Proposed Rule2023-13511
Premerger Notification; Reporting and Waiting Period Requirements
Primary source
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Published
June 29, 2023
Issuing agencies
Federal Trade Commission
Abstract
Pursuant to Section 7A(d) of the Clayton Act, the Federal Trade Commission ("FTC" or "Commission") is proposing amendments to the premerger notification rules ("the Rules") that implement the Hart-Scott-Rodino Antitrust Improvements Act ("the Act" or "HSR") and to the Premerger Notification and Report Form (the "Form") and Instructions ("Instructions"). These proposed changes would result in a redesign of the premerger notification process through both a reorganization of the information currently required and the addition of new information and document requirements. In addition, these changes would implement the Merger Filing Fee Modernization Act of 2022. The proposed amendments would involve changes to both the Rules and the Instructions, and the Commission proposes explanatory and ministerial changes to the Rules as well as necessary amendments to the Instructions to effect the proposed changes.
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[Federal Register Volume 88, Number 124 (Thursday, June 29, 2023)]
[Proposed Rules]
[Pages 42178-42218]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-13511]
[[Page 42177]]
Vol. 88
Thursday,
No. 124
June 29, 2023
Part III
Federal Trade Commission
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16 CFR Parts 801 and 803
Premerger Notification; Reporting and Waiting Period Requirements;
Proposed Rule
Federal Register / Vol. 88, No. 124 / Thursday, June 29, 2023 /
Proposed Rules
[[Page 42178]]
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FEDERAL TRADE COMMISSION
16 CFR Parts 801 and 803
RIN 3084-AB46
Premerger Notification; Reporting and Waiting Period Requirements
AGENCY: Federal Trade Commission.
ACTION: Notice of proposed rulemaking.
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SUMMARY: Pursuant to Section 7A(d) of the Clayton Act, the Federal
Trade Commission (``FTC'' or ``Commission'') is proposing amendments to
the premerger notification rules (``the Rules'') that implement the
Hart-Scott-Rodino Antitrust Improvements Act (``the Act'' or ``HSR'')
and to the Premerger Notification and Report Form (the ``Form'') and
Instructions (``Instructions''). These proposed changes would result in
a redesign of the premerger notification process through both a
reorganization of the information currently required and the addition
of new information and document requirements. In addition, these
changes would implement the Merger Filing Fee Modernization Act of
2022. The proposed amendments would involve changes to both the Rules
and the Instructions, and the Commission proposes explanatory and
ministerial changes to the Rules as well as necessary amendments to the
Instructions to effect the proposed changes.
DATES: Comments must be received on or before August 28, 2023.
ADDRESSES: Interested parties may file a comment online or on paper, by
following the instructions in the Invitation to Comment part of the
SUPPLEMENTARY INFORMATION section below. Write ``16 CFR Parts 801-803--
Hart-Scott-Rodino Coverage, Exemption, and Transmittal Rules, Project
No. P239300'' on your comment. File your comment online at <a href="https://www.regulations.gov/">https://www.regulations.gov/</a> by following the instructions on the web-based
form. If you prefer to file your comment on paper, mail your comment to
the following address: Federal Trade Commission, Office of the
Secretary, 600 Pennsylvania Avenue NW, Suite CC-5610, (Annex H),
Washington, DC 20580.
FOR FURTHER INFORMATION CONTACT: Robert Jones, Assistant Director,
Premerger Notification Office, Bureau of Competition, Federal Trade
Commission, 400 7th Street SW, Room CC-5301, Washington, DC 20024, or
by telephone at (202) 326-3100.
SUPPLEMENTARY INFORMATION:
Overview
The Act and Rules currently require the parties to certain mergers
and acquisitions to submit premerger notification filings (``HSR
Filings'') to the Commission and to the Assistant Attorney General in
charge of the Antitrust Division of the Department of Justice (``the
Assistant Attorney General'') (collectively, ``the Agencies''), and to
wait a short period of time before consummating such transactions. The
reporting and waiting period requirements are intended to enable the
Agencies to determine whether a proposed merger or acquisition may
violate the antitrust laws, including Section 7 of the Clayton Act, 15
U.S.C. 18, if consummated and, when appropriate, to seek an injunction
in federal court in order to enjoin anticompetitive acquisitions prior
to consummation.
Section 7A(d)(1) of the Clayton Act, 15 U.S.C. 18a(d)(1), directs
the Commission, with the concurrence of the Assistant Attorney General,
in accordance with the Administrative Procedure Act, 5 U.S.C. 553, to
require that premerger notification be in such form and contain such
information and documentary material as may be necessary and
appropriate to determine whether the proposed transaction may, if
consummated, violate the antitrust laws. In addition, Section 7A(d)(2)
of the Clayton Act, 15 U.S.C. 18a(d)(2), grants the Commission, with
the concurrence of the Assistant Attorney General, in accordance with 5
U.S.C. 553, the authority to define the terms used in the Act, exempt
classes of transactions that are not likely to violate the antitrust
laws, and prescribe such other rules as may be necessary and
appropriate to carry out the purposes of Section 7A.
In this notice of proposed rulemaking (``NPRM''), the Commission
proposes amending the Rules (Part 801 and Part 803 and its appendices),
the Form, and the Instructions to reorganize the information currently
required with an HSR Filing and to require additional information
critical to the Agencies' initial review. These changes would improve
the efficiency and effectiveness of that initial review by providing
the information the Agencies need to identify during the initial 30-day
waiting period any transaction that may pose competition concerns and
potentially narrow the scope of any investigation or reduce the need to
conduct a more in-depth investigation of the proposed transaction.
These amendments also incorporate the changes to implement the
collection of information mandated by the Merger Filing Fee
Modernization Act of 2022 (``2022 Amendments'') contained within the
Consolidated Appropriations Act, 2023 (Pub. L. 117-328, 136 Stat. 4459)
to Section 7(a) of the Clayton Act, 15 U.S.C. 18a. Finally, the
Commission proposes explanatory and ministerial changes to the Rules as
well as necessary amendments to the Instructions to effect the proposed
changes.
Background
The premerger notification program is designed to provide the
Commission and the Assistant Attorney General with the information and
documentary material necessary and appropriate for an initial
evaluation of the potential anticompetitive impact of transactions. The
HSR premerger notification program is an essential tool for effective
and efficient merger enforcement because it enables the Agencies to
investigate acquisitions that may substantially lessen competition or
tend to create a monopoly in violation of Section 7 of the Clayton Act
and to challenge them before they are consummated and the businesses of
the two companies are ``scrambled'' or integrated such that effective
post-merger relief is much more difficult. Congress intended that
premerger review would ``strengthen the enforcement of Section 7 by
giving the government antitrust agencies a fair and reasonable
opportunity to detect and investigate large mergers of questionable
legality before they are consummated.'' \1\ Premerger notification and
review, including a mandatory waiting period during which they cannot
consummate the transaction, gives the Agencies the procedural tools
necessary to seek to prevent mergers in court before they cause harm or
the operations of the firms become so integrated that the premerger
state of competition cannot be restored.
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\1\ H.R. Rep. No. 94-1373 at 5 (1976).
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The HSR Act and Rules specify that transactions subject to the HSR
Act cannot be consummated until 30 days for most transactions (cash
tender offers and certain types of bankruptcies observe a 15-day
waiting period) \2\ after the parties submit an HSR Filing to the
Agencies. These statutory deadlines for conducting an initial review
are extraordinarily short, and the Agencies must work quickly to
determine whether to take steps to prevent the consummation of
potentially anticompetitive transactions. During the initial waiting
period, the FTC's
[[Page 42179]]
Premerger Notification Office (``PNO'') staff must review each HSR
Filing to ensure it complies with the HSR Rules. Staff at both Agencies
initially review the information and documents for substantive
antitrust concerns, identify and assess the relevant facts, conduct a
preliminary antitrust analysis, form preliminary recommendations
regarding the investigation's direction, and communicate those
recommendations within each Agency. As staff formulate recommendations,
they must also initiate clearance from the other agency for those
transactions that merit collection of additional information to avoid
any duplication of effort and ensure that only one agency investigates
the transaction. Senior leadership at the investigating agency must
review staff's recommendations and determine whether to issue a Request
for Additional Information (``Second Request''),\3\ which starts the
second phase of the agency's merger investigation. If there are other
jurisdictions investigating, Agency staff coordinate with relevant
state Attorneys General or international counterparts. All of this must
happen during the initial waiting period, which is typically 30 days.
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\2\ 15 U.S.C. 18a(b)(1)(B); 11 U.S.C. 363(b)(2).
\3\ 15 U.S.C. 18a(e).
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Given the large number of HSR Filings submitted each year, the
Agencies must use their resources efficiently and effectively to focus
primarily on transactions that may harm competition. Information
submitted as part of the HSR premerger notification process is a key
starting point, and the information contained in the HSR Filing should
be sufficient to allow the Agencies to conduct a thorough but quick
evaluation of whether the proposed transaction is one that requires
more in-depth investigation through the issuance of Second Requests.
However, after a comprehensive review of the premerger notification
process and based on the Agencies' experience conducting in-depth
investigations of challenged mergers, the Commission believes that the
information currently reported in an HSR Filing is insufficient. In
fact, the challenges of premerger review have expanded considerably
over time as result of several factors. First, there has been
tremendous growth in sectors of the economy that rely on technology and
digital platforms to conduct business and, given the dynamic nature of
these markets and the importance of acquisition strategies to success
and market growth, mergers and acquisitions in these sectors present a
unique challenge for the Agencies.\4\ In these sectors, some
transactions involve firms whose premerger relationship is not clearly
horizontal or vertical; rather, merger activity in these sectors
increasingly involves firms in related business lines where the
Agencies must closely examine the potential for direct competition in
the future.
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\4\ See, e.g., Fed. Trade Comm'n, Non-HSR Reported Acquisitions
by Select Technology Platforms 23-24 (2021).
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In addition, the very nature of HSR-reportable transactions has
become more complex over time. Transaction structures have evolved to
include not only the Ultimate Parent Entity (UPE) and its acquiring
entity,\5\ but also other entities within the acquiring person. For
instance, there can be numerous entities between the UPE and acquiring
entity, and other investors can have a stake in any one of these
entities. As a result, these investors could have a direct role in
effectuating the transaction. Individuals or entities other than the
those directly involved in the transaction may be able to exert
influence over the transaction as well. The existence of subsidies or
loans, among other means, may subject the buyer to additional pressures
from individuals or entities not directly a party to the reportable
transaction. Indeed, the use of board observers has become a more
frequent way for outside players to gain direct access to company
strategy. Each of these factors can affect a transaction's impact on
the competitive landscape.
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\5\ 16 CFR 801.1(a).
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Consistent with this concern, the Commission's NPRM also proposes
changes to implement the collection of information about certain
subsidies, as mandated by the 2022 Amendments. Congress determined that
foreign subsidies can distort the competitive process or otherwise
change the incentives of the firm in ways that undermine competition
following an acquisition and are particularly problematic when provided
by entities or countries that are strategic or economic threats to the
United States.\6\ The proposed changes require filing parties to
provide information about subsidies received from foreign entities of
concern, as discussed in more detail below.
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\6\ Title II of the Merger Filing Fee Modernization Act of 2022,
Public Law 117-329, Div. GG, sec. 201(a)(1) at 3826, 136 Stat. 4459.
Congress pointed to remarks of former Commissioner Noah Phillips
that ``one area where antitrust needs to reckon with the strategic
interests of other nations is when we scrutinize mergers or conduct
involving state-owned entities . . . companies that are controlled,
by varying degrees, by the state . . . [and] often are a government
tool for implementing industrial policies or to protect national
security.'' Id. at sec. 201(a)(5).
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Another factor that has an impact on the complexity of premerger
review is that consistent with the law and binding judicial precedent,
the Agencies have stepped up efforts to review transactions for all
their potential competitive impacts. The Agencies are responding to
evidence that the U.S. economy is becoming increasingly concentrated
overall.\7\ This concentration may reflect decreased competition, which
can result in higher prices for consumers, decreased innovation,
reduction in output, and lower wages for workers. For example,
economists have estimated that workers' share of national income has
fallen sharply since 2000, such that the workers' share of income today
is now 6 to 8 percentage points below the 1980 level.\8\ These findings
reveal that despite the Agencies' efforts to prevent market
consolidation through merger enforcement, many markets suffer from a
lack of robust competition and mergers continue to cause harm.\9\ As
President Biden noted in his Executive Order on Promoting Competition,
industry consolidation and weakened competition ``deny Americans the
benefits of an open economy,'' with ``workers, farmers, small
businesses, and consumers paying the price.'' \10\
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\7\ See, e.g., Council of Econ. Advisers Issue Brief, Benefits
of Competition and Indicators of Market Power at 4 (Apr. 2016),
<a href="https://obamawhitehouse.archives.gov/sites/default/files/page/files/20160414_cea_competition_issue_brief.pdf">https://obamawhitehouse.archives.gov/sites/default/files/page/files/20160414_cea_competition_issue_brief.pdf</a> (noting change in revenue
share earned by the 50 largest firms in each sector); David Autor et
al., The Fall of the Labor Share and the Rise of Superstar Firms,
135 Q.J. Econ. 645 (2020) (finding that the top 4 firms in the top
sectors of the economy became steadily and significantly more
concentrated); Thomas Philippon, Causes, Consequences, and Policy
Responses to Market Concentration, in Aspen Economic Strategy Group,
Maintaining the Strength of American Capitalism (2019) (reviewing
literature on concentration in the U.S. economy).
\8\ See, e.g., Gene M. Grossman and Ezra Oberfield, The Elusive
Explanation for the Declining Labor Share, 14:1 Ann. Rev. Econ. 93-
124 (2022).
\9\ See, e.g., Keith Brand, Chris Garmon, Ted Rosenbaum, In the
Shadow of Antitrust Enforcement: Price Effects of Hospital Mergers
from 2009-2016, (forthcoming in J.L. Econ.); Zack Cooper et al., The
Price Ain't Right? Hospital Prices and Health Spending on the
Privately Insured, 134 Q.J. Econ. 51 (2019); Gautam Gowrisankaran,
Aviv Nevo, and Robert Town, Mergers When Prices are Negotiated:
Evidence from the Hospital Industry, 105 Am. Econ. Rev. 172 (2015);
Orley Ashenfelter, Daniel Hosken, and Matthew C. Weinberg, Did
Robert Bork Understate the Competitive Impact of Mergers? Evidence
from Consummated Mergers, 57 J.L. & Econ. S67 (2014).
\10\ Exec. Order No. 14,036, 86 FR 36,987 (July 14, 2021). See
also The White House, Fact Sheet: Executive Order on Promoting
Competition in the American Economy (July 9, 2021), <a href="https://www.whitehouse.gov/briefing-room/statements-releases/2021/07/09/fact-sheet-executive-order-onpromoting-competition-in-the-american-economy/">https://www.whitehouse.gov/briefing-room/statements-releases/2021/07/09/fact-sheet-executive-order-onpromoting-competition-in-the-american-economy/</a> (noting that ``Economists find that as competition
declines, productivity growth slows, business investment and
innovation decline, and income, wealth, and racial inequality
widen.'').
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[[Page 42180]]
Each year, many of the transactions that are investigated by the
Agencies are also investigated by another jurisdiction under their laws
and procedures and this adds to the complexity of premerger review.
Moreover, the Agencies' experience gained while cooperating with
international competition agencies that are conducting their own merger
investigation reveals that better information can help address the
increased complexity of premerger review and improve its efficiency. As
compared to the Form, most international jurisdictions have merger
filing forms that ask filers to provide significantly more information
that their staff considers relevant to the competition analysis,
including details about the transaction's structure and rationale,
horizontal overlaps, vertical and other relationships, and more
detailed sales data. Importantly, many other jurisdictions rely on
narrative responses from the parties that contain basic information
about business lines or company operations, and several require the
parties to self-report overlaps.
For all these reasons, the Commission believes that the information
currently collected by the Form is insufficient for the Agencies to
conduct an effective and efficient initial evaluation of a
transaction's likely competitive impact on all of those who might be
affected, including consumers, small businesses, and workers. In the
Agencies' experience, the current Form does not provide their staff
with complete information, including information about the transaction;
the filers' business operations and those of any related entities; the
premerger relationship between the acquiring person and the acquired
entity; individuals or entities that may have influence over the
operation of the relevant business lines; the full range of potential
competitive implications of the transaction, including effects on
workers; and prior acquisitions.
To supplement the shortcomings of HSR Filings, Agency staff must
often rely on voluntary cooperation from third parties--customers and
competitors of the merging parties--during the initial waiting period
to learn basic information about the parties' business dealings and the
markets in which they compete. In addition, staff needs to conduct
independent research using publicly available information to supplement
the modest amount of material submitted with the HSR Filing. Neither of
these is reliable as a substitute for information provided by the
parties themselves and certified as a complete response. Moreover, the
additional effort required to discover basic business information about
the parties to the transaction and their premerger relationship is
inefficient and can result in both too few in-depth investigations when
the information collected does not uncover a significant premerger
competitive relationship as well as in-depth investigations that are
either too broad or too narrow due to the insufficient detail about
those relationships that is currently provided in HSR Filings. The
information collected by the parties for their own premerger assessment
of the transaction is paramount for the Agencies' antitrust assessment
and should be collected and submitted with the initial filing.\11\ The
Commission therefore proposes additional questions and document
requests to provide the Agencies with the information necessary to
facilitate their initial review, as discussed further in this NPRM.
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\11\ ``The House conferees contemplate that, in most cases, the
Government will be requesting the very data that is already
available to the merging parties, and has already been assembled and
analyzed by them. If the merging parties are prepared to rely on it,
all of it should be available to the Government.'' 122 Cong. Rec.
H30877 (Sept. 16, 1976) (remarks of Rep. Rodino).
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At the same time, it has become clear to the Commission that
certain required information currently submitted in the Form to aid the
Agencies' review is not as helpful as originally intended. For
instance, as a general screening tool, reporting revenue by specific
dollar amounts for specific industry codes, as defined by the North
America Industry Classification System (``NAICS''), does not materially
assist the Agencies in their initial review. Reporting revenue ranges
for the NAICS codes, would sufficiently convey which lines of business
of the filing person generate the most revenue. In addition, the
requirement to report manufacturing revenues at a granular level has
become less helpful to the Agencies during their initial review as a
result of changes made by the United States Census Bureau (``Census'')
to one of its revenue classification systems. Finally, the Commission
believes that the identification of minority investors in target
entities, other than those that will ``roll over'' their investments
post-consummation, is of limited use. The Commission therefore proposes
deleting these requirements, as discussed in further detail below.
The Commission anticipates that the proposed reorganization and
collection of additional information in HSR Filings would greatly
enhance the Agencies' ability to complete the review of a reportable
transaction in a short period of time, and that they are necessary and
appropriate in order for the Agencies to vigorously enforce the
nation's antitrust laws. The changes would improve the efficiency and
effectiveness of the Agencies' initial review process and reduce the
need to rely on the voluntary submission of additional information by
the parties and third-party industry sources during the initial waiting
period.
Finally, the Commission notes that since the implementation of the
Act and Rules in the late 1970s, there has never been a large-scale
reorganization of the information required in an HSR Filing. As a
result, the Commission is proposing a comprehensive redesign of the
premerger notification process through both a reorganization of the
information currently required and the addition of new information
requirements. As the Agencies are currently working to complete an
electronic filing (``e-filing'') platform, the exact structure of the
redesign is unclear at this time. The Commission believes that the
development and roll-out of an e-filing platform will mark a
significant improvement in the submission and processing of HSR
Filings, with benefits for both filers and the Agencies. Thus, in this
NPRM, the Commission is providing an overview of the proposed
reorganization of the information currently required and the proposed
new information requirements. The exact form of the redesign and how
filers will submit this information will be more clearly laid out in
any Final Rule after the Commission reviews all comments to this NPRM.
Proposed Changes to the Rules
I. Proposed Changes to Part 801
A. Section 801.1: Proposed Definitions of ``Foreign Entity or
Government of Concern'' and ``Subsidy''
On December 29, 2022, the President signed into law the
Consolidated Appropriations Act, 2023, which included amendments to the
HSR Act in t2022 Amendments. Public Law 117-328, 136 Stat. 4459.
Congress found that foreign subsidies, particularly those from
``countries or entities that constitute a strategic or economic threat
[[Page 42181]]
to United States interests,'' \12\ ``can distort the competitive
process by enabling the subsidized firm to submit a bid higher than
other firms in the market, or otherwise change the incentives of the
firm in ways that undermine competition'' \13\ post-merger. The 2022
Amendments require the Commission, with concurrence of the Assistant
Attorney General, and in consultation with Chairperson of the Committee
on Foreign Investment in the United States, the Secretary of Commerce,
the Chair of the United States International Trade Commission, the
United States Trade Representative, and heads of other appropriate
agencies (``Relevant Agencies''), to promulgate a rule to require
persons making an HSR Filing to disclose subsidies received from
countries or entities that are strategic or economic threats to the
United States. Congress identified those threats as ``foreign entities
of concern'' as defined in section 40207 of the Infrastructure and Jobs
Act, 42 U.S.C. 18741(a), and required the Commission to collect
information about subsidies from these entities as part of HSR Filings.
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\12\ Title II of the Merger Filing Fee Modernization Act of
2022, Public Law 117-329, Div. GG, sec. 201(a)(2) at 3826, 136 Stat.
4459.
\13\ Id. at sec. 201(a)(1).
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After conducting its own internal diligence to draft a rule and in
consultation with the Relevant Agencies on this topic, the Commission
proposes amending Sec. 801.1 to add proposed paragraphs (r)(1) and
(2), which define ``foreign entity or government of concern'' and
``subsidy,'' respectively.
1. Section 801.1(r)(1) Foreign Entity or Government of Concern
In the 2022 Amendments, Congress found that foreign subsidies are
particularly problematic when granted by countries or entities that
constitute a strategic or economic threat to U.S. interests. To
identify such subsidies, the Commission proposes new rule Sec.
801.1(r)(1). This proposed rule defines, in proposed subsection (i),
subsidies that would have to be disclosed, per Congress' mandate, if
received from a ``foreign entity of concern'' as the term is defined in
section 40207 of the Infrastructure Investment and Jobs Act (``IIJ
Act''), 42 U.S.C. 18741(a). The Commission therefore proposes adopting
this definition in Sec. 801.1(r)(1)(i).
The Commission recognizes, however, that the definition of a
``foreign entity of concern'' in the IIJ Act does not explicitly
include foreign governments or government agencies. To the extent that
HSR filers have received any subsidy directly from the government of a
country designated by 42 U.S.C. 18741(a)(5)(C), the Commission believes
that including these subsidies would be consistent with Congress'
mandate to capture information regarding subsidies when granted by
entities posing a strategic and economic threat to the United States.
Indeed, the Agencies' understanding of the subsidies' competitive
significance would be incomplete without including subsidies granted by
foreign governments or government agencies of foreign countries that
are covered nations under 42 U.S.C. 18741(a)(5)(C). Therefore, the
Commission proposes requiring persons making an HSR Filing to report
subsidies received from governments (and their agencies) of foreign
countries that are covered nations under 42 U.S.C. 18741(a)(5)(C) in
proposed Sec. 801.1(r)(1)(ii).
Finally, the Commission proposes that proposed Sec. Sec.
801.1(r)(1)(i) and (ii) retain the references to the respective
sections of the IIJ Act rather than incorporating the current text of
these sections to assure that the proposed rule remains consistent with
any subsequent amendments to these sections within the IIJ Act.
2. Section 801.1(r)(2) Subsidy
The 2022 Amendments found that ``[f]oreign subsidies, which can
take the form of direct subsidies, grants, loans (including below-
market loans), loan guarantees, tax concessions, preferential
government procurement policies, or government ownership or control,
can distort the competitive process.'' \14\ Thus, the 2022 Amendments
require the Commission to collect information about such subsidies to
enable the Agencies to determine whether the transaction, if
consummated, would violate the antitrust laws. But the statute does not
define the term ``subsidy'' and its specific definition has, in fact,
been heavily debated and negotiated in both U.S. legislation and
international treaties in other contexts. The Commission is mindful of
the relevant caselaw and expertise of other U.S. agencies that have
developed over decades and, after consultation with the Relevant
Agencies on this topic, the Commission proposes the adoption of the
definition of subsidies in Title VII of the Tariff Act of 1930
(``Tariff Act''), 19 U.S.C. 1677(5)(B).
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\14\ Id.
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The Tariff Act definition of ``subsidy'' is consistent with the
definition in the World Trade Organization's Agreement on Subsidies and
Countervailing Measures (``SCM''), to which the United States is a
party.\15\ The Commission believes that because this definition is
found both in U.S. law and in the SCM, both U.S. and foreign filing
parties, or the law firms that represent them, should be familiar with
and able to apply. The Commission also believes this definition is
consistent with the Congressional mandate in the 2022 Amendments.
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\15\ 19 U.S.C. 3511(d)(12).
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The Commission thus proposes adopting this definition in Sec.
801.1(r)(2) and that the proposed rule retain the reference to the
Tariff Act definition rather than incorporating the current text of
that section to assure that the proposed rule remains consistent with
any subsequent amendments to the Tariff Act.
The incorporation of this proposed change into the Instructions is
discussed below at III.E.1.
II. Proposed Changes to Part 803
A. Sections 803.2, 803.5, and 803.10: Adoption of Electronic Filing
The Commission proposes amending Sec. Sec. 803.2(e) and (f);
803.5(a)(1), (3), and (b); and 803.10(c)(1)(i) and (ii) to eliminate
references to paper and DVD filings to physical offices. In March 2020,
the COVID-19 pandemic and resulting closures of federal office
buildings prevented the Commission and Assistant Attorney General from
physically accepting HSR Filings, as had been the practice since the
original adoption of the Rules in 1978. As a result, on March 17, 2020,
the Agencies began accepting filings electronically.\16\ Given the
success of that system, the Commission proposes amending the Rules as
noted above to adopt electronic filing and eliminate references to
paper and DVD filings. This change benefits both the Agencies and
filing parties by reducing reliance on the delivery and acceptance of
paper filings or DVDs.
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\16\ Press Release, Fed. Trade Comm'n, Premerger Notification
Office Implements Temporary e-Filing System (March 13, 2020),
<a href="https://www.ftc.gov/news-events/news/press-releases/2020/03/premerger-notification-office-implements-temporary-e-filing-system">https://www.ftc.gov/news-events/news/press-releases/2020/03/premerger-notification-office-implements-temporary-e-filing-system</a>.
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B. Section 803.2: Requiring Separate Forms for Acquiring and Acquired
Persons
The Commission proposes amending Sec. 803.2(a) and deleting Sec.
803.2(b)(1)(v) so that filing persons that are both the acquiring and
acquired person are required to make separate filings. Currently, the
Rules, Instructions, and Form permit filers that are both an acquiring
and an acquired person in a transaction to file only one Form. This
[[Page 42182]]
scenario arises most commonly when a seller will receive voting
securities of the buyer as consideration for the sale of the target. In
such transactions, both the acquisition of the target by the buyer and
the acquisition of the buyer's voting securities by the seller may be
reportable. Thus, the buyer and seller can each be an acquiring and an
acquired person.
Although the Rules permit filers to use one Form for the two
transactions in these cases, Sec. 803.2(b)(1)(v) requires that
separate responses be provided for Items 5 through 8, one set of
responses as the acquiring person and one set as the acquired person.
In the Commission's experience, filers that opt to combine the
information on a single Form often do not include everything that is
required, and these filings are, in fact, very confusing for the
Agencies to review. In contrast, when filers choose to submit two
separate Forms for such transactions, these filings provide all the
required information and in a much clearer format. The Commission thus
proposes amending Sec. 803.2(a) and deleting Sec. 803.2(b)(1)(v) to
require acquiring persons and acquired persons to submit separate HSR
Filings, one as the acquiring person and one as an acquired person, in
instances where filers qualify as both. This proposed approach would
make the Agencies' initial review much easier by more clearly
separating information related to the acquiring person from the
acquired person. No new information would be required, and technology
allows parties to save copies of filings to reduce the need to input
repetitive information.
C. Section 803.5(b): Requiring Draft Agreements or Term Sheets
The Commission proposes amending Sec. 803.5(b) to require filers
who have not executed a definitive transaction agreement before making
an HSR Filing to submit a draft agreement or term sheet that describes
with sufficient detail the scope of the entire transaction that will be
consummated after observing the waiting period required by the Act.
Section 803.5(b) currently allows filers in any non-Sec. 801.30
acquisition to file on the basis of ``a contract, agreement in
principle or letter of intent to merge or acquire [that] has been
executed'' and an affidavit attesting to that execution as well as the
good faith intention to complete the transaction. In permitting parties
to file before the signing of a definitive agreement, the Commission
has relied on the assumption that the filings would ``contain
sufficiently definitive information about the transaction to permit
accurate analysis.'' \17\ In the Commission's experience, however,
filings submitted on the basis of bare preliminary agreements, such as
an indication of interest, non-binding letter of intent, or agreement
in principle (``Preliminary Agreements''), typically do not meet this
standard.
---------------------------------------------------------------------------
\17\ 43 FR 33450, 33511 (July 31, 1978).
---------------------------------------------------------------------------
Often, Preliminary Agreements reflect only very early discussions
between the parties, and since there is currently no obligation to file
a draft or final agreement once the HSR Filing is submitted, the
Agencies must spend time during the initial waiting period simply
trying to discover the scope and timing of the transaction. Moreover,
given the preliminary nature of such a filing, the parties have often
not yet undertaken a robust analysis of the transaction and therefore
have drafted few, if any, documents responsive to Items 4(c) or 4(d) of
the current Form. Permitting parties to submit an HSR Filing prior to a
complete substantive analysis of the transaction, and at times even
before the parties have done diligence on rationales or justifications
for the transaction, puts the Agencies at a distinct disadvantage
during the initial waiting period in determining what the transaction
is and whether it may violate the antitrust laws if consummated.
Additionally, HSR Filings made during the early phases of
negotiations may be too uncertain to merit review. The original
Statement of Basis and Purpose from 1978 (``1978 SBP'') provides clear
guidance that ``[b]ecause of the time and resource constraints upon the
agency staffs,'' the Agencies should not expend resources to review
transactions so lacking in specifics that they could be considered
merely ``hypothetical.'' \18\ Yet allowing for the submission of a
filing on the basis of a Preliminary Agreement often triggers the use
of limited resources for hypothetical transactions, first to discover
the full range of potential viable transactions, and then to assess the
competitive impact of those potential iterations.
---------------------------------------------------------------------------
\18\ Id. at 33510-511.
---------------------------------------------------------------------------
The Commission therefore proposes amending Sec. 803.5(b) to
eliminate the ability to submit an HSR Filing on any Preliminary
Agreement without providing a term sheet or draft agreement that
reflects sufficient detail about the proposed transaction to allow the
Agencies to understand the scope of the transaction and to confirm that
the transaction is more than hypothetical. The Commission also proposes
a corresponding change to the Instructions, as noted at III.C.6.
Because detailed term sheets or draft agreements are often prepared in
the ordinary course of deal negotiations, the Commission does not
expect this change would impose a significant burden on filing parties.
However, the Commission recognizes that eliminating the parties'
ability to make filings prior to the negotiation of such documents may
change the timing of filing and would likely result in more robust
filings that would take additional time to prepare. On balance, the
Commission believes that this proposed change is consistent with the
original intent of the Rules to prevent expending scarce Agency
resources on hypothetical transactions and would allow the Agencies to
focus on transactions definitive enough to permit accurate analysis.
D. Section 803.8: Translation of Documents
The Commission proposes amending Sec. 803.8 to require submission
of English-language translations for all foreign-language documents
submitted with the initial HSR Filing. Section 803.8(a) currently
provides that parties need not translate foreign-language materials
submitted with the initial filing, and that English-language outlines,
summaries, extracts, or verbatim translations need only be provided if
they already exist. Section 803.8(b), in contrast, has required since
1983 that all foreign-language documents responsive to a Second Request
be provided with English translations.\19\
---------------------------------------------------------------------------
\19\ The Commission proposed mandatory translation in 1981, 46
FR 38710 (July 29, 1981), and issued a final rule in 1983, 48 FR
34427 (July 29, 1983).
---------------------------------------------------------------------------
In the Commission's experience since the early 1980s when Rule
803.8 was first adopted, it is no longer enough to require translations
of only those foreign-language documents submitted in response to
Second Requests because today's HSR Filings quite frequently contain
foreign-language materials. These materials typically include key
documents, such as the transaction agreements submitted in response to
current Item 3(b) of the Form, the relevant financials submitted in
response to current Item 4(b), and the documents submitted in response
to current Items 4(c) and 4(d) of the Form. Parties often submit
foreign-language materials in their HSR Filings with no translation at
all or with only rough English-language outlines, summaries, or
extracts, which may not accurately and fully convey the contents of the
foreign-language document. As a result, the Agencies must either obtain
their
[[Page 42183]]
own translations of these documents or miss out on potentially critical
information, leaving the Agencies at a disadvantage during their
initial review. Given the wide variety of foreign languages the
Agencies typically see, it would be very costly for the Agencies to
retain translation services for each filing that may contain some
foreign-language material. Further, obtaining translations adds
significant delay within the already time-constrained initial waiting
period and would not allow for filing parties to review the
translations for errors. These translations may be especially important
for those transactions that report foreign subsidies.
To address this issue, the Commission proposes combining Sec. Sec.
803.8(a) and 803.8(b). Proposed Sec. 803.8 would therefore be one
paragraph requiring that verbatim English translations be provided with
all foreign-language materials submitted as part of an HSR Filing or in
response to a Second Request. For either an initial HSR Filing or in
response to a Second Request, both the original document and the
English translation would need to be submitted. Proposed Sec. 803.8
would not require any particular method of translation but would
specify that, whatever translation method the parties choose, all
verbatim translations must be understandable, accurate, and complete.
This proposed change would also be reflected in the Instructions, as
specified below in III.A.4.
Although the Commission noted in its 1983 final rulemaking that
requiring translations created a burden for filing parties,\20\ the
Commission now believes that translation tools available to the parties
have become more abundant and that these tools provide many options for
translation that should significantly reduce the burden of providing
translations. Translations of foreign-language documents would greatly
benefit the Agencies in allowing staff to know the content of
responsive documents submitted in a foreign language. The Commission
invites comment on whether there are categories of documents identified
in this NPRM that would present a significant burden to translate and
what other alternatives might achieve the Commission's goal of being
able to understand and assess foreign-language documents while creating
less burden for filing parties.
---------------------------------------------------------------------------
\20\ 48 FR 34427, 34440 (July 29, 1983).
---------------------------------------------------------------------------
E. Section 803.10: Commencement of Waiting Periods
The Commission proposes amending Sec. 803.10(c)(1)(i) to clarify
when filings made electronically are to be credited as received by the
Agencies. Specifically, the Commission proposes amending this rule to
clarify that compliant filings will be credited as received on the date
filed if: (i) the electronic submission is complete by 5:00 p.m.
Eastern Time; and (ii) such date is not a Saturday, Sunday, legal
public holiday (as defined in 5 U.S.C. 6103(a)), or the observed date
of such legal public holidays.
These clarifications are consistent with current and historical
practices. Of course, historically, the Rules did not need to specify
this information, since the receipt of physical filings (either on
paper or DVD) required the offices of the Assistant Attorney General
and Commission to be open. But because electronic filing platforms can
allow submission of filings even when Agency staff is not available to
receive the filings, the proposed amendments make clear that filings
are only credited as received during regular business hours on regular
business days. These proposed changes would provide clarity and thus
benefit both filing parties and the Agencies.
F. Section 803.12: Information To Be Updated With Refiling
The Commission proposes amending Sec. 803.12(c) to specify which
responses to the items in the proposed Instructions would need to be
updated if the acquiring person chooses to withdraw its HSR Filing and
refile it (an ``Updated HSR Filing''). The procedure for voluntary
withdrawal and refiling permits the acquiring person to restart the
initial waiting period, so long as no material changes have been made
to the transaction, to provide the Agencies an additional 15 or 30 days
(depending on the transaction type) to review the transaction without
issuing a Second Request. If the Updated HSR Filing is received within
two business days of withdrawal, no new fee is required, but filers
currently must provide a new affidavit and certification and update
current Item 4 of the Form to provide the Agencies with more recent
information that is likely relevant to the continued review.
The Commission proposes eliminating the requirement to provide
updated financials, currently required by Item 4(a) and (b), in the
Updated HSR Filing. The Commission's experience has shown that, given
that the withdraw and refile procedure is completed within
approximately one month of the original filing, the financial documents
required by Item 4(a) and (b) are rarely changed and therefore updating
them is not essential in this phase of its investigation.
The Commission proposes requiring updated Transaction-Related
Documents with the Updated HSR Filing, which, as discussed below in
III.D.1.a., would comprise the current Item 4(c) and (d) documents
subject to proposed modifications of the custodians and clarifications.
Documents responsive to current Item 4(c) and (d) typically reflect the
most relevant thinking of key individuals with knowledge of the
transaction within the acquiring person and are required as part of an
Updated HSR Filing. Therefore, the Commission believes these documents
are essential to the Agencies' initial antitrust assessment of the
transaction.
The Commission also proposes adding two new requirements for the
Updated HSR Filing: updated transaction agreements and updated
information about subsidies from Foreign Entities of Concern. Though
the voluntary withdrawal and refiling process is only available if the
transaction is materially the same, the Commission believes that the
Agencies would benefit from having a complete understanding of all
aspects of the status of and rationale for the transaction, including
any changes that have occurred since the day the HSR Filing was
submitted. Therefore, the Commission proposes requiring that the
Updated HSR Filing include the latest version of the transaction
agreements, including the most recent drafts, if a final version has
not been executed. The Commission believes this proposed requirement
would not impose a substantial burden, since this would be a limited
set of documents that should be readily available to the acquiring
person.
The Commission also proposes requiring that the Updated HSR Filing
include updated information regarding Subsidies from Foreign Entities
or Governments of Concern, which is discussed below at III.E.1. The
Commission believes that most updated HSR Filings would reflect no new
information related to subsidies given the short period of time since
the original HSR Filing. However, if new information about subsidies
from foreign entities of concern were to become available, the
Commission believes that it would be consistent with Congressional
intent for the Agencies to have access to this information.
[[Page 42184]]
Proposed Changes to the Instructions
III. Part 803 Appendix A and Appendix B
As mentioned above, the Agencies are developing an e-filing
platform through which filers would submit information required by the
HSR Rules via an online portal. As a result, this NPRM does not contain
a new draft Form. Instead, this NPRM presents the information
requirements as Instructions for collecting and submitting documents
and information required by the HSR Rules. The proposed Instructions
reorganize the information to reflect the planned layout of the e-
filing platform in development, which would be described in any final
rule. Prior to the implementation of the e-filing platform, the
proposed Instructions contemplate filers would submit the proposed
requests for information and narratives via uploads in a standard
format such as PDF and Excel.
The proposed changes to the information that filing parties would
be required to provide are detailed below. The Commission recognizes
that, in total, these proposed changes would be significant and impose
additional burden on some filing parties. Some proposed changes ask for
additional information or documents that the Commission believes are in
the possession of the filing persons in a form that could be readily
uploaded into the e-filing platform. Other proposed changes would
require filing parties to compile or generate the requested information
specifically for the HSR Filing, such as items requesting narrative
responses, which would involve additional effort. As explained below,
the Commission has determined that the additional burden associated
with these proposed changes is justified because the requested
documentary material and information is necessary and appropriate for
effective and efficient review of HSR Filings to determine within the
initial waiting period whether the transaction may, if consummated,
violate the antitrust laws.\21\
---------------------------------------------------------------------------
\21\ 15 U.S.C. 18a(d).
---------------------------------------------------------------------------
Based on the Agencies' experience conducting merger investigations,
and as discussed above, the Commission believes that the limited
information currently available to the Agencies in the HSR Filing is no
longer sufficient to conduct an effective initial screening of the
transaction for all types of competitive harm that may result from the
transaction. The proposed set of reorganized revenue information,
additional documents, and narrative responses would create a much more
complete, accurate, and robust basis on which to screen the transaction
for the various potential competitive effects, including those that
arise from non-horizontal transactions or combinations involving
competing employers. These proposals would also provide a more reliable
and robust set of information to determine when the transaction does
not warrant an in-depth investigation, which often requires a
substantial investment of time and resources for both the investigating
agency and the merging parties. Based on the Agencies' experience in
reviewing and challenging illegal mergers, the proposals target the
information that is most relevant and readily available to filing
persons and would require it to be presented in a coherent and
organized way that will facilitate quick antitrust review by the
Agencies during the initial waiting period. But the Commission welcomes
comments on the burden associated with and the appropriate balance of
having to provide information in the form of revenues, documents, and
narratives as part of the proposed changes in this NPRM and invites
alternative proposals that meet the objectives described below.
At their core, the proposed changes are motivated by the
fundamental purpose of the HSR Act, which is to allow the Agencies,
within a short period of time to review the information submitted with
the Filing and identify potentially problematic transactions prior to
consummation, and, where appropriate, initiate an in-depth review by
issuing Second Requests. The fact that the Agencies must conduct their
evaluation in an initial waiting period of 15 or 30 days, depending on
the transaction type, means that the Agencies must have enough
information to consider a wide range of potential effects on
competition on an expedited basis. Based on the cumulative learning of
the Commission and Assistant Attorney General over the course of
decades of investigations, the Commission proposes requiring new
information and narratives to address particular areas where the
Agencies have found specific deficiencies in the type of information
currently required by the Form. In addition, this NPRM would implement
changes required by the 2022 Amendments, which are consistent with the
need for sufficient information to screen for all types of competitive
concerns.
Despite the added burden for filing persons, on balance, the
Commission believes that the benefit to the Agencies' merger review
would be significant and would help address information asymmetries
between Agency staff and the filing persons in the initial waiting
period. The Agencies expend substantial resources during the initial
waiting period to discover and confirm basic business information about
the filing persons, information that is well-known to them but not to
Agency staff and is not available from any other source. These
information asymmetries have become more acute as deals and companies
have become more complex. In the Commission's experience, the
inefficiency created by information asymmetries can overwhelm the
initial review process, especially when the volume of HSR reportable
transactions is high.\22\ The proposed changes would also benefit
filing persons where information contained in an HSR Filing would
demonstrate to the Agencies that the transaction at issue does not need
further investigation. Indeed, both the Agencies and filing persons
have an interest in ensuring that HSR Filings are robust enough for the
Agencies to quickly identify transactions that do not require further
investigation during the initial waiting period. It is the Commission's
aim to be cognizant of all such interests in proposing the substantial
changes contained in this NPRM.
---------------------------------------------------------------------------
\22\ The Agencies experienced a surge in HSR reportable
transactions during 2021 and 2022. For instance, FY 2021 HSR
reportable transactions were double those of FY 2020 (1,637 versus
3,520), and in FY 2022, reportable HSR transactions remained high,
at over 3,200. The pace and volume of HSR filings (generally two
filings per transaction) during that time (in addition to on-going
merger investigations) required the Agencies to adjust their HSR
review process, including suspending the granting of requests for
early termination of the waiting period.
---------------------------------------------------------------------------
For ease of reference, the Commission includes the following
materials regarding the proposed changes in this NPRM:
<bullet> An outline of the reorganization contemplated in the
proposed Instructions,
<bullet> A chart that identifies proposed new locations of the
current Items of the Form including whether substantive changes are
proposed, and
<bullet> A chart of proposed new categories of required
information.
These materials appear immediately below.
Proposed Instructions Outline
<bullet> General Instructions and Information
<bullet> Ultimate Parent Entity Information
[cir] UPE Details
[cir] Organization Structure
<bullet> Transaction Information
[cir] Parties
[cir] Filing Fee
[cir] Transaction Details
[[Page 42185]]
[cir] Transaction Description
[cir] Joint Ventures
[cir] Agreements and Timeline
<bullet> Competition and Overlaps
[cir] Business Documents
[cir] Competition Analysis
[cir] NAICS Codes
[cir] Controlled-Entity Overlaps
[cir] Minority-Held Entity Overlaps
[cir] Prior Acquisitions
<bullet> Additional Information
[cir] Subsidies from Foreign Entities or Governments of Concern
[cir] Defense or Intelligence Contracts
[cir] Identification of Communications and Messaging Systems
[cir] Other Jurisdictions
<bullet> Certification
<bullet> Affidavits
Cross Reference Between Current Form and Proposed Instructions
------------------------------------------------------------------------
Current form item New location Substantive changes?
------------------------------------------------------------------------
Fee Information............... Transaction No.
Information/
Filing Fee.
Corrective Filing............. Transaction No.
Information/
Transaction
Details.
Cash Tender Offer............. Transaction No.
Information/
Transaction
Details.
Bankruptcy.................... Transaction No.
Information/
Transaction
Details.
Foreign Jurisdictions......... Additional Yes.
Information/
Other
Jurisdictions.
Early Termination............. Transaction No.
Information/
Transaction
Description.
Item 1(a)..................... Ultimate Parent No.
Entity
Information/UPE
Details.
Item 1(b)..................... Ultimate Parent No.
Entity
Information/UPE
Details.
Item 1(c)..................... Ultimate Parent No.
Entity
Information/UPE
Details.
Item 1(d)..................... Ultimate Parent No.
Entity
Information/UPE
Details.
Item 1(e)..................... Ultimate Parent No.
Entity
Information/UPE
Details.
Item 1(f)..................... Ultimate Parent Yes.
Entity
Information/
Organization
Structure.
Item 1(g)..................... Ultimate Parent No.
Entity
Information/UPE
Details.
Item 1(h)..................... Ultimate Parent Yes.
Entity
Information/UPE
Details.
Item 2(a)..................... Transaction No.
Information/
Parties.
Item 2(b)..................... Transaction No.
Information/
Transaction
Details.
Item 2(c)..................... Transaction No.
Information/
Transaction
Details.
Item 2(d)..................... Transaction No.
Information/
Transaction
Details.
Item 3(a) (Entities).......... Transaction No.
Information/
Parties.
Item 3(a) (Description)....... Transaction Yes.
Information/
Transaction
Description.
Item 3(b)..................... Transaction Yes.
Information/
Agreements and
Timeline.
Item 4(a)..................... Ultimate Parent No.
Entity
Information/UPE
Details.
Item 4(b)..................... UPE Information/ No.
UPE Details.
Item 4(c)..................... Competition and Yes.
Overlaps/
Business
Documents.
Item 4(d)..................... Competition and Yes.
Overlaps/
Business
Documents.
Item 5(a)..................... Competition and Yes.
Overlaps/NAICS
Codes.
Item 5(b)..................... Transaction Yes.
Information/
Joint Ventures.
Item 6(a)..................... Ultimate Parent Yes.
Entity
Information/
Organization
Structure.
Item 6(b)..................... Ultimate Parent Yes.
Entity
Information/
Organization
Structure.
Item 6(c)(i).................. Competition and Yes.
Overlaps/
Minority-Held
Entity Overlaps.
Item 6(c)(ii)................. Competition and Yes.
Overlaps/
Minority-Held
Entity Overlaps.
Item 7(a)-(d)................. Competition and Yes.
Overlaps/
Controlled-
Entity Overlaps.
Item 8(a)..................... Competition and Yes.
Overlaps/Prior
Acquisitions.
------------------------------------------------------------------------
Proposed New Requirements and Categories of Information
------------------------------------------------------------------------
Proposed new sections Location
------------------------------------------------------------------------
New Definitions........................... General Instructions and
Information.
Document Log.............................. General Instructions and
Information.
Translations.............................. General Instructions and
Information.
Organization of Controlled Entities....... Ultimate Parent Entity
Information/Organization
Structure.
Identification of d/b/a or f/k/a names.... Passim.
Identification of Additional Minority Ultimate Parent Entity
Interest Holders. Information/Organization
Structure.
Narrative Describing Ownership Structure Ultimate Parent Entity
of the Acquiring and Acquired Entities. Information/Organization
Structure.
Organizational Chart for Funds and Master Ultimate Parent Entity
Limited Partnerships. Information/Organization
Structure.
Identification of Other Types of Interest Ultimate Parent Entity
Holders that May Exert Influence. Information/Organization
Structure.
Identification of Officers and Directors.. Ultimate Parent Entity
Information/Organization
Structure.
Description of Acquiring Person........... Ultimate Parent Entity
Information/Transaction
Details.
Narrative Describing Transaction Rationale Ultimate Parent Entity
Information/Transaction
Details.
Diagram of the Transaction................ Ultimate Parent Entity
Information/Transaction
Details.
Identification of Related Transactions.... Ultimate Parent Entity
Information/Transaction
Details.
Expansion of Transaction Agreements to be Ultimate Parent Entity
Produced. Information/Agreements and
Timeline.
Production of other Agreements between the Ultimate Parent Entity
Acquiring and Acquired Persons. Information/Agreements and
Timeline.
Provision of a Transaction Timeline....... Ultimate Parent Entity
Information/Agreements and
Timeline.
Production of Certain Documents of the Competition and Overlaps/
Supervisory Deal Team Lead(s). Business Documents.
Production of Certain Strategic Plans..... Competition and Overlaps/
Business Documents.
Production of Certain Drafts.............. Competition and Overlaps/
Business Documents.
Organizational Chart of Authors and Competition and Overlaps/
Certain Recipients of Documents. Business Documents.
Narrative Describing Horizontal Overlaps.. Competition and Overlaps/
Competition Analysis.
Narrative Describing Supply Relationships. Competition and Overlaps/
Competition Analysis.
Narrative Describing Labor Markets........ Competition and Overlaps/
Competition Analysis.
[[Page 42186]]
Identification of Minority Held Entities Competition and Overlaps/
with Revenue Overlaps. Minority-Held Entity
Overlaps.
Provision of Geolocation for Certain Competition and Overlaps/
Locations of Operations. Controlled-Entity Overlaps.
Identification of Additional Prior Competition and Overlaps/
Acquisitions. Prior Acquisitions.
Disclosure of Subsidies from Foreign Additional Information.
Entities or Governments of Concern.
Identification of Certain Defense or Additional Information.
Intelligence Contracts.
Identification of Communications and Additional Information.
Messaging Systems.
Mandatory Disclosure of Foreign Filings... Additional Information.
Voluntary Waivers for International Additional Information.
Competition Authorities.
Voluntary Waivers for State Attorneys Additional Information.
General.
Statement of Penalties for False Certification.
Statements.
Prevention of Destruction of Documents.... Certification.
------------------------------------------------------------------------
The following discussion of the proposed changes in this NPRM
tracks the Proposed Instructions Outline above, explaining which
information requirements are materially the same as those currently
included in the Form and Instructions, which the Commission proposes
changing, and which are proposed new categories of required
information.
Throughout the proposed Instructions, references to paper and DVDs
have been eliminated, as discussed in II.A. above.
A. General Instructions and Information
The Commission proposes creating a General Instructions and
Information section within the proposed Instructions that would largely
parallel the General section of the current Instructions but would be
significantly reorganized. Within the proposed General Instructions and
Information section, the Commission proposes substantive changes to the
following sections: Filing Person, Definitions, Responses, and
Translations, as detailed below.
1. Definitions and Explanation of Terms
The Commission proposes creating two new definitions and deleting
an existing definition within the proposed Instructions.
a. Economic Research Service's (ERS's) Commuting Zones (CZ)
The Commission proposes adding a definition for Economic Research
Service's Commuting Zones. As discussed below at III.D.2.c., the
Commission proposes new questions that would require the submission of
information about the filing person's employees to aid the Agencies'
evaluation of the potential impact of proposed transactions on labor
markets. These proposed questions would require data to be submitted
using the Department of Agriculture's Economic Research Service
Commuting Zones for the year 2000. These codes are available at <a href="https://www.ers.usda.gov/data-products/commuting-zones-and-labor-market-areas/">https://www.ers.usda.gov/data-products/commuting-zones-and-labor-market-areas/</a>.
b. North American Product Classification System (NAPCS) Data
The Commission proposes eliminating the reporting of 10-digit North
American Product Classification System (``NAPCS'') based codes, as
discussed in more detail below at III.D.3. Thus, the Commission
proposes deleting the NAPCS definition from the proposed Instructions.
c. Standard Occupational Classification
The Commission proposes adding a definition for Standard
Occupational Classification. As discussed below at III.D.2.c., the
Commission proposes new questions that would require the submission of
information about the filing person's employees to aid the Agencies'
evaluation of the impact of proposed transactions on competition for
workers in labor markets. The proposed definition of Standard
Occupational Classification (``SOC'') would require filers to submit
data by the first six digits of the relevant code, as published by the
United States Bureau of Labor Statistics, available at <a href="https://www.bls.gov/soc/2018/#classification">https://www.bls.gov/soc/2018/#classification</a>.
2. Filing
As discussed above at II.B., the Commission proposes amending Sec.
803.2 and deleting Sec. 803.2(b)(1)(v) to require filing persons to
submit separate forms when filing as an acquiring and acquired person.
The proposed Instructions would also reflect this proposed change.
3. Responses
The Commission proposes replacing the current Responses section
with a new Responses section that would provide details on how to
provide the information responsive to the proposed new questions. This
would include eliminating instructions that are specific to filings
made on paper or DVD, see above at II.A. The proposed revised Responses
section would also describe the information that filing persons would
need to provide in a log of responsive documents and narrative
responses to be submitted with an HSR Filing. This information would
generally be the same as the information currently required for
documents submitted in response to Items 4(c) and 4(d) of the current
Form, with two proposed expansions.
First, the Commission proposes requiring the filing person to
identify the request(s) to which the document would be responsive.
Though the proposed Instructions do not include item numbers at this
time, indented and bolded headings in the proposed Instructions should
each be considered a separate request. The Commission routinely
requires this type of referencing for document submissions pursuant to
compulsory process, including in response to a Second Request, and it
is extraordinarily helpful in quickly identifying materials responsive
to a specific request. This proposed requirement would allow the
Agencies to understand the content of filings more quickly by providing
a cross-reference between information and documents, facilitating a
more efficient review.
Second, the Commission proposes modifying the requirements for
identification of authors of documents prepared by third parties. For
documents prepared by third parties at the request of a filing person,
such as market studies, quality of earnings analyses, confidential
information memoranda, management presentations, or board
presentations, the Commission proposes that, in addition to providing
the name of the third party that prepared the document, the filing
person would be required to provide the name, title, and company of the
individual within the filing person who supervised the preparation of
the document or for whom the document
[[Page 42187]]
was prepared. Understanding who, within the filing person, was
responsible for overseeing or receiving the work of outside consultants
would materially assist the Agencies in identifying key decision-makers
for the transaction. In the case of documents that were not
commissioned by the filing person, such as subscription market reports,
unsolicited banker's books, or documents received from the other filing
person, the Commission proposes that the filing person would only be
required to list the document title and name of the third party that
prepared the document.
These proposed changes would allow the Agencies to quickly assess
which documents were key to the decision to pursue the transaction and
who within the filing person coordinated the assessment that resulted
in that decision.
4. Translations
As noted above at II.D., the Commission proposes amending Sec.
803.8 to require the filing person to submit English translations of
all foreign-language documents. The proposed Instructions would also
reflect this change.
B. Ultimate Parent Entity Information
The Commission proposes the creation of an Ultimate Parent Entity
(UPE) Information section within the proposed Instructions. Currently,
information about the structure of the acquiring and acquiring persons
is required in various sections of the Form: Item 1 contains basic
contact information; Item 2 identifies the ultimate parent entities;
Item 3 identifies the acquiring and acquired entities; and Item 6
identifies certain controlled and minority-held entities, as well as
certain minority holders of the filing person. The Commission proposes
the reorganization, clarification, and expansion of these items to
require additional information about the acquiring person and acquired
entity(s) in order for the Agencies to receive a more complete picture
of the scope of the operations of each, and to identify points of
contact for questions about the HSR Filing or potential Second
Requests, as well as key interest holders. These proposed changes,
discussed below, would fall within the following proposed categories:
UPE Details and Organization Structure.
1. UPE Details
The proposed UPE Details section within the proposed Instructions
would contain most of the information currently required in Item 1 of
the Form. The Commission proposes adding a new Size of Person
Stipulation item that would allow the filing person to stipulate that
the size of person test is met, when applicable, making it easier for
staff to determine that the size of person test is met and streamlining
the review process as a result.
The Commission also proposes clarifying which financials are
required from acquiring persons who are natural persons. As a result of
feedback from filers over the years, the Commission is aware that this
item causes confusion. The proposed language in the Instructions would
make it clear that natural persons who are acquiring persons must
include the annual reports and/or annual audit reports of (1) the
acquiring entity(s) and any entity controlled by the natural person
whose dollar revenues contribute to a NAICS overlap, and (2) the
highest-level entity(s) the natural person controls. It is the intent
of the Commission that the Instructions require this information from
natural persons, and the proposed change would make that intent clear.
Finally, the Commission proposes requiring all filing persons to
identify the person to whom Second Requests should be addressed.
Current Item 1(g) requires the identification of two individuals to
contact regarding the HSR Filing, and current Item 1(h) requires the
identification of an individual located within the United States for
the limited purpose of receiving a notice of a Second Request. But the
Instructions currently limit application of Item 1(h) to filings made
by foreign persons, so for U.S. filers, Second Requests are sent to the
person identified in Item 1(g). The Commission now understands that
U.S. filing persons sometimes have separate points of contact to answer
questions regarding the HSR Filing as compared to questions regarding
the receipt of Second Requests. Therefore, the Commission proposes
requiring all filing persons to separately provide contacts for
questions related to the HSR Filing and Second Requests.
These proposed changes would provide clarity for filing persons,
and the Agencies would benefit from receiving more precise information
about the UPE.
2. Organization Structure
The proposed Organization Structure section within the proposed
Instructions would expand the required information about how the UPE is
organized and the identity of other individuals and entities that may
have influence over business decisions or access to confidential
business information. The proposal would require the identification of
entities within the acquiring person or acquired entity, minority
shareholders, and other non-controlling entities, and create new
requirements to identify certain other interest holders that may exert
influence, as well as officers, directors, and board observers.
a. Entities Within the Acquiring Person and Acquired Entity
The proposed Entities Within the Acquiring Person and Acquired
Entity section would contain information currently required by Items
1(f) and 6(a) of the Form. Item 1(f) requires the identification of the
acquiring entity(s) or acquired entity(s) (as appropriate). Item 6(a)
requires the acquiring person to list all entities it controls with
total assets of $10 million or more (though foreign entities with no
sales into the United States may be omitted). The acquired person
currently has the same obligation, but the scope is limited to the
acquired entity(s); the acquired person is not required to provide
information about entities that are not part of the transaction. The
Commission proposes requiring additional information about the reported
entities within the filing persons.
First, the Commission proposes requiring filing persons to organize
the list of controlled entities by operating company or business. As
filing persons have become more complex, an alphabetically or
geographically organized list of the controlled entities, which is
currently permitted by Item 6(a) of the Form, often does not provide
the Agencies with a sufficient overview of the scope of the businesses
that the acquiring person and acquired entity(s) control. Some filers
currently organize the list of entities held by the acquiring person or
acquired entity by operating company, and in the Commission's
experience, this is a much more useful way to present the information.
Understanding which companies are part of an operating group or
portfolio company would allow staff to identify the actual market
participants from among all legal entities. The Commission thus
proposes requiring that lists of controlled entities be submitted in
this manner to aid the Agencies' review during the initial waiting
period.
Second, for each such operating company or business, the Commission
proposes that filers identify the name(s) by which the company or
business does business, as well as any name(s) by which it formerly did
business within the three years prior to filing. While it remains
important for the Agencies to receive legal entity names, these names
[[Page 42188]]
are often unrelated to the names used in the marketplace and may be
unfamiliar to industry participants. Being able to connect the legal
names to the ``doing business as'' and ``formerly known as'' names
would greatly assist the Agencies in understanding the scope of the
operations of the acquiring person and acquired entity and allow the
identification of other public information about the entity during the
initial waiting period.
b. Minority Shareholders and Other Non-Controlling Entities
The proposed Minority Shareholders and Other Non-Controlling
Entities section would contain information currently required by Item
6(b) of the Form, which requires identification of holders of 5% or
more, but less than 50%, of the acquiring UPE and acquiring entity by
the acquiring person, and of the acquired entity(s) by the acquired
person. In order to provide the Agencies with a more complete
understanding of the individuals or entities that have significant
investments in the filing persons, the Commission proposes amending the
current Item 6(b) requirements and expanding them to require the
identification of additional minority interest holders.\23\
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\23\ The acquisition of a minority position may be reportable
under the Act, and failure to make an HSR Filing and observe the
waiting period may result in significant civil penalties. 15 U.S.C.
18a(g).
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The identification of certain minority holders of the filing
persons has been required since the first iteration of the Form in
1978, though the level of detail that has been required has changed
over time.\24\ Prior to 2011, Item 6(b) only required the
identification of holders of minority interests in voting securities.
In 2011, Item 6(b) was amended to require the identification of holders
of 5% or more but less than 50% of unincorporated entities.\25\ The
Commission, however, made an exception for limited partnerships and
only required the identification of the general partner. At that time,
the Commission understood that limited partners had no control over the
operations of the fund or portfolio companies and therefore did not see
them as essential to the Agencies' initial review.\26\ Since that time,
the Commission has come to understand that the Agencies would benefit
from more complete information about all minority holders of the filing
parties, including the identification of limited partners. As a result,
the Commission proposes collecting information about minority holders
of all entities within the acquiring person that are related to the
transaction and requiring the identification of certain limited
partners.
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\24\ See 43 FR 33450 (July 31, 1978); 52 FR 7066 (Mar. 6, 1987);
76 FR 42471 (July 19, 2011).
\25\ 76 FR 42471 (July 19, 2011).
\26\ Proposed Rules, 75 FR 57110, 57118 (Sept. 17, 2010),
adopted in 2011, 76 FR 42471 (July 19, 2011).
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The current limitation on providing minority holder information for
only the acquiring ultimate parent entity and acquiring entity often
prevents the identification of key interest holders. For example, co-
investors often do not invest at the UPE or acquiring entity level but
may hold a 5% or greater interest in an entity that is in between the
UPE and the acquiring entity in the ownership structure. In particular,
when funds make acquisitions, it can be the case that more than one
fund may be substantively involved in the acquisition, using a variety
of corporate or unincorporated entity types. The identification of not
only the controlling person but also significant minority investors can
be an important component of the Agencies' evaluation of the potential
competitive effects of the transaction during the initial waiting
period,\27\ and obtaining a broader picture of relevant minority
investments, where they exist, would aid the Agencies in their
assessment of the nature of competitive decision-making within the
relevant entity.
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\27\ 43 FR 33450, 33531 (July 31, 1978).
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In the case of limited partnerships, Item 6(b) currently does not
require the identification of limited partners, even if they hold 5% or
more. At the time this item was adopted, the Commission understood that
limited partners had no control over the operations of the fund or
portfolio companies and therefore did not see them as essential to the
Agencies' initial review.\28\ However, after more than a decade, the
Commission now believes that it is inappropriate to make
generalizations regarding the role of investors in limited partnership
structures. Identification of limited partners can provide valuable
information about co-investors and lead to the identification of
potentially problematic overlapping investments resulting from the
transaction that could violate Section 7.\29\ Thus, it is important
that the Agencies know the identities of limited partners to understand
the transaction in its entirety and to uncover investment relationships
that may have competitive significance.
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\28\ Proposed Rules, 75 FR 57110, 57118 (Sept. 17, 2010),
adopted in 2011, 76 FR 42471 (July 19, 2011).
\29\ See, e.g., In re Red Ventures Holdco and Bankrate, FTC Dkt.
C-4627 (Nov. 3, 2017) (enforcement action involving overlapping
limited partnership holdings); United States v. Dairy Farmers of
Am., 426 F. 3d 850 (6th Cir. 2005) (DFA stakes in competitors Flav-
O-Rich and Southern Belle violated Section 7).
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Accordingly, for the acquiring person, the Commission proposes the
reporting of certain minority holders of (1) the acquiring entity, (2)
any entity directly or indirectly controlled by the acquiring entity,
(3) any entity that directly or indirectly controls the acquiring
entity, and (4) any entity within the acquiring person that has been or
will be created in contemplation of, or for the purposes of,
effectuating the transaction. For entities affiliated with a master
limited partnership, fund, or investment group, the ``doing business
as'' or ``street name'' of that group would also be required.
Under these proposals, minority holders that would have to be
reported would include all entities or individuals, including limited
partners, that hold 5% or more of the voting securities or non-
corporate interests of one of the identified entities. To be clear, the
Commission proposes requiring limited partnerships to identify all
holders of 5% or more, but less than 50%, to harmonize the requirement
for limited partnerships with the requirements for limited liability
companies and corporations. The requirement to identify the general
partner of a limited partnerships would remain the same.
The Commission acknowledges that these proposed requirements may
require significant additional information from investment entities,
such as funds and master limited partnerships, for which organizational
structures are often more complex. But the Commission believes that the
disparate treatment of LLCs as compared to limited partnerships is no
longer appropriate. Further, the complexity of these organizational
structures makes it all the more important that the filing person
provide this information with the HSR Filing. The complex structure of
investment entities is not adequately captured by the current Form, and
there is often no other source for Agencies to learn of these
relationships. Though the introduction of the definition of
``associate'' in 2011 \30\ provides the Agencies with some valuable
information with which to identify competitively significant
relationships that exist through related holdings, it does not provide
enough detail about all of the potential players involved in the
structure of the acquiring person. As a result, the Commission believes
that the
[[Page 42189]]
proposed identification of all minority investors of 5% or more in
entities related to the transaction would allow the Agencies to more
quickly identify potential competitive issues related to these holdings
during the initial waiting period.
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\30\ 76 FR 42471 (July 19, 2011).
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To reduce the additional burden associated with these proposed
changes, the Commission proposes limiting the information about
minority holders collected from the acquired person. Currently, the
acquired person must list certain minority interest holders of the
acquired entity(s), but this requirement does not distinguish between
minority holders that will be cashed out as a result of the
transaction, and those that will continue investment after the
transaction. On balance, the Commission believes that identifying only
the minority holders that would continue to have an interest in the
acquired entity(s), directly or indirectly, would provide the most
relevant information to the Agencies during the initial waiting period.
Therefore, the Commission proposes that the acquired person only be
required to identify minority holders of the acquired entity(s) that
will continue to hold interest in the acquired entity(s) or will
acquire interests in any entity within the acquiring person as a result
of the transaction. The Commission recognizes that in certain
transactions to which Sec. 801.30 applies, the acquired person might
not have this information. In such cases, it would be permissible for
the acquired person to indicate that the information is unknown.
c. Other Types of Interest Holders That May Exert Influence
The proposed Other Types of Interest Holders that May Exert
Influence section would require the identification of entities or
individuals that may have material influence on the management or
operations of the acquiring person beyond those with the minority
interests discussed above. Because these other interest holders retain
the ability to influence decision-making by the acquiring person after
the transaction, it is important for the Agencies to know about these
relationships during the initial waiting period.
The Commission has long recognized the potential influence of
minority holders and the possibility that they may seek to change
competitive decisions of the target firm.\31\ In the 1978 SBP, the
Commission explained that competitors, customers, or suppliers holding
a significant interest in one of the parties can raise antitrust
concerns.\32\ As originally conceived, minority holdings reported in
Item 6 were designed to alert the Agencies to situations in which the
potential antitrust impact of the transaction does not result solely or
directly from the transaction itself, but may arise from direct or
indirect shareholder relationships between the parties to the
transaction.\33\
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\31\ See United States v. E.I. du Pont de Nemours & Co., 353
U.S. 568 (1957) (du Pont's 23% stake in General Motors violated
Section 7 by giving it an advantage over other suppliers and thereby
resulting in a substantial lessening of competition). In considering
the proper remedy, the Supreme Court found that divestiture of only
voting rights was insufficient due to the on-going ``special
relationship'' could still result in competitive harm. United States
v. E.I. du Pont de Nemours & Co., 366 U.S. 316, 332 (1961).
\32\ 43 FR 33450, 33531-32 (July 31, 1978).
\33\ Id. at 33531.
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As entity structures have evolved and become more complex, the
Commission now believes that relationships beyond those created by
holding voting securities or non-corporate interests can give rise to
similar and significant competitive concerns. For instance, some credit
arrangements permit the creditor to exercise rights and influence
similar to those of equity holders. Additionally, some equity interests
that do not provide rights to vote for the board of directors can,
nevertheless, provide rights to vote on or influence business practices
of the company, including investments in future product or service
lines. Further, contractual arrangements allowing individuals or
entities to nominate directors or board observers have proliferated. In
addition, some entities outsource the management of operations to third
parties that do not beneficially own interests in the company. Each of
these relationships can be relevant to understanding the transaction
and its potential competitive effects. Without information about these
relationships, the Agencies cannot easily identify those transactions
where these relationships exist and may affect the competitive dynamics
before and after the transaction.
As a result, the Commission proposes that the acquiring person
identify certain individuals (other than employees of the acquiring
person) or entities that, in relation to the acquiring entity or any
entity it directly or indirectly controls or is controlled by, (i)
provide credit; (ii) hold non-voting securities, options, or warrants;
(iii) are board members or board observers, or have nomination rights
for board members or board observers; or (iv) have agreements to manage
entities related to the transaction. Credit relationships would be
limited to creditors that have, or would have, in conjunction with or
result of the transaction, provided credit totaling 10% or more of the
value of the entity in question. Holders of non-voting securities,
warrants, or options would be limited to those the value of which
equals or exceeds 10% of the entity or could be converted to 10% or
more of the voting securities or non-corporate interests of the
company.
The Commission recognizes that the compilation of this information
would add to the burden of preparing an HSR Filing for an acquiring
person with a complicated investment structure, but it is important
that the HSR Filing contain this information because individuals or
entities that fall into any of the four categories described above can
have a material influence on the operations or strategy of the
acquiring person. As with minority investors, these relationships can
affect the competition analysis of the transaction, and the proposed
identification of these individuals or entities would allow the
Agencies to know the identity of those in a position to influence post-
merger competition decisions.
d. Officers, Directors, and Board Observers
The proposed Officers, Directors, and Board Observers section would
require the identification of the officers, directors, or board
observers (or in the case of unincorporated entities, individuals
exercising similar functions) of all entities within the acquiring
person and acquired entity, as well as the identification of other
entities for which these individuals currently serve, or within the two
years prior to filing had served, as an officer, director, or board
observer (or in the case of unincorporated entities, roles exercising
similar functions). This information would allow the Agencies to know
of 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.\34\
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\34\ Although Section 8 does not technically apply to
unincorporated entities, information sharing and coordination can
still raise concerns under Section 1 of the Sherman Act.
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Section 8 of the Clayton Act generally prohibits a person from
serving as an officer or director of competing corporations, subject to
certain categorical and de minimis exceptions. This section of the
Clayton Act aims to prevent information sharing and coordination
between competitors through a per se ban that prohibits the same
individual from serving as an
[[Page 42190]]
officer or director of two competing firms.\35\
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\35\ Like Section 7, Section 8 was designed to ``nip in the bud
incipient violations of the antitrust laws by removing the
opportunity or temptation to such violations through interlocking
directorates.'' United States v. Sears, Roebuck & Co., 111 F. Supp.
614, 616 (S.D.N.Y. 1953).
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In the Agencies' experience, many acquiring persons have board
members who also serve on the boards of other companies. As a result,
the Agencies often investigate existing board relationships as well as
potential interlocks that would result from the transaction as part of
its initial review. Section 8 bars interlocks that arise through rights
to appoint board members to a competitor \36\ or officers or directors
serving on the boards of competing companies. Investment entities that
acquire board seats across a diverse portfolio of companies may be
particularly likely to encounter Section 8 compliance issues via a
merger or acquisition.\37\
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\36\ See, e.g., Complaint, United States v. CommScope Inc.,
1:07-cv-2200 (D.D.C.) (Dec. 6, 2007) <a href="https://www.justice.gov/atr/case-document/complaint-69">https://www.justice.gov/atr/case-document/complaint-69</a> (alleging violations of Sections 7 and 8
where buyer also acquired rights to appoint members to the board of
its competitor). See also Press Release, U.S. Dep't of Just.,
Tullett Prebon and ICAP Restructure Transaction after Justice
Department Expresses Concerns about Interlocking Directorates, (Jul.
14, 2016). The Department of Justice has announced its intent to
reinvigorate Section 8 enforcement, after seven directors resigned
from corporate board positions. See Press Release, U.S. Dep't of
Just., Justice Department's Ongoing Section 8 Enforcement Prevents
More Potentially Illegal Interlocking Directorates (Mar. 9, 2023),
<a href="https://www.justice.gov/opa/pr/justice-department-s-ongoing-section-8-enforcement-prevents-more-potentially-illegal">https://www.justice.gov/opa/pr/justice-department-s-ongoing-section-8-enforcement-prevents-more-potentially-illegal</a>.
\37\ The Agencies also consider whether the acquiring person
would be expanding into the business of the other company that
shared a board member such that the two companies would have
competing sales in excess of the de minimis amounts permitted by
Section 8.
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Currently, filers are not required to disclose the identity of the
members of their boards of directors, and this makes it difficult for
the Agencies to complete their assessment of potential Section 8 issues
during the initial waiting period. Having information about potential
interlocking directorates in the HSR Filing would allow the Agencies to
take steps to prevent the sharing of board-level confidential
information much more quickly. This information is also relevant to the
competition analysis of the transaction, as well as concerns about
potential gun-jumping, which may violate the Act or Section 1 of the
Sherman Act.\38\ This is particularly important given that post-merger
enforcement of Section 8's per se ban can be ineffective after the
individual has been privy to the confidential business information of
two competitors: Section 8 provides a one-year grace period to remedy
an illegal interlock that arises after the individual is elected or
chosen to be an officer or director.\39\ Moreover, Section 8 does not
provide for civil penalties or other monetary relief, only injunctions
barring the individual from serving on the two boards.
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\38\ Any sharing of competitive information between or among
competitors, including during the pendency of merger review, that
results in competitive harm may be a violation of Section 1 of the
Sherman Act, or Section 5 of the FTC Act. Complaint, United States
v. Gemstar, cv 1:03-00198 (D.D.C. 2003), <a href="https://www.justice.gov/atr/case-document/complaint-108">https://www.justice.gov/atr/case-document/complaint-108</a>; Complaint, In re Insilco Corp., No.
C-3783 (F.T.C. 1998), <a href="https://www.ftc.gov/sites/default/files/documents/cases/1998/01/insilcocmp.pdf">https://www.ftc.gov/sites/default/files/documents/cases/1998/01/insilcocmp.pdf</a>.
\39\ 15 U.S.C. 19(b).
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Information about board observers can also be relevant to the
Agencies' analysis of the proposed transaction. Board observers are not
subject to the Section 8 ban on interlocking directorates, and yet may
have access to the same materials that are shared with officers and
directors. In December 2020, the Commission issued an advance notice of
proposed rulemaking (``ANPRM'') that, among other things, sought to
gather information about sources of influence on corporate decision-
making outside the scope of voting securities.\40\ The Commission noted
the possibility that there are ways to gain influence over a company
other than through the acquisition of voting rights, for instance
through board observers, and pointed to the increasing use of board
observers as part of the governance structure. Because the acquisition
of rights to be a board observer is not a reportable event under the
HSR Act, the Commission sought information about whether having rights
as a board observer provides opportunities to influence an issuer's
business decisions.\41\
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\40\ 85 FR 77042 (Dec. 1, 2020).
\41\ ``At the very least, board observers gain insight into an
issuer's strategic decision-making, which is not only useful to the
investor sponsoring the board observer, but may also be useful to
competitors in the market, especially when those board observers
also serve as officers or directors of a competitor. Companies
likely benefit from interacting with board observers because company
management can obtain additional investor insight without having to
alter the composition or voting balance on the board.'' Id. at
77050.
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The Commission received two comments in response to the ANPRM that
discuss the role of board observers, and each comment indicated that
individuals serving as board observers typically receive the same
information as the board of directors, although there may be ways to
exclude them from reviewing privileged or competitively sensitive
information.\42\ In the Commission's experience, board observers have
become more prevalent and could be privy to the same information as
members of the board. For that reason, information about who these
individuals are and whether they also serve as officers, directors, or
board observers with other companies is important for understanding
other sources of influence on the company's competitive decision-making
and whether such individuals could share information between
competitors. The Commission believes that having this information
available during the initial waiting period would permit the Agencies
to take steps to minimize the sharing of information prior to
consummation.
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\42\ See Am. Bar. Ass'n, Comment on Hart-Scott-Rodino Coverage,
Exemption, and Transmittal Rules ANPRM, 10-11 (Feb. 1, 2021),
<a href="https://www.regulations.gov/comment/FTC-2020-0086-0015">https://www.regulations.gov/comment/FTC-2020-0086-0015</a>; Comput. &
Commc'n Indus. Ass'n, Comment on Hart-Scott-Rodino Coverage,
Exemption, and Transmittal Rules ANPRM, 11 (Jan. 26, 2021), <a href="https://www.regulations.gov/comment/FTC-2020-0086-0002">https://www.regulations.gov/comment/FTC-2020-0086-0002</a>.
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The Commission thus proposes that filing persons provide
information about the officers, directors, and board observers (or in
the case of unincorporated entities, individuals exercising similar
functions) of the acquired entity(s) and entities within acquiring
person(s), as applicable, for the prior two years, and for each
individual, identify any other companies for which those individuals
would serve or have served during the prior two years as officers,
directors, or board observers. The Commission also proposes requiring
the same information for the prospective officers, directors, or board
observers of the acquired and acquiring entities after the transaction,
as well as for any officers, directors, or board observers of new
entities created as a result of the transaction (and, in each case, for
unincorporated entities, individuals serving those functions). If it
would be impossible to identify the specific officers, directors, and
board observers, filers should describe who would have the authority to
choose them. Information received through these proposals would help
the Agencies identify individuals with the ability to participate in or
influence competitively relevant decision-making related to the filing
persons or with access to confidential business information, allowing
the Agencies to engage in more effective enforcement of the antitrust
laws. The Commission believes that this information should be known to
or readily accessible by the filing parties, and in some cases already
[[Page 42191]]
collected as part of an incorporated entity's antitrust compliance
program.
C. Transaction Information
The Commission proposes the creation of a Transaction Information
section within the proposed Instructions. Currently, information about
the transaction is required in several sections of the Form: the
initial portion of the current Form requires information about the
filing fee and whether early termination of the waiting period is
requested; Item 2(a) requires identification of the ultimate parent
entities of the acquiring and acquired persons; Item 2(b) identifies
the type of transaction; Item 2(c) identifies the Sec. 801.1(h)
threshold that will be crossed; Item 2(d) seeks information about the
percentage and value of the voting securities, non-corporate interests,
and/or assets to be required; Item 3(a) asks for identification of the
acquiring and acquired persons and entities, as well as a description
of the transaction; Item 3(b) requires the listing and attaching of the
most recent transaction agreement, or letter of intent; and Item 5(b)
requires information about joint ventures and formations. The
Commission proposes the reorganization, clarification, and expansion of
these items to require information that will aid the Agencies in
understanding the totality of the transaction during the initial
waiting period. These proposed changes, discussed below, would require
information about the transaction to be reported in the following
proposed categories: Parties, Filing Fee, Transaction Details, and
Transaction Description.
1. Parties
The proposed Parties section within the proposed Instructions would
require the identification of the acquiring and acquired persons and
the acquiring and acquired entities. This information is currently
collected in Item 3(a) of the Form, and the Commission is not proposing
any material changes to this requirement.
2. Filing Fee
The proposed Filing Fee section within the proposed Instructions
would require identification of the total filing fee required for the
transaction and information about the payment, including identification
of the paying entity and the Electronic Wire Transfer confirmation
number.\43\ This information is currently collected in the Fee
Information section of the Form, and the Commission is not proposing
any material changes to this requirement.
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\43\ If electronic wire transfers are not available to the
filing party, the Instructions would continue to provide
instructions for paying by check.
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3. Transaction Details
The proposed Transaction Details section within the proposed
Instructions would require the same information currently required by
Items 2(b)-2(d) of the Form that detail whether the transaction
involves the acquisition of voting securities, non-corporate interests
or assets, and the approximate value of each, as well as whether a
notification threshold is crossed. The Commission is not proposing any
material changes to these requirements.
4. Transaction Description
The Commission proposes creating a Transaction Description section
within the proposed Instructions to reorganize information currently
required in the Transaction Description portion of Item 3(a) of the
Form, and to expand the required information, as described below.
a. Business of the Acquiring Person
The Commission proposes requiring the acquiring person to describe
its business operations. Currently, Item 3(a) of the Form requires
filing persons to briefly describe the transaction, including whether
assets, voting securities, or non-corporate interests (or some
combination) are to be acquired. Filers must also describe the business
operation being acquired or what the assets being acquired
comprise.\44\ Although this information helps the Agencies understand
what is proposed to be acquired, it does not provide any insight into
the full range of business operations or other entities involved in the
transaction on the part of the acquiring person. In the Commission's
experience, understanding the scope of the acquiring person's business
operations is critically important to determining whether the
transaction poses any potential competition concern. Although this
information is well known to the acquiring person, it is often not
easily or quickly collected and confirmed from public sources during
the initial waiting period.
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\44\ 81 FR 60257 (Sept. 1, 2016).
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As a result, the Commission proposes requiring the acquiring person
to briefly describe the business operations of all entities within the
acquiring person to provide a clear overview of all aspects of the
acquiring person's pre-transaction business to facilitate the Agencies'
antitrust review during the initial waiting period. Many businesses
have pre-prepared descriptions of their operations for use in press
releases, marketing materials, and investor materials. Unlike the
requirement to describe the entities or assets to be acquired, which
would apply to both the acquiring and acquired person, the requirement
to describe business operations would be limited to the acquiring
person.
b. Business of the Acquired Entity
As noted above, Item 3(a) of the Form requires filing parties to
briefly describe the transaction, including whether assets, voting
securities, or non-corporate interests (or some combination) are to be
acquired. Filing persons must also describe the business operation
being acquired or what the assets being acquired comprise. The
Commission is not proposing any material changes to this requirement.
c. Non-Reportable UPE(s)
Item 2(a) of the Form currently requires the identification of any
UPE that is not required to file, and the Commission is not proposing
any material changes to this requirement.
d. Transaction Description
Item 3(a) of the Form currently requires a brief description of the
transaction. The Commission is not proposing any material changes to
this requirement.
e. Transaction Rationale
The Commission proposes adding a new requirement that filing
persons provide a narrative that would identify and explain each
strategic rationale for the transaction. As helpful as the documents
responsive to current Items 4(c) and 4(d) of the Form can be, they do
not always convey each filing person's cumulative views on the
rationale(s) for the transaction. Indeed, such documents (when they are
submitted and when they discuss rationales) often contain differing,
and at times conflicting or mutually exclusive, statements regarding
the transaction depending on when they were prepared or by whom. For
example, different members of the deal team might have different
perspectives on the potential motivations for the transaction at
different times, and the submitted documents do not resolve the filing
person's ultimate thinking regarding the topic. Since documents
responsive to Items 4(c) and 4(d) do not consistently provide an
overview of the rationale(s) for the transaction, it would be of
immense value for the Agencies to have during the initial waiting
period a
[[Page 42192]]
statement that discusses each the strategic rationale(s) from the
perspective of each filing person.
The Commission thus proposes that the acquiring and acquired person
be required to submit a narrative describing all strategic rationales
for the transaction, including, for example, those related to
competition for current or known planned products or services that
would or could compete with a current or known planned product or
service of the other reporting person, expansion into new markets,
hiring the sellers' employees (so-called acqui-hires), obtaining
certain intellectual property, or integrating certain assets into new
or existing products, services or offerings. The Commission also
proposes that the filing person identify which documents submitted with
the HSR Filing support the rationale(s) described in the narrative.
This proposed requirement would help ensure that the provided narrative
is grounded in the filers' ordinary-course documents and not mere
advocacy designed to portray a favorable view of the transaction.
Moreover, any cited documents that support the narrative would also
provide additional context for the Agencies as they assess the parties'
stated rationale(s) in relation to any potential competitive
consequences of the transaction. Understanding the business reason(s)
for pursuing the transaction can materially affect the course and
direction of the Agencies' antitrust review during the initial waiting
period.
f. Transaction Diagram
The Commission proposes a new requirement that the filing persons
provide a diagram of the deal structure along with a corresponding
chart that would explain the relevant entities and individuals involved
in the transaction. The brief narrative currently required in Item 3(a)
of the Form does not require filers to explain all the relevant
entities or identify steps involved in the transaction and their
sequence. As a result, the Agencies frequently request a more detailed
account of these steps during the initial waiting period, but these
submissions are voluntary, not uniform in their detail, and often lack
important aspects of the transaction that may bear on the competitive
analysis and the determination of whether the transaction warrants in-
depth review. In the Commission's experience, particularly in the case
of complex or multi-step transactions, diagrams are generally more
helpful than simple narratives in conveying the relationships of the
relevant entities and the deal structure.
The Commission's proposal that filing persons submit a diagram of
the deal structure along with a corresponding chart explaining the
entities involved in the transaction would further assist the Agencies'
conceptualization of the transaction and save considerable time in
obtaining basic information about the entities involved and how the
transaction would affect the operations of those entities. Such
diagrams are often prepared by companies in the ordinary course of
business for other purposes, such as for transaction diligence
requirements.
g. Related Transactions
While Item 3(a) of the current Form asks parties to indicate
whether there are additional filings related to the transaction, filers
sometimes overlook this requirement. The proposed Instructions would
clarify that filing persons must identify related transactions. The
proposed Instructions would also provide a list of common circumstances
in which multiple filings are required to guide filing parties in their
responses. These proposed changes would provide clarity for both filing
persons and the Agencies.
h. Early Termination
The proposed Early Termination section would ask whether the filing
party requests early termination of the waiting period. This question
is currently asked on page one of the Form, and the Commission is not
proposing any material changes to this requirement.
5. Joint Ventures
The proposed Joint Ventures section within the proposed
Instructions would require information about transactions structured as
a joint venture or formation pursuant to Sec. Sec. 801.40 or 801.50.
This information is currently collected in Item 5(b) of the Form and
requires information about the contributions each person will make to
the entity, what consideration will be received, the business in which
the new entity will engage, and an allocation of revenue to industry
codes. As discussed in section III.A.1.b. above and III.D.3. below, the
Commission is proposing eliminating the use of 10-digit NAPCS codes.
Therefore, the Commission proposes also eliminating the requirement to
identify the NAPCS codes in which the joint venture will derive
revenue. The Commission is not proposing any other material changes to
this requirement.
6. Agreements and Timeline
The proposed Agreements and Timeline section within the proposed
Instructions would require filing persons to provide a term sheet or
draft agreement that reflects sufficient detail about the proposed
transaction to demonstrate the transaction is more than hypothetical,
if a definitive agreement has not been executed, as described above in
the proposed amendments to Sec. 803.5(b) at II.C. In addition, the
Commission proposes additional changes regarding which agreements must
be submitted. These proposed changes, discussed below, include a
requirement to submit the entirety of all agreements related to the
transaction and a new requirement to submit other agreements between
the filing persons that are not related to the transaction, as well as
a timetable for the transaction.
a. Transaction-Specific Agreements
The Commission proposes requiring that all transaction-specific
agreements be submitted with HSR Filings. Currently, Item 3(b) of the
Form requires the submission of all documents that constitute the
agreement(s) among the acquiring person(s) and the person(s) whose
assets, voting securities, or non-corporate interests are to be
acquired, as well as agreements not to compete and other agreements
between the parties. The production of schedules to agreements is not
currently required, unless the schedules contain agreements.\45\ In the
Commission's experience, the structure of transactions has become
increasingly complex, often comprising not only multiple agreements
between the filing persons but agreements with third parties.
Understanding the entirety of the transaction, including but not
limited to non-competition and non-solicitation agreements and other
agreements negotiated with key employees, suppliers, or customers in
conjunction with the transaction, is crucial to determining the
totality of the transaction and assessing during the initial waiting
period the transaction's potential competitive impact. Moreover,
schedules increasingly include descriptions of key terms and
provisions.
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\45\ 16 CFR 803 Appendix Notification and Report Form
Instructions at page V.
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The Commission thus proposes requiring filing persons to produce
all agreements, inclusive of schedules, exhibits, and the like, that
relate to the transaction, regardless of whether both parties to the
transaction are signatories. It is the Commission's understanding
[[Page 42193]]
that these documents are collected and are typically included in
materials necessary for closing. Having a complete set of transaction-
related agreements would provide the Agencies with a more complete
understanding of the transaction under review.
b. Other Agreements Between the Parties
The Commission also proposes requiring filing persons to submit all
agreements between any entity within the acquiring person and any
entity within the acquired person in effect at the time of filing or
within the year prior to the date of filing. Understanding the scope of
any existing contractual relationships between the filers would
materially assist the Agencies' review by revealing any business
interactions or relationships that exist prior to the transaction and
that may be affecting premerger competition. These might include
licensing agreements, supply agreements, non-competition or non-
solicitation agreements, purchase agreements, distribution agreements,
or franchise agreements, among others. Understanding the full extent of
the filing parties' existing contractual relationships would allow the
Agencies to identify those relationships that contribute to the
premerger competitive dynamics, which is material to assessing how the
transaction may affect post-merger competition.
c. Timeline
The Commission also proposes that filing persons provide a
narrative timeline of key dates and conditions for closing. Just as it
is critical for the Agencies to understand the totality of the
transaction during the initial waiting period, it is also critical to
understand the timing of key milestones and the conditions to closing,
which are often complex and not easily understood from the transaction
documents themselves. The Agencies often cannot confirm basic deadlines
for the transaction from the transaction documents and in those cases,
the Agencies expend a great deal of time and effort to confirm with
filers key dates, including the timing of pre-closing conditions,
during the initial waiting period. Understanding deal timing is
critical to each Agency's decisions regarding how to manage its merger
workload on a priority basis, focusing available resources on those
deals whose closing dates are imminent. This basic information about
the timing of the transaction is not adequately captured in the current
Form, and, to the extent the filing person knows at the time of the HSR
Filing and can readily provide it, this information would help the
Agencies understand key deal milestones and better manage the timing
and focus of the investigation during the initial waiting period.
D. Competition and Overlaps
The Commission proposes creating a Competition and Overlaps section
within the proposed Instructions. This section would collect, in one
place, information that reveals any existing business relationships
between the filing persons that requires the Agencies to take a closer
look to determine whether the transaction warrants an in-depth
investigation, which is the primary purpose of premerger notification
and review. Information collected in this section would include
information and documents currently collected in several parts of the
Form: in Items 4(c) and 4(d), which require the production of certain
documents created in conjunction with the evaluation of the
transaction; Item 5(a), which requires the allocation of revenue from
U.S. operations to industry and product codes; Item 6(c), which
identifies certain minority-held entities of the filer; Item 7, which
provides information about industries in which the acquiring person and
acquired entity both participate; and Item 8, which requires the
identification of certain prior acquisitions made by the acquiring
person. The Commission proposes expanding and reorganizing the
information and requiring additional documents that would bear directly
on the premerger competitive relationship between the filing persons.
The proposed Competition and Overlaps section would provide a new
source of relevant information related to horizontal overlaps, as well
as new information about supply relationships and employees, which
would enable to Agencies to quickly identify and assess the potential
impact of the transaction across many dimensions of competition. These
proposed changes, discussed below, would be organized in the following
proposed categories: Business Documents, Competition Analysis, NAICS
Codes, Controlled-Entity Overlaps, Minority-Held Entity Overlaps, and
Prior Acquisitions.
1. Business Documents
The proposed Business Documents section within the proposed
Instructions would require the submission of documents currently
required by Items 4(c) and 4(d) of the Form and additional categories
of documents. The Commission's proposal for requiring additional
documents is informed by a comparison of documents submitted by filing
persons with the HSR Filing and those submitted during the Agencies'
in-depth investigations that are not required by the current Form but
would have been highly probative to the initial antitrust assessment of
the transaction during the initial waiting period. The specific types
of proposed business documents are discussed below.
a. Transaction-Related Documents
The proposed Transaction-Related Documents section would comprise
the same types of documents currently required by Item 4(c) of the
Form, which the Commission proposes to expand to include documents
prepared by or for the supervisory deal team leads, and Item 4(d),
which the Commission proposes to clarify without material changes. The
Commission also proposes requiring the submission of certain previous
draft versions of these documents.
i. Documents Prepared by or for Officers, Directors, or Supervisory
Deal Team Lead(s)
In the proposed Documents Prepared by or for Officers, Directors,
or the Supervisory Deal Team Lead section, the Commission proposes
expanding the scope of requested documents evaluating the transaction
by adding a requirement to submit such documents prepared by or for the
supervisory deal team lead(s). Currently, Item 4(c) requires filing
persons to provide all studies, surveys, reports, plans, and analyses
prepared by or for officers or directors to evaluate the acquisition
with respect to market shares, competition, competitors, markets,
potential for sales growth, or expansion into products or geographic
markets. These transaction-specific assessments of competition, past
and future, provide the Agencies with invaluable insights into each
party's view of how the transaction could change the competitive
landscape and, most importantly, narrow the inquiry to particular
markets and companies that each party believes to be its competitors.
Since the beginning of the premerger notification program, 4(c)
documents have been a key screening tool for the Agencies to identify
those transactions that require more than a cursory review during the
initial waiting period. The proposed section would retain the same
definition of transaction-related documents to be submitted but add the
supervisory deal team lead(s) to the list of individuals to whom this
item would apply.
In some companies, an officer may lead the day-to-day activities of
the deal team and would be considered the supervisory deal team lead,
resulting in
[[Page 42194]]
no change to the documents currently required as part of Item 4(c) of
the Form. But someone other than an officer or director often
functionally leads the deal team. In the Commission's experience, in
those cases, responses to current Item 4(c) often do not contain
documents with sufficient information about the filing person's
analysis of the competitive implications of the transaction to enable
the Agencies to identify potentially problematic transactions. In fact,
based on documents submitted in response to Second Requests, it is the
Agencies' experience that individuals other than officers and directors
are often the authors or recipients of documents that are otherwise
responsive to Item 4(c) of the Form but are not required to be
submitted with the HSR Filing because they were not prepared by or for
an officer or director. These documents, typically in the possession of
the supervisory deal team lead(s), often include information that would
have been crucial to the Agencies' analysis of the transaction during
the initial waiting period.
The Commission thus proposes that in addition to requiring
documents prepared by or for officer and directors, filing persons must
also submit these transaction-related documents prepared by or for
supervisory deal team lead(s). Identification of any supervisory deal
team lead would not be based upon title alone. The Commission proposes
that the filing person determine the individual or individuals who
functionally lead or coordinate the day-to-day process for the
transaction at issue. A supervisory deal team lead need not have
ultimate decision-making authority but would have responsibility for
preparing or supervising the assessment of the transaction and be
involved in communicating with the individuals, such as officers or
directors, that have the authority to authorize the transaction. Any
such individual(s) might be the leader(s) of an investment committee,
tasked with heading the analysis of mergers and acquisitions, or
otherwise given supervisory capacity over the flow of information and
documents related to transaction.
The Commission believes this proposal strikes a balance between the
interests of the Agencies and those of filing persons in requesting
additional documents responsive to Item 4(c) of the Form. Requiring
filing persons to include materials prepared by and for supervisory
deal team lead(s) would allow the Agencies to receive additional key
materials relevant to the analysis of the transaction without requiring
information from all deal team members, in light of the opportunity to
obtain additional documents through the issuance of Second Requests.
ii. Confidential Information Memoranda
The proposed Confidential Information Memoranda section would
collect the information currently required by Item 4(d)(i) of the Form.
The Commission is not proposing any material changes to this
requirement.
iii. Studies, Surveys, Analyses, and Reports
The proposed Studies, Surveys, Analyses, and Reports section would
collect the information currently required by Item 4(d)(ii) of the
Form. The Commission is not proposing any material changes to this
requirement.
iv. Synergies and Efficiencies
The proposed Synergies and Efficiencies section would collect the
information currently required by Item 4(d)(iii) of the Form, and the
Commission proposes to clarify that forward-looking analyses are
responsive. Currently, Item 4(d)(iii) asks for all studies, surveys,
analyses, and reports evaluating or analyzing synergies, and/or
efficiencies prepared by or for any officer(s) or director(s) (or, in
the case of unincorporated entities, individuals exercising similar
functions) for the purpose of evaluating or analyzing the acquisition.
The Commission proposes to specifically include a reference to models
and financial projections to make clear that filers should submit
forward-looking assessments of synergies or efficiencies. This
information is especially important for screening the competitive
impact of products or services not yet generating revenue but projected
to do so. As before, financial models without stated assumptions would
not need to be provided. For many transactions, especially those
involving markets in which competition occurs via on-going innovative
efforts, these forward-looking assessments will materially benefit the
Agencies' identification of transactions that warrant in-depth review.
v. Drafts
Along with expanding the required Transaction-Related Documents as
described above, the Commission also proposes requiring the submission
of drafts responsive to these requests. It has been a long-standing
position of the Commission's PNO that the submission of draft versions
of documents responsive to Item 4(c) or 4(d) is not required unless
there is no final version, in which case the most recent draft has been
required, or unless a draft was sent to the board of directors. Under
this guidance, if a draft version of a document is sent to the Board,
it ceases to be a ``draft'' and must be submitted, even if a final
version is also submitted. As a result, the Commission has not
typically received many draft documents as part of HSR filings.
The Agencies routinely ask for and receive draft documents in
response to Second Requests and, in the Agencies' experience, these
drafts often reveal additional information about the transaction that
would have been important to the Agencies' review during the initial
waiting period, such as references to specific product markets or
competitors that were removed in subsequent versions. In addition,
these drafts can contain highly relevant, probative, or candid
statements about the competitive impact not reflected in the final
version of the document. In some cases, it appears that the draft
documents have been edited to remove candid assessments of factors
relevant to competition prior to circulation to officers or directors.
In others, the dates of the documents suggest that otherwise responsive
drafts were not finalized or shared with officers or directors until
after making an HSR Filing.
The Commission therefore proposes clarifying in the Instructions
that drafts of responsive transaction-related documents must be
submitted if that document was provided to an officer, director, or
supervisory deal team lead(s). This proposed change would ensure that
the Agencies have access to documents that reflect pre-transaction
assessments of business realities, as opposed to ``sanitized''
versions, to aid in their analysis during the initial waiting period.
The addition of the supervisory deal team leader(s) to this requirement
should capture draft materials important to managing the transaction
but avoid the burden of having to submit prior versions that were not
reviewed by senior managers or decision-makers. As stated elsewhere in
this NPRM, the Commission aims to strike a balance between the
Agencies' need to obtain material information about the transaction and
the burden on filing parties, so the scope of this request is limited
so as not to require filing parties to search numerous company
personnel beyond officers, directors, and supervisory deal team
lead(s).
The Commission recognizes that requiring draft transaction-related
documents creates an additional burden for filing parties to collect
and submit more documents to the Commission with their HSR filings and
that, to some
[[Page 42195]]
degree, previous versions of submitted documents may contain repetitive
information. Moreover, HSR filings that contain large document
submissions could overwhelm the Agencies and undermine the goal of
effective and efficient screening for transactions that require an in-
depth investigation. For this reason, the Commission seeks comment on a
potential alternate approach in which filing parties collect draft
Transaction-Related Documents as part of preparing HSR filings but do
not submit these documents until and unless agency staff reviewing the
transaction requests the draft documents during the initial waiting
period. In the event that agency staff requests the draft documents,
the filing person would be required to submit them within 48 hours in
order to retain the initial waiting period. The Commission invites
comment on whether this alternative approach would reduce the burden
for the parties and the Agencies compared with submitting all versions
with the HSR Filing as described above, whether there are logistical
issues with providing the collected draft documents within 48 hours,
and the estimated volume of drafts collected.
b. Periodic Plans and Reports
The proposed Periodic Plans and Reports section would require
filing persons to submit certain high-level strategic business
documents that were not created in contemplation of the transaction but
still contain information relevant to the antitrust analysis. As a
result of decades of experience, the Agencies are aware that, as part
of diligence for a potential transaction, companies often collect a
targeted set of ordinary course documents that do not need to be
submitted as part of an HSR Filing. Such documents typically include
strategic plans and documents that are useful to those negotiating or
evaluating the transaction because they discuss general market
dynamics, competitors, or other potential mergers and acquisitions. The
Commission understands that these documents are collected to provide
key transaction decision-makers with the company's internal assessment
of commercial realities of the premerger marketplace.
The Commission therefore proposes requiring certain plans and
reports created in the ordinary course of business and not prepared
solely for the purpose of evaluating the proposed transaction to be
submitted as part of the HSR Filing. Periodic plans and reports created
in the ordinary course of a company's business often contain detailed
assessments of core business segments, markets, competitors, other
acquisition targets, and projections about future competitive
dynamics--insights that have direct bearing on the Agencies' antitrust
assessment of the transaction in the initial waiting period. The
Commission proposes requiring the submission of semi-annual and
quarterly plans and reports that discuss market shares, competition,
competitors, or markets of any product or service that is provided by
both the acquiring person and acquired entity, if those documents were
shared with a chief executive of an entity involved in the transaction,
or with certain individuals who report directly to a chief executive.
The Commission also proposes requiring the submission of all plans and
reports submitted to the board of directors (or, in the case of
unincorporated entities, individuals exercising those functions) that
discuss market shares, competition, competitors, or markets of any
product or service that is provided by both the acquiring person and
acquired entity.
These proposed new document requirements would be limited in
certain specific ways to minimize the overall number of documents
submitted with the HSR Filing. First, the new Periodic Plans and
Reports section would not require documents that analyze ``the
potential for sales growth or expansion into product or geographic
markets'' as is required by current Item 4(c). Additionally documents
responsive to this item would be limited to those prepared or modified
within one year of the date of the HSR Filing. The Commission believes
that the submission of a limited set of ordinary course business
documents that were not prepared specifically to evaluate the
transaction but discuss premerger and future competitive dynamics and
strategies broadly would provide valuable insight and context for the
transaction-related documents submitted with the HSR Filing. These
ordinary course business documents are routinely submitted during in-
depth investigations in response to Second Requests and routinely
contain unique information about the state of premerger competition,
which if available during the initial review period would help the
Agencies determine if an in-depth review is warranted and if so, its
proper scope.
The Commission is aware that this new requirement has the potential
to result in the submission of a large number of documents for complex
or large transactions. The Commission is also aware of the potential
impact on the filing persons and on the Agencies of large document
submissions. The Commission seeks to balance these interests and
invites comment on how or whether narrowing the set of custodians for
periodic reports and plans, or any other proposed limits, would still
generate information about the premerger state of competition that is
not specific to the transaction while reducing any burden on filers and
the Agencies.
Finally, the Commission notes that filing persons should not
exchange additional information with respect to planned products or
services to provide a response to this proposed requirement but should
respond instead on the basis of regular diligence and the knowledge or
belief of the filing person. The Commission recognizes that an acquired
person would have limited information about the acquiring person's
operations, including products under development, and the Commission
does not intend these proposed changes to encourage additional
information sharing of this type of information.
c. Organizational Chart of Authors
As the final part of its proposed Business Documents section, the
Commission proposes requiring filing persons to identify the authors of
all responsive documents submitted with the HSR Filing and to provide
additional information about each individual. Given the short period of
time for review during the initial waiting period, it is crucial for
the Agencies to have a clear understanding of how authors of key
documents fit into the organization or entities of each filing person
to determine the importance and perspective of the responsive documents
submitted with the HSR Filing and to identify key employees within the
organizations. Thus, the Commission proposes requiring an
organizational chart(s) that would reflect the position(s) within the
filing person's organization held by identified authors, and for
privileged documents, the recipients of each document submitted with
the HSR Filing. The Commission also proposes requiring the filer to
identify the individuals searched for responsive documents. It would be
sufficient to indicate by notation on the organization chart(s) which
individuals were searched.
Providing a chart will help contextualize reporting relationships,
as well as the relative seniority, of the authors and recipients and
allow the Agencies to more quickly assess which documents contain high-
level assessments from key employees. The benefit of being able to
identify important decision-makers within the filing person and having
context for key documents would allow the Agencies to
[[Page 42196]]
quickly assess the probative value of the documents
2. Competition Analysis
The Commission proposes creating a new Competition Analysis section
within the proposed Instructions. This proposed section would create
new requirements for filing persons to provide narratives that would,
among other things, describe their basic business lines and provide
product or service information for all related entities; identify
current and potential future horizontal overlaps and supply
relationships between the filing persons; and provide information about
their employees and what services these employees provide. These
proposed narrative requests would provide the Agencies with crucial
information about current and future competitive relationships between
the filing parties, including whether they compete to hire employees,
which is information that is not required by the current Form.
a. Horizontal Overlap Narrative
The Commission proposes creating a new Horizontal Overlap Narrative
section that would require each filing person to provide an overview of
its principal categories of products and services (current and planned)
as well as information on whether it currently competes with the other
filing person. Such information is core to the Agencies' substantive
antitrust analysis during the initial waiting period and is not readily
accessible from sources other than the filers themselves. In drafting
the Horizontal Overlap Narrative, each filing person would describe its
current and planned principal categories of products and services in
the way that those business lines are referred to in the company's day-
to-day operations so that the Agencies could more readily understand
the information in the context of current market realities. If any of
the submitted documents support the information contained in the
narrative, the filing person would also identify such documents.
The products or services offered by the filing persons that
currently or potentially compete with each other are often referred to
by antitrust professionals as ``horizontal overlaps.'' The
identification and assessment of such horizontal overlaps is an
essential starting point for the Agencies' substantive review of any
transaction to determine whether it has the potential to violate the
antitrust laws. As discussed elsewhere, NAICS code reporting can result
in underreporting of horizontal overlaps, and not every HSR Filing
contains 4(c) documents that could potentially reveal overlaps not
identified by NAICS code reporting. In such cases, the HSR Filing does
not contain basic screening information that the Agencies need to
determine whether the transaction merits closer scrutiny during the
initial waiting period. Premerger notification is intended to allow the
Agencies to scrutinize any transaction that eliminates competition
between existing or potential competitors, and it is important for
every HSR Filing to identify any existing or potential horizontal
overlap created by the transaction.
As a result, the Commission proposes that within the Horizontal
Overlap Narrative, each filing person would be required to list each
current or known planned product or service that competes with (or
could compete with) a current or known planned product of the other
filer. For each such overlapping product or service, the filing person
would provide sales, customer information (including contacts), a
description of any licensing arrangements, and any non-compete or non-
solicitation agreements applicable to employees or business units
related to the product or service.
The proposed requirement for this information about each filing
person's market presence in overlapping products or services would
enable the Agencies to quickly identify and assess the significance of
the filers' respective businesses both in relative and absolute terms.
Proposed customer information would enable the Agencies to understand
the customer base of the overlapping businesses and to promptly
conduct, at the beginning of the initial waiting period, further
industry research with customers likely to be affected by the
transaction or those who are particularly knowledgeable about the
parties' business operations, relevant industry dynamics, and other
market participants. Contacting customers to confirm basic market
dynamics is a key step in the antitrust analysis conducted by Agency
staff during the initial waiting period, and the parties are frequently
asked to provide this information on a voluntary basis once one Agency
has granted clearance to the other to conduct an initial investigation
of the transaction. However, since this information is not compulsory,
the Agencies do not always receive it in a timely fashion during the
initial waiting period, hampering the ability of the Agencies to use
that period to effectively screen for transactions that merit the
issuance of Second Requests.
The proposed requirement to describe any licensing, non-compete, or
non-solicitation agreements involving the overlapping products or
services would enable the Agencies to assess specific categories of
existing contracts that are likely to affect how the transaction will
impact competition for those products or services. These existing
relationships bear on premerger market conditions and may reflect that
the filers already view themselves as competitors (in the case of non-
compete or non-solicitation agreements) or as key trading partners (in
the case of licensing agreements).
The Commission acknowledges the burden drafting the proposed
Horizontal Overlap Narrative could create for some filers, especially
for transactions involving close competitors with multiple overlapping
product or service lines. But identifying those transactions that
present broad and complex competition issues is a critical first step
for the Agencies. Once identified, the Agencies must then properly
manage their review, first determining which markets could be impacted
by the transaction and then deciding which of those necessitate in-
depth review. On balance, this proposed requirement would significantly
improve the information available to the Agencies to identify any
existing or potential horizontal overlap to assess the competitive
implications of a transaction during the initial waiting period. The
Commission notes that in the Agencies' experience, companies who are
horizontal competitors prior to the transaction frequently assess the
antitrust risk associated with the transaction prior to making an HSR
Filing, and therefore the information required by this proposal may
already be available, in whole or part, to include with the HSR Filing.
Although the Agencies have not previously required this type of
narrative to be submitted as part of the Form, other jurisdictions have
required such narratives for many years.
b. Supply Relationships Narrative
The Commission proposes creating a Supply Relationships Narrative
section that would require each filing person to provide information
about existing or potential vertical, or supply, relationships between
the filing persons. A prior version of the Form required similar
information about vertical vendor-vendee relationships, but the
requirement was eliminated in 2001 because the type of information
collected did not prove useful enough to the Agencies as a screen for
potential non-horizontal relationships to justify
[[Page 42197]]
the burden of providing it at that time.\46\ Based on the Agencies'
experience investigating vertical mergers in the intervening decades,
the Commission believes that the current proposal would provide
sufficiently robust information to allow the Agencies to identify
vertical and other non-horizontal issues, including those presented by
diagonal mergers. Non-horizontal relationships can be hard to detect in
certain sectors where supply chains are not well defined, for instance
in the provision of services rather than physical products. The
Agencies have an interest in knowing whether a transaction in which the
filing persons operate in related markets would result in any change in
market structure or incentives that might affect post-merger
competition. Early identification of potential non-horizontal
competitive issues is critical to determining whether further
investigation is needed, as structural changes in these relationships
require additional fact development to determine the nature and scope
of potential non-horizontal competitive concerns, which can often be
complex and unique. These issues are difficult to discern from the
information currently required by the Form, and filing parties are in a
unique position to identify existing or future non-horizontal business
relationships between them.
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\46\ The Form originally required information about any vendor-
vendee relationship between the reporting parties regarding
manufactured product during the most recent year; this information
was intended to help the Agencies identify supply relationships that
could give rise to concerns about foreclosure or other competitive
consequences of vertical integration. The Commission eliminated this
requirement in 2001 because it was not effective in identifying
vertical issues, not because vertical acquisitions present no
potential competitive risks. 66 FR 8680, 8686-87 (Feb. 1, 2001).
Since 2001, the Form has not collected specific information related
to vertical relationships.
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The Commission thus proposes to collect, in a narrative response,
information for related sales and purchases between the filing persons
or with other companies that use the filing person's products,
services, or assets to compete with the other filing person. Filing
persons would report sales to the other filing person and to any other
business that, to the best of the filing person's knowledge, uses its
product, service, or asset as an input for a product or service that
competes or is intended to compete with the other filing person's
products or services. Filing persons would also provide information
(including contact information and a description of the supply
agreement) for other customers that use the product, service, or asset
to compete with other filing person. Filing persons would provide
similar information for purchases made from the other filing person and
from any other business that, to the best of the filing person's
knowledge, competes with the other filing party to provide a
substantially similar product, service, or asset. This information
would allow the Agencies to identify whether the transaction would
create opportunities for post-merger foreclosure of rivals arising from
vertical or diagonal relationships.
The Commission acknowledges that this will increase the burden on
filers whose transaction involves existing supply relationships or who
supply or purchase from companies that compete with the other filing
party. But the Commission believes that requiring filing parties to
provide a narrative that reveals existing and potential supply
relationships between the acquiring person and acquired entity is
important for the Agencies because it would allow them to quickly
identify those transactions that raise concerns about non-horizontal
competitive effects.
c. Labor Markets Information
The Commission proposes creating a new Labor Markets section that
would require each filing person to provide certain information about
its workers in order to screen for potential labor market effects
arising from the transaction. The Agencies have increasingly recognized
the importance of evaluating the effect of mergers and acquisitions on
labor markets and have stepped up efforts to identify and investigate
potential labor market effects arising from reportable transactions.
Transactions have been challenged on the basis that consummation would
result in labor market harms,\47\ and consent agreements have included
provisions that stop the use of certain non-compete clauses that limit
the ability of potential market entrants to hire key employees.\48\
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\47\ Press Release, U.S. Dep't of Just., Justice Department Sues
to Block Penguin Random House's Acquisition of Rival Publisher Simon
& Schuster, (Nov. 2, 2021), <a href="https://www.justice.gov/opa/pr/justice-department-sues-block-penguin-random-house-s-acquisition-rival-publisher-simon">https://www.justice.gov/opa/pr/justice-department-sues-block-penguin-random-house-s-acquisition-rival-publisher-simon</a>. See also Concurring Statement of Commissioner
Slaughter and Chair Khan regarding FTC and State of Rhode Island v.
Lifespan Corporation and Care New England, at 1-2 (Feb. 17, 2022),
<a href="https://www.ftc.gov/system/files/ftc_gov/pdf/public_statement_of_commr_slaughter_chair_khan_re_lifespan-cne_redacted.pdf">https://www.ftc.gov/system/files/ftc_gov/pdf/public_statement_of_commr_slaughter_chair_khan_re_lifespan-cne_redacted.pdf</a> (recommending including a count in the complaint
that the proposed merger would have violated Section 7 of the
Clayton Act in a relevant labor market).
\48\ Press Release, Fed. Trade Comm'n, FTC Imposes Strict Limits
on DaVita, Inc.'s Future Mergers Following Proposed Acquisition of
Utah Dialysis Clinics (Oct. 25, 2021), <a href="https://www.ftc.gov/news-events/news/press-releases/2021/10/ftc-imposes-strict-limits-davita-incs-future-mergers-following-proposed-acquisition-utah-dialysis">https://www.ftc.gov/news-events/news/press-releases/2021/10/ftc-imposes-strict-limits-davita-incs-future-mergers-following-proposed-acquisition-utah-dialysis</a>.
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In transactions that involve two firms that purchase labor from the
same labor market(s), the Agencies consider whether the transaction may
substantially lessen competition for buyers of labor services. Every
firm competes for labor in at least one labor market and, more
commonly, in multiple labor markets. Companies that compete in the same
product market may also compete in the same labor market. Employers,
however, may compete in the same labor market even when they do not
compete in the same product or input market.
Yet the Form does not collect any information about employees that
would allow the Agencies to conduct an initial screening for potential
labor market effects, which has materially hampered their ability to
protect employees from the harmful effects of mergers. To identify
whether the filing persons compete to employ the same types of workers
in a particular geographic area, the Commission proposes requiring
certain information concerning each filing person's workers before the
transaction and any plans that would affect workers post-consummation.
This proposed section would identify potential labor market overlaps
and allow the Agencies to engage with the filers on potential labor
market issues during the initial waiting period.
i. Largest Employee Classifications
The Commission proposes creating a Largest Employee Classifications
section that would serve as a screening tool based on the SOC system,
developed by the Bureau of Labor Statistics, which classifies workers
into occupational categories. Labor markets have two dimensions: the
type or features of work performed, and the location of the work.
Because describing every relevant feature of each job would be
burdensome for parties, the Commission proposes requiring filing
persons to classify their workers into occupational categories based on
the SOC system, a widely used system for reporting worker statistics.
While SOC categories do not always provide exact comparisons, SOC codes
would nevertheless provide the Agencies with an objective
classification standard which can be used as an initial screen for
potential labor market overlaps. The use of these codes as a screening
tool is not intended to endorse their use for any other purpose, such
as defining a relevant labor market. To implement this proposed
screening
[[Page 42198]]
tool, the Commission proposes requiring filers to list their five
largest categories of workers by the relevant 6-digit SOC
classification and to provide the total number of employees for each 6-
digit code identified.
ii. Geographic Market Information for Each Overlapping Employee
Classification
The Commission proposes creating a Geographic Market Information
for Each Overlapping Employee Classification section that would serve
as a screen for the geographic component of labor markets based on the
United States Department of Agriculture's ERS system. The ERS commuting
zones were designed to delineate local economies based on where people
live and work.\49\ Filers would be required to identify the top five
largest 6-digit SOC codes in which both parties employ workers. This
should provide enough information for the Agencies to use SOC
classifications as an initial proxy for labor issues while balancing
the burden on filers by limiting the request to their five largest
categories of workers. Also, for each of the five largest SOC codes in
which both parties employ workers, this section would require filing
persons to list the overlapping ERS-defined commuting zone(s) from
which the employees commute and the total number of employees within
each commuting zone. This proposed requirement would be limited to
overlapping geographies, expressed as commuting zones, to capture
sufficient information to identify potential labor market concerns
without requiring filing parties to provide a complete list of all
commuting zones in which they have workers.
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\49\ See U.S. Dep't of Agric., ERS Commuting Zones and Labor
Market Areas, <a href="https://www.ers.usda.gov/data-products/commuting-zones-and-labor-market-areas/">https://www.ers.usda.gov/data-products/commuting-zones-and-labor-market-areas/</a>.
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This information would represent a material improvement in the data
available to the Agencies during the initial waiting period. By relying
on existing metrics that are familiar to U.S. companies and by limiting
the request to the top five SOC classifications, the Commission's
intent is to minimize the burden on filers. Nonetheless, the Commission
seeks comment on whether this information would be difficult or costly
to collect, and any alternative means by which the Commission could
screen HSR Filings for potential labor market overlaps, for example by
collecting information on the number and types of workers employed at
each of the filing person's facilities.
iii. Worker and Workplace Safety Information
The Commission proposes creating a Worker and Workplace Safety
Information section that would require filing persons to identify any
penalties or findings that were issued against the acquiring person or
acquired entity by the U.S. Department of Labor's Wage and Hour
Division, the National Labor Relations Board, or the Occupational
Safety and Health Administration during the five-year period before the
filing. If a firm has a history of labor law violations, it may be
indicative of a concentrated labor market where workers do not have the
ability to easily find another job. The proposed five-year period
limitation would capture the most relevant information for analysis
during the initial waiting period while lessening the burden on filers
to search through older files. This information is not always publicly
available but is known to the filers and is relevant to identifying
potential labor market effects.
3. NAICS Codes
The Commission proposes creating a NAICS section within the
proposed Instructions. This section proposes changes to certain
information currently required by Item 5(a) of the Form, which now asks
filing persons to submit information regarding dollar revenues and
lines of commerce with respect to operations conducted within the
United States during the most recently completed fiscal year. This
includes products manufactured in the United States, regardless of
where they are sold, products manufactured outside the United States
but sold into the United States or through a U.S. entity, and products
or services derived from U.S. operations, whether sold to a U.S. or
foreign customer.
The current version of Item 5 of the Form requires the reporting of
revenue by industry and product codes developed by Census to track
economic activity in the United States. Over the years, the Commission
has revised Item 5 as it sought to balance the need to receive filing
persons' revenue information with the burden on filers to provide that
revenue information.\50\ As part of the redesign of the premerger
notification process contemplated in this NPRM, the Agencies reviewed
the totality of revenue information currently required in Item 5(a) to
determine which information is especially valuable, which is due for an
update, and which is not sufficiently reliable or needed to conduct a
robust initial assessment of reported transactions. As a result, the
Commission now believes that it can further revise revenue reporting
requirements to make reported revenue information more informative for
the Agencies and less burdensome for filing parties. The Commission
thus proposes a substantively different approach to revenue information
through six proposed changes. The Commission also proposes a
ministerial change to adopt the 2022 version of the NAICS codes, which
are the most recent released by Census. Through these proposed changes,
the Commission would expand and clarify the industry and product codes
that filing persons would have to report, as well as limit the
requirements on how revenue must be reported.
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\50\ See 43 FR 33450, 33520 (July 31, 1978) (revenue reporting
based upon Standard Industrial Classification codes of the U.S.
Bureau of the Census); 66 FR 35541 (July 6, 2001) (amending the Form
and Instructions to report revenue by North American Industry
Classification System codes of the U.S. Bureau of the Census); 76 FR
42471 (July 19, 2011) (elimination of the requirement to report
``base year'' data); 84 FR 30595 (June 27, 2019) (amending the Form
and Instructions to report manufacturing revenue by North American
Product Classification System-based codes of the U.S. Bureau of the
Census).
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First, the Commission proposes eliminating the requirement that
filing persons provide the precise amount of revenue attributed to each
NAICS code. The Commission intends for the proposed change to
streamline revenue reporting for filers and result in figures that
would be just as useful to the Agencies for identifying important
business lines of each person. It is the Commission's understanding
that many businesses do not maintain detailed revenue information by
NAICS code in the ordinary course of business and generating this
information can require great effort. In fact, even obtaining estimates
of revenue to the nearest $100,000, as is currently required, can still
be burdensome for filers. The Commission therefore proposes that filing
persons would only need to estimate revenue at five levels: pre-revenue
(for certain products and services, as described below); less than $10
million; between $10 million and $100 million; between $100 million and
$1 billion; and more than $1 billion. The Commission anticipates these
ranges would provide the Agencies with an important overview of the
magnitude of revenue generated by particular products and services, an
important factor in the analysis of transactions during the initial
waiting period, while at the same time reducing the burden of reporting
revenues for filers. The Commission welcomes comments on
[[Page 42199]]
the proposed ranges, as well as other potential ways to capture the
relative magnitude of the business of the acquiring person or acquired
entity attributable to each NAICS code.
Second, the Commission proposes that NAICS codes be reported on a
descriptive basis, encompassing all U.S. operations. Revenue reporting
in Item 5(a) currently relies on the filing persons' ordinary course
financial records. In the Commission's experience, reliance on these
financial records often results in under-reporting or reporting in
codes that may not actually be descriptive of the products or services
provided. To address this issue, the Commission proposes requiring
individuals familiar with the business operations of each operating
company (or subdivision) to review the available NAICS codes to select
the codes that would best describe the full line of products and
services related to U.S. operations, regardless of whether the company
tracks revenue by such codes in the ordinary course of business or
relies on them for other reporting requirements. The Commission intends
for this change to shift the collection of NAICS codes from how a
company records revenue to align more closely with the full range of
products and services offered. Because the Commission proposes to
eliminate the requirement to specifically quantify the amount of
revenue attributable to the codes, as described above, the Commission
does not anticipate that this change will substantially increase the
burden of collecting the information. Further, codes related to non-
manufacturing activities estimated to have generated less than $1
million in the last fiscal year would not need to be listed, unless
they overlap with a code reported by the other filing person.
Additionally, the Commission recognizes that some NAICS codes are
imprecise, which can result in two filing persons engaged in similar
businesses using different NAICS codes. Therefore, the Commission
proposes that if more than one code might be appropriate, the filing
persons would be required to list all the codes that describe the
products or services offered and use end notes as needed to clarify
selections and any potential overlap where the same revenues are
reported in more than one NAICS code. This would assist the Agencies in
understanding the businesses of the filing persons during the initial
waiting period and address some of the shortcomings of NAICS code
reporting.
Third, the Commission proposes changing how NAICS codes should be
organized. Currently, filing persons must aggregate revenue across all
entities within the acquiring person or acquired entity. But often the
acquiring person or acquired entity comprises multiple operating
companies or units, which may be engaged in multiple lines of business.
For example, large companies can contain multiple operating units or
subsidiaries that do business under separate brands and offer diverse
products or services. Similarly, funds that file as acquiring persons
may control many different operating companies. The Commission thus
proposes to require acquiring persons and acquired entities with more
than one operating company or unit to identify which entity(s) derives
revenue in each code. This proposed requirement would facilitate
efficient review and quickly identify the operating company(s) that may
or may not be relevant to the antitrust analysis. From this
information, the Agencies could quickly identify which entity within
the filing person has competing or related business activities with the
other filing party.
Fourth, the Commission proposes requiring the reporting of certain
NAICS codes for certain pipeline or pre-revenue products. Currently,
filers are not required to provide information about products or
services that did not derive revenue in the last fiscal year. Yet these
pre-revenue or early revenue activities are often core to the
transaction rationale and essential to understanding the potential
competitive impact of the transaction during the initial waiting
period. This information is known to the filing person and is not
available from other sources, as it is typically highly sensitive. As a
result, the Commission proposes adding a requirement for acquiring and
acquired persons to report NAICS codes for certain pipeline or pre-
revenue products. The acquiring person would be required to identify
any NAICS codes for products and services under development if those
codes would overlap with the codes for current or known pipeline
products or services of the acquired entity(s). The acquired person
would identify the NAICS codes that would apply to the products or
services of the acquired entity(s) that are under development or pre-
revenue and anticipated to have annual revenue totaling more than $1
million within the following two years. The Commission believes the
benefit to the Agencies would be substantial and anticipates that the
burden associated with the collection of these codes would be minimal,
as identification of these products and services would likely be
completed during ordinary diligence. The Commission understands that
the acquired person may have limited knowledge about the planned or
under-development products of the acquiring person and does not intend
the filing persons to divulge this information for the purpose of
making an HSR Filing.
Fifth, the proposed NAICS code section would clarify that the
acquired person must report the NAICS codes relevant to the acquired
entity(s) at the time of closing. While most filers currently report in
this manner, others have asserted that when an acquired entity is
merely a shell at the time of the HSR Filing due to anticipated pre-
consummation reorganization, no NAICS codes are required. This is not
the intent of the revenue reporting requirements in the current Form,
and the Commission proposes clarifying this issue by requiring NAICS
reporting that reflects the operations of the acquired entity(s) upon
consummation. This would provide clarity and make NAICS code reporting
more reliable for both filing persons and the Agencies.
Finally, the Commission proposes eliminating the requirement for
filing persons engaged in manufacturing to provide revenue by NAPCS-
based codes. The requirement to allocate revenue to product codes dates
from the promulgation of the Rules in 1978 and has been updated to
reflect various product code formats implemented by Census over the
years. The most recent Census industry code format is the 6-digit NAICS
format.\51\ Initially, Census also created 10-digit NAICS-based codes
to provide more detail about the products within the 6-digit NAICS
industry codes, and these were adopted by the Commission for use in HSR
Filings in 2001.\52\ In 2018, Census discontinued the use and updating
of 10-digit NAICS-based codes in favor of 10-digit NAPCS-based codes.
As a result, in 2019, the Commission amended the Form and Instructions
to require use of the NAPCS-based codes for manufactured products.\53\
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\51\ NAICS Codes were first published in 1997 and first used in
the HSR Form in 2001. See 66 FR 23561 (May 9, 2001).
\52\ 66 FR 35541 (July 6, 2001).
\53\ 84 FR 30595 (June 27, 2019).
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However, these new NAPCS-based codes have been less useful for the
Agencies' analysis than the discontinued 10-digit NAICS-based codes and
have created significant confusion for both filers and the Agencies.
The NAICS-based system provided 6, 8, and 10-digit codes, with the
description of the products becoming more precise as the number of
[[Page 42200]]
digits in the code increased. But the 10-digit NAPCS-based codes
created by Census correspond to a combination of former 8-digit and 10-
digit NAICS-based manufactured product codes. As a result, some parties
inadvertently report revenue using a NAPCS code that corresponds to an
8-digit NAICS code. When this happens, the Agencies lack the more
granular and descriptive nature of the NAPCS-based codes that correlate
to the former 10-digit NAICS-based code that would allow the Agencies
to more accurately identify mergers of companies that produce similar
types of products. Additionally, when one filing party uses a NAPCS-
based code that corresponds to an 8-digit NAICS-based code and the
other filing person uses a NAPCS-based code that corresponds to a 10-
digit NAICS-based code, the filing may not properly capture codes in
which both parties report revenues. This could result in filings that
should report revenue overlap code(s) but do not, limiting the
Agencies' ability to rely on the codes to conduct an initial screen for
competitive overlaps.
Because the proposed Horizontal Overlap section of the proposed
Instructions would require the identification of overlapping products
or services, as discussed in III.D.2., the Commission believes that
additional identification of products by NAPCS code would no longer be
necessary. The elimination of NAPCS-based revenue reporting would
lessen the burden on filers to collect and report these figures, which
have become less useful to the Agencies as a tool for identifying
horizontal overlaps.
4. Controlled-Entity Overlaps
The Commission proposes creating a Controlled-Entity Overlaps
section within the proposed Instructions. This section would continue
to require the submission of information currently required by Item 7
of the Form, such as the identification of certain entities within the
filing person that derive revenue in the same NAICS codes as the other
filing person and geographic information regarding the operations and
sales of such entities, but the Commission proposes certain changes to
what information would be collected and reported. As explained below,
specific information related to entities controlled by the filing
person is critical to the Agencies' initial antitrust review as it
serves as the primary tool for identifying horizonal overlaps between
the parties to the transaction and their controlled entities,
especially for transactions involving a UPE with complex corporate
structures and multiple entities under its control. Compared to the
current HSR Form, this proposed section would: (i) add a requirement to
provide the name(s) by which entities have done business within the
last three years, (ii) require the filing person to identify the
overlapping entity within its own person, rather than the other filing
person, (iii) update the NAICS codes that require geographic reporting
at the street address level, (iv) require the identification of
locations of franchisees for certain NAICS codes, and (v) add a
requirement to provide geolocation data.
a. NAICS Overlaps of Controlled Entities
The Commission proposes that the new Controlled-Entity Overlaps
section include the information currently required by Item 7(a), which
requires the identification of the overlapping NAICS codes for the
acquiring person (or an associate) and acquired entity, and Item 7(b),
which requires the identification of the entities that derived revenue
in overlapping NAICS codes within the UPE of the other filing person
and, for the acquiring person, its associates. The Commission
understands that filing persons often do not identify for the other
filing person the entities that report in overlapping NAICS codes.
Therefore, the Commission believes that it would be less of a burden
for each filing person to only report entities within its own person
that derive revenue in the overlapping NAICS codes. The Commission thus
proposes requiring the acquiring person to identify the entity(s)
within its own person that has operations in the same NAICS code as the
acquired entity(s), and for the acquired person to identify the
entity(s) within the acquired entity(s) that has operations in the same
NAICS codes as the acquiring person. This proposed change would refine
NAICS code reporting to provide the Agencies with a reliable source for
identifying whether any entity within each filing person generates
revenues in the same or related codes. As this information, unlike the
current information required by Item 7(b), is known to the filing
parties, the Commission anticipates that the burden of responding to
this request will be diminished.
The Commission proposes two additional changes to the current
requirements of Item 7(b). First, the Commission proposes requiring the
identification of ``doing business as'' or ``formerly known as'' names
used within the last three years by entities with U.S. operations in
overlapping NAICS codes. This information would allow the Agencies to
more efficiently collect information about the overlapping entities in
publicly available resources during the initial waiting period by
connecting each entity with any name by which it is known to other
market participants. This information is known to filers and limited to
a three-year look back period.
In addition, the Commission proposes that filing persons be
required to identify the entity(s) that have U.S. operations in the
overlapping NAICS code(s). For acquiring persons, this would include
entities controlled by associates that have U.S. operations in a NAICS
code in which the acquired entity(s) report. Currently some filers
voluntarily match the overlapping NAICS codes to the entities within
the acquiring person (or its associates) or acquired entity. In the
Commission's experience, this information aids the Agencies in quickly
identifying the entities within the filing person that may be relevant
to the competitive analysis during the initial waiting period.
b. Geographic Market Information
The Commission proposes creating a Geographic Market Information
section to collect the information currently required by Items 7(c) and
7(d) of the Form, which require, for each overlapping NAICS code, the
identification of geographic markets where the entities controlled by
the acquiring person (and its associates) and the acquired entity(s) do
business. The Commission proposes to modify these requirements by
updating the NAICS industries in which street-level reporting is
required, requiring geolocation information for these addresses, and
requiring the reporting of franchisees' locations.
The Commission periodically reviews which NAICS codes require more
granular street, city, and state address information and which NAICS
codes need only be reported at the state level.\54\ Recognizing the
burden that providing the street-level address for each location of an
entity can require, the Commission differentiates between (1) NAICS
industry codes that either do not tend to involve small local or
regional markets or involve local markets but nonetheless can
adequately be reviewed if the parties specify only the state in which
revenue is derived, and (2) those which do tend to involve local
markets for which knowing the areas served by each filing person is
important to identify locations where
[[Page 42201]]
both parties compete for sales (i.e., geographic overlaps). As part of
this proposed rulemaking, the Agencies have reviewed the list of NAICS
industries for which such street-level information is required and have
adjusted the list of sectors which, based on their experience, require
more granular geographic information than state-level information. The
Commission thus proposes updating the list of NAICS codes for which
locations need only be identified at the state level and NAICS codes
for which street-level information would be required.
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\54\ See, e.g., 75 FR 57110 (Sept. 17, 2010), adopted by 76 FR
42471 (July 19, 2011).
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The Commission proposes removing the Nondepository Credit
Intermediation NAICS codes (codes beginning with 5222) from the list of
codes for which street-level information is required. In the Agencies'
experience, these industries tend not to be locally focused. Therefore,
for these codes, the Commission proposes requiring filing persons to
list only the states within which they conduct operations, rather than
street address as is now required. This proposal should reduce the
burden on those filing persons who report sales in these NAICS codes.
The Commission proposes that filers be required to provide street-
level reporting for the following additional codes (codes with
asterisks indicate that all NAICS codes that begin with the preceding
numbers are included).
113*** Forestry and Logging
2211** Electric Power Generation, Transmission and Distribution
2212** Natural Gas Distribution
3115** Dairy Product Manufacturing
311611 Animal (except Poultry) Slaughtering
311613 Rendering and Meat Byproduct Processing
311615 Poultry Processing
31181* Bread and Bakery Product Manufacturing
321*** Wood Product Manufacturing
32221* Paperboard Container Manufacturing
324*** Petroleum and Coal Products Manufacturing
325110 Petrochemical Manufacturing
325130 Synthetic Dye and Pigment Manufacturing
325180 Other Basic Inorganic Chemical Manufacturing
325193 Ethyl Alcohol Manufacturing
325194 Cyclic Crude, Intermediate, and Gum and Wood Chemical
Manufacturing
325199 All Other Basic Organic Chemical Manufacturing
325211 Plastics Material and Resin Manufacturing
3271** Clay Product and Refractory Manufacturing
3272** Glass and Glass Product Manufacturing
327310 Cement Manufacturing
327390 Other Concrete Product Manufacturing
42331* Lumber, Plywood, Millwork, and Wood Panel Merchant
Wholesalers
42333* Roofing, Siding, and Insulation Material Merchant Wholesalers
42344* Other Commercial Equipment Merchant Wholesalers
42345* Medical, Dental, and Hospital Equipment and Supplies Merchant
Wholesalers
42346* Ophthalmic Goods Merchant Wholesalers
42349* Other Professional Equipment and Supplies Merchant
Wholesalers
4239** Miscellaneous Durable Goods Merchant Wholesalers
4241** Paper and Paper Product Merchant Wholesalers
4242** Drugs and Druggists' Sundries Merchant Wholesalers
42441* General Line Grocery Merchant Wholesalers
42442* Packaged Frozen Food Merchant Wholesalers
42451* Grain and Field Bean Merchant Wholesalers
42452* Livestock Merchant Wholesalers
4247** Petroleum and Petroleum Products Merchant Wholesalers
4248** Beer, Wine, and Distilled Alcoholic Beverage Merchant
Wholesalers
42491* Farm Supplies Merchant Wholesalers
42495* Paint, Varnish, and Supplies Merchant Wholesalers
44911* Furniture Retailers
493*** Warehousing and Storage
54138* Testing Laboratories and Services
54194* Veterinary Services
562*** Waste Management and Remediation Services
7132** Gambling Industries
71394* Fitness and Recreational Sports Centers
These are codes that represent industries in which the Agencies
often determine that competition occurs on a local or regional basis.
For those codes that represent regional competition, the Commission
believes that there would be few individual addresses that would need
to be provided, and therefore the burden would not be significantly
higher than reporting the overlaps at the state level. The Commission
acknowledges that for those industries where competition occurs on a
very localized level, for example where customers travel to the
company's location to purchase goods or services, providing street-
level revenue information can be challenging. However, because
businesses often face different competitors in each of these markets,
the Agencies have learned that businesses often track sales at the
local level in the ordinary course of business for these sectors.
Knowing where within a state the filer's facilities are located is an
important screening tool for the Agencies to quickly identify existing
and potential geographic overlaps, and that benefit justifies requiring
street-level reporting for these NAICS codes. Providing the Agencies
with information to screen for geographic overlaps during the initial
waiting period also benefits filing persons by reducing need to issue
Second Requests to determine if there are such overlaps.
The Commission recognizes that providing the street address of
tens, hundreds, or, in certain cases, thousands of locations can impose
a burden on filers. Therefore, the Agencies have reviewed the NAICS
codes closely to identify only those codes for which the Agencies would
most benefit from street-level information. For these transactions that
require more than a cursory review, attempts to collect this
information from the parties during the initial waiting period slows
down the review and delays the decision on whether an in-depth
investigation of the transaction is needed. Further, the Commission
believes that such information should be available in an accessible
manner for most businesses that have a large number of facilities.
Nonetheless, the Commission welcomes comments that identify, with
rationales, NAICS codes that should either be added to or deleted from
the list of codes for which state-level information is required.
The Commission also proposes requiring filers to report latitude
and longitude information for street addresses so that the Agencies can
easily and quickly use that information to populate mapping software
and create maps to better identify possible geographic overlaps between
the acquiring person and the acquired entity. Street addresses alone
can be inadequate or inaccurate for isolating the exact location of
facilities. Converting street addresses to coordinates is difficult due
to abbreviations such as BLVD or ST, and street addresses often lack
important information, such as South or North, or contain errors, such
as mislabeling a Street address for an Avenue. Latitude and longitude
information is unique, which reduces the likelihood of errors. Any
errors in generating maps displaying the locations of the relevant
facilities may affect screening for local markets, resulting in over-
or under-identification of geographic overlaps. Since filing persons
are familiar with the location of their own establishments, the
Commission believes that they would be in best position to validate the
accuracy of the locations through more precise latitude and longitude
reporting.
The Commission also proposes requiring filers to list locations
where franchisees of the acquiring or acquired person (as appropriate)
generate revenue
[[Page 42202]]
in overlapping NAICS codes that require street-level reporting.
Currently, there is no information submitted with the Form that allows
the Agencies to begin this analysis for companies that do business
through franchisees. Yet all company locations at issue in the
transaction that generate revenues, both directly and indirectly
through franchisees, must be accounted for when the Agencies analyze
the existence and extent of competition between the filing persons.
These proposed changes would provide the Agencies with all company
locations to begin assessing geographic overlaps during the initial
waiting period. Because franchisors must approve the location of
franchisee operations and get regular sales reports from those
operations, the Commission believes filers with these relationships
will have this information about their franchisees.
5. Minority-Held Entity Overlaps
The Commission proposes creating a Minority-Held Entity Overlaps
section within the proposed Instructions that would amend certain
information that is currently required by Item 6(c) of the Form. Item
6(c) currently requires filing persons to list all of the entities in
which the acquiring person and associates of the acquiring person, or
the acquired entity (as appropriate), holds a minority interest of 5%
or more. As originally proposed by the Commission in 2010, this item
was intended to focus on only those minority-held investments that
provide products or services that report in the same NAICS code as the
other filing person, but in the final version of the rule, in order to
limit burden, the Commission permitted filers to list all minority-held
companies rather than limiting the list to those that created a NAICS
code overlap.\55\ However, in the Agencies' experience with information
collected in Item 6(c), permitting parties to list all minority-held
companies instead of only those that are in the same line of business
or NAICS code has hindered the Agencies' ability to determine which
entities may be relevant to the competitive analysis of the transaction
during the initial waiting period. Unlike the filing persons, which
have likely done diligence on the companies in which they invest, the
Agencies have no basis to determine from the entire list of minority-
held companies which ones have competitively significant relationships
with the other filing person as this information is not available from
any other source.
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\55\ 75 FR 57110 (Sept. 17, 2010), adopted by 76 FR 42471 (July
19, 2011).
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The Commission thus proposes eliminating the option to list all the
minority-held entities of the acquiring person and its associates or
acquired entity (as appropriate) and proposes once again to require
identification of those that, to the filing person's knowledge or
belief, would derive revenue in the same NAICS codes or have operations
in the same industry as the other filing person. The Commission also
proposes requiring filers to provide the names by which the listed
entities do business. As noted above, the d/b/a or f/k/a names of the
businesses are especially helpful to the Agencies in conducting
additional research about the entities using public or third-party
sources. These proposed changes would significantly assist the Agencies
in determining which minority-held entities may be relevant to the
competitive analysis of the transaction during the initial waiting
period. In the Agencies' experience, there has been an increase in the
number and type of companies in which the acquiring person and acquired
entity have minority investments, and where they exist, understanding
the business lines of these related companies can be important for
determining any significant premerger competitive relationship between
the filing persons that may be affected by the transaction. This is
especially true where the important competitive relationship is not at
the UPE level but arises from within the corporate structure or
holdings of the filing persons. While the Commission recognizes that
investors have more limited information regarding entities in which
only a minority interest is held, the proposed Instructions would
continue to permit filing persons to rely on their knowledge or belief.
The Commission believes that filers have done some level of diligence
to determine the business lines prior to investing in these entities,
and should have some basis to identify overlaps.
6. Prior Acquisitions
The Commission proposes creating a Prior Acquisitions section
within the proposed Instructions that would include the information
currently required by Item 8 of the Form, as well as additional
information. At present, Item 8 requires the acquiring person to
identify all NAICS codes in which the acquiring person derived $1
million or more in revenue and the acquired entity(s) or assets also
derived $1 million or more. For such codes, the acquiring person is
required to report acquisitions made within the five years prior to
filing that (i) resulted in control of entities that had net sales or
total assets of greater than $10 million in the year prior to
acquisition, or (ii) was an acquisition of assets valued at or above
the statutory size-of-transaction threshold. The Commission proposes
expanding the scope of prior acquisitions that would be identified and
making the requirement applicable to the acquired entity as well.
Information about prior acquisitions has always been important for
the Agencies, allowing them to identify strategies to gain market share
through acquisitions rather than internal expansion or more vigorous
competition. Filers have been required to provide information about
prior acquisitions from the beginning of the premerger notification
program.\56\ This information can be especially important in sectors
where acquisitions are typically not HSR-reportable but nonetheless can
cause competitive harm and alter the market dynamics for the reported
transaction.\57\ The Agencies have taken steps to address concerns
about acquis
[…truncated; see source link]Indexed from Federal Register on June 29, 2023.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.