Overview
On October 10, 2024, the Federal Trade Commission (“FTC”) released the final version of material changes to the submissions required under the Hart-Scott-Rodino Antitrust Improvements Act (“HSR”). The final rules (“Rules”),[1] first proposed in mid-2023, while scaling back several of the more aggressive original proposals, nevertheless represent significant changes to the HSR process. The FTC’s goals include enhancing the efficiency and effectiveness of premerger reviews while aligning those reviews with the objectives of the 2023 Merger Guidelines U.S. Department of Justice and the Federal Trade Commission.
What You Need to Know:
Some highlighted changes in the new world order for HSR Form filings are:
- The new HSR regime is likely to take effect in early 2025.[2] The new approach requires separate and different forms for buyers and sellers, with party-specific instructions accompanying each Form.
- The new approach will require descriptive narratives about the strategic rationale for the transaction, horizontal/competitive overlap and existing vertical supply relationships between the parties.
- The new rules will also require expanded disclosures of both transactional and ordinary course documents, and require identification of a “supervisory deal team lead” – who may or may not be an officer or director. This may require documentary disclosures beyond those historically required because they were created “by or for officers or directors” if the identified person is not an officer or director. In addition, ordinary course documents include reports regularly provided to the CEO about competition, competitors and market condition unrelated to any transaction.
- Draft transaction documents given to board members are treated as final versions of those documents in their hands and must be disclosed.
- Expanded disclosures of corporate and ownership structures, minority investors and information about officers and directors will be required.
Given the scope of the new requirements, the FTC’s Premerger Notification Office (PNO) plans to provide further compliance guidance in advance of the final rule’s effective date. This Alert highlights and summarizes certain aspects of the new requirements and provides several practice pointers to be kept in mind as a result of these changes.
Modernization of the Premerger Review Process
The changes seek to modernize the premerger review process to better address increasing deal sophistication, ever-more-complex deal structure and evolving market dynamics. The new requirements facilitate the detection and prevention of potentially anticompetitive combinations and mark the most comprehensive overhaul of the HSR process in over four decades. While the final rule is less burdensome than the original proposal, the FTC itself has estimated that it will increase the time spent on preparing filings by 68 hours on average. In deals where there are existing supply relationships and/or product overlaps between the parties, the FTC also notes that it might take up to 121 additional hours to compile and submit a compliant HSR Form, with the Acquiring Person bearing the larger portion of the increased time and associated costs.
Draft Agreements and Term Sheets
In deals where there is not yet an executed definitive transaction agreement, parties will be required to submit a draft agreement or term sheet detailing the terms of the transaction. In addition, if the executed agreement lacks specificity regarding the transaction’s scope, a supplemental document with adequate details must also be submitted. Acceptable supplemental documents can vary in form, provided they sufficiently outline key transaction terms, including, but not limited to:
- Identity of the parties
- Transaction structure and scope
- Purchase price calculation
- Estimated closing timeline
- Employee retention policies and post-closing governance
Submission Requirements for Acquiring and Acquired Persons
The changes introduce new, tailored HSR Forms and Instructions specifically for both the Acquiring and Acquired Persons. The FTC has amended 16 C.F.R. § 803.2(a) and deleted 16 C.F.R. § 803.2(b)(1)(v), requiring filing parties that act as both Acquiring and Acquired Persons to submit separate HSR Forms. The new Forms require production of a variety of additional information, most significantly information relating to competitive overlaps and existing supply and other contractual relationships between the Acquired and Acquiring Persons.
Acquired Persons have a lesser submission burden, as Acquiring Persons must submit information which is not similarly required of the Acquired Person:
- Identification of Minority Shareholders, other than those that will roll over to the Acquiring Person
- Ownership Structure Description and Chart
- Reporting of Officers and Directors
- Identification of International Antitrust Notifications
- Transaction Diagram
- Identification of Other Existing Agreements Between the Parties
Disclosure of Minority Investors
Minority investors holding five percent or more in various entities related to the Acquiring Person, including limited partnerships, must now be disclosed. This is intended to shed light on areas of potential antitrust concern. Additionally, identification of all entities positioned between the ultimate parent entity (“UPE”) and the Acquiring Entity, as well as minority investors with significant rights, will also be required.
Supervisory Deal Team Lead
One of the more significant additions to the HSR review process is a requirement that filers also submit transaction-related documents prepared by or for “supervisory deal team lead(s).” Depending on how parties run their deals internally, this requirement can create reporting requirements that go well beyond the submission of documents historically provided under Item 4(c) of the former HSR Form, i.e., those documents “prepared by or for officers or directors.”[3] As a practical matter, this is more than just a nuance in terms of how deals are run inside a buyer’s or seller’s operations, and there are new areas of care to be exercised by counsel to avoid inadvertent increases in documentary submissions.
“Supervisory deal team lead” has been defined as the individual who has primary responsibility for supervising the strategic assessment of the deal, and who would not otherwise qualify as a director or officer. In the situation where the only individuals supervising the strategic assessment of the deal are already either an officer or director, filers can state that this is the case and identify an officer or director as the supervisory deal team lead.
Document Preparation and Compliance
Filers must now submit documents prepared by third parties related to transactions, identifying individuals who supervised or for whom the documents were prepared, particularly in cases with NAICS overlaps. If filers cannot provide complete information, they must indicate available details and rationale for non-compliance, with allowances for estimates marked as such. Filing parties must also provide the “doing business as” names that entities with US operations in overlapping NAICS codes have used within the last three years.
Competitive Overlap & Supply Chain Disclosures
Filing parties must submit new, detailed information on competitive overlaps and supply relationships, including:
- Descriptions of competing products or services, supported by sales data for the most recent year.
- Identification of the top 10 customers in terms of units and sales for overlapping products.
- Information about products representing over $10 million in sales exchanged between the parties or related businesses, along with customer data for each party’s competitive inputs.
- R&D pipeline disclosures on potential competitive products.
- Global, not just U.S.-based, data on overlaps and relationships.
Given the sheer scope of potential disclosures and newly required submissions, counsel would be wise to engage their clients now to get a head start on having these kinds of information readily available, especially for clients very active in the acquisition space. Interestingly, the FTC has added to the Instructions a statement that the parties should not exchange information for the purpose of responding to the overlap or supply relationships descriptions. The FTC believes that the Acquiring and Acquired Persons should each respond on the basis of information known to them in the ordinary course of their business or through normal transaction diligence. The actual meaning in practice of this statement is uncertain. Your writer’s experience over the years has been that discussions between HSR counsel occur when issues are identified that will require dialogue and advocacy before the FTC about concerns relating to overlap and other competition matters. Therefore, how this admonition by the FTC will play out in practice remains to be seen.
Parties are also required to produce ordinary-course plans and reports that were provided to the chief executive officer (CEO) and board of directors of the target or Acquiring Entity (and entities they control or are controlled by) if those documents analyze market shares, competition, competitors, or markets relating to products or services for which the filing parties have current or potential future competitive overlap. In other words, this requirement goes beyond the prior requirement of such documents that were deal-specific in their analysis – given the FTC vision, potentially, into what parties were thinking about in terms of growth before any deal was pursued. These documents must include responsive documents that were created within one year prior to filing.
Ownership Structure and Organizational Charts
Acquiring Persons must provide a description of their ownership structure and, for a fund or master limited partnership UPE, an organizational chart to illustrate relationships among affiliated entities, but only if such chart already exists.
Identification of Officers and Directors
Acquiring Persons must now identify their officers and directors who have responsibility for developing, marketing, or selling products that overlap with those of the target entity or who have control over other relevant entities. This requirement only applies to entities directly involved in the acquisition or in the same industry as the target.
Description of Business Operations
Filers must provide a comprehensive overview of the Acquiring Entity’s business operations, but without needing to detail each entity involved. This change aims to streamline the information required while ensuring clarity regarding the acquirer’s business activities.
Strategic Rationale for Transactions
A very significant new requirement is that both parties to a deal will be required to articulate all strategic rationales for the transaction. This includes:
- Competition for existing or planned products or services.
- Expansion into new markets.
- Acquisition-related hiring, particularly of the target’s employees.
- Intellectual property acquisition and integration of assets.
Additionally, filers must specify which documents submitted with the HSR filing support their articulated strategic rationales. This new requirement will need the supervision of antitrust counsel because the narrative will effectively be a carefully written advocacy piece for the deal and why its rational does not present potentially anticompetitive concerns.
Deal Structure Diagram
For non-select 801.30 transactions, filers must provide a diagram of the deal structure. This must be accompanied by a chart explaining the relevant entities and individuals involved in the transaction, enhancing the FTC’s understanding of complex deals. While this is a new requirement, given the ever-increasing complexity of deal structures, most if not all HSR counsel already develop and work off of such diagrams for a variety of reasons, and many deals go through multiple iterations of diagrams as deal structures and things like tax matters are taken into account. Careful consideration will need to be given to what is created by counsel and the client, including what may be attorney work product and perhaps not subject to disclosure versus what must be disclosed.
Documentation Submission Requirements
Draft documents, which in today’s practice circulate at warp speed via email, text and other methods of distribution, create a very real and new practice-related concern. If a draft of a responsive deal document is sent to the board of directors, or even just one member of the board, it must be submitted with the HSR filing, regardless of whether the ultimate final version is also included. In other words, the fifth draft of a purchase agreement emailed to a Board member in a deal signed after the eighth draft was finalized must be produced because the fifth draft is treated as final in the hands of that director. It will allow the FTC to see how, if at all, a deal has morphed over time. Absent appropriate guidance and control of draft distribution, as currently written the new requirement is likely to sweep in a large number of additional documents, particularly given the common practice of including the CEO on the Board of Directors and the involvement of a supervisory deal team lead. Parties will be wise to follow the likely admonitions of their counsel to exercise extreme care in the distribution of draft deal documents to the Board, its members, and otherwise, throughout the process of a deal.
Disclosure of Prior Agreements
Acquiring Persons must disclose any contractual agreements between entities within the Acquiring Person and the Acquired Entity that are effective at the time of filing or within the prior year. The types of agreements specified include:
- Non-compete or non-solicitation agreements.
- Leases, licensing agreements, and supply agreements.
This aims to identify significant business relationships that may affect potential competition-related issues the deal may implicate.
Previous Acquisitions
The acquired entity must now report prior acquisitions going back five years including acquisitions of substantially all of the assets of a business which is now being treated as an acquisition that must be disclosed.
Additionally, if the transaction has related HSR filings, the parties must identify the basis of the related filing (via checkbox), such as a backside transaction, joint venture, consolidation or other circumstances mandating the filing. The parties must provide the filer names, transaction numbers, or other information necessary to identify and connect the related filings.
Translation of Documents
Parties will now need to provide English-language translations of all foreign-language documents included with their filings. These translations will need to be readily understood, materially accurate, and complete. This is a departure from existing HSR filing rules, which required parties to provide translations only to the extent they already exist.
Conclusion
The new requirements are likely to produce significant changes in the management of deal process as it relates ultimately to constructing a compliant HSR Form filing. There are new points in the process of a deal which counsel and their clients must accomplish with a finer focus so as not to create an obligation to disclose items of no real competitive significance just because, for example, a draft was emailed to a board member in the middle of negotiations. In addition, the changes, given the kinds of information now being required as a part of the initial HSR filing, can be seen essentially as bringing aspects of what parties facing a “Second Request” into that very first step. Parties will be expected to explain deals in narrative and more complete ways, as to both structure and substance, to give the FTC greater insight into who the parties are, how and where they operate, whether they are already connected in commercially significant ways, and how a deal, if closed, may affect a relevant market going forward.
As the new HSR regime progresses to an effective date, Saul Ewing’s HSR team will be providing alerts concerning how the new requirements are or should be affecting the internal operations of client “development teams” and their daily work on pursuing potential mergers, acquisitions and other combinations.[4] And, as always, please feel free to contact your Saul Ewing counsel with questions and concerns as they arise.
[1] Fed. Trade Comm'n, Final Rule on Premerger Notification; Reporting and Waiting Period Requirements (Oct. 10, 2024), https://www.ftc.gov/system/files/ftc_gov/pdf/p110014hsrfinalrule.pdf.
[2] The Final Rules will take effect 90 days after publication in the Federal Register, which has not yet occurred.
[3] In fact the “Item #” approach to sections of the former HSR Form has been eliminated, and sections of the new Forms simply identify categories of information to be submitted in each section.
[4] As a first step in that direction, please see the attached Executive Summary, a one-sheet which further highlights the FTC’s new requirements.
EXECUTIVE SUMMARY
HSR FILINGS: NEW REQUIREMENTS AND
THINGS TO CONSIDER
- Filing on an LOI less likely – requires explanation and specifics on key deal terms
- Strategic Deal Rationale – careful narratives and antitrust advocacy regarding competition, expansion, hiring of target’s employees, IP acquisition and asset integration – and identify all documents supporting the rationale including with the filing.
- Parties’ Relationships – customer overlaps, supply/vertical relationship disclosures – sensitive information – regulator reactions?
- Disclosure of prior agreements between the parties – non-competes, non-solicitation, licensing
- Disclosure of top customers and suppliers – sensitive information – regulator reactions?
- Competing products or services? Describe.
- Sales between parties in excess of $10M? Disclose along with customer data for competitive inputs
- R&D pipeline disclosures for potentially competitive products – disclose.
- Global data on overlaps and relationships, not just U.S.
- Buyers must identify responsible officers and directors regarding overlapping products with target or control of other entities involved in the acquisition or same industry as target,
- Supervisory Deal Team Lead – must be identified; officer or director or not?
- Production of “Business Documents – not just the old 4(c) and 4(d) – includes things prepared by or for Supervisory Deal Team Lead and ordinary course plans, reports and strategic documents given to the CEO, whether or not deal related
- Drafts that go to the Board or any member thereof -- are considered final in their hands and must be produced whether an actual final executed document is submitted
- Disclosure of minority investors, funds, other vehicles of investment must be disclosed
- Seller must disclose its last five years of acquisitions
- Diagram of ownership structure required
- Deal diagrams explaining entities and individuals involved – submit with filing
- Third party documents relating to deal must be disclosed and explained as t by/for whom
- Interlocking directorate relationships must be disclosed
- Related HSR filings must be identified
- Foreign subsidies must be disclosed
- Must disclose and identify international antitrust filings
- Translations are required
