FTC Proposes Substantial Revisions to HSR Form as Part of Increasing Aggressiveness Against Transactions

The Federal Trade Commission (FTC or Commission), with the concurrence of the U.S. Department of Justice’s (DOJ) Assistant Attorney General of the Antitrust Division, has announced proposed rules that would substantially change the information required as part of the initial filings that companies have to make under the Hart-Scott-Rodino (HSR) Act. The proposed rules have a 60-day public comment period, after which the Commission will consider comments and determine whether to approve the rules in their current or amended form.

These changes follow other aggressive actions the FTC and DOJ have taken to challenge or deter what they believe are anticompetitive mergers — including increased court challenges, a skepticism about merger settlements, and elimination of early termination for mergers except in rare circumstances (although the proposed form would still include a question on whether the parties want early termination). The proposed rules would substantially increase the burden and time it will take to prepare the initial HSR form and potentially subject more filed transactions to further review.

As set forth below, the proposed rule would require detailed information on the filing companies’ organizations, new information on prior and existing relationships between the parties, additional transaction-related documents as well as ordinary course business documents, narrative descriptions of horizontal and vertical relationships, and a variety of additional information. While the Commission anticipates that it will take 144 hours to complete the revised HSR form (up from 37 hours), our estimate is that it will take multiple times that figure.

The FTC indicated that it believes these changes are necessary because the current information submitted in an HSR filing is insufficient for staff to determine within 30 days whether a proposed deal may violate the antitrust laws.¹ They note that they often receive the information that would be submitted upfront in the proposed HSR revisions after the HSR filing is made through voluntary compliance, but that is not always the case. The Commission explained that its study of unreported acquisitions by Apple, Amazon, Facebook, Google, and Microsoft “highlighted the importance of collecting more information on the firm’s history of acquisitions, the sectors they had identified as strategically important for acquisitions, and how these acquisitions figured into the companies’ overall business strategies.”² Further, the Commission noted that much of the new information they are requiring is already collected by other antitrust authorities in their review of transactions.

The Notice of Proposed Rulemaking is over 100 pages long and contains significant detail on the revised information the agencies want (and certain information it no longer wants, which is far less than the additional information it now seeks). A summary of the proposed revisions is set forth below.

1. UPE Information

The proposed rule would require additional information on:

• How the ultimate parent entity (UPE) is organized, including organizing the list of controlled entities by operating company or business and additional information on legal and doing business as names
• Minority holders, including minority holders of non-corporate entities (but for the acquired entity only those that will retain an interest and not be cashed out)
• Other types of interest holders that may exert influence, such as certain creditors, option holders, holders of non-voting securities, board members, or board observers and similar entities
• Identity of officers, directors, and board observers (including information about other boards on which they serve)

2. Transaction Information

The proposed rule would require:

• The acquiring person to describe its business operations and what is being acquired (the type of information often used in press releases)
• The transaction rationales, including those related to competition, expansion into new markets, hiring employees, obtaining intellectual property and the like, along with a cite to the relevant Item 4(c) or 4(d) documents “to ensure the provided narrative is grounded in the filers’ ordinary course-documents and not mere advocacy designed to portray a favorable view of the transaction”
• A transaction diagram
• Additional information on the transaction agreements including all schedules, as well as key employee agreements and a narrative timetable for the transaction
• Other agreements between the parties that are in effect or entered into within the year prior to the date of the filing, including licensing, supply, non-compete, non-solicit, and purchasing agreements

3. Competition and Overlaps

The changes here are by far the most significant in requiring additional information.

Documents

• Expansion of Item 4(c) to include documents prepared by or for the leader(s) of the deal team not just officers or directors
• A similar expansion of Item 4(d) to include financial models, even if the model does not contain stated assumptions
• Submission of drafts, which are not required under the current rules. The Commission notes that “[i]n some cases, it appears that the draft documents have been edited to remove candid assessments of factors relevant to competition prior to circulation to officers or directors. In others, the dates of the document suggest that otherwise responsive drafts were not finalized or shared with officers or directors until after making an HSR filing.” The Commission recognizes the burden and suggests as an alternative the filing parties collect drafts but submit them within 48 hours only if requested.
• Submission of certain high-level strategic business documents created in the ordinary course if those documents were shared with a chief executive or the chief executive’s reports in relation to the transaction
• An organization chart that would reflect the position held by each author and the recipients of privileged documents and additional information on authors of third party documents. The Commission also proposes requiring filers to identify the individuals searched for responsive documents.

Competition Analysis

This section requires a narrative section, akin to what the EU requires in its filing submissions.

• Horizontal overlap narrative: This would require an explanation of the products and services as they are referred to in the ordinary course and identification of “each current or known planned product or service that competes with (or could compete with) a current or known planned product of the other filer. For each such overlap, the form would require 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.
• Supply relationship narrative: This would require information for related sales and purchases between the filing persons or with other companies that use the filing person’s products, services, or assets to compete with the other filing person, including supply agreements and contact information.
• Labor markets information: The form will seek significant information on employees, including information reported using a classification system based on Bureau of Labor Statistics SOC codes and commuting zones based on the Department of Agriculture ERS system, and worker and workplace safety information.

NAICS Codes

• The rule proposes to continue to request NAICS codes but that they be reported on a descriptive basis (and in revenue buckets rather than with specific revenue amounts), reported for certain pipeline or upcoming products and organized differently. The form would no longer require NAPCS codes.

Controlled Entity Overlaps

• This section would require (1) the names under which entities have done business within the last three years; (2) the filing person to identify the overlapping entity within its own person (not the other person); (3) updating the NAICS codes that require geographic reporting at the street address level; (4) identification of locations of franchisees for certain codes; and (5) provision of geolocation data.

Minority-Held Entity Overlaps

• The form would eliminate the option to identify all minority-held companies and require instead identification of only those which derive revenue in the same NAICS codes or have operations in the same industry as the other filing person.

Prior Acquisitions

• The rule proposes to expand the identification of prior acquisitions. It will require prior acquisition information from both filers going forward, not just the acquiring person. The rules would expand the time period from five years to 10 years, eliminate the US$10 million in “total assets or revenue” threshold for reporting prior acquisitions, and include identification of transactions involving substantially all of the assets of a business.

4. Additional Information

The rules also would require submission of:

• Subsidies from foreign entities or governments of concern, countervailing duties, and jurisdictions conducting investigations of duties, pursuant to Congress’ directive
• Information on existing or pending defense or intelligence contracts
• Identification of communications and messaging systems
• Information on other jurisdictions that are investigating the transaction as well as a voluntary “check-the-box” to allow waivers with foreign jurisdictions

5. Miscellaneous Other Changes

Other changes include:

• Requiring entities that are both acquired and acquiring entities to file separate forms
• Requiring draft agreements or detailed term sheets for filers that have not executed a definitive agreement; this may delay a filing until the point at which the transaction is more certain and the specifics are laid out in more detail
• Requiring verbatim English translations of documents with both the original and the English translation being submitted. The parties may choose the method, but the translations must be “understandable, accurate, and complete.”
• For “updated” filings, i.e., filings after an acquiror voluntarily withdraws and refiles its HSR form, the Commission proposes no longer requiring updated financial information under 4(a) and 4(b), continuing to receive updated 4(c) and 4(d) information, and adding a requirement for updated transaction agreements and updated information about subsidies from foreign entities.
• Requiring a certification that the filer has taken steps to prevent the destruction of documents and information

These changes will substantially increase the burden on filers, particularly for the first filing a party makes after the rules are implemented. They will delay the time in which parties can make HSR filings in many cases, particularly in situations where the parties are planning to file on a letter of intent (LOI) because the bare-bones LOIs on which parties previously filed will not be accepted. This additional information will likely also lead to staff asking additional questions during the initial waiting period, again increasing costs and burdens and making it more likely parties will have to pull-and-refile.

Substantively, asking for information on officers and directors may cause the agencies to open more investigations into interlocking directorates, while seeking information on non-competes and non-solicits will also spawn non-merger investigations. The requirement to provide information on prior relationships among the parties may invite scrutiny into those agreements. Whether the additional information will lead to more second requests or more investigations and litigation than would have occurred if the old form remained in effect is more difficult to predict.

We recommend that companies that are likely to undertake transactions within the next year begin to organize and collect the required information as it is likely that the Commission will implement these rules in substantially their current form. We would be pleased to assist clients in these efforts.

© Arnold & Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.