New Hart-Scott-Rodino Proposal Signals Sea Change in U.S. Merger Review Process That Will Delay Transactions and Raise Costs
- The recent proposal would require significantly more information to be provided up front to the U.S. antitrust agencies.
- The new rules will likely take effect in Q4 2023 or Q1 2024.
- The final rules are expected to result in a complete overhaul of the premerger notification program that has been in place since 1978.
- If adopted, the average estimated time to prepare an HSR filing would increase “conservatively” to 144 hours, nearly four times the current estimate of 37 hours.
- Companies engaging in M&A will need to plan for longer time periods between signing and filing and between signing and closing.
- To reduce delays and manage costs, companies engaging in frequent M&A should develop internal systems to track prior acquisitions, board positions, strategic documents, and other information.
- Companies may be required to make fact-intensive, subjective judgments about market definition, potentially risking compliance allegations by the government.
On June 27, 2023, the U.S. Federal Trade Commission (“FTC”), with the concurrence of the Antitrust Division of the U.S. Department of Justice, announced proposed rules that, once implemented, are expected to result in dramatic changes to the Hart-Scott-Rodino (“HSR”) premerger notification program. The proposed rules are intended to replace the current HSR form, which the FTC says collects information that is “insufficient…to conduct an effective and efficient initial evaluation of a transaction’s likely competitive impact on all of those who might be affected, including consumers, small businesses, and workers.”
While certain aspects of the FTC’s proposal would streamline some of the information currently required to be disclosed by filing parties in the HSR form, the proposed changes as a whole are expected to vastly increase the amount of information and documents to be produced up front by filing parties. Thus, in the future, filing parties and their HSR counsel should anticipate devoting significantly more time and resources to ensure compliance with the new requirements once a final rulemaking is issued and comes into effect.
The HSR premerger notification program was first implemented in 1978 after passage of the HSR Act in 1976, providing the agencies the opportunity and a procedural mechanism to review the competitive implications of transactions meeting certain thresholds prior to consummation. Since then, the HSR form and instructions have been refined and amended from time to time, but the new proposal “marks the first time in 45 years that the agencies have undertaken a top-to-bottom review of the [HSR form] that businesses must fill out when pursuing an acquisition that must be notified in accordance with the HSR Act.”1
The FTC commissioners unanimously voted 3-to-0 to publish the changes in a Notice of Proposed Rulemaking for public comment. The window for the submission of public comments regarding the proposed HSR rules is currently open through August 28, 2023.
Doing Away With The Familiar Form
The agencies’ proposal indicates that the actual HSR Form itself will be replaced in its entirety by a new e-filing portal that is currently in development. Instead of the familiar numbered items, the agencies propose that the new electronic form be reorganized entirely into the following sections:
- Ultimate Parent Entity Information. Includes information about the filing party, contact information, and organizational structure.
- Transaction Information. Includes information about filing parties, filing fee, and relevant transaction details.
- Competition and Overlaps. Includes submission of: business documents, many of which are currently required to be disclosed under Items 4(c) and 4(d) of the HSR form (but with significant additions); narrative sections discussing horizontal overlaps, supply relationships, and employee information; revenue estimates by NAICS code; information identifying overlapping controlled entities and geographic locations; lists of overlapping minority investments; and disclosure of prior acquisitions. This will require fact-intensive, subjective judgments relating to market definition.
- Additional Information. Includes: disclosure, to the filing party’s knowledge and belief, of subsidies from foreign entities or governments “of concern”; identification of existing or pending defense or intelligence procurement contracts; listing of all communications systems or messaging applications on any device used by the acquiring or acquired person (as appropriate) that could be used to store or transmit information or documents related to its business operations; identification of other non-U.S. jurisdictions in which the transaction has already been notified (or will be notified) to competition authorities; and voluntary waivers permitting sharing of information with non-U.S. competition authorities or state attorneys general.
- Certification. Includes new language confirming that appropriate steps have been taken to prevent the destruction of documents and information related to the proposed transaction prior to the expiration of the waiting period.
- Affidavit. Parties submitting a letter of intent in lieu of a definitive agreement will also need to attest that the term sheet or draft agreement included with the filing describes with specificity the scope of the transaction that will be consummated.
Many Additions; A Few Subtractions
The agencies propose several clarifying or ministerial changes, as well as some new disclosure requirements for certain information and documents that should be still readily accessible to the filing party’s HSR counsel (such as the exhibits and schedules to definitive agreements, which are not currently required to be produced). However, several key proposals have the potential to be quite burdensome or otherwise concerning to filing parties, including the following:
- Foreign subsidy information. Unsurprisingly, the agencies’ proposal addresses the Congressional mandate contained in the Merger Filing Fee Modernization Act of 2022 to implement the collection of foreign subsidy information through HSR filings. The proposal would require the filing party to disclose, to its knowledge and belief, whether the acquiring or acquired person (as appropriate) has received within the two years prior to filing any subsidy (or commitment to provide a subsidy in the future) from any foreign entity of concern, or a government, or agency thereof, of a foreign country that is a covered nation, in each case as defined in the Infrastructure Investment and Jobs Act.2 In addition, for products produced in whole or in part in a covered nation, the agencies propose the disclosure of countervailing duties imposed on such products in any jurisdiction, and whether, to the filing party’s knowledge and belief, any such product is the subject of current investigation for countervailing duties in any jurisdiction.
- Detailed new narrative sections. Currently, the HSR form does not require lengthy narratives. Transaction descriptions tend not to be overly detailed, and there is no section that obligates the filing party to prepare detailed explanations to advance the agencies’ competitive assessment. The agencies propose new narrative sections explaining: (i) the filing party’s strategic rationale for the transaction together with cross-references to documentary attachments supporting such rationale; (ii) the timeline of key dates and closing conditions; (iii) horizontal overlaps, both current and planned, including, for each overlapping product or service, sales data (in dollars and units), customer information/contacts, and descriptions of any licensing, non-compete or non-solicitation agreements applicable to the employees or business units related to the product or service; and (iv) any existing or potential vertical or supply relationships between the acquiring and acquired persons. The agencies are seeking to require cross-references to ordinary-course documents in particular (see “Significantly expanded document requirements” below) to help ensure that the narrative is not “mere advocacy designed to portray a favorable view of the transaction.”
- Structure and organizational diagrams. The agencies propose that parties include a transaction structure diagram (such as a steps plan) in the transaction description, along with a chart explaining the entities involved. In addition, with respect to business documents being submitted with the HSR filing (such as documents currently required to be disclosed in Items 4(c) and 4(d) of the HSR form), the agencies propose that filing parties provide a chart reflecting the positions of the authors (and, in the case of privileged documents, the recipients).
- Agreements between the parties. In negotiated transactions, parties will still be required to furnish all copies of the agreements among the acquiring and acquired persons. However, this would be expanded to include not only all exhibits and schedules to the agreement(s), but also other agreements between the acquiring and acquired persons (e.g., licensing agreements, supply agreements, distribution agreements, etc.) in effect at the time of the filing or within one year prior to filing. Furthermore, although it will still be possible to file prior to the execution of a definitive agreement if there is a signed letter of intent, a term sheet or draft agreement reflecting adequate detail regarding the transaction would also need to be included.
- Significantly expanded document requirements. The new rules would significantly expand on the categories of documents currently required to be disclosed in Items 4(c) and 4(d) of the HSR form and resemble requests typically only seen in Requests for Additional Information (otherwise known as “Second Requests”). First, “supervisory deal team leads” would be included among the individuals required to be searched for responsive materials, which currently only includes officers and directors (and, in the case of unincorporated entities, individuals exercising similar functions) of one or more entities within the filing person. “A supervisory deal team lead need not have ultimate decision-making authority but would have the responsibility for preparing or supervising the assessment of the transaction and be involved in communicating with the individuals, such as officers or directors, that have the authority to authorize the transaction.” Second (but likely to be far more concerning), the agencies propose that all drafts of responsive documents that were provided to an officer, director or supervisory deal team lead also be produced with the HSR filing, even if final or subsequent versions are also being produced. The FTC has indicated that the proposal stems from a concern that “candid statements about the competitive impact” of transactions are being “sanitized” out of the final versions that are included in the parties’ initial filings. However, such a requirement, if implemented as proposed, could alone result in hundreds more documents being produced even in relatively straightforward filings, the content of which would be largely repetitive, particularly if supervisory deal leads are copied every time a draft is circulated (as may be the case depending on how deals are staffed). Earlier drafts could include outdated, misleading, or factually inaccurate information that has nothing to do with the competitive analysis. Finally, certain ordinary course materials that are currently outside the scope of Items 4(c) and 4(d) would need to be disclosed – these would include semi-annual and quarterly plans and reports, prepared or modified within one year prior to the filing, that discuss market shares, competition, competitors, or markets of any product or service provided by both the acquiring person and target business, if shared with a chief executive of an entity involved in the transaction, or certain individuals who report directly to a chief executive.
- Translation of foreign language documents. Any documents submitted with the HSR filing (such as transaction agreements, financial statements, and the types of documents currently required to be disclosed in Items 4(c) and 4(d)) that are in a foreign language would need to be accompanied by a verbatim English language translation. Given the length and complexity of documents typically submitted with HSR filings, this could add significant preparation time and expense for some filing parties.
- Expanded disclosure of minority shareholders in entities within the acquiring person. This would include 5% or greater shareholders or equity holders at various levels in the ownership chain between the acquiring entity and its ultimate parent entity including any entity to be formed in contemplation of, or for the purpose of effectuating, the transaction. Limited partners that hold a 5% or greater interests in a partnership would also be required to be disclosed (currently, only general partners need to be listed for partnerships). However, acquired persons would no longer be required to list 5% or greater minority equity holders of the target that will not continue to hold an interest in the target post-transaction.
- Disclosure of outside individuals and entities that may exert influence on the acquiring person. The acquiring person would need to identify individuals (other than employees of the acquiring person) or entities that, with respect to the acquiring entity or any entity it controls or is controlled by, that: (i) provided credit totaling 10% or more of the value of the entity in question; (ii) hold non-voting securities, options or warrants that amount to at least 10% of the value of the entity or could be converted to 10% or more of the voting securities or non-corporate interests of the entity; (iii) are board members/observers or have rights to nominate board members/observers, or (iv) have agreements to manage entities related to the transaction).
- Detailed information regarding all officers, directors or board observers to detect interlocking officers and directors. In order to allow the agencies to more easily assess existing, prior, or potential interlocking directorate issues, the agencies propose a new requirement to identify all officers, directors or board observers (or in the case of unincorporated entities, individuals exercising similar functions) of all entities within the acquiring person or target business. The filing party would also need to provide the names of other entities for which such individuals also serve (or served, within the prior two years) as an officer, director or board observer (or in the case of unincorporated entities, roles with similar functions). Prospective officers, directors, and board observers of the post-closing acquiring and acquired entities and any new entities being created in the context of the transaction would also need to be included. For filing parties with long lists of subsidiaries or multiple operating businesses, compiling and maintaining such information in the format to be prescribed by the FTC will likely take a significant amount of time.
- Information relating to labor markets. As part of the agencies’ increasing efforts to determine whether a proposed transaction may harm workers, the proposal introduces a new requirement for the acquiring person or target business (as appropriate) to list its five largest categories of workers by the relevant 6-digit Standard Occupational Classification code (including the number of employees in each code). In addition, for each of the 5 largest of these codes in which both the acquiring person and target business employ workers, a listing of the Economic Research Service Commuting Zones published by the U.S. Department of Agriculture from which such employees of the filing party commute and the total number of employees within each commuting zone. Finally, the agencies also propose that filing parties identify certain labor law violations during the five-year period prior to filing. The FTC justifies the need for such data by claiming that a history of labor law violations “may be indicative of a concentrated labor market where workers do not have the ability to easily find another job.”
- More geographic market information for certain overlapping NAICS codes. While many NAICS codes will still only require lists of states in which products are sold or operations are located, an increased number of NAICS codes would require the provision of full street-level addresses of each location that generated revenue within the overlap codes if there is an overlap. In addition, the agencies’ proposal would require that geolocation information (i.e., latitude and longitude) be provided when street-level information is required. Locations of franchisees will also be required to be included where applicable.
- Expanded disclosure regarding prior acquisitions in overlapping NAICS codes. This change would increase the lookback period from 5 years to 10 years. In addition, while only acquiring persons are currently required to report prior acquisitions in overlapping NAICS codes, under the proposed rules acquired persons would also need to report such prior acquisitions by the target business. Finally, under the proposed rules, the current de minimis exclusions that limit reporting to acquisitions of entities with annual net sales or total assets over $10 million, and asset acquisitions valued above the size-of-transaction threshold then in effect, would be eliminated except for acquisitions of distinct assets that did not constitute substantially all the assets of a business.
While the proposed rules generally ask for more information, the most significant proposed streamlining of information currently required to be reported in the HSR form relates to the requirement to report and segment revenues by NAICS industry codes and NAPCS product codes. Under the proposed rules, filing parties would no longer need to provide a granular breakout of the prior year’s revenues, but would instead estimate revenues within each applicable NAICS code at five levels: pre-revenue for products in development, less than $10 million, between $10 million and $100 million, between $100 million and $1 billion, and more than $1 billion. In addition, the proposal eliminates the need to separately report manufacturing revenues by 10-digit NAPCS product codes in its entirety. However, filing parties would need to indicate the operating entities that derive revenues in each NAICS code (which is not currently required). Furthermore, if more than one NAICS code could apply to the same activity, filing parties would need to indicate the potential alternative NAICS codes along with the estimated revenue.
Parties and Counsel Will Need to Adjust For Adequate Time to Prepare Filings
The HSR rulemaking will not be implemented until after public comments are addressed and a final rulemaking is published (which could be before the end of 2023). Even if the final rulemaking cuts back on some of the proposals made by the agencies, it is very likely that whatever changes are implemented will greatly increase the amount of information and documents to be gathered and disclosed up front with the initial HSR filings. After internally canvassing FTC staff who worked on HSR filings while in private practice, FTC has conservatively estimated that the proposal would cause the average preparation time for an HSR filing to increase by 107 hours to 144 hours, nearly four times the current estimate of 37 hours on average.
Certain filings involving complex transaction or ownership structures could take even more time – the FTC “conservatively assumes that 45% of the filings may require an additional 222 hours to prepare.” Companies that are frequently involved in M&A activity, such as private equity firms with numerous portfolio companies, may find themselves on the high end of the spectrum, as they manage gathering, maintaining, and updating detailed information on each operating business (e.g., foreign subsidies, creditors, labor data), even where there are few or no overlaps. Deals that end up taking longer to close may have greater uncertainty and much higher costs, in addition to the filing fees associated with each reportable transaction.
Practically speaking, this means that for most transactions, the typical 10 business days to file HSR post-signing will no longer be sufficient. The estimated average preparation time cited by FTC could translate to several more weeks, or even months in some cases. Transacting parties may need to extend the transaction timetable to allow for the necessary preparation time or commit resources to gathering information and documents for the HSR filing during the pre-signing period when key personnel are typically focused on negotiating the transaction. In order to facilitate the gathering of data and documents, filing parties may wish to consult with experienced HSR counsel regarding internal procedures that could be implemented in order to track the new requirements, such as collecting the NAICS codes for closed acquisitions on an ongoing basis (including those that are not HSR reportable), compiling a database of board of directors seats, and gathering relevant ordinary course documents in a centralized location.
Be Careful What You Wish For
After submitting HSR filings on a reportable transaction, the parties are required to observe a statutory waiting period, typically 30 days (15 days in the case of cash tender offers and certain bankruptcy transactions). During the initial review period, the agencies can determine whether the transaction warrants an in-depth investigation (which may include the issuance of a Second Request). Historically, Second Requests were only issued in a very small percentage of notified transactions (ranging from 1.9% to 3.7% during fiscal years 2012 through 2021). Up until the “temporary” suspension of the agencies’ granting of early termination of the statutory waiting period that started in February 2021 (and remains in effect today), early termination was requested in the majority of transactions and, when requested, early termination was granted most of the time.
It remains to be seen whether the agencies will be able to process all the information and documents that could be required under the HSR rules on a timely basis. While the agencies acknowledge that the “deadlines for conducting an initial review are extraordinarily short,” the changes purport to “improve the efficiency and effectiveness of that initial review by providing the information the Agencies need to identify during the initial 30-day waiting period any transaction that may pose competitive concerns and potentially narrow the scope of any investigation or reduce the need to conduct a more in-depth investigation of the proposed transaction.” The agencies already frequently make use of Voluntary Access Letters to request additional information from the parties to further their competitive assessment and filing parties frequently agree to a “pull-and-refile” if the staff needs more time to review a filing. It is quite possible that staff at the agencies will be overwhelmed by the added complexity of sifting through the additional information that will be required across the board from all filing parties, and the overall impact could make the program less efficient in the long run.
The press release announcing these changes and the published version of the notice of proposed rulemaking may be accessed by clicking on the links below.
 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. P239300, June 27, 2023, available at