The amount of time it takes to meet pre-merger compliance requirements could skyrocket if US regulators move forward with a proposed rule that would overhaul the process.
On average, the number of hours spent completing the process would increase nearly fourfold to 144 from the current average of 37 hours, the Federal Trade Commission estimated in its proposal. Preparation time for some deals could rise by 222 hours, the FTC said.
But even those figures might underestimate the increased burden, according to Kara Kuritz, a partner in the antitrust practice at the law firm Vinson & Elkins. When trying to calculate the estimates regulators might have only captured the increased legal advisory time but not necessarily the time spent by the companies involved, she said on the latest episode of "The Pipeline."
Preparing for a deal would become much more time-consuming under this proposal because the FTC and the Department of Justice would ask companies to provide more information when completing the pre-merger notification requirements, which were authorized under Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR). That law requires pre-merger notification for transactions that meet certain statutory thresholds, such as transaction value. The thresholds are reviewed each year; for 2023 the minimum transaction value that would require notification is $111.4 million.
Further detail sought
Federal regulators have put forward a redesign because they believe the current process is insufficient to evaluate whether transactions might violate competition laws. They said the challenges of reviewing M&A deals have expanded considerably for several reasons, including the ways technology and digital platforms have changed how business is conducted.
"Some transactions involve firms whose premerger relationship is not clearly horizontal or vertical," the proposal said. "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."
Still, the amount of information now being sought may be against the spirit of the HSR Act, Kuritz said, noting that the law was put in place to give regulators an idea of which deals might raise competition concerns and prompt them to investigate deals further.
The law was never intended to let regulators say "'we're going to do our whole investigation based on the HSR filing up front,'" Kuritz said.
Under the proposal, parties involved in deals would have to submit all drafts of documents and presentations that investment bankers present to their clients on topics including competition and market share. Kuritz said companies right now only have to submit final versions of those documents; regulators now want to see the earlier versions because they have concerns that competitive information is "getting scrubbed out" before they are finalized.
A complicating factor is that sometimes the earlier versions of those documents have information that is not accurate, Kuritz said.
"It will be difficult for the agencies to look at those draft documents and know … is this really what the company thought?" she said. "Or is this just an early draft and the view evolved over time."
Logistical challenges
The proposal would also require parties to submit narrative descriptions of transactions that explain details like strategic rationale and the areas of overlap between the combining companies. Kuritz said foreign regulators often require a narrative description, but those regimes have short forms for transactions that are less likely to raise competitive problems.
Along with the increased time burden, Kuritz said meeting the requirements of the proposal can create some logistical challenges for companies pursuing deals.
Kuritz noted that a requirement in the proposed rule is for companies to have taken steps to retain documents about the transaction and prevent them from being destroyed. Setting up systems that allow companies to access or preserve all communications — including text messages and chats — can be costly, Kuritz said.
"It's something that the agencies are requiring you to implement up front," Kuritz said. "Before, the typical standard is once you anticipate litigation, you have to start retaining documents."