see “FTC publishes 2023 adjusted thresholds for premerger notification and interlocking directorates, with reference charts” and “Changes to fee structure for Hart-Scott-Rodino Act filings“.
On 27 June 2023, the FTC gave notice of a proposed rulemaking (NPRM) overhauling the procedural rules governing filings required by the HSR Act. Because the FTC shares responsibility for enforcement of the antitrust laws regarding mergers, the FTC issued the NPRM with the concurrence of the Department of Justice (DOJ). Comments on the proposed rule changes are accepted through 28 August 2023.
The NPRM does not alter the statutory thresholds or the other requirements in deciding whether a filing is required. Rather, the NPRM relates to the form and supporting information that must be filed once a decision to file has been made.
The proposed changes expand the type and volume of information to be filed. The proposed rules would require detailed information regarding the organizational structure of the filing parties, including any entities that may “influence” the decisions of those parties, as well as detailed narratives, data, and documentary information on the businesses at issue, competitive landscape, and impact on related markets such as labor and suppliers.
Reason for proposed changes
The proposed rules clearly reflect the enforcement agencies’ increased focus on industry concentration and their desire to broaden the scope of challenges to proposed transactions. As explained in a statement by the FTC commissioners, the procedural rules governing HSR filings had not been substantively updated since the late 1970s and are out of step with enforcement priorities and market realities. The FTC asserts that the current HSR form provided insufficient information for the agencies to review the competitive impact of a proposed transaction within the statutory 30-day waiting period, forcing the agencies to rely too heavily on voluntary productions or third-party interviews that often came too late.
The proposed rulemaking seeks to address these shortcomings by shifting some of the information the agencies currently obtain post-filing to the filing itself. It also expands the nature of information requested to cover a wider range of competitive concerns, such as impacts on related markets, suppliers and labor.
Substantive changes and potential impacts
The NPRM reorganises the form into four sections and adds to the documentary requirements.
Overall, the NPRM reflects the agencies’ policy shift, skepticism of prior merger enforcement and recent enforcement efforts. Not all proposed changes are unduly burdensome or unwarranted. Several proposed changes are sensible updates that would provide the agencies with valuable relevant information without significant hardship, regardless of their underlying philosophies of enforcement (eg, the provision of customers lists for proposed transactions involving competitors or a narrative description of relevant business operations). But for several new proposed changes, the breadth and detail could represent a significant burden on filing parties. The true burden depends heavily on the complexity of the organization.
Parties: UPE and organizational structure
The proposed changes would require parties to identify and at times explain a much broader network of relationships for each filing party. In particular, the proposed rules add the identification of other persons or entities that may “influence” the ultimate parent entity (UPE) or other entities within the UPE without necessarily controlling it, such as minority investors in other controlled entities, board members, managers and creditors.
Those parties with complex organizational structures, such as investment funds and entities with multiple layers of controlled entities and investors, may see the biggest increase in burden here. This is not the first time this topic has been broached. This proposed change seems consistent with the proposed rule that the FTC published in September 2020, but never adopted, which would have required holdings under a common investment manager be combined for purposes of analyzing whether a filing was required. For further information on the former proposed Rule, please see “FTC suspends grants of early terminations and lowers minimum threshold for reporting acquisitions“.
The FTC asserts that the current HSR form does not capture the totality of the transaction nor place the transaction in a broader competitive and economic context. The proposed rules expand and/or add new informational requirements to require detailed narratives, data and documents on the businesses of the filing parties as well as on the proposed transaction’s structure, rationale and timeline.
These new requirements may change how parties approach dealmaking and antitrust clearance. Under the proposed rules, parties must provide agreements or drafts with sufficient detail for the agencies to effectively evaluate the impact of the transaction. While parties may still file before a definitive agreement is signed, the substance of the new rules may require parties to be closer to a definitive deal before they may file.
Competition and overlap analysis
This category is the largest expansion of the HSR requirements and will add a substantial burden on filing parties, particularly where the proposed transaction involves competitors.
The proposed rules would require the provision of detailed information on the relationships between the filing parties, horizontal overlaps, supply relationships and labor markets. Parties may have to provide:
- narrative descriptions;
- geographic locations;
- ordinary-course documents;
- certain agreements;
- supply contracts; and
- customer lists with contact information.
Expanded documentation production requirements
The proposed rules also expand the type and volume of ordinary-course and transaction-specific documents to be produced with any HSR form. Currently, filing parties submit certain final versions of documents that demonstrate transaction-related analysis used by or made for officers or the equivalent. The proposed changes expand the people from whom documents must be produced and adds the requirement to provide certain ordinary-course strategic documents. The NPRM also proposes requiring the provision of all drafts of certain transaction-related documents, extending the entirety of the transaction discussion.
The NPRM proposes to make disclosure of foreign filing mandatory and adds a section to allow parties to waive HSR Act confidentiality for other competition authorities specifically indicated by the parties. The NPRM would also require the provision of information about certain foreign subsidies as required by the Merger Filing Fee Modernization Act of 2022 (MFFMA). For more information on the MFFMA and new foreign subsidies element, please see “Changes to fee structure for Hart-Scott-Rodino Act filings“.
Of note, the FTC intends to seek information relevant to the logistics of any investigation by requiring parties to preemptively identify all messaging systems used by the parties and to certify that the filing entities have taken measures to prevent destruction of relevant documents during the waiting period.
The DOJ and FTC have been clear they intend to use “all tools in the toolbox” to achieve their policy goals and the NPRM is a prime example. While technically only a procedural rule update, the NPRM is one step in the effort to shift US merger review in line with the broad anti-consolidation priorities of the Biden administration. For more information about the anti-consolidation policy shift in antitrust enforcement, see “New inflection point? US antitrust agencies see opportunity to change direction of antitrust law“.
Just recently, on 19 July 2023, the FTC and DOJ took another step and issued their draft merger policy guidelines, which while not law, are statements of the federal government’s enforcement priorities. These draft guidelines show the agencies’ broad view of potential anticompetitive harm and provide the reason and justification for the likely significant burden of the NPRM.
For this reason, general comments about burden or chilling effects of the revised form are likely to be unpersuasive. The Biden administration has made clear that it views past merger review as too lenient and encouraged if not caused significant and problematic economic concentration. The FTC understands the proposed rules will substantially increase the burden on filing parties and believes the burden is justified. A slight chill could be the intent, if not a welcome side effect.
No matter the final rule, the message is clear: change is coming. It will become increasingly important to bring in antitrust counsel early in deal discussions and to build in time to gather the required information. It is very likely that any final rule will require the provision of more transaction-specific documents, such as strategy and planning documents. Parties should take care that all persons involved, from employees to third-party bankers and consultants, are mindful of the expanded obligations and are thoughtful in their communications to avoid mischaracterising the nature of the industry, the rationale for the transaction or its likely competitive effects.
This content was originally published on August 10, 2023, via the International Law Office (ILO) newsletter. It can be found here: Proposed premerger notification form overhaul could change how deals are done
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