The Federal Trade Commission (“FTC”), with the concurrence of the Antitrust Division of the U.S. Department of Justice (“DOJ”), recently issued a Notice of Proposed Rulemaking regarding proposed changes to the premerger notification form and associated instructions, as well as the premerger notification rules implementing the Hart-Scott-Rodino Act of 1976 (the “HSR Act”). If adopted, these revisions would completely overhaul the filing process under the HSR Act and significantly expand the information and documents required to be submitted by HSR filers, which in turn will also significantly increase the time and cost of such filings. In this client alert, we highlight some of those proposed changes, as well as initial reactions and next steps in the rulemaking process.
Summary of the Hart-Scott-Rodino Act
The HSR Act requires parties to mergers and other stock or asset acquisitions meeting specified dollar thresholds to disclose certain information about the transaction and their business to the FTC and DOJ prior to closing the transaction, thereby allowing those agencies to assess whether the transaction raises antitrust concerns. Once a party has completed its filing, it must wait 30 days (or 15 days in the case of a cash tender offer or bankruptcy) to close the transaction, unless (1) the agencies grant early termination of the waiting period, or (2) the agencies issue a request for additional information. A request for additional information triggers a supplemental waiting period during which the agencies will complete their review and either close the investigation, enter into a negotiated consent agreement with the parties, or challenge the deal.
Highlights of Proposed Changes
The FTC’s Notice of Proposed Rulemaking represents the first significant changes proposed to the HSR Act since its enactment in 1976. In a statement made on June 27, 2023, FTC Chair Lina M. Khan announced that soaring deal volume, the increased complexity of transactions, and changes to investment vehicles, among other industry shifts, have made it increasingly challenging for agency staff to determine whether a proposed deal may violate the antitrust laws within the applicable waiting period.
The proposed changes accordingly mark a “top-to-bottom” overhaul of the HSR form, with the stated aim of more quickly providing agency staff with relevant deal information. According to the FTC, these changes will also avoid staff needing to rely on issuing supplemental requests during the waiting period, which is an ad hoc process that the FTC claims has resulted in “key gaps” in information.
A brief summary of the more significant proposed changes to the HSR form is as follows:
Additional Details Concerning the Transaction. Among other things, the proposed changes would require HSR filers to submit a substantial amount of additional information about the transaction itself, including a narrative explanation of the strategic rationale for the transaction, a diagram of the deal structure, organizational charts identifying the involved entities and parties, and a narrative timeline of key dates and conditions for closing of the transaction. Filers would also need to disclose detailed information about their operational structure, including a list of entities held by the filer, as well as all names under which those companies currently or formerly did business. Further, filers with existing or potential supply relationships with the target would need to provide a host of additional information regarding those relationships.
Expanded Item 4(c) and 4(d) Documents. Broadly speaking, Item 4(c) and 4(d) of the HSR form require filers to submit documents, such as memoranda and presentations, analyzing the transaction with respect to competition-related topics. The changes proposed by the FTC would expand the definition of 4(c) and 4(d) documents beyond transaction-specific documents to include certain ordinary course Board documents and ordinary course quarterly and semiannual strategic plans, and would require filers to submit additional documentation, including drafts of responsive documents if they were sent to officers, directors, or a deal team lead or supervisor, as well as forward-looking assessments of synergies or efficiencies. The proposed rules would also introduce expansive document retention and identification requirements.
Details Regarding Prior Acquisitions. Under the current rules, the acquiring party is required to disclose information about past transactions for a period of five years prior to filing. The proposed changes would require such disclosure from both the acquiring and the acquired party, including nonreportable deals, and expand the time period from five to ten years prior to the HSR filing.
Board and Management Information. The revised HSR form would obligate filers to identify the names and contact information for officers, directors, or board observers in both the acquiring person and acquired entity and for all entities they control. Proposed changes would also require filers to identify the individuals who will serve in those capacities after close of the transaction. Additionally, for each individual identified, filers would be required to disclose any other entity at which those individuals are currently serving, or have served within two years prior to the HSR filing, as officers, directors, or board observers. The FTC and DOJ have increased their enforcement of interlocking directorates and requiring disclosure of these individuals’ roles at entities not related to the transaction reflects the agencies’ ongoing focus on such arrangements.
Identification of Other Individuals or Entities with “Influence.” The proposed changes would also require parties to identify individuals or entities that may have a material influence on the management and operations of the acquirer, including individuals or entities that provide credit totaling 10% or more of the value of any entity within the transaction structure, hold non-voting securities, options, or warrants totaling (or to be converted to) 10% or more of the entity within the transaction structure, or have agreements to manage entities within the transaction structure. In addition, the acquiring entity would be required to disclose the identity and contact information for minority investors holding 5%-49.9% of any entity within the transaction structure. Filers for the acquired entity would also be required to disclose the names and contact information of those 5%-49.9% minority interest holders of the acquired entity, as well as those of any entity within the acquired entity, if they will continue to hold such an interest following the closing of the transaction.
Impact on Labor Markets. The amended HSR form would require filers to disclose information intended to screen for the transaction’s impact on the labor market. Filers would need to, among other things, classify employees of the target entity based on certain occupational categories and geographic markets, and disclose penalties or findings imposed in the prior five years by the National Labor Relations Board, the U.S. Department of Labor’s Wage and Hour Division, and the Occupational Safety and Health Administration.
Initial Reactions and Next Steps
Initial reactions to the proposed changes have been mixed, with analysis largely focused on the potentially significant increase to the time and money needed to prepare HSR forms and comply with the premerger notification process. Notably, in its Notice of Proposed Rulemaking, the FTC posited that the estimated time to prepare an HSR filing would increase nearly fourfold—from 37 hours to 144 hours per filing. Other analysts have speculated that this estimate is conservative, and that the time spent could increase nearly tenfold and result in substantial delays between a transaction’s signing and closing.
Besides impacting M&A transactions generally, this increased delay would be particularly burdensome for investment funds looking to make open market purchases of voting securities of U.S. entities that exceed the applicable HSR dollar threshold but are not otherwise subject to an exemption under the HSR rules.
The FTC and DOJ are accepting comments on the proposed changes until September 27, 2023. Detailed information on how to submit a comment, which can be done by paper or online, can be found under the “Invitation to Comment” section of the Notice of Proposed Rulemaking.
For additional information on the HSR Act, please contact your Seward & Kissel relationship attorney.
