You're gonna need a bigger boat: Stormy waters ahead as the FTC proposes far-reaching changes to HSR Form

If the proposed rule is finalized, merging parties will face expansive requirements for HSR filings and lengthy filing preparation times.

On June 27, 2023, the US Federal Trade Commission ("FTC"), with the concurrence of the Antitrust Division of the US Department of Justice, issued a Notice of Proposed Rulemaking ("Proposed Rules") to amend the Hart-Scott-Rodino ("HSR") Form and Instructions.¹  The Proposed Rules would be the most sweeping changes to the HSR Form for US premerger notification filings ("HSR Filings") in 45 years. The changes would apply for every HSR-reportable transaction – and, if finalized, would significantly increase the burden of and time to prepare HSR filings.

The Proposed Rules are subject to a 60-day public notice and comment period—until August 28, 2023—and could go into effect as early as Q4 2023. Finalizing a proposed rule typically takes several months.

Key Expected Changes

Under the Proposed Rules, merging parties would need to provide significantly more information about their transactions in their HSR Filings. Accordingly, parties should factor additional time, cost, and burden into their plans to collect and prepare this information several months in advance of an HSR Filing.

• Competitive Analysis on a Range of Topics in Initial HSR Filing: The new HSR Form would add a "competition analysis" section that would require affirmative narratives on competitive / horizontal overlaps and supply or other non-horizontal relationships. This new section would require the parties to disclose (a) the identity and contact information of top customers, (b) the rationale behind the deal, and (c) the timeline for the deal.
• Extensive Labor Markets Information: Parties would need to classify employees based on current Standard Occupational Classification ("SOC")² system categories and commuting zones, as well as provide worker and workplace safety records. If the buyer and target have employees in the same SOC categories, they would be required to provide geographical information on where those employees are located.
• More Individuals Covered by Expanded Item 4(c)/(d) Obligations: Currently, parties are generally only required to submit documents seen by an officer or director about the transaction if the documents mention certain topics: competition, competitors, markets, market shares, potential for sales growth or expansion, or synergies or efficiencies. The Proposed Rules would require documents prepared by or for "the supervisory deal team leads" for a given transaction, i.e., individuals other than officers or directors of a company who "functionally lead or coordinate the day-to-day process for the transaction at issue." This requirement would broaden the pool from which Item 4(c)/(d) documents are typically collected. For example, the requirement would expand document collection to leaders of the investment committee at a company or to individuals who supervise or analyze how a company considers M&A targets.
• Mandatory English Translations of Foreign Language Item 4(c)/(d) Documents: The Proposed Rules would require parties to submit English-language translations for all foreign-language Item 4 documents. Currently, parties are not obligated to provide translations unless they already exist in the ordinary course and, generally, are only required to translate documents submitted with a Second Request investigation.
• Requirement to Submit Draft Transaction Documents: The Proposed Rules would require parties to submit all drafts of transaction documents provided to an officer, director, or a supervisory deal team lead, rather than just the final versions. The FTC's current position is to require a draft version of Item 4(c)/(d) documents only if there is no final version available or if a draft was sent to the board of directors. This requirement could significantly increase the volume of documents provided to the FTC or DOJ, and would carry implications for individuals drafting deal documents.
• Requirement to Submit Internal Documents on Market Conditions: Parties would be required to disclose internal ordinary course documents, such as periodic plans or reports and other high-level strategic business documents that discuss market shares, competition, competitors, or markets of any product or service that both merging parties offer. This requirement would be limited to documents shared with a chief executive of an entity involved in the transaction, certain individuals who report directly to a chief executive, or the board of directors (or, in the case of unincorporated entities, individuals exercising those functions).
• Disclosure of Investment Vehicles and Corporate Relationships: Parties would have to disclose details surrounding the investment vehicle and corporate relationships involved in a transaction. For example, the Proposed Rules would require more information from investment entities, such as funds and master limited partnerships in private equity investments.
• Disclosure of "Subsidies from Foreign Entities or Governments of Concern": Under the Merger Filing Fee Modernization Act of 2022,³ the agencies are required to collect information on subsidies received from certain foreign governments or entities that are "strategic or economic threats to the United States." First, the Proposed Rules to the HSR Form would require parties to report any subsidy (or commitment for a future subsidy) from any foreign entity or government of concern in the last two years. Second, the Proposed Rules would also require parties to list products, the countervailing duty imposed, and the jurisdiction that imposed the duty for any products produced in the four covered nations: North Korea, Russia, China, and Iran. Third, the parties would have to indicate whether any of these listed products are subject to an investigation for countervailing duties in a foreign jurisdiction.
• Mandatory Disclosure of Foreign Filings: Unlike the current standard, which makes disclosure of foreign merger control filings voluntary, parties filing transactions under the Proposed Rules would be mandated to disclose the jurisdictions where such merger control filings will be made.
• Requirement to Provide Information on Acquisitions from Past 10 Years for Both Parties: The current rules only require the acquiring party to report acquisitions from the past 5 years in segments where the parties overlap. The Proposed Rules would expand this to 10 years, require the acquired party to report this information, and would also eliminate the threshold for listing prior acquisitions, which currently limits reporting to only acquisitions of entities with annual net sales or total assets greater than $10 million in the year prior to the acquisition.
• Disclosure of Officers, Directors, and Board Observers for Section 8 of the Clayton Act Assessment: Parties would be required to provide information about officers, directors, and board observers who have served in the position for the preceding two years. For each individual, parties would need to identify any other companies for which those individuals have served during the prior two years as officers, directors, or board observers. In addition, parties would need to list individuals who will or are likely to serve as an officer, director, or board observer of an entity within the acquiring person as a result of the transaction. This change specifically targets interlocking directorate issues⁴ under Section 8 of the Clayton Act. Compliance with the Proposed Rules could be especially burdensome for acquiring persons with subsidiaries, holding companies, and unrelated industry investments.
• Information on Creditors and Holders of Non-Voting Securities: The FTC believes that some credit arrangements permit the creditor to exercise rights and influence similar to those of equity holders. The Proposed Rules would require the acquiring person to identify certain individuals or entities that provide credit, hold non-voting securities, options, or warrants, are board members or observers or have nomination rights, or have agreements to manage entities related to the transaction.

In justifying these changes, FTC Chair Lina Khan, joined by FTC Commissioner Rebecca Kelly Slaughter and FTC Commissioner Alvaro Bedoya stated that the existing HSR Form "is insufficient" to allow government entities to adequately analyze a transaction in 30 days, particularly "during periods of high merger activity"—which the FTC had been experiencing up until recently.⁵

The FTC Commissioners claim that these updates place US requirements closer to the data and information requirements of foreign antitrust authorities. Despite the dramatic overhaul of the rules, and the increased burden that would undoubtedly fall on parties post-adoption, the FTC contends it could be worse: foreign enforcers already require much more detail in initial merger filings. For example, while the European Commission requires extensive information through its Form CO, it offers the alternative of a Short Form CO for transactions that are unlikely to pose any competitive concerns. The Proposed Rules do not address a "short form" alternative for deals where there are no competitive concerns, and could forego that administrative ease and, instead, enforce the same set of extensive reporting requirements for all deals, regardless of competitive overlap. In practice, in transactions where it is clear there is no competitive issue, such as a low-value deal where the parties do not compete nor have any other relationships, the Proposed Rules would do nothing more than add cost, burden, and delay.

What Does This Mean for My Next Deal?

The Proposed Rules would have immediate and practical effects if implemented. So while parties wait for final rules, parties should consider behaving as if these changes will likely move forward. Some short-term proactive considerations include:

• Regulatory Clauses: In negotiating deal documents, parties should consider adding flexibility for timing around HSR Filings. It is now typical to include 5 or 10 business days as the period for completion of an HSR Filing after executing a transaction agreement. Going forward, as is common for transactions reportable in other jurisdictions, parties should consider using "as promptly as practicable" or a longer time limitation to allow themselves more time to complete what would be a longer filing.
• Analyze Antitrust Risks Early: Parties should consider analyzing the antitrust risks and competitive overlaps early in transaction planning. This will allow parties to draft the newly required competition analysis in the best possible light and will allow the parties to consider any additional timing implications. Depending on the level of antitrust risk and transaction certainty, parties should consider preparing the HSR Filing earlier in the process.
• Early Preparation, Timing Impacts, and A More Costly HSR Process for All Filers: The Proposed Rules would be time-consuming and costly, even for deals bereft of competitive issues. The FTC estimates that the number of hours required to prepare an HSR filing could increase four-fold: from 37 hours to 144 hours of preparation. And the government paperwork hourly estimates are notoriously lower than the actual real-world burden. As a result, according to the FTC's analysis, parties should prepare for up to two to three months of additional preparation time. These increased burdens will have significant implications for parties considering tender offers or other open market transactions, where an acquired party often has a shortened window to submit its HSR Filing.
• Exercise Awareness in Document Creation: Parties should be mindful that they may have to submit even early draft documents created today for an HSR filing that will be submitted months from now. It will become even more important for parties to exercise caution in how they describe competitors, competition, market shares, and markets, particularly where a transaction may have competitive overlaps (even if perceived as remote).
• Be Sensitive To Document Retention Obligations: Parties considering filing an HSR should also be aware of the steps they must take to preserve documents and to prevent destruction of relevant information. Under the Proposed Rules, parties will be required to identify "all communications systems or messaging applications on any device used by the acquiring or the acquired person [] that could be used to store or transmit information or documents related to its business operations."
• Consider Implications of Submitting an HSR Filing on a Letter of Intent: Parties considering filing an HSR with an executed letter of intent will need to weigh the benefits of 100+ hours of preparation of a filing before a transaction agreement is ever finalized. To note, the Proposed Rules would require that parties filing on a letter of intent submit draft agreements or term sheets that describe the deal with sufficient detail.
• Spotlight on Private Equity: Private equity buyers will have substantially expanded disclosure obligations, including disclosing the structure of entities involved in private equity investments. Certain other proposed changes, including requiring parties to list prior acquisitions for the last ten years, appear targeted particularly at private equity sponsors. For example, the Proposed Rules specifically call out "roll-up strategies." Private equity sponsors should work with counsel early on document creation and to collect additional structure information that would be required in the HSR Form.

_{1 Notice of Proposed Rule Making to 17 C.F.R. Parts 801 and 803, June 27, 2023, https://www.ftc.gov/system/files/ftc_gov/pdf/p239300_proposed_amendments_to_hsr_rules_form_instructions_2023.pdf.
2 This Proposed Rule would require filers to submit data by the first six digits of the relevant code, as published by the United States Bureau of Labor Statistics, available at https://www.bls.gov/soc/2018/#classification.
3 On December 23, 2022, as part of a broader omnibus spending bill, Congress passed the Merger Filing Fee Modernization Act of 2022 (Fee Modernization Act), which was signed into law by President Biden on December 29, 2022.
4 DOJ Antitrust Announces Five More Director Resignations from US Company Boards in Continued Aggressive Clayton Act Section 8 Enforcement, Increasing the Spotlight on Private Equity (PE) and Technology Firms | White & Case LLP (whitecase.com)
5 Statement of Chair Lina M. Khan Joined by Commissioner Rebecca Kelly Slaughter and Commissioner Alvaro M. Bedoya Regarding Proposed Amendments to the Premerger Notification Form and the Hart-Scott-Rodino Rules Commission File No. P23930, (June 27, 2023), https://www.ftc.gov/system/files/ftc_gov/pdf/statement_of_chair_khan_joined_by_commrs_slaughter_and_bedoya_on_the_hsr_form_and_rules_-_final_130p_1.pdf}

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