FTC Proposes Major Overhaul of Merger Filing Requirements
The Federal Trade Commission (FTC), with the concurrence of the Department of Justice Antitrust Division, published a Notice of Proposed Rulemaking (Proposed Rule) aiming to revamp the premerger notification rules and process implementing the Hart-Scott-Rodino (HSR) Act in ways that will substantially increase the burdens on filing parties.
- The proposed overhaul would require companies to disclose significantly more detailed information related to a transaction, including entirely new narratives detailing the impact of the transaction on competition and the labor market.
- The FTC conservatively estimates that the amount of time it takes companies to file required documentation would increase, on average, from 37 to 144 hours – but notes the burden is justified because the requested information is “necessary and appropriate for effective and efficient review of HSR Filings.”
The Bottom Line
The FTC is accepting comments on the Proposed Rule through August 25, 2023, after which it will publish a Final Rule. Many parties contemplating a reportable transaction may hasten to submit filings before the Final Rule becomes effective to avoid the considerable burdens and potential delays imposed by the proposed changes.
On Tuesday, June 27, 2023, the Federal Trade Commission (FTC), with the collaboration and concurrence of the Department of Justice Antitrust Division, published a Notice of Proposed Rulemaking (Proposed Rule) proposing significant changes to the premerger notification form and associated instructions, as well as the premerger notification rules implementing the Hart-Scott-Rodino (HSR) Act, that will require filing parties to devote significant additional resources to completing the form.
The HSR Act and its implementing rules require that parties to reportable mergers and acquisitions submit premerger notification to the Agencies, which involves completing HSR Forms and providing required documents, and waiting a specific period, usually 30 days, before closing the transaction. Currently, each party to a transaction must disclose, among other things, basic information about the entities involved, the transaction agreement, existing documents created by or for officers or directors analyzing the impact of the transaction on the relevant market, revenue information, significant ownership interests, and previous acquisitions by the party in the same industry impacted by the proposed transaction. There is no requirement that parties create information examining the transaction’s impact on competition for the HSR filing.
The proposed changes would require companies to disclose significantly more detailed information related to the potential impact of the merger or acquisition than what is currently required. In a statement, FTC Chair Lina Khan remarked that information currently submitted under the HSR Act is “insufficient” to allow enforcers to assess the potential impact of deals during their initial 30-day review period. She explained that the HSR Form has remained largely unchanged since the HSR Act was passed in 1978, while deal volume has “soared” and transactions have become “increasingly complex, in both deal structure and potential competitive impact” accompanied by changes to investment vehicles and how firms do business more broadly. She explained that the proposed changes “seek to fill key gaps” most routinely encountered, including information about deal rationale, the structure of investment vehicles, and key aspects of competitive impact.
The Proposed Rule would reorganize the information currently required and require the submission of additional information for the Agencies to review, including considerably more detailed information on topics already requested by the HSR Form. For example, parties to the transaction would be required to:
- Describe the business operations of all entities within the acquiring entity and provide a clear overview of all aspects of the acquiring entity’s pre-transaction business;
- Submit all transaction specific agreements, regardless of whether both parties are signatories, including schedules to transaction documents and all non-competition, non-solicitation, and other agreements negotiated with key employees, suppliers, or customers in conjunction with the transaction;
- Draft a narrative identifying and explaining all strategic rationales for the transaction, including those related to competition for current or known planned products or services that would or could compete with a current or known planned product or service of the other reporting party, expansion into new markets, hiring the seller’s employees, obtaining certain intellectual property, or integrating certain assets into new or existing products, services or offering;
- Submit a diagram of the deal structure along with a corresponding chart explaining the relevant entities and individuals involved in the transaction;
- Submit all agreements between any entity of a party to the transaction in effect at the time of filing or within one year prior to the filing date; and
- Submit a narrative timeline of the key dates and conditions for closing.
The Proposed Rule also contemplates entirely new sections regarding competitive and labor market impacts. Within a proposed new “Competition and Overlaps” section, parties would be required to submit a Competition Analysis containing the following narratives:
- Horizontal Overlap Narrative: listing each current or known planned product or service that competes with (or could compete with) a current or known planned product of the other party. For each such overlapping product or service, the filing party would provide sales, customer information, a description of any licensing arrangements, and any non-compete or non-solicitation agreements applicable to employees or business units related to the product or service.
- Supply Relationships Narrative: providing information about existing or potential vertical, or supply, relationships between the filing parties. This includes information for related sales and purchases between the filing parties or with other companies that use a filing party’s products, services, or assets to compete with the other filer.
- Labor Markets Information: providing information about employee job categories and geographical information on where workers may overlap post-merger as well as worker and workplace safety information. In particular, parties would be required to sort employees into job categories based on Bureau of Labor Statistics criteria and disclose their five largest classifications of workers. Parties would also be required to identify the top geographic zones where their workforces operate, based on a Department of Agriculture system for delineating local economies. Parties would have to identify any penalties or adverse findings issued by the U.S. Department of Labor’s Wage and Hour Division, the National Labor Relations Board, or the Occupational Safety and Health Administration in the previous five years as well as any pending matters before those bodies.
The Proposed Rule’s attention to labor markets is consistent with increasing attention to labor markets within antitrust law, as we’ve reported here and here. These new disclosure requirements would allow the Agencies to review the impact of proposed transactions on the labor market with heightened scrutiny and could result in additional merger challenges where proposed transactions have the potential to negatively impact worker mobility, wages, and/or benefits.
In addition to these substantive changes, the Agencies are currently working to complete an electronic filing platform that the Proposed Rule says is intended to “mark a significant improvement in the submission and processing of HSR Filings, with benefits for both filers and the Agencies.” Because this process is still underway, the details of the redesign and how filers will submit information will not be available until the Final Rule is published. This timing results in the lack of any public comments on the e-filing system.
The Proposed Rule states that the Commission anticipates these proposed changes will enhance the Agencies’ ability to complete the review of a reportable transaction in a short period of time, and that they are necessary and appropriate for vigorous enforcement of antitrust laws. It recognizes the additional burden associated with these changes – conservatively estimating that the amount of time it takes companies to file required documentation would increase, on average, from 37 to 144 hours – but states that the burden is justified because the requested information is “necessary and appropriate for effective and efficient review of HSR Filings.”
Comments to the Proposed Rule are due 60 days after publication, or by August 25, 2023, after which the FTC will review public comments and issue a Final Rule. It is uncertain when the Final Rule will be issued given that there will undoubtedly be a large volume of comments. However, the increased burden and delay resulting from these proposed changes may lead parties considering a reportable merger or acquisition to endeavor to submit pre-merger filings prior to the effective date of the Final Rule.
Attorneys in Ballard Spahr’s Antitrust and Competition Group are available to advise businesses on the effects of these developments.
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