Final FTC Rule Enacts Fundamental Changes to HSR; Will Complicate Merger Filings
On October 10, 2024, the Federal Trade Commission (FTC) published its Final Rule enacting changes to the Hart-Scott-Rodino Act (HSR Act) premerger notification rules. The Final Rule will usher in the most significant changes to HSR reporting requirements in the program’s 45-year history.
The HSR Act requires parties to a merger or acquisition that meets certain dollar thresholds to file premerger notification reports with the FTC and the Department of Justice (DOJ) (the “Agencies”) and to wait statutorily prescribed periods before consummating the transaction.
The changes to the HSR rules do not alter substantive antitrust doctrine; in order to block a transaction, the government still must prove in court that a transaction is likely to result in a substantial lessening of competition. Nor does the Final Rule modify FTC and DOJ authority to issue Requests for Additional Documentary Information and Materials (Second Requests) or their scope. However, the changes will make the merger control process more burdensome to parties by significantly expanding the information that must be provided to the government in the HSR Form.
For example, the Final Rule will require parties to provide:
- Additional transaction-related documents and documents about the industry at issue, including competition therein
- Narrative descriptions about:
- Transaction rationale
- Products and services sold by each party, including any that overlap
- Top 10 customers for overlapping products or services
- Information about supply relationships between the parties
- Complete listings of the buyer’s officers, directors, and investors
The Final Rule will take effect 90 days after it is published in the Federal Register. For planning purposes, transacting parties should operate under the presumption that filings made in, and following, mid-January 2025 will need to comply with the Final Rule. In short, any filings made after the effective date will be under the new rule. (Practically, for deals in the pipeline around the time of the effective date, parties may want to consider filing under a letter of intent before the effective date to take advantage of the old rule.)
While it is possible that there will be attempts to delay or prevent the Final Rule from taking effect by challenging it in court, it is hard to predict what the outcome of any such challenge may be. Notably, the FTC voted unanimously to adopt the Final Rule and both Republican-appointed commissioners issued statements stressing how the Final Rule, which dropped many requirements of the proposed rule that were seen as particularly onerous, was “a lawful improvement over the status quo.”1
In addition to the changes to HSR filings, the FTC announced it will lift its suspension of early termination implemented in September 2020. The FTC and DOJ will again consider merging parties’ request to terminate the initial 30-day HSR waiting period.
Overview of Major Changes
The Final Rule will alter HSR filings but will not change the criteria that require notification of deals under the HSR Act. Parties should be aware that the Final Rule will affect all transactions reportable under the HSR Act, possibly in unanticipated ways. Once the Final Rule goes into effect, there will be a period of months or even years during which parties and the government will adjust to and clarify requirements. As a result, the timing of merger clearance will be much more uncertain in the immediate term. Planning and filing for premerger notification will similarly involve more work and effort than it currently does, as parties and counsel adapt their processes to the new rule and supply the additional required information.
Specifically, the following new requirements should be accounted for in any deal planning or scope work.
- Description of Overlap and Products Services
The Overlap Description must identify whether the merging parties compete with each other. This provides parties an opportunity to describe the competitive relationships, including whether overlaps identified by the Census Bureau NAICS codes may be flawed or misleading.
- Description of Supply Relationships (i.e., Vertical Relationships)
The Description must provide information on vertical markets including whether either party supplies, or is supplied by, the other transacting party or its competitors or whether the buyer has an existing contractual relationship with the seller.
- Ownership
The new rule has provisions that will affect certain types of transacting parties, including deals involving private equity.
For example, the new rule requires additional information regarding holdings by minority investors in both the acquiring entity and acquired entity. As in the past, the acquiring person (the ultimate parent of the acquiring entity) and acquiring entity each must provide the name, headquarters address, and percentage held by minority investors (investors holding 5% or more but less than 50% of the equity interests). Under the new rule, this same information also must be provided for any entity that directly or indirectly controls or is controlled by the acquiring entity (including the acquiring person), or that is created by the acquiring person to effectuate the transaction (each defined as a “covered entity”). For the acquired entity, while the current rule requires this information to be provided for minority investors only in the acquired entity itself, it now must be provided for a similarly defined group of covered entities.
Where a covered entity for the acquiring entity is a limited partnership, the Final Rule now requires, in addition to identifying the general partner, providing the percentage interest held by the general partner. For limited partners who hold a minority interest, the name, headquarters and percentage held must be provided only if they will have the right to serve as, nominate, veto or approve board members or individuals with similar responsibilities for a covered entity. A similar requirement applies where a covered entity for the acquired entity is a limited partnership.
- Deal Rationale
Merging parties must also submit a Transaction Rationale and identify documents included in the filing that relate to the Transaction Rationale. Buyers should avoid the temptation to describe the Transaction Rationale narrowly, as the DOJ or FTC may try to use that narrow rationale to limit the parties’ ability to raise efficiencies and other defenses later in the merger control process. The Final Rule provides, however, that it should be sufficient for sellers to provide “a brief description of the transaction rationale” that is “accurate and does not conflict without explanation with stated rationales in documents submitted with the HSR Filings.”3
- Transaction-Related Documents
The new rule expands the scope of documents responsive to Items 4(c) and 4(d), which ask for Transaction-Related Documents. Transacting parties must now produce information prepared for or by a team lead, who is defined to have “primary responsibility for the supervising strategic assessment of the deal, and who would not otherwise qualify as an officer or director.” 4
- Information on Previous 5 Years of Deals
The acquired entity must now report prior acquisitions going back five years. Additionally, acquisitions of substantially all of the assets of a business will now be treated as an acquisition that must be disclosed.
- Translations of Documents
Parties will be required to provide the Agencies access to translations of all documents submitted in a language other than English.
Key Differences Between Proposed Rule and Final Rule
The Final Rule varies in many ways from the proposed rule.
First, the Final Rule clarifies the proposed rule’s requirements for descriptions of Overlap Products and Services and Supply Relationships. The proposed rule appeared to require a detailed and potentially complex “narrative” on these topics. During the commenting period, many believed such a narrative would require the use of counsel or experts to write something akin to a white paper. In the Final Rule, the FTC clarified: “The Commission intends to collect factual information about overlaps and supply relationships via a written answer (as opposed to documents or data) but is not seeking opinions or arguments about what those facts should imply.” 5 The description will not require an opinion, story, or position.
Second, many of the proposed rules were rejected. Parties are not required to produce additional information on labor markets nor drafts of transaction-related documents outside of those provided to the board of directors.
Finally, many of the provisions adopted in the Final Rule are scaled down from what was originally proposed. As discussed above, parties have to submit additional information about prior deals in the past five years. The proposed rule would also have required parties to submit this information for the past 10 years. The proposed rule would have also required the production of transaction related documents to multiple Supervisory Deal Team Leads; the Final Rule only requires production of such documents for one person.
Impact on Deal Making
These changes will impact all deals subject to the HSR initial notification process. However, the Final Rule does not change which deals must be reported, which is determined by the size of the person and the size of the transaction tests.
Cost
The Final Rule estimates the new requirements will take an additional 68 hours to complete. The Commission estimates this will cost transacting parties just under $40,000. The Final Rule stressed compliance costs are likely to be highest for the first few deals but will decrease as parties and counsel become familiar with the new requirements. To ease the transition, the FTC has said it is “working to provide future compliance guidance in advance of the final rule’s effective date.”6
In the Final Rule, the Commission emphasized how collecting the additional information from transacting parties will help alleviate the burden on third parties, who the Agencies currently rely on to fill in gaps of information.
Time
In the Final Rule, the FTC asserts most of the additional information required by the Final Rule will be readily available or collected as part of each filer’s due diligence efforts.
However, putting the additional information into a form that is acceptable to the Agencies, especially for the descriptions, may take some time and may result in the Agencies rejecting an initial filing or otherwise requiring clarifications or additional detail. Parties should anticipate HSR filings to require additional time and money.
Deals Receiving Additional Scrutiny
The changes to the HSR rule will enhance the Agencies’ ability to review and block deals that may have impacts on vertical relationships. Over the past few years, the Agencies have increased their focus on vertical relationships. The importance of such deals was emphasized by both Chair Khan’s and Commissioner Ferguson’s statements on the Final Rule.
What Happens Next
The new rule for HSR filings is not immediately effective. Assuming the rule is not enjoined, it will go into effect 90 days from publication in the Federal Register, which should occur shortly and will result in an effective date of mid-January 2025.
It is possible that the Final Rule will be challenged either for exceeding the statutory authority of the FTC or violating the Administrative Procedures Act by differing significantly from the proposed rule.
It is hard to predict how any future lawsuits will develop. Transacting parties should operate under a presumption that filings made 90 days after the Final Rule is published in the Federal Register will need to comply with the Final Rule. This will help ensure a timely filing.
1 Concurring Statement of Commissioner Andrew N. Ferguson in the Matter of Amendments to the Premerger Notification and Report Form and Instructions, and the Hart-Scott-Rodino Rule 16 C.F.R.. Parts 801 and 803 (Oct. 10, 2024) https://www.ftc.gov/system/files/ftc_gov/pdf/ferguson-final-hsr-rule-statement.pdf
2 FTC Finalizes Changes to Premerger Notification Form, Fed. Trade Comm’n (Oct. 10, 2024) https://www.ftc.gov/news-events/news/press-releases/2024/10/ftc-finalizes-changes-premerger-notification-form (Hereinafter, Press Release)
3 Final Rule, Premerger Notification; Reporting and Waiting Period Requirements, Fed. Trade Comm’n, (Oct. 10, 2024) at 262, https://www.ftc.gov/system/files/ftc_gov/pdf/p110014hsrfinalrule.pdf (Hereinafter, Final Rule)
