At long last, we have a rule. On October 10, 2024, the Federal Trade Commission (FTC) unanimously issued a final rule updating the Hart-Scott-Rodino Act (HSR Act) premerger notification process (the Final Rule). The Final Rule is expected to go into effect in January 2025. While the Final Rule is less burdensome than the FTC’s initial 2023 proposal, it nonetheless implements the most sweeping reforms to the premerger notification process in the nearly 50 years since the HSR Act’s enactment. These reforms will be felt across a wide range of industries, particularly so in healthcare.
The Final Rule
The Final Rule seeks to address what the FTC describes as “gaps” in the current HSR framework that have led to inadequate enforcement, such as (1) disclosure of entities and individuals within the acquiring person; (2) identification of potential labor market effects; (3) identification of acquisitions that create a risk of foreclosure; (4) identification of potential law violations involving innovation effects, future market entry, or nascent competitive threats; and (5) disclosure of roll-up or serial acquisition strategies.
To address these perceived gaps, the Final Rule requires parties to a reportable transaction to provide more extensive data and information across a variety of categories. The most significant changes include:
- Corporate Organizational Information - The Final Rule expands the requirement for disclosing minority shareholders or interest holders of certain entities within the acquiring person and the acquired entities. Filers (both the acquiring person and acquired entity) must now specifically highlight minority holdings within overlapping revenue categories between the parties.
The Final Rule will also require the acquiring person to disclose recent officers and directors who have responsibility for the development, marketing, or sale of any products or services in overlapping revenue categories. The acquiring person must identify the board and corporate affiliations that each officer and director holds with other entities outside of the filing company, where those entities are in the same industry as the target.
The Final Rule further requires “that acquiring persons provide a description of the ownership structure of the acquiring entity and, for fund or master or master limited partnership UPEs, an organizational chart sufficient to identify and show the relationship of all the entities that are affiliates or associates … if such charts exist.”
- Transaction Information - Some of the most significant changes in the Final Rule pertain to the business documents required under Item 4(c). Notably, Item 4(c) will now require filing parties to submit certain documents generated by the “supervisory deal team lead” even where that lead is not an officer or director. In addition, parties must submit certain ordinary course plans and reports discussing market shares, competition, competitors, or markets that were shared with a CEO and/or board of directors. Finally, merging parties must also submit a descriptive narrative explaining the Transaction Rationale and identifying documents included in the filing that relate to and support the stated rationale.
- Competition Descriptions - Each filing party will be required to provide a brief overview of its principal categories of products and services, as well as information on whether it currently competes with the other filing party. This overview is not expected to be a lengthy narrative containing extensive antitrust analysis, but rather a short description describing:
- Any current or potential overlapping products or services, and, for each, provide (a) sales over the last fiscal year or projected revenues for products or services not yet generating revenues; (b) a description of categories of customers; and (c) a list of the top 10 customers.
- Any relationships as buyers or sellers of one another’s products and supply arrangements with competitors of the other party. For each such product or service, the new form requires disclosure of sales/purchase amount for the last year and the filer’s top 10 customers or suppliers. Supply relationships where the sales, licenses, or supplies of the product or service or asset represent less than $10 million in revenues will not be reportable.
While the June 2023 Notice of Proposed Rulemaking would have required disclosure of detailed information about employees and competition for labor, the Final Rule has eliminated this requirement. The Final Rule does not require the parties to provide detailed information regarding competition for employees, including noncompete, or non-solicitation agreements; however, the Final Rule expressly notes that the FTC might still require such information pursuant to a Request for Additional Documentary Information and Materials (“Second Request").
- Prior Acquisitions - Building on recent efforts to combat serial or “roll-up” acquisitions, the Final Rule will require both filing parties to report acquisitions of more than $10 million in total assets and annual sales that occurred in the five years prior to the acquisition. Historically, only the acquiring person was required to provide information on prior acquisitions.
- Filing Procedures - The Final Rule reinstates the early termination process that has been suspended since March 2020. Once effective, parties can again request clearance of proposed transactions in advance of the 30-day waiting period’s expiration. Grants of early termination will continue to be published in the Federal Register.
The Final Rule also preserves the ability for parties to file on the basis of a letter of intent (LOI) or memorandum of understanding (MOU), provided that the LOI or MOU contains sufficient details regarding “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” (see final rule at 82).
In conjunction with the Final Rule, the FTC has also announced a new electronic portal for market participants, stakeholders, and the general public to weigh in directly and submit comments on proposed transactions that may be under review by the FTC. The FTC is specifically seeking the perspectives of “consumers, workers, suppliers, rivals, business partners, advocacy organizations, professional and trade associations, local, state, and federal elected officials, academics, and others.” Comments provided through the portal will be publicly available, while filing parties’ HSR forms and other information provided pursuant to the HSR Act remains confidential and exempt from Freedom of Information Act requests.
Looking Ahead
The Final Rule is consistent with the FTC’s recent initiatives to strengthen merger control. Specific to the healthcare industry, the agency relied on its “significant expertise and interest in preventing hospital mergers that may violate the antitrust laws” in tailoring the Final Rule to address those healthcare transactions “that are most likely to present antitrust risk” (see final rule at 171). Moreover, the Final Rule identifies the healthcare industry as one in which serial acquisition strategies (e.g., “roll-ups”) are particularly prevalent, and even more so in healthcare markets involving private equity buyers. Healthcare entities that engage in large transactions – particularly those involving hospitals – should be prepared for an onerous premerger process delving into their organizational structure, finances, and recent acquisition history, while also keeping an eye towards a potential Second Request. Indeed, the FTC has estimated that the Final Rule will require an average of 68 additional hours to comply with the changes, with certain transactions involving overlaps or supply relationships taking up to 121 additional hours of preparation (see final rule at 379-80).
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The FTC’s Premerger Notification Office is expected to provide additional guidance as the effective date of the Final Rule approaches. Bradley’s Antitrust & Competition team will monitor these updates and be prepared to answer any questions about the new Hart-Scott-Rodino process.
