Merger control in the United States is on the cusp of significant change as the Federal Trade Commission, in collaboration with the Department of Justice, prepares to finalize a proposed rule—first announced in June—that will reshape premerger notifications that are required to be filed under the Hart-Scott-Rodino (HSR) Act. After a 30-day extension to the public comment period late this summer, the clock expired for comments on September 27, 2023. More than 700 comments were submitted, and the FTC may now finalize the rule as is or make changes in response to the comments that it received.
Although the precise timing for finalization is uncertain, it is possible the new rule could take effect as soon as the end of this year or early 2024.
The HSR Act generally requires parties to file notifications, including a filing fee, with the FTC and DOJ when a proposed transaction—such as a merger, joint venture, stock or asset acquisition, or exclusive license—meets specific dollar thresholds and no exemptions apply. If a notification is required, the transaction cannot close while the statutory waiting period runs (generally 30 days) and the federal antitrust agencies review the transaction.
Most commonly, a filing is required if the parties meet both the "size-of-person" and "size-of-transaction" tests. Currently, the lower size-of-person threshold is $22.3 million, and the size-of-transaction threshold is $111.4 million. In the event that a filing is required, each of the merging parties must submit information regarding the persons involved and the structure of the transaction, revenues by North American Industry Classification System (NAICS) code, and certain documents, such as balance sheets, annual reports, and certain planning and evaluation documents that pertain to the proposed transaction.
A major overhaul of the HSR process is very likely, with FTC Chair Lina Khan calling it the "first time" that the government has undertaken a "top-to-bottom" review of the HSR form since the act became law in 1976. As currently drafted, the proposed rule would significantly increase the time and expense associated with reporting transactions under the HSR Act. Merging parties would be required to collect and submit a broader range of documents from a wider range of individuals and, for the first time, to include detailed narratives about the competitive landscape and the strategic rationale for the transaction. By the FTC's own estimate, the average time required to prepare an HSR filing would increase by nearly fourfold—from 37 to 144 hours.
Some of the most notable proposals outlined in the proposed rule would require filing parties to:
- Draft detailed narrative responses describing any horizontal overlaps and supply relationships between the parties
- Identify all prior acquisitions (including non-reportable transactions) in the past 10 years in any line of business where there is a potential competitive overlap
- Disclose customer information for overlapping competitive products and services, including contact information
- Produce draft (not just final) "Item 4 documents"—i.e., documents that analyze the transaction with respect to competition-related issues—that were provided to an officer, director, or deal team lead or supervisor
- Produce certain strategic documents and reports created in the ordinary course of business, even if they do not relate to the proposed transaction
- Submit a projected closing timeline and a diagram showing the relationship between all entities and persons involved in the transaction
- Disclose any labor law violations by the parties in the past five years
- Detail information about employees, such as (i) the five largest categories of workers based on their occupational categories as defined by the Bureau of Labor Statistics; (ii) the five largest Standard Occupational Classification codes in which both parties employ workers; and (iii) overlapping geographical commuting zones
- Report latitude and longitude information for street addresses
- List all North American Industry Classification System (NAICS) codes that could apply to categorize the parties' revenues
- File a detailed draft agreement or term sheet that reflects "sufficient detail" about the deal and confirms the transaction is "more than hypothetical"—whereas, currently, parties can file HSR based on a simple executed letter of intent or indication of interest
Going forward, merging parties should make sure to allot sufficient time to prepare their HSR filings and should engage HSR counsel as early as possible to ensure that the HSR process does not unduly delay the transaction. In addition, companies should continue to be mindful of the antitrust risks of non-reportable transactions. The FTC and DOJ have always been able to investigate and challenge even non-reportable transactions; however, under the proposed rule, non-reportable transactions could end up needing to be disclosed as part of any future HSR-reportable transaction involving a similar line of business, and thereby be subject to an additional layer of scrutiny.
State Action Shields Hospital Merger from HSR Act
In another notable HSR development, on September 27, 2023, a Louisiana federal judge ruled against the FTC in its suit challenging the failure of Louisiana Children's Medical Center and HCA Healthcare to make an HSR filing in connection with their merger. The court granted summary judgment, finding that the transaction was covered by the state action doctrine, which shields activity from the federal antitrust laws that is regulated and actively supervised by a state. Louisiana had previously issued the merging parties a certificate of public advantage for the transaction. Although the court ultimately ruled against the FTC, the case stands as an example of the FTC's heightened vigilance with respect to ensuring compliance with the HSR Act.
