US private equities face extra scrutiny under new merger review rules

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Advisers to the world’s largest private equity firms warn new merger notification rules proposed by the US antitrust agency threaten to disproportionately influence serial dealmakers and significantly delay transactions that cross the line.

Changes to the Hart-Scott-Rodino (HSR) form, which companies fill out to notify the Federal Trade Commission and the Department of Justice of deals that exceed a certain threshold, will force purchasing groups to disclose significantly more information in the early stages of a transaction and potentially causing more transactions to be blocked, antitrust experts say.

“It’s astonishing and astonishing in the reach and potential impact it has on the deal,” said James Langston, partner at Cleary Gottlieb in New York. “There’s nothing broken about existing processes.”

The HSR overhaul, as it is often called, is the first in more than four decades and has been widely anticipated by dealmakers.

Under the proposal, companies will be required to submit more detailed information to the FTC and the DoJ about the parties involved, their respective markets, and how the business operates before an initial 30-day assessment period.

Antitrust lawyers say this level of oversight was previously only needed in what is called the second stage of the approval process when the agency asked for more information about some of the deals which raised further concerns.

The agency estimates that this will add another 100 hours to the time it takes companies to prepare forms, although dealmakers believe it could be significantly longer.

Lina Khan, chair of the FTC, said in a statement that “a lot has changed” since the HSR was first put in place, including the increasing complexity and volume of deals. “The information currently collected by the HSR forms is insufficient for our team to determine, within the first 30 days, whether the proposed deal may violate antitrust laws,” he said.

The bodies did not highlight specific sectors or businesses, such as private equity, when announcing the proposals, which will move to a 60-day comment period prior to final implementation.

While the rules apply regardless of the buyer’s funding model, there are certain provisions that experts say specifically target private equity firms, which have been the most active dealmakers over the past decade. In 2021 and 2022 alone, individual purchasing companies accounted for around a fifth of global transactions, according to data from Refinitiv.

Among the list of new requirements is disclosure of previous transactions over a 10-year period and a detailed labor report to identify whether there is significant overlap between the two parties, which lawyers say will ensnare large private equity buyers who own multiple businesses across industries.

“People have realized that private equity can sometimes be shrouded in secrecy in a way that large public companies cannot. It’s hard to know what private equity holds,” said one antitrust lawyer. “[Regulators] aware of the fact that they want to know what’s going on in private equity.”

Private equity firms are increasingly finding themselves in the crosshairs of regulators as their footprint in the US has grown rapidly to the point where they control large portions of the economy. Neither Khan nor Jonathan Kanter, the heads of the DoJ’s antitrust division, have been vocal about their desire to increase scrutiny of deals by buying groups.

Last year, the FTC required JAB’s private equity buyers to divest 11 vet clinics as it completed two major acquisitions due to market concentration concerns, a sign of the agency’s tougher stance on private equity roll-ups – plans by private investors to consolidate such niche sectors. . such as vet clinics and funeral homes.

The DoJ, meanwhile, is keeping a close eye on Thoma Bravo’s $2.3 billion proposal to take privately from cybersecurity firm ForgeRock, which lawyers say could lead to a rare antitrust challenge involving a large private equity deal.

Antitrust regulators are also focusing on so-called “hooked” boards of directors, in which representatives from one private equity firm sit on multiple boards in a single sector. The FTC’s proposed changes seek to improve oversight of how boards exercise their influence by forcing buying companies to identify “board observers” — key dealmakers who monitor investments who don’t hold official board seats.

The attorneys, some of whom said they had received numerous calls from frustrated clients following the HSR announcement, may lament the extra time it took to put the materials together but admit it was ultimately good for them.

An antitrust lawyer said the new rules would likely be “good for my pocket but bad for my personal life” as long as deal volumes were not dramatically affected.

“The real beneficiaries are the antitrust attorneys who specialize in HSR,” said George Hay, a professor of antitrust at Cornell University. “Their bills will increase very substantially especially in the first year as law firms learn the ropes.”

However, a prolonged slowdown in deal making amid a financing environment and tougher regulations have led others to feel that there will be a bigger price to pay if the acquirer drops out.

“This is going to hurt small companies especially by substantially increasing the cost of the deal,” said Eric Laumann, a former litigator who heads North American risk arbitration research at Oscar Gruss.

Regulators “want more information about the structure and holdings of private equity funds and they call it an attempt to get more transparency. I’m skeptical of that view,” said Daniel Culley, a partner at Cleary Gottlieb who focuses on antitrust issues. “I think they’re trying not to like private equity as an acquirer.”

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