FTC and DOJ Release Proposed Rulemaking to Update the HSR Form; Proposals Significantly Increase Required Disclosures

On June 27, 2023, the Federal Trade Commission (FTC), in coordination with the Department of Justice’s Antitrust Division (DOJ), issued a Notice of Proposed Rulemaking (NPRM) to amend the Hart-Scott-Rodino Act (HSR) Form and Instructions to require additional information in initial and refiled submissions.

The NPRM is subject to a 60-day public comment period; it remains to be seen when (and whether) all of the proposed changes will be implemented.

The NPRM proposes numerous additional requirements, including extensive information disclosures relating to areas traditionally governed by other federal agencies such as labor, defense, international trade and national security and would prove extremely burdensome and time-consuming for filers, although the Agencies expressed some willingness to balance parties’ burdens with information helpful to the Agencies’ review process in implementing amendments to the HSR Form. Some of the most significant changes to the HSR Form contemplated under the NPRM include:

• Disclosing “subsidies” received from a “foreign entity of concern,” including governments and agencies of foreign countries that are covered under 42 U.S.C. 18741(a)(5)(C) (e.g., foreign terrorist organizations, OFAC-designated nationals or blocked persons, persons or entities which have been convicted under espionage-related Acts);
• Requiring filers to report certain contracts with defense or intelligence agencies;
• Providing draft transaction agreements or term sheets that “provide sufficient detail about the scope of the entire transaction” if filing before there is a definitive executed agreement;
• Requiring a written narrative describing horizontal and vertical overlaps and other competitive dynamics in transactions;
• Expanding the scope of custodians subject to “Item 4” document disclosure to include supervisory deal team lead(s) that are not officers or directors;
• Requiring drafts of responsive Item 4 documents to be submitted if those drafts were provided to an officer, director or supervisory deal team lead;
• Requiring submissions of ordinary course strategic plan documents;
• Providing verbatim English-language translations for all foreign-language documents;
• Eliminating North American Product Classification System (NAPCS) revenue data allocation and instead implementing new data collection methods which include commuter zone and occupational classification data regarding the filing person’s employees;
• Requiring identification of any penalties or findings issued against the filer by the Department of Labor, National Labor Relations Board or OSHA during the previous five years;
• Requiring the reporting of North American Industry Classification System (NAICS) codes for certain pipeline or pre-revenue products and expanding overlap disclosures to include pre-revenue and pipeline products anticipated to have annual revenue totaling more than $1 million within the following two years;
• Expanding the description of the ultimate parent entity (UPE) and requiring, for each entity within the UPE, the identification of all current officers, directors (to facilitate the agencies’ assessment of Section 8 interlocking directorate issues^[1]), board observers or those who served in the past two years, and “other type of interest holders that may exert influence,” which could include certain creditors and option/warrant holders;
• Expanding disclosure of prior acquisitions from the past 5 years to the past 10 years, and eliminating any assets or revenue thresholds which may have limited prior disclosures (under the proposed rules acquisitions of new entrants, nascent competitors, or a pattern of small roll-ups would now be identified);
• Expanding disclosures of 5%+ minority holders; notably identifying (i) limited partners in partnerships rather than just the general partner as is currently required, and (ii) minority holders of any entities within the control chain of other acquiring entity rather than just the acquiring entity and its UPE; and
• Requiring transaction diagrams and organization structure charts.

The NPRM also contemplates requiring additional information regarding the terms of the transaction, investors and employees, additional transaction and strategic documents, as well as certain ordinary-course business documents that discuss competition in the markets that may be affected by the transaction, information about other reviewing jurisdictions, including a voluntary waiver option to permit cross-jurisdictional sharing of information submitted in the HSR process; and identification of any communication or messaging systems on any device used by the filer.

The Agencies explain that the proposed revisions will help fill key information gaps that the Agencies’ staff face when reviewing transactions in the initial 30-day waiting period– including insufficient information regarding transaction rationales and structure of investment vehicles. Further, the NPRM is intended to better capture information about key aspects of competition such as labor markets or R&D activity.^[2] 

The NPRM justifies many of these changes by explaining that the amendments will bring the U.S. process in line with the more comprehensive upfront approach in other jurisdictions, including the European Commission (EC). However, the EC only examines mergers when there is a change of control or when certain strategic governance rights are obtained, and only if the parties reach certain meaningful EU-turnover thresholds, which are significantly higher than the current HSR transaction value threshold of $111.4 million in 2023^[3]. Typically only approximately 300 mergers are notified to the EC every year,^[4] whereas in FY 2021 3,520 transactions^[5] (4,130 total filings) and in FY 2022 3,200 transactions^[6] were reported under the HSR Act, which captures minority, non-controlling interests and other competitively insignificant transactions such as executive compensation. Further, for transactions that are unlikely to raise competition concerns, the EC (and many other international competition agencies) have simplified filing procedures, with significantly reduced information and data requirements for the merger notification and clearance timelines can sometimes be significantly shortened. The NPRM does not state or imply that the revised HSR Form and Instructions would include any similar simplified/fast-track procedures. The NPRM also does not mention whether the Agencies will recommence granting early termination of the waiting period for transactions that are unlikely to raise any issues after that process was “temporarily suspended” on February 4, 2021.^[7]

Later this week, the proposed changes will be published in the Federal Register and the Agencies will accept public comments for 60 days. The Agencies will then consider comments and eventually publish a final rulemaking. This process could take several months or longer to complete. Note the FTC’s September 2020 NPRM relating to the HSR Form and Rules so far has not been implemented after the public comment period.

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[1]       See our client alert DOJ Expresses Concerns about Interlocking Directorates.

[2]       See page 3 of Statement of Chair Kahn joined by Commissioners Slaughter and Bedoya of June 27, 2023: https://www.ftc.gov/system/files/ftc_gov/pdf/statement_of_chair_khan_joined_by_commrs_slaughter_and_bedoya_on_the_hsr_form_and_rules_-_final_115p.pdf.

[3]       See our client alert FTC Announces Hart-Scott-Rodino and Clayton Act Section 8 Thresholds for 2023.

[4]       See https://competition-policy.ec.europa.eu/system/files/2021-02/merger_control_procedures_en.pdf.

[5]       See page 2 of Hart-Scott-Rodino Annual Report, Fiscal Year 2021, October 1, 2020 through September 30, 2021, https://www.ftc.gov/system/files/ftc_gov/pdf/p110014fy2021hsrannualreport.pdf.

[6]       See page 24 of the Notice of Proposed Rulemaking, released June 27, 2023, https://www.ftc.gov/system/files/ftc_gov/pdf/p239300_proposed_amendments_to_hsr_rules_form_instructions_2023.pdf.

[7]       See our client alert FTC and DOJ Temporarily Suspend Early Terminations of HSR Waiting Period.