On June 27, 2023, the U.S. Federal Trade Commission (FTC) announced the first significant overhaul to the HSR Act filing form (HSR Filing) and rules (HSR Rules) since the HSR Act was promulgated in 1978. The proposed changes impact nearly every component of the HSR Filing and reflect the current enforcement priorities of the FTC and Antitrust Division of U.S. Department of Justice (DOJ) (the Agencies)—i.e., focus on tech/digital platforms, potential/nascent competition, private equity, and labor markets. The rules would align certain aspects of the HSR Form more closely with requests from jurisdictions outside the United States, while also expanding document requests in unique ways. If enacted, the proposed changes will significantly impact the time, cost, and burden of submitting an HSR Filing, and to the extent multiple jurisdictions are reviewing transactions, heighten the need for merging parties to have a coordinated global approach.
- The time, cost, and burden on all filing parties would increase significantly.
- Expanded disclosures and new narrative and data requests would create headaches for all companies, but private equity/financial sponsor clients, in particular.
- New HSR Rules highlight the need to have consistent antitrust compliance training, particularly regarding document creation to ensure that documents accurately reflect competitive dynamics and deal rationale.
- Disclosures of subsidies from certain foreign governments would target investments from countries such as China, Russia, North Korea, and Iran.
- New HSR Rules could impose electronic discovery burdens—i.e., litigation hold-type obligations—on merging parties irrespective of the competitive implications or issues raised by a transaction.
- Inability to rely on published HSR guidance will lead to uncertainty at the outset.
- Significant overlap with ex-U.S. merger clearance processes, further increasing the importance of a coordinated global approach to merger control filings.
- But when all is said and done, will enforcement increase? Potentially, but at a minimum timelines for review could increase by 2–3 months and the new HSR Rules reinforce the need for careful analysis of antitrust risk and strategic consideration of antitrust risk mitigation provisions in deal documents.
Expanded Corporate and Transaction Information
The new HSR Rules would significantly expand the existing corporate and transaction disclosures in the HSR Form. We call out key new or expanded requests below:
- Additional information regarding certain minority LPs.
- Officer/director relationships, including board observer roles.
- Information about entities that may exert influence over the filing party, including entities that provide (or provided) credit to the acquiring party, that hold non-voting securities comprising greater than 10% of the acquiring party, that have board membership (or observer status) or the right to appoint a board member (or observer), and that have an agreement to directly or indirectly manage or control the acquiring party.
- Disclosures of prior acquisitions within the past 10 years (up from 5 in the current HSR Form) now for both acquiring and acquired parties.
The proposed HSR Rules also would require the parties to provide all agreements, exhibits, and schedules that relate to the transaction, regardless of whether the parties themselves are signatories (the current HSR requirement is more limited), as well as any agreements between the parties up to one year before the HSR Filing. The proposed HSR Rules also would require parties to provide information about certain U.S. Department of Defense and intelligence community procurement contracts.
Expanded Document Requirements May Impose Compliance Burdens
The new rules would expand the existing HSR document production requirements by:
- Increasing the universe of company employees who should be searched for responsive documents from Officers and Directors to include the “supervisory team lead(s).”
- Requiring the production of ordinary course strategic business documents that discuss certain competition topics that were provided to the CEO or people who report to the CEO and produced within one year of the HSR Filing.
- Requiring production of all drafts of responsive documents provided to any team lead, officer, or director.
A search for draft documents also may require forensic collection (i.e., electronic discovery) to ensure a thorough search for all drafts unless steps are taken up front to ensure that drafts are stored in a central location.
Narratives Reflect EU Inspiration
Taking a page from EU filing requirements, the newly devised narrative sections would require in-depth information about current and planned products and services. For any “overlapping” products and services, additional information regarding sales, customer contacts, licensing arrangements, and non-compete agreements would be required. There is an additional proposed narrative section regarding supply relationships.
New Labor Market Data Requests
The new labor market rules would require detailed data on a filing party’s workers based on certain classification codes. Identifying and collecting this data and categorizing it by code may be a challenge, particularly for large companies and private equity/financial sponsor clients.
Foreign Subsidy Disclosures
The Merger Filing Fee Modernization Act that was signed into law in December 2022 included a provision that required the disclosure of subsidies from foreign states that are of strategic concern to the United States. The proposed rule changes here implement this statute—i.e., that certain subsidies from China, Russia, Iran, or North Korea must be disclosed.
HSR and Litigation Holds
The proposed HSR Rules also would require parties to provide a list of all communication and messaging systems used including, specifically, ephemeral messaging systems. The Agencies’ stated rationale is that parties presently are not expanding document holds to include these types of communication systems. To address this, the FTC and DOJ are proposing to require parties to sign a certification stating that they have taken the necessary steps to prevent the destruction of documents and information relating to the transaction, including, for example, suspension of auto-delete policies. Effectively, this certification would require a filing party to institute a litigation hold on anyone whose files were searched for the filing process until the HSR waiting period ends.
Proposed Changes Reflect Agencies’ Enforcement Agenda
The changes track many of the issues that FTC and DOJ political leadership have been focused on in recent years. The proposal contains, for example, a discussion of how technology and digital platform markets have altered the competitive landscape and required enforcers to consider “premerger relationships [that are not] clearly horizontal or vertical” and firms “in related business lines [where there is] potential for direct competition in the future.” To this end, many of the new and expanded rules seek information about competition as it exists today or how parties believe it may exist in the future.
The proposed HSR Rules also seek information regarding board appointments, including board observer roles, explicitly stating that this information is sought to identify potential Clayton Act Section 8 violations relating to board interlocks—a recent focus for the Agencies’ enforcement efforts. Other proposed changes specifically target private equity entities, such as seeking more information about minority investors or expanding the prior acquisitions rule (to get more information about so-called “roll-up” deals). Finally, adding an entire section requiring detailed labor market data highlights the continued focus on employee competition issues.
What is next?
- Will the new HSR Rules be implemented? Likely yes. Based on the aggressiveness of current FTC political leadership, we can expect the FTC to adopt as many of the proposed new rules as possible, amending only those rules that FTC leadership thinks could be subject to a legal challenge.
- When will the changes be implemented? The notice/comment period will end on Monday, August 28, 2023, but it could be extended an additional 30 days to Wednesday, September 27, 2023. After that, the FTC will need time to review and respond to the comments. The earliest final HSR Rules will be published likely is early 2024. However, while the changes are not immediate, companies that make multiple filings can start preparing now so as to efficiently navigate the more complex regime.
- Will this lead to more enforcement? The Agencies have made clear that increased antitrust enforcement is a priority, and this potentially is another tool in the toolkit. But undoubtedly this will result in longer reviews (e.g., more questions and potentially more instances in which parties decide to pull-and-refile).