Dealmakers Face a Time-Consuming Filing Burden Under New Rules

The Federal Trade Commission, along with the Department of Justice finalized new rules for companies seeking a merger that dramatically changes the amount of information and number of documents to be produced up front to the agencies.

The new rules under the Hart-Scott-Rodino Antitrust Improvements Act don’t change whether parties need to file with the agencies, but rather how they file. The changes will make filing HSR more akin to responding to a preliminary investigation and it will be both more burdensome and significantly more expensive for filers.

Burden Shift

Under the current form, competitive overlap is described primarily via industry codes, specifically the North American Product Classification System and the North American Industry Classification System codes. Parties in the US must choose which code(s) best fit their business. If there is a six-digit code overlap between the buyer and target, the parties provide additional data such as geographic information.

While the current form can produce both false positives and false negatives—in part because of nebulous codes—the current form also takes the burden off filers to define the parameters of competition and whether the merging parties are both engaged in the same “market.” The collection of competition-related deal documents created by or for officers and directors supplements the view of competition.

Now, in deals with potential overlaps, the burden on defining the competitive landscape has clearly shifted to the filing parties. Parties will need to produce certain ordinary course documents that wouldn’t normally be part of a filing. Parties must now describe competitive overlaps, supplier relationships, and the deal rationale. Filers must also disclose customer lists in overlapping products or services.

Pushback to these provisions cited the need for filing parties to engage antitrust counsel, economists, and other professional consultants on every deal regardless the impact on competition. But the FTC has dismissed these complaints, saying the narrative sections are merely descriptions to be filled out by business people, not experts, and should be consistent with other business documents submitted with the filing.

In addition to information about the competitive landscape, the new form requires more information about the ownership structure of the parties. The form requires some filers to disclose certain officers and directors for what seems like a mandatory interlocking directorates assessment.

Section 8 of the Clayton Act prohibits so called interlocking-directorates—executives serving as an officer or director of two competing companies. Filers in overlapping deals will now provide the information the agencies need to open such an investigation.

Also—in line with the agencies’ foreign counterparts—the agencies are pushing for the disclosure of foreign subsidies. Both buy-side and sell-side must disclose such contributions. They must also list other merger control jurisdictions where they will file.

Future Enforcement

These provisions are aimed at more aggressive antitrust enforcement, providing information up front that the agencies would normally only receive after opening a preliminary investigation. Barring a stay in implementation, the final rules will likely go into effect in late January.

Whether lawsuits will follow—like they did for the recent non-compete rule—is still to be seen. It’s unclear if and how the election could change implementation. The FTC put a great deal of effort into getting its Republican commissioners on board, a move that may stymie resistance to the new normal for HSR filings.

Republican Commissioner Melissa Holyoak has gone on record saying the initial proposal was unlikely to “survive any sort of judicial review.” However, her Oct. 10 statement released along with the finalized rules, states that they are “consistent with the statutory grant of authority.”

Companies should take the following steps:

• Companies should review whether directors and officers have other board seats or positions. They should break any potential interlock now before they need to file HSR.
• Officers, directors, deal leads, and the employees that create documents for them should receive immediate antitrust training. They need to be aware of how their wording can impact reviews of transactions given the expanded document collection, including drafts sent to any member of the board.
• Companies currently considering a deal should discuss the competitive landscape with antitrust counsel and plan for customer outreach now that the FTC and DOJ will have customer names as soon as a filing is made.
• All frequent filers should begin to think about how they can save time—and money—by collecting certain needed information annually.
• Parties already in negotiations will need to rethink the deal timeline, especially the number of business days to get on file for those who haven’t prepared for the implementation of these new rules.

The new rules come with an estimate of 68 extra hours to complete a filing, with an average low of 10 hours for transactions subject to rule 801.30 (open market purchases, tender offers, exercise of options or warrants, conversions) and an average high of 121 hours for filings from a buyer with competitive overlaps. This is likely a conservative estimate.

Given the current environment, parties with deals in the pipeline that can’t get on file by year-end will need to start collecting the new information immediately and should be consulting with their antitrust counsel as soon as possible.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Ryan Phair is co-chair of Paul Hastings’ antitrust and competition practice.

Michael Murray is co-chair of the Paul Hastings’ antitrust and competition practice and served as the principal deputy assistant attorney general at the Department of Justice.

Catherine Kordestani is of counsel at Paul Hastings, where her practice focuses on obtaining merger clearance under the Hart-Scott-Rodino Act.

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