New U.S. Merger Legislation: Major Implications for Private Equity

The U.S. Federal Trade Commission (FTC) and the Department of Justice (DOJ) have introduced significant changes to the Hart-Scott-Rodino Act (HSR) pre-merger notification rules. Announced on October 10, 2024, these final HSR Rules represent the first large-scale overhaul of the HSR form in decades and have profound implications for private equity firms and their merger and acquisition (M&A) activities.¹

Enhanced Disclosure Requirements

One of the most impactful changes is the enhanced disclosure requirements targeting private equity and other investment firms' ownership structures and investment strategies. The new rules mandate that acquiring persons and firms provide detailed information about their ownership structures, including minority investors with at least a 5% stake and management rights.² While such minority stakes with management rights are uncommon in standard private equity structures, firms with complex ownership arrangements must now navigate these additional reporting obligations.

Furthermore, the new HSR Form requires both the acquiring and acquired persons to disclose prior acquisitions in the same industry over the past five years.¹ This provision aims to shed light on "roll-up" strategies, where private equity firms acquire multiple companies within the same sector to consolidate market share. Regulators are increasingly scrutinizing these strategies for potential anticompetitive effects.³

Increased Scrutiny on Roll-Up Strategies

The FTC and DOJ are focusing on private equity's role in potentially lessening competition through serial acquisitions. The agencies have expressed concerns that roll-up strategies can lead to market consolidation, reducing consumer choices and increasing prices.³ The FTC filed its first-ever lawsuit last year targeting a private equity roll-up, signaling a shift in enforcement priorities.³

Extended Review Timelines and Higher Compliance Costs

Preparing HSR filings will now require significantly more time and resources. The FTC estimates that the average time to prepare a filing will increase by 68 hours, totaling approximately 105 hours per filing.² This extension could affect deal timelines, particularly in competitive bidding situations where speed is crucial.

Compliance costs are also expected to rise due to the increased complexity of the filings. Private equity firms must allocate additional legal and compliance resources to meet the new requirements, potentially affecting the profitability and feasibility of certain transactions.¹

Return of Early Termination with Uncertainty

In a notable development, the FTC announced that it will resume granting requests for early termination of the HSR waiting period once the new rules take effect.¹ However, it remains uncertain how frequently early termination will be granted, especially given the agencies' intensified focus on private equity transactions. Firms should not rely on early termination as a strategy to expedite deals.

Strategic Implications for Private Equity Firms

The new regulations necessitate a strategic reassessment for private equity investors:

• Due Diligence and Antitrust Risk Assessment: Firms must conduct thorough antitrust analyses early in the deal process to identify potential issues arising from ownership overlaps or prior acquisitions.³

• Simplification of Ownership Structures: To reduce disclosure burdens and regulatory scrutiny, firms may consider simplifying their ownership hierarchies and investment structures.³

• Increased Transparency with Minority Investors: Firms need to be prepared to disclose information about minority investors, particularly those with management rights, which could expose strategic relationships and investment strategies.²

• Longer Deal Timelines: Extended preparation and review periods mean that firms must adjust deal timelines and be prepared for potential delays due to regulatory scrutiny.²

Navigating the New Regulatory Landscape

To mitigate potential challenges, investment firms should:

• Initiate Early Planning: Start the HSR filing preparation as early as possible, considering the increased time required for compliance².

• Enhance Compliance Infrastructure: Allocate sufficient resources to legal and compliance teams to handle the additional workload and ensure accurate and complete filings.²

• Monitor Regulatory Developments: Stay informed about further guidance from the FTC and DOJ, as well as any potential legal challenges to the new rules.¹

Conclusion

The new HSR rules mark a significant shift in U.S. merger regulation, with a clear focus on private equity activities. The enhanced disclosure requirements and increased scrutiny of roll-up strategies reflect the agencies' intent to closely monitor and regulate private equity's influence on market competition. Firms must adapt to these changes by reassessing their strategies, enhancing compliance efforts, and preparing for longer and more complex deal processes.

Quick Hits:

• Stocks stumble, dollar and gold rise as traders weigh US rates, election

• Qualcomm, Alphabet team up for automotive AI; Mercedes inks chip deal

• Venture Capital Is on the Verge of a New Role: Washington Insider
  

Follow Us:

𝕏: https://x.com/BuysideJournal

Instagram: https://www.instagram.com/buysidejournal/

LinkedIn: https://www.linkedin.com/company/the-buyside-journal/

_{1. MorganLewis, US Federal Trade Commission Issues Final Rules on HSR Pre-Merger Reporting, 2024.}

_{2. Bloomberg Law, Private Equity M&A Moves Will Face Sharper Focus From Regulators, 2024.}

_{3. White &Case, Finally, the Final HSR Rules: Key Takeaways for the New HSR Pre-Merger Notification Form, 2024.}

_{The content herein is solely for informational purposes and should not be viewed as investment or any other advice or a current or past recommendation, or an offer to sell or the solicitation to buy securities or adopt any investment strategy. Certain of this material has been generated by an artificial intelligence language model, ChatGPT, which has been prompted to provide topical finance-related articles. The articles herein may not reflect the most current news, events, or developments. While we strive for accuracy, there may be limitations, inaccuracies, or biases present, and The Buyside Journal (including, for the avoidance of doubt, its affiliates) assumes no liability for the content herein and does not guarantee the accuracy, adequacy or completeness of such information (and does not undertake any duty to correct or update such information). Readers are encouraged to independently verify the information herein and consult with professionals for specific advice or information. Predictions, opinions, and other information contained herein are subject to change continually and without notice of any kind and to the extent accurate initially may no longer be true after the date indicated. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Actual results could differ materially from those anticipated in forward-looking statements.}