Merger Program Overhaul Adds Compliance Burdens for Companies

A sweeping overhaul of a merger notification program overseen by US antitrust regulators will place far more demands on companies and their counsel, ultimately raising the compliance costs for deals.

The revamp, which was unveiled Oct. 10 and is set to take effect in January, is part of the Biden administration’s effort to sharpen its scrutiny of mergers and acquisitions across the economy.

Under the Hart-Scott-Rodino Act, companies making acquisitions valued at more than $119.5 million must submit a form giving the Federal Trade Commission or the Justice Department 30 days to review the deal.

The form is designed to give agencies information about a company’s business, but Biden antitrust officials say the current disclosure requirements have been inadequate given the increasing sophistication of deals. Companies seeking to merge will now be required to disclose far more information, on areas such as overlapping businesses and supply links, that will eat up more time and costs.

FTC Chair Lina Khan branded the update a “generational upgrade” that will allow for more effective oversight of mergers that may hurt competition or help create monopolies.

The added burdens won’t chill the appetite for deals inside boardrooms, Bruce McCulloch, an antitrust partner at Freshfields Bruckhaus Deringer LLP in Washington, said. But they will amount to a “greater tax on doing a deal,” he said.

Time, Cost Burdens

HSR forms up to now could be akin to a tax filing, usually taking law firms less than a week to complete, according to some M&A advisers. The additional reporting requirements will, however, require more time and resources.

Lawyers will bear the brunt of that workload, but in-house legal and compliance departments will swallow those costs.

The FTC projects the new HSR form will on average take 68 additional hours to complete, with an average low of 10 hours for an acquired entity and an average high of 121 additional hours for an acquirer. Added costs could run from $5,830 to $70,500 and will likely depend on the size of transactions.

The highest costs will be borne by the acquiring firm in a transaction with overlapping products or supply relationships in the target’s industry, per the FTC. Filings that are “more likely to raise antitrust risk” will require “higher hours,” the agency said in revealing the rule.

McCulloch, whose firm advised on 156 deals worth $197 billion through the first three quarters this year, said “run-of-the-mill simple filings” will create three times the burdens under the new HSR regime.

A more complicated filing, one where the merging entities have competitive overlaps or existing supply relationships, will create “anywhere from five to seven times the burden,” he said.

Document Collection

Beyond costs, in-house counsel will feel the added burdens most from the extensive demands for internal records. They include requirements for certain “ordinary-course-of-business” documents, including plans and reports shared with the CEO or board.

“When you have a deal, you have a year’s worth of potential documents that you need to go back through for the CEO,” McCulloch said. “Ordinary-course basically doubles the burden for document collection.”

The disclosure requirements are scaled back from a proposal released last year, with the agencies nixing requests for information on merging firms’ labor forces. But they still demand internal records across a much broader scope.

The new form asks for high-level business plans linked to competition and more details about ownership structure. The latter provision will affect private equity in particular because of the various stakeholders that may have connections to a transaction.

Transaction-related documents prepared for or by the supervisor of each merging party’s deal team are also targeted. The current form already asks for such documents from a company’s officers and directors.

A requirement to translate any foreign-language documents into English will in some cases add a significant amount of time for cross-border transactions, according to Deidre Johnson, head of Ropes & Gray LLP’s premerger notification program.

Overlaps, Supply Link Descriptions

The updated HSR form adds questions going well beyond the “data and document heavy” approach of the current program, Aleksander B. Livshits, a Fried Frank antitrust partner in New York, said.

Regulators want information on the deal rationale and descriptions on the merging entities’ overlapping product lines and supply chain links—asks that could involve some discretion.

“Some of the information required around overlaps—who are your competitors, customers—those are substantive antitrust points that companies are going to have to be really careful about,” Mike Keeley, head of Axinn, Veltrop & Harkrider LLP’s antitrust practice in Washington, said. “You can’t just write it down to get the form done. You have to worry about how that will be interpreted by a regulator.”

Such disclosure requirements could place significant costs on filers, the FTC acknowledged.

At the same time, these descriptions will be highly relevant to screening potential anticompetitive deals, the agency said.

Transaction Terms

Another key change includes stricter requirements for transactions reported at a preliminary stage in the deal negotiations, Foley & Lardner LLP said in a note.

The new HSR form requires merging parties to reach an agreement on terms such as the structure of the transaction, employee retention policies, and the scope of what is being required. That could lead more companies to file at “a later stage, not on the basis of very preliminary agreements,” Johnson added.

“The new rules require more certainty on transaction terms,” she said, “making it more difficult to file on very preliminary agreements.”