This week, the US Federal Trade Commission (FTC) announced two significant changes to the US merger review process: (1) the suspension of the practice of early termination of the typical 30-day waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (HSR), and (2) a decrease in the HSR notification thresholds for 2021.
These changes will have an impact on both deal timing and to the number of transactions that trigger the HSR thresholds. We discuss each announcement in more detail below.
Suspension of the Practice of Early Termination
The US antitrust agencies – the FTC and the Antitrust Division of the US Department of Justice (DOJ) – have the discretion to terminate the HSR waiting period early for transactions that do not raise competitive concerns. However, on February 4, the FTC, over the objection of the two Republican Commissioners, announced it was suspending the practice of granting early termination of the 30-day HSR review period in order to allow the agency to review the processes and procedures used to grant early termination to HSR filings. Early termination, if granted, typically speeds up an initial review by two weeks. The FTC noted that it “anticipate[s] that this temporary suspension will be brief,” but did not provide a clear timeline for when it aims to resume granting early termination to applicable transactions.
According to the agency’s press release, this decision was motivated by the “unprecedented volume of HSR filings for the start of a fiscal year” as well as the transition to the new Administration. In light of these factors, Acting Chairwoman of the FTC, Rebecca Kelly Slaughter, stated that the agencies need all 30 days to review transactions: “Given the confluence of an historically unprecedented volume of filings during a leadership transition amid a pandemic, we will presume we need those 30 days to ensure we are doing right by competition and consumers.”
As noted in the Freshfields M&A monitor last December, the second half of 2020 saw the biggest spike in M&A value on record relative to the first half of 2020. Although it is understandable that the agencies are struggling to keep up with the large number of pre-merger notifications given the spike in M&A activity – all in the middle of a pandemic that requires staff to telework and in the midst of a pending change of agency leadership and staff ushered in by the new Administration – the immediate suspension of early termination will have an effect on the large number of simple transactions that raise no substantive issues for which early termination is requested every year.
Traditionally, simple transactions represent the majority of the transactions reported to the agency in a given year. According to the most recent FTC Annual Report, in FY2019, early termination was requested in more than 70% of the transactions reported and was also granted in more than 70% of the cases in which it was requested.
This is not the first time the agencies have suspended the practice of early termination. However, as Commissioners Phillips and Wilson point out in their dissent, the agencies have suspended granting early termination “only when they lacked the capacity to review transactions,” which have arisen in two circumstances: (1) at the beginning of the COVID-19 pandemic in March 2020, when the agencies suspended the practice for two weeks in order to transition to an e-filing system; and (2) during government shutdowns. According to the dissent: “There is no similar limitation here, and thus no reason to interfere with the functioning of the capital markets and the efficient allocation of resources.”
Going forward, merging parties must account for the full waiting period in planning for closing and ensure they file HSR in time to meet any closing deadlines they set.
Size-of-Transaction Threshold Decreased to $92 Million for Merger Transactions Closing on or After March 4, 2021
The FTC announced a second important change this week. On February 2, the FTC published a Federal Register notice adjusting the pre-merger monetary thresholds for all transactions closing on or after March 4, 2021. For the first time since the 2008 recession, the HSR thresholds will decline, with the size-of-transaction threshold dropping from $94 million to $92 million. The other HSR thresholds are also declining, as shown in the table below.
|Original HSR Threshold||Current Threshold||Threshold in Effect as of March 4, 2021|
|$10 million||$18.8 million||$18.4 million|
|$50 million||$94 million||$92 million|
|$100 million||$188 million||$184 million|
|$200 million||$376 million||$368 million|
|$500 million||$940.1 million||$919.9 million|
These changes arise as a result of amendments to the HSR Act introduced in 2000, which require the FTC to publish adjustments to the HSR’s jurisdictional and filing fee thresholds in the Federal Register, annually for each fiscal year beginning on September 30, based on the change in the gross national product. Due to the pandemic and associated recession, the gross national product declined in 2021.
As the correct threshold for determining the reportability of a transaction is the one in effect at the time of closing, the decline in the thresholds will require counsel for merging parties to reassess reportability for transactions with a size of transaction below $94 million that have not closed before March 4. This could impact transactions that were close to the prior thresholds but did not meet them. To the extent the transaction triggers the thresholds and no exemption is available, the merging parties will need to account for the time to prepare their HSR filings and to allow the full HSR waiting period to run in preparing their timelines for closing.
Not certain is how many additional transactions must be notified under the lower HSR thresholds. However, what is clear is that any additional HSR filings as a result of the lower thresholds will only compound the burdens the US antitrust agencies are currently facing and that led to the agencies temporarily suspending the practice of early termination.