In a move that could dramatically reshape the landscape of mergers and acquisitions in the United States, the Federal Trade Commission (FTC) and Department of Justice (DOJ) have proposed sweeping changes to the Hart-Scott-Rodino (HSR) Act filing process. These changes, if implemented, are expected to substantially increase the time, resources, and costs associated with completing M&A transactions.
The proposed revisions, first announced in June 2023, represent the first major overhaul of the HSR Act since its establishment in 1976. Under the new rules, companies involved in M&A deals exceeding $119.5 million would be required to provide significantly more detailed information in their filings.
The FTC estimates that the time needed to complete an HSR filing could quadruple under the new rules. However, many industry experts believe this might be an underestimate. What currently takes about a week could extend to a month or longer, significantly impacting deal timelines and strategies.
Key areas of expanded disclosure include:
Detailed Ownership Structures and Business Operations
The new rules demand unprecedented transparency in corporate structures. Companies must now provide intricate entity structure charts, detailing management entities, general partners, and co-investors. This extends to foreign investors and entities with board nomination rights. Creditors providing significant funding must be disclosed, along with comprehensive organizational charts showing all affiliates and associates. Even the names and roles of key personnel across controlled entities are required, creating a complex web of disclosure.
Transaction Rationale and Potential Competitive Effects
Under the proposed changes, companies must articulate their motivations for the deal with greater clarity. Narrative responses explaining the transaction rationale are now mandatory. Firms must also delve into potential horizontal competitive effects, necessitating thorough market analysis. In a move that could expose deals to increased scrutiny, contact information for top customers in areas of competitive overlap must be provided, potentially inviting direct feedback from market participants.
Vertical and Horizontal Supply Relationships
The new requirements cast a wide net over business relationships between merging parties. Companies must now disclose all existing or recently expired non-transaction-specific agreements, including supply, license, and collaboration agreements. This comprehensive approach aims to give regulators a clearer picture of how the merging entities are already intertwined, potentially highlighting areas of concern that were previously overlooked.
Labor Market Overlaps and Workplace Safety Information
Labor markets are now under the regulatory microscope. Companies must provide detailed employment data, including Standard Occupational Classification codes for their major worker categories. The geographic distribution of employees in overlapping job categories must be disclosed, spotlighting potential labour market concentration issues. Additionally, any history of labour law violations or safety infractions must be reported, adding a new dimension to merger review.
Comprehensive Transaction-Related Agreements
The scope of required documentation has expanded significantly. All transaction-related agreements, including ancillary documents like employee retention agreements and transition services agreements, must be submitted. Side letters and exhibits are no longer exempt. For deals involving government contractors, additional disclosures about procurement relationships with defence and intelligence agencies are mandatory, potentially complicating national security-sensitive transactions.
Historical Acquisition Data Spanning the Past Decade
Regulators are now looking at M&A activity through a wider lens. Companies must compile and submit data on all acquisitions made over the past ten years. This long-term view allows regulators to assess patterns in a company’s growth strategy and identify potential cumulative effects on market concentration. This historical perspective adds another layer of complexity to the review process, potentially flagging concerns that might not be apparent when looking at a single transaction in isolation.
The proposed changes would also require companies to implement stricter document retention procedures and attest to the accuracy of their filings.
For private equity firms, the impact could be even more pronounced. The new rules would require disclosure of limited partners, co-investors, and other entities that may exert influence over the acquiring company, potentially complicating deal structures and partnerships.
While the implementation date for these changes remains uncertain, experts advise companies to start preparing now.
If you’re thinking about M&A in the United States, be prepared for a process that’s about to become significantly longer, more complex, and more expensive. As the regulatory environment tightens, thorough preparation and strategic planning will be key to navigating these new challenges in the world of mergers and acquisitions.
Was this article helpful?
YesNo