Tomer D. Elkayam
Loyola University Chicago School of Law, JD 2024
The Federal Trade Commission (FTC) has announced proposed changes to the Hart-Scott Rodino Antitrust Improvement Act (HSR Act), which are considered the most substantive changes since its enactment 47 years ago. The HSR Act, which is codified at 15 U.S.C. § 18a, directs parties to file “notification and report” forms with the FTC detailing mergers. The FTC and the Department of Justice (DOJ) review the forms, and analyze whether the proposed mergers adversely affect competition and violate U.S. Antitrust laws. In an overview of the proposed rule changes, the FTC estimates the changes would require anywhere from 12 to 222 hours of additional time to complete the filings, which the agency currently estimates taking 37 hours to prepare on average. Some argue these changes may ultimately be deemed arbitrary and capricious, whereby courts may determine the requirements are burdensome or unreasonable.
The current makeup of the HSR Act
The HSR Act requires that before a merger, acquisition, or tender offer can be completed, the parties involved must file the Notification and Report Form for Certain Mergers and Acquisitions. This report is filed with the FTC and the Antitrust Division of the Department of Justice, who then review the transaction to determine if it violates any antitrust laws.
After filing, the parties must allow a 30-day waiting period. If the regulators find that there is any likelihood that the transaction may cause an anti-competitive effect in the markets, they may demand additional information to assess the transaction. If the agencies take no further action, the initial waiting period ends at 11:59 p.m. on the last day of the 30-day period.
The HSR Act requires the company making the proposed acquisition to pay a filing fee when filing an HSR form with the FTC and the DOJ. The amount of filing fees charged depends on the size of the transaction and is classified into three tiers.
Key changes under the proposed rules
Under the proposed rules, merging parties would need to provide significantly more information about their transactions in their HSR Filings. First, Parties would need to classify employees based on current Standard Occupational Classification (SOC) system categories and commuting zones, as well as provide worker and workplace safety records, which go far beyond the current reporting standard.
Next, parties would be required to provide information about officers, directors, and board observers who have served in any position for the preceding two years. For each individual, parties would need to identify any other companies those former employees have served or currently serve. In addition, parties would need to list individuals who are likely to serve as officers, directors, or board observers of the newly formed entity, and supply their full backgrounds.
In addition, the new HSR Form would add a “competition analysis” section that would require detailed narratives on competitive overlaps, similar to what’s required in a form S-1 for companies going public. This new section would require the parties to disclose: 1. the identity and contact information of top customers 2. the rationale behind the proposed merger, and 3. the timeline for the merger itself.
The Proposed Rules would be time consuming and costly. According to the FTC’s analysis, parties can expect up to two to three months of additional preparation time. These increased burdens will have significant implications for parties considering tender offers or other open market transactions, where market volatility may ultimately impact an acquisition that takes a longer period of time to close.
In addition, private equity buyers will have substantially expanded disclosure obligations, including disclosing the structure of entities involved in private equity investments. Private equity firms would be required to list prior acquisitions that have occurred over the last ten years. These details would have historically been kept private, to avoid publicizing investment strategy.
Lawyers may benefit from the regulatory changes, as billing hours are likely to increase significantly as a result of the change. However, with an already slowing M&A market, these proposed rules may temporarily bring the deal market to a complete halt and remove liquidity from a market that otherwise faces the highest interest rates since 2001.
Some argue the proposed changes are onerous and may fail to meet the requirements of the arbitrary-or-capricious test which gives courts power to assess rules proposed by federal agencies and nullify them. The American Hospital Association, which represents nearly 5,000 hospitals nationwide, recently opposed the proposed changes. In their comments to the FTC, the association pointedly asserts that the proposed changes are arbitrary and capricious, setting up a potential lawsuit if the changes are enacted.