Introduction
Production of additional documents
Information on associates
Revenue reporting requirements
Requirement that parties identify all entities under Hart-Scott-Rodino control
Information on third parties holding between 5% and 50% of certain entities
Information on minority holdings of filing parties
Elimination of need to provide certaindocuments
Addition of non-compete agreements
Comment
Introduction
On July 7 2011 the Federal Trade Commission (FTC) and the Department of Justice announced revisions to the Hart-Scott-Rodino pre-merger notification rules and the Hart-Scott-Rodino form. The new rules and form changes will take effect 30 days after publication in the Federal Register. The purpose of some of the changes is to make Hart-Scott-Rodino filing less burdensome by eliminating requests for information that the agencies have not found useful in their antitrust assessment of transactions. However, other changes, particularly those involving the new concept of 'associate' and those requiring production of a new category of documents (new Item 4(d)), will add to the burden of completing the form. According to the agencies, these changes are justified because they will result in the production of information and documents useful to their antitrust assessment of reportable transactions. This update discusses some of the most significant changes.
Production of additional documents
Filing parties often find that the collection and review of documents responsive to Item 4(c) of the Hart-Scott-Rodino form are the most time-consuming and costly part of the Hart-Scott-Rodino filing process. Item 4(c) requires the production of all documents (including emails and handwritten notes) prepared by or for an officer or director:
"for the purpose of evaluating or analyzing the acquisition with respect to market shares, competition, competitors, markets, potential for sales growth, or expansion into product or geographic markets."
This item, which is intended to provide the antitrust agencies with information useful to its assessment of the competitive effects of the reported transaction, remains unchanged. However, the FTC has added three additional categories of document that must be included in addition to the Item 4(c) documents:
- Item 4(d)(i) – this new item will require the production of confidential information memoranda that were prepared by or for officers or directors of the ultimate parent entity of the acquiring or acquired person or of the acquiring or acquired entity, and that specifically relate to the sale of the entity or assets to be acquired. If no such documents exist, parties must produce any documents given to any officers or directors of the buyer that served the same function as a confidential information memorandum. This item is limited to documents produced within one year of filing.
- Item 4(d)(ii) – this new item will require the production of all documents prepared by investment bankers, consultants or other third-party advisers (engaged by or seeking an engagement with the filing party) for any officers or directors of the ultimate parent entity of the acquiring or acquired person or of the acquiring or acquired entity if such documents contain "4(c) content" and specifically relate to the sale of the entity or assets to be acquired. This item is also limited to documents produced within one year of the Hart-Scott-Rodino filing.
- Item 4(d)(iii) – this new item will require the production of all documents evaluating or analysing synergies and/or efficiencies if they were prepared by or for an officer or director for purposes of evaluating or analysing the reportable transaction. Financial models without stated assumptions need not be provided.
Filing parties should anticipate an increase in the time and cost associated with searching for and identifying documents responsive to new Item 4(d). In addition, parties must also be mindful that the officers and directors covered by the requests in Items 4(c) and 4(d) now differ depending on the specific item. For example, Items 4(c) and 4(d)(iii) apply to officers and directors of the ultimate parent entities of the acquiring and acquired persons and of all entities within their Hart-Scott-Rodino control.(1) Items 4(d)(i) and 4(d)(ii), on the other hand, apply only to officers and directors of the ultimate parent entities of the acquiring and acquired persons and of the acquiring and acquired entities, and not any other entities they control. Finally, there is likely to be uncertainty in complying with new Item 4(d)(i) to the extent that parties do not have confidential information memoranda. In such cases the new instructions require the production of "ordinary course documents and/or financial data shared in the course of due diligence" if such served the purpose of confidential information memoranda.
Information relating to associates
The current Hart-Scott-Rodino rules require that the ultimate parent entity of the acquiring person provide information in its Hart-Scott-Rodino form with respect to all entities under its Hart-Scott-Rodino control. As a result, information about entities that are under common management with an acquiring person, but not under common Hart-Scott-Rodino control, is not included in the present form. The agencies believe that information about competitive overlaps between the acquiring person (including entities under common investment or operational management with the acquiring person) and the acquired entity or assets is important to provide a full picture of the competitive effects of the proposed transaction. The agencies have therefore introduced a new concept – 'associate' – and will now require the acquiring person to provide information about its associates and certain of their holdings.
An 'associate' is defined in the new Hart-Scott-Rodino rules as an entity that is not under common control with the acquiring person, but:
- has the right, directly or indirectly, to manage the operations or investment decisions of an acquiring entity (a 'managing entity');
- has its operations or investment decisions directly or indirectly managed by the acquiring person;
- directly or indirectly controls, is controlled by or is under common control with a managing entity; or
- directly or indirectly manages, is managed by or is under common operational or investment management with a managing entity.(2)
Both Items 6(c) and 7 are affected by these changes:
- Item 6(c) – the form will have a new Item 6(c)(ii) that only the acquiring person will complete. Specifically, the acquiring person must provide information about each of its associates that holds either at least 5% but less than 50% of the voting securities or non-corporate interests of the acquired entity or at least 5% but less than 50% of a corporation or the non-corporate interests of an unincorporated entity which derived US revenues in the most recent year in any six-digit North American Industry Classification System (NAICS) code in which the acquired entity/assets also derived US revenues. If the NAICS codes of the entities in which associates hold minority interests are not known, the acquiring person should answer this new item based on whether its associates hold minority interests in entities that operate in the same industries as the acquired entity or assets. In addition, the acquiring person may rely on regularly prepared financials if they are no more than three months old to identify its and its associates' minority investments.
- Item 7 – Item 7 currently requires identification of NAICS code overlaps between the acquiring person (including all entities under common Hart-Scott-Rodino control with such person) and the acquired entity or assets. In addition to this information, new Item 7 will require the acquiring person to identify the names of any of its associates that also derived revenues in the six-digit NAICS code(s) used by the acquired entity or assets and certain information about the geographic areas in which its associates derived revenues in such overlapping codes.
These revisions will primarily affect certain types of acquiring person (eg, master limited partnerships and private equity funds). However, they will certainly increase, in many cases quite substantially, the burden of completing Hart-Scott-Rodino forms by such acquiring persons.
Revenue reporting requirements
Item 5 of the Hart-Scott-Rodino form currently requires the parties to a transaction to report certain US revenues classified by NAICS codes for the most recent year and for a base year – currently 2002.(3) The most significant change to Item 5 is the elimination of the requirement to report historical (currently 2002) US revenues. In addition, parties will no longer be required to provide information on "added or deleted" manufactured products. Instead, the parties will be required only to provide revenues for the most recent year, broken down by six-digit NAICS codes for non-manufacturing activities (as is currently required) and by 10-digit NAICS codes for manufacturing activities (instead of the seven-digit NAICS codes currently required).
Another change to Item 5 relates to the proper NAICS codes to use in connection with a party's manufacturing outside of the United States of products that are sold into the United States. The new form will require that parties provide revenues related to manufacturing operations conducted outside of the United States to the extent that such operations result in sales in or into the United States whether at the wholesale or retail level or directly to customers. Such revenues would be reported under a 10-digit manufacturing NAICS code.
The revisions to Item 5 will significantly decrease the burden of responding to Item 5.
Requirement that parties identify all entities under Hart-Scott-Rodino control
Item 6(a) currently requires that filing parties list and provide the full addresses for entities under their (or in the case of the acquired person, under the acquired entity's) Hart-Scott-Rodino control, regardless of whether the entity is located in the United States, with total assets of at least $10 million. This requirement can be particularly burdensome for large corporations with numerous foreign subsidiaries. The new form decreases the burden by requiring that filing parties list:
- responsive US entities under common Hart-Scott-Rodino control; and
- responsive foreign entities under common Hart-Scott-Rodino control that have sales into the United States.
In addition, filing parties will only be required to provide a city, state, and country (not a street address) for all entities listed in Item 6(a).
Information on third parties holding between 5% and 50% of certain entities
Item 6(b) currently requires information about the third parties that hold at least 5% but less than 50% of the voting securities of corporations under common Hart-Scott-Rodino control with the acquiring person or of the voting securities of corporations under common Hart-Scott-Rodino control with the acquired entity. New Item 6(b) would require information about third parties that hold at least 5% of the voting securities or non-corporate interests of corporations or unincorporated entities only for the acquired entity and only for the acquiring entity and its ultimate parent entity. For natural persons, third-party holders of at least 5% of corporations or unincorporated entities would need to be identified only for the top-level corporate or unincorporated entities under the Hart-Scott-Rodino control of such natural persons. In addition, this item would be extended to request identification of the general partners of limited partnerships, regardless of what percentage they hold in such partnerships.
Information on minority holdings of filing parties
In addition to the above noted changes with respect to associates, new Item 6(c) requires that both filing parties list their minority holdings – of at least 5% but less than 50% – of the voting securities or non-corporate interests of an issuer or unincorporated entity with total assets of at least $10 million (current Item 6(c) requests information only on 5% stockholders of corporations). In addition, under the new form, the acquiring person would list only its responsive minority holdings of entities that derived dollar revenues in the most year in the same six-digit NAICS code(s) as the acquired entity or assets. Similarly, the acquired entity would list only its minority holdings in entities that derived revenues in overlapping six-digit NAICS code(s) with the acquiring person.
Elimination of need to provide certain documents
Item 4(a) currently requires that filing parties provide documents or Internet links to certain documents submitted to the Securities and Exchange Commission (SEC), such as their most recent 10-K filing. The changes to the Hart-Scott-Rodino form would simplify this requirement. Under new Item 4(a), parties will provide only the names and Central Index Key number for all entities under common Hart-Scott-Rodino control with them that file annual reports with the SEC.
Item 4(b) currently requires that filing parties provide the most recent annual report, annual audit report and regularly prepared balance sheet of the person filing notification and each unconsolidated US issuer included within that person. New Item 4(b) would require parties to provide only the most recent annual report and/or annual audit reports (and not the most recent balance sheet) of the person filing notification and each unconsolidated US entity included within such person.
Significantly, natural persons who are filers would need only to provide annual reports and/or annual audit reports for the highest-level entities under their control. Personal balance sheets would no longer be required.
Addition of non-compete agreements
Currently, and with some exceptions, parties are now required to file copies of their executed agreement. This request (re-numbered new Item 3(b)), will be extended to require additionally that parties file executed agreements not to compete. If, at the time of the Hart-Scott-Rodino filing, the parties' most recent version of a non-compete is still in draft and not yet executed, they would be required to produce the most recent draft.
Comment
Other changes to the Hart-Scott-Rodino form are intended to streamline the notification process. Companies should review all changes, particularly those related to the production of additional documents (Item 4(d)) and those related to the new associate concept, and consult counsel in advance to evaluate their impact on the Hart-Scott-Rodino notification and review process. In addition, parties should assume that the time to prepare the new filing and the costs of doing so will increase, at least in the short run. Private equity funds and other entities should also consider identifying their associates as part of the ordinary course of their business to reduce the time it will take them to prepare Hart-Scott-Rodino filings when needed.
Endnotes
(1) The Hart-Scott-Rodino regulations define 'control' as holding 50% or more of the voting securities of a corporation or having the contractual power to designate 50% or more of its directors. Control of a partnership or limited liability company (LLC) is defined as having the right to 50% or more of the profits of the partnership or LLC or the right, in the event of dissolution, to 50% or more of the assets of the partnership or LLC, taking preferential distributions into account.
(3) The acquiring person provides US revenues for its ultimate parent entity and all entities under the Hart-Scott-Rodino control of the ultimate parent entity. The acquired person provides US revenues only for the entity or assets being acquired. This will not change.
For further information on this topic please contact Michele S Harrington at Hogan Lovells US LLP's McLean office by telephone (+1 703 610 6100), fax (+1 703 610 6200) or email ([email protected]). Alternatively, contact Leigh Oliver or Michaelynn R Ware at Hogan Lovells US LLP's Washington DC office by telephone (+1 202 637 5600), fax (+1 202 637 5910) or email ([email protected] or [email protected]).