Proposed Rule Would Enact Significant Substantive and Procedural Changes to Premerger Filings and Increase Time and Costs to Merging Parties
This week, the Federal Trade Commission announced a massive overhaul of the Hart-Scott-Rodino (HSR) Act’s rules and instructions for premerger filings to the U.S. antitrust agencies. The proposed rule represents the most significant revisions to the HSR process since its inception in 1976, vastly expanding the scope of information required to be submitted by parties. The proposed rules would impose significant additional substantive and procedural burdens, substantially increase the time and cost to prepare filings, and raise critical strategic questions for filing parties.
Most significantly, the revised filing requirements would include:
- Detailed narrative: A narrative description of the merging parties’ products and services, including additional information regarding each area of current or future competitive overlap. This includes extensive information regarding the parties’ revenues, customers, licensing arrangements, and non-compete agreements, among other things, and may require the parties to take a position on market definition and other issues before making their filing.
- Strategy and structure information: A narrative description of the strategic rationale for the transaction from the perspective of each party, supporting documents and diagrams of the deal structure, and charts explaining entities and individuals involved in the transaction.
- Draft and ordinary-course documents: Copies of drafts of documents (not just final or most-recent versions) prepared by and for officers, directors, and (new) supervisory deal team leads analyzing the transaction in terms of markets and competition, as well as certain ordinary-course documents, including strategic plans and annual and quarterly reports that discuss any overlapping businesses.
- Transaction documents: Submission of all transaction-specific agreements (not just purchase/merger and any non-compete agreement), including all schedules and agreements with employees, suppliers, and customers related to the transaction, and all agreements between any entity within the filer and any entity in the other party at the time of filing and within one year prior to filing.
- Employee information: Extensive information regarding the parties’ employees, including a breakdown of those employees by occupational classification and by geographic commuting zone and other information.
- Investors and influencers: Identification of significant minority shareholder information, and the identification of entities that or individuals who may have material influence on the management or operations of the acquiring person, including the identification of other entities for which those individuals currently serve or served for two years prior to filing, applying not only to current but also to prospective officers, directors, and board observers.
Through these changes, the Commission appears to be adopting an approach more closely resembling those taken by other global merger-control agencies, such as the European Commission, that routinely require merging parties to submit narratives and extensive information about their businesses, industry, and competition. But the proposed rulemaking goes even further and asks for information that no other antitrust agency has ever deemed necessary in routine merger filings. For example, the HSR filing would now require parties to provide latitude and longitudinal information for geographic locations of overlap facilities, and classify employees into occupational categories. While some of this information may be useful in a limited number of in-depth merger investigations, sourcing such information is likely to impose significant additional burden on merging parties while being of little, if any, benefit to the initial agency merger review in most notified transactions. If adopted, the proposed changes will significantly increase the burden and cost to filing parties, effectively imposing an additional tax on U.S. and foreign merger activity.
Furthermore, these changes will also have a significant impact on the timing of HSR filings and merger-review periods. Preparing these expanded HSR filings will require substantial additional time and resources (the FTC itself estimates that parties will need to spend an average of 107 more hours to prepare HSR filings, which could very well underestimate the burden involved). Additionally, the new rules prohibit filings based on a Letter of Intent or similar non-definitive document. Instead, parties must have more detailed transaction documents, such as a draft definitive agreement or term sheet containing “sufficient detail,” before filing their notification. As such, parties should plan for longer contractual periods between agreeing to deals in principle and filing their HSR notifications.
The Notice of Proposed Rulemaking will be published in the Federal Register, triggering a 60-day notice and comment period. Any final rule will be published after the close of that comment period and, potentially, revisions to the proposed rule. We anticipate that the proposed rule will generate significant comments by numerous industry participants and private parties. Crowell & Moring is closely following all developments on these issues and will provide further updates. Please reach out to your C&M contact for further information or if you wish to submit a public comment.
For further information, please contact:
Jeane A. Thomas, Partner, Crowell & Moring
jthomas@crowell.com
