Tell Me More, Tell Me More: The FTC Finalizes Expansion of the HSR Form for the Pre-Merger Review Process

On October 10, 2024, the Federal Trade Commission (FTC) released final rules overhauling the form that must be used to notify certain transactions to the U.S. government under the Hart-Scott-Rodino (HSR) Act (the “Final Rules”). Adopted unanimously by the Commission, the Final Rules are the most significant major revision to the HSR form since its introduction nearly fifty years ago. The FTC’s action significantly expands the disclosures parties to a reportable transaction must make under the HSR Act, although the FTC did pare back its initial proposed revisions.

The Final Rules will become effective 90 days from their date of formal publication in the Federal Register, which has not yet occurred as of the date of this client alert. If the Final Rules are published the week of October 21, the rules would become effective in the third week of January 2025. However, this timeline could be disrupted if there is litigation under the Administrative Procedures Act (APA) challenging one or more aspects of the Final Rules. Note that the Final Rules contain a severability provision that would prevent judicial invalidation of one aspect of the Final Rules from invalidating the Final Rules altogether.

Even as pared back from the initial proposal, the Final Rules will still substantially increase the time and effort required to prepare an HSR filing. The FTC estimates that a typical filing will take about 68 more hours to prepare than under the old rules and that a more complex filing involving a competitive overlap will take about 121 additional hours to prepare. As a result of the additional time required to prepare HSR filings, parties to reportable transactions will need to provide in their deal documents significantly more time to make the filing than the standard 5 to 10 business days after signing.

The good news is that in conjunction with publishing the Final Rules, the FTC has announced that it will reinstate early termination. The FTC and DOJ will resume terminating, at their discretion, the HSR waiting period before the 30-day clock expires for transactions which do not raise competitive concerns, a practice they suspended in 2021.

While the Final Rules change the HSR form in numerous ways, they expand the required disclosures most significantly in the following five ways.

1. More Business Documents Must Be Submitted

The Final Rules dramatically expand the requirements for documents that the filer must attach to its submission, formerly known as 4(c) and 4(d) documents. Under the Final Rules, the filer must attach all transaction-related documents touching on competition issues prepared by or for the “supervisory deal team lead,” in addition to all such documents prepared by or for officers and directors, as required under the old rules. The “supervisory deal team lead” is defined as “the individual who has primary responsibility for supervising the strategic assessment of the deal, and who would not otherwise qualify as a director or officer.”

The Final Rules also require most filers to submit all “plans and reports” prepared or modified within one year of the filing date that discuss market shares, competition, competitors, or any overlap markets, including those prepared in the ordinary course of business, which were shared with the CEO of an entity involved in the transaction or the Board of Directors of the filing party. This requirement was formerly limited to such documents that related to the transaction. Because the Final Rules expand this requirement to include documents unrelated to the transaction and prepared merely in the ordinary course of business, they substantially increase the scope of the documents that must be searched for and produced.

Fortunately, the Final Rules do not require the submission of draft documents, only final documents. Under the FTC’s original proposal, drafts would have had to been submitted.

2. Expanded Requirement for Documents Relating to the Transaction

The parties have always had to submit the principal transaction agreement and certain exhibits, schedules and ancillary agreements. The Final Rules expand the scope of this disclosure to include all agreements “related to the transaction, including, but not limited to, exhibits, schedules, side letters, agreements not to compete or solicit, and other agreements negotiated in conjunction with the transaction that the parties intend to consummate, and excluding clean team agreements.” The requirement to submit non-compete and non-solicit agreements, while not new, is significant in light of the FTC’s Final Rule banning non-compete agreements nation-wide. That ban excludes non-compete agreements entered into as part of a sale of a business or all of a business’s operating assets. Nonetheless, the FTC is likely to scrutinize the scope of those agreements to assess whether they are narrowly tailored. The FTC’s ban has been enjoined in federal court, and the FTC is likely to appeal. But even if those challenges prevail, the FTC would retain its authority to exercise its enforcement powers against non-compete and non-solicit agreements on a case-by-case basis. Disclosure of such agreements in an HSR filing may prompt it to do so.

3. Greater Narrative Disclosures

The Final Rules expand the required narrative descriptions of each company’s business lines, including descriptions of any potential product or service expansion plans. They also require the filer to submit a detailed narrative description of the filer’s rationale for the transaction, as well as an “Overlap Description” and “Supply Relationships Description.” These submissions are intended to aid the agencies in the identification of potential competition concerns.

4. Greater Disclosure of Investors

The Final Rules mandate the disclosure of any investor who holds a stake of 5 percent or more in the acquiror, as well as any party who has “management rights” in the acquiror. This expanded disclosure is particularly relevant to investment funds that operate through a series of management agreements, and is likely to face a court challenge prior to the Final Rules going into effect.

5. Greater Disclosure of Prior Acquisitions

The Final Rules require the seller to disclose prior acquisitions of entities or assets with U.S. sales of overlap products or services. The seller must disclose all such acquisitions from the five years prior to filing even if the transaction being disclosed was not subject to the HSR reporting requirements at the time of consummation. This requirement is aimed at “roll-up” transactions, which the FTC and DOJ specifically called out as potentially anticompetitive in the updated Merger Guidelines, which were finalized earlier this year.