The Final Rule

The Final Rule codifies a number of changes to the current HSR form, minor revisions to the premerger notification rules and amendments to the HSR instructions to effect the proposed changes. The crucial takeaway from these changes is that regulators will expect significantly more information from merging parties to determine whether a transaction is lawful under the antitrust laws. The key changes are set forth below and categorized in accordance with the impacted sections of the HSR form.

Paring back the proposed rule changes

While the Final Rule undoubtedly represents a sea change for filing parties, it is apparent that the FTC considered the approximately 721 comments that were submitted in response to the notice of proposed rulemaking last year, as it ultimately narrowed or abandoned outright many of the requirements from the proposed rule. The Final Rule does not require, among other things, the submission of employee information, geolocation information, the identity of other interest holders and information about board observers. Perhaps most significantly, the Final Rule also abandons a proposed requirement to submit all drafts of responsive documents, which would have imposed significant challenges on companies engaged in merger analysis and planning. Consistent with the HSR rules currently in effect, the Final Rule imposes fewer new reporting requirements on an acquired person as compared to an acquiring person. Finally, the Agencies will continue to permit filers to rely on “good faith estimates” or averments that certain information does not exist.

More documents required to be submitted

The Final Rule also proposes expanding the scope of business documents that must be submitted pursuant to items 4(c) and 4(d). Specifically, the Agencies will now require the submission of certain ordinary course documents not prepared specifically for the transaction – which generally has not been a requirement since the HSR Act was passed in 1976. This amendment is based on the Agencies’ “experience with the probative value of high-level ordinary course documents,” and requires the submission of ordinary course plans and reports that are provided to a company’s CEO or board of directors. Moreover, whereas the old rules merely required the submission of transaction-related documents that were prepared by or for a company’s officers and directors, the rule has been expanded to include documents prepared by or for the supervisory deal team lead(s), which is defined as any individual “who has primary responsibility for supervising the strategic assessment of the deal, and who would not otherwise qualify as a director or officer.”

From a practical standpoint, the Final Rule is far less burdensome to filing parties than the rule changes as originally proposed. But in preparing HSR filings, merging parties must now collect and submit documents from additional custodians that supervise the deal making process, as well as ordinary course documents provided to the company’s executives. More important, it is imperative that buyers and sellers carefully manage not only how deal teams and outside advisors create transaction-specific documents but also how competitive analysis documents are created in the ordinary course of business, as these categories of documents will no longer be shielded from submission with HSR filings.

Additional descriptive information

The most significant changes to the regulations require that additional categories of descriptive information be submitted. These changes will increase the costs and time associated with preparing HSR filings, particularly for acquiring parties.

First, the Agencies will now require the submission of an “overlap description” and a “supply relationships narrative” under a section on the HSR form labeled “Competition Descriptions.” The Agencies have historically relied upon North American Industry Classification System (NAICS) codes to identify areas of horizontal competition. However, the Final Rule also requires the submission of a narrative description that outlines the type of information a company “provides to customers, suppliers, investors, or the public for purposes other than an antitrust analysis – to simply describe the products or services it offers for sale.” Likewise, it will require filers to submit information about existing or potential purchase or supply relationships, including a description of “each product, service or asset (including data) that the filer sold, licensed or otherwise supplied to the other party or to any other business that, to the filer’s knowledge or belief, uses its product, service, or asset to compete with the other party’s products or services, or as an input for a product or service that competes with the other party’s products or services.” Critically, the final instruction contains a statement that parties should not exchange information for purposes of responding to the overlap or supply relationships descriptions. This is notable, as filers typically coordinate on the identification of NAICS codes and may implicate additional clean room requirements.

Second, the Final Rule will require filers to provide a description of the ownership structure of the acquiring entity. If a fund or master limited partnership is the ultimate parent entity (UPE), a company must file any existing organizational chart that shows the relationship of any entities that are affiliates or associates. If no such chart exists, there is no obligation to create one.

Third, with the exception of certain non-negotiated transactions, such as tender offers or open market purchases (known as Rule 801.30 transactions), the Agencies will expect companies to identify and explain “each strategic rationale” for the transaction that was discussed or contemplated by its officers, directors or employees. If the rationale of the acquiring entity is different from the UPE, both rationales must be submitted. This change further requires companies to identify every document produced in the filing that confirms or discusses the stated rationale(s), including by providing citations to the specific page(s) of the document that discuss the stated rationale(s).

Fourth, with respect to any transaction involving the formation of a joint venture or an unincorporated entity, the Final Rule will require the filing parties to submit a general description of the business in which the joint venture or unincorporated entity will engage, including principal types of products or activities and the geographic areas in which it will do business.

Fifth, filing parties will need to submit additional information about minority shareholders or interest holders, as well as officers and directors from the acquiring person. These rules target what the Agencies characterize as a “blind spot” that has prevented thorough premerger screening for transactions involving complex corporate structures and investment vehicles. The FTC deems these rules necessary to identify additional areas of competitive concern created by minority stakeholders or “influential decision-makers” who have existing relationships with entities that are related to the target of the acquisition. With the Agencies’ eyes on private equity and similarly structured entities, this requirement comes as no surprise. The Final Rule is limited, however, and does not adopt proposed requirements that would have required filing parties to identify board observers, creditors, holders of non-voting securities or entities with management agreements.

Further, in conjunction with requiring parties to submit more comprehensive descriptions of the transaction, the Agencies plan to launch a new online portal that invites and makes it easier for the public to submit information and complaints on proposed transactions and to show how they might affect competition. The open invitation for comments from various stakeholders, such as consumers, workers or competitors, signals the Agencies’ intention to analyze other “blind spots” missed by traditional HSR review, such as impacts on the labor market and concerns from other advocates.

What do the additional descriptive requirements mean for buyers and sellers?

Although the Agencies assert that they do not seek to require parties to submit “an antitrust analysis akin to a ‘white paper’” or hire experts to delineate the relevant area of competition, the overlap and supply relationships descriptions require parties to carefully consider what facts they proffer about their products, services and common supply relationships, and how those narrative descriptions may be interpreted by regulators. That is a cumbersome task not currently mandated by the HSR rules. The requirement that parties identify strategic rationales for the merger and pinpoint documents reflecting these strategic rationales will significantly increase the preparation time, cost and administrative burdens for filers. It is likely that parties will acutely feel those burdens in large, cross-border transactions, given the array of strategic considerations raised by such transactions across a company’s global supply chain. Moreover, the requirements to submit charts reflecting companies’ ownership structure and to identify certain officers and directors not only presents new burdens of production in merger clearance but also presents risk by “unmasking” the corporate relationships between affiliated entities to a higher degree than the previous rules.

Detailed letters of intent, draft agreements or term sheets

Under the Final Rules, filers that have not executed a definitive transaction agreement will be required to submit a document that provides “sufficient detail” about the scope of the transaction, such as a draft agreement or term sheet. Although filers may currently submit preliminary agreements – such as an indication of interest, letter of intent or agreement in principle – the Agencies contend that a “small but significant minority” of filings made on the basis of such preliminary agreements do not contain enough detail to enable an accurate analysis of whether the proposed deal violates the antitrust laws. The Agencies further conclude that this change is necessary to ensure that filings are not made prematurely – i.e., “before the scope of the transaction has been sufficiently determined” and prior to the parties undertaking due diligence “such that consummation is not merely hypothetical.” The Final Rule, however, does not specifically require parties to submit term sheets or draft agreements for all transactions in which a definitive agreement has yet to be executed. In response to numerous comments focused on the increased burden and delay for filing parties of the proposed regulation, the Agencies have charted a middle course.

Going forward, filers will continue to be required to submit an executed agreement. But if that agreement, in the Agencies’ view, does not describe with specificity the scope of the transaction, filers must also submit an additional dated document (such as a term sheet or a draft definitive agreement) that contains more detail about the transaction. The Agencies emphasize that simply submitting a term sheet or draft agreement is not dispositive; what matters is the degree of detail about the transaction supplied on the face of the document. In this respect, the revised instructions clarify that the definitive agreement or supplemental document should contain some combination of the following terms: “the identity of the parties; the structure of the transaction; the scope of what is being acquired; calculation of the purchase price; an estimated closing timeline; employee retention policies, including with respect to key personnel; post-closing governance; and transaction expenses or other material terms.” Although the Agencies have indicated that less than 10 percent of transactions submitted in 2021 would have failed to provide the requisite degree of detail, this change may significantly impact the timing of premerger filings under the HSR Act, mandating that companies must have meaningfully negotiated key terms prior to filing on the basis of an executed letter of intent or other non-definitive agreement.

Areas of future competition and emerging rivals

The Agencies have taken the position set forth in the 2023 Merger Guidelines that Section 7 of the Clayton Act mandates scrutiny over acquisitions that may eliminate emerging rivals or threaten competition in lines of products that are still in development. Changes to the HSR form will require information about products and services under development that are not yet generating revenues. For pre-revenue companies with innovative products, this information may raise the risk of a second request for information. In advocating for this change, the FTC specifically cites enforcement actions involving pipeline products still in early-stage development and markets for research and development, suggesting that the revised HSR form will “bolster these efforts.” This signals that the Agencies intend to intensify their scrutiny of transactions involving emerging rivals or innovative products.

Identifying a greater range of prior acquisitions

The Agencies seek to prevent companies from strategically consolidating a market in piecemeal fashion. To that end, the Final Rule also includes changes designed to target “the rise of serial acquirers” – firms that engage in several strategic acquisitions in the same industry or “roll up” smaller competitors in the same or adjacent markets. Citing private equity firms and investors who have deployed roll-up strategies in housing and health care markets, in particular, the Agencies will now require companies to report prior acquisitions the company has made within the same lines of business, and both acquiring and acquired entities must provide information on certain acquisitions that closed within the previous five years. This historical analysis reflects a substantial change in enforcement and may lead to more second requests or enforcement actions on the basis of a company’s strategic expansion in the same market.

International merger control

Particularly with respect to cross-border transactions, the Final Rule imposes a new requirement that acquiring persons identify whether a transaction is subject to merger control in a foreign jurisdiction. Currently, such disclosure is voluntary. Specifically, a filing entity must now compile and submit a listing of each jurisdiction in which it has already filed or is preparing notifications to be filed, as well as a list of the jurisdictions in which it has a good faith belief it will file. The change reflects a keen interest in inter-agency consultation in the event that ex-U.S. jurisdictions are evaluating the competitive impacts of a transaction. Although the requirement will only impact companies with international revenues, any cross-border transaction will now require closer coordination between U.S. antitrust counsel and foreign counterparts.

Looking ahead

The proposed Final Rule in many ways is an acknowledgement that some of the Agencies’ most sweeping amendments would impose costs on merging parties that are not proportionate to the Agencies’ interests in evaluating the competitive impact of a deal. The Agencies abandoned significant aspects of the proposed rule changes – including onerous requirements concerning information about a company’s workforce to screen for potential impacts on labor markets – in response to feedback from industry stakeholders. But make no mistake: Massive changes are coming to U.S. merger control.

From a practical standpoint, it is important to understand that the HSR filing process will soon require the parties to expend far more effort than was required under the old rules. Merger control already consumes scarce resources in the transaction process. Now, parties will be required to devote substantially more resources over a longer time horizon. For frequent filers and businesses considering transactions in 2025, it is imperative to consult with antitrust counsel now to begin the process of compiling the information required under the Final Rule so as to minimize delays to transaction timelines when the Final Rule goes into effect in early 2025. Moreover, buyers and sellers should work with antitrust counsel to create and implement best practices for deal teams to manage risk at the outset of a transaction in light of the Final Rule – particularly with respect to document creation, given the broader criteria for responsive documents. At the same time, the Agencies plan to lift the temporary suspension on requests for early termination for filings in an effort to reduce the timeline to approval for transactions that present little competitive risk, citing the more comprehensive new requirements as providing sufficient information to quickly determine which transactions pass muster.

In this respect, it is important to remember that while the Final Rule “pares back some of the labor market requirements,” in the words of FTC Chair Lina M. Khan, “the information required by the other provisions of the Final Rule will position the Agencies to identify transactions that threaten competition in labor markets.” In other words, the new requirements to submit overlap and supply relationship descriptions and high-level business- and transaction-related documents are, in the Agencies’ view, sufficient to address their concern about the competitive impacts of transactions on labor markets. How the Agencies use these new tools – and the associated burdens to filing parties – will present real risks to deals moving forward.

In-depth 2024-212