Killing Deals Softly: FTC Proposes 107-Hour Increase in Hart-Scott-Rodino Burden
Additional Requirements Likely to Deter Many Potential M&A Transactions
- The Federal Trade Commission (FTC) on June 27, 2023, announced its intention to increase the cost and burden of its regulatory processes, which might prevent many even benign and procompetitive mergers and acquisitions (M&A) from getting out of corporate boardrooms.
- Companies involved in M&A activities already face cumbersome and costly regulatory demands before they can consummate their transactions, but those requirements will become significantly more challenging if the regulatory changes proposed are ultimately adopted.
- This Holland & Knight alert summarizes some of the key provisions of the proposed new requirements for Hart-Scott-Rodino filings.
The Federal Trade Commission (FTC) on June 27, 2023, announced its intention to increase the cost and burden of its regulatory processes, which might prevent many even benign and procompetitive mergers and acquisitions (M&A) from getting out of corporate boardrooms.
Companies involved in M&A activities already face cumbersome and costly regulatory demands before they can consummate their transactions, but those requirements will become significantly more challenging if regulatory changes proposed by the FTC – with the support of the Antitrust Division of the U.S. Department of Justice (DOJ) – are ultimately adopted. Under the Hart-Scott-Rodino (HSR) Antitrust Improvements Act, parties to proposed transactions that satisfy certain reporting thresholds (currently including transactions of at least $111.4 million) must first provide information to the FTC and DOJ about the proposed transaction. Lawyers and economists at the FTC and DOJ review these "HSR filings" and have 30 days to decide whether to investigate the transaction – or, alternatively, to take no action and allow the parties to close their deal.
The new proposal addresses the nature of the information that parties must provide with their HSR filings and would increase substantially the cost and burden of the HSR process for merging parties. The FTC expressly recognized the additional burden its proposal would impose, predicting that the time it would take a merging party to prepare an HSR filing would increase by 107 hours (to a total of 144 hours per filing). The additional information that merging companies would be required to submit with their HSR filings would also arm the antitrust agencies at the outset with a greater amount of information about proposed transactions, likely increasing the chance that agency lawyers will find a reason to want to investigate and hold up the closing of transactions.
The FTC is expected to publish its proposal in the Federal Register this week and invite companies to submit comments on the proposal within 60 days (by about the end of August, depending on when the proposal is published).
Key Provisions of the Proposal
The new proposal expands on specific existing requirements and also would impose several new reporting requirements. The following are the key new provisions about which companies regularly involved in M&A activity will want to be aware:
- A key component of HSR filings under the current rules is the requirement that merging parties submit "Item 4(c)" documents, which are documents prepared by or for officers or directors of the company for purposes of evaluating the transaction. These documents provide the reviewing agency a glimpse into the merging companies' internal views of the marketplace in which they operate and the potential impact of the proposed transaction, and the thorough collection of these materials is a significant challenge in preparing an HSR filing. The FTC's proposal expands the scope of the Item 4(c) documents that merging parties must submit with their HSR filings in two ways and, thus, increases the burden associated with the collection of these Item 4(c) materials. First, the proposal would require merging parties to produce not only relevant documents prepared by or for officers and directors, but would also reach documents prepared by or for "supervisory deal team lead(s)" who "coordinate the day-to-day process for the transaction at issue." The FTC's proposal also requires for the first time the submission of drafts of Item 4(c) documents if the draft was shared with an officer, director or supervisory deal team lead(s), addressing a concern that documents are often "sanitized" to remove candid assessments of the marketplace before they are finalized.
- In addition to the expanded list of Item 4(c) documents that merging parties would need to collect and produce with their HSR filings, they would also be required under the FTC's new proposal to produce "semi-annual and quarterly plans and reports" produced within one year of the HSR filing and shared with the chief executive or board of any entity involved in the transaction "that discuss market shares, competition, competitors, or markets of any product or service" that both merging parties provide. The FTC acknowledges that this set of ordinary-course documents is unrelated to any specific analysis of the proposed transaction but believes the burden is justified by the probative value of these materials to the agencies reviewing the proposed transaction.
- The new HSR filing requirements as proposed by the FTC would include several detailed narrative descriptions of the merging parties, their business operations and the proposed transaction. The requirements include providing 1) an explanation of "all strategic rationales for the transaction," 2) a detailed description of any business lines in which the merging parties compete with one another, including "sales, customer information (including contacts), 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," 3) a narrative description of each party's supply relationships, and 4) information about each company's workers, including the occupational categories in which their employees work and the geographic areas where employees are based. For transactions in which the merging parties operate in industries where competition occurs at a local level, the FTC proposes to require merging parties to provide street-level information (including latitude and longitude) about their operations, acknowledging that this might entail identifying locations of "tens, hundreds, or, in certain cases, thousands of locations" for certain parties.
- Under the new proposal, parties would be required to disclose significantly more information about the structures of the merging parties, including information about all minority investors in any entities associated with either of the merging parties, others (such as creditors) in a position to influence competitive decisions, and members of their boards of directors (as well as board observers). These requirements are intended to address concerns by the antitrust agencies with the potential competitive impact of the influence that minority investors or others in positions of influence can have when associated with competing firms. They also view this additional reporting as a way to expose potential violations of Section 8 of the Clayton Act, which prohibits interlocking directorates.
- To uncover serial acquisitions or "rollup" strategies, the new proposal would require merging parties to identify all prior acquisitions in the preceding 10 years in industries in which the merging parties have reported horizontal overlaps, without any exemption based on the size of the prior acquisition.
- The new proposal would also complicate a strategy employed by companies seeking an early assessment of potential antitrust risk of submitting an HSR filing based only on a letter of intent between the merging parties. The proposal would require parties to submit a draft agreement or term sheet that describes the transaction "with sufficient detail" to allow the agencies to understand the parties' proposed deal.
Conclusion and Takeaways
The FTC's explanation for the need for the imposition of additional HSR burdens is generally consistent with its recently expressed views that existing approaches to merger review have been too permissive and not up to the task of preventing mergers that harm consumers. The agency justifies the demand for more information at the initial stages of the merger review process by pointing to difficulties in assessing the competitive impact of transactions in markets "that rely on technology and digital platforms," complexities in corporate and deal structures that might hide potential competitive concerns, and the need to consider competitive effects such as the impact of mergers on workers that might have been overlooked in the past.
But the agency does not explain why existing investigative tools – including the ability to speak to customers or other industry participants or to seek additional information when needed from the merging parties themselves – cannot continue to allow the antitrust agencies to "determine whether the transaction warrants in-depth investigation," which the FTC acknowledges "is the primary purpose of premerger notification and review." When FTC statistics show that, for the vast majority of transactions, the DOJ or FTC does not issue a Second Request and does not investigate the transaction after the initial 30-day waiting period, the FTC's decision to indiscriminately impose significantly greater burden on all transactions might be overly broad and in need of additional consideration.
Holland & Knight's experienced HSR attorneys and Antitrust Team are available to discuss the FTC's new proposal and work with clients seeking to bring concerns about the proposal to the attention of the FTC.
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