Hart-Scott-Rodino merger review explained: HSR filings

The Hart-Scott-Rodino Act, usually shortened to HSR, requires the parties to certain large mergers and acquisitions to notify the federal antitrust agencies before closing and then to wait while the government decides whether to take a closer look. The Federal Trade Commission (FTC) administers the program, and the Department of Justice’s Antitrust Division shares the review. The result is that many large deals cannot close until a waiting period ends.

In brief

• Filing is required only for deals that meet value and size tests, which the FTC updates annually.
• Both agencies receive the filing, but one agency reviews each deal.
• The standard waiting period is 30 days, or 15 days for a cash tender offer or bankruptcy sale.
• A Second Request extends the review and can add months.

Why the law exists

Before HSR, the agencies often learned of a large merger after it had closed. Challenging a deal that had already combined two companies was difficult, and unwinding it more so. The premerger notification system moves the review earlier. Parties file, the agencies look at the likely competitive effects and the deal does not close until the government has had its chance to act.

HSR is a procedural law. It does not itself prohibit mergers. The substantive standard comes from the antitrust statutes, which bar acquisitions whose effect may be to lessen competition substantially. HSR gives the agencies the time and information to apply that standard before the transaction is done.

Who must file

Not every transaction needs a filing. The FTC explains that the deal must meet a minimum value and the parties must meet a minimum size, with thresholds updated annually. The dollar amounts change from year to year, so check the FTC’s current notice rather than a secondhand figure. The FTC also notes that some stock or asset purchases are exempt, as are some purchases of real property, and that a filing fee applies. For most reportable deals, both the buyer and the seller file forms with information about their businesses.

The unit that matters is the “person,” which the FTC’s rules define as the ultimate parent entity and all the entities it controls, directly or indirectly. A natural person who controls corporations is part of the same person as those corporations. This is why the analysis starts at the top of the corporate chain.

Transactions covered include purchases of voting securities, acquisitions of assets and the formation of certain joint ventures or corporations. A purchase of shares on the open market can trigger a filing when it crosses a threshold, even if the buyer has no intention of acquiring the company. For this reason, an investor building a position in a public company, including one in an activist campaign, has to consider HSR as well as the beneficial ownership rules described in our guide to Schedule 13D versus 13G. Whether an exemption applies to a particular purchase depends on the facts and on the current rules.

What the filing contains

The parties submit a notification and report form with information about the transaction and their businesses, along with supporting documents. The FTC revises the form from time to time, and the current form and instructions are on the agency’s website. The filing goes to both the FTC and the Antitrust Division.

The waiting period

The statute, 15 U.S.C. 18a, sets the clock. The initial waiting period ends on the thirtieth day after the agencies receive the completed notification, or on a later date if extended. For a cash tender offer, the period is shorter and ends on the fifteenth day. The FTC’s guide adds that the same 15-day period generally applies to a bankruptcy sale.

The agencies can end the period early. Early termination lets the parties close before the period would otherwise expire. The statute requires the agencies to publish a notice when they grant it. The availability and practice of early termination has changed over time, so check the FTC’s current guidance.

Which agency reviews

Both the FTC and the DOJ receive every filing, but only one reviews a given deal. Staff from the two agencies decide which one in a process the FTC calls clearance. Industry experience often drives the choice, so one agency tends to handle certain sectors.

Three outcomes of the initial review

When the initial review ends, the agency can:

1. Grant early termination. The parties may close immediately.
2. Let the waiting period expire. The parties may close, and the agency retains its power to challenge the deal later.
3. Issue a Second Request. The agency asks for more information, and the waiting period is extended.

Most filings clear in the initial period. The share that draws a Second Request is small.

The Second Request

A Second Request is a formal demand for documents and data. According to the FTC, it typically seeks business documents and data on products, market conditions and likely competitive effects, and the agency may also interview personnel or others. The parties cannot close until they have “substantially complied” with the request and a second waiting period has passed.

After substantial compliance, the agency typically has 30 days to review and act, or 10 days for a cash tender offer or bankruptcy sale. The statute allows that period to run from the time the agency receives the information or a statement explaining any noncompliance, and further extension requires a court order. In practice, the parties and the agency often agree in writing to extend the timing to resolve remaining issues. Compliance with a Second Request can take months, which is why a deal with a Second Request usually takes much longer than the 30-day headline.

How a review ends

The FTC lists three results after a Second Request investigation:

• The investigation closes and the deal proceeds unchallenged.
• A negotiated consent agreement with provisions meant to restore competition, for example, a divestiture of overlapping assets.
• A court challenge. The agency seeks a preliminary injunction in federal court to stop the transaction pending an administrative trial on the merits.

Unless a court order blocks the merger, the parties may close at the end of the waiting period. The FTC notes that parties sometimes abandon the deal when they learn that the agency is likely to challenge it.

Closing too early

The waiting period is mandatory. Parties generally cannot close before it ends or is terminated, and they cannot hand over operational control before then. Conduct that effectively merges the businesses ahead of clearance, often called gun-jumping, can bring penalties under the antitrust laws. Companies in a pending deal usually keep operating as independent competitors until clearance.

How HSR appears in public filings

For a public-company deal, HSR clearance appears in the filings that investors read.

• The merger agreement. The agreement, filed with the SEC, typically makes expiration or termination of the HSR waiting period a condition to closing and describes each side’s obligations to seek approvals.
• Form 8-K. A company announcing a merger agreement files a Form 8-K that describes the agreement. This is the kind of filing tracked under the heading merger 8-K. Later 8-Ks may report the expiration of the waiting period, a Second Request or the closing.
• Proxy statement. If shareholders vote on the deal, the proxy statement describes the regulatory approvals required and their status.
• Periodic reports. Quarterly and annual reports update the status of pending approvals.

All of these can be searched on EDGAR, which supports company search, full-text search and a latest-filings view. A reader can follow the regulatory path of a deal by searching a target’s filings for terms such as the Hart-Scott-Rodino Act, waiting period and Second Request.

Worked example in outline

Imagine two hypothetical companies, Buyer Co. and Target Co., that sign a merger agreement and announce it on a Form 8-K. A reader would expect the following sequence, with timing varying by deal.

1. The parties file HSR notifications with the agencies.
2. The 30-day waiting period begins on receipt.
3. Staff clear the deal to one agency.
4. At the end of the initial period, the agency either lets the period expire or issues a Second Request.
5. If there is a Second Request, the parties gather documents, respond and agree on timing.
6. The agency closes its review, negotiates a consent agreement or sues.
7. The parties report the outcome in an 8-K and close if other conditions are met.

The example is illustrative and does not describe any real transaction.

Other approvals

HSR clearance is one of several approvals a deal can require. Parties may also need approvals from foreign competition authorities, from sector regulators such as banking or telecom agencies, from state authorities and from shareholders. The merger agreement lists the required approvals. HSR is the one that is nearly universal for large US transactions.

Common misconceptions

HSR approves or blesses a merger. The expiration of the waiting period means the agencies have not stopped the deal. They can still challenge it afterward.

Every merger needs an HSR filing. Only deals that meet the thresholds and are not exempt need one.

A Second Request means the deal will be blocked. It means the agency wants more information. Many deals with Second Requests close, some after remedies.

Only the buyer files. In most reportable deals, both sides file.

The thresholds are fixed. They are adjusted annually, and the FTC publishes the new figures.

FAQ

What does HSR stand for?

Hart-Scott-Rodino, the name of the 1976 antitrust improvements act that created the premerger notification system. The statute is codified at 15 U.S.C. 18a.

How long is the HSR waiting period?

Thirty days after a completed filing is received, or 15 days for a cash tender offer, subject to extension and early termination. A Second Request extends the review.

Who enforces HSR?

The FTC and the DOJ Antitrust Division. The FTC administers the program, and only one agency reviews each deal.

What is a Second Request?

A formal request for additional documents and information that extends the waiting period until the parties substantially comply and a further review period passes.

Is there a filing fee?

Yes. The FTC says a fee applies and updates the amounts. Check its current fee schedule.

Where can I follow a deal’s HSR status?

In the company’s SEC filings on EDGAR, including the merger agreement and Form 8-K announcements, and on the FTC’s website for agency notices.