Biden Administration’s One-Two Punch for Merger Reform

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Biden Administration’s One-Two Punch for Merger Reform

Biden Administration’s One-Two Punch for Merger Reform

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July 31, 2023

Proposed Changes to HSR Act Rules Expand Upfront Merger Reviews

A few weeks before releasing the draft Merger Guidelines on July 19 (“Merger Guidelines”), the Federal Trade Commission (“FTC”) and Department of Justice (“Agencies”) announced an overhaul of the premerger notification process under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act”) – the first of its kind since the HSR Act was adopted.¹ The sweeping changes are estimated to nearly quadruple the amount of hours needed (on average from 37 hours to 144 hours) to prepare a premerger notification filing for reportable transactions – typically transactions, including the purchase of a non-controlling stake of voting securities, valued over $111.4 million (adjusted annually).² The proposed rules reflect the Agencies’ intention to look more deeply at issues beyond direct horizontal overlaps, including non-horizontal competition, labor competition, influence through board participation (even as an observer) and minority investments, and industry roll-ups through serial acquisitions. The themes underlying the changes are reflected in the draft Merger Guidelines and consistent with the enforcement priorities, including greater emphasis on non-horizontal and forward-looking competitive harm.

FTC Chair Khan reiterated these priorities earlier this month before the U.S. House of Representatives Committee on the Judiciary in connection with the Committee’s investigation into whether the FTC has abused its power over the past two years.³ Displeased Republicans could derail the FTC’s efforts to examine every reportable transaction for a broad range of possible concerns by simply cutting the FTC’s budget. The House Appropriation Committee proposed cutting the FTC’s budget by 25 percent and restricting FTC Bureau of Competition spending to $165 million, with no funds from the FTC Bureau of Consumer Protection to be reprogrammed for competition enforcement. This is a hard hit for the FTC, which has already lost 71 senior attorneys during Chair Khan’s tenure and where employee confidence in the agency’s integrity has dropped from 57.6% in 2020 to 22.5% in 2022. If the FTC’s budget does not increase significantly, the HSR changes will impose undue burdens on filers with little change to enforcement activity as the FTC will face an unworkable deluge of information.

The proposed changes impose significant burdens on all filers, even in financial investment transactions that do not raise competition concerns – which is the vast majority of transactions filed. Over the past decade, only two to four percent of reported transactions were scrutinized beyond the initial 30-day waiting period through an in-depth merger investigation, often referred to as a “Second Request."⁴ The majority of reported transactions over the past decade (ranging from 52 to 63 percent of transactions each year) received early termination of the 30-day waiting period, reflecting that these transactions posed no evident competition concerns.⁵

If the proposed rules are adopted, all filers will have to submit an expanded range of documents and to prepare narrative responses regarding transaction rationale, competition, labor and business relationships that will inform the Agencies’ antitrust analyses. Entities with complex structures, such as investment funds, will face additional burden to provide more detailed explanations of their organization, control relationships, and board participations.

The following table provides an overview of the notable changes and their purpose.

Category	Requirements	Purpose
Corporate Relationships / Organization	Disclose: Limited partners holding 5-50% interests of any entity within the UPE, including an organization chart of master limited partnerships Minority holders of any entity that directly or indirectly controls, or is controlled by, the acquiring entity Individuals or entities that provide credit totaling 10 percent or more of the value of the acquiring entity Individuals or entities that hold non-voting securities, options or warrants that could be converted to 10 percent or more of voting securities/interests of the acquiring person	Identify potentially problematic overlapping investments by co-investors or other interest holders who may exert influence See Guideline #12 of Merger Guidelines (examining impact on competition from partial ownership or minority interests)
Governance / Influence	Identify: Officers, directors, and board observers for the past two years for all entities within the acquiring person and acquired entity and identification of other entities for which these individuals serve similar functions (or have served in the past two years) Individuals or entities that have nomination rights for board members or board observers of the acquiring entity Individuals or entities that have agreements to manage entities related to the transaction Prospective officers, directors and board observers’ post-transaction	Identify individuals or entities that can have a material influence on the operations or strategy of the acquiring person; identify interlocking directorates and whether individuals or entities may have improper access to sensitive information. See Guideline #12 of Merger Guidelines (examining impact on competition from partial ownership or minority interests)
Transaction Details, including Rationale and Evaluation	Describe and provide: Strategic rationales for the transaction (supported by documents) Timeline of transaction Diagram of deal structure Detailed term sheet, draft agreement or complete executed agreement (LOI no longer sufficient) All transaction-specific agreements (e.g., employee agreements, supplier and customer agreements) regardless of whether both parties are signatories	Assess the stated rationale in relation to potential competitive consequences of the transaction
Nature of the Business	Describe and submit: Overview of business operations of all entities within the acquiring person Ordinary course agreements between the parties (e.g., licensing agreements, purchase agreements) High-level strategic periodic plans (semi-annual and quarterly) created in the ordinary course of business within one year of filing	Understand commercial realities and state of premerger competition
Horizontal Overlaps	Submit and describe: Expanded “Item 4” documents – now to include drafts and documents created by or for “team lead” (and organization chart of authors) Expanded geographic detail for locations from which overlapping NAICS revenue is derived Overview of basic business lines and current and future horizontal overlaps For each identified current or potential overlap, provide: Sales Customer information (including contacts) Any licensing arrangements Any non-compete or non-solicitation agreements	Quickly identify and assess the significance of the filers’ respective businesses; ability to promptly conduct further industry research with customers likely to be affected, and to confirm basic market dynamics
Vertical Relationships	Identify and provide: Existing or potential vertical, or supply relationships between the parties Information for related sales and purchases between filing person and other companies that use the filing person’s products, services, or assets to compete with the other filing person, including contact information for such customers and sales.	Ability to understand whether the transaction could change market structure or incentives – non-horizontal competitive concerns difficult to discern from information currently provided See Guideline #5 (Mergers should not substantially lessen competition by creating a firm that controls products or services that its rivals may use to compete); Guideline #6 (Vertical mergers should not create market structures that foreclose competition)
Serial Acquisitions	List of acquisitions (of any size) by either party over the past ten years	To aid in evaluating harm per Guideline #9 where the effect of a transaction will be examined among the whole series of transactions, even if the transaction at hand itself does not raise concerns
Labor	Classification of workers into occupational categories based on SOC system and report of total number of employees for the top five applicable SOC categories Identification of overlapping ERS-defined commuting zones for any overlapping top 5 SOC categories Disclosure of labor law violations in the past five years	Evaluation of whether the transaction lessens competition for buyers of labor services consistent with Guideline #11
Foreign Subsidies	Identify and describe subsidies received (or anticipated to be received) from a foreign entity or government of concern in the past two years Disclose any product that is subject to countervailing duties (or under investigation for potential countervailing duties) and is produced in a country that is a covered nation	Under the Merger Filing Fee Modernization Act of 2022, Congress determined that foreign subsidies, particularly those from countries or entities that constitute a strategic or economic threat to U.S. interests, can distort the competitive process by enabling the subsidized firm to submit higher bids than other firms in the market or otherwise change the incentives of the firm in ways that undermine competition post-merger.⁶
Communications and Messaging Systems	Certification that parties have taken steps to prevent destruction of relevant information Identification of communications and messaging systems	Communication and messaging systems (internal chat, text messages) are commonly used and an important part of investigation; ensuring application of document preservation to these modalities

The notice of proposed rulemaking was published on June 29, 2023. Comments are due within the 60-day period expiring on August 28, 2023. The Agencies will have to consider whether alternate solutions would be more effective and less burdensome. Major changes could lead to another notice and comment period before publication of the final rule. The changes would not go into effect until at least 30 days after publication of the final rule in the Federal Register. The proposed changes are also subject to review under the Paperwork Reduction Act of 1995.

These changes, combined with the Merger Guidelines, underscore the need to consider antitrust early in transaction planning to evaluate risk, prepare filings, and avoid costly delays. The changes make the U.S. pre-merger notification process more aligned with pre-merger notifications in other jurisdictions, such as Canada and the European Union.

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[1] Press Release, Federal Trade Commission, FTC and DOJ Propose Changes to HSR Form for More Effective, Efficient Merger Review (June 27, 2023), available at ttps://www.ftc.gov/news-events/news/press-releases/2023/06/ftc-doj-propose-changes-hsr-form-more-effective-efficient-merger-review.
[2] Parties to the transaction must meet the “size of person” test for transactions valued between $111.4 million to $445.5 million. The “size of the person” test requires one party to have assets or sales over $22.3 million and the other party to have assets or sales over $222.7 million. Transactions valued over $445.5 million are reportable regardless of the “size of the person” unless certain exemptions apply.
[3] See Prepared Statement of the Federal Trade Commission, Hearing on Oversight of the Federal Trade Commission before the Committee on the Judiciary, U.S. House of Representatives, July 13, 2023.
[4] Hart-Scott-Rodino Annual Report, Fiscal Year 2021, available at target="_blank">https://www.ftc.gov/system/files/ftc_gov/pdf/p110014fy2021hsrannualreport.pdf.
[5] Id.
[6] Title II of the Merger Filing Fee Modernization Act of 2022, Public Law 117-329, Div. GG, sec. 201(a)(1)-(2) at 3826, 136 Stat. 4559.