New HSR Requirements Will Dramatically Increase the Burden on Filers
Key Points
- The good news about the long-awaited new HSR rules is that they are not as burdensome as the proposed HSR rules that came out last summer. But while the new HSR rules walk back some of the Antitrust Agencies’ more onerous proposals, they nevertheless promise to substantially increase the burden on HSR filers. The new HSR rules are expected to go into effect in late January or February.
- Compared to the current requirements, some of the most significant changes include:
- Broadening the scope of documents required by (1) expanding the scope of individuals to be searched to include the “supervisory deal team lead,” (2) requiring the submission of draft “Item 4” documents that go to an individual director (or equivalent, such as an investment committee member), and (3) requiring certain ordinary course business plans provided to the CEO or to the board of directors where there is a horizontal overlap between the parties.
- Where there are horizontal overlaps or vertical relationships between the parties, the new HSR rules will require interrogatory-like explanations of the parties’ products and services, the parties’ sales by product or service, and lists of top customers overall and by customer category, among other information.
- Requiring acquirers to identify officers and directors of certain entities within the acquirer that also serve as officers or directors at other companies that may compete with the target, likely aimed at enabling the agencies to facilitate their detection of prohibited interlocking directorates.
- Numerous other changes that, individually and in aggregate, will significantly increase the burden on filers.
- While the new HSR rules purport to not require the submission of draft transaction-related documents, the Antitrust Agencies effectively do this by expanding the definition of what constitutes a “draft.” In the past, parties were not required to submit draft documents that analyze the transaction (known under the current HSR Form as “Item 4” documents) unless they went to the full board (or its equivalent for non-corporate entities). Under the new rules, draft Item 4 documents—which the Agencies will now call “Business Documents”—that go to any individual director (or equivalent, such as investment committee member) must now be submitted. This change would encompass drafts sent to CEOs that also sit on the board, investment committee members at PE firms and hedge funds, PE and hedge fund personnel who sit on the boards of operating companies, and employees who are on the boards of lower-level or non-operating subsidiaries but not the main board. These expanded requirements create practical challenges in collecting, reviewing and producing these types of “drafts,” and provide more opportunity for the Agencies to raise non-compliance concerns.
- The new HSR rules also introduce significant subjectivity into HSR filings, which increases the risk that filers will be “bounced” for deficient filings, potentially even deep into investigations and even where the filers believe the information is accurate. For example, the new “Overlap Description” section requires filers to identify and describe each current or potential future horizontal overlap and supply relationship. Market definition is often heavily contested during merger investigations and litigation, and it often is informed by considerably more information than filers may have available at the time of an HSR filing. The Antitrust Agencies may seek to use overlap descriptions on the HSR form as admissions in the event of a subsequent investigation or challenge. They may also seek to bounce the filing later in the process if the Antitrust Agencies disagree with the parties’ initial view of competition or the parties’ competitive relationships or information developed by the parties alters their views. Merging parties will need to take care that their descriptions of competition and the parties’ competitive relationships are both accurate and flexible enough to account for later changes.
- Whether the Agencies will insist on a literal interpretation of other new requirements is unclear. For example, the new HSR rules would require filers to identify overlaps and provide top customer lists on a global basis—but, for example, will the Antitrust Agencies insist on customer lists for products that only overlap in Kazakhstan? Of course, the Antitrust Agencies in the past typically have asked for customer lists in areas of interest. But those requests, often included in voluntary access letters, have typically followed initial discussions with the parties. Now the Agencies appear to be asking filers to provide this information upfront, even if it may have limited competitive significance.
- Key items that were identified in the proposed rules that were released last summer but did not make it into the new HSR rules include: information about labor market issues; information about prior acquisitions for the last 10 years (the lookback period remains five years); information about “other interest holders” such as debtholders and holders of options and preferred stock; information about the parties’ efforts to preserve documents; identification of messaging systems; and a timeline of key dates in the transaction.
- Now, more than ever, it will be important to engage antitrust counsel early in the deal process and to build in time for the transacting parties to cooperate and collaborate to collect information and prepare the HSR Form and accompanying materials.
The New HSR Rules Will Dramatically Increase the Burden on Filing Parties
The long-awaited new HSR rules have finally been released. On October 10, 2024, the Federal Trade Commission (FTC), with concurrence of the Department of Justice (DOJ) (collectively, the Agencies), released the 460-page final version of their revisions to the Premerger Notification and Report Form (the HSR Form), associated instructions, and the premerger notification rules implementing the Hart-Scott-Rodino (HSR) Act (hereafter, the “new HSR rules”). The new HSR rules will go into effect 90 days after they are published in the Federal Register (which should occur soon) and are expected to go into effect in late January/February 2025. These changes represent the Agencies’ resolution to proposed changes they released about 16 months ago in mid-2023 (“proposed rules”).
The new HSR rules will significantly increase the burden on all filers regardless of whether any competitive relationship exists between them, though the new rules will substantially increase the burden on filers that have a competitive relationship. Considerable information that previously would have been provided only after the Agencies believed investigation may be warranted will now be required upfront.
Here are the most significant changes to the filing requirements in our view, which are compared against both the current rule and the proposed rule from last summer:
|
Category |
Current Rule |
Proposed Rules from June 2023 |
New HSR Rules |
|
Item 4 Documents |
Unless interim drafts are provided to the full board of directors, filers are required to provide only final versions of certain documents prepared by or for officers or directors that analyze the competitive aspects of the transaction or its potential to generate synergies. |
The proposed rules would have required filers to provide additional Item 4 documents, including: · Draft Item 4 documents (not just the final version) provided to officers, directors or supervisory deal team lead(s). · Item 4 documents that are prepared by or for “supervisory deal team leads.” · Board reports and certain semi-annual and quarterly ordinary course business plans that evaluate the competitive aspects of any overlapping product or service. |
The new HSR rules will require filers to provide additional Item 4 documents, including: · Draft Item 4 documents (not just the final version) provided to individual directors or their equivalent for non-corporate entities (e.g., investment committee members). · Item 4 documents that are prepared by or for a single “supervisory deal team lead.” · Board reports and certain annual, semi-annual and quarterly ordinary course business plans that evaluate the competitive aspects of any overlapping product or service. |
|
Information About the Transaction |
Filers must describe the nature of the assets, voting securities or non-corporate interests to be acquired by the acquired person and of the acquired entity. |
The proposed rules would have required: · A narrative explanation of each strategic rationale for the deal (apart from the Item 4 documents required to be produced), with citations to supporting documents. · A diagram of the deal structure with an explanation of all entities involved. · A description of each of the filer’s businesses and products/services (which could be extensive for conglomerates and private equity (PE) funds). · A narrative timeline of key dates and conditions for closing. |
The new HSR rules will require: · A narrative explanation of each strategic rationale for the deal (apart from the Item 4 documents required to be produced), with citations to supporting documents. · A diagram of the deal structure, unless one does not exist. · A description of each of the filer’s businesses and products/services (which could be extensive for conglomerates and PE funds).
|
|
Competitive Overlaps |
Filers are required to report revenue for overlapping NAICS codes, identify the overlapping entities, describe geographies in which the filing parties both derive revenue, and identify prior acquisitions. The scope of information required to be provided is limited to horizontal overlaps (i.e., the parties are competitors). |
The proposed rules would have required much more detail about the competitive relationship between the parties, including: · Identifying current and potential future horizontal overlaps (i.e., perhaps even where one or both parties may not even generate revenue), and for each overlap, filers must provide sales, customer information (including contact information), describe licensing arrangements, and describe relevant non-competes and non-solicitation agreements. · Detailed narrative explanations of any vertical relationships between the parties, including descriptions and copies of any contracts between the parties, and contact information for relevant customers and vendors. · Detailed information about potential labor overlaps (discussed further below). |
The new rules also require much more detail about the competitive relationship between the parties, including: · Identifying current and potential future horizontal overlaps (i.e., perhaps even where one or both parties may not even generate revenue), and for each overlap, filers must provide sales, customer information and identify any pre-existing agreements between the parties such as licensing arrangements and non-competes or non-solicitation agreements. · Detailed narrative explanations of any vertical relationships between the parties, including descriptions, and information regarding relevant customers and vendors. · No information regarding labor market overlaps. *The new HSR rules seek information about horizontal overlaps and vertical relationships on a global basis. By the Antitrust Agencies’ logic, the requests for sales and top customer lists are not limited to the United States, meaning that parties are required to provide global sales data and lists of global top customers, which may not provide useful information to the Agencies where the parties have significant ex-U.S. operations. The new HSR rules also raise questions about how to respond for transactions where local markets are implicated (e.g., gas stations, supermarkets). At present, it is unclear whether information must be provided on an overall basis or for each localized geography. |
|
Filings Based on Indications of Interest (e.g., Letters of Intent (LOI)) |
Currently, filers are permitted to file on the basis of “a contract, agreement in principle or letter of intent to merge or acquire” and an affidavit attesting the good faith intention to complete the transaction. Filing on an LOI, which is a common practice, enables parties to file HSR on the general metes and bounds of a transaction while continuing to negotiate the finer points of an agreement. There currently is no obligation to file a draft or final agreement, either upon HSR filing or after the HSR filing is submitted. |
The proposed rules would have required parties to provide a term sheet or draft agreement with “sufficient detail” about the proposed transaction (although the proposed rules indicated that typical LOI and other indications of interest do not meet the Agencies’ view of “sufficient detail,” the proposed rules did not define what “sufficient detail” beyond requiring, elsewhere, a description of the timeline of key dates and conditions for closing). The proposed rules, therefore, would have made it more difficult to file strictly on indications of interest like an LOI. |
The new HSR rules clarify that HSR filings can be made on an LOI or similar so long as it contains 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. In our experience, most LOIs that are submitted with HSR filings today will also be acceptable under the new HSR rules. |
|
Minority Investors |
The HSR Rules currently require each filer to disclose the minority shareholders (5% or greater but less than 50%) of the acquiring/acquired entity. However, for limited partnerships, only the general partner(s), regardless of percentage held, needs to be listed. The acquiring entity must also disclose the minority shareholders of the acquiring person (the ultimate parent) and provide additional information for overlaps involving minority holdings. |
The proposed rules would have required significantly more information about minority investors, including: · The minority holders of all entities within the chain between the acquiring person and the acquiring entity. · The limited partners (which may include individuals or institutions that wish to maintain their privacy) that hold 5% or greater but less than 50% of each entity within the chain. |
The new HSR rules will require significantly more information about minority investors, including: · The minority holders of all entities within the chain between the acquiring person and the acquiring entity. · The limited partners (which may include individuals or institutions that wish to maintain their privacy) that hold 5% or greater but less than 50% of each entity within the chain and which have the right to serve as, nominate, appoint, veto or approve board members (or their equivalent). |
|
Officers, Directors and Board Observers |
The current rules do not require the identification of officers, directors or board observers. |
The proposed rules would have imposed sweeping new requirements to identify officers, directors and board observers, including: · The officers, directors and board observers (or in the case of unincorporated entities, individuals exercising similar functions) of all entities within each of the acquiring person and the acquired entity. · Any other entities for which these individuals currently serve, or within the two years prior to filing have served, as officers, directors or board observers. *Unlike the requirement to identify minority investors (discussed above) and “other types of interest holders” (discussed below), this requirement would have covered all entities within the acquiring person without regard to those entities’ involvement in the transaction. In other words, the acquirer would have been required disclose all officers, directors and board observers for all of its majority holdings, even those that are wholly unrelated to the transaction being reported. |
The new HSR rules require the acquirer to identify certain officers and directors that also serve as officers or directors at other companies that may compete with the target. For this analysis, the acquirer must assess: · The entities within the acquirer that result in a horizontal overlap or vertical relationship · All entities within the acquisition chain. *This requirement was substantially rolled back from the proposed rules, as it now applies only when there is a horizontal overlap or vertical relationship or where there is a NAICS code overlap. |
|
“Other Types of Interest Holders That May Exert Influence” |
The current rules do not require the identification of “other types of interest holders that may exert influence.” |
The proposed rules would have created new requirements to identify other types of interest holders that may “exert influence” over any entity within the chain between the acquiring person and the acquiring entity. This includes: · Providers of credit totaling 10% or more of the value of the entity · Holders of non-voting securities, options or warrants the value of which equals or exceeds 10% of the entity or could be converted to 10% of the company · Having nomination rights for board members or board observers · Having agreements to manage entities related to the transaction. |
This proposal was removed in its entirety and is not included in the new HSR rules. |
|
Labor and Employment |
The current rules do not require any information about labor and employment from the filing parties. |
The proposed rules would have created a new “Labor Markets” category of information to screen for potential adverse competitive effects on labor. Among other requirements, the proposed rules would have required filers to: · Identify their five largest employee categories by six-digit Standard Occupational Classification (SOC) code, an employee classification system developed by the Department of Labor Statistics. · For each of the top five overlapping SOC codes, provide overlapping geographies using the Employee Research Service’s-defined commuting zones, which the Department of Agriculture developed. |
This proposal was removed in its entirety and is not included in the new HSR rules. |
|
Additional Information Not Required by the Current HSR Form |
|
Other new requirements of the proposed rules included: · Requiring the filing to certify that it has implemented a document hold at the time of filing for every HSR-reportable transaction, whether the transaction raises competitive issues or not. · Identification of the filer’s communications and messaging systems. · Requiring information about foreign subsidies and defense/intelligence contracts. · Submission of full English-language translation for all foreign-language documents. |
Other requirements of the new HSR rules include: · Requiring information about foreign subsidies and defense/intelligence contracts. · Submission of full English-language translation for all foreign-language documents. |
The New HSR Rules Will Require the Submission of Draft Transaction-Related Documents in Many Scenarios
Under the current HSR rules, the Antitrust Agencies’ longstanding position was that draft transaction-related documents (i.e., Item 4 documents) are not required to be produced unless they went to the full board of directors (or equivalent, such as investment committee). The proposed rules sought to change that by requiring drafts that went to officers, directors or supervisory deal team lead(s).
While the new HSR rules purport to not require the submission of draft transaction-related documents, the statement of basis and purpose accompanying the new HSR rules explains that any document “that was shared with any member of the board of directors (or similar body) is responsive and should not be considered a draft.”1 For many filers, this may be the exception that swallows the rule. For example, draft documents may need to be collected from the following individuals:
- CEOs or other executives who also sit on the board
- Investment committee members at PE firms and hedge funds, who often are integrally involved in the day-to-day analysis of a deal and routinely receive (and provide input to) draft transaction-related documents
- PE and hedge fund personnel who sit on the boards of operating companies
- Employees who are on the boards of lower-level or non-operating subsidiaries, but not the main board
- Employees of small companies who also sit on the board.
Filers may need to revise their processes to collect these kinds of documents to comply with the new rules.
New Obligations to Describe Competition and the Parties’ Competitive Relationships Create New Risks for Filing Parties
While the current HSR form requires largely objective information, many new requests require the parties to offer conclusions about competition between the parties and their competitive relationships that the Antitrust Agencies and the parties may see differently, increasing the risk that filers will be “bounced” for being deficient, which could result in restarting the waiting period. These risks extend even deep into investigations and even where the parties reasonably do not believe their responses are deficient.
As one example, the new “Overlap Description” section requires filers to identify and describe each current and potential future horizontal overlap (including prospective overlaps) and supply relationship. The response, therefore, requires parties to offer a view about the nature of competition between the parties and their competitive relationships upfront. The answers are not always clear cut; the parties and agencies may disagree on core elements of the analysis, even after extensive investigation. A key question, therefore, is whether filings could be bounced if the agencies disagree with the parties’ responses to these questions or new information emerges during an investigation that calls the parties’ initial views into question.
On top of these risks, the Agencies may seek to use overlap descriptions on the HSR form as admissions in the event of a subsequent investigation or challenge. Merging parties must take care that their descriptions of the nature of competition between the parties and their competitive relationships are both accurate and flexible enough to account for later changes.
As another example, the new HSR rules require filers to “identify and explain each strategic rationale for the transaction discussed or contemplated by the filing person or any of its officers, directors, or employees.” While this may seem as simple as parroting back the key points in a board presentation, what if, for example, older documents contain rationales that were superseded by more recent documents? Moreover, the “…or employees” clause also raises questions. What if there is a Second Request and a document emerges in which a lower-level employee commented on the transaction rationale, and that rationale is not included in the HSR filing? It remains to be seen whether the Agencies might try to bounce a filing on that basis.
Practical Considerations
- Filing parties should consider engaging antitrust counsel early. Given the volume of new information and documents requested, filing parties and their counsel may need to devote considerably more resources and collaborate closely to prepare HSR filings. They will need to work to identify and describe horizontal overlaps and vertical relationships and to collect other materials that the new HSR Form will require. If parties wish to file HSR within the customary five to 10 business days after signing, they likely will need to start the HSR process much earlier than before.
- Frequent dealmakers should consider revising their processes to track the information that will be required in the new HSR form. Without adopting these processes, frequent filers may find it difficult to get on file and start the initial waiting period on their desired timelines.
- Filing parties also should consider whether they want to make changes to their internal processes and structures to make HSR filings go more smoothly. This could include implementing internal review processes to ensure that board members (or their equivalent) are not unnecessarily receiving draft documents and changing the constitution of boards of lower-level and non-operating subsidiaries to minimize collection burdens, among other activities.
1 New HSR Rules at 273.
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