Introduction
Hello, I’m John Montague, the managing partner of Montague Law. Over the years, I’ve facilitated hundreds of millions of dollars worth of Mergers and Acquisitions (M&A) transactions. Today, I present to you a vital issue looming large in the M&A landscape – the Federal Trade Commission’s (FTC) proposal to overhaul the Hart-Scott-Rodino Act of 1976.
A Regulatory Tornado on the Horizon
On the last Tuesday of June 2023, the FTC, along with the U.S. Department of Justice (USDOJ), sent shockwaves through the M&A community. They introduced a 133-page Notice of Proposed Rulemaking (NPRM), aimed at revamping the premerger notification process enshrined in the Hart-Scott-Rodino Act of 1976 (HSR Act).
The HSR Act mandates that parties engaging in mergers, acquisitions, joint ventures, and the like, which meet certain jurisdictional parameters and aren’t otherwise exempted, must file premerger notification and report forms with the FTC and USDOJ. They then have to wait 30 days (or 15 in the case of particular bankruptcy proceedings and cash tender offers) before closing their transactions.
Having been in play since 1976, the HSR Act gives regulators a chance to assess transactions for potential antitrust concerns before closure. While the NPRM doesn’t recommend any substantive changes to the Act, it paves the way for an extraordinary revamp of the premerger notification and report form and instructions. This overhaul will undoubtedly create a substantially greater burden and increased cost for filing parties.
The article ahead provides a snapshot of the proposed changes and their prospective impact.
The Motivation Behind the Changes
The catalysts for these proposed changes took root during the early days of the Biden administration. The appointment of Lina M. Khan as Chair of the FTC in June 2021, a staunch critic of mergers and “big tech”, set the stage for this transformation.
By July 2021, President Biden announced an Executive Order emphasizing the administration’s keen interest in enhanced antitrust enforcement, asserting that industry consolidation adversely affects prices, innovation, and American workers. Meanwhile, as the pandemic unfolded, M&A activity hit record levels, and the number of HSR filings skyrocketed.
Against this backdrop, in February 2021, the FTC, with the USDOJ’s support, stopped issuing early termination of the HSR waiting period for transactions appearing competitively benign. The FTC also stopped publishing informal interpretations of the HSR Act and HSR rules on its website.
Fast forward to August 2021, the FTC switched its stance on excluding debt from the size of the transaction for calculating whether an HSR filing is required. Simultaneously, the FTC hinted at the current proposed overhaul, announcing that it was “currently in the process of working with the DOJ to update its existing merger filing process”.
Nearly two years on, we see the fruition of those early seeds, with the FTC releasing its proposed updates to the merger filing process.
The Proposed Changes
In a nutshell, the proposed changes will bring an unprecedented overhaul to the HSR form and instructions. Several key proposed changes will demand additional time and expense from filing parties. Here’s an overview:
- Draft Agreements or Term Sheets: The new regulations will no longer permit HSR filing based on preliminary agreements without providing a term sheet or draft agreement with sufficient transactional detail.
- Translation of Foreign Language Documents: All documents in a foreign language must be translated into English, even if no such translations currently exist.
- Additional Information from Private Equity: The proposed form will necessitate comprehensive additional information from private equity funds about their investment relationships.
- Disclosure of Labor-Related Information: Filers will be required to submit comprehensive information about labor markets, reflecting the current intense focus on labor issues by federal antitrust regulators.
- Identification of Other Interest Holders: Parties need to identify creditors, non-voting security holders, board members, board observers, and management agreement holders.
The list is exhaustive, and the proposed changes will bring significant changes to the HSR process.
Impacts and Next Steps
These changes will have a profound impact on merger filings in the United States. Filing parties will require additional time and resources, resulting in greater expenses. Public comment is open until August 28, 2023, and I encourage you to share your thoughts and perspectives on these changes.
