Proposed HSR Rule Changes:
What GPs Should Do Now
In recent years, antitrust agencies in the U.S. have leveled their sights on the private equity industry, which they increasingly target as a source of anticompetitive consolidation. Roll-up strategies are under heavy scrutiny, with the Department of Justice (DOJ) and Federal Trade Commission (FTC) identifying buy-and-build plays in the healthcare sector as particularly problematic. This focus is exemplified by the recent action brought by the FTC against private equity advisers Welsh Carson and JAB Consumer Partners, alleging anticompetitive roll-up transactions in the anesthesiology and the veterinary services sectors, respectively.
Against this backdrop, we turn to the FTC’s and DOJ’s recently proposed changes to the premerger notification form and related rules implementing the Hart-Scott-Rodino Act (HSR)1. These changes, which were jointly proposed by the FTC and DOJ on June 27, 2023, relate to the premerger filings required under HSR. If adopted, the changes would greatly increase the cost and overall timeline to clear all transactions, including those that do not present any competitive overlap, by creating burdensome disclosure requirements for transactions that meet the pre-merger reporting thresholds (generally those larger than $111.4mn). Some of these changes are particularly relevant to private equity fund advisers (GPs).
In recent years, antitrust agencies in the U.S. have leveled their sights on the private equity industry, which they increasingly target as a source of anticompetitive consolidation. Roll-up strategies are under heavy scrutiny, with the Department of Justice (DOJ) and Federal Trade Commission (FTC) identifying buy-and-build plays in the healthcare sector as particularly problematic. This focus is exemplified by the recent action brought by the FTC against private equity advisers Welsh Carson and JAB Consumer Partners, alleging anticompetitive roll-up transactions in the anesthesiology and the veterinary services sectors, respectively.
Against this backdrop, we turn to the FTC’s and DOJ’s recently proposed changes to the premerger notification form and related rules implementing the Hart-Scott-Rodino Act (HSR)1. These changes, which were jointly proposed by the FTC and DOJ on June 27, 2023, relate to the premerger filings required under HSR. If adopted, the changes would greatly increase the cost and overall timeline to clear all transactions, including those that do not present any competitive overlap, by creating burdensome disclosure requirements for transactions that meet the pre-merger reporting thresholds (generally those larger than $111.4mn). Some of these changes are particularly relevant to private equity fund advisers (GPs).
The comment period on the proposed rules closed on August 28, 2023. Before the changes can be implemented, the agencies will need to release a proposed final rule. The agencies recently indicated that they anticipate doing so in a matter of weeks. The rule will then be subject to some further administrative steps and potential Congressional review. In addition, any final changes may be subject to legal challenge. As a result, it is unclear if and when these changes will be adopted.
Additionally, the agencies have also suggested that they expect the final rule to differ from the proposed rule—however, the agencies’ recent track record in responding to public comment is to make largely cosmetic changes that do not substantively alter their original proposals. Thus, despite some uncertainty, GPs should consider familiarizing themselves with the scope of the proposal now, to shore up their policies and procedures and to identify any potential implications for their obligations under fund operating documents and side letter agreements.
Below we provide a brief overview of the proposed HSR changes, their potential impact on GPs and recommended steps GPs can take now to prepare for additional antitrust scrutiny.
The comment period on the proposed rules closed on August 28, 2023. Before the changes can be implemented, the agencies will need to release a proposed final rule. The agencies recently indicated that they anticipate doing so in a matter of weeks. The rule will then be subject to some further administrative steps and potential Congressional review. In addition, any final changes may be subject to legal challenge. As a result, it is unclear if and when these changes will be adopted.
Additionally, the agencies have also suggested that they expect the final rule to differ from the proposed rule—however, the agencies’ recent track record in responding to public comment is to make largely cosmetic changes that do not substantively alter their original proposals. Thus, despite some uncertainty, GPs should consider familiarizing themselves with the scope of the proposal now, to shore up their policies and procedures and to identify any potential implications for their obligations under fund operating documents and side letter agreements.
Below we provide a brief overview of the proposed HSR changes, their potential impact on GPs and recommended steps GPs can take now to prepare for additional antitrust scrutiny.
High-Level Summary of the Proposed HSR Changes
The proposed changes would require, among other things:
Additional information about the filer, its operations and its officers, directors, board observers, and employees, including:
- Identifying creditors of the acquiring entity and any entity that controls or is controlled by the acquiring entity,
- Identifying any person or entity that has an agreement to manage any of the entities related to the transaction,
- The organizational structure of the acquiring and acquired entities,
- For each officer, director, and board observer, a list of all other entities for which such person has served in a similar capacity in the last two years,
- A list of all communications and messaging systems used by the filer,
- Identifying all minority shareholders – including limited partners – holding 5% or more of the acquiring entity or any entity that controls or is controlled by the acquiring entity (currently, the HSR form only requires listing the GPs of limited partnerships and the identities of persons holding 5% or more of corporate entities), and
- Extensive information about employees, which would require categorizing employees by 6-digit SOC classification (an employee classification system developed by the Department of Labor Statistics), identifying the five largest categories (with the number of employees in each) and, for the five-largest overlapping SOC codes, the overlapping ERS-defined commuting zone(s) from which the employees commute and the total number of employees within each commuting zone (based on the U.S. Department of Agriculture’s ERS system, which lists more than three thousand such zones).
- Filers would also be required to provide worker safety violation information relating to the five-year period before the filing.
Additional transaction narratives and documentation, including:
- A description of “all strategic rationales” for the transaction,
- All transaction-related agreements, even unexecuted drafts and including those that were reviewed or prepared by a “supervisory deal team lead” (in addition to those reviewed and prepared by officers and directors),
- A list of all non-U.S. merger control filings, based on the filer’s “good faith belief,”
- Customer contact details and additional information regarding any overlapping products or services, and
- A detailed draft agreement or term sheet.
Extensive new information about deal history, revenues and overlaps where the filing parties both report revenues from the same company NAICS code, including:
- Anticipated revenue from “pipeline products,” and
- Prior acquisitions involving overlapping NAICS codes from the past 10 years, regardless of size (currently, the HSR form only requires reporting of overlapping acquisitions in the past five years and is limited to acquisitions of entities with annual net sales or total assets greater than $10mn).
New national security related disclosure requirements, including:
- Subsidies received by filers from countries of concern from the past two years, and
- Contracts the filer has with U.S. defense or intelligence agencies valued at $10mn or more.
For a more detailed review of the proposed HSR changes, please see Cleary Gottlieb’s client alert available here.
High-Level Summary of the Proposed HSR Changes
The proposed changes would require, among other things:
Additional information about the filer, its operations and its officers, directors, board observers, and employees, including:
- Identifying creditors of the acquiring entity and any entity that controls or is controlled by the acquiring entity,
- Identifying any person or entity that has an agreement to manage any of the entities related to the transaction,
- The organizational structure of the acquiring and acquired entities,
- For each officer, director, and board observer, a list of all other entities for which such person has served in a similar capacity in the last two years,
- A list of all communications and messaging systems used by the filer,
- Identifying all minority shareholders – including limited partners – holding 5% or more of the acquiring entity or any entity that controls or is controlled by the acquiring entity (currently, the HSR form only requires listing the GPs of limited partnerships and the identities of persons holding 5% or more of corporate entities), and
- Extensive information about employees, which would require categorizing employees by 6-digit SOC classification (an employee classification system developed by the Department of Labor Statistics), identifying the five largest categories (with the number of employees in each) and, for the five-largest overlapping SOC codes, the overlapping ERS-defined commuting zone(s) from which the employees commute and the total number of employees within each commuting zone (based on the U.S. Department of Agriculture’s ERS system, which lists more than three thousand such zones).
- Filers would also be required to provide worker safety violation information relating to the five-year period before the filing.
Additional transaction narratives and documentation, including:
- A description of “all strategic rationales” for the transaction,
- All transaction-related agreements, even unexecuted drafts and including those that were reviewed or prepared by a “supervisory deal team lead” (in addition to those reviewed and prepared by officers and directors),
- A list of all non-U.S. merger control filings, based on the filer’s “good faith belief,”
- Customer contact details and additional information regarding any overlapping products or services, and
- A detailed draft agreement or term sheet.
Extensive new information about deal history, revenues and overlaps where the filing parties both report revenues from the same company NAICS code, including:
- Anticipated revenue from “pipeline products,” and
- Prior acquisitions involving overlapping NAICS codes from the past 10 years, regardless of size (currently, the HSR form only requires reporting of overlapping acquisitions in the past five years and is limited to acquisitions of entities with annual net sales or total assets greater than $10mn).
New national security related disclosure requirements, including:
- Subsidies received by filers from countries of concern from the past two years, and
- Contracts the filer has with U.S. defense or intelligence agencies valued at $10mn or more.
For a more detailed review of the proposed HSR changes, please see Cleary Gottlieb’s client alert available here.
Potential Impact on Private Equity GPs
The most significant impacts for private equity GPs include:
Longer timeline to file
- The proposed changes to the HSR form will materially impact the time involved in making a filing. The FTC itself estimates that the number of hours required to complete an HSR filing for a transaction with no overlaps would quadruple to 144 hours, with some filings taking as long as 382 hours2. We believe these estimates are far too low. If the proposals are adopted, we recommend that a filing GP anticipate requiring several weeks or even months to gather the relevant information and prepare the filing, depending on complexity of both the transaction and the GP’s business.
Potential Impact on Private Equity GPs
The most significant impacts for private equity GPs include:
Longer timeline to file
- The proposed changes to the HSR form will materially impact the time involved in making a filing. The FTC itself estimates that the number of hours required to complete an HSR filing for a transaction with no overlaps would quadruple to 144 hours, with some filings taking as long as 382 hours2. We believe these estimates are far too low. If the proposals are adopted, we recommend that a filing GP anticipate requiring several weeks or even months to gather the relevant information and prepare the filing, depending on complexity of both the transaction and the GP’s business.
FTC’s Estimated Impact of HSR Rule Changes on Filing Times
Current estimated filing
time for non-index filings
Estimated hours needed
for filing under new rules
Source: FTC
- This significant increase in the time to prepare a filing would result not only from additional data and document collection but also from the significant increase in the new required narratives including for the first time, identification and explanation of the strategic rationale(s) for the transaction.
- In competitive acquisition processes, this may adversely affect a GP’s speed advantage over strategic acquirors, as the longer timeline to file will push out overall transaction timing.
- In addition, the longer approval timeline may increase the required timeline for debt commitments, thereby increasing the cost of the debt.
- The proposals, if adopted, could create a dynamic where the FTC rejects filings for purported technical non-compliance or encourages parties to extensively consult with staff prior to submitting filings or even to submit draft filings for “pre-filing review” – as is common in European merger control practice – which could extend the process for several months.
FTC’s Estimated Impact of HSR Rule Changes on Filing Times
Current estimated filing time for non-index filings
Estimated hours needed for filing under new rules
Source: FTC
- This significant increase in the time to prepare a filing would result not only from additional data and document collection but also from the significant increase in the new required narratives including for the first time, identification and explanation of the strategic rationale(s) for the transaction.
- In competitive acquisition processes, this may adversely affect a GP’s speed advantage over strategic acquirors, as the longer timeline to file will push out overall transaction timing.
- In addition, the longer approval timeline may increase the required timeline for debt commitments, thereby increasing the cost of the debt.
- The proposals, if adopted, could create a dynamic where the FTC rejects filings for purported technical non-compliance or encourages parties to extensively consult with staff prior to submitting filings or even to submit draft filings for “pre-filing review” – as is common in European merger control practice – which could extend the process for several months.
Greater expense to file
- Given the breadth of additional information required and the corresponding increase in the amount of time to prepare HSR filings, the changes, if adopted, would substantially increase the cost of HSR filings with respect to both in-house expenses and outside service provider expenses.
LP disclosure
- In 2011, when the requirement to disclose the identities of 5% shareholders of an acquiring corporation was adopted, the FTC acknowledged that because limited partners do not control a limited partnership, the disclosure of LP identities was not necessary. In a significant departure from its prior stance, the FTC is now taking the position that LP identities are critical to assessing potential antitrust violations by similarly requiring the identification of any limited partner with a stake of 5% or more in an acquiring entity that is a limited partnership.
Greater expense to file
- Given the breadth of additional information required and the corresponding increase in the amount of time to prepare HSR filings, the changes, if adopted, would substantially increase the cost of HSR filings with respect to both in-house expenses and outside service provider expenses.
LP disclosure
- In 2011, when the requirement to disclose the identities of 5% shareholders of an acquiring corporation was adopted, the FTC acknowledged that because limited partners do not control a limited partnership, the disclosure of LP identities was not necessary. In a significant departure from its prior stance, the FTC is now taking the position that LP identities are critical to assessing potential antitrust violations by similarly requiring the identification of any limited partner with a stake of 5% or more in an acquiring entity that is a limited partnership.
What GPs Can Do Now
In preparation for the new proposed rules, GPs should consider taking the following anticipatory steps.
Review confidentiality provisions in LPAs and side letters:
- Although the LP identities listed in HSR filings would not be shared with third parties and would be protected from Freedom of Information Act (FOIA) disclosures, the information could be disclosed as part of litigation.
- GPs should verify that their existing fund documentation allows for such information to be shared, should it be required by law.
Maintain control of document creation:
- Consider legal review of documents and drafts before sending them to officers, directors, and “supervisory deal team leads.”
- In transactions with overlaps, consider legal review of ordinary course documents before sharing them (1) with the board or (2) with the CEO or direct reports of the CEO of an entity involved in the transaction.
Review budget and expense provisions with respect to HSR filings:
- As noted above, we expect that these changes would result in a substantial increase in related costs, with respect to both in-house expenses and outside service providers. This increase in buy-side transaction expenses may require an increase in equity checks and will make GPs more focused on having such expenses borne ratably by all investors in the buy-side consortium.
When a potential acquisition is identified, diligence and document overlapping business:
- The disclosure requirements for overlapping businesses would include: details of revenues and projected revenues for overlapping products and services under development, key customers, licensing arrangements and non-compete or non-solicitation agreements, as well as research and development information for products that have not yet come to market. GPs with portfolio companies in the same supply chains would be required to provide details regarding sales to the other party and its competitors.
- Private equity GPs would be particularly impacted by these rule changes because of their propensity to repeatedly execute transactions in sub-sectors where they have built value creation playbooks and relationships over time.
- The proposed changes would also have implications for roll-up strategies, which the FTC and DOJ have already highlighted as an area of concern.
- Regardless of when and whether the HSR changes are adopted, identifying and documenting these overlaps and their impact on the “rationale” for the transaction will help prepare a GP for any future inquiry by antitrust regulators.
- To mitigate the effect of the longer timeline on the overall transaction process, GPs may want to begin preparing the filing before signing or seek to file on the basis of a non-binding term sheet.
Review and, if necessary, revise off-channel communications policies
- The proposed requirement that filers list all business communication and messaging systems indicates that the FTC and DOJ, like the U.S. Securities and Exchange Commission (SEC), are focused on the use of off-channel business communications. All GPs should be reviewing their policies regarding approved systems for business communications and related recordkeeping and ensuring that they have appropriate monitoring and testing systems in place for identifying off-channel business communications by employees.
While it is not yet known what form the final HSR changes will take, the potential for significant additional substance and complexity in pre-merger filings is clear. If the changes are adopted largely as proposed, HSR filings can be expected to take weeks – if not months – instead of days, and may require even more upfront advocacy for strategic deals.
We will provide further guidance on the scope of these changes following the release of a proposed final rule, which as noted above we expect will occur imminently. However, even if the changes are ultimately not adopted, they are indicative of the level of antitrust scrutiny GPs should expect under the current administration. In either case, preparation is key.
What GPs Can Do Now
In preparation for the new proposed rules, GPs should consider taking the following anticipatory steps.
Review confidentiality provisions in LPAs and side letters:
- Although the LP identities listed in HSR filings would not be shared with third parties and would be protected from Freedom of Information Act (FOIA) disclosures, the information could be disclosed as part of litigation.
- GPs should verify that their existing fund documentation allows for such information to be shared, should it be required by law.
Maintain control of document creation:
- Consider legal review of documents and drafts before sending them to officers, directors, and “supervisory deal team leads.”
- In transactions with overlaps, consider legal review of ordinary course documents before sharing them (1) with the board or (2) with the CEO or direct reports of the CEO of an entity involved in the transaction.
Review budget and expense provisions with respect to HSR filings:
- As noted above, we expect that these changes would result in a substantial increase in related costs, with respect to both in-house expenses and outside service providers. This increase in buy-side transaction expenses may require an increase in equity checks and will make GPs more focused on having such expenses borne ratably by all investors in the buy-side consortium.
When a potential acquisition is identified, diligence and document overlapping business:
- The disclosure requirements for overlapping businesses would include: details of revenues and projected revenues for overlapping products and services under development, key customers, licensing arrangements and non-compete or non-solicitation agreements, as well as research and development information for products that have not yet come to market. GPs with portfolio companies in the same supply chains would be required to provide details regarding sales to the other party and its competitors.
- Private equity GPs would be particularly impacted by these rule changes because of their propensity to repeatedly execute transactions in sub-sectors where they have built value creation playbooks and relationships over time.
- The proposed changes would also have implications for roll-up strategies, which the FTC and DOJ have already highlighted as an area of concern.
- Regardless of when and whether the HSR changes are adopted, identifying and documenting these overlaps and their impact on the “rationale” for the transaction will help prepare a GP for any future inquiry by antitrust regulators.
- To mitigate the effect of the longer timeline on the overall transaction process, GPs may want to begin preparing the filing before signing or seek to file on the basis of a non-binding term sheet.
Review and, if necessary, revise off-channel communications policies
- The proposed requirement that filers list all business communication and messaging systems indicates that the FTC and DOJ, like the U.S. Securities and Exchange Commission (SEC), are focused on the use of off-channel business communications. All GPs should be reviewing their policies regarding approved systems for business communications and related recordkeeping and ensuring that they have appropriate monitoring and testing systems in place for identifying off-channel business communications by employees.
While it is not yet known what form the final HSR changes will take, the potential for significant additional substance and complexity in pre-merger filings is clear. If the changes are adopted largely as proposed, HSR filings can be expected to take weeks – if not months – instead of days, and may require even more upfront advocacy for strategic deals.
We will provide further guidance on the scope of these changes following the release of a proposed final rule, which as noted above we expect will occur imminently. However, even if the changes are ultimately not adopted, they are indicative of the level of antitrust scrutiny GPs should expect under the current administration. In either case, preparation is key.
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