For the first time in 45 years, the Federal Trade Commission (FTC) and the Antitrust Division of the US Department of Justice (DOJ) proposed on June 27, 2023, a massive overhaul of the Hart-Scott-Rodino Act (HSR) pre-merger filing form. Since the HSR Act introduced the US system of pre-merger notifications in 1976, the HSR form has been straightforward, calling for relatively little information. That contrasts with the notification regimes in many other leading jurisdictions – including the European Union and China – that require copious substantive information, such as detailed information regarding competition in relevant markets where the parties proposing to merge have a horizontal or vertical relationship. While the form itself is straightforward, the US HSR notification process requires an often-substantial document submission – including Item 4(c) and 4(d) documents, which include certain documents evaluating or analyzing the competitive effects of the transaction or related matters.
The proposed new form would simultaneously (a) move HSR notifications much closer towards other jurisdictions’ notification regimes by requiring detailed narratives regarding (among other things) markets that the proposed merger may impact, and (b) substantially expand the document submission requirement that already sets the HSR regime apart. These changes would substantially increase the burdens associated with each of the thousands of HSR notifications made every year – almost 2,500 in 2022 – and have significant implications for deal timelines and, in many cases, strategy. Notably, other jurisdictions that require detailed notification information such as that proposed in the new HSR form capture many fewer deals – for instance, 371 notifications to the European Commission were made in 2022 – and most of those were simplified notifications.
The Most Significant Proposed Changes
The agencies’ Federal Register Notice describing the proposed changes to the HSR form runs to 41 pages. We highlight here the most crucial ones – the new narrative description requirements and the expanded document submission requirements.
Narrative Responses. For the first time, parties filing an HSR form would be required to provide narratives regarding key aspects of substantive antitrust assessment.
- Horizontal Overlaps. The parties would need to describe any current or potential overlapping products or services, and, for each, provide (a) sales over the last two fiscal years (or projected revenues for products or services not yet generating revenues); (b) a categorical description of customers, plus contact information for top 10 customers; and (c) any relevant licensing, non-compete, or non-solicitation agreements.
- Vertical Relationships. Consistent with the US agencies’ current focus on potential vertical antitrust concerns (see our alert), the parties would need to describe their relationships as buyers or sellers of each others’ products, and supply arrangements with competitors of the other party. For each relevant product or service, the parties would need to provide their sales/purchase amount for the last two years and their top 10 customers or suppliers.
- Labor. A party would need to “provide certain information about its workers in order to screen for potential labor market effects arising from the transaction,” which is consistent with the agencies’ current emphasis on merger impacts in labor markets. Each Party would need to disclose (a) headcount for its 5 largest occupational categories; (b) headcount by commuting zone – geographic units reflecting where people live and work, designed by the Department of Agriculture’s Economic Research Service – for the 5 largest occupational categories for which both parties have employees; and (c) any penalties or investigations for labor-related violations over the last five years.
- Strategic Rationale. Each party would need to provide a “narrative that would identify and explain each strategic rationale for the transaction."
Extensive Document Disclosures. Currently, parties need provide only final versions of Item 4(c) and 4(d) documents – competition/market/synergy documents, or third-party advisor documents, analyzing the transaction, prepared by or for an officer or director. The proposed changes would substantially expand the required document submissions, and sweep in documents that parties ordinarily would not provide absent a specific request from the agencies for those documents.
- Drafts. Parties would have to provide drafts, not just the definitive versions, of 4(c)/(d) documents.
- Supervisory Deal Team Documents. 4(c) documents would be defined to include documents that were prepared by or for the “supervisory deal team lead(s),” not just by or for an officer or director.
- Ordinary Course Strategic Documents. Parties would need to submit certain ordinary course high-level strategic documents (e.g., period business or strategic plans), not just internal documents created in contemplation of the notified transaction. The proposed changes would capture documents that contain information regarding market shares, competition, competitors, or markets regarding products or services where the parties overlap.
Other Significant Proposed Changes
Under the proposed changes, parties would be required to provide many other types of information that the current form does not mention, including:
- Interlocking Directors or Officers or Observers. For the first time, the parties would need to disclose their officers, directors, or board observers (and people with similar functions in unincorporated entities) and identify any other entities where those individuals have had such roles for the last 2 years.
- Prior Acquisitions. The agencies propose to substantially expand obligations to report prior transactions. The proposal would (i) eliminate the current $10 million annual net sales or total assets threshold for disclosures of prior acquisitions, so all acquisitions in overlapping NAICS codes or in the horizontal overlaps narrative would need to be disclosed; (ii) expand the timeframe for reporting prior acquisitions from 5 to 10 years; (iii) extend the obligation to the acquired, not just the acquiring, party.
- Minority Stakes. The revised form would expand parties’ obligations to disclose minority interests and large shareholders. For instance, each party would also need to list entities where they hold a minority stake of 5% or more that overlap with the other party – currently parties can simply list all entities where they hold a minority stake, regardless of any overlap.
First, if the proposed revisions are adopted, HSR notifications will be much more burdensome and require substantially more preparation time and consideration. This will materially extend the time to closing and transaction costs for many transactions. For instance, the FTC estimates that businesses would need on average 144 hours to prepare the revised notification, or 4 times more than the current average, and 7 times more for complex transactions. In addition, the parties will need to adopt at the time of filing critically important positions relating to overlaps and non-horizontal relationships, which will frame any subsequent investigation or litigation, a process that will require great care.
Second, the proposed requirements to provide draft 4(c)/(d) documents will require that businesses be even more vigilant to avoid creating vague, incomplete, or otherwise misleading documents that could trigger an extended investigation. It will be crucial for companies to have robust training and monitoring programs for both deal-related and high-level ordinary course document creation.
Parties will now have until August 28, 2023 to submit comments on the proposed changes to the HSR form. The FTC and DOJ will then decide what, if any, changes to make to the proposal before the new HSR form becomes final. Changes to the form may not become operative for a year or more, but it is not too early to start planning for a notification regime that – absent dramatic changes to the proposal – will bring a new, and vastly different, merger notification regime in the United States.