Filings will Require Significant Additional and More Detailed Information “Early Termination” Reinstated
On October 10, 2024, the Federal Trade Commission (“FTC”), with the concurrence of the Antitrust Division of the U.S. Department of Justice (“DOJ”), adopted final rules overhauling the premerger notification form and filing instructions under the Hart-Scott-Rodino Improvements Act of 1976 (“HSR Act”). Following a robust public comment process, the long-awaited overhaul represents the first major re-write of the HSR filing form and instructions in the 48-year history of the HSR Act. While the final rules dropped some of the provisions from the FTC’s 2023 initial proposal that were widely viewed by non-regulators as onerous if not draconian, the new rules will require merging parties to collect, analyze and submit significant additional new and more detailed information than ever required to be reported in an HSR filing. Although the stated purpose of the changes is to reform the efficiency and effectiveness of the agencies’ merger reviews generally, the additional time, expense and other burdens on filing parties will be substantial and will need to be carefully considered as part of overall deal planning. The new rules take effect for HSR Act forms first filed on or after a date in mid-January 2025 (90 days after their official publication in the Federal Register which is imminent).
On the positive side of the ledger, the FTC will lift its February 2021 suspension of “early termination.” Before the suspension, many filing parties routinely requested early termination of the HSR waiting period (typically 30 days) and were able to close their transactions immediately upon such request being granted by the agencies. The reinstatement of “early termination” is welcome and should allow the agencies to avoid expending time and resources on transactions unlikely to reduce competition or pose other antitrust concerns.
The HSR Act, a model for global merger control since 1976, requires parties to mergers and acquisitions to file advance notice to the FTC and DOJ and observe a waiting period before closing deals over certain thresholds (currently $119.5 million). Many non-merger or M&A transactions, such as investments (including non-controlling investments), bankruptcies, joint ventures, grants of IP licenses, and the exercise, exchange or conversion of convertible securities, also trigger the HSR Act.
Although the FTC states the new requirements to the HSR form are intended as a “gap filler” to gather needed information, the changes to the HSR form and filing instructions are substantive and extensive.
Key changes to the HSR form include:
Required Description of “Deal Rationale” and Other New Narrative Requirements
- Each of the filing parties must include narrative to “identify and explain each strategic rationale for the transaction discussed or contemplated by the filing person or any of its officers, directors, or employees” together with “each document produced in the filing that confirms or discusses the stated rationale(s)”
- Each of the parties must describe their “principal categories of products and services,” including any “current or known planned product or service.” Additionally, for any current or potential product or service offered by both parties (an “overlap”), the parties must also provide:
- Sales revenue, “projected revenue, estimates of the volume of products to be sold, time spent using the service, or any other metric” used to measure performance
- A “description of all categories of customers” of the product or service or, if in development, “the date that development of the product or service began; a description of the current stage in development, including any testing and regulatory approvals and any planned improvements or modifications; the date that development (including testing and regulatory approvals) was or will be completed; and the date that the product or service is expected to be sold or otherwise commercially launched”
- Sales and other information for the top 10 customers (by units and sales revenue) within each overlapping product or service
- Each of the parties must also describe supply relationships with the other party, as well as any supply arrangements with competitors of the other party. For each such product or service, each party must list the amount of revenue involved and its top 10 customers
Significantly More “Item 4” and Other Documents Required to Be Submitted with Form
- The scope of filing parties’ so-called “Item 4(c) and (d) documents” (a long-standing critical tool used by the agencies which analyze the transaction from market, market shares, competitors, sales growth, potential product or geographic expansion and other competitive perspectives has been expanded to include documents prepared by or for any “supervisory deal team leads”
- A “supervisory deal team lead” is 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 significant expansion will, for the first time, require including in the filing documents that were prepared by or for a senior business executive who is not an officer or director
- The documents required to be filed have been expanded to include certain “ordinary course” documents unrelated to the transaction, but drafted within one year of the HSR filing, such as “high-level business plans related to competition”
- In addition to the principal purchase or other transaction agreement, the parties now will have to submit all other transaction-related agreements “including, but not limited to, exhibits, schedules, side letters, agreements not to compete or solicit, and other agreements negotiated in conjunction with the transaction that the parties intend to consummate, and excluding clean team agreements”
- Full English translations of all foreign-language documents must now be submitted with the HSR filing
Expanded Information Required for the Buyer’s Officers, Directors, Investors and Affiliates
- Buyers will now be required to provide a description of the ownership structure of the buyer and, for a fund or limited partnership ultimate parent entities (“UPEs”), an organizational chart, to the extent already existing
- The form now requires the identification of all of Buyer’s officers and directors who have held such positions for the prior three months and for all entities within the buyer’s UPE that are responsible for developing, marketing, or selling products or services related to reported overlaps
- Expanded disclosure now requires additional information regarding the buyer’s investors, including those with management rights over the firm (such as Board appointment rights)
- The existing requirement to disclose information regarding certain minority holdings (5% to 50%) has been expanded to include entities positioned between the buyer’s UPE and the buyer
Expanded Information Regarding Prior Acquisitions
- The new rules notably extend this reporting requirement to sellers, not just buyers
- Both buyers and sellers will be required to list all acquisitions closed during the past 5 years even if not reportable under the HSR Act, excluding de minimis acquisitions (entities with less than $10 million in total assets and annual net sales in the year prior to the acquisition)
What does this all mean?
The changes are so extensive and substantive that the amount of time needed to plan and prepare an HSR filing for every type of deal will substantially increase, particularly for private equity and other parties that engage in ongoing M&A activity. The FTC’s own estimate of the number of hours required to prepare an average HSR filing has nearly tripled (though this is an improvement over the estimated quadrupling of time under the FTC’s initially proposed overhaul). Since the final rules impose different disclosure requirements on buyers and sellers, for the first time, there will be a different HSR filing form for each.
M&A participants will need to engage antitrust counsel earlier in their transaction planning to ensure that they actively manage the new document creation, collection and disclosure requirements. Importantly, this should include critically analyzing the substantive antitrust risks and competitive overlaps very early in the pursuit of any transaction. For private equity and other serial buyers, considerably more advance time will be needed to collect and maintain up-to-date information and documents to support any filing. The expanded universe of documents that must be included in an HSR filing under the new rules argues for considerably more awareness and care in document creation in the first instance.
While the practical effect of the increased timing burden is yet to be seen, parties can expect that a “market” standard 5-10 business-day filing deadline in a definitive purchase agreement will likely not provide sufficient time to complete the filings unless parties start preparation of the HSR Act form significantly in advance of signing. All companies involved in M&A should also consider whether risk allocation and other changes are needed to the antitrust provisions in their deal’s purchase documents to account for the review of their HSR filing.
