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The Federal Trade Commission is overhauling the antitrust requirements enshrined in the US’s merger…
The Federal Trade Commission is overhauling the antitrust requirements enshrined in the US’s merger control rules, adding several more layers of admin to the M&A process.
In a move that heralds the most substantial change to US antitrust regulations in more than four decades, the Federal Trade Commission (FTC), with support from the Department of Justice (DoJ), has unanimously approved an overhaul of the Hart-Scott-Rodino (HSR) Act rules which, since 1978, have required companies planning certain mergers or acquisitions (M&A) to notify federal regulators and wait for approval before proceeding. The latest reforms will impose additional reporting obligations on merging parties and will be implemented in January 2025, although this date could well shift if, as expected, businesses challenge the new rules in court.
Although the FTC has rowed back some of the more controversial aspects of the initial proposal from June 2023, the final rules still introduce substantial changes, increasing the amount of time, effort and expense involved in preparing HSR filings. According to the FTC’s own estimates, companies may now need on average an additional 68 hours to prepare their documentation, almost twice the time required under current regulations, with some complex deals potentially requiring up to 121 extra hours.
THE BACKGROUND
The move to reform HSR filing requirements stems from concerns raised by FTC Chair Lina Khan, who has argued that the existing pre-merger review process does not provide the FTC nor the DoJ with adequate information to thoroughly assess potential antitrust issues, leading to delays and inefficiencies. As a result, she pledged to revisit and update the HSR rules, which had remained largely unchanged since their introduction in the seventies.
Fifteen months prior to the announcement of the final rules, the FTC released a Notice of Proposed Rulemaking (NPRM) outlining the intended changes. The proposal drew widespread criticism from various stakeholders, who argued that the new rules would place unjustifiable burdens on filing parties and overstep the FTC’s statutory authority. Nonetheless, the reforms still impose significant new requirements on companies filing for HSR approval, even in cases where there is no immediate concern about potential antitrust issues.
While the changes were adopted unanimously by the FTC’s five commissioners, the accompanying statements from the two Republican commissioners, Melissa Holyoak and Andrew Ferguson, suggest that their votes were secured through negotiations that tempered the final scope of the changes. Their support may have also been contingent upon reinstating the early termination of the HSR waiting period, a process that allows quicker approval of straightforward deals without antitrust concerns – a policy suspended early in President Biden’s administration.
KEY CHANGES TO HSR REQUIREMENTS
The revised rules introduce a range of new and expanded requirements for companies involved in M&A transactions, with filings now required to include a detailed explanation of the rationale behind the proposed transaction. Additionally, companies must describe their principal products and services and identify any that overlap with those of the other party. For each overlap, the filer must provide sales figures, or a relevant metric such as projected revenue or user growth, along with information about the customer base for those products.
The new rules also mandate the disclosure of supply relationships between the merging parties, or between one party and the other’s competitors, for any product generating at least USD 10 million in annual sales. This provision is aimed at helping the FTC assess whether vertical integration resulting from the merger could lead to antitrust concerns, with companies also required to report sales figures for the top 10 customers of these products.
Companies will also be required to submit not just the principal transaction agreement, but also any side agreements, schedules, exhibits and non-compete agreements between the parties. If a letter of intent or term sheet is used instead of a definitive agreement, the parties must provide specific details about the contemplated transaction.
After the rules come into effect, the FTC will require filers to disclose any subsidies received from foreign governments or entities of concern, including China, Russia, North Korea and Iran. Companies must also disclose sensitive US government contracts with the Department of Defense or intelligence agencies, especially if such contracts relate to the competitive overlap of the parties.
GET THE LAWYERS INVOLVED
For businesses contemplating going down the M&A route, early engagement with antitrust counsel will be essential. Companies should allow for longer lead times and higher costs when preparing HSR filings and any internal teams involved in the transaction process, particularly those overseeing strategic assessments, will need to be aware of what is required of them.
It is undeniable that the FTC’s overhaul of HSR merger filing requirements represents a major shift in the US antitrust landscape, with companies involved in M&A transactions facing substantially increased reporting obligations and preparation times, making early and thorough planning critical to navigating the new regulatory environment.
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