On October 10, 2024, the Federal Trade Commission (the “FTC”), with the Department of Justice Antitrust Division’s concurrence, released a Final Rule containing long-anticipated revisions to the Hart-Scott-Rodino Act Premerger Notification Form. While the Final Rule pares back the agencies’ original proposal in many respects, it nonetheless creates significant additional burdens for filing parties, including expanded document productions, increased reporting of buy-side structures, minority shareholders, and information about certain officers and directors, and new narrative responses about relationships between the buyer and the target. The Final Rule will affect all filers, but asset managers, private equity firms, and other firms with complex fund structures will bear the most burden, particularly on the buy side.
Background of the Rule Changes
A key theme of the Final Rule is a shift toward requiring more information, up-front, than the HSR form requires today. The FTC’s view is that this shift will address information asymmetries that hamper the agencies’ ability to investigate and clear mergers within the statutory time period. The FTC asserts that much of the new material and information required as part of the new HSR filing is (i) readily available to the parties, (ii) more reliable when received directly from the parties rather than collected or inferred from other sources, or (iii) among the first items requested on a voluntary basis. Adoption of the Final Rule now means that parties to strategic transactions, including transactions that may not warrant in-depth review, can expect their HSR filings to include information previously reserved for Voluntary Request Letters (“VRLs”) or Second Requests. This includes top customer information, narrative responses regarding transaction rationales and competitive overlaps, and organizational structure information.
The new HSR form also uses conditional reporting whereby certain sections must be completed only if there is a competitive overlap or customer-supplier relationship between the parties, which in the FTC’s view makes the burden of preparing any given HSR filing commensurate with the risk of the underlying transaction.1 For example, submission of narrative-focused “Competition Descriptions” is required only if the parties have any existing competitive, supply, or customer relationship (an admittedly broad list). A requirement for the buyer to identify certain officers and directors is similarly limited. Many new requirements, however, impose more burdensome reporting obligations regardless of this so-called transaction risk. For example, all parties must now undergo a more expansive document collection process and draft a transaction rationale. Of particular relevance to private equity and other investment fund filers, buyers must now identify a range of information around intermediate-level and minority ownership.
Companies will welcome other portions of the Final Rule. First, early termination is back after an almost four-year hiatus. Once the Final Rule goes into effect, the FTC presumably will begin granting early termination of the 30-day waiting period for transactions that do not raise antitrust risk.2 Second, the Final Rule drops all of the proposed changes related to labor markets, including requirements to report employee-related Standard Occupational Classification codes, certain worker and workplace safety information, and information related to unions and collective bargaining. Third, filers will now report revenue by range instead of exact dollar value (although the new NAICS reporting requirements are more burdensome in other ways). Finally, most sell-side filers will be spared from several reporting obligations, including those related to minority shareholders, ownership structure, identification of certain officers and directors, international antitrust notifications, transaction diagrams, and identification of other agreements between the parties.
Note that the Final Rule is only procedural in nature: it defines what parties must submit in connection with their HSR filing for a reportable transaction. The Final Rule does not meaningfully change the criteria for what makes a transaction reportable in the first place, and it does not change the substantive antitrust law or change how the agencies investigate and analyze the underlying transaction. That said, many of the new reporting requirements relate to theories of harm given increased prominence in the 2023 Merger Guidelines:
The new HSR form will allow the agencies to more readily consider the new, expansive theories of harm in the Merger Guidelines within the initial 30 day waiting period. The FTC claims that the new HSR form will reduce the need for Second Requests in deals that do not lead to enforcement actions. This might be true, but the new HSR form will require reporting of information that relates to theories of harm that rarely arise in practice, and could increase the number of transactions subject to extended review.
Key Changes to the HSR Form
The Final Rule implements significant changes to many existing reporting requirements and creates some entirely new reporting requirements. Below, we compare the new reporting requirements to existing sections of the HSR form.
Transaction Information (Item 3)
The Final Rule adds a new section to the HSR form requiring the filing parties to provide a transaction rationale and any existing diagrams regarding the transaction. The Final Rule does not specify the exact level of detail that will be required; however, parties are encouraged to rely on and cite to otherwise responsive documents submitted with the filing. As a practical matter, much of the drafting burden will fall on buyers, who are likely to have more information and responsive documents.
Business Documents (Item 4)
The Final Rule fundamentally expands the scope of strategic documents (commonly known as “Item 4(c)/4(d) documents”) submitted with the HSR filing. The Final Rule requires document collection from an additional employee – the “supervisory deal team lead” – and also requires production of certain ordinary course documents provided to the CEO and Board of Directors.
First, the Final Rule now requires responsive document productions from a “supervisory deal team lead,” defined as the individual who has primary responsibility for supervising the strategic assessment of the deal, and who may not otherwise qualify as a director or officer. Although the supervisory deal team lead is limited to a single individual, collecting his or her materials will increase the burden of preparing an HSR filing given the incremental volume of responsive materials the supervisory deal team lead may possess.
Second, the Final Rule expands the scope of responsive documents to include ordinary course “Plans and Reports.” For transactions involving overlapping products or services, the rule will require parties to produce one year’s worth of annual, semi-annual, or quarterly plans or reports provided to a CEO that discuss market shares, competition, competitors, or markets for those overlapping lines of business. The Final Rule also requires filers to submit all plans and reports (including special or other non-regularly-prepared reports) provided to the Board of Directors on these topics.
The FTC believes these additional materials will be “highly probative” to the antitrust risk assessment during the initial waiting period, but these requirements impose more burdensome document collections on filing parties. Ordinary course document productions (and the general prohibition on coordinating the Competition Descriptions discussed below) also will open the buyer’s and target’s filings to more divergence than exists between the filings today. For example, the parties’ documents may offer different views of the industry, or of the industry definition itself. Under current practice, these and other unpolished documents (such as those that may go to the deal team lead, but not officers or directors) typically were not provided until the VRL or Second Request process.
Despite these additions, the FTC dropped some of the most burdensome document requirements proposed in the initial draft of the rule, including a requirement that filers submit all drafts of responsive documents and a requirement that filers collect documents not just from the CEO, but also from individuals reporting to the CEO. Dropping these eDiscovery-style collection requirements likely was key to getting support of the Republican Commissioners.
Revenue and Overlaps (Item 5)
The Final Rule brings a mixed bag of changes to how filers will report their revenues. The most significant and burdensome change, unmodified from the proposed rule, is that filers must now provide a separate revenue by NAICS code breakdown for each operating entity under its control. Today, filers identify revenue by NAICS code on a firmwide basis, at the ultimate parent level. The Final Rule also will impose more granular geographic overlap reporting requirements for many NAICS codes. Companies, such as grocery stores or retail fuel providers, who currently may report certain NAICS code overlaps on a statewide basis, must now provide location street addresses.4 On the bright side, filers can report revenue ranges (rather than exact figures) and no longer need to identify 10-digit NAPCS manufacturing code overlaps.
Ultimate Parent Entity Information (Items 1, 6)
One of the Final Rule’s signature features is increased transparency (and commensurate reporting requirements) into company structures, particularly on the buy-side, to identify coinvestors and other partners or minority shareholders in fund structures who arguably may have the power to influence business decisions of entities competing with, supplying, or purchasing from the target. The current HSR rules elicit minority ownership information about only two entities: the acquiring entity and its ultimate parent entity. The Final Rule requires buyers to identify minority shareholders throughout the entire chain of control above and below the acquiring entity, as well as minority shareholders of any entity within the acquiring person created in connection with the transaction.
Notably for private equity funds and other investment firms with fund ownership structures, filers must disclose the name, headquarters mailing address, and approximate percentage held of limited partners (e.g., a minority fund investor) of 5% or more and who have certain Board appointment rights. The current HSR rules only require limited partnerships to identify their general partners. The Final Rule also requires the buyer’s ultimate parent to identify all current officers and directors of controlled entities that have a competitive, supply, or customer relationship with the target.
Competition Descriptions (New)
The Final Rule requires the parties to draft a description of overlapping products or services as well as supply or customer relationships between the buyer and target as part of a new “Competition Descriptions” section of the HSR form. For each such relationship, filers must then provide their most recent annual sales figures in dollars and identify top customers overall as well as by “customer category.” Such customer information is an example of information now requested up-front instead of via VRLs or Second Requests.
Importantly, the Competition Descriptions are divorced from NAICS code overlaps; parties must identify and describe such overlaps regardless of whether the parties report a NAICS code overlap.5 The FTC stresses that the new descriptions call for straightforward, ordinary course business language and asks parties to tie descriptions to submitted documents. But thoughtful buyers will consider ripple effects such as how the descriptions might affect advocacy during the course of agency review and, even beyond review of the current deal, for future transactions. Commissioner Ferguson’s concurring statement even acknowledges the incentive filers have to carefully draft transaction rationales consistent with the document submissions. Consistent and forward-thinking language will likely require a more detailed assessment analysis despite the Final Rule’s assertions to the contrary. At the same time, the subjectivity inherent in narrative-style descriptions gives the agencies an expanded ability to not commence the waiting period after submission, or “bounce” HSR filings, because the agencies believe the narrative responses are incomplete or otherwise deficient.
Prior Acquisitions (Item 8)
Motivated in large part by concerns around serial acquisitions and roll-up strategies, the FTC implemented a modest expansion to the obligation to identify prior acquisitions. The Final Rule requires both the buyer and the target to report prior acquisitions, whereas currently only the buyer currently reports prior acquisitions. Both parties must also now identify prior acquisitions of entities or assets deriving revenue from products or services identified in the Overlap Descriptions in addition to overlapping NAICS codes. Notably absent from the Final Rule is the originally proposed ten-year look back period, removal of the $10 million minimum net sales or total assets threshold for prior entity acquisitions, and a blanket requirement to report all prior acquisitions regardless of overlap with the current deal.
Other Key Changes to the Filing Process
The Final Rule implements numerous additional changes to the filing process beyond the form itself:
- The Final Rule creates a new category of “select 801.30 transactions” for which the FTC has limited the HSR reporting requirements in light of its determination that such transactions have a low propensity for antitrust risk. Select 801.30 transactions include open market purchases, tender offers, certain executive compensation packages, and other acquisitions where there is no agreement or contemplated agreement between the buyer and the target or seller.
- Parties may no longer rely on barebones LOIs or term sheets to file notification. The Final Rule still allows parties to file using non-definitive agreements; however, the agreements must describe with specificity 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.” Parties may, but will not be required to, submit a draft agreement containing these terms. Still, the FTC points out that approximately 90% of recent HSR filings based on LOIs or term sheets would have complied with the Final Rule.
- The Final Rule implements disclosure requirements for foreign subsidies required by the Merger Filing Fee Modernization Act of 2022. Both parties must now identify and describe any subsidies received from a “foreign entity or government of concern,” a term of art the Department of Energy uses to define foreign actors that may pose a threat to the U.S. security or economy. The Final Rule also requires parties to identify any pending or active defense or intelligence agency contracts.
- The FTC is introducing an online comment portal through which members of the public may submit comments on public pending transactions.
Looking Forward
Make no mistake – big changes are coming to the HSR filing process. The FTC estimates that the new form will increase preparation time by 68 hours on average, although the figure varies significantly depending on whether the filer is a buyer or seller, and on whether the parties have an existing competitive or vertical relationship. The changes will almost certainly lead to longer, more expensive filing timelines, particularly as counsel and the agencies work through novel questions and issues that will arise when the Final Rule comes into effect in early 2025.
Parties will find it particularly helpful to assess antitrust risk as early as possible in the process, particularly for strategic deals or those involving overlaps or supply relationships. New narrative requirements mean companies should expect more up-front preparation in any deal where the parties have an existing relationship, even if the deal doesn’t present significant antitrust risk.
The Final Rule will come into effect 90 days after publication in the Federal Register, likely in the first quarter of 2025. (As of this date, the Final Rule is not yet published.) Vinson & Elkins attorneys will continue to assess the impact of these HSR changes and work to ensure a smooth transition for our clients.
1 Specifically, if the parties have a competitive overlap or a customer/supplier relationship, then the parties must provide a description of the overlap or supply relationship, a list of officers and directors (buyer only), plans and reports related to the business, prior acquisitions in the overlap areas, state and street address-level geographic information, and defense and intelligence contracts.
2 In February 2021, the FTC and DOJ announced that they would “temporarily” suspend the practice of granting early termination, stating that this was due to the “unprecedented volume” of HSR filings that had been filed in the preceding fiscal year.
3 Guideline 7 also addresses industry trends towards consolidation.
4 We note that the state-level reporting requirements of NAICS codes commonly used by upstream and midstream oil & gas companies remain unchanged.
5 The Final Rule scaled back some pieces of the original proposal, scrapping the proposed requirements to submit labor market details and preliminary deal drafts, as well as installing a de minimis exemption for customer and supplier relationships.
