This week’s post was contributed by Robinson+Cole’s Kathleen M. Porter, Jennifer M. Driscoll, and Amy R. Roth.

Companies pursuing acquisitions that require a filing in the United States under the Hart-Scott-Rodino Act (HSR)[1] may, by year-end, face vastly expanded disclosure requirements necessitating far greater investments in time, effort, and planning.

In a June 27, 2023, announcement, FTC Chair Lina M. Khan proposed a “top-to-bottom” revision of the HSR premerger notification program. According to Khan, the reason for these proposed revisions is that much has changed in the 45 years since Congress passed the HSR Act—deal volume has soared, transaction structures and potential competitive impacts have become increasingly complex, and investment vehicles have changed—yet the HSR form has remained largely the same.

“Against the backdrop of these vast changes, the information currently collected by the HSR form is insufficient for our teams to determine, in the initial 30 days, whether a proposed deal may violate the antitrust laws,” said Khan. “Our staff are put in the position of expending significant time and effort to develop even a basic understanding of key facts.”

To enable examiners to better understand complex deals’ structures—and discover their potential anticompetitive effects from the outset—the FTC’s “key” proposals would require the acquiring and acquired parties to provide the following additional information in their HSR notifications:

  • Details about the transaction rationale and investment vehicles or corporate relationships;
  • Information related to horizontal products and services and non-horizontal business relationships, such as supply agreements;
  • Projected revenue streams, transactional analyses and internal documents describing market conditions, and the structure of entities involved, such as private equity investments;
  • Additional details regarding previous acquisitions;
  • Information regarding labor market issues; and
  • Disclosure of subsidies from foreign governments or entities that are strategic or economic threats to the United States.

Highlights of the Proposed New Requirements

Important proposed changes to the HSR notification filings would include the following:

  • Ultimate Parent and Controlled Entities Information
    • Identification of officers, directors, and board observers of all entities within the acquiring person and acquired entity
    • Identification of limited partners
    • Expanded minority shareholder information
    • Identification of other types of interest holders that may exert influence

The proposed additional information on the Ultimate Parent and the Controlled Entities is designed to ascertain the identity of individuals and entities that may influence business decisions or access confidential business information, which could affect a transaction’s competitive impact.

  • Transaction Information
    • Brief description of the business operations of all entities within the acquiring person
    • Narrative identifying and explaining each strategic rationale for the transaction including, for example, those related to products or services that could compete with a product or service of the other reporting person, expansion into new markets, hiring the sellers’ employees, obtaining certain intellectual property, or integrating certain assets into new or existing products, services, or offerings
    • Detailed diagram of the deal structure along with a corresponding chart explaining the entities involved in the transaction
    • Term sheet or draft agreement and timetable if a definitive agreement has not been executed
    • All transaction-related agreements, including schedules and exhibits
    • All agreements in effect in the prior year between any entities within the acquiring person and the acquired person
    • Narrative timeline of key dates and conditions for closing

The proposed additional transaction information is designed to provide examiners with a more in-depth understanding of the transaction and to enable them to prioritize their merger workload.

  • Competition and Overlaps
    • Documents provided by or for the supervisory team lead(s)
    • Forward-looking assessments of synergies or efficiencies
    • Drafts of transaction-related documents
    • Ordinary-course periodic plans and reports prepared within the prior year that broadly discuss premerger and future competitive dynamics and strategies
    • Horizontal Overlap Narrative: an overview of principal categories of current and planned products and services; any current competition with the other filing person in those products and services; and any licensing, non-compete, or non-solicitation agreements involving overlapping products or services
    • Supply Relationships Narrative: information about existing or potential vertical (or supply) relationships between the filing persons
    • Labor markets information regarding the transaction’s potential labor market effects, largest employee classifications, geographic market information for each overlapping employee classification, and workplace safety information
    • All acquisitions by buyer, seller, and target in the previous ten years within the overlapping markets
  • Additional Information
    • Information on subsidies from foreign governments or entities of concern, to identify foreign subsidiaries or countries that are or may be strategic or economic threats to the U.S.
    • Disclosure of any defense or intelligence contracts exceeding $10 million
    • A certification requirement requiring filers to affirm that they have taken necessary steps to prevent the destruction of documents and information related to the transaction, which would safeguard needed materials should a Second Request under HSR be issued.

Reasons for Proposed Changes and Initial Reaction.

In its Notice of Proposed Rulemaking (NPRM), the FTC maintains that its proposed more “robust” HSR filings would benefit all parties by enabling examiners to “quickly identify transactions that do not require further investigation during the initial waiting period.”

However, most commentators have described the proposed revisions as burdensome, with one critic calling them an “everything but the kitchen sink approach.” Even the FTC acknowledges that many of the proposed changes would increase the burden on all filers and, by its own reckoning, increase the time required to prepare a filing by 12 to 222 hours, depending on the deal’s complexity. The FTC pegs the total additional labor costs at approximately $350 million.

Still, Commissioner Khan sees the proposed revisions as a mechanism to “more effectively and efficiently screen transactions” by appropriately shifting the burden of collecting information from the examiners to the filers. “Much of the key information,” she explained, “is known only to the firms proposing the mergers, such as the exact timeline of the proposed transaction, the deal rationale, and the structure of each relevant entity. Seeking this information on a voluntary basis can leave key gaps.”

“This proposal,” Khan concludes, “is designed to ensure that we can efficiently and effectively discharge our statutory obligations and faithfully execute on the mandate that Congress has given us.”

Next Steps

The new HSR disclosure proposals will, if implemented, require companies to build additional time into their filing preparation process—from a few weeks to a few months. Companies may wish to consider leveraging available technology to its fullest potential and implement robust digital systems—including appropriate AI tools—to facilitate gathering the required additional data and information.

The FTC is accepting public comments on the proposed changes until August 28, 2023. The American Bar Association Section of Antitrust Law is preparing a comment, and when that is made public, we will provide an overview of its most important points. In addition, several industry groups have reportedly asked the FTC for additional time to comment on the proposed changes.

[1] For an acquisition to be reportable under the HSR, both the size-of-transaction and size-of-person notification thresholds must be met (unless an exemption applies). For 2023, the minimum size-of-transaction notification threshold is $111.4 million, and the minimum size-of-person notification threshold is $222.7 million in total assets or annual net sales for one party and $22.3 million for the other. Acquisitions exceeding $445.5 million are reportable regardless of the size of the parties.