The Federal Trade Commission (FTC), with the concurrence of the Department of Justice, has unanimously adopted sweeping changes to the Hart-Scott-Rodino Act (HSR) rules. Although the breadth and scope of the final rules announced October 10 have been significantly scaled back compared to those originally proposed back in June 2023, the changes nonetheless constitute the most significant overhaul of HSR reporting requirements since the first rules were introduced in 1978. The final rules, if not blocked by a court challenge, will become effective in January 2025.
The new rules impose substantial additional burdens on most filing parties that will greatly increase the amount of time and effort to prepare required filings, regardless of whether the transaction may present substantive antitrust issues. The FTC itself estimates an average increase in preparation time of 68 hours under the new rules—almost double the FTC’s estimate of the current burden of 37 hours—with an average increase of 121 hours for deals involving parties with competitive overlaps or supply relationships. This will significantly extend pre-filing timelines and HSR-related expenses. Companies considering M&A activity1 should plan accordingly, including by engaging with HSR counsel early in the process of considering a transaction.
Shortly after her appointment in 2021, FTC Chair Lina Khan asserted that the current HSR premerger review process does not provide the antitrust agencies sufficient information to adequately review proposed deals in a timely manner and announced her intention to revisit the HSR rules to fill perceived gaps.
Fifteen months ago, Khan followed through on that promise when the FTC announced a raft of proposed changes to the HSR rules via a Notice of Proposed Rulemaking (NPRM). The proposed rules imposed a number of new and burdensome obligations and beefed up or extended several existing obligations. The NPRM prompted a large number of public comments, many of which criticized the proposals for, among other things, allegedly overstepping the FTC’s statutory authority and imposing unjustifiable burdens on filing parties.
The final version of the rules eliminates many of the most egregious perceived excesses, such as the proposal to require parties to institute a litigation hold pending HSR review and proposals that would have required the gathering and submission of data relating to potentially affected labor markets. Nevertheless, the new HSR rules effectively impose a significant tax on almost all prospective transactions by requiring parties to all reportable transactions to now provide information in their initial HSR filings that previously was required only of transactions that raised substantive antitrust issues sufficient to prompt at least a preliminary investigation.
While the HSR rulemaking was adopted unanimously by the Commission, the accompanying statements by Commissioners Melissa Holyoak and Andrew N. Ferguson clearly suggest that the two Republican Commissioners leveraged their votes (and the prospect of damaging dissenting statements) to moderate the final changes, as well to lift the suspension of grants of early termination of the HSR waiting period that was instituted in the early days of the Biden administration. The final rule changes will become effective 90 days after their publication in the Federal Register, which likely means sometime in January 2025. However, a 5-0 vote adopting the rule changes does not immunize the Commission from legal challenges which, if mounted, could delay implementation of the rules.
The FTC’s final rules institute a wide variety of changes, including establishing a number of wholly new requirements, modifying certain existing requirements, and making a slew of ministerial changes to the HSR form and instructions. The most significant changes relevant to companies planning future M&A activity are summarized below:
Rationale and Overlap Narratives and Data: The new HSR form will require narrative descriptions of the rationale for the transaction, and a description of “each of the principal categories of products and services” offered by the filing person. Filers will also be required to describe any “current or known planned products or services” of the filing person that “competes with (or could compete with) a current or known planned product or service” of the other filing party. For each product or service identified as a competitive overlap, the filer is required to also provide the following:
Information on Supply Relationships: As a means of assisting the agencies in further exploring vertical theories of harm, filings will now require extensive information about supply relationships between the parties—or between one party and any of the other party’s competitors—for any products that generated at least $10 million in supplier revenue from all sources in the prior year. Where such relationships exist, parties will be required to report annual sales in total, as well as for each of the product or service’s top 10 customers, and describe the key terms of any relevant supply or licensing agreements.
Deal-Related Documents: HSR filings currently require filers to submit certain documents created by or for officers or directors, called “Item 4(c)” and “Item 4(d)” documents. The new rules expand those requirements to include documents created by or for a “supervisory deal lead,” who is defined as the person with primary responsibility for supervising the strategic assessment of the deal, and who would not otherwise qualify as a director or officer. Parties are also now required to submit transaction diagrams if such diagrams exist.
Plans and Reports: In addition to deal-related documents, the new rules also require filers to submit any ordinary course “plans and reports” going back one year prior to filing that were submitted to a filing person’s CEO or Board of Directors and that “analyze market shares, competition, competitors, or markets pertaining to any product or service of the acquiring person also produced, sold, or known to be under development by” the other party to the deal. All foreign-language portions of these documents, as well as the deal-related documents, must now also be provided with English translations.
Submission of All Agreements: The existing requirement to submit the principal transaction agreement and any relevant noncompete agreements between the parties will be extended to require all agreements between the parties, including any side letters, schedules, exhibits, etc.
Additionally, for filings made on the basis of a letter of intent or term sheet instead of a definitive agreement, the parties must describe the contemplated transaction’s parameters with specificity or submit an additional dated document (such as an unsigned draft of the definitive agreement) that reflects the deal’s currently contemplated details and scope.
Increased Reporting on Subsidiaries: Each majority-held subsidiary of the acquirer or the target must be listed along with any “dba” names for that entity, and all entities must be organized by operating entity (i.e., how they would appear on a company organizational chart). In addition, filers must provide estimates of revenues generated by each subsidiary in codes that overlap with the other filer.
Foreign Subsidies: In response to a new legislative requirement, HSR filings made under the new rule will require the filing person to disclose any subsidies received (or anticipated to be received) from any foreign entity or government of concern, as well as whether the filing person has products subject to certain trade restrictions relating to those countries. The relevant countries for this requirement include China, Russia, North Korea, and Iran.
Sensitive Government Contracts: There is a new requirement to disclose certain government contracts with the U.S. Department of Defense or any member agency of the U.S. intelligence community, along with any pending proposals for such contracts, if valued at $100 million or more and relevant to any product/service overlap or supply relationship with the other filing person.
Build in Time and Resources: Today, most HSR filings can be prepared in less than two weeks, with some larger or more complex filings taking longer and very simple filings taking much less. Going forward, depending on the existence of supply relationships between the parties or with competitors to a party, and any actual or potential competitive overlaps between the parties, the new requirements could add several weeks to HSR preparation times. Companies considering potential M&A activity should plan accordingly.
Plan for Increased Burden on Relevant Company Personnel: While outside antitrust counsel can handle much of the crafting the newly required narrative responses and complying with new ministerial requirements, the new rules will require significantly more information and data from your company, particularly to the extent the transaction involves supply relationships with the other party or its competitors, or any actual or potential competitive overlap with the other party. Similarly, the “supervisory deal team lead” will likely have greater involvement in identifying and producing responsive documents, so companies should be mindful of these requirements when staffing a potential transaction.
Exercise Caution in Document Creation: With the new requirement to submit certain ordinary course plans and reports with HSR filings, making sure your company observes best practices in the creation of business documents is more crucial than ever. Documents submitted with HSR filings provide agency investigators their first impression of a deal, and as such, care should be taken to ensure the documents accurately reflect the relevant facts and commercial landscape, and avoid inclusion of hyperbole, exaggeration, or ill-conceived strategies or other potential distractions.
Reinstatement of Early Termination Grants: While most HSR filings will now take quite a bit more time to prepare, if your transaction is relatively straightforward and does not present potential antitrust issues, you can once again potentially secure an early termination of the applicable HSR Act waiting period when the new rules become effective. This means that many deals without issues may benefit from shorter post-filing timelines.
Involve Antitrust Counsel Early in Deal Evaluation: When considering a potential M&A transaction, antitrust counsel can help identify potential aspects of a deal that could affect desired deal timelines. Early involvement will allow antitrust counsel and the company to get ahead of potential speed bumps, and avoid time consuming pitfalls, while helping to set appropriate expectations on deal timing.
Fenwick & West has been monitoring the evolution of the new HSR rules since they were first proposed in Summer 2023. We will continue to assess the potential impacts, and will provide additional guidance from time to time to assist deal parties in planning for and handling these substantial new burdens.
Footnotes
1 Most of the additional reporting requirements will not be applicable to a small subset of reportable transactions. These include, for instance, open market purchases of minority stakes in a public company, where no board seat or management rights are conferred on the buyer, and the transaction is not subject to agreement between the buyer and the company. These are referred to as “select 801.30 transactions” in the new rules.