Regulatory Updates for M&A and Investing in the United States

On 27 June 2023, the US Federal Trade Commission (FTC) announced proposed changes to the Premerger Notification and Report Form (the “HSR Form”) and associated instructions, and also to the pre-merger notification rules implementing the Hart-Scott-Rodino (HSR) Act. The FTC’s wide-ranging proposal could be adopted and become effective by year-end 2023, and would dramatically change the current merger filing process in the United States for HSR-reportable deals.

If adopted, the proposed rules will likely result in enhanced scrutiny of transactions that may previously not have triggered review given their benign nature, including increases in the number of occasions when parties need to pull-and-refile their HSR forms to provide the agency additional time to review the contents of the HSR forms.

Key changes under the proposal include:

If adopted in its current form, the FTC’s proposal would substantially increase the burden and expense associated with all transactions reportable under the HSR Act, including those that pose little or no competitive concerns.

Merging parties should ensure that they build in considerably more time to prepare their HSR filings, including by not over-committing in acquisition agreements regarding filing deadlines. Currently, it is customary for parties to commit to making HSR filings in Merger Agreements within seven to ten business days – a timeframe that is likely to be challenging if and when the new filing requirements are adopted.

In addition to the proposed changes to the HSR Form discussed above, on 19 July 2023, the U.S. Department of Justice (DOJ) and the FTC released draft revised merger guidelines in an effort to support the Biden administration’s aggressive antitrust enforcement agenda.

Of particular note, the draft guidelines:

The proposed guidelines are not expected to be made final for several months. However, as they are reflective of the DOJ and FTC’s current thinking, companies should be taking them into account with regard to proposed transactions.

Earlier this year, the Committee on Foreign Investment in the United States (CFIUS or the “Committee”) released its Annual Report to Congress for calendar year 2022 (the “Report”). Overall, the Report underscores an increasingly challenging but manageable CFIUS process. Notably, CFIUS required mitigation measures in nearly one out of every four transactions for which a notice was filed, representing a significant increase from historical trends. In addition, parties submitted a record number of filings in 2022.

The Report generally reflects a longer and more challenging CFIUS process, with a significant increase in short-form declarations resulting in requests for full notices, and more reviews of CFIUS notices extending into second-stage investigations. That said, CFIUS continues to approve the vast majority of notified transactions without mitigation.

Transaction parties should take the generally longer and more challenging CFIUS process into account, as well as CFIUS's willingness to use its expanded authorities and resources. Accordingly, it is critical to carefully manage CFIUS considerations and timing early on in US investment and M&A transactions.

In connection with US M&A transactions, domestic and foreign acquirers often establish a US corporate entity as the acquisition vehicle due to tax, liability and other considerations.

Effective as of 1 January 2024, the majority of legal entities incorporated, organised or registered to do business in a US state must disclose information relating to their owners, officers and controlling persons with the Financial Crimes Enforcement Network (FinCEN), pursuant to the newly enacted Corporate Transparency Act (CTA).

The CTA is mainly an anti-money laundering law, and identifies 23 entity types that are exempt from the definition of reporting companies (eg, SEC-reporting companies, insurance companies, tax-exempt entities, subsidiaries of exempt entities). Importantly, a “large operating company” is also exempt if it employs more than 20 employees on a full-time basis in the US, has filed a federal US income tax return for the previous year showing more than USD5 million in gross receipts or sales (not including receipts and sales from sources outside of the US), and operates from physical office premises in the US.

The CTA forces reporting companies to provide identifying information for the beneficial owners of the reporting company. It states that a beneficial owner is an individual who, directly or indirectly, either (a) exercises “substantial control” over a reporting company or (b) owns or controls at least 25% of the ownership interests of a reporting company. Individuals exercise “substantial control” if they satisfy any of the following factors:

A domestic reporting company created before 1 January 2024 must file its initial beneficial ownership information report not later than 1 January 2025. A domestic reporting company created on or after 1 January 2024 must file a report within 30 calendar days of the date on which it receives actual or public notice that its creation has become effective.

In 2022, state legislatures in the US continued to narrow the permissible scope of employee non-competition agreements, while courts enforced them with increased scrutiny.

Furthermore, the FTC started 2023 by proposing a new rule that would impose a general ban on employee non-competes as an unfair method of competition. The FTC is taking public comment, including on various alternatives short of a complete ban. As currently proposed, the ban would not apply to non-competes in the context of the sale of a business by a “substantial” (ie, at least 25%) owner, member or partner.

Dealmakers will need to review the scope of a target company’s non-competes, including those in existence prior to a transaction as well as those entered into in connection with a transaction, and consider whether other protections may be necessary or appropriate, such as an NDA or other long-term employment incentives.

On 4 October 2023, the DOJ announced a new safe harbour policy providing that acquiring companies can be entitled to a presumption that the DOJ will decline to prosecute them if they make voluntary self-disclosures of potential criminal misconduct identified in connection with mergers and acquisitions.

Acquiring companies will now have clear deadlines to self-disclose and remediate in all cases involving aggravating circumstances at the acquired company, provided they satisfy the requirements of the new safe harbour policy.

Acquiring companies should carefully evaluate the DOJ’s heightened scrutiny on compliance due diligence investigations, which could function as a liability shield for an acquirer if properly executed.