On June 29, 2023, the Federal Trade Commission ("FTC"), with the concurrence of the Antitrust Division of the U.S. Department of Justice ("DOJ"), published a Notice of Proposed Rulemaking in the Federal Register that would dramatically increase the burden of premerger notification filings under the Hart-Scott-Rodino ("HSR") Act. If the proposed rules are enacted, they have the potential to delay closings as the FTC estimates that the amount of time required to prepare an HSR filing for an ordinary transaction will nearly quadruple.
The FTC has stated that the proposed changes, which are the most significant changes to the HSR filing procedure since the HSR Act's passage in 1976, will allow the agency to more effectively and efficiently review transactions for anticompetitive effects because the new rules ask parties to provide clearer pictures of their proposed transactions. The public comment period for the proposed rule is 60 days from publication in the Federal Register. Following this public comment period, the FTC may finalize and publish the final rule or amend the proposed rule in light of the public comments.
In an effort to acquire more information from parties to an HSR-reportable transaction, the proposed changes significantly alter the HSR reporting form and instructions. Substantively, the proposed rules require parties to gather and submit much more information about a transaction than is currently required for an HSR filing. Some of the proposed changes include:
- Narrative Descriptions. The proposed rules would require narratives to be submitted with an HSR filing which provide more detail on the transaction by describing the strategic rationale and the potential competitive effects of the transaction. As an example, the proposed "Horizontal Overlap Narrative" will require each party to provide an overview of its principal categories of products and services along with information on whether the party currently competes with the other party to the transaction. Parties would also be required to submit "Supply Relationships Narratives" and provide information about existing or potential vertical, or supply, relationships between the filing persons. Similarly, parties would be required to submit "Transaction Rationales" which identify and explain the strategic rationale for the transaction.
- Draft Deal Documents. Parties would be required to submit draft versions of all "Transaction-Related Documents," including studies, surveys, analyses, and reports, that were sent to deal team leads, officers, and directors. The FTC has stated that the goal of obtaining these draft documents is to understand the pre-transaction assessments of business realities not available through "sanitized" final versions of documents. However, in recognizing the burden that reviewing draft versions of "Transaction-Related Documents" could cause on the FTC, the agency has stated that it is considering an alternate approach where parties gather draft documents but only submit them upon request.
- Ordinary Course Documents. Parties would be required to submit certain documents that discuss market shares, competition, competitors, or markets for any overlapping products or services prepared in the "ordinary course" of business (as opposed to documents prepared specifically for purposes of analyzing the transaction).
- Prior Acquisition History. Reporting requirements for prior acquisitions of both the acquired and acquiring entity are significantly expanded under the proposed rules. The time frame for reporting prior acquisitions would be expanded from five years to ten years, and the threshold for listing prior acquisitions would be eliminated, which was previously only required for acquisitions of entities with net sales or total assets greater than $10 million.
- Labor Markets Information. The proposed new version of the HSR form includes a section on labor markets, which would require each filing party to produce material demonstrating the effect a transaction would have on the labor markets. Filing parties would be required to classify their workers into occupational categories and provide their five largest categories of workers to the FTC. Under the new rules, filing parties would also be required to provide information about the geographic areas where both parties employ workers based on commuting zone categories from the U.S. Department of Agriculture.
- Organization Structure. The proposal would significantly expand the information that must be disclosed about the "Ultimate Parent Entities" involved in a transaction. The new rules would require disclosure of additional minority holders beyond the present requirements, which will impose burdens on acquiring persons who are investment entities with complex organizational structures. The acquiring party would also be required to disclose certain individuals or entities that exert influence over the acquiring entity, such as those that provide credit, hold non-voting securities, are board members or observers, or have agreements to manage entities related to the transaction. Finally, the revised Organization Structure section would require both parties to identify officers, directors, and board observers of all entities within the acquiring and acquired entities, as well as all other entities in which these individuals serve, or have served as an officer, director, or board observer in the two years prior to filing.
- Elimination of Ability to File on Simple Letters of Intent. Under the proposed rules, parties would no longer be permitted to make HSR filings based on simple letters of intent, but rather would be required to submit more detailed draft agreements or term sheets identifying key terms of their proposed transactions.
The proposed rules are subject to change after the public comment period, and the final rules will not be promulgated until later this year, at the earliest. However, even if the proposed rules are not enacted in their entirety, it is likely that the HSR Act will see profound changes requiring parties to provide significantly more information in connection with a transaction. Parties to an HSR-reportable transaction should anticipate a substantial increase in the time and expense to prepare an HSR filing as significant pre-deal planning will be required.
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