On September 26, 2023, Americans for Tax Reform submitted a comment letter to the Federal Trade Commission (FTC) requesting the withdrawal of a proposed rulemaking amending the rules that implement the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR). The proposed rule would expand premerger filing requirements for businesses engaged in or thinking about engaging in mergers and acquisitions (M&A). These reforms are particularly harmful to small businesses, their private equity (PE) investors, and the public pensions that invest in PE funds.
The comment letter describes the FTC’s provisions in the proposed rule as arbitrary and capricious due to the burdensome and unnecessary reporting requirements, which would collect proprietary information on transactions as well as personally identifiable information (PII) on limited partners (LPs), lenders, portfolio companies (small businesses), and other entities involved in acquisition related transactions. The regulators:
estimate since “the Commission conservatively assumes that 45% of the filings may require an additional 222 hours to prepare” compliance with the newly issued regulations is estimated to cost $350 million in labor costs alone if enacted.
The FTC fails to make a compelling case for collecting information on LPs. The FTC claims regulators would benefit from having more information available to identify anticompetitive mergers, but the comment letter points out that the FTC never provides empirical evidence showing this requirement is necessary. On the contrary, the provision possesses significant downside in disclosing proprietary contractual provisions which would weaken competition and dealmaking:
The Proposal does not make a convincing case for requiring information on LPs. No evidence is given in the Proposal that doing so would prevent anticompetitive transactions from being identified. Additionally, revealing proprietary information pertaining to clients and acquiring entities would be incredibly harmful. It would undercut competition by exposing proprietary contractual provisions, such as side letters, and preferential treatment agreements between the PE firms and LPs.
Another provision embedded in the proposed rule would require identification of what the FTC calls “Interest Holders that May Exert Influence.” In practice this would essentially mandate any entity providing credit or holding securities, options, or nomination rights for board members of the acquiring entity to be identified in new premerger filings. Of particular concern is the identification requirements for:
Lenders financing transactions “totaling 10% or more of the value of the entity” or holders of non-voting securities, warrants, or options equaling or exceeding 10% of the entity would be identified under new rules. This arbitrary mandate could severely impede access to credit, which is necessary to complete M&A transactions as creditors reconsider lending to avoid divulging sensitive information. Privacy concerns and compliance costs raised by the proposed amendments will undoubtedly reduce access to capital for PE. The suggested 10% credit threshold presents an unreasonable burden given that a sizable number of PE acquisitions are financed with credit above that threshold. This could deter lenders from offering financing and limit investment opportunities for PE funds.
The comment letter then goes on to raise concerns about the prior acquisitions reporting provision. PE firms would be subject to disclosing information on 10 years of past acquisitions, an extension from the current 5-year timeframe. The FTC would also eliminate the reporting threshold entirely, which currently stands at $10 million in total assets or net sales for acquired entities. The letter notes this is an unwarranted regulatory burden lacking justifiability. While the FTC argues it needs possession of additional information to identify patterns of vertical integration and concentration, the comments emphasize the consumer welfare standard being at the forefront of determining any concerns regarding antitrust violations. The letter clarifies that:
Unless the FTC has concrete evidence that an acquisition would lead to an impoverishment or restriction of services or products offered to consumers, it cannot make a conclusive decision restricting the completion of an acquisition; to do so would be arbitrary and capricious.
The comments also highlight that the proposed rules exceed the FTC’s statutory authority. Under the major questions doctrine, as reaffirmed in the West Virginia v. EPA case, the FTC cannot enact rules with significant political or economic consequences unless authorized by Congress. Congress has not authorized the FTC to collect proprietary information from PE firms, their public pension investors, lenders, and the small businesses that rely on PE capital.
The letter concludes by urging the FTC to consider the ramifications of over-regulation in the PE industry. The comments note that public pension funds and state retirement systems serving millions of public employees (e.g., police officers and firefighters) rely on PE firms to generate returns to cover their liabilities:
The risks of hampering acquisitions and investment do not only affect the firms themselves, but also workers and public employees who depend on these firms for their retirement and taxpayers who would bear the costs of excessive regulatory intervention in the financial sector.
The expansion of HSR filing requirements will impede acquisitions and dealmaking in the PE sphere, along with failing to meaningfully curb anticompetitive practices. The costs of these regulations will ultimately be shouldered by ordinary citizens.