Clifford Chance

LO

Welcome to the Clifford Chance Podcast where we discuss pressing issues and trends faced by the business world today. On today's podcast, we will cover the Federal Trade Commission's finalized changes to the Hart Scott Rodino pre-merger notification form, also known as the HSR Form. These changes were announced on October 10th, 2024. These changes will become effective 90 days after they're published in the Federal Register. As of today, October 24, that's not happened. We're anticipating, however, that they will be published in the Federal Register any day now, and therefore the changes will become effective as early as January 2025.
The new HSR form calls for significantly more information to be disclosed compared to the current form, including additional documentary attachments related to competition and strategic plans, narratives regarding the structure and rationale of the transaction and competitive overlaps between the parties, information about the filing companies' ownership structure and certain directors and officers, and information related to foreign subsidies and defense contracts.
I'm Leigh Oliver, the head of the US Antitrust practice at Clifford Chance. I'm pleased to be moderating a discussion today with my colleagues, Brian Conklin and Lauren Rackow. Brian and Lauren, it's my understanding that in publishing the new HSR form, the FTC is seeking to modernize the form to reflect the information they need to better assess the competitive impact of a proposed transaction. What is the approach?
The new form takes to achieve the FTC's objectives.

BC

Thanks, Leigh. This is Brian Conklin. I'll start by taking this one.
I think overall, if you were lucky enough to have read the whole 460 pages the FTC just published, you'll have noticed in it that they are taking what they're referring to as an "if, then" format.
The idea is if the parties respond yes to certain information, particularly about overlaps or vertical relationships, then the parties need to provide additional information.
One can almost think of it as a simplified and non-simplified form, getting the most information for deals with overlaps or supply relationships. They've also taken the decision that for certain, so-called 801.30transactions, where the acquiring party is not obtaining control, less information is required.
The idea is the FTC is attempting to gain more information for the deals that they think require more scrutiny while trying to keep the burden lower for the types of deals that they expect to raise less antitrust concerns.
That said, even for those other transactions, that should raise less concerns, there are still additional requirements clients will need to be aware of.

LR

And now I'll jump in, this is a Lauren Rackow speaking.
So in addition, what the FTC has now requested is that we have narratives on both competitive overlaps between the parties and supply relationship between the parties to the extent that that exists. If there is an overlap, the new form requires that sales for the most recent year be listed for products and services that overlap.
Additionally, the parties also will now have to provide a description of the categories of customers that purchased the products and services of overlap. The form also now requires that the top 10 customers overall that overlap, and also the top 10 customers in each overlap product and service be identified in the HSR form.
The HSR form also examines vertical relationships, that is when companies are in a different relationship. One is downstream and the other one is more upstream or vice versa. So, for the buyer, if there are any vertical relationships between the buyer and the target, the form now requires that any sales to the target or any of the target's competitors are required. Additionally, any purchases from the target or any of the target's competitors are required. And of course, we have the vice versa for the target that any sales to the acquiring person of the HSR form or any of its competitors are also required to be disclosed as well as any purchases from the acquiring person or any of his its competitors must be disclosed. There is a de minimis threshold for vertical relationships. However, this is very low, it's at 10 million.
And another key point here is that any overlaps or any vertical relationship between the parties is not limited to the United States. So if there is a very small overlap relationship somewhere else in the world, that will still result in the parties having to disclose that relationship and this information on the HSR form.

BC

Thanks, Lauren. I think that latter point regarding the scope outside of the US is very important. I think Leigh, you also asked about documents. I know that issue is top of mind for many clients. Let me break the document request into two buckets. First, you have what I would consider the standard Item 4(c)/4(d) documents with one edition. Parties will need to respond to and provide any documents that went to any officer or director,
and now any supervisory deal team lead, that were used to analyze the transaction with respect to the markets, competition, competitors, opportunities for growth. They'll also have to provide the CIM and 3rd party reports as before. As I said, the new wrinkle here is the addition of the supervisory deal team lead. The agencies define this as the single individual responsible for supervising the strategic assessment of the deal. In many instances, it's likely going to be the head of M&A or the business development team.
The second bucket of documents is what the form refers to as plans or reports.
First, you have regular reports that went to the CEO. These are annual, biannual, or quarterly reports. They must be provided if they discuss products that are manufactured by both the acquiring person and the target or services that are offered by both. Second, you have all plans that went to the Board of Directors.
Again, only being required if there's an overlap between the acquiring person and the acquired target.
One other really important point here is I think the agencies made a big fuss over drafts and highlighted they got rid of the previously announced proposal to require all drafts of these documents. While it's true that the agencies removed that requirement such that, at a high level, drafts are no longer required, they somewhat backdoored that by saying that they are no longer going to follow their previous interpretations that said certain drafts that went to the board do not need to be submitted. Now under this new rule, if a draft document goes to any member of the board, single individual, even if not the entirety of the board, that draft document needs to be considered a final document and must be submitted. Because of that, clients are going to need to very carefully consider the practical implications of document control, particularly for individuals sitting on the board that are also serving as.
CEOs or in a strategic role relating to the transaction.

There's also now a requirement to include the transaction rationale. Both parties have to describe that transaction rationale, although the parties may copy and paste from documents.
Additionally, there's now more information required in some senses, but in other senses less information required, regarding the NAICS codes and revenue. As before, parties are required to report their US revenue by NAICS code, but the agencies have gotten rid of the requirement to also provide it by NAPCS code.
The wrinkle here is whereas before the agencies said parties could rely on how the NAICS codes were recorded in the ordinary course of business, the agencies are asking parties to use NAICS codes on what they're referring to as a descriptive basis.

LO

Sounds like there's quite a bit of information and change that goes into the new form. So I wanted to talk about another topic, we've heard in the last couple of years both the FTC and the DOJ Antitrust Division express much greater interest in private equity firms and the potential competitive implications of their transactions.
What new elements of this HSR form are particularly relevant for private equity firms?

LR

I'm happy to start off on this one, Leigh. So one area is, what needs to be disclosed by the parties relating to previous acquisitions. So the current form now does require the buyer to report previous acquisitions in the past five years in any areas where they overlap with the target's NAICS codes. That remains in the current form.
However, what the new form does is it includes this requirement for the target as well. So now, the target must also report previous acquisitions in the past five years in any area where they overlap with the buyer. So this is an effort on the part of the Federal Trade Commission to catch any roll-up of acquisitions or serial acquisitions, and this can particularly affect private equity firms, especially now when they're on the sell side. This information will be disclosed to the agencies.

BC

Thanks, Lauren. If I could jump in, I think there's two other areas that may be particularly relevant to private equity. I'd say first, there's also a requirement to list officers and directors of all entities that also serve on the Board of Directors or serve as officers of an entity that competes with the target.

Second, there's now a requirement to describe the ownership structure of the acquiring entity and also provide an org chart if one exists. I think both of those will be particularly relevant to private equity clients.

LO

Thanks, Brian, Lauren. I think I have another follow up question on that, somewhat related, but the form is always, or the current form has always included certain requirements about information on minority holdings. What does the new form do in the way of having to provide information on minority holdings?

LR

Thank you, Leigh. So the new form does require additional information on this. For the buyer or acquiring person, we will now have to report in the new form, minority shareholders, not only at the acquiring person level and acquiring entity level, but also at every level up and down the chain. So at every level, we'll need to report whether there is anyone who has 5% or more but less than 50% holding in all of those entities. This will bring in additional disclosures. Again, this will touch on private equity because entities that are investing through a midco or through an aggregation vehicle, all of the information about the minority holders will have to be disclosed.

Additionally in the current form, if you have a limited partnership, you can just disclose the general partner. However now, the new form will have for limited partners that you have to disclose both the general partner and also other limited partners that fulfill certain criteria.

BC

And in terms of disclosing minority holdings as opposed to minority holders, Leigh, the form is largely the same. Parties will still be required to disclose any minority holdings that overlap with the target, and also minority associates, pursuant to the same associate analysis that was done before. The one addition is, now, that the parties will be required, in addition to providing the legal name they also have to provide the doing business as name of the minority overlaps.

LO

Great. Thank you. So another thing I've heard a lot about just in the few days since the new form has come out is, I understand that the form has a section on foreign subsidies and defense contracts. What does this mean for filing parties?

BC

Sure. I think this is going to be one of the trickier areas for a lot of people because this is really venturing outside of what is traditionally the antitrust gamut really into the trade world. But at a high level, the new form will require the acquiring person and acquired person to disclose subsidies from foreign entities of concern and foreign governments of concern. Breaking that into two pieces. First, you've got what qualifies as a subsidy? There you have to look at the Tariff Act and under that, a subsidy is a financial contribution that confers some type of benefit on the investor or on the party. That's a specifically defined term, but in essence it means that there needs to be some type of special privilege or special rights that party is getting as a result of the financial contribution. In terms of what entities or countries qualify as foreign entities and governments of concern, you have to look at the IIJ Act.
There, by and large, it's focused on China, Russia, Iran and North Korea, and entities that are under the control supervision are otherwise subject to the jurisdiction of those countries.

LR

And then another section of the form as well that is different or outside of the typical realm of antitrust, is that information relating to defense and intelligence contracts also must be disclosed. So for the filing party, any information relating to that party's contracts or request for proposals with the Department of Defense or any member of the US intelligence community for the past two years, that is valued at 100 million or more, needs to be disclosed.

BC

Thanks, Lauren. One other thing to add regarding the subsidy point, is parties are also going to be required, at least for the acquiring person and acquired person, to indicate if they've produced products, in whole or in part, in a country such as North Korea, China, Iran, or Russia where the product is subject to a countervailing duty or subject to a current investigation for countervailing duties. So clients and companies are going to need to be very careful in terms of tracking that information so they can respond to all of these subsidy information requests.

LO

Thank you. So it sounds like there's quite a bit here, but there's probably even more detail to get into in the 460 pages of the new rule that you referenced, Brian. Let's think about what clients should do now and what steps they can take now to prepare for having to make a filing under the new form. Can you guys walk me through that?

BC

Sure, I'm happy to start. I think there's a lot and we're working to create, you know, a better list and playbook for clients that are interested, but at a very high level, I think couple of quick things. One, to start tracking and understanding who the officers and directors are of the various entities within the company. Two, similarly, keeping track of all minority holders of entities within the company. And three, keep track of the minority holdings of the various entities within the company.

LR

And then jumping in, there are an additional 3 steps that we think clients can take. Keeping track and organizing ordinary course documents that touch on competition, competitors, market growth, etc, to have this in an easy to access folder so we can be ready if there is a filing. Additionally, clients can take a list of their top customers and suppliers, so we recommend that clients keep this list and update it as needed throughout the year so that it can be ready to go should we have an HSR filing.

So in addition to keeping track of top customers and suppliers for the client or entity as a whole, also what clients can do is list their top customers and suppliers in each service and product that they produce or work in so that this will be ready should it need to be put in the HSR form because there is an overlap or a vertical relationship with either the target or with the buyer, depending on which side the client is on.
Finally, we also recommend that clients start to create a list of the NAICS codes they report into and also a list of the controlled entities of the client and which NAICS codes those entities report into because that will also be helpful to have should we need to use that on the new HSR form.

LO

That's really helpful. There's also been a lot of buzz, or I should say there was a lot of buzz when the draft form came out last year. But I want to clear up any confusion that there might be out there between what was in the draft form and what has been actually adopted in the final form. Are there some key issues or areas that were not adopted in this final form but maybe have had generated a lot of discussion when the draft came out?

I think those are three great ones and I would say three others, Lauren, that I think created a lot of buzz, but were ultimately dropped and for good reason. One was this concept of having to indicate, in addition to minority interest holders, other interest holders such as those offering certain loans and having board observer seats. Those are no longer required. Similarly, you know I already referenced the requirement to disclose officers and directors, but at this point it's limited to the acquisition stackand limited to those officers and directors that serve on the board of an overlapping entity with the target. That's different from the previous proposal, which requested a much broader swath of disclosure of officers and directors. Finally, I think it's worth noting that the previous proposal requested steps to preserve documents and to disclose all communication systems or messaging apps that are used. That no longer is going to be required in the final form.

I think with that it's important to note that in the coming weeks, we expect the FTC to publish additional guidance both formally and possibly informally. As to the latter, we think that may happen either through questions from practitioners and clients or doing so-called brown bag sessions offered by the FTC.

So, to further educate the audience on these new developments and dive deeper into what each these new requirements mean, please be on the lookout for additional podcasts which we plan to produce on a rolling basis.