Proposed HSR Rules Upend M&A and Merger Control Review

At a Glance 

• The Federal Trade Commission recently announced changes to the Hart-Scott-Rodino (HSR) filing and notification form. 
• These changes are the most dramatic modifications to the filing process since the HSR Act was enacted 45 years ago. 

On June 27, 2023, the Federal Trade Commission (FTC), in collaboration with the Department of Justice (DOJ) Antitrust Division, announced proposed changes to the Hart-Scott-Rodino (HSR) filing and notification form that represent the most dramatic modifications to the HSR filing process since the HSR Act was enacted 45 years ago. The proposal is detailed in a 133-page Notice of Proposed Rulemaking (NPRM) and it is expected that the proposals, following a public comment period, could go into effect in four to six months.

The FTC had hinted at its concerns about the effects of transactions on a host of issues — innovation and pipeline products, labor and employment, supply chains, private equity structures and practices, corporate governance and deal structure — that might mask a deal’s competitive impact. All of these are touched on in the FTC’s NPRM. At base, the antitrust enforcement agencies want the HSR form to provide a detailed analysis of a transaction’s potential impacts of these issues at the time of filing so that the agencies’ burden of initial investigation is reduced. 

The FTC has proposed a massive redesign of the HSR notification form, including the introduction of new and expanded information requests, more documentation, and additional disclosures by filing parties. By the FTC’s own estimation, the burden on the parties, as measured in hours per filing, will at least quadruple — from 37 hours to 144 hours. We view this as a low estimate; for those companies with complex structures or multiple business lines (such as multinational companies, PE funds, hedge funds, limited partnerships, etc.), the time investment, and thus costs, will be significantly higher.

Other changes would affect the timeline for preparing an HSR filing. In addition to proposed robust and detailed data and document requests, the NPRM proposes to prohibit the get-the-clock-started strategy of filing on a bare-bones letter of intent rather than a fully negotiated acquisition agreement. Although a letter of intent will still be acceptable, it must be detailed and specific — and accompanied by drafts of the acquisition agreement and related acquisition documents.

Key proposed changes to the HSR filing include:

Comprehensive Details on the Transaction. The proposed rules would require filers to disclosure significantly more details about the transaction itself. This includes a closing timeline of events, and transaction diagram, and a narrative describing the strategic rationale for the transaction. Filers would be required to produce all transaction-related agreements between the parties, not just acquisition agreements. Supply agreements, licenses and management agreements, as well as transaction-related agreements with third parties, would all be considered responsive. Schedules to the acquisition agreement must also be provided.

Transaction-Related Item 4c and 4d Documents. Many are familiar with the requirement to produce documents responsive to items 4c and 4d of the existing HSR form; those are documents (final or final drafts) relating to the acquisition, prepared by or for officers and directors analyzing the competitive merits and synergies of a deal. The proposal would expand the scope of such documents by (1) expanding the search beyond officers and directors to include documents from “supervisory deal team leaders” (such as corporate development leads); and (2) requiring filers to produce drafts of any 4c/4d documents (in addition to final documents) if the drafts were shown to an officer, director or supervisory deal team leader.

Narratives on Competitive Effects. Every filer, even if the transaction does not pose competitive concerns, must provide narrative responses to new items in the HSR form related to the competitive effects of the transaction. The narrative responses, a competitive effects analysis for the transaction, must describe the markets and rationale for undertaking the transaction, describe all business relationships between the parties (including existing or potential vertical agreements), describe and analyze the competitive landscape, identify overlaps between direct competitors, and provide sales data and a list of top customers that includes their contact information. This kind of information, which is routinely provided in response to a Second Request or a Voluntary Request Letter, would now be required with respect to all transactions as part of the HSR filing. Significantly, the FTC expects that the narratives will cross-reference supporting data for the identified transaction rationales in the documents discussed in the next section.

Ordinary Course and Planning Documents. Filers may be required to produce key ordinary course of business documents, such as strategic plans, market analyses and financial documents prepared or updated during the year preceding the filing when there is overlap (even small overlap) between the parties and if the documents were seen by executive officers or directors.

Corporate Governance Information. Filers must provide lists of all board members, officers and board observers of every entity within the acquiring person and of the target. For board members, a listing of board memberships will be required as well. The proposed look back for these items is two years. Proposed directors, officers and board observers of the combined business must be disclosed as well.

Prior Acquisitions. Currently, where parties report a horizontal overlap, the buy side is required to report prior acquisitions in the overlapping lines of business, going back five years, for deals over a certain size. The NPRM, which indicated these changes are designed to address “roll-up strategies,” proposes to expand this (1) to include reporting of the target’s prior deals as well, (2) to extend the lookback to ten years, and (3) to eliminate the floor for the size of deals.

Labor Market Information. The NPRM anticipates the creation of a new labor and employment section in the HSR form based on the Standard Occupational Classification (SOC) system developed by the Bureau of Labor Statistics. Filers would use the SOC codes to list their five largest categories of workers and the total number of employees within each code. If one or more of the parties’ SOC codes overlap, further information (regarding community zones, using the US Department of Agriculture’s ERS system) would be required. The NPRM also proposes that the parties be required to report violations (in the last five years) of labor laws to the Department of Labor, Occupational Safety and Health Administration and the National Labor Relations Board.

Disclosure Information About Investors and Others. The form currently requires information about minority investors (five percent and greater) and certain minority investments of the acquiring filer and the target. Limited partnerships currently have to disclose the identity of the general partner(s) but have been excused from disclosing limited partners, even those holding five percent or more of the partnership equity. The NPRM would include such limited partners, and proposes to include others who might have an ability to influence the management of the combined entity:

• Holders of nonvoting securities, warrants or options.
• Those having the right to name board members or board observers.
• Those who provide credit or financing (greater than 10% of the value of the entity).
• Those with management agreements.
• Those with significant supply relationships and others.

The Census Bureau’s NAICS Codes/NAPCS Codes and Revenue Reporting. The new rule would eliminate the use of NAPCS codes to report revenue from manufactured products. For other revenue reporting, exact dollar values for each NAICS code would no longer be required, replaced by reporting by revenue range (pre-revenue for products in development, less than $10 million, $10-100 million, $100 million to $1 billion, and more than $1 billion). Revenue should be reported by business unit. Pre-revenue for products in development would be reported only if it was expected to generate revenue of at least $1 million within two years of the filing date.

Communications Systems and Document Storage; Translations. If the NPRM is implemented as proposed, filers must identify all internal communication systems (including messaging apps) that could be used to store or transmit business documents. With respect to document storage, each filing party must turn off “auto-delete” functions and take other steps to preserve business documents and communications related to the transaction (similar to a litigation hold) and certify that it has done so. Documents written in a foreign language must be translated before the initial filing is submitted (until now, translations were only mandated at the Second Request stage). This potentially creates an additional burden of translation expense and time delays for foreign companies and companies with significant foreign divisions.

Foreign Subsidies; Defense and Intelligence Contracts. The NPRM would implement the Merger Filing Fee Modernization Act of 2022 relating to disclosure of “subsidies” (broadly defined) from certain foreign countries and entities that “threaten U.S. strategic interests,” including among others China, Russia, Iran and North Korea (covered nations). Filers must identify and describe, to their knowledge and belief, any subsidies received (or commitments for subsidies) from any foreign entity or government of concern within two years prior to filing. For any products the filing person produced in whole or in part in a country that is a covered nation, the filing person also must disclose whether any of those products are subject to countervailing duties or any investigations for countervailing duties in any jurisdiction.

The NPRM also seeks to mandate that each filer disclose its procurement contracts with the Department of Defense (DOD) or the intelligence community (current or pending), identifying each such award and their DOD/intelligence personnel liaisons. Contracts for procurement less than $10 million appear to be excluded from this requirement.

The NPRM states that comments are due by August 28. If you have concerns or suggestions, you can find a link for comments here. Let us know if we can help or provide additional information. (Note that all comments are made public as part of the rulemaking process.) The FTC “welcomes comments on the burden associated with” reporting revenues, documents and narratives and “invites alternative proposals” that meet the FTC’s data needs specified in the NPRM. While comment topics are not limited, four areas are of specific interest where public comments are invited:

1. Whether the collection of the information is necessary for the proper performance of the functions of the FTC, 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 validity of the methodology and assumptions used.
3. Ways to enhance the quality, utility and clarity of the information to be collected.
4. Ways to minimize the burden of theses information requests on respondents.