On October 10, 2024, the Federal Trade Commission (FTC) and the Department of Justice (DOJ), released significant updates to the Hart-Scott-Rodino (HSR) premerger notification and filing rules. These are the most comprehensive changes to HSR requirements since the act’s inception in 1976, aimed at addressing increasingly complex business structures and modernizing the antitrust review process. The new rules will take effect in early 2025, allowing a 90-day period for businesses to adapt. In this article, we’ll explore why the FTC implemented these new rules, how they differ from previous regulations, and the implications for companies in preparing HSR notifications and filings. The new rules will increase the burden on all filers, regardless of whether a competitive relationship exists between them.
FTC’s Motivation Behind the New HSR Rules
The FTC and DOJ cited multiple reasons for overhauling the HSR filing rules. Foremost is the need to address the evolving landscape of business deal-making, where complex mergers and acquisitions (M&A) often conceal competitive risks. Many business structures and deal strategies have become more intricate over the years, with certain information gaps making it challenging for the FTC to adequately assess competitive impacts under the old HSR framework.
These changes also align with the current FTC administration’s priorities to reinforce antitrust enforcement and are designed to provide a comprehensive view of transactions from the onset. The FTC asserts that by collecting more detailed information early on, it can more effectively screen for transactions that could reduce competition and issue a Second Request (a follow-up inquiry that prolongs the antitrust review) only when necessary. This approach not only benefits the FTC but also helps minimize reliance on third-party sources, like small businesses, to gather information about potential competitive risks.
Key Differences Between the New and Old Rules and What They Mean for Companies
The new HSR rules introduce several substantial changes, expanding the scope of required information and creating new compliance obligations. Below are the primary differences and their implications for companies preparing filings:
- Increased Documentation Requirements: Under the previous rules, HSR filings primarily required companies to submit high-level deal documents. Now, companies must provide transaction analyses prepared by designated “supervisory deal team leads” who oversee deal assessments but are not officers or directors. This extends beyond the traditional Item 4(c) and 4(d) documents which were limited to reports prepared for executives. Additionally, companies need to submit more strategic business documents, like annual plans and reports that discuss competition or market conditions. All agreements related to the transaction, such as non-compete clauses, must also be included during filing. The new rules also mandate that draft documents must be included during the filing. All submitted documents and documentation must be translated if they contain any foreign language.
- Detailed Competitive Overlap and Supply Chain Narratives: A new section in the HSR form requires a “narrative” of competitive overlap between the merging parties, including product and service categories where they directly or potentially compete. This narrative extends to potential vertical overlaps where one party supplies another or both supply a competitor. Companies must identify these overlaps and provide projected revenues and top customer data, which requires a deep dive into the companies’ supply chains and competitive interactions.
- Comprehensive Ownership and Subsidiary Information: Previously, HSR filings required basic ownership details. Now, companies must include more comprehensive ownership structures, including identifying all limited associations with significant stakes in private equity setups. This added transparency is intended to reveal potential conflicts of interest, such as “interlocks” where executives hold roles across competing entities.
- Disclosure of Foreign Subsidies and Defense Contracts: In line with national security concerns, the FTC now requires companies to disclose any foreign government subsidies, particularly from countries deemed “entities of concern,” such as China, Russia, and Iran. Additionally, contracts with U.S. defense or intelligence agencies exceeding $100 million must also be disclosed, a move aimed at shedding light on deals that may impact national interests.
- Prior Transactions: Companies must report recent acquisitions (within the last five years) related to similar business lines to identify “serial acquisitions” or market consolidation trends. This information helps the Agencies review the impact on competition beyond the immediate transaction.
- Early Termination and Public Comments: The FTC has reinstated early termination for transactions that clearly pose no competitive risks, which may allow some filings to clear in less than the standard 30-day period. Moreover, a new public portal enables stakeholders to comment on pending transactions, potentially adding another layer of scrutiny.
The changes transform the HSR notification process from a relatively straightforward regulatory filing into an extensive submission of business and strategic documents, similar to international antitrust regimes but applied across a broader range of US transactions.
Increased Burden on Companies for Initial HSR Filing
The new rules place a significantly greater burden on companies in terms of the time, cost, and resources needed to prepare HSR filings. The FTC estimates that the preparation process will take three times as long as before, a conservative estimate according to some legal professionals, especially for companies with complex competitive overlaps. Several factors contribute to this increased burden:
Extensive Document Collection and Analysis: The need to gather, organize, and analyze additional documents — such as detailed competitive strategies, internal reports, and business plans, along with certain draft documents — requires substantial effort. Companies must prepare descriptions of supply chain relationships and detailed competitive narratives that were not previously necessary. This means greater involvement from cross-functional teams, from legal and finance to operations and market analysis, to ensure a comprehensive and compliant filing.
Increased Compliance and Legal Risk: With more detailed information required in the initial filing, companies face greater scrutiny and potential liability. Statements regarding competitive overlaps, revenue projections, and market strategies must be carefully crafted, as these filings can become part of the record if the FTC pursues an investigation. Consequently, companies will need to exercise caution to avoid providing information that could raise red flags, especially in markets with limited competition.
Cost Implications: The expanded filing requirements translate directly into higher costs. Many companies may find it necessary to set aside larger budgets for antitrust compliance, legal consultations, and internal resources dedicated to document preparation. This increased financial burden is likely to be particularly pronounced for serial acquirers who frequently undergo HSR reviews.
The Need for Early Involvement of Outside Counsel and Consultants
Given the complexity and breadth of the new HSR requirements, companies can no longer wait until the Second Request stage to involve Outside Counsel and consulting vendors. Instead, early engagement with legal advisors and consulting firms is essential for several reasons:
Strategic Document Preparation: Outside Counsel can help companies frame their competitive overlaps and market rationale to help minimize potential antitrust concerns. For example, descriptions of product or service overlaps must be both accurate and strategically crafted, as inconsistencies or vague narratives could raise questions that prolong the review process. Consulting vendors with experience in market analysis can assist in producing clear and concise narratives that align with the FTC’s requirements.
Efficient Document Collection and Review: Legal and consulting professionals are better equipped to manage the extensive document review and collection process. By involving counsel early on, companies can ensure that key documents are organized and reviewed for relevance and compliance. The new requirement to include draft documents also requires technology vendors with skills to locate and forensically collect prior versions of documents which must be included in the filing. This proactive approach reduces the risk of errors or omissions that could lead to delays or even penalties during the review.
Risk Mitigation and Compliance: With higher stakes associated with the initial filing, Outside Counsel can help companies understand the full scope of compliance requirements, identifying potential areas of concern before they escalate into formal investigations. Consulting firms, particularly those with skills in antitrust and regulatory compliance, can assist in gathering data on product categories, revenue projections, and customer relationships to meet the HSR form’s rigorous standards.
Cost-Effective Preparation for Potential Second Requests: Preparing a robust initial filing reduces the likelihood of a Second Request, which can be both costly and time-consuming. Second Requests often involve a deeper level of investigation that could disrupt business operations. By anticipating the FTC’s requirements in the initial filing, companies can mitigate the risk of a prolonged review process and the associated costs.
BDO’s Perspective
The recently issued rules mark the largest transformation in the pre-merger clearance process in over four decades. BDO’s primary takeaways and insights:
Increased Burden on Companies, Law Firms, and Consultants: The new rules are designed to support more thorough fact-finding from the onset, enabling regulators to better determine if a deal should undergo deeper scrutiny through an investigation and formal Second Request. Historically, less than 1% of all HSR notifications are scrutinized in this way, and this percentage is expected to remain steady under the new rules. Consequently, for the other 99% of HSR filings, the increased burden doesn’t impact the outcome of the transaction, but it will lead to higher costs for outside support.
While some view the new requirements as an opportunity for companies to advocate for their transactions earlier, many law firms argue companies already had the chance to voluntarily present relevant data during the HSR filing process. Therefore, although the rules aim to refine scrutiny for the few deals that warrant it, they add a substantial burden for most transactions. Most likely, there is not a higher chance of receiving a Second Request based on the new HSR filing rules and requirements.
Need for Consultants in Initial Filings: Previously, the HSR filing process was straightforward. Now, with expanded requirements, including "ordinary course of business" documents and draft documents, gathering and preparing these records has become more complex and costly. This is especially challenging for smaller and mid-market companies that may lack experience with eDiscovery technologies and processes. Efficient eDiscovery is crucial for identifying, collecting, and submitting documents. While the volume of Second Requests may remain unchanged, the enhanced First Request (“1R”) process will require more input and support from Outside Counsel and eDiscovery consultants during the filing. For transactions likely to attract more scrutiny, companies will need external resources to manage both the 1R and, if it arises, the Second Request (“2R”) response. Starting this work earlier enables more effective planning and compliance with stringent timelines.
Long-Term Permanence of These Rules: Unlike the recent turmoil surrounding the FTC’s stance on non-compete clauses, the new HSR filing rules are here to stay. The bipartisan nature of this update, with unanimous support from a committee of three Democrats and two Republicans, underscores its stability. Given this strong cross-party support, it is highly unlikely that these rules will be rolled back anytime soon.