On October 10, 2024, the U.S. Federal Trade Commission (“FTC”), with the concurrence of the U.S. Department of Justice (the “Agencies”), announced the most significant changes to the Premerger Notification Rules since the Hart-Scott-Rodino Act (the “HSR Act) was enacted in 1976. The Final Rule dramatically increases the burden on parties required to submit premerger notifications under the HSR Act, even for transactions that present little to no antitrust issues.
Barring a legal challenge, the Final Rule is expected to become effective by mid-January 2025—90 days after publication in the Federal Register which will likely occur in a matter of days. Under the HSR Act, parties to merger and acquisition transactions are required to submit premerger notification filings with the Agencies for all transactions valued above $119.5 million (as adjusted annually). The Final Rule will apply to every HSR reportable transaction once the rule becomes effective.
Preceding the recent announcement, the FTC published a Notice of Proposed Rulemaking (“NPRM”) in June 2023. The NPRM faced fierce criticism from practitioners and business groups (among others) concerned about the increased burden the proposed changes would place on parties to merger and acquisition transactions. According to the FTC’s own estimate, the proposals in the NPRM would have nearly quadrupled the burden of preparing a premerger notification filing in the average transaction, and much more in transactions with overlapping product or supply relationships.
While the Agencies scaled back the proposals from the NPRM (in some cases excising certain proposals entirely from the Final Rule), according to the FTC’s own estimates the average time to complete a premerger notification filing will approximately triple and the burden will be even more significant for transactions with overlapping products and supply relationships. In practice, the Final Rule will dramatically increase the time required to prepare premerger notifications in the U.S., particularly for acquiring parties, and will significantly impact how companies prepare for and execute mergers and acquisitions, as well as when parties can expect to file after signing a deal.
Under the current rules, most transaction parties agree to submit HSR filings within 5 to 10 business days of deal signing. Under the new rules, significantly more time will be needed upfront to collect the required information and prepare the premerger notification filings. As a result, deal teams will need to engage HSR counsel weeks earlier in the process.
Key changes in the Final Rule include —
1) Production of additional deal analysis documents and ordinary course strategic documents
- In addition to documents about the transaction prepared by or for officers or directors (so-called 4(c) and 4(d) documents), the new rules require documents prepared by or for the “supervisory deal team lead,” defined as “the individual who has primary responsibility for supervising the strategic assessment of the deal, and who would not otherwise qualify as an officer or director
- In addition to documents prepared to analyze the transaction, the new rules also require HSR filers to produce ordinary course business plans and reports pertaining to overlapping products or services provided to the Chief Executive Officer or Board of Directors within one year prior to filing.
2) Preparation of narrative responses about the transaction and relationships between the transaction parties
- HSR filers must explain each strategic rationale for the transaction and identify documents included in the filing supporting each rationale
- HSR filers must describe the business lines of the filer and identify horizontal overlaps between the transaction parties, including for products or services that are in development
- HSR filers must describe the vertical relationships of the filing parties, including descriptions of each product, service, or asset representing at least $10 million in revenue in the most recent year that the party buys from or sells to the other party and its competitors
3) More stringent requirements for filing on indications of interest (IOIs) or letters of intent (LOIs)
- HSR filings submitted on preliminary agreements (e.g., IOIs, LOIs, term sheets) must now include detailed information that is not always agreed upon at the time of signing the preliminary agreement
- In particular “some combination of the following terms: the identity of the parties; the structure of the transaction; the scope of what is being acquired; calculation of the purchase price; an estimated closing timeline; employee retention policies, including with respect to key personnel; post-closing governance; and transaction expenses or other material terms” is required
- The FTC recognized that “this new requirement may cause some filers to delay notification compared to the current rules”
4) Disclosure of detailed sales/supply data and customer information
- For each horizontal overlapping product or service between the parties, filing parties must provide their most recent year sales data, a description of each category of customer (e.g., retailer, distributor, government, military, educational, national account, local account, commercial, residential or institutional), and identify the top 10 customers overall and by category
- For each vertical relationship between the parties, filing parties are required to provide sales and purchase data from the other party and from competitors of the other party; list of the top 10 customers that use the product or service to compete with the other party’s products or services; list of the top 10 suppliers; and descriptions of supply, purchase, or licensing agreements
5) Disclosure of sensitive information about the ownership, directors, officers, and investors of the acquiring person
- The acquiring person must describe the ownership structure of the acquiring entity, including existing organizational charts for funds and master limited partnerships that show the relationship of entities under common investment management
- The acquiring person is required to identify officers and directors of the acquiring person that serve as officers or directors of other entities in the same industry as the target
- The acquiring person must identify minority investors that have a 5 percent or more share in entities that control or are controlled by the acquiring entity, including limited partnerships with management rights
6) Additional required disclosures
- The acquiring party must identify the non-US competition authorities expected to receive premerger notification filings regarding the transaction (under the current rules providing this information is optional)
- Both filing parties, under the new rules, must disclose prior acquisitions during the past 5 years in overlapping industries (under the current rules only the acquired person is required to disclose such prior acquisitions)
- The acquiring person is required to identify categories of contractual relationships between the transaction parties within one year of filing, including non-compete, non-solicitation, and supply, services, operating, or licensing agreements
- Both filing parties are required to identify whether they have existing or pending contracts with the Department of Defense or Intelligence Community (as defined by 50 U.S.C. § 3003(4)) valued at $100 million or more and provide identifying information about the award and relevant DoD or IC personnel
7) Limited Exemptions for Select 801.30 Transactions
- The Final Rule defines a new category of “select 801.30” transactions. 801.30 transactions generally refer to non-negotiated transactions where the consent of the target is not required, such as open market purchases, tender offers, exercise or warrants or options, or the conversion of non-voting securities
- “Select 801.30 transactions” are exempt from certain requirements of the final rule, including transaction rationale, overlap descriptions, and business plans and reports. Certain other detailed restrictions apply
- Select 801.30 transactions include acquisitions resulting from executive compensation arrangements where the executive exercises contractual benefits pursuant to a compensation plan to acquire voting securities
- Select 801.30 transactions do not include those that confer control, director or management rights, or include an agreement between the parties
Early Termination
Concurrent with the announcement of the Final Rule, the FTC announced that it will lift its over three-and-a-half-year “temporary suspension” of early termination grants when the Final Rule goes into effect. “Early termination” is the termination of the applicable HSR waiting period in circumstances where the Agencies have decided they will not take any enforcement action during the waiting period. Early termination is granted at the discretion of the Agencies.
Some NPRM Rules Not Adopted
The FTC voted unanimously – a 5-0 vote – to approve the Final Rule, in part because of significant changes made from the NPRM. Among the changes from the draft to the final rule include the following:
- The Final Rule no longer requires submission of any labor data or related employee information.
- Several new categories of required documents included in the NPRM are absent from the Final Rule, including: drafts of transaction analysis documents and organizational charts showing document authors and recipients.
- The Final Rule will not require filing parties to provide deal timelines (except those requirements associated with filing on preliminary agreements) or detailed geolocation information; identify messaging systems used by the filers; nor identify creditors, holders of non-voting securities, or individuals with whom the filers have management relationships.
Strategies for Compliance
For planning purposes, parties should operate under the assumption that the Final Rule will take effect mid-January 2025.
The Final Rule dramatically increases the burden on all filing parties and will increase preparation time significantly, and more so for transactions with complex structures or where the parties have horizontal overlaps or vertical relationships. Filing parties should expect to engage with HSR counsel weeks earlier during transaction negotiations to comply with the new requirements and avoid delays to deal timelines.
