These revisions would significantly increase the burden on filing parties―so much so that the agencies are concerned that filings will contain so many documents, they will be overwhelmed.
On June 27, 2023, the Federal Trade Commission (FTC), with the collaboration and concurrence of the Department of Justice (DOJ), announced a notice of proposed rulemaking that proposes extraordinary changes to the information required to be submitted to the agencies as part of the pre-merger notification process under the Hart-Scott-Rodino (HSR) Act.
- The changes would mark the first “top-to-bottom” expansion and reorganization of the information collected in the pre-merger process since 1978.
- The dramatic overhaul of the pre-merger notification process requires that all transactions include disclosure in the initial filing of much of the information that, in past practice, had been the subject of post-filing voluntary requests only for transactions of interest. This is expressly intended to address information asymmetry so the agencies have the pertinent information the parties do, while also requiring affirmative efforts by the parties to obtain and present additional information.
- The burden on merging parties to comply with these proposed changes would be significant, including providing the following as part of the pre-merger process, which the notice estimates will more than triple the amount of time needed to prepare the submission:
- Key information about the terms of and rationale for the transaction, horizontal product or service overlaps, vertical relationships, company investors and employees;
- Additional transaction and strategic documents and ordinary-course business documents that discuss competition in affected markets;
- English translation of foreign language documents; and
- Information about other jurisdictions that will review the transaction, including a voluntary waiver option to permit sharing of information submitted to the FTC and DOJ.
- The revisions also address disclosures related to foreign subsidies from countries or entities that represent a strategic or economic threat to United States interests, as required under the Merger Filing Fee Modernization Act of 2022, and require disclosure of defense or intelligence contracts.
- The revisions may increase the lead time needed for parties and counsel to prepare an HSR filing by several months.
- The proposed changes are not final. The notice will go out for a 60-day public comment period once it is published in the Federal Register. The FTC will review the comments in developing a final rule.
Analysis of the Changes to the HSR Pre-Merger Notification Process
The HSR Act requires parties to transactions that meet certain thresholds to file pre-merger notifications to the FTC and DOJ, and to not close their deal until the statutory waiting period, typically 30 days, has expired. According to a statement by FTC Chair Lina M. Khan, and joined by Commissioners Rebecca Kelly Slaughter and Alvaro Bedoya, the proposed changes to the HSR reporting form will allow the DOJ and FTC to more effectively examine the competitive impact of a proposed transaction within the statutory waiting period. Under the proposed changes, parties to reportable transactions would have to submit significantly more information to the agencies than is currently required, including some of the types of information on horizontal overlaps and vertical relationships that is required in merger control filings in many other jurisdictions.
The 133-page notice proposes several significant changes to pre-merger filings under the HSR Act, including:
- Establishing permanent electronic filing procedures;
- Description of the rationale for the transaction and a diagram explaining relationships between all entities or natural persons involved, as well as a timeline for the transaction;
- Expansion of the types of documents the parties must provide to the agencies to include “certain high-level strategic business documents” created separately from the transaction, as well as expansion of production of drafts of transaction related documents on competition and financial models reflecting future revenues;
- A narrative response addressing the competitive impact of the deal, including details on any horizontal overlap, vertical relationships and supply agreements, including identification of and contact information for top customers and suppliers and information that would illuminate labor market effects;
- A complete revamp of the revenue reporting requirements and additional categories of industries with local competition requiring more detailed geographic information on overlaps;
- Additional disclosures of 5 percent interest holders of various entities (including limited partners), as well as organization charts;
- Expanded disclosures of prior acquisitions in the past 10 years, instead of five, without current size filters and applied to both the acquiring and acquired person;
- Disclosure of foreign investment from the governments or government agencies of particular identified countries of concern and identification of defense or intelligence contracts;
- Translations of all foreign language documents;
- A bare-bones letter of intent is no longer sufficient, and a filing without an executed definitive agreement (with all of its schedules and exhibits) must include a detailed term sheet or draft agreement outlining the transaction;
- A list of all communication platforms used by the parties along with a certification that steps have been taken to preserve relevant information.
After the notice of proposed rulemaking is published in the Federal Register, there will be a 60-day public comment period. The FTC will then consider the comments that it receives and will issue a final rule.
These revisions would significantly increase the burden on filing parties―so much so that the agencies are concerned that filings will contain so many documents, they will be overwhelmed. The proposed structure means front-loading much of the information that had in the past been the subject of voluntary requests to filing parties where the agencies have questions. The proposed changes recognize that Census Bureau North American Industry Classification System revenue splits are an imprecise screen for competitive overlaps, and instead place the burden on the parties to identify both horizontal overlaps and vertical relationships. The revisions also target several aspects of HSR practice that will require experienced deal teams to revisit their process, practices and document management to avoid certain past practices. They do not include the expansion of the definition of “person” contemplated in prior proposed revisions, but they do require additional disclosures relating to owners and those who may influence management or operations. They further include document sweeps of not just officers and directors, but also supervisory deal team leads, and require disclosure of officers, directors and board observers for all entities on both sides. In the aggregate, once finalized, these revisions will significantly alter HSR practice in many ways that all of those involved in dealmaking will need to absorb and incorporate going forward.
For More Information
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