Federal Trade Commission Issues Final HSR Rules

After more than a year, the Federal Trade Commission (FTC or the Commission) issued the revised Hart-Scott-Rodino (HSR) rules. The Commission first issued its draft rules on June 29, 2023. Those rules were roundly criticized as unduly burdensome, particularly for the vast majority of transactions that raise no concerns. The Final Rules will become effective 90 days after they are published in the Federal Register.

The majority statement focuses on several aspects of the rule. First, they note that the additional information will help shed light on complex and opaque entities, including private equity and minority holders, provide information that will allow the Commission to focus on vertical and other non-horizontal mergers, reveal areas of future competition and emerging rivals, and identify a greater range of prior acquisitions.

The revised rules still add to the burden of preparing an HSR form, but are considerably scaled back. It appears that the Republican Commissioners pushed hard to have certain proposals excluded from the Final Rules in exchange for their vote in support for the rules, even though they are not fully on board with all the changes,¹ and the Democratic majority was willing to concede certain aspects to issue the Final Rules in a unanimous vote.

Along with the Final Rules, the Commission also announced the return of early termination once the Final Rules are effective, although it is not clear the extent to which it will be granted. In her statement,² Chair Khan noted that:

The Commission initially suspended early termination due to a historic volume of filings amidst the COVID-19 pandemic. But a revisiting of the FTC’s early termination policy was overdue. Data reveal that permissively granting early termination led to the consummation of some deals that resulted in significant harm. Moreover, the law makes clear that the granting of early termination is purely a discretionary function. Merging parties are not entitled to early termination, and I question the wisdom of using agency resources on a discretionary function while resource constraints impede our ability to fully execute on our mandatory functions. Because the Final Rule will provide the agencies with additional information necessary to probe the competitive risk that a transaction may pose, we will be better positioned to determine the right set of policies and procedures around early termination, including which subset of deals may receive it and under what circumstances.

Finally, the Commission announced that it is launching a new online portal to allow the public to submit comments directly on mergers that may threaten competition.

What the Final Rules Add to the Existing Requirements

The Final Rules, described generally below, impose obligations on filing parties that go beyond the rules currently in force. A careful reading of the form and instructions will be required to determine what specific information must be reported in each filing.

• Documents

• Transaction-related documents. In addition to the existing requirement of documents related to certain deal-related topics by or for officers and directors, the new rule requires documents prepared by or for a single supervisory deal team lead, identified by the party, who is not an officer or director. Importantly, as discussed below, the Final Rules do not require the inclusion of drafts of such documents.
• Ordinary course documents. Regularly prepared plans and reports provided to the chief executive officer for both the acquiring and acquired entities or any entity those companies control that analyze market shares, competition, competitors, or markets pertaining to any overlap product or service, including those under development that the filer believes may compete with existing or overlap products of the other filer, must be submitted. The Commission believes this will better allow them to investigate both actual and potential competition issues.

• Relationships Between the Parties

• Overlap products and services. The Final Rules require brief descriptions of how the products and services of the companies overlap and how the parties compete. This requirement was scaled back to mandate only a brief description rather than a detailed narrative, and is limited to a business assessment rather than an antitrust analysis.
• Supply relationships. The Final Rules add fairly extensive requests designed to determine whether a transaction could pose vertical concerns. The revised form requires identification of supply or purchase agreements between the parties or between each of the parties and the other’s competitors. It then requires the sales volume and the top 10 customers or suppliers that use that product or service to compete with the other party’s products or services. The Final Rules, however, do not require disclosure of contact information for individuals employed by customers or suppliers as originally proposed.
• Other agreements between the parties. The Final Rules require that the parties identify, by filling in a chart, the types of relationships they have, e.g., licensing, non-compete, non-solicit, or lease agreements. It does not otherwise require a description of those agreements or a copy of those agreements.

• Information on the Parties

• Entity, structure issues. The revised form requires identification of limited partners who have management rights; description of entity, structures, and, to the extent they already exist, organizational charts for funds and master limited partners; and a transaction diagram, also to the extent it was previously prepared.
• Officers and directors. The Final Rules require, for all entities within the acquiring person responsible for the development of marketing or sales of overlap products or services, information on officers or directors.
• Defense or intelligence contracts. The Final Rules require information relating to (1) pending requests for proposals from the Department of Defense or intelligence community and (2) awarded procurement contracts valued at $100 million or more if there is an overlap or supply arrangement between the parties.
• Transaction specific information.

• The Final Rules require a description of the transaction rationale, as well as identification of documents provided with the filing that discuss the stated rationale.
• The Final Rules require a draft agreement, term sheet, letter of intent, and related agreements for filings made on a non-definitive agreement that provides sufficient detail for the agencies to evaluate the transaction that the parties intend to consummate.
• A transaction diagram must be provided if one has previously been prepared.

• Reporting of subsidies from foreign entities of concern. Providing information on this issue was mandated by Congress.

• NAICS revenue reporting. Among the changes are that (1) revenue will now be reported in ranges, not as precise dollar figures; (2) filing parties must identify the operating entities that derive revenue in each NAICS codes; (3) the 2022 version of NAICS codes will be used as opposed to the 2017 version; and (4) the use of NAPCS codes for manufacturing revenue will no longer be required.

• Prior acquisitions. This requirement is limited to listing prior acquisitions to five years (instead of the proposed 10) and requires this information only for prior acquisitions where the target had net sales or total assets greater than $10 million (rather than no floor). The requirement applies to both the acquiring and acquired parties and includes acquisitions of substantially all the assets of the business.

• Miscellaneous

• Translation of foreign documents is now required as mandated by Congress.
• With regard to potential service by an individual on competing boards, for acquiring persons, the Final Rules will require disclosure of the identities of certain officers and directors who have served for three months before filing that also serve as an officer or director of another entity that derives revenue in overlapping products.
• The revised form requires mandatory identification of filings related to the transaction in foreign jurisdictions, and allows filers to voluntarily check boxes to permit disclosures to state attorneys general and international enforcers.

Many of the new requirements are not required for (1) transactions where there is no horizontal overlap or supply arrangement, (2) “Select 801.30” transactions, which are acquisitions of third parties’ voting securities where the acquiror does not gain control, and (3) executive compensation agreements.

What the Rules Do Not Include

Labor information: Perhaps the most notable exclusion is the requirement to provide detailed classification of the five largest categories of employees with geographic information and safety information on employees and drafts of transaction-related documents. This would have resulted in significant burden.

Drafts of Transaction-Related Documents: Another proposal that raised significant concern was the proposal that filers provide drafts of transaction-related documents. This, fortunately, has not been included in the Final Rules. Of course, the FTC and Department of Justice staff can request these documents voluntarily during an initial waiting period and such documents will be responsive to a Second Request.

Miscellaneous: Other proposals that were rejected include a discussion of the deal, timeline, certain interest holders who insert influence, organizational charts of authors and recipients of submitted documents, and additional documents related to financial projections concerning synergies and efficiencies, among others.

Takeaways

The Final Rules reflect considerable compromise. The drafts cut back on information relating to issues the Democratic Commissioners have focused on, most notably labor issues. In her statement, Commissioner Holyoak takes pains to note her skepticism about some of the Commission’s focus. She noted that requesting labor information was “a solution in search of a nonexistent problem,” pointing to the lack of any standalone labor challenge to a transaction. She also noted that requiring certain information (e.g., on non-reportable transactions) should not be viewed as a license to analyze all non-reportable transactions or other allegedly problematic conduct divorced from the filed-for transaction. Of course, nothing prevents the Commission from using information in these filings to launch new investigations into past transactions or conduct as they have done for decades.

However, despite the exclusion of some of the more burdensome information that would have been difficult to pull together for every deal, companies should begin thinking ahead about how to pull together the information they will need for filings. It will be important, for instance, for companies to determine, at the outset of a transaction, the one individual who will serve as the supervisory deal lead so that individual’s documents can be identified and collected when the time comes. It will also be important to understand in advance the universe of relationships between the merging parties so that a description of any overlaps, identification of agreements between them, and the like can be quickly gathered. Finally, deal agreements often require HSR filings to be made within 10 days; that period of time may be aggressive when parties are first starting to put together forms under the Final Rules.

© Arnold & Porter Kaye Scholer LLP 2024 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.