On August 13, 2010, the Federal Trade Commission (the “FTC”) announced a series of proposed amendments to the rules and notification form required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR”). The proposed changes have not yet been enacted, but the period for public comments expired on October 18, 2010. There are two proposed changes, in particular, which could substantially impact some private equity deals.
Additional Document Disclosures
First, HSR currently requires that parties to proposed mergers, certain other business combinations, and acquisitions of a certain size notify the FTC and the Department of Justice (“DOJ”) by completing a premerger Notification and Report form. Currently, the form calls for the submission of information regarding the transaction and its parties, such as a description of the transaction, information about the parties’ parents, subsidiaries and major shareholders as well as certain revenue data.
“[P]rivate equity firms . . . [would be required to] devote time and resources to identifying “associate” entities and ensuring the collection of all requisite information, including additional documents required to be produced by Item 4(c) and, if adopted, Item 4(d).”
In order to comply with HSR, a party must produce with its filing documents that were prepared by or for an officer or director “for the purpose of evaluating or analyzing the acquisition with respect to market share, competition, competitors, markets, potential for sales growth or expansion into product or geographic markets” where such documents were created for the purpose of evaluating the proposed transaction. This is required pursuant to Item 4(c) of HSR.
The proposed amendments would add a new Item 4(d), which would widen the scope of the required production by: (1) eliminating the requirement that documents have a relationship with the proposed transaction, (2) requiring production of any ordinary course studies and competitive analyses prepared by third party advisors, such as investment bankers and consultants, that reference the entity or assets to be acquired if they were prepared within two years of the proposed transaction and (3) requiring production of documents that analyze potential synergies or efficiencies resulting from the proposed transaction. Put simply, this will potentially increase the burden of premerger document collection and production.
The additional requirements come in the wake of some high-profile civil penalties for failure to comply with Item 4(c). In October 2007, the DOJ secured a $550,000 civil penalty from Iconix Brand Group, a New York-based owner of fashion brands, for its failure to submit 4(c) documents related to its acquisition of a clothing brand, Rocawear. The undisclosed documents included a presentation to the Board of Directors as well as emails between the directors and officers regarding the acquisition. Notably, the DOJ investigated, and ultimately fined Iconix even though it determined that the underlying transaction presented no antitrust violation.
Just a few months later, in December 2007, the government obtained a $1.1 million civil penalty in federal court in Washington, D.C. against Value Act Capital Partners LLC for its failure to make appropriate premerger notifications in three separate acquisitions of stock between 2003 and 2007. The FTC considered the remedy appropriate in light of ValueAct’s repeated and pervasive disregard for its duties and obligations under HSR.
Introduction of the “Associate” Concept
Another proposed amendment involves the introduction of the term “associate” to the HSR form. At present, an acquiring person must report information about entities that it “controls,” where control is defined narrowly to include only those entities in which the acquiring person holds at least 50 percent of the voting securities of a corporation, or has the contractual right to designate at least half of the directors, or, in the case of a non-corporate entity, to receive at least half of the profits or assets upon dissolution.
However, the revised form would require an acquiring person to report information about entities it controls as well as information about “associate” entities. An “associate” entity would include any entity that is under common management, but not necessarily control, of the acquiring person. Specifically, this requirement would compel the disclosure of: (1) the names of all entities in which the acquiring company’s associates hold at least a 5 percent but less than 50 percent interest and which derive revenues in the same industry; (2) identification of each industry in which any associated entity and the acquired entity both derive revenue; (3) the name of the associate entity and any entity it controls that derives revenue in the same industry as the acquired entity and (4) identification of the respective geography in which the associated entity or any entity it controls derives revenue that is the same industry as the acquired entity or assets.
This change could impose burdens on certain private equity firms since they must now devote time and resources to identifying “associate” entities and ensuring the collection of all requisite information, including additional documents required to be produced by Item 4(c) and, if adopted, Item 4(d). This burden will be exacerbated for filers that have to marshal such information and documentation from associated investment funds with holdings that may frequently change.
Thresholds for Filing Have Increased
The proposed amendments described above have not been adopted. However, there have been effective changes with respect to the annual adjustments in the thresholds for filing. The revised thresholds are slightly higher for 2011. Effective February 24, 2011, an HSR notification is required if the “size of the transaction”: (i) exceeds $263.8 million (up from $253.7 million); or (ii) is between $66.0 million (up from $63.4 million) and $263.8 million provided that one filing party has more than $131.9 million (up from $126.9 million) in total assets or annual net sales and the other filing party has more than $13.2 million (up from $12.7 million) in total assets or annual net sales (this latter requirement being known as the “size of person” test). The fees for filing, however, have remained the same and still range from $45,000 to $280,000 based on the value of the transaction.
As the proposed changes have yet to be enacted, we will continue to monitor the situation and provide updates as they become available.