Key Takeaways
- On October 10, the FTC published new HSR forms, representing the first "significant" overhaul to the HSR forms in 45 years. The new HSR forms will become effective 90 days following the publication of the Final Rule in the Federal Register, which is likely to be published in the next two weeks.
- The new HSR forms require substantial additional information and documentation from filing parties.
- The new HSR forms do not alter current filing thresholds or filing fees.
The Federal Trade Commission's (FTC) Final Rule mandates the adoption of new, expanded Hart-Scott-Rodino (HSR) forms1 and the creation of a public comment portal for pending transactions.2 The new HSR forms will become effective 90 days after the Final Rule is published in the Federal Register. The new forms require much more information and documentation than the present forms. The new forms do not alter current filing thresholds or filing fees.3 Additionally, the electronic filing system will be a permanent HSR feature going forward.
The Final Rule, like the proposed Rule, emphasizes that the HSR forms have not substantively changed in 45 years, whereas the "economic realities" affecting competition have purportedly changed. The new HSR forms, according to FTC, will provide the FTC and the Department of Justice Antitrust Division with the information and documents they need to expeditiously identify, in the initial 30-day waiting period, those transactions that should be scrutinized further for anticompetitive effects, as well as those that do not warrant any additional scrutiny. The FTC predicts that the new forms will thus reduce the frequency of "pull and refile" scenarios and overbroad second requests.
The FTC asserts that the Final Rule strikes an appropriate balance between the burden imposed on filers with the need for the agencies to receive the information to rapidly assess the competitive effects of proposed transactions. According to the FTC, the new HSR forms will help the federal antitrust agencies to, among other things, readily identify acquisitions of nascent and potential market entrants.
- New Document Production Requirements
- Parties who elect to file a letter of intent will now have to produce a term sheet or then-current draft of the definitive agreement. FTC reasons that this requirement will give it a better understanding of transaction structure and will ensure filings generally occur later in the diligence process when there will be more responsive documents for the agencies to assess antitrust risk.
- The FTC expanded the requirement to produce documents addressing competitive impacts of the transaction (Item 4(c)/(d) documents on the present form) to include certain documents prepared by the "Supervisory Deal Team Lead," the one individual who has "primary responsibility for supervising the strategic assessment of the deal," but is not an officer or director.
- The new HSR forms also expand Item 4(c)/(d) to cover ordinary course documents that constitute CEO and/or board periodic reports concerning competition and the relevant market, prepared within one year of the filing.
- While the proposed rule requiring disclosure of all "draft" Item 4(c)/(d) documents was not adopted, the final rule mandates that a "draft" is a "final" version for the purposes of filing if shared with a board member, even if it is labeled a "draft."
- The Acquiring Person, in certain transactions, must prepare and produce a transaction structure diagram.
- New Narrative Requirements
- The Acquiring Person must describe its organizational structure and an organization chart if one exists.
- The Acquiring Person's transaction narrative must contain a description of all of the business lines within the Acquiring Person. It must also list related transactions and/or other related HSR filings, as well as any foreign premerger filings that are required for the transaction.
- Both parties must provide transaction rationales. If a party's rationale conflicts with the supplied documents, the party must explain the conflict.
- Filers must describe all horizontal overlaps that exist or are planned and identify vertical relationships, if any. The overlap description must include information about customers in each overlapping product or service. The required description of vertical relationships will have a de minimis exception for products or services that derive less than $10 million in revenue.
- New Form Process and Information Requirements
- There will be separate new HSR forms for the buyer and seller instead of the current single form.
- A filer may elect to waive confidentiality of its filing so that HSR contents can be disclosed to other government agencies (i.e., foreign competition authorities and/or state attorneys general). FTC asserts that this can provide utility to a filer by reducing duplicative regulatory burdens.
- Filers must report certain foreign government subsidies.
- To facilitate coordination with the appropriate defense and intelligence agencies, filers must disclose contracts valued at over $10 million that result in revenues in overlapping North American Industry Classification System codes (NAICS).
- In certain transactions, the Acquiring Person must identify its officers and directors.
- The Acquiring Person also must disclose whether there are any contracts between it and the Target, and if so, what type of agreements exist.
- NAICS code reporting will be substantially altered. 2022 NAICS codes will be used going forward. Revenues may now be reported within a range within each code instead of with precision. But filers must specify those within it that generate the revenues in each code. Filing parties that are engaged in manufacturing no longer are required to allocate revenues by North American Product Classification System codes (NAPCS).
- For the list of subsidiaries within the Acquiring Person and Acquired Entity, the new rules require identifying only those subsidiaries that derive revenues within overlaps, but filers must now disclose "d/b/a" names, if different from the legal entity name of each subsidiary.
The FTC reports that it received over 700 public comments to the Proposed Rule and in response to the comments, several items in the Proposed Rule were dropped or substantially modified. Those proposals that were dialed back include: supplying a transaction timeline, information about nontraditional interest holders (including board observers), information concerning labor, drafts of responsive documents, certain enhanced geographic information and certain increased information concerning prior acquisitions. The FTC also dropped heightened document preservation rules.
The FTC promises that it will bring back early termination (ET) because it will have enough information to assess filings rapidly. This may be a silver lining or maybe just pewter – asking for ET results in the public disclosure of the filing, which will give complainants the opportunity to use the public comment portal.
On average, the FTC estimates the new HSR forms will increase HSR preparation time by 68 hours, or just under $40,000 per filing. The FTC calculated that the aggregate yearly cost to filers would be about $139 million, although this is substantially less than the cost calculated in a third-party report submitted by a commentor. The FTC did not estimate the dollar benefit of the new HSR forms, which leaves open the question of whether there is $139 million or more in benefits. There were 3,515 filings in 2023. Typically, less than 2 percent of filings result in second requests. Using the 2023 data, there were 3,444 filings in which providing the additional FTC-mandated information would not do much good. For the 2 percent, about 70 filings, most practitioners agree to a pull and refile of the HSR form, which extends the waiting period about 30 days. In that 30-day period, the antitrust agencies can easily obtain all the information the new HSR form requires. In fact, if the antitrust agencies are on top of their game, they can obtain all that information during the first waiting period and can obtain much more information in the pull-and-refile waiting period. And this additional burden is only placed on 70 deals. The additional burden of the pull-and-refile period over 70 deals will likely cost much, much less than $139 million. So where is the benefit that outweighs the cost burdening the other 98 percent of filers? The FTC does not clearly specify. But the FTC may be thinking that the antitrust agencies are not on top of their game and the additional information will allow them to catch additional mergers resulting in anticompetitive effects. In fact, there are many stories among practitioners of filings that should have resulted in further investigation but did not. Despite the increased burden and the absence of quantifiable benefits outweighing the burden, the FTC asserts that the final rule does not fall within the "major questions" doctrine because the Final Rule falls squarely within the agency's statutory authority. Many of the issues that made the FTC's noncompete rule vulnerable are not in play here.4 We will have to wait and see whether there will be court challenges to the new forms before the effective date and whether they can succeed. Stay tuned.
Footnotes
2 https://www.ftc.gov/enforcement/merger-review/comment-on-a-proposed-merger
4 https://www.bakerlaw.com/insights/ftc-issues-final-rule-banning-non-competes/
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