The Federal Trade Commission (FTC) has proposed, for comment, significant changes to the information and documents to be submitted with premerger filings—even in transactions that do not raise significant antitrust issues. The changes proposed may not take effect and may be different when finalized. But if promulgated as proposed, every Hart-Scott-Rodino (HSR) filing will be more difficult and time-consuming, and transactions that might raise even marginal antitrust issues will require significant up-front work. We summarize below the most significant proposed changes and actions to take now to prepare for the changes if they are issued as proposed.
The FTC published proposed rules that, if promulgated as proposed, will extensively—and fundamentally—alter the HSR Antitrust Improvements Act filing regime. The proposed rules will create a more burdensome, intrusive filing system, which will add significant cost and time to M&A reviews.
As part of the initial filing for every transaction, the proposed rules will require information and document production that the FTC previously would have sought only if it chose to open a preliminary investigation and issue a voluntary request letter or similar request, or to issue a second request. Parties will also need to make strategic decisions about product markets and present written responses and advocacy on core competitive issues as part of their initial filings.
The proposed rules were published in the Federal Register on June 29, 2023, triggering a 60-day comment period. The FTC will consider any comments and can then publish final rules. We expect that a new filing regime may begin in 2024.
CHANGES PROPOSED IN THE FTC RULES
The proposed rules and explanations are more than 130 pages long. Here, we set out a roadmap to guide you through the most important points:
Filings cannot commence on a simple letter of intent (LOI). To file on a LOI, parties will also need to submit a well-developed draft agreement or a detailed term sheet specifying key aspects of the transaction.
Narrative responses and advocacy will be required as part of the initial filing, even if there is no product overlap. Parties will need to provide:
A detailed written description of all rationales for the transaction.
A detailed timeline for the transaction.
Written descriptions of all existing business relationships between the parties, such as supply arrangements.
A detailed narrative analysis of competition, identifying product overlaps, sales data, top customers and contact information.
More deal documents will need to be submitted. The traditional Item 4(c)/4(d) materials required for filings still must be submitted, but the proposed rules will require more materials from more individuals, including:
Key transaction documents from supervisory deal team leaders (e.g., the corporate development staff), even if those materials were not provided to officers or directors.
Drafts of any responsive final documents prepared by or for an officer, director or supervisory deal team leader(s).
A broader range of transaction-related agreements between the parties or with any employees or third parties, as well as all schedules.
Ordinary course of business and strategic plans will need to be submitted with the initial filing. If there is any competitive overlap between the buyer and the target (no matter how small the overlap is, or the size of the two parties in that field), a party must assemble and submit one year’s worth of key, regularly prepared documents seen by the CEO, other key executives or board of directors.
Parties will need to implement document-preservation steps prior to making a filing. The proposed rule requires parties to identify the communications and messaging systems they use in their business, including “internal chat technologies” or “ephemeral messaging.” The officer certifying the filing will need to attest that steps have been taken to preserve communications and documents that could be relevant to the investigation, including stopping auto-delete features on any system used in any entity controlled by the filing party. This will create confidentiality and potential securities law issues in which a party must communicate with a broad group of employees or other individuals to ensure information is preserved, when a transaction may not have been publicly, or even internally, announced. This preservation obligation also goes beyond standard practice in litigation or an investigation by imposing preservation obligations on portions of the organization unrelated to the issues under investigation.
Parties will need to gather and submit data on their labor force, including:
Classifying their largest employee groups by occupational codes and reporting geographic information on their employee locations when the buyer and seller have employees in the same occupational codes.
Identifying any wage-and-hour violations, Occupational Safety & Health Administration violations and/or National Labor Relations Board actions against them within the previous five years.
More information will need to be reported on investors, limited partners, financiers and others with the potential ability to influence the post-merger company. This could create a significant change in disclosure obligations for private equity funds.
All board memberships will need to be provided. Parties will need to list all officers, directors and board observers of every entity within the corporate structure.
All prior acquisitions of any size within the prior 10 years will need to be reported by the acquiring and acquired person where there is any competitive overlap between the buyer and seller. This expands the current rule, which applies only to the buyer, has a five-year look back and does not require smaller transactions—particularly certain asset transactions—to be reported. This proposed rule increases the likelihood that the FTC and Department of Justice Antitrust Division (DOJ) may investigate consummated transactions that were not HSR-reportable.
All subsidies in the prior two years from certain entities or countries of concern (e.g., China and Russia, foreign terrorist organizations or individuals on the Office of Foreign Assets Control’s Specially Designated Nationals and Blocked Persons List) will need to be reported. Subsidies are defined by the Tariff Act of 1930 and include any financial contribution, income or price support provided or directed to be provided by a government authority.
All current defense and intelligence contracts valued at more than $10 million will need to be identified. This is not limited by any areas of horizontal or vertical overlap. Parties will need to provide identifying information for the contract and relevant Department of Defense (DoD) and intelligence community personnel. There is not a carve-out for classified information, but that information cannot be disclosed under the security restrictions governing that data.
WHAT THIS MEANS
It is hard to overstate the significance of these proposed changes to the HSR filing regime.
The HSR process will take longer to clear. The FTC is seeking to delay filings so they cannot be made on a bare-bones LOI. Preparing filings will take substantially longer, which will delay the start of any waiting periods. The FTC will also need to process more data with each filing. We predict the agencies will complain they have too much information to sort through in the initial waiting period, and parties may need to pull and refile more frequently.
Preparing filings will take longer and cost more. The FTC estimates that it will take four times longer to complete a filing, increasing from 37 hours to 144 hours per filing. There is a good chance these estimates understate the true burden involved.
Compliance fights with the agencies will become more likely. The agencies can try to bounce filings that are deemed deficient at the time of filing, or later in the second request process if the FTC or DOJ see materials that they believe should have been included with the HSR filing. The new rules allow for more judgment calls that can be second-guessed by the agencies. This raises the risks of the investigating agency challenging the adequacy of an HSR filing well into the review process.
Parties will need to create more off-the-shelf items to be used in future filings. Historically, some parties have created annual updates to the boilerplate information needed for HSR filings, such as their revenues by Census codes. These rules will create more categories of information that need to be provided with every filing, such as information on labor forces and violations, subsidies, DoD contracts and others. More information will need to be maintained to allow parties to file relatively quickly after reaching an agreement.
Parties will need to make sure corporate development staff is well schooled in document preparation. These personnel will prepare many of the key documents that will need to be produced with the filing, now including drafts.
It will be more important than ever for companies to invest in careful document creation for all business activities and know what their documents say. The proposed rules will require companies to submit many more documents, and those documents can have a major impact on the review process. Ordinary course of business and strategy documents that historically would not be disclosed unless the FTC or DOJ investigated a transaction closely and issued a second request (subpoena) now will be disclosed with the initial filing. More documents will be disclosed to regulators, even for transactions that do not raise substantive concerns. Therefore, companies will need to take a cautious approach to document creation, maintenance and production, including:
Implementing strong antitrust training for a broad range of employees, particularly those who may be involved in the creation of top-level strategic documents that are or may be shared with senior executives;
Ensuring that top-level strategic documents are accurate, fact-based and avoid content that could be misconstrued to reflect negatively on key competition issues (e.g., documents that suggest overly narrow product or geographic market definitions, or that exaggerate barriers to entry or diminish the importance of smaller or foreign competitors); and
Investing in up-front review of documents that may be candidates for submission under the proposed new HSR approach, to ensure that information contained in such documents is consistent with narrative content to be supplied in the HSR filing (e.g., the proposed Horizontal Overlap Narrative).
Interested parties may file comments to the proposed rulemaking by August 28, 2023. The FTC may hold listening forums or other opportunities for public input. There is no mandatory timeline for finalization of new federal rules.
Even if the FTC reduces the scope of its proposed modifications, the revised HSR rules will dramatically increase the time and cost to prepare the HSR filing and increase the likelihood that US antitrust regulators will investigate all horizontal and vertical issues in transactions, regardless of the size of the overlap.
Because the revised HSR rules require buyers and sellers to identify all transactions of any size completed within the last 10 years, companies will need to establish a system to assess any regulatory issues for non-HSR-reportable transactions—and to better understand the antitrust agencies’ potential views on competitive issues associated with serial transactions, some of which might not appear to raise concerns when considered in isolation.
Finally, it will be more important than ever for companies to take a strategic, holistic view of key documents, investing in sophisticated antitrust training for those who create such documents and the business leaders and decision-makers who use them.