FTC and DOJ Issue Proposed Rulemaking Revising the HSR Form – Propose Sweeping Changes and Increased Disclosures

On June 27, 2023, the Federal Trade Commission (the “FTC”) proposed changes to the premerger notification form, instructions, and rules promulgated pursuant to the Hart-Scott-Rodino Act (the “HSR Act”). If implemented, the additional information required will drastically affect transactional timelines and require increased attention from dealmakers for all HSR reportable deals.

The HSR process currently requires parties to proposed transactions to submit a premerger notification form (“HSR Form”) to the FTC and the Department of Justice (the “DOJ”) and abide by the applicable waiting periods before consummating the transaction. On June 27, the FTC, with the concurrence of the Assistant Attorney General of the DOJ, issued a notice of proposed rulemaking (“NPRM”) that would dramatically change the HSR Form and greatly expand the scope and volume of materials required to be submitted. The changes would significantly increase the cost of premerger notifications and create pitfalls that could derail otherwise non-anticompetitive transactions.

If finalized, this rulemaking would have significant ramifications for companies entering into reportable transactions: 1) the proposed rule would require the parties to include in their initial HSR filing substantially more information, documents and data, as well as up-front advocacy than is currently the case; 2) the FTC would use the proposed process to gather information to evaluate a far broader spectrum of “concerns” than is currently the case or than was arguably contemplated by the HSR Act – including “doubling down” on the agencies’ recent focus on employees and labor; and 3) the new process would require filers to provide information useful to the agencies in investigating past related transactions, future plans for transactions, and relationships among far-flung entities in a corporate family. These implications may be particularly significant to private equity firms and other financial institutions. Moreover, even according to the agencies, it will significantly increase the upfront time and cost required to prepare the initial HSR filings for virtually every reportable transaction.

The most notable changes to the HSR Form under the proposed rulemaking include:

• Creating a new section of the HSR Form dedicated to Labor Markets and requiring each filer to submit occupational classification data and commuter zone data regarding the filing person’s employees;
• Eliminating the ability of parties to file on a Letter of Intent without submitting term sheets or draft agreements that provide “sufficient detail” regarding the proposed transaction;
• Expanding the description of the ultimate parent entity (“UPE”) and requiring that each filer provide extensive information about officers, directors, and board observers (or in the case of unincorporated entities, individuals exercising similar functions), for each entity within the UPE and the merged firm (for the purpose, among others, of facilitating the agencies investigation of potential board interlocks in violation of Section 8 of the Clayton Act);
• Requiring filers to identify all entities within the acquiring person or acquired entity, minority shareholders of each entity, and other non-controlling entities as well as other interest holders (such as creditors and holders of non-voting securities);
• Requiring filers to submit all agreements relating to the transaction – this includes any and all schedules as well as any agreements that either party enters into with suppliers, key employees, or other entities that relate to the transaction;
• Requiring filers to disclose prior acquisitions from the past 10 years, and eliminating any current materiality thresholds for such disclosures;
• Requiring filers to provide a written narrative describing the rationale behind the proposed transaction and identifying the documentary support submitted as part of the HRS Form for each strategic rationale;
• Requiring filers to provide a written narrative describing any horizontal or vertical competition that exists among the parties as well as the competitive dynamics that may be impacted by the transaction;
• Requiring the acquiring entity to provide descriptions of the business operations of all entities within the acquiring entity;
• Expanding the scope of documents, including drafts, that must be submitted under items 4(c) and 4(d) of the current form;
• Requiring filers to submit periodic ordinary course strategic planning documents entirely unrelated to the instant transaction;
• Requiring filers to submit internal organization charts showing roles for each of the authors of documentary materials submitted with the HSR Form;
• Requiring filers to report certain contracts with defense or intelligence agencies; and
• Including a “check box” to proactively waive confidentiality for the exchange of information and materials with certain state and foreign antitrust enforcers.

In order to address the HSR Act amendments included in the Consolidated Appropriations Act of 2023, the NPRM also includes a requirement that filers identify and describe certain subsidies received or that are anticipated to be received by any entity within its person from a foreign entity or government of concern, as defined by section 40207 of the Infrastructure Investment and Jobs Act (“IIJ Act”), 42 U.S.C. 18741(a).

The NPRM is subject to a 60-day public comment period. After all comments have been reviewed, FTC may submit a revised NPRM or even withdraw the proposal. If the FTC issues a final rule, then the rule generally will come into effect 30 days after being published in the Federal Register. The process likely will extend at least to the end of the year.

These proposed changes are in line with the FTC and DOJ Antitrust Division’s aggressive posture and increased substantive concerns towards merger enforcement. Questions are likely to be raised as to whether the particular changes to the HSR Form outlined in the NPRM exceed FTC’s statutory authority.

As drafted, the NPRM envisions the parties to transactions providing much more “analysis” and competition-related information, both in narratives and documents, than is currently required when filing an HSR Form. In support of these changes, the FTC suggests that much of this information is already collected by antitrust enforcers in other jurisdictions. Even if true for some of the information in the NPRM, the HSR Act impacts many more companies and many more transactions than virtually all foreign merger regimes. Premerger filings at the European Commission, for instance, are necessary only for transactions having a significant impact across Europe and average fewer than 400 per year, while in 2021, there were over 3,500 transactions requiring HSR filings to be made to FTC and DOJ. The FTC has estimated that, if implemented, preparing HSR filings may take up to an additional 222 hours. This estimate does not take into account more complex transactions, however, which could far surpass the estimated filing time. Now, companies, particularly financial investors, will need to identify possible substantive issues and develop a strategy for addressing them at an earlier stage in order to consummate transactions according to closing timelines.