On June 27, 2023 the United States Federal Trade Commission (“FTC”) and the United States Department of Justice (“DOJ”) announced proposed changes to the pre-merger notification process under the Hart-Scott-Rodino Act (the “HSR Act”). These proposed changes were published on June 29, 2023.
By way of background, the HSR Act is federal legislation that requires merging parties to report transactions to the FTC and DOJ (together, the “US Agencies”) if the transaction meets certain monetary thresholds. Currently, when notifying a transaction under the HSR Act, parties need to supply relatively basic information, including information about the transaction, their respective businesses (including their subsidiaries, revenues and shareholders) and the competitive overlaps between their respective businesses. Merging parties may not close a notifiable transaction until a 30-day statutory waiting period (15 days in the case of a cash tender offer or a bankruptcy) expires or is terminated.
The US Agencies have proposed significant amendments to the premerger notification rules (the “HSR Rules”) that implement the HSR Act and to the premerger notification and report form (the “HSR Form”) and instructions (“HSR Instructions”). Notably, this is the first comprehensive review of the HSR Form since 1978. The proposed amendments include a reorganization of the information currently required, as well as the addition of new information and document requirements. The US Agencies are also developing an e-filing platform through which filers would submit HSR filings via an online portal.
According to the US Agencies, these changes “would enable the [a]gencies to more effectively and efficiently screen transactions for potential competition issues within the initial waiting period” and would “reduce the need to rely on the voluntary submission of additional information by the parties and third-party industry sources during the initial waiting period”. The US Agencies further noted in their press release that, in their experience, “the current [HSR] Form does not provide their staff with complete information, including information about the transaction; the filers’ business operations and those of any related entities; the premerger relationship between the acquiring person and the acquired entity; individuals or entities that may have influence over the operation of the relevant business lines; the full range of potential competitive implications of the transaction, including effects on workers; and prior acquisitions”. The US Agencies also noted that the proposed changes would “improve the efficiency and effectiveness of that initial review” and may “potentially narrow the scope of any investigation or reduce the need to conduct a more in-depth investigation of the proposed transaction”.
According to the FTC, it currently takes an average of 37 hours for merging parties to prepare their HSR filings. However, the FTC has estimated that the new requirements, which are discussed below, would add an average of 107 hours to the time it takes parties to prepare their filings, ranging from an average of 12 additional hours for relatively simple transactions to 222 additional hours for very complex transactions. That said, initial feedback from US lawyers specializing in HSR filings with whom we regularly work is that the FTC’s estimates are conservative and that the additional time needed to prepare HSR filings could in fact be much longer if the changes are implemented. This is consistent with the views expressed by the Bloomberg Intelligence, which noted that “we’re looking at changing something from a 10-day process to a two-to-three month process” – something that may need to be factored into deal timelines going forward.
The proposed changes to the HSR Rules, HSR Form and HSR Instructions include the following:
- Requiring additional information regarding the filing parties’ organizational structure, including:
- details regarding the acquiror’s ultimate parent entity (including an organizational chart for funds and certain limited partnerships) and the acquiror’s controlled entities;
- identification of officers, directors and board observers (or in the case of unincorporated entities, individuals exercising similar functions) for the prior two years, and for each individual, identification of any other companies for which that individual would serve or has served during the prior two years as officer, director, or board observer;
- identification of additional minority interest holders (including minority holders of all entities within the acquiring person that are related to the transaction and identification of certain limited partners);
- identification of other types of interest holders that may exert influence (including certain persons that, in relation to the acquiring entity or any entity it directly or indirectly controls or is controlled by, (i) provide credit; (ii) hold non-voting securities, options or warrants; (iii) are board members or board observers, or have nomination rights for board members or board observers; or (iv) have agreements to manage entities related to the transaction); and
- identification of business names (such as d/b/a or f/k/a names).
- Requiring additional details regarding the transaction and the current relationship between the parties, including:
- description of the acquiring person and its business;
- description of the ownership structure of the acquiring and acquired entities;
- description of the strategic rationale for the transaction;
- provision of a transaction timeline (including key dates and conditions for closing);
- provision of a diagram of the deal structure along with a corresponding chart that explains the relevant entities and individuals involved in the transaction;
- identification of related transactions;
- production of other agreements between the acquiring and acquired persons (such as licensing agreements, supply agreements, non-competition or non-solicitation agreements, purchase agreements, distribution agreements or franchise agreements, among others.);
- expansion of transaction documents (currently required by section 4(c) and 4(d) of the HSR Form) to include documents prepared by or for supervisory deal team leads (in addition to officers and directors, as the current HSR Form requires);
- production of transaction related agreements (which would now require filing persons to produce all agreements, inclusive of schedules, exhibits, etc., that relate to the transaction); and
- provision of an expanded list of prior acquisitions (including transactions within the previous 10 years, as oppose to the current time frame of five years, and transactions of any size, as opposed to the previous monetary threshold for listing prior acquisitions).
- Requiring information related to the competitive impact of the proposed transaction with respect to both potential horizontal and non-horizontal issues, including:
- description of horizontal overlaps between the parties (including listing each current or known planned product or service that competes with (or could compete with) a current or known planned product of the other filer, and, for each such overlapping product or service, sales, customer information (including contacts), a description of any licensing arrangements, and any non-compete or non-solicitation agreements applicable to employees or business units related to the product or service);
- description of any existing or potential vertical, or supply, relationships between the filing persons (including information for related sales and purchases between the filing persons or with other companies that use the filing person’s products, services, or assets to compete with the other filing person);
- provision of projected revenue streams, transactional analyses and internal documents describing market conditions, and the structure of entities involved such as private equity investments;
- description of labor markets and disclosure of information that screens for labor market issues by classifying employees based on current Standard Occupational Classification system categories;
- provision of additional information regarding minority held entities with revenue overlaps;
- provision of geolocation information for operations;
- identification of certain existing or pending defense or intelligence contracts valued at $10 million or more; and
- production of certain strategic plans (which would include certain high-level strategic business documents that were not created in contemplation of the transaction but still contain information relevant to the antitrust analysis).
- Requiring the submission of draft agreements and/or term sheets, where filers have not executed a definitive transaction agreement before making an HSR filing. Relatedly, the proposed changes include eliminating the ability to submit an HSR filing without providing a term sheet or draft agreement that reflects sufficient detail about the proposed transaction to allow the US Agencies to understand the scope of the transaction and to confirm that the transaction is more than hypothetical.
- Requiring information regarding subsidies received or that are anticipated to be received from a foreign entity or government and identification of products produced in certain countries and which are subject to countervailing duties or potential countervailing duties.
- Identification of communications systems or messaging applications on any device that is used or that could be used to store or transmit information or documents related to the filer’s business operations.
- Requiring English translations of all materials submitted as part of the initial HSR filing or a formal Second Request from the applicable US Agency.
Notably, in Canada, much of the new information required by these proposed changes is generally included in the competitive impact assessments submitted by parties to the Canadian Competition Bureau (the “Bureau”) during a merger review. While competitive impact statements assessments are not legally required in Canada, it is nearly a universal practice to submit such an assessment, as Canada’s merger review process allows the Bureau to formally pre-clear proposed transactions through the issuance of an Advance Ruling Certificate or No-Action Letter – something that is not available in the United States. Among other things, a competitive impact assessment generally includes a significant amount of information regarding the parties organizational structure (including minority interest holders), a description of the transaction and the rationale for the transaction and a substantial analysis of all competitive impacts of the proposed transaction including both potential horizontal and non-horizontal issues.
This accords with the fact that, in discussing the proposed changes, the US Agencies highlighted that the changes to the HSR notification process were driven by consideration of the notification regimes of foreign jurisdictions which revealed that better information can help address the increased complexity of premerger review and improve its efficiency. In this regard, the US Agencies noted that “[a]s compared to the [HSR] Form, most international jurisdictions have merger filing forms that ask filers to provide significantly more information that their staff considers relevant to the competition analysis, including details about the transaction’s structure and rationale, horizontal overlaps, vertical and other relationships, and more detailed sales data” and that “many other jurisdictions rely on narrative responses from the parties that contain basic information about business lines or company operations, and several require the parties to self-report overlap”.
As noted above, the proposed changes to the HRS Rules, HSR Form and HSR Instructions were published in the Federal Register on June 29, 2023. These proposed changes will be open for public comment until August 28, 2023.