On June 27, 2023, the FTC and DOJ (together the “Agencies”) announced a notice of proposed rulemaking (“NPRM”) proposing extensive revisions to both the rules that implement the Hart-Scott-Rodino Antitrust Improvements Act (the “Act” or “HSR Act”) and the Premerger Notification and Report Form (the “Form”) that merging parties must submit under the Act. Our previous analysis of the NPRM is covered here.
The NPRM would substantially expand both the filing process and substantive antitrust review for Private Equity (“PE”) firms and other investors seeking to clear transactions that trigger the filing requirements of the HSR Act. In addition to the administrative burden of the significant amount of additional information the revised Form would require, the NPRM would require filers to submit new types of information meant to facilitate investigation into topics such as the potential for exchange of strategic and other competitive information among portfolio companies, interlocking directorates among PE firms, managers, and their portfolio companies, and serial small acquisitions. While these topics have always been within the purview of the Agencies to investigate, requiring expanded categories of disclosures in the Form increases the potential for substantive inquiry and potential delays for PE firms and other investors required to file a premerger notification under the HSR Act.
By way of update, the NPRM was published in the Federal Register on June 29, 2023. The initial public comment period expired on August 28, 2023 and was extended to September 27, 2023. The Agencies now need to review and address the several hundred public comments before adopting the final rule. The Agencies may proposed further changes to the rules and/or the Form, which may warrant another round of public comment. It is difficult to predict when the new rules may come into effect but, in view of the breadth of the proposed changes, finalization may still be several months away.
While the NPRM, if finalized as currently drafted, would substantially change the federal antitrust merger review landscape across all industries, the proposed changes to the rules would have a particularly significant impact on PE firms.
(A Lot) More Information Will Be Required
The FTC last updated the rules and Form targeting the private equity sector in 2011 by requiring filers to disclose relationships with entities not just under common ownership or governance control but also entities with common investment or operational management with the acquiring person (i.e. “Associates” of the buyer), thus requiring additional information from private equity funds.
The 2011 changes were modest, however, compared to the NPRM’s potential impact on PE firms and their portfolio companies. A few proposed changes standout:
- Parties may be required to describe the business operations of the parties, including new narratives setting out their basic business lines and providing product or service information for all related entities. This provision would require PE firms to provide details about the operations of all of the overlapping portfolio businesses under their control and potentially even those in which the PE firm has a minority investment.
- A buyer would be required to list investors owning 5% or more (including limited partners of investment funds), holders of 10% or more of non-voting securities, and other investors who may exert influence (e.g., as board members, observers or creditors). In the case of limited partnerships, the Form does not currently require the identification of limited partners, even if they hold 5% or more. The proposed changes would require the disclosure of information about investors that PE Firms have historically treated as confidential.
- Parties would also be required to identify the officers, directors, and board observers (or in the case of unincorporated entities, individuals exercising similar functions) of all entities within the acquiring person and acquired entity (going back two years prior to filing) to allow the Agencies to identify existing, prior, or potential interlocking directorates and to assess the competitive implications of such relationships under both Sections 7 and 8 of the Clayton Act. This proposal would require the disclosure of PE firms’ representatives monitoring investments even if the PE investor does not have formal board seats.
- Parties would be required to report consummated transactions going back 10 years instead of the 5 year look back currently required, with no de minimis threshold to scrutinize potentially anticompetitive non-reportable transactions. The NPRM proposes these changes “to assist the Agencies in identifying a potential pattern of acquisitions in a particular industry that has contributed to a trend toward concentration or vertical integration that affects the competitive dynamics for the parties to the transaction, as well as the commercial realities of post-merger competition.”
What Does it Mean and What’s Next?
As currently proposed, the NPRM would add substantial cost and time to preparing HSR filings for PE firms. The FTC estimates that the new Form, across industries, will take nearly four (4) times the number of hours as the current HSR form requires. This estimate likely understates the additional time it will take PE firms to complete the Form, and does not account for the time likely to be spent engaging with FTC staff regarding the expanded information provided.
The NPRM is also not just about process. FTC Chair Lina Khan argues that the Agencies seek to expand information filers must submit in connection with merger review specifically to provide it with information that it could use to launch more detailed investigations of the structure of PE firms’ investments in operating companies with both horizontal and vertical relationships in the marketplace, as well as PE firms’ business conduct.
In this way, the NPRM furthers the Agencies’ broader antitrust focus on PE firms and other investors as we have detailed in previous blog posts. The Agencies under the current Administration have been aggressively targeting PE firms that consolidate ownership or influence over portfolio companies in multiple sectors:
Private Equity & Healthcare: Antitrust Enforcement in 2023–PE Roll-Ups in the Cross Hairs “the Agencies’ have a keen interest in private equity and its impact on the healthcare industry—particularly healthcare providers.”
Antitrust Enforcement Agencies Continue to Target Interlocking Directorate Arrangements | Antitrust Law Blog “The FTC marked its first enforcement action of the prohibitions on interlocking directorates under Section 8 of the Clayton Act in over 40 years.”
FTC Sues Private Equity Firm and Anesthesiology Practice for Antitrust Violations | Antitrust Law Blog “The FTC sued Welsh, Carson, Anderson & Stowe (WCAS) and U.S. Anesthesia Partners, Inc. (USAP), in the Southern District of Texas.”
We will continue to follow closely developments relating to the NPRM, which may not be finalized until 2024.