Extreme Makeover: US Merger Notification Edition
The Biden Administration’s effort to radically revamp US merger control continues with sweeping changes to the US premerger notification form. As proposed by the Federal Trade Commission and Department of Justice’s Antitrust Division, the new form will significantly impact all types of reportable transactions. Parties will be required to submit substantially more information, including additional data, many more documents, and detailed narratives on the competitive effect of the transaction. Changes to the document requirements will also impact standard filing practices, such as the ability to file on a bare bones letter of intent.
While clearance in no issues transactions today can be expected within 5 to 6 weeks after signing, the proposed changes would upend that timeline. Preparation will likely take significantly longer, and Parties may also have more back-and-forth with the FTC about the contents of the filing before the waiting period starts. Parties will need to build additional flexibility into their timelines, as the current 5 to 6 week expected timeline will be much less realistic.
New Rules for a Changing Landscape
The Agencies claim that the proposed changes will add “critical” information that will facilitate more efficient and effective reviews because transactions with substantive issues will be easier to identify in the initial waiting period. Since HSR Forms have not changed meaningfully since 1978, the Agencies now consider them to be insufficient. In their view, the economy has become too concentrated over time through underenforcement and missed transactions. The changes also reflect a view that transactions have become more complex, markets are more dynamic, and the US has fallen behind practices in other jurisdictions.
In addition to generally supporting the Agencies’ efforts to quell potentially anticompetitive transactions, the proposed changes would also further the Agencies’ broader enforcement priorities. Consistent with parallel changes to the Merger Guidelines, the changes target specific issues not clearly captured by the current contents of the HSR form such as:
- potential effects on labor and employment,
- acquisitions of nascent or potential competitors,
- “roll-up” transactions by private equity firms, and
- minority investments with interlocking directors.
The proposals for the new form would significantly expand the information required for disclosure, both in extending the scope of existing information requirements and adding entirely new categories of information. The proposed amendments would require disclosure of the following:
- Entities or individuals with material influence on the management or operations of the acquiring person (beyond those with minority interests), such as creditors and holders of non-voting securities or options;
- Officers, directors, and board observers of all entities within the corporate group, as well as a list of any other entities for which those individuals have served in this capacity in the prior two years;
- Prior transactions for an extended period up to the past 10 years in any areas of competitive overlap, regardless of whether a filing was made;
- Labor and employee data across all businesses, including employee classifications, geographic market information, and workplace safety histories; and
- Foreign subsidies from “foreign entities of concern”, currently China, Iran, North Korea, and Russia.
These broader disclosures not only increase the burden of preparing the filing, but could increase enforcement risk for conduct unrelated to the transaction. Examples include potential exposure for interlocking directors, information exchange, and failure to file past transactions.
More Burdensome Documentation
The proposed form also includes more burdensome document requirements that may impact how parties manage deal documents. Currently, parties must provide documents prepared by or for officers and directors that analyze the transaction with respect to various competition-related topics.
- Transaction-related documents would be expanded to include (i) documents prepared by or for the supervisory deal team lead and (ii) drafts of documents, not just final versions;
- Ordinary course strategy plans not created for the transaction may be required, including periodic plans and reports assessing markets, competitors, and competitive dynamics;
- Transaction agreements that are more detailed than the letters of intent previously permitted, effectively requiring drafts of full-form transaction agreements; and
- Other agreements between the parties effective within a year of filing, including supply or license agreements.
These changes significantly increase document collection requirements and require more careful document management processes. Translations of all foreign language documents will also be required for the first time. Parties will also have to certify that they implemented a document hold to preserve all transaction-related documents until expiration of the waiting period.
Introduction of Narrative Assessments
Similar to jurisdictions such as the European Union, China, and Brazil, parties would be required to provide narratives describing features of the transaction and the competitive environment.
- Potential horizontal competitive overlaps across each party’s principal products and services (both current and planned), as well as describing the related supply chain and providing top 10 customers in any of these areas;
- Potential vertical relationships between the parties, including information about sales to the other party or entities that use its products or services to compete with the other party;
- Expanded transaction description covering the strategic rationale and structure for the transaction, including a diagram with a chart explaining the relevant entities.
Unlike in other jurisdictions, however, the US does not provide detailed guidance or decisional practice on past transactions on how to frame competition. The instructions also notably decline to endorse the use of a traditional relevant market analysis in this process. To the extent that the agencies can reject a transaction if the filing is incomplete, this discretion may in practice lead to more uncertainty and longer prenotification periods.
These proposed changes are significant and will impact all reportable transactions. Dealmakers should plan for the implementation of these new rules, particularly with regard to extended timelines.
The Agencies are accepting comments on these proposed changes until September 27, 2023, after which they will consider amendments based on the comments. While it's not guaranteed that all the proposed changes will be enacted, we do not expect significant deviations from the current proposal.
The Linklaters US AFIG team continues to closely monitor the proposed changes to the HSR Form, which is expected to have a significant impact on all reportable transactions. Should you have any questions on these proposed changes, please contact Thomas McGrath, Antonia Sherman, or John Eichlin.