The U.S. Federal Trade Commission (FTC) has published proposed amendments to the Hart-Scott-Rodino (HSR) premerger notification rules that, if implemented, will overhaul and expand the information and documents that parties will be required to produce in their HSR filings. As proposed, these rules would fundamentally change the HSR filing process and significantly increase the cost, preparation, and timing for filings on all notified transactions, the large majority of which pose no competitive concerns.
Implementation is still months away. The proposed rules are subject to a 60-day public comment period (which closes August 28, 2023), Office of Management and Budget review, and potential legal challenge under the Administrative Procedure Act. Although the final amendments are likely to vary from the current proposals, it is conceivable that the new rules could go into effect in the fourth quarter of this year.
While the proposed amendments are subject to review and revision, the financial cost and time required to prepare HSR filings will increase significantly. The FTC estimates that the changes, as proposed, will quadruple the filing preparation burden. Some experts believe that is a significant underestimate.
Deadlines commonly articulated in standard purchase agreements would need to be adjusted accordingly. Submission of an HSR filing within five or 10 business days of signing will likely no longer be feasible without significant preparation. Parties that file frequently may want to consider implementation of procedures for regularly tracking and updating the newly required data. Due to new preservation and labor data submission requirements, parties will likely need to bring additional individuals “inside the tent” prior to announcement of the transaction, which increases the risk of potential preannouncement leaks.
The most significant proposed amendments to HSR may be summarized as follows.
Draft Item 4(c)/4(d) Documents, Ordinary Course Documents, Document Retention
Current HSR submissions must include so-called 4(c)/4(d) documents, which consist of transaction-related documents prepared by or for officers and directors with respect to enumerated factors1 bearing on competition analysis. Drafts and works-in-progress are excluded except when transmitted to the full Board. The proposed rules significantly expand the burden on both the Acquiring2 and Acquired Person3 by adding several categories:
- Draft Item 4(c)/4(d) Documents: Parties would be required to produce all draft versions of responsive 4(c)/4(d) documents.
- Ordinary Course Documents: The proposed rules would expand the definition of 4(c)/4(d) documents beyond transaction-specific documents to include certain ordinary course Board documents and ordinary course quarterly or semiannual strategic plans. Specifically, parties would need to produce materials prepared or modified within one year of the date of filing that contain 4(c)/4(d) content related to products or services produced, sold, or under development by the counterparty.
- Translations: Parties would be required to prepare and submit verbatim translations of any responsive foreign-language 4(c)/4(d) documents.
- Deal-Team Leads: In addition to documents prepared by or for officers and directors, the proposed rules would require the production of responsive documents prepared by or for “deal team leads.”
The new categories would significantly increase the review time and cost burden on filing parties in routine transactions. The FTC and Department of Justice (DOJ) have always been able to request and obtain documents within the expanded set, but they have done so only in connection with reviews of transactions that potentially raise competition concerns; the new rules would apply to all notifiable transactions, including those that pose no competitive issues. Beyond the burden concern, early drafts often include preliminary and inaccurate information that may distort the agencies’ view of important facts related to their competitive assessment. If adopted, the proposed rules would necessitate careful consideration of potential antitrust implications in the creation and tracking of potentially responsive materials — not only deal documents beginning at early stages but also ordinary-course planning materials unrelated to any particular transaction.
Document Retention, Expanded Certification, and Identification of Communications and Messaging Systems
The proposed rules introduce expansive document retention and identification requirements, including the following:
- Document Retention: Prior to submitting their HSR filings, parties would be required to implement document retention procedures to ensure that steps have been taken to preserve all documents and information related to the transaction. The obligation specifically includes internal messaging systems and document management systems.
- Expanded Certification: The officer or director who attests (under penalty of perjury) to the accuracy of the contents of the party’s HSR filing would also have to attest that steps have been taken to prevent the destruction of documents and information relevant to the transaction.
- Identification of Communication Systems: Each filing party would be required to identify all communication and messaging applications on any system or device used to store or transmit information or documents related to its business operations.
Implementation of document preservation procedures for email, document management systems, messaging and chat systems, and other sources of potentially relevant information is often costly. It would be required for all notifiable transactions, even those that would not be likely to require a detailed investigation or involve the issuance of a second request. Identification of messaging and communication systems would also require parties to conduct prefiling interviews of key employees involved in the transaction to identify all relevant systems and devices.
Co-Investors, General Partners, Creditors, Other Influential Entities
The Acquiring Person would be required to provide the name, address, and percentage of holdings for any person or entity that currently holds or will hold a minority interest in or could exert influence over entities both within and outside the transaction structure. This includes the following:
- Investment Managers/General Partners: Any entity that manages or is a general partner of an entity within the transaction structure.
- Minority Investors: Co-investors, foreign investors, persons, or entities with nomination rights for board members or observers, and any other person holding 5% to 49.9% of any entity within the transaction structure.
- Creditors: Creditors who provide 10% or more of the value of any entity within the transaction structure.
- Existing Investors: Any existing investor who holds a 5% to 49.9% interest in entities controlled by the Acquiring Person (including certain controlled entities outside the transaction structure).
- Other Influential Entities: Entities or persons who hold or will hold nonvoting equity, options, or warrants totaling (or to be converted to total) 10% or more of an entity within the transaction structure.
- Affiliates and Associates: Organizational charts that illustrate the relationships of all affiliates or associates (e.g., portfolio companies of other funds not involved in the notified transaction).
These expanded disclosure requirements could increase the burden of procuring commitments from co-investors and creditors prior to filing. They could also discourage investments unrelated to the particular transaction by co-investors, creditors, or other influential entities that would not want their identity disclosed to the FTC and DOJ in subsequent HSR filings. The FTC has indicated that when a minority investor’s investment percentage is not known at the time of filing, the Acquiring Person and Acquired Entity would be required to provide good-faith estimates for each such investor.
To lessen the burden on the Acquired Person, the disclosure requirements of the Acquired Entity would be limited to include identification of the name and percentage ownership of only those 5%-to-49.9% minority interest holders that will continue to have such an interest in Acquired Entity after closing.
Identification of Officers, Directors, Principals, and Board Observers
- Transaction-Related Entities: The Acquiring Person and the Acquired Entity would be required to produce the identity and job function of all principals, officers, directors, and board observers for all entities they control, not just those within the transaction structure.
- Non-Transaction-Related Entities: Significantly, the proposed rules would also require identification of any other entity for which these individuals currently serve in similar functions (or have served within the last two years).
Public companies ordinarily collect this type of information but maintain it in business units that typically have not previously been involved in the preparation of HSR filings. Nonpublic companies often do not systematically maintain this type of information, so for them the proposed rule would introduce a new tracking and compliance function. Particularly for nonpublic companies, the disclosure of individuals’ names and roles outside of the Acquiring Person and Acquired Entity would often implicate highly sensitive information. The FTC and DOJ have increased their enforcement of interlocking directorates and requiring disclosure of these key individuals’ roles at entities not related to the transaction reflects the agencies’ ongoing focus on such arrangements.
Transaction and Non-Transaction-Specific Agreements
- Transaction Agreements: The Acquiring Person and Acquired Person would each be required to produce all transaction-related agreements (such as key employee retention agreements, transition services agreements, and future supply agreements), including any side letters, schedules, and exhibits.
- Nontransaction Agreements: The Acquiring Person and Acquired Person would also each be required to produce any existing or recently expired (within the last year) non-transaction-specific agreements between the parties such as existing supply, license, or collaboration agreements.
Production of all transaction-related agreements would give the FTC significant additional details about the transaction (e.g., information typically contained in schedules, exhibits, and side letters like material contracts, other required regulatory approvals, and financing commitments) as well as insight into the intended relationship between the parties after closing. Most of this information would not be material to the agencies’ substantive assessment of the transaction; the HSR rules once required the parties to provide an “index of ancillary documents,” but the FTC dropped the requirement because it did not yield useful information. Still, the production of all transaction-related agreements is not likely to be highly burdensome because the parties presumably have those readily at hand. By contrast, the requirement to produce nontransaction agreements would introduce a new and potentially burdensome requirement. Non-transaction-specific existing or recently expired agreements would give the FTC insight into the historical and current relationship between the parties, including previous transactions not subject to notification under the HSR Act.
Filing in Advance of a Signed Purchase/Merger Agreement
- Parties would be prohibited from filing on an indication of interest or letter of intent without an additional draft term sheet or draft agreement that reflects “sufficient detail about the scope of the entire transaction.”
This prohibition could significantly affect the category of transactions in which the parties seek regulatory comfort before investing substantial resources in conducting diligence and negotiating transaction agreements. It might also alter the timing and structure of the diligence process because parties would need to conduct sufficient diligence to reach a detailed and documented agreement regarding the scope of the transaction prior to submitting their HSR filings.
- Both the Acquiring Person and Acquired Person would be required to produce narrative responses regarding the ownership structure of the Acquiring Person and the Acquired Entity, business operations of the Acquiring Person, transaction rationale, horizontal competitive effects, vertical and horizontal supply relationships, and potential labor market overlaps. These responses would require detailed information regarding sales, customers, licensing arrangements, and noncompete and nonsolicitation agreements related to the products and services of the Acquiring Person and Acquired Entity, including current or known planned products or services that compete with (or could compete with) a current or known planned product or service of the other party.
This requirement has the potential to introduce a fundamental shift in the HSR process. Currently, parties are not required to express antitrust contentions or provide competitive analyses in HSR filings; the parties simply provide specified categories of documents and accounting data, from which the reviewing agencies glean information relevant to their antitrust review. The FTC’s proposal moves the U.S. in the direction of the European Union (EU) and China, where merger filings require the parties to provide detailed competitive analyses. Unlike the FTC’s proposal, however, the EU and China both have short forms that materially reduce burden for transactions that have no competitive effect, and their systems reach a materially smaller number of transactions each year than the U.S. HSR framework. Even for short-form filings, it is commonplace in the EU and China for parties to spend months negotiating with regulators about the details of the narratives that will be included in their filings, and one can envision that the introduction of narratives in the U.S. might lead to a higher rate of rejection of HSR filings and eventually a practice of prefiling consultations, as we see in some other U.S. agencies and in many competition systems abroad. At a minimum, the introduction of HSR narratives would require parties to engage in more detailed consultation with antitrust counsel, even for transactions that should present no competitive concern, and to focus significant resources and time well in advance of an HSR filing (and potentially early in the diligence process) to collect the data and information needed to support certified contentions.
Labor Overlaps and Workplace Safety
- The proposed amendments include new requirements to produce Standard Occupational Classification (SOC) codes, as defined by the Bureau of Labor Statistics, for the five largest categories of workers employed by the Acquiring Person and Acquired Entity. They would also require production of the aggregate number of classified employees in each Economic Research Service commuting zone, as defined by the Department of Agriculture, where both parties report an overlapping SOC code.
- The proposed amendments further require disclosure of any penalties or decisions issued against either the Acquiring Person or Acquired Person by the U.S. Department of Labor Wage and Hour Division, the National Labor Relations Board, or the Occupational Safety and Health Administration.
While designed to provide the antitrust agencies insight into how a transaction may affect or restrain labor-related competition and the ability of employees to choose among prospective employers, these new data requirements would likely require participation of business units that have not been involved in the preparation of HSR filings. That would tend to expand the number of employees who have knowledge of the transaction prior to public disclosure.
Other Key Additions
- Foreign Subsidies and Countervailing Duty Investigations: Each party would be required to identify and describe subsidies4 received (or anticipated to be received) from a foreign entity or “foreign government of concern.”5 For any products produced in such countries, the Acquiring Person and Acquired Person must also describe such products and disclose whether they are subject to any countervailing duties.
- Identification of Certain Defense or Intelligence Contracts: The Acquiring Person would be required to disclose all entities within the transaction structure that have a pending or active procurement contract with the U.S. Department of Defense or any member of the U.S. intelligence community.
- Mandatory Disclosure of Foreign Antitrust Filings: Each party would be required to identify all international antitrust filings that have been or will be made in connection with the transaction.
- Expanded Street-Level Overlap Codes: Each party would be required to collect and produce geolocation and street-level address information for approximately 33 additional North American Industry Classification System (NAICS) codes for entities in which they both derive revenues in the same NAICS code.
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