US Private Equity transactions face enhanced compliance

Lea Hogg 3 months ago
US Private Equity transactions face enhanced compliance

Delays in private equity transactions may result due to the new merger rules proposed by US antitrust agencies. The proposal is subject to a 60-day discussion before it is approved for implementation.

The changes to the Hart-Scott-Rodino (HSR) form, the disclosure document filed by companies to notify the Federal Trade Commission and Department of Justice of deals exceeding a certain threshold, are expected to introduce stricter reporting requirements, potentially leading to deal delays and even blocked transactions. More detailed information about the parties involved in the transactions, their respective markets, and how the businesses operate, right from the early stages of a deal will need to be disclosed.

2021-2022 were record-breaking years for private equity investors and deals became more complex – ‘it was not a question about buyout any more’ according to a report by Bain & Co.

Previously, this level of scrutiny was typically required only in the second stage of the approval process. The additional burden of compliance is anticipated to increase the time and resources needed to complete the required forms, creating further obstacles for private equity dealmakers. The potential impact to private equity deals may be damaging to the sector as a result of the new process.

Merger review results in more scrutiny

Private equity firms, known for their extensive deal-making activities, are expected to be affected by the rules. The requirement to disclose previous transactions over a 10-year period and provide detailed workforce reports to identify potential conflicts between the involved parties is likely to pose challenges for large private equity buyers with diverse holdings across various industries.

The increased scrutiny on private equity is part of an effort for regulators to focus on the sector due its growing influence and impact on  the economy. Regulators such as the Federal Trade Commission (FTC) and the Department of Justice (DoJ) have expressed their intentions to scale up their supervision on private equity dealmaking. Recent actions, such as requiring divestitures in large acquisitions and thoroughly examining board directorships, demonstrate a more vigilant approach to concerns arising from private equity activities.

This will be the first review in more than 40 years. Sector specialists say that it was expected.

Negative impact on smaller companies

While compliance lawyers may benefit from increased demand for their services as a result of the revised regulations, concerns are growing over the potential impact on deal volume. The prolonged slowdown in dealmaking, coupled with a more challenging financing and regulatory environment, could discourage acquirers and have a negative impact on small companies that rely on private equity investment.

It is believed that the increased reporting requirements are not solely about transparency but rather an attempt to create a less favourable environment for private equity firms as acquirers.

The proposed overhaul rules mark a significant development in the regulation of private equity in the US. If implemented, it will create delays in the closure of deals, increase costs to businesses, and change the landscape of dealmaking. Striking a balance between regulatory oversight and a healthy environment for private equity investments will be crucial to ensure fairness of the market. The 10-year period reporting will include detailed information about the workforce

In 2021 and 2022 alone, buyout firms accounted for about a fifth of global transactions.

The fact that private equity firms are able to impact a large proportion of the economy has motivated regulators to demand more information. As opposed to large public companies, it is sometimes difficult to work out the ownership of private equity firms. There is an element of mystery associated with details of ownership of private equity firms ‘being shrouded in secrecy’.

Regulators will also be focusing on “interlocking” board directors. This can happen when directors from one private equity firm sit on numerous boards in a single sector. Supervision will be increased on how boards can influence buyout firms to identify key dealmakers to monitor investments and deals.
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In summary, the proposed merger review rules will subject US private equity to heightened scrutiny and stricter reporting requirements, resulting in a tougher landscape for dealmaking.

The real beneficiaries will be the antitrust lawyers specialising in HSR. Their billings will increase very substantially especially in the first year as law firms learn the ropes.”

Professor George Hay, Cornell University

Balancing regulatory oversight with the adoption of  a favorable investment environment will be vital to maintain equity and fairness in the market.


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