Navigating the FTC's Proposed HSR Act Reforms: What You Need to Know for 2024

As we move into 2024, a key development in the M&A world is the Federal Trade Commission’s (FTC) proposed reform of the Hart-Scott-Rodino (HSR) Act filing requirements. These changes come at a time when corporate deal-making is expected to rise across industries, driven by a need to strengthen portfolios, especially in sectors like pharmaceuticals. However, the proposed reforms to the HSR Act could add new layers of complexity to this process, potentially lengthening timelines and increasing the regulatory burden for businesses. For companies aiming to execute acquisitions  in a timely-manner, understanding these changes and their implications will be critical as they navigate the new requirements.

The Hart-Scott-Rodino Act, enacted in 1976, is central to antitrust regulation in the U.S., requiring companies to file with the FTC and the Department of Justice (DOJ) before completing large transactions. These filings give regulators time to review the deal’s potential competitive impacts before the transaction can proceed.  In 2024, however, the FTC has proposed significant changes to the HSR process that could substantially alter the M&A and private equity landscape. These changes, according to an article by Sidley Austin LLP, are set to be implemented to all transactions closing on or after March 6th of this year.

The HSR Act and its implementing rules require the parties to certain mergers and acquisitions to submit premerger notification to the FTC and the Antitrust Division of the U.S. Department of Justice (the Agencies), which involves completing HSR Forms, and to wait a specified period of time before consummating their transaction (Federal Trade Commission, 2023).

The most notable change is the expansion of the scope of information that companies must submit in HSR filings. Historically, these filings focused on the financial details of the deal, including market shares and the potential competitive impact. However, per a review by Reed Smith LLP, under the new proposal, companies would need to disclose far more information, particularly regarding past acquisitions, employment agreements, and foreign subsidiaries. These expanded disclosures are aimed at providing regulators with a more comprehensive understanding of how a merger could affect market competition and consumer interests​ (Kaplan et al, 2024).

One specific area of focus, as stated by law firm Davis Polk, is the disclosure of previous acquisitions. The filing parties would need to provide information about prior acquisitions in any overlapping industries in the past ten years, as opposed to the current five-year requirement.  Moreover, “the current threshold for prior acquisitions that need to be reported (i.e., acquisitions of entities with annual net sales or total assets greater than $10 million in the year prior to the acquisition) would be removed, requiring parties to provide information on all prior acquisitions regardless of size” (Arp et al, 2023). This move is designed to help regulators identify so-called “serial acquisitions,” where firm, particularly private equity players, acquire smaller companies in a way that doesn’t trigger traditional antitrust thresholds but may still pose competitive risks over time​.

Private equity firms are therefore likely to feel the greatest impact of these proposed changes. These firms, which often acquire multiple businesses within a sector, have traditionally structured deals to avoid triggering HSR filing requirements. However, under the new rules, the cumulative effect of smaller acquisitions may come under increased regulatory scrutiny​. In addition, the new disclosure requirements for “officers and directors of portfolio companies as well as for limited partners/minority investors at both the fund and portfolio level are likely not only to result in significant compliance costs, but also to erode privacy protections for investors” (Arp et al, 2023). This is further exemplified by the proposed requirement that “acquired persons must identify minority holders of the acquired entity(s) that will retain an interest in the acquired entity(s) or will acquire interests in any of the acquiring person’s entity(s) due to the transaction, i.e., rollover shareholders” (Arp et al, 2023). These changes could impact private equity firms’ ability to secure additional capital due to the increased disclosure of key creditors and minority investors.

The reforms proposed to the HSR act will likewise impact the timeline and pace of M&A deal-making.  Companies will likely face longer preparation times as they gather the additional data required for filing, which could include narrative descriptions of how the merger would impact competition and labour. According to an article by Cooley LLP, “the FTC estimates that adoption of the new rules will increase the HSR time filers need to prepare the form by 12 to 222 additional hours per filing, depending on the complexity of the filing” (Cooley, 2023). Consequently, it is likely that transactions will need to account for a longer timeline, extending beyond the usual five to ten days typically allocated for HSR filings.

The FTC has also announced the costs associated with failing to comply with the proposed HSR regulations. According to a report by Sidley Austin, “the maximum civil penalty for HSR violations has increased from $50,120 per day to $51,744 per day. This new maximum penalty applies to violations assessed on or after January 10, 2024, even if the underlying violation occurred before that date” (Sidley Austin LLP, 2024). This means companies that fail to adhere to the updated rules could face significant financial penalties, underscoring the importance of timely and accurate compliance with the expanded filing requirements.

Are there only downsides to the proposed reforms? While, preparing these new HSR filings will necessitate deeper internal reviews, longer timelines, and likely higher costs, the upside should still not be discounted. The reforms to HSR will not only target monopolistic behaviour but will also aim to protect employees from workforce suppression as a result of mergers. Additionally, they will enhance transparency and oversight, ensuring that the competitive M&A landscape remains balanced.