The Federal Trade Commission and the Department of Justice recently announced amendments to the rules and reporting requirements associated with premerger notification filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the HSR Act). The agencies have said that they anticipate that the changes will reduce the filing burden on parties, streamline the HSR form, and expedite the filing process. However, in certain circumstances, the amendments may actually increase the filing burden on some parties by creating new or expanded disclosure obligations. Particularly in light of the increased requirements to submit documents with the initial HSR filing, companies and their transaction counsel will need to consult at an early stage with their antitrust advisors to ensure that they will have the necessary complete filing to start the HSR waiting period.
The most significant of the changes include the following:
- Introduction and definition of “associates,” a concept that requires parties to disclose information about additional entities that are under common management with the acquiring entity. Currently, such information is only required for entities under common control (as narrowly defined by the HSR rules). This is likely to impact most significantly large noncorporate entities with complicated management structures, as is common in many investment funds.
- Obligation to provide certain business documents in addition to the narrow category of competition documents already mandatory under Item 4(c). This broadened scope of required document production may substantially increase the diligence process for collecting and identifying responsive documents that must be submitted with the HSR notification.
- Elimination of the “base year” revenue reporting requirement that required parties to allocate historical revenue data by industry codes. However, the amendments also expanded the revenue reporting obligations for the most recent fiscal year.
The final rules will take effect in mid to late August 2011, 30 days after they are published in the Federal Register.
Introduction of Reporting Requirements on “Associates”
The current HSR form requires parties to report on information from the so-called “Ultimate Parent Entity” (UPE)1 of each party to the transaction, as well as any entity the UPE controls.2 The “UPE” and “control” definitions under the HSR rules are fairly narrow, and do not always reflect the business realities of actual control and ability to influence competitive actions. The amendments will require additional reporting information about “associates” of the acquiring person in order to analyze the holdings of entities that are under common management with the acquiring person, even if not under common control. “Associate” is defined as follows:
[A]n entity that…: (A) has the right, directly or indirectly, to manage the operations or investment decisions of an acquiring entity (a “managing entity”); or (B) has its operations or investment decisions, directly or indirectly, managed by the acquiring person; or (C) directly or indirectly controls, is controlled by, or is under common control with a managing entity; or (D) directly or indirectly manages, is managed by, or is under common operational or investment management with a managing entity. 16 C.F.R. § 801.1(d)(2).
This revision would allow the agencies to assess the potential competitive impact of those entities, which as the result of common management, may be considered to be under the effective control of a single entity and that may have potential competitive overlapping interests in the same industry as the target. Accordingly, parties are required to file additional information regarding (1) competitively relevant minority holdings of entities that are under common management with the acquiring person; and (2) minority and controlling interests of associates that overlap with the acquired entity. In recognition of the burden imposed on parties by these additional requirements, the revised form and instructions provide for several measures to ease these reporting obligations.
Required Documents No Longer Limited to Just “4(c)” Competition Material
The change that will affect all transactions is the expansion of the documentary materials that will now be required in filings after mid to late August 2011. Implementation of new Item 4(d) requires the submission of certain documents in addition to the competition documents currently required by Item 4(c), likely increasing the burden to and diligence required of filing parties. The current Item 4(c) requires submission of documents 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.”
The amendments clarify that parties must also submit Confidential Information Memoranda that specifically relate to the entity or assets to be sold, regardless of competition-related content, as well as those competition documents prepared by third-party advisors during an engagement or for purposes of seeking an engagement that specifically relates to the entity or assets to be sold. Moreover, the amendments also require the submission of documents related to the synergies or efficiencies of a proposed transaction.
Decreased and Increased Reporting Obligation for Revenue Data
The amendments to the revenue reporting requirements may both increase and decrease the burden to filing parties. The current form requires parties to provide historic revenue information—revenue data allocated by applicable North American Industry Classification System (NAICS) codes for base-year 2002—as well as data for the most recently completed year. The revised rules eliminate the requirement for base-year revenue data, decreasing the burden on some parties who may not have had this information readily available.
However, the revisions also increase the burden on some parties who must provide manufacturing revenues for the most recently completed year by the more detailed 10-digit NAICS codes instead of the broader classification currently required with the seven-digit NAICS codes. Additionally, while the current form requires only reporting of revenues derived from U.S. operations, the new form requires parties to identify the 10-digit NAICS product codes and revenues for each product they manufacture outside the United States and sell in the United States at the wholesale or retail level, or that they sell directly to customers in the United States.