New merger review rules bring heightened scrutiny for US private equity

Advisers to the world’s largest private equity firms are raising concerns over proposed changes to the Hart-Scott-Rodino (HSR) form, which could disrupt and delay transactions. The new merger notification rules, put forward by US antitrust agencies, would require buyout groups to disclose more information at an early stage of a deal, potentially leading to more deals being blocked. Antitrust experts believe that these changes would disproportionately affect serial dealmakers. James Langston, a partner at Cleary Gottlieb, described the proposals as “breathtaking and astonishing.”

The HSR form overhaul is the first in over four decades and has been highly anticipated by dealmakers. Under the proposed changes, companies would have to provide more detailed information to the Federal Trade Commission (FTC) and the Department of Justice (DoJ) about the parties involved, their respective markets, and how their businesses operate. This increased level of scrutiny would be required during the initial 30-day assessment period, rather than just during the second stage of the approval process, as it currently stands.

While the agencies predict that the new requirements would add 100 hours to the time needed to prepare the forms, dealmakers believe it could take significantly longer. Lina Khan, FTC chair, justified the changes by stating that the current information collected by the HSR form is insufficient for teams to determine whether a proposed deal violates antitrust laws within the initial 30-day period.

The proposal does not specifically highlight private equity firms, but experts believe that certain provisions target them due to their active involvement in dealmaking. Private equity firms were behind approximately one-fifth of global transactions in 2021 and 2022, according to data from Refinitiv. New requirements include disclosing previous transactions over a 10-year period and providing detailed workforce reports to identify significant overlap between the parties involved.

Private equity firms have faced increasing regulatory scrutiny as they have gained significant control over various sectors of the economy. The FTC and the DoJ are both focused on increasing their oversight of buyout groups. Last year, the FTC required JAB, a private capital buyer, to divest 11 veterinarian clinics to address market concentration concerns. The DoJ is closely examining Thoma Bravo’s proposed $2.3 billion take-private of cyber security company ForgeRock, potentially leading to a rare antitrust challenge.

The proposed changes also aim to increase scrutiny on “interlocking” board directors, where representatives from one private equity firm sit on multiple boards in a single sector. Law firms specializing in antitrust issues are likely to benefit from the increased workload resulting from the changes.

While these changes may be positive for antitrust lawyers, some are concerned that they will discourage dealmaking and increase costs for small companies. Critics argue that the agencies are attempting to disfavor private equity as acquirers.