FTC Announces Major Proposal to Change HSR Form and Process | Practical Law

FTC Announces Major Proposal to Change HSR Form and Process | Practical Law

On June 27, 2023, the Federal Trade Commission (FTC) issued a Notice of Proposed Rulemaking containing a proposal to significantly change the Hart-Scott-Rodino Act (HSR) filing and related instructions, as well as the rules implementing the HSR Act. The proposal is subject to an initial 60-day comment period after publication in the Federal Register, which was later extended by 30 days. The extended comment period ends September 27, 2023.

FTC Announces Major Proposal to Change HSR Form and Process

Practical Law Legal Update w-039-9547 (Approx. 10 pages)

FTC Announces Major Proposal to Change HSR Form and Process

by Practical Law Antitrust
Law stated as of 30 Jun 2023 • USA (National/Federal)
On June 27, 2023, the Federal Trade Commission (FTC) issued a Notice of Proposed Rulemaking containing a proposal to significantly change the Hart-Scott-Rodino Act (HSR) filing and related instructions, as well as the rules implementing the HSR Act. The proposal is subject to an initial 60-day comment period after publication in the Federal Register, which was later extended by 30 days. The extended comment period ends September 27, 2023.
On June 27, 2023, the Federal Trade Commission (FTC) issued a Notice of Proposed Rulemaking containing a proposal to change the Hart-Scott-Rodino (HSR) Act filing and related instructions, as well as the rules implementing the HSR Act. The FTC stated it determined the information currently reported in an HSR filing is insufficient following a comprehensive review of the premerger notification process and based on the agencies' experience conducting in-depth investigations of challenged mergers. This marks the first large-scale proposal to reorganize the HSR form since its initial implementation in 1978. The proposal is subject to a 60-day comment period after publication in the Federal Register (88 Fed. Reg. 42178 (June 29, 2023)). The initial 60-day comment period ending August 28, 2023 was later extended by 30 days to September 27, 2023.
The proposal includes a significant number of changes. The FTC acknowledged that while some of the changes are intended to reduce the burden on filing parties, many of the proposed changes increase the burden and some increase the burden significantly. However, the FTC stated that the changes to the HSR form would significantly benefit the agencies' merger review.
Most significantly, the proposal increases the burden on filing parties by requiring the submission of the following:
  • Additional information about transaction, including:
    • narrative explanations of the business or assets being acquired, the strategic rationale for the transaction, and deal timeline;
    • a transaction diagram; and
    • the complete set of transaction documents (including exhibits and schedules), and any other agreements between the merging parties.
  • Information about:
    • competition and overlaps between the parties, including narrative responses that identify current and potential future horizontal overlaps and supply relationships between the parties;
    • the filing person's organizational structure, including how the filing ultimate parent entity (UPE) is organized and a list of controlled entities by business or operating company;
    • interest holders that might have material influence on the filing UPE's management or operations; and
    • officers, directors, and board observers of the UPE and its controlled entities for the past two years and for those that will be appointed post-transaction.
  • Additional documents, including:
    • transaction-related documents prepared by or for supervisory deal team leads, meaning individuals who functionally lead or coordinate the day-to-day process for the transaction at issue;
    • drafts of responsive transaction-related documents if provided to an officer, director, or supervisory deal team lead; and
    • certain periodic plans and reports created in the ordinary course of business and not created for the transaction but relevant to the antitrust analysis.
Other changes to the HSR form include:
  • Requiring parties to submit information about:
    • contracts with US defense or intelligence agencies, to help the antitrust agencies work together with those agencies in merger reviews;
    • the filing party's communication and messaging systems (such as instant messaging or chat platforms), which often contain documents relevant to the agencies' analysis of the transaction;
    • certain subsidies received from foreign entities of concern, meaning those that are strategic or economic threats to the US, to help the agencies identify those that affect the transaction's competitive analysis; and
    • the filing person's employees to help the agencies evaluate the transaction's potential impact on labor markets.
  • Requiring filing parties to submit the following:
    • a term sheet or letter of intent (LOI) that describes in detail the scope of the entire transaction where there is no definitive agreement; and
    • English-language translations for all foreign-language documents included with the initial HSR filing.
  • Requiring the parties to identify other jurisdictions that may be engaging in an antitrust review of the transaction (currently a voluntary request).
  • Requiring the filing party to indicate whether it will waive confidentiality under the HSR Act to allow the sharing of confidential information with specified non-US antitrust authorities and state attorneys general.
  • Changing Item 5 to no longer require the filer to report revenue by specific dollar amounts by North American Industry Classification System (NAICS) codes and manufacturing revenue by North American Product Classification System (NAPCS) codes, but instead report revenue ranges for NAICS codes.
  • Deleting the requirement to identify minority investors in target entities, other than those that roll over their investments post-consummation.
  • Procedural amendments to the HSR rules, such as:
    • requiring the electronic submission of HSR forms. The FTC is still developing its e-filing platform, and its exact form will be published in the Final Rule;
    • an explanation of when the waiting period starts for electronic filings;
    • what information must be updated for a withdrawal and refile of the HSR form, which previously was only informal guidance; and
    • a requirement that parties filing as both an acquiring and acquired UPE submit separate HSR forms (currently the rules allow them to file a single HSR form).
For more on the HSR Act, see Practice Note, Hart-Scott-Rodino Act: Overview. For a standard document counsel can use to prepare the HSR form, see Standard Document, Hart-Scott-Rodino (HSR) Form. This Standard Document is also found in a customizable, automated version in Contract Express. For more on the FTC generally, including an overview of the Bureau of Competition, see Practice Note, US Federal Trade Commission: Overview.

Rationale for Proposed Rule Changes

The FTC stated in the NPRM that the information currently reported in an HSR filing is insufficient based on several factors. First, premerger review has expanded considerably over time, including due to:
  • The challenges and complexities of analyzing mergers in technology and digital platforms. Mergers play a big role in growth strategy in these dynamic markets and are difficult to analyze because some involve companies in related business lines, where the relationship is not clearly horizontal or vertical, and where the agencies must look at future competition.
  • Increasingly complex transaction structures have shown that a transaction's impact on the competitive landscape can also be affected by:
    • investors with a stake in an entity on the buy-side either directly effectuating, or exerting influence over, the transaction;
    • the existence of subsidies or loans that allow individuals or entities not parties to the transaction to put pressure on the buyer; and
    • company use of board observers that allow outside players to gain direct access to company strategy.
    • In addition, the FTC noted that form changes are required because of:
  • An overall increase in enforcement efforts to review all transactions for their competitive impact because of an increase in market concentration.
  • Parallel transaction review by non-US antitrust agencies, where filers provide significantly more information relevant to the competition analysis, including about the transaction's structure and rationale, horizontal overlaps, vertical and other relationships, and more detailed sales data, as well as narrative responses about business lines or company operations.

Key Changes to the HSR Form

The following changes to the HSR form will significantly increase the burden of preparation for the filing parties.

Transaction Information

The revised HSR form as proposed would require added information about the transaction, including:
  • From the acquiring UPE, a description of all aspects of the acquiring person's pre-transaction business.
  • A description of the business or assets being acquired.
  • A narrative explaining each strategic rationale for the transaction, such as expansion into new markets or obtaining certain intellectual property.
  • A diagram of the deal structure, as well as a chart setting out the relevant entities and individuals involved in the transaction.
  • Identification of related transactions.
  • The revised HSR form would also require submission of:
  • All transaction-specific agreements, including exhibits and schedules, which are not currently required for submission.
  • A narrative timeline of key dates and conditions for closing.
  • Any agreements in place between the parties at the time of filing or within the year prior to the date of filing.

Information on Competition and Overlaps

The revised HSR form as proposed will require submission of information relating to competition and overlaps, including the a new narrative section on competition analysis that:
  • Describes the merging parties' basic business lines and provides product or service information for all related entities.
  • Identifies current and potential future horizontal overlaps and supply relationships between the parties.
  • Provides information about the parties' employees and the services they provide.

Organizational Information

The FTC states that the information currently required in the HSR form about the acquiring UPE often does not provide the agencies with a sufficient overview of the scope of the businesses that the acquiring UPE and acquired entity control. As a result, the FTC proposes that the revised HSR form require the filing party to disclose additional information about its organizational structure, including listing:
  • Controlled entities by business or operating company or by portfolio company, to help the staff identify the actual market participants from all legal entities.
  • The names by which the company or business does business or which it formerly did business within the three years before filing. Since legal names are often unknown to market participants, the FTC states that this would help the agency better understand the merging parties' scope of operations and locate public information about the entity during the initial waiting period.
  • For the acquiring person, certain minority holders of the acquiring entity and of any entity it directly or indirectly controls, or that controls the acquiring entity, and any entity within the acquiring person created for the transaction.
  • For the acquired UPE, minority holders of the acquired entity that either will:
    • continue to hold an interest in the acquired entity; or
    • acquire interests in any entity within the acquiring person as a result of the transaction.

Holders That Might Exert Influence

The FTC recognizes that relationships beyond being an equity holder can lead to significant competitive concerns. Because interest holders can influence decision making by the acquiring UPE post-acquisition, the FTC prefers to understand these relationships pre-acquisition.
As a result, the revised HSR form would require the filer to identify entities or individuals (other than employees of the acquiring UPE) that in relation to the acquiring entity, or any entity it directly or indirectly controls or is controlled by, either:
  • Provide credit totaling 10% or more of the value of the entity in question.
  • Hold non-voting securities, options, or warrants.
  • Are, or have nomination rights for, board members or board observers.
  • Have agreements to manage entities related to the transaction.
The FTC recognizes that compiling this information adds to the burden of preparing an HSR filing for an acquiring UPE with a complicated investment structure. However, it has found that relationships in these four categories can materially influence the acquiring UPE's operations or strategy, and thus affect the competition analysis of the transaction.

Officers, Directors, and Board Observers

The revised HSR form would require the filing party to identify officers, directors, or board observers (or for non-corporate entities, individuals exercising similar functions):
  • For the past two years, of the acquired entity and of all entities controlled by the acquiring UPE and of other entities for which these individuals currently serve or did serve in the past two years as an officer, director, or board observer.
  • For each individual that would serve in this role post-transaction for either the acquired or acquiring entities or for a new entity created for the transaction.
The FTC intends to use this information to determine whether there are, have been, or may be interlocking directorates, and to assess the competitive implications of those relationships under both Sections 7 and 8 of the Clayton Act. The FTC also stated that it believes this information should be known to or readily accessible by the filing parties, and may have been collected as part of a company's antitrust compliance program.
For more on interlocking directorates, see Practice Note, Interlocking Directorates.

Additional Document Requests

The proposed HSR form changes will expand the scope of documents required to be submitted in response to Item 4(c) and 4(d), as well as include requests for new types of documents:
  • Expanded Item 4(c) and 4(d) request. In addition to being required to submit documents currently responsive to Item 4(c) and 4(d), parties will need to include:
    • transaction-related documents prepared by or for supervisory deal team leads, meaning individuals who functionally lead or coordinate the day-to-day process for the transaction at issue; and
    • drafts of responsive transaction-related documents if provided to an officer, director, or supervisory deal team lead.
      (For more on Items 4(c) and 4(d) of the HSR form, see Practice Note, HSR Form: Item 4(c) and 4(d) Documents.)
  • Periodic plans and reports. Parties will also have to submit certain periodic plans and reports created in the ordinary course of business and not created for the transaction but relevant to the antitrust analysis.
As it relates to the submission of draft 4(c) and 4(d) documents, the FTC noted that it sought comment on an alternative approach where filing parties collect drafts as part of their filing process, but do not submit these documents unless requested by agency staff during the initial waiting period. In that case, drafts would need to be submitted within 48 hours.
As it relates to the proposed submission of periodic plans and reports, the FTC seeks comment on how and whether narrowing the set of custodians or other limits would still generate information about the premerger state of competition that is not specific to the transaction while reducing the burden on the filer or the agencies.

Other Changes to the HSR Form

The most significant of the other proposed changes to the HSR form are set out below.

Foreign Subsidies

As part of the HSR Act amendments set out in the Consolidated Appropriations Act of 2023, the FTC must amend the HSR form to require filing parties to disclose certain information about foreign subsidies from countries or entities that threaten US strategic or economic interests. To do this, the FTC proposes to add definitions of "subsidy" and "foreign entity or government of concern" to the HSR rules. In addition, the FTC will modify the HSR instructions to require the filing party to identify:
  • Certain subsidies received or expected to be received by any entity within the filing party from a foreign entity or government of concern within two years, to its knowledge or belief using good faith diligence.
  • Its products produced in a country that is covered nation (as defined in 42 U.S.C. § 18741(a)(5)(C)) that are:
    • subject to countervailing duties in any jurisdiction (and to list the duty and jurisdiction); and
    • the subject of an investigation by any jurisdiction for potential countervailing duties to the filing party's knowledge or belief (and to list the jurisdiction).
The FTC states that these requests would help identify those foreign subsidies most likely to affect the competitive analysis of a proposed transaction. These requests will also aid the agencies in understanding if there are significant ties to individuals or entities that might affect the agencies' assessment of the transaction's potential competitive risks. For example, these requests may reveal a financial relationship that might influence the filing party to make different choices in the marketplace than it would without the subsidy.

Labor Markets Information

The revised HSR form would require the filing party to submit information about its workers to examine the transaction's potential labor market effects. This change reflects the agencies' increasing emphasis on evaluating how mergers effect labor markets and their increased enforcement efforts in those markets.
The FTC states that they seek to identify whether the merging parties employ the same types of workers in certain geographic areas by requiring the parties to identify the following, using existing metrics available to US companies:
  • Their largest employee classifications. The filing party would need to classify their workers into occupational categories using the Standard Occupational Classification (SOC) system used to report worker statistics, by disclosing their five largest categories of workers by the relevant 6-digit SOC classification and the total number of employees for each 6-digit code identified.
  • Geographic market information for each employee classification. The filing party would need to identify the top five largest 6-digit SOC codes in which both parties employ workers.
  • The FTC seeks comment on whether this information would be too difficult or costly for companies to collect, and alternative ways to gather it.
The FTC also would require filing parties to identify penalties or findings issued against the acquiring UPE or acquired entity by the US Department of Labor's Wage and Hour Division, the National Labor Relations Board, or the Occupational Safety and Health Administration during the five-year period before the filing. The FTC states that a history of labor law violations can indicate a concentrated labor market where workers cannot easily find another job.

Contracts with US Defense or Intelligence Agencies

The FTC proposes to require filing parties to:
  • Identify current or pending intelligence procurement contracts valued at $10 million or more with the Department of Defense (DoD) or the intelligence community (IC).
  • Provide information about the contract and relevant DoD or IC personnel.
The FTC states that this information is readily available to companies engaged in this type of business. It also states that the additional information would greatly assist the agencies in working with DoD or IC in a merger investigation and in seeking their input relating to customers that might be impacted by the merger.

Communications and Messaging Systems

The FTC also proposes that filing parties disclose all communications systems or messaging applications used on any device to store or transmit business information or documents, such as internal chat technologies. This is in response to companies' more frequent use of these systems and the fact that such communications:
  • Frequently contain highly relevant information about the transaction and its competitive effects.
  • Can be used to evade document retention requirements.

Item 5

  • The revised HSR form as proposed also changes Item 5 to make reported revenue more useful to the agencies and less burdensome for filing parties. For example, the FTC proposes:
  • Deleting requirements to provide revenues by NAICS code but instead, to require parties to estimate revenue at five levels, such as: less $10 million, between $10 million and $100 million, or between $100 million and $1 billion.
  • Reporting revenues on a descriptive basis for all US operations by having individuals familiar with the business select the most appropriate NAICS codes regardless of how the company reports its revenue.
  • If more than one NAICS code is appropriate, listing all relevant codes to describe the products or services offered and use end notes to clarify selections and any potential overlap between the parties.
  • No longer aggregating NAICS codes across controlled entities, but reporting them separately, identifying which entity derives revenues in each code.
  • Adding a reporting requirement for NAICS codes for certain pipeline and pre-revenue products.
  • Deleting a requirement to report manufacturing revenues by NAPCS code.
For more information on Item 5 of the HSR Act, see Practice Note, HSR Form: Item 5.

Item 6(c)

The revised HSR form as proposed would modify current Item 6(c) of the HSR form, which lists minority interests, to require the filing party to disclose:
  • Only minority holdings of either the acquiring UPE and its associates, or the acquired entity, that, to the filing person's knowledge or belief, would derive revenue in the same NAICS codes or have operations in the same industry as the other filing person.
  • For disclosed minority holdings, the names those entities use to do business (such as d/b/a or f/k/a).
The FTC states that these changes will help the agencies determine which minority-held entities are relevant to the competitive analysis of the transaction during the initial waiting period.
For more information on Item 6(c) of the HSR Act, see Practice Note, Preparing the HSR Form: Buyer: Item 6.

Item 7

The revised HSR form as proposed would also expand current Item 7 of the HSR form, which lists certain overlap information. The revisions would require the filing party to identify, for controlled entity overlaps:
  • The overlapping entity on its side of the transaction, rather than having the other filing party report this information, as is done currently.
  • The names the entities that overlap have used to do business within the last three years.
  • The entities that have US operations in the overlapping code.
  • Street address level geographic information for additional NAICS codes listed in the NPRM, as well as locations of franchisees and geolocation data for those additional NAICS codes.
The FTC states that these changes would provide the agencies with information needed to more quickly identify the entities within the filing party that are relevant to the competitive analysis and to begin assessing geographic overlaps during the initial waiting period.
For more on Item 7 of the HSR form, see Practice Note, Preparing the HSR Form: Buyer: Item 7.

Item 8

  • The FTC is also proposing changes that expand the information provided relating to prior acquisitions in Item 8 of the HSR form, such as:
  • Requiring the acquired UPE (in addition to the acquiring UPE) to disclose relevant information.
  • Extending the timeframe for reporting prior acquisitions from five to ten years.
  • Eliminating the threshold for prior acquisitions, which requires only reporting of those acquisitions of entities with annual net sales or total assets greater than $10 million in the year prior to the acquisition.
  • For more information on Item 8 of the HSR form, see Practice Note, Preparing the HSR Form: Buyer: Item 8.