October 21, 2024 October 21, 2024 ,

On October 10, 2024, the U.S. Federal Trade Commission (FTC) finalized sweeping changes to the Hart-Scott-Rodino Act (HSR) premerger notification rules (“Updated HSR Rules”), introducing substantial changes to disclosure and reporting requirements for transactions.

As discussed in our previous analysis of the proposed changes, these Updated HSR Rules significantly increase the regulatory burden on private equity firms and other entities involved in transactions. The rules underscore regulators’ growing focus, in particular, on private equity’s role in mergers and acquisitions. FTC Chair Lina Khan, in a statement, explicitly referenced the agency’s concerns about private equity roll-up tactics in industries such as healthcare and veterinary services.

Overview of the Updated HSR Rules

The FTC’s final rule, anticipated to take effect in January 2025, does not alter substantive antitrust doctrine but will make the M&A process more burdensome by expanding the scope of information, from buyers and sellers, that must be provided to the government in pre-merger HSR filings. Some of the key changes and updates include:

  1. Item 4(c)/(d) Documentation: Previously limited to materials prepared for officers and directors, the new rule now covers, among other things, documents prepared for or by a “supervisory deal team lead,” defined as the individual primarily responsible for supervising the strategic assessment of the deal, even if they are not an officer or director. 
  2. Detailed Narrative Descriptions: The new rules mandate narrative descriptions covering: a) transaction rationale, b) products and services sold by each party, including overlaps, c) top 10 customers for overlapping products or services, and d) supply relationships between the parties. These narratives are intended to provide regulators with a clearer understanding of the strategic intent behind transactions and their potential market impacts.
  3. Expanded Ownership Information and Organizational Structure: The new rules introduce significant changes to disclosure requirements, in particular for deals involving private equity and complex organizational structures. These changes aim to provide regulators with a more comprehensive view of complex ownership structures, including broader disclosure of minority investors’ names, contact information and ownership levels.
  4. Prior Acquisition History: Acquired entities must now report acquisitions going back five years, including those involving substantially all assets of a business. This change allows regulators to assess potential cumulative effects of multiple acquisitions within the same business line.

Impact on Private Equity

  1. Increased Scrutiny on Roll-up Strategies: FTC Chair Lina Khan explicitly referenced concerns about private equity roll-up tactics, and some of the new requirements are designed to shed light on these strategies and their potential competitive impacts.
  2. Disclosure of Complex Ownership Structures: Private equity firms will need to provide more detailed information about their ownership and investment structures.
  3. Focus on Cumulative Effects: The requirement to disclose five years of prior acquisitions allows regulators to assess the cumulative competitive impact of multiple small acquisitions, a common private equity strategy.
  4. Transaction Rationale Scrutiny: The mandated narrative on deal rationale could expose more of the strategic thinking behind private equity acquisitions, potentially leading to increased regulatory scrutiny.

Practical Implications for Deal-Making

The Updated HSR Rules will have multifaceted impacts on deal-making. The FTC estimates an additional 68 hours on average to complete new filings, with costs rising by nearly $40,000 per filing. Deals timelines may have to be adjusted as well, as parties adapt to uncertainties in merger clearance timing. Deal parties must also take the new rules into account in due diligence processes to incorporate expanded disclosure requirements, which also may extend deal timelines. Parties will also need to be more mindful of how they document deal rationales and competitive analyses, as these narratives will likely be subject to greater regulatory scrutiny. 

Looking Ahead

  1. Potential Legal Challenges: While the FTC voted unanimously to adopt the Updated Final Rules, there may be attempts to delay or prevent its implementation through legal challenges.
  2. Closing Deals Under Current Rules: The Updated HSR Rules are not expected to take effect until January, 2025, so parties may push to speed up the HSR process for pending deals.
  3. More Information to Come: The FTC indicated that it will be providing additional compliance guidance prior to the Updated HSR Rules taking effect.

Conclusion 

The finalization of the Updated HSR Rules ushers in a new era of regulatory oversight for M&A activity, particularly for the private equity industry. We will continue to monitor and update you regarding new developments related to the FTC’s actions.