On Thursday, October 10, 2024, the Federal Trade Commission (“FTC”) published its long-delayed Final Rule revising the Hart-Scott-Rodino (“HSR”) Premerger Notification Form and Instructions.  The Final Rule will become effective 90 days after publication in the Federal Register. Although the FTC ballyhoos the extent to which the Final Rule pares back the scope of material that the FTC originally proposed to be required in an initial HSR filing, what remains in the requirements of the Final Rule will impose substantial new burdens on almost everyone required to make an HSR filing.  The potential cost of compliance with the Final Rule to individual filers and the economy as a whole is likely to be substantial.

In connection with the Final Rule, the FTC announced that the FTC and Department of Justice Antitrust Division (together the “Agencies”) would again consider granting early termination during the waiting period for deals that do not raise competitive concern or warrant further scrutiny. The practice of early termination has been suspended for the last three-and-a-half years, so this announcement is one positive development for dealmakers and will mean that deals that do not raise competitive concern will be eligible for expedited Agency approval.

Background and Overview

This Final Rule is the first thorough overhaul of the HSR Form since its introduction in the 1970s.  It comes more than a year after the FTC published a Notice of Proposed Rule Making (“NPRM”) proposing wholesale changes to the HSR process.  The NPRM elicited substantial criticism for imposing significant new burdens on all filers.  Critics noted that the changes essentially would have transformed the premerger filing process into a “mini-Second Request” regardless of whether a transaction raised antitrust concerns.[1]

The FTC unanimously approved the Final Rule following “intense negotiations” with Republican Commissioners Ferguson and Holyoak, who were seated after the NPRM was published, and the Final Rule scales back or abandons several of the NPRM’s more controversial proposed provisions.  For example, the Final Rule no longer expands the scope of so-called Item 4 documents to include draft documents or requires filers to produce labor-related data and information.

Notwithstanding that certain obligations contemplated by the NPRM have been scaled back or dropped, however, the Final Rule still imposes new and potentially significant burdens on filers.  In particular, the Commission makes clear in the Final Rule that many changes to the HSR Form are squarely aimed at addressing the “role of private investors, including private equity, . . . [which has] become more pronounced” in M&A activity since the original promulgation of the HSR Rules in 1978.[2]  For example, the Commission states that new disclosure requirements for “each party’s record of prior acquisitions in the same business lines”[3] are necessary because “serial acquisitions are less likely to attract the attention of enforcers until the strategy is identified.”[4]

Moreover, while the Commission asserts that the Final Rule will not require filers to provide antitrust analyses in the premerger filing, the rule, in fact, requires filers to provide “Transaction Rationale” as well as “Competitive Description” narratives (in addition to supporting documents) identifying overlaps, supply relationships and customers that will require many filers to consult with antitrust lawyers (and perhaps economists) before filing.  The failure to consult with knowledgeable counsel runs the risk of responses that significantly extend the regulatory waiting period.  For example, the “naked” identification of “overlaps” based on a broad view of the marketplace without explaining why they do not actually give rise to any competitive concerns (or being prepared to do so in the first 30-day waiting period) could result an extended investigation where none is warranted. Alternatively, if the Agencies determine that the filers failed to identify and provide information on an overlap that is not obvious to a lay person (as opposed to an antitrust lawyer), then the HSR filing might be deemed incomplete weeks or months later with potentially adverse implications for expiration of the applicable waiting period.  More concerning, given the inclusion of the narrative elements that are inherently subjective, the Final Rule for the first time explicitly incorporates language into the Form itself stating that the Agencies will consider criminal prosecution for certifications of filings alleged to be false or incomplete.

Overall, the changes are likely to substantially increase the time burden and expense required for parties to complete an HSR filing, in part because many of the changes introduce additional ambiguity through undefined terms and unclear requirements for additional information.

Several of the more impactful changes under the Final Rule include the following.

• Expanded scope of disclosure for business documents (formerly Item 4 documents). The Final Rule requires the submission of documents prepared by or for the “supervisory deal team lead” in addition to officers and directors. The Final Rule also requires filers to produce certain ordinary course documents shared with the Chief Executive Officer and Board of Directors outside the context of the transaction.
• Additional Information on Officers and Directors. The Final Rule requires acquiring persons to identify and provide information regarding certain officers and directors for the filing party, or any subsidiaries or portfolio companies, that produces, markets, or sells products identified in the new “Overlap Description” portion of the Form.
• Expanded Ultimate Parent Entity (“UPE”) Description. The Final Rule requires the acquiring party to provide additional information about entities with minority holdings (of shares or other interests) in the UPE and about the UPE’s holdings not directly related to the acquisition target. The FTC has indicated this information is being sought to enable the Agencies to assess the transaction in context with minority holdings in and by the buyer.
• Narrative Descriptions. Notwithstanding the Commission’s contention that the Final Rule no longer requires filers to engage in an antitrust analysis, the Final Rule requires several narrative responses regarding the transaction rationale, overlaps and supply and other relationships that are likely to raise significant uncertainty and impose new and significant regulatory burdens and risks (as described above).
• Additional Requirements to Identify Prior Transactions. In addition to the requirements faced by the acquiring person, the Final Rule requires that acquired persons now report prior transactions in overlap areas, as reported by NAICS codes and the Overlap Description, for the previous five years.
• Additional Requirements to Identify Revenue Sources. The Final Rule requires both acquiring persons and acquired entities with more than one operating company or unit to identify revenue in each NAICS code by specific entity.

The changes identified above—and their implications for filers—are discussed in further detail below.  We do not purport to address here each and every change in a filer’s HSR obligations introduced by the Final Rule, nor do we intend to explain comprehensively all of the obligations that filers will confront under the new regime.  The FTC has proposed a wholescale (and unprecedented) revision and reorganization of the HSR Form; and the Final Rule includes many requirements which are vague, unclear, and require additional guidance from the Premerger Notification Office.  Filers proceeding under the new Form should consult with experienced antitrust counsel to conduct a rigorous, deal-specific analysis to ensure compliance with the various obligations and nuances of the Final Rule

Expanded Requirements for Business Documents.

Although less extreme than the regime initially proposed in the NPRM, the Final Rule significantly expands the existing document production burden on filers.

Competition Documents. While the Final Rule does not demand draft documents, as the NPRM had proposed, the Final Rule expands the current the scope of Item 4(c) to include documents evaluating the proposed transaction with respect to market shares, competitors, and other competition issues prepared by or for a “Supervisory Deal Team Lead,” in addition to officers and directors.^[5]  The Commission defines the “supervisory deal team lead” as the “individual with primary responsibility for supervising the strategic assessment of the deal, and who would not otherwise qualify as a director or officer.”^[6]  By expanding beyond officers and directors, many documents that previously would not have been responsive to Item 4(c) will now need to be produced, including documents that may not be reflective of the transaction as evaluated by a filer’s officers and directors. The individual at a filer who would constitute the “supervisory deal team lead” often may not be clear and will depend on the idiosyncrasies of a particular transaction and particular filer.

Ordinary course Plans and Reports to CEO and Board.  The Final Rule calls for filers to produce certain plans and reports prepared in the ordinary course of business that, while not prepared in connection with or reviewed for the purposes of the proposed transaction, (1) contain analysis of market shares, competitors, and discussion of other competition-related issues with respect to a product or service offered by both parties and (2) were shared with the CEO or Board of Directors, in the ordinary course of business, within one year prior to the filing .^[7]  For filers with numerous portfolio companies or subsidiaries, the new burden associated with collecting documents in response to this new section could be significant.  The FTC asserts that these documents are like those requested in a Voluntary Access Letter; however, only a small minority of transactions currently receive such a request, and usually only after the reviewing staff has identified a particular area of concern.

The FTC contends that the increased burden associated with this new disclosure requirement will be “manageable” because it would not necessarily expand the number of document custodians whose files would need to be searched in connection with a Filing.  However, in the Final Rule, the Commission does not acknowledge or address the implications of the new requirement on filers’ document preservation and retention policies, which may now need to be adjusted to preserve ordinary-course documents presented to the CEO or Board of Directors that were not prepared for or in connection with the transaction at issue.  Moreover, this new requirement will “up the ante” for ordinary course reports to the CEO and Board that misidentify competitors, exaggerate competitive positions, or otherwise describe competitive conditions in a way that inaccurately suggests the presence of antitrust issues.

Additional Information on Officers and Directors.

The Form directs filers to list all current officers and directors of (1) entities within the acquiring person that the filer has identified in either the Overlap Description or Supply Relationships Description sections;[8] and (2) of entities that control or are controlled by the acquired person or that have been or will be created in connection with the transaction.[9]  These requirements will require certain filers to engage in a somewhat complex analysis and, particularly for private equity funds and large filers with complex corporate structures, continual monitoring will be required of all the officers and directors serving on subsidiary boards or boards of various portfolio companies.

The Final Rule makes clear that this new reporting obligation is intended to aid the Agencies’ renewed interest in investigating board overlaps that allegedly violate Section 7.  In the Final Rule and recent enforcement proceedings, the FTC has asserted the dubious and controversial position (which has not yet been litigated) that board (or board-like) overlaps can amount to a Section 7 violation even if the overlaps in question do not amount to prohibited board or officer interlocks that violate Section 8 – the statute that unlike Section 7 is clearly and exclusively directed at board and officer overlaps.

Expanded Requirements UPE Reporting.

The new Form directs the acquiring UPE to provide new information about entities with minority holdings (of voting securities or other ownership interests) in the UPE and about the UPE’s own holdings not directly related to the acquisition target. The FTC argues the Final Rule’s changes are necessary because, under the current Form, the antitrust agencies are unable to assess how a UPE’s portfolio companies, for example, may be relevant to an antitrust assessment of the UPE’s acquisition of a target that may operate in the same line of business as companies within the UPE’s portfolio holdings. Indeed, the expanded requirements for UPE reporting will likely require private equity companies to maintain and provide significant amounts of information regarding relationships by and among portfolio companies.

With respect to minority interest holdings, the Final Rule requires the acquiring person to report the name, headquarters mailing address, and approximate percentage held by persons having an interest of more than 5% in (i) the acquiring entity, (ii) any entity that directly or indirectly controls the acquiring entity, (iii) any entity that is controlled by the acquiring entity, and (iv) any entity that has been or will be created to effectuate the transaction (each of these entities is considered a “covered entity”).[10]  For limited partnerships, the Final Rule imposes additional disclosure requirements.[11]

The acquired party, in contrast, must only identify minority holders of 5% or more if such holder will continue to be invested in the target or will acquire an interest in an entity within the acquiring person as part of the transaction.[12]

Narrative Descriptions.

The Final Rule requires that filers provide written narratives describing both the transaction rationale and “competition descriptions,” including a description of product and service “overlaps” (including potential overlaps from products currently under development) and supply relationships.  These additions to the HSR Form present significant risks to filers notwithstanding—or because of—the FTC’s explanation that filers “should rely on business personnel to describe the products and services they offer (or that are under development) using terms and language that is natural in the marketplace.”  While the FTC asserts that these descriptions do not require “the parties to submit an antitrust analysis akin to a ‘white paper,’ or hire counsel or experts simply to create narratives,” the Final Rule notes that the Agencies expect such narratives to align with the business documents submitted subject to other sections of the Form, indicating that a thorough analysis that all documents and descriptions is required. Failure to consult counsel could lead to significant regulatory delay and risk to deal completion.  It could also expose a company to liability for a businessperson’s failure to identify overlaps that one of the Agencies later determines should have been included in the filing.  Whether intended as such or not, these new provisions are a trap for the unwary, under-counseled company, and filers who attempt to provide the requisite descriptions without advice of counsel do so at considerable risk.

Additionally, given the transaction rationale description must be supported by documents required by the filing, extra care will need to be taken to document all important aspects of a deal’s rationale that could be relevant to an antitrust assessment. Similarly, because the overlap description must be determined based on an assessment of ordinary course documents, filers will need to conduct a close review of those documents as part of their filing preparation, even though submission of those materials will not be required for the filing.

While framed as requests for easily drafted “descriptions,” responses to these sections of the HSR Form will be treated as party admissions, making it difficult to present evidence of complementarity or a lack of direct competition in the context of a potential deal challenge.  Market realities are often far more nuanced than can be represented in a brief text box on a notification form.  Particularly for a transaction that may present issues warranting a deeper competitive analysis, significant care should be devoted to preparing such responses with the help of knowledgeable antitrust counsel.

In the Final Rule, the FTC does not articulate the level of detail that filers must provide in their descriptions, or what information should be included. The Instructions to the Form provide no guidance for determining what constitutes an “overlap” or, for that matter, a “product” or “service.” [13]  This is significant because what an antitrust regulator or court would consider to be a relevant overlap product or service can be very different from how a businessperson considers those terms.  The Agencies might consider the relevant product or service to be broader, including actual or potential alternatives, or narrower, focusing on a group of customers, for example.  As described above, several other pieces of information required to be reported in the Form are linked to the identification of overlaps, including information regarding the top ten customers for each identified product or service.[14] In addition to the potential issues that would arise around collecting necessary data when any of the identified products or services are provided by a subsidiary or portfolio company that has not been informed of the potential transaction, there is a significant risk that the Agencies could view a filing that fails to identify or sufficiently describe product overlaps to be deficient and take the position that the relevant waiting period has not been triggered until the filing is corrected and re-certified.

At the same time, being conservatively over-inclusive in identifying overlaps can also create issues.  First, it can increase the burden associated with various elements of the HSR Form.  Second, it may prolong the investigation or even prompt the issuance of a Second Request covering products that involve no meaningful competitive issue.

The obligation to provide a transaction rationale is also more complex than might appear at first blush.  For example, the Form instructions require the parties to submit documents that “confirm” and discuss the rationale for a transaction.  This suggests that careful early assessment and documentation of the rationale will be important.  In particular, the parties will have to consider that transaction efficiencies discussed for the first time later in the deal process may be viewed skeptically by the investigating agency if they were not considered as part of the original deal rationale.  Likewise, the investigating agency might decline to credit benefits of the transaction identified in the filing but not backed up by “confirming” documentation.

Prior Transactions and Overlap Revenue Disclosures.

To better capture any “roll-up” style or serial acquisitions strategies, the Final Rule now requires that both the acquiring person and the acquired person provide information on prior transactions for the last five years in industries of overlap between the two parties. Previously, only the acquiring person was required to report such information. Given that the definition of overlaps has been expanded to include not only overlaps based on NAICs code revenues over $1 million, but also any overlaps identified in the “Competitive Overlaps” description section, more transactions are likely to be swept into this requirement, as the Agencies intend.

In addition, the Final Rule requires that filers must identify and provide any NAICS code revenues separately for each of the acquiring person’s “operating business[(s)]” identified in the “Overlap Description” as an overlap with any of the acquired person’s operating businesses.  Not only does this present a significant burden for a filer with multiple subsidiaries or portfolio companies, the Final Rule does not clearly define “operating business” beyond merely stating that an operating business is an entity responsible for a “distinct operation[].”[15] The Final Rule notes that in the context of describing operating businesses, “a fund must organize its response by portfolio company(s) and a conglomerate must organize its response by business(es);” however, such details provide no definitive guidance as to whether those divisions alone will satisfy the Final Rule’s requirements for reporting revenues in overlapping lines of business. For example, portfolio companies and conglomerates will likely be made up of several entities, each of which may itself qualify as a separate operating business that derives revenues in multiple NAICS codes.[16] The Rule’s lack of clarity regarding an “operating business” or a “distinct operation” will likely result in case-by-case determinations and require the advice of knowledgeable counsel.

Additional Items of Note:

• New requirements for letters of intent: The Final Rule requires any filers that file based on a letter of intent or other preliminary agreement to include detailed information regarding transaction terms and other items. To satisfy the requirements of the Final Rule, an LOI must thus reflect many more aspects of the transaction in question than may normally be addressed in an LOI, thus narrowing the ability for parties to file under such an agreement.
• Translation of Foreign Documents: The Final Rule requires filers to submit English translations of foreign-language documents in addition to the original document. The FTC declined to explicitly endorse the use of machine translations, noting instead that (regardless of the translation method) parties must certify translations as “materially accurate.”[17]  For some filers, this new requirement could impose meaningful new costs, particularly because the Final Rule will now require filers to produce greater quantities of ordinary-course documents, which may be more likely to require translation than material prepared for officers and directors in connection with a proposed transaction.
• Emphasis on criminal liability for false statements in HSR filings: The Commission has added language to the Form’s Certification for the first time explicitly putting filers “on notice” that false statements in the HSR Form are punishable by criminal penalties. Although the Commission denies that “should fully expect a harsh and punitive response to filing errors” under the new HSR Rules, the promise that government prosecutors will exercise reasonable discretion may provide little comfort to companies already concerned about enforcement agendas driven by political considerations.  Filers should protect themselves by obtaining the advice of knowledgeable counsel to avoid errors.

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Although the Final Rule does pare back some of the onerous obligations originally proposed under the NPRM, the overhaul of the HSR Notification process will result in significantly increased burdens on parties required to make a notification filing.  The changes to the HSR Form will not only increase the expense of complying with the HSR Act but will also require parties to devote significantly more time to preparing, completing, and reviewing the Form prior to submission, which can directly impact deal timing.  Beyond the additional burden, the Final Rule presents numerous potential pitfalls and risks for filers, making the guidance and direction from experienced antitrust counsel even more critical.

Footnotes:

[1] See, e.g., Comment of U.S. Chamber of Com., Doc. No. FTC-2023-0040-0684.

[2] Final Rule, at 23.

[3] Id. at 63.

[4] Final Rule, at 58.

[5] Item 4(c) calls for “all studies, surveys, analyses and reports which were prepared by or for any officer(s) or director(s) (or, in the case of unincorporated entities, individuals exercising similar functions) for the purpose of evaluating or analyzing the acquisition with respect to market shares, competition, competitors, markets, potential for sales growth or expansion into product or geographic markets.”

[6] Final Rule, at 205. Filers are permitted to designate an officer or director as the supervisory deal team lead if “the only individuals supervising the strategic assessment of the deal are already either an officer or director.”

[7] HSR Form, at 9.

[8] HSR Form for the Acquiring Person at 5. The Form instructs that “[f]or all entities within the acquiring person responsible for the development, marketing, or sale of products or services that are identified as overlaps within the Overlap Description or as supply relationships within the Supply Relationships Description:  List all current officers and directors (or in the case of unincorporated entities, individuals exercising similar functions) and those who have served in one of these positions within the three months before filing that also serve as an officer or director of another entity that derives revenue in the same NAICS codes reported by the target. For each, provide the name of all such entities. If NAICS codes are unavailable, list all such entities that have operations in the same industry, based on the knowledge or belief of the acquiring person or the identified individual.”

[9] Final Rule, at 249.

[10] Final Rule, at 213.

[11] If a covered entity is a limited partnership, the filer must provide the required information for its (a) general partner, regardless of the percentage it holds, and (b) limited partners that (i) currently hold, or will hold as a result of the transaction, 5% or more but less than 50% of the non-corporate interests of the covered entity, and (ii) have or will have the right to serve as, nominate, appoint, veto, or approve board members, or individuals with similar responsibilities, of any covered entity, or of the general partner or management company of a covered entity.

[12] If the target is a limited partnership, limited partners must only be identified if the limited partner (1) holds 5% or more in the acquiring entity, (2) will continue to hold an interest in the acquired entity, or acquire an interest in the acquiring person, after the transaction is consummated, and (3) will have certain board rights related to the acquiring entity or related entities.  Final Rule, at 232.

[13] The Final Rule does, however, articulate that filers can limit its inclusion of

[14] The overlaps identified in the “Competition Description” are cross-referenced in: “Acquiring Person Structure: Annual Reports and Audit Reports,” “Additional Acquiring Person Information: Officers and Directors,” “Business Documents: Plans and Reports,” “Revenues and Overlaps: NAICS Codes,” “Revenues and Overlaps: Prior acquisitions,” “Additional Transaction Information: Transaction Rationale,” and “Defense and Intelligence Contracts.”

[15] The Final Rule acknowledges that the NPRM’s various references to the “operating business,” “operating entity,” and “operating company” when referring to distinct business operations confused many who submitted comments during the rulemaking process. Final Rule, at 235.

[16] Final Rule, at 235.

[17] Final Rule at 191.