Changing the HSR Landscape
The HSR Act requires parties to certain transactions that exceed a jurisdictional threshold to file notifications (“Form” or “HSR Form”) with the FTC and the Department of Justice Antitrust Division (collectively, “Agencies”) and observe a waiting period before completing the transaction. The types of transactions notifiable under the HSR Act include mergers, acquisitions, and other transactions (e.g., acquisitions of voting securities pursuant to executive compensation packages and conversion of preferred shares to voting securities) that have an aggregate value over the minimum reporting threshold. The current threshold is $119.5 million as of March 6, 2024; this threshold is adjusted annually based on GDP. The HSR notification process allows the Agencies to review proposed transactions for potential antitrust concerns, use its subpoena power to investigate the transaction if necessary, and take legal action against those deals that the Agencies believe will substantially lessen competition.
The New Rules are intended to better enable the Agencies to identify and scrutinize potentially anticompetitive mergers. They require parties to describe the strategic rationale behind deals, identify competitive overlaps and supply relationships, include drafts of transaction-related documents if provided to a single director of the filing person or any of its subsidiaries, and disclose other information. While it is not clear whether the disclosures in the New Rules will help the Agencies identify more potentially problematic transactions, it is nearly certain that they will create a substantial burden on merging parties.
It will also inundate the Agencies with more information, which means the Agencies will face challenges completing a review within the 30-day statutory waiting period, given the number of transactions filed. Under the New Rules, filings will include more documents, even for the vast number of perfunctory and non-problematic filings required by the HSR Act. This will slow the Agencies’ review, with the unintended consequence that they do not identify problematic mergers more efficiently within the initial waiting period.
For its part, the FTC asserts that the New Rules are necessary to address a growing gap between the information and analyses compiled by merging parties and the information made available to regulators at the outset of a merger review. For example, the FTC believes that the existing HSR Form does not adequately capture the nuances involving complex corporate structures, private equity funds, or nascent competition concerns. This information asymmetry, they contend, has hampered the Agencies’ ability to effectively detect and prevent anticompetitive mergers within the statutory timelines.
Moreover, the New Rules face criticism for inconsistencies and implementation hurdles. Critics, including antitrust practitioners and industry groups such as the U.S. Chamber of Commerce, believe certain requirements are impractical. For example, filers must describe supply relationships and overlaps between them without coordinating with the other party, something parties are specifically admonished not to do. This disconnect may lead to filings with two different views of the market that will be hard for the Agencies to reconcile within the 30-day waiting period. Additionally, critics have raised concerns about the requirement for extensive disclosure of ordinary course business documents, particularly those unrelated to the transaction. Critics highlight the added burden of collecting draft documents, including emails which comprise the drafting process of other final documents, if provided to or copying a single board member, particularly when this was not proposed in the June 2023 Notice of Proposed Rule Making (“June 2023 NPRM”) and the FTC rejected a similar proposed requirement to submit drafts of transaction-related documents as overly burdensome and unnecessary. These critics have also raised the potential for delays and disputes over compliance and confidentiality provisions as concerns with the New Rules.
The New Rules, while intended to enhance transparency and efficiency, risk introducing inconsistencies and unforeseen consequences that will require significant adjustments in information gathering, document production, legal strategy for counsel and clients alike, and review protocols and timelines for the Agencies.
Form and Filing Logistics
Parties to HSR reportable transactions will have a wide range of new practical and substantive concerns when the New Rules take effect. Many changes deal with the simple logistics of the filing itself—such as the introduction of two sets of entirely different HSR Forms and instructions for Acquired and Acquiring Persons, as defined in the HSR Rules, and the elimination of paper or DVD filings. Others, however, are poised to dramatically change the state of play for practitioners and parties. While some of the more controversial aspects of the proposed changes in the June 2023 NPRM were ostensibly rejected, the New Rules significantly widen the scope of required documents. They also demand much greater detail about the transaction and the parties, while limiting parties’ ability to coordinate when preparing to file.
The New Rules overhaul the HSR Form itself. Notably, there are now two distinct versions of the Form—one tailored to the disclosures required by the Acquiring Person and the other reflecting the slightly different instructions for the Acquired Person.
There are two other noteworthy changes to the Form. First, it eliminates item numbers in favor of topical descriptions. For example, what practitioners commonly refer to as “Item 4 documents” are now called “Transaction-Related Documents.” Second, it includes updated language in the Certification portion that explicitly warns filers about applicable criminal penalties for frustrating or impeding government agency functions. This may inhibit parties from coordinating on the filing where the form specifically asks the parties not to confer with each other.
Further ministerial changes and clarifications were made regarding manufacturing NAICS codes disclosures, permissible filing formats, translations of foreign language documents, contact information for Second Requests, natural person financial disclosures, stipulations regarding the size of person test, disclosure requirements upon withdrawal and refiling, and filing on preliminary agreements.
Filing Person’s Structural Disclosures
Filings under the New Rules will require more details and descriptive information about the transaction and the parties; the burden of disclosure will be higher for a buyer. A primary stated purpose of these changes is to provide the Agencies more visibility into the Acquiring Person, the entities between the Acquiring Person and the Acquiring Entity(s), any significant minority investors within the Acquiring Person’s structure, at any level, including limited partners of entities with managerial rights in limited partnerships (“LPs”), and any of Acquired Entity(s)’s minority investors that will continue to invest post-close. These requirements include the submission of any existing transaction structure diagrams and short descriptions of operating businesses within each of the Acquiring Person and the Target. The New Rules also call for each of the Acquired and Acquiring Persons to provide a narrative description of the strategic rationale for the transaction. Parties will need to identify and cite to any Transaction-Related Documents included in the filing that describe the stated rationale. Finally, the New Rules require filers to disclose subsidies from foreign entities or governments.
Expanded Acquiring Person Disclosures. Under the New Rules, the Acquiring Person must disclose all minority shareholders in every entity along the chain of control between the Acquiring Person and Acquiring Entity, along with any current “doing business as” names of each minority investor.
A significant number of transactions above the HSR reportability threshold utilize passive co-investors to fund the acquisition. Minority shareholders frequently invest through an LP vehicle (often comprised of many unrelated passive investors) to ensure protection against liabilities arising from their passive investment. Currently, a filer must identify the general partner of any LPs and any holders of at least five but less than 50 percent of corporations or limited liability companies. The New Rules have expanded the disclosure; a filer must now also identify any limited partners that (i) currently hold or will hold at least five but less than 50 percent of the LP and (ii) have or will have the right to serve as, appoint, veto, or approve members of the board of directors or any such equivalent body. This applies to both filing parties.
New Limitations on Acquired Person Disclosures. Under the New Rules, the Acquired Person must only identify minority holders of five percent or more if that holder will continue to be invested in the Acquired Entity(s) or will acquire an interest in an entity within the Acquiring Person (i.e., roll-over investors). If a minority investor in a LP is retaining an interest in the Acquired Entity(s), the Acquired Person must disclose the LP’s limited partners to the extent that any limited partners have management rights. If the Acquired Person does not possess this information, it must so indicate in an endnote.
Acquiring Person and Acquired Entity Structure Disclosures. The New Rules specify the manner of organization for disclosure of controlled entities within the Acquiring Person and Acquired Entity. It will require filing persons to organize the list of controlled entities by operating business, whether that business is a corporation, noncorporate entity, or assets that function as an operating business. Additionally, filing persons must provide the “doing business as” name of each entity as it stands at the time of filing, like the required disclosure for minority investors. In the private equity context, this means organizing its list of controlled entities by each portfolio company controlled by the fund; a conglomerate would organize its response by each business unit.
Additional Acquiring Person Disclosures. The New Rules require a few additional disclosures from the Acquiring Person. The New Rules require the Acquiring Person to provide a detailed explanation of the ownership structure of the Acquiring Entity that leads to the ultimate parent entity conclusion. The intention is to allow the Acquiring Person to provide clarification and context for the nuances that the FTC may not be able to glean under the current Form or from a structure chart, including whether the ownership structure of the Acquiring Entity is subject to change between the filing of the Form and consummation of the transaction.
For transactions where a fund or master LP is the Acquiring Person, there is an additional requirement under the New Rules to provide any existing organizational chart showing which entities are Associates. However, if no such organizational chart exists, filing persons need not create one. It is unclear whether parties will be required to disclose up to hundreds of structure charts that, when taken together, would show the entire universe of Associates; one chart would certainly not capture all of the Associates of an Acquiring Person. Finally, and perhaps most importantly, the New Rules impose a requirement that the Acquiring Person disclose certain officers and directors (or equivalent) of entities within the person that overlap with the Acquired Entity(s).
A major change for Acquiring Persons relates to disclosure of officers and directors of any entity within the Acquiring Person’s organizational structure that might contribute to an overlap with the Acquired Entity. For all entities within the Acquiring Person responsible for the development, marketing, or sale of products and services identified within the Overlap or Supply Relationships Descriptions, the Acquiring Person must list all current (or within the last three months) officers and directors (or equivalents) who also serve as officers or directors (or equivalents) for any other entity—including entities that are unrelated to the transaction—that derives revenue in an overlapping NAICS code with the Acquired Entity(s).
For entities related to the transaction (i.e., the Acquiring Person, the Acquiring Entity, any intermediary entities along the chain of control between the Acquiring Person and Acquiring Entity, and any new entities created for the transaction), the Acquiring Person must list all current or prospective officers and directors (or equivalents), and identify their other positions as officers or directors of any other entity that derives revenue from an overlapping NAICS code with the Acquired Entity(s). If the prospective officers or directors are unknown, the Acquiring Person must include a brief endnote stating who will have the authority to select them.
These additional disclosures will aid the Agencies’ enforcement of Section 8 of the Clayton Act (“Section 8”). Section 8 prohibits any person from serving as either a director or an officer of competitors where certain thresholds based on competitor size and competitive sales are met. Section 8 is a bright-line statute, meaning that the interlocking directorates are prohibited regardless of whether competition in the markets in which the companies operate will be affected by the board appointment rights. Recently, the Agencies have focused on enforcement against private equity funds, and the DOJ has announced a specific intention to increase enforcement of interlocking directorates under Section 8. The filing parties should be aware that disclosing officers and directors of merging competing entities will increase Section 8 scrutiny of the proposed transaction and transacting parties.
Transaction Information and Document Production
The New Rules significantly increase parties’ document production burdens beyond what is currently required. The New Rules expand the universe of required documents by adding a new category of document custodian and requiring more ordinary course of business documents for some transactions. The New Rules also make some ministerial changes to transaction information disclosures regarding foreign jurisdiction filings, existing ordinary-course agreements between the parties, and defense and intelligence contracts. One of the most dramatic changes, however, is updated guidance—quietly tucked into a line of commentary—on what qualifies as a final version of a responsive document.
Currently, a draft version of an otherwise responsive Item 4(c) or 4(d) document is determined to be a final document that may be responsive if it was shared with the entire board of directors or equivalent body, such as an investment committee, or is the latest version in time, if no such final document exists. Although the FTC declined to adopt its initial proposal “requiring drafts of responsive Transaction-Related Documents if that draft document was provided to an officer, director, or supervisory deal team lead(s),” the New Rules significantly broaden the definition:
The Commission now clarifies that any Transaction-Related Document (currently referred to as 4(c) and 4(d) documents) that was shared with any member of the board of directors (or similar body) is responsive and should not be considered a draft; rather, it should be treated as a final version and submitted with the HSR Filing as a Competition Document.
It is noteworthy that the FTC explains its reasoning for modifying this informal guidance in part by explicitly stating the Agencies’ interests in drafts, despite its decision not to adopt the draft proposal to require that drafts be submitted. However, the New Rules as written contradict the stated rejection of the draft requirement and will require submission of draft documents far beyond what was previously contemplated by the June 2023 NPRM. Under current HSR understanding, a “document” can be any written word, including post-its, journals, emails, and, of course, presentations or decks. If any “document” that goes to any director or investment committee member is “final,” the number of potentially responsive documents for a single filing could be in the thousands.
The New Rules will capture an inordinate number of additional documents through this clarified guidance because of the way that deal teams are often structured. For example, in private equity, it is common for each deal team to include the lead partner who is or will be a director of the prospective portfolio company post-acquisition. That means the person is already an Item 4 custodian whose draft Transaction-Related documents must be produced, including emails on which they were copied. Similarly, most public companies have lower-level deal team members appointed as corporate secretary or other director-level position of minor subsidiaries for administrative convenience of having a signatory easily available. This person is currently an Item 4 custodian, and all final documents are already collected, but under the New Rules, they would also be required to provide all draft documents and drafting process emails in their files. Even smaller family-owned businesses will be negatively impacted because the CEO or founder is often also the board’s chairperson. The changes will now capture all drafts and drafting process emails received by this person with any responsive content. None of the 721 comments received by the Agencies could have raised these concerns because the changed definition of what constitutes a draft for Item 4 documents was not included in its initial proposal.
The New Rules also expand the list of custodians for Transaction-Related Documents beyond that for current Item 4(c) and 4(d) documents. Filers will now have to submit documents prepared for or by a supervisory deal team lead (“SDTL”), defined as “the individual who has primary responsibility for supervising the strategic assessment of the deal, and who would not otherwise qualify as a director or officer.” This definition seems to underappreciate that private equity deal team leads, for example, are often current or intended directors of either the Acquiring/Acquired Person or their respective controlled subsidiary, such as a portfolio company, and already captured by the Item 4 custodian requirements. Assuming the intent was to capture the documents of a typical public company vice president of M&A or corporate development, there would be limited impact outside of this context.
Competition Descriptions
The New Rules introduce a new Competition Description section requiring filing parties to submit narratives regarding competitive overlap and supply relationships with the other filing party. The Agency states that this section is intended to supply crucial information regarding existing and future competitive relationships between the filing parties and that such information is “the starting point for any assessment of whether the transaction may violate the antitrust laws.”
Competition Overlap. The New Rules require filing persons to disclose available information about potential horizontal overlaps with the other party that would be consolidated as a result of the acquisition. The filing person must disclose and describe each current or known planned products or services (including those pre-revenue) that competes or potentially competes with a current or known planned product or service of the other party.
The Acquiring or Acquired Person are specifically prohibited from exchanging information for the purpose of responding to this item. Rather, filing persons are expected to disclose known products of the other party based on documents kept in the ordinary course of business. The list of known planned products or services may be limited to those referenced in the ordinary course business documents now required to be provided under the New Rules.
For each product or service that competes or could compete with that of the other party, the filing person must list (1) the revenue for the most recent year (or the projected revenue or performance indicator for products/services pre-revenue or measured by other metrics); (2) a description of all categories of customers of the product or service (e.g., retailer, distributor, broker, government, etc.); (3) the overall top 10 customers in the last year by revenue; and (4) the top 10 customers [by revenue] within each specific customer category identified as an overlap.
Supply Relationships Description. The New Rules introduce a new requirement for filers to disclose significant information regarding supply relationships. A filer will now be required to provide information related to sales and purchases of its products, services, or assets that are supplied to or from the other filing party. The filing party must disclose (1) sales; (2) information about other customers that use the product, service, or asset in question; and (3) information about its own similar purchases from the other filer. The FTC states that this is necessary to fill an information gap pertinent to vertical threats to competition.
Potential Issues with Competitive Overlap and Supply Relationship Descriptions. The New Rules and new Form instructions counsel parties against sharing information to align on responses to the Competitive Overlap and Supply Relationship Descriptions. This not only makes the already onerous process less efficient, but it also creates a risk that the Agencies may interpret disparate conclusions from the parties as one or both parties’ noncompliance.
Moreover, with this addition, the FTC appears to have failed to consider the implications in the private equity context. To fully respond to this requirement, a private equity company with multiple portfolio companies in the same industry would have to collect this data from all applicable subsidiaries. In the process, it would be risking disclosure of confidential transaction information to completely unrelated portfolio companies. The FTC dismissed this concern with a notation that public companies owe an underlying duty to comply with securities laws. Setting aside whether the compliance with this requirement would require disclosure at a level of granularity beyond what the SEC rules require, the FTC provided no guidance to private equity firms who have a sincere interest in protecting their own confidential information.
Another potential issue may arise if the Agencies disagree with the filing parties’ description of the competitive overlap, or lack thereof. It is not uncommon in an antitrust merger investigation for the Agencies to have a different view from the parties about if the parties actually compete and how they define the market.
Revenue and Overlaps
The New Rules require additional overlap disclosures regarding geographic information, minority holdings information, and prior acquisitions.
First, the new Form’s “Controlled Entity Geographic Overlaps” section modifies and expands on the information currently solicited by the required disclosures regarding geographic overlap in Item 7 of the HSR Form. While declining to adopt proposed requirements that filers identify three years’ worth of past “doing business as” names for their entities within overlapping NAICS codes and provide precise geolocation data when street addresses are required, the FTC adopted several proposed changes for this section. A filing person—acquired or acquiring—will now be required to identify which entities within its own person derive revenue in overlapping NAICS codes and which of those entities have U.S. operations. The New Rules and updated Form also significantly expand the list of NAICS codes for which street-level location information must be provided. For any overlapping NAICS codes requiring street-level reporting, filers must also provide the location of any of their franchisees deriving revenue.
Next, the New Rules alter what information parties must provide regarding minority holdings, currently addressed by Item 6(c) of the current HSR Form. The new “Minority-Held Entity Overlaps” section will require filers to specifically identify which of its minority holdings (greater than 5 percent but less than 50 percent of voting securities or noncorporate interests) derive revenue in overlapping NAICS codes, eliminating the current option to provide a complete list of all minority holdings without differentiating. Filers will also have to list the names by which these entities do business. The FTC asserts that both of these changes will facilitate more efficient review by the Agencies.
Finally, despite declining to adopt most of the proposed changes regarding disclosure of prior acquisitions, the New Rules still contain significant changes to the disclosure requirements. Previously, only the Acquiring Person was required to disclose information regarding prior acquisitions; now, both the Acquiring and Acquired Persons are required to make such disclosures. Further, the New Rules (1) eliminate the $10 million threshold for prior acquisitions in overlapping NAICS codes; (2) require filing persons to include prior acquisitions of entities that provide competing products or services listed in the Overlap Description section; and (3) align acquisitions of all or substantially all of an entity’s assets with acquisitions of over 50 percent of an entity’s voting securities or noncorporate interests. However, the $10 million revenue exception for acquisitions of 50 percent or greater of an entity’s shares or noncorporate interests, or substantially all of an entity’s assets, remains untouched. Additionally, the Filing Person must include all acquisitions that may pre-date its ownership of the entity that made the prior acquisition. This raises concerns about a filer certifying information for the Form, without firsthand knowledge. It also raises the question of whether a statement of noncompliance will become the norm with most filings.
Questions for Resolution Prior to Implementation
The New Rules introduce a variety of new concepts and criteria required to complete an HSR filing. While the implementation of the New Rules will certainly require clarifications of the requirement and applications to specific scenarios, several areas require clarification before the New Rules go into effect.
Drafts
The FTC should clarify its intention behind the shift in the definition of what is a draft version of a document versus the final. Treating documents shared with any member of the board of directors (or similar body) as final documents will require filers to submit thousands, if not tens of thousands, of Transaction-Related documents. It would be impractical and difficult for the Agencies to review such filings within the initial 30-day HSR waiting period.
The FTC’s e-filing system also presents logistical limitations for filers submitting numerous drafts because it can only accept 50 attachments per upload, not hundreds or thousands. Filers would benefit from FTC guidance on how it plans to address this disconnect.
No Coordination of Overlap
The FTC should clarify whether the caution against parties’ coordination on certain portions of the HSR filing applies only to direct coordination between the filers or if it extends to in-house or outside counsel coordination. In its guidance, the FTC might consider explaining why the Noerr-Pennington doctrine, which protects the First Amendment right of competitors to coordinate in petitioning the government, does not apply to such coordination.
It should also explain why the benefits to the Agencies outweigh the potential harm to the filing parties. For example, as a practical matter, the New Rules require the Acquiring Person to contact all entities it controls, including entities and portfolio companies unrelated to the proposed transaction regarding competitive overlaps and supply relationships with the Target. Such outreach could publicize the transaction or disclose confidential, nonpublic information to those without knowledge of the transaction. If the filing parties were permitted to coordinate on supply relationships, for example, a Target company could search its records and provide the Acquiring Person with information regarding supply relationships with the Acquiring Person’s controlled entities without risking disclosure of confidential or nonpublic information.
Disagreements between the Agencies and Filing Parties on Competition and Supply Relationships Description
Filing parties would benefit from Agency clarification on how the Agencies will handle disagreements between the Agencies and the filing parties on substantive issues within the HSR filing related to the competitive overlap description. It is not uncommon throughout the course of a merger investigation for the reviewing agency to disagree with how the merging parties are characterizing the definition of the market. It is unclear whether the Agencies intend to “bounce” or reject the HSR filing as insufficient, and restart the 30-day waiting period, should they disagree with how the parties are describing the market and competition, or lack of competition, between the parties, especially when such a disagreement may arise weeks into the HSR waiting period.
Best Practices for Deal Makers
While the New Rules pull back on some burdens initially proposed by the Agencies, they will substantially increase administrative burdens on both transacting parties and Agency resources, raise filings costs, and extending the period between signing the definitive agreement and making the HSR filing. Deal makers can reduce these burdens with advanced document management protocols, early detection of competitive overlaps and supply relationships, and understanding how deal structure will impact what information will be included in the HSR filing.
Document Management
It will require time and expense beyond that required for compliance with the current rules for parties to meet the new document production requirements to produce Transaction-Related Documents and responsive ordinary-course plans and reports where an overlap has been identified. Dealmakers should identify the scope of potentially responsive documents early in the life of a deal by identifying relevant custodians, including the SDTL, and determining whether the transaction presents a competitive overlap.
Depending on the makeup of the deal team, and whether deal team members are directors of any controlled entities or any to-be-formed newly created entities, dealmakers may consider retaining an e-discovery vendor to gather potentially responsive documents and prepare documents for production with the HSR filing.
Additionally, dealmakers should establish protocols related to document retention such that all potentially responsive versions of documents can be efficiently collected either directly or through an e-discovery system. The document retention policy should cover both Transaction-Related Documents and ordinary-course plans and reports presented to the CEO and board of directors.
Identify Competitive Overlaps and Supply Relationships
Determining whether a competitive overlap or supply relationship exists between the parties will require additional time and expense to prepare the filing. Once either dynamic is identified, dealmakers should seek counsel immediately to advise on the collection of required materials, drafting clear narratives to describe the competitive overlap or supply relationship, and to ensure that all other types of materials the New Rules call for are properly maintained and produced. Even in transactions without competitive overlap or supply relationships, however, significant review of both ordinary-course and Transaction-Related Documents will be necessary on the front end to make such a determination. Filing parties should prepare for the time and expense of this initial review on all deals.
Identifying the competitive overlap or supply relationship early on will allow the parties to institute a communications policy with customers and other industry participants. Given that the HSR filing will now include customer lists, the filing parties should assume that the Agencies will contact those customers on the first day of their investigation of the proposed transaction. As such, the filing parties may want to solidify their communication plan before filing their HSR notifications.
Deal Structure Disclosures
Filing parties should understand how a contemplated deal’s structure will impact disclosure of minority investors, including limited partners, and how such disclosure will impact those investors. It is not uncommon for filing parties to make an HSR filing and seek investment in the interim period between signing (or filing HSR notifications) and closing the deal. The parties should consider how the timing of securing co-investment impacts the disclosure requirements and whether the inclusion of certain co-investors will create antitrust risk and increase deal uncertainty.
Conclusion
A key tenet of the New Rules is “to improve the efficiency and effectiveness” of premerger review. Many of the changes made by the New Rules will help the Agencies identify transactions that merit a closer look, and those changes should lead to improved efficiencies for both the filing parties and the Agencies. But further guidance and clarification on certain key issues are essential. And the FTC can expect that it will need to respond to the questions raised by filers and their counsel to create a more efficient and streamlined merger review program under the HSR Act. That only works if all stakeholders are willing to engage thoughtfully to ensure that these New Rules function without unintended and inefficient consequences.
