October 24, 2024

By Matt Wiederrecht, Director of Capstone’s Special Situations Team

Capstone believes a new Federal Trade Commission (FTC) rule requiring merging companies to increase the amount of information submitted to antitrust regulators when filing their pre-merger Hart-Scott-Rodino Act (HSR) filings will lead to additional costs and delays for mergers and expose more transactions to intrusive antitrust investigations.

• The new rule, released on October 10^th, significantly expands the scope of documentation submitted when submitting an HSR filing to include far more information than just transaction details, basic financial information, and information about the parties.
• HSR filings will now include more information on how the merging parties might compete with one another, supply relationships between the parties, and acquisition-related information, such as internal documents related to the transaction from the deal team working on it. The new information that must now be submitted was previously not sought until a second request for information was received.
• In addition to the additional information, the Federal Trade Commission (FTC) will be opening a new online portal that will allow competitors, customers, and other stakeholder groups to submit their comments on transactions being reviewed by regulators, which could provide regulators with additional insights on how a proposed transaction might impact competition. This type of information was typically not sought by regulators until a second request for information was received and regulators committed to conducting a more thorough review of the transaction.
• Analysis by the FTC estimates that the time needed to prepare an HRS filing will increase from 37 hours to between 68 and 121 hours. This suggests that companies can expect to spend twice to three times as much time and effort preparing HSR filings moving forward.
• However, we are highly skeptical of the FTC’s estimates and suggest that investors keep in mind that transactions where companies might submit an HSR filing a couple of weeks after a deal is announced, may now require a couple of months to prepare.

All the new information companies must submit is information the FTC and Department of Justice (DOJ) usually get if they decided to investigate a transaction more thoroughly by issuing a second request. Over the last decade, these agencies issued 40 to 65 second requests per year, and starting in 2025 they will get at least some of the information received in a second request for roughly 2,000 transactions a year that require the merging parties to submit an HSR filing. This means that, in theory, if DOJ and the FTC had the resources, they could do a more thorough job of scrutinizing all these transactions, and it certainly means at least a more detailed cursory review will be done substantially more moving forward.

We believe the biggest winners from this new rule are the law firms and professional services firms that help companies comply with HSR filing requirements, and the biggest losers will likely be companies seeking to merge with competitors in more niche markets that might have escaped regulatory scrutiny before this new rule. The reason the rule could be a problem for some merging companies is it turns every HSR filing into almost a second request for information and gives the DOJ and the FTC access to internal documents, information on competitors, and other privileged information that might provide regulators with a better sense as to how smaller transactions these agencies might not normally scrutinize might adversely impact competition in niche markets. This information could cause regulators to scrutinize more transactions for potential antitrust violations, particularly concerning smaller transactions that the DOJ and the FTC might have ignored under the old rules.

A DEEPER LOOK

Background on the New HSR Rule

When Biden was sworn in as President, it became very apparent that his administration would be far more aggressive with respect to promoting competition in the economy than prior administrations. This focus on competition policy stems from a belief that the US economy has seen too much consolidation over the last few decades across various industries ranging from financial services and healthcare to passenger air travel and poultry processing. It is the administration’s position that increased concentration has led to decreased competition, resulting in less choice and higher prices for consumers and depressed wages for workers by reducing the competition for labor.

This focus on competition caused the administration to take the following steps:

• Executive Order. Biden issued an executive order early in his first term ordering a “whole-of-government approach to promote competition that involves not only antitrust regulators, but the Federal Communications Commission (FCC), US Department of Agriculture (USDA), Department of Labor (DOL), and Department of Transportation (DOT).
• Appointments. Biden appointed Lina Khan as chair of the Federal Trade Commission (FTC) and Jonathan Kanter as Assistant Attorney General for the Antitrust Division of the Justice Department (DOJ). Both individuals have aggressively pushed competition policy, including blocking several high-profile mergers.
• New Rules and Guidance. DOJ and the FTC updated their merger guidelines to be more stringent with respect to how each agency will evaluate mergers moving forward. In addition, the agencies released this new HSR rule, which would require companies going through a merger review process to submit far more information when filing a premerger notification, which will allow for far more thorough reviews of the roughly two thousand or so transactions a year large enough to warrant the companies submitting an HSR filing.
• Other Actions. Agencies across the federal government have also taken an aggressive stance on junk fees, deceptive trade practices, and price collusion, promoting greater transparency for consumers and reducing barriers to entry for new competitors, all to help support greater competition and lower prices.

The New HSR Rule

This new rule on premerger notification filing requirements goes into effect 90 days after it is published in the Federal Register sometime in mid-January 2025. All HSR-reportable transactions fall under the new disclosure requirements and will require each company party to a reportable transaction to submit substantially more information to regulators than has historically been required. For a frame of reference, in 2023, the threshold for reportable transactions was $111.3 million, and there were 1,805 reported transactions, with nearly a quarter of these transactions worth over $1 billion. There were over 3,000 reported transactions in 2022 and 2021, and the average number of reportable transactions over the last decade is slightly more than 2,000 per year. The new requirements are as follows:

• Transaction-Related Documentation. Detailed information on the structure of the transaction, parties involved, merger agreement, disclosure of minority parties, and a narrative of the purpose of the transaction and description of the business operations of the merging parties need to be submitted. This includes providing detailed information on the ownership of the acquiring party, including if any foreign entities from countries like Russia or China will become minority owners of the combined company once the transaction closes.
• Competition Impacts Documentation. Regulators also want a narrative discussion on any horizontal or vertical overlaps between the companies, information on prior acquisitions in the space within the past five years, business plans, and other internal strategy documents relating to competition relevant to the transaction prepared for the executive team and board of directors of the acquiring entity, and geographic market information which probably matters the most for businesses in hospitality, retail, healthcare and other similar markets where each location competes in a hyper-localized market as opposed to a regional or national market.
• Deal Team Documentation. The new rule requires that documents used in evaluating the transaction that is prepared for or by the executive tasked with supervising the transaction also be submitted. This could include consultant reports and other documents analyzing the competitive dynamics of a transaction.
• Verbatim translations. All documents in a foreign language must be accurately translated into plain English.
• Other disclosures. Several other types of disclosures are required that are unrelated to competition policy companies must also provide. These include disclosures surrounding defense and intelligence agency contracts, the identification of foreign jurisdictions involved in the transaction, the presence of subsidies and countervailing duties from certain foreign governments, and the identification of contracts related to the transaction between the merging companies.

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