In Gershwin’s Summertime, “the living is easy”, but not for dealmakers and M&A lawyers. In recent weeks, the Department of Justice and Federal Trade Commission have embarked on the largest formal revisions to antitrust enforcement policy in a generation – revisions that represent a highly skeptical and pessimistic view of the ability of the economy and markets to serve consumers’ interests without government intervention.
The two agencies, tasked with merger review and antitrust enforcement in the U.S., have published draft revisions to the Hart-Scott-Rodino (HSR) merger review process and Draft Merger Guidelines for public comment. After the comment period ends next month, the agencies will publish final rules and guidelines which will likely go into effect around year-end.
Whether this is a wish list that is meant to be pared down, or something the agency will hold firm on remains to be seen. But what’s clear is merger review is about to get thornier. The proposed changes will make for a longer merger filing process and increase deal costs for companies, which will ultimately impact ROI, chilling some future dealmaking. Among the numerous changes that practitioners and dealmakers should familiarize themselves with, these stand out.
The overarching takeaway from both proposals is that merging parties should expect greater scrutiny for transactions. This appears in concrete ways such as the Draft Merger Guidelines setting lower thresholds for market share and market concentration than in previous guidelines. Additionally, the revised HSR notification requirements will include new sections requiring filers to explain the strategic rationale for the transaction and describe their business lines and the current state of their relevant markets. While these narrative sections will increase the time required and cost of HSR filings, they also present an opportunity for advocacy.
Practitioners should use these narrative responses to present the transaction in a favorable light to the agency consistent with the available facts. These responses can highlight efficiencies and other pro-competitive effects from the deal. Narrative responses can provide regulators with needed context to consider a transaction which can facilitate review, especially for the numerous transactions that raise no competitive concerns.
Private Equity Deals
The agencies have repeatedly expressed skepticism regarding private equity “serial acquisitions”. According to the Draft Merger Guidelines, partial or minority acquisitions, such as those involving private equity, raise concerns of potential misuse of competitively sensitive information and interlocking directorates across entities. Similarly, the new HSR rules bring in typically “off-limits” reporting such as the identity of private equity fund limited partners/investors – historically strongly opposed by the investment community. Filers will also be required to provide PE fund structures and investment vehicle funding sources.
PE Firms and their representatives have already begun to socialize the new HSR regime with investors. If the proposals go into effect, parties to PE-backed transactions will need to provide significantly more information to regulators, so advance preparation will be essential.
Mergers’ effect on labor markets, across industries, has been a key talking point for the current administration although not a historic focus of antitrust enforcement. This area of focus is reflected in both the Draft Merger Guidelines and changes to the HSR Rules. Filers will now be required to provide detailed information on their workforce, and plans that would affect workers post‑transaction.
The Proposed HSR Changes will Require Filers to:
Identify the five largest categories of workers organized by the Bureau of Labor Statistics’ classification system (SOC codes) and provide the total employee count for each code
Identify the five largest SOC codes in which both transacting parties employ workers and provide USDA Economic Research Service (ERS) Commuting Zones for all workers in each overlapping SOC code; and
Provide worker and workplace safety information for the last five years.
To facilitate the HSR process, regularly filing companies can collect this workforce information in advance. While there may be additional ways to mitigate the burden this requirement will impose, the reality is that if these changes go into effect, the burdens will be dramatically increased.
What Dealmakers Can Do
Looking forward, the following best practices and considerations will help streamline the HSR process and position deals for quick and painless clearance so you can get on with your business:
1. Plan AheadFor investment firms that file frequently, along with operating companies that regularly make acquisitions, many parts of the new filing requirements that are buyer-specific can be ‘pre-built’ and ready to go for filings as they arise. This has the benefit of being able to move faster – which can be a key competitive advantage in deals – while ensuring consistency on an ongoing basis with respect to statements made and positions taken in filings.
2. Be StrategicNew filing requirements calling for narrative responses relating to transaction rationale, markets, competitive landscape, and labor impacts provide an opportunity for advocacy to best position a transaction for approval. Think about this part of the submission as a mini white paper on the deal that would be submitted to the agency in response to a preliminary investigation.
3. Maintain a Good RecordWhile the new filing process provides real opportunities for advocacy, it will be key to establish and maintain a solid evidentiary basis for statements made and positions taken.
4. Stand your GroundPlan to stand by the level of detail and statements made in filings under the new rules. Invariably, the agencies will use ambiguities in the new filing requirements to push for additional disclosures and clarifications, and time. While the extent to which parties respond to such inquiries is a strategic decision, a key point and precedent to establish early on under the new rules and filing process is that the submission of a complete and compliant HSR form triggers HSR review and the waiting period.
5. Use the Agencies’ PlaybookThe Draft Merger Guidelines, while brutal in their approach to capital movement, also provide the perfect playbook for how to get deals through. No need to read lips to steal plays here – making sure every element of the guidelines is addressed and supported is the surest and quickest path to approval and deal completion.
The changes to HSR notifications and the Draft Merger Guidelines provide key insights to dealmakers and practitioners into how the agencies are viewing transactions, pursuing investigations, and arguing their cases in court – though often to an unreceptive judiciary. The Agencies are making a concerted effort to expand the pool of deals that will face antitrust headwinds, while simultaneously gathering significantly more information through initial HSR filings. While the FTC and DOJ have been tightening the merger review process over the course of the Biden administration, the proposed changes mirror the increasing time and resource commitment required for merger filings internationally. If implemented, the U.S. will no longer be an exception to the more time-consuming merger notification process in place in other major jurisdictions. Expect to see a rush of HSR filings in the lead-up to implementation of the new rules as firms try to take advantage of the current, less burdensome, filing requirements.