On July 7, the Federal Trade Commission (FTC) and Department of Justice (DOJ) announced significant changes to the Premerger Notification Rules under the Hart-Scott-Rodino Antitrust Improvements Act and the Premerger Notification Form. These changes became effective on August 18, 2011. Although the revised form and instructions make changes which in some important respects streamline the filing process, the revised form now requires that the parties submit a new category of documents with their filings – so-called "4(d) documents."
These 4(d) documents fall into three categories:
- "Confidential Information Memoranda" prepared by or for an officer or director (or individuals exercising similar functions) that specifically relate to the sale of the acquired entity(s) or assets;
- Studies, surveys, analyses, and reports prepared by investment bankers, consultants or other third party advisors for an officer or director (or individuals exercising similar functions) for the purpose of evaluating or analyzing market shares, competition, competitors, markets, potential for sales growth or expansion into product or geographic markets that specifically relate to the sale of acquired entity(s) or assets;
- Studies, surveys, analyses, and reports evaluating or analyzing synergies and/or efficiencies prepared by or for an officer or director (or individuals exercising similar functions) for the purposes of evaluating or analyzing the acquisition.
In most cases, "Confidential Information Memoranda" (offering or marketing materials prepared in connection with the sale of a business) will already be filed as responsive to Item 4(c). Item 4(c) of the Premerger Notification Form has long required the filing of studies, surveys, analyses, and reports prepared by or for an officer or director (or individuals exercising similar functions) 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 revised form will, however, require that Confidential Information Memoranda be filed even if they do not contain competitive information.
More significant are the new requirements that materials prepared by third party advisors and materials evaluating or analyzing synergies and efficiencies must now be filed.
Third party advisor materials with competitive information must be filed if they (i) specifically relate to the sale, (ii) were developed during an engagement or for the purpose of seeking an engagement, and (iii) were produced up to one year before the date of filing.
Companies and their advisors should consider these new filing requirements in the materials they prepare or have prepared for them. We'd recommend that:
- Bankers be cautious about including competitive information in their pitch books in the absence of client guidance that this analysis is desired;
- Companies manage the type of information received from third party advisors and potential advisors to clarify when they expect their advisors to provide competitive information; and
- Companies retain materials from third party advisors that may be responsive to the requirements of new Item 4(d) for a one-year period.
In cases where synergies or efficiencies may be a factor in supporting an acquisition, companies should also consider preparing these studies prior to filing as part of the analysis for the acquisition.
The revised rules also introduce the concept of an "associate" and will require that certain information be disclosed regarding the minority ownership positions of associates and overlapping business activities of associates and acquired persons. Associates is a new concept, broadly defined to pick up interlocking management absent a controlling relationship and is likely to particularly impact private equity investors and hedge funds.
We often receive questions about the likelihood of receiving a second request – a formal request for additional information issued by the reviewing agency, typically signaling significant antitrust concerns and, at a minimum, requiring substantial expense and effort by the filing parties. Although the likelihood of a second request ultimately depends on the antitrust issues raised by a particular transaction, each year the FTC and DOJ publish a Hart-Scott-Rodino Annual Report, which includes an abundance of interesting statistics.
By way of example, in fiscal year 2010 (October 1, 2009 through September 30, 2010), the most recent year for which an annual report is available, total premerger notification filings were up significantly from 716 reported transactions in 2009 to 1,166 reported transactions in 2010. This is, however, still significantly below the level of filings from 2004 to 2008 (peaking in 2007 with 2,201 filings).
Perhaps correlatively, as the number of filings has gone down, the percentage of second requests has increased to a high of 4.5% of transactions in fiscal 2009, stepping back to 4.1% in 2010. Those percentages were 2.6% in 2006, 3.0% in 2007, and 2.5% in 2008. In any event, both the number of transactions and percentage of transactions in which a second request is issued remains small (45 in fiscal 2006, 63 in 2007, 41 in 2008, 31 in 2009, and 46 in 2010). Correspondingly, a significant percentage of transactions are granted early termination each year (approximately 74% in fiscal 2010).
While the FTC and DOJ granted second requests for only 46 transactions in fiscal 2010, they granted clearances for further review to determine whether to issue a second request in 222 transactions (or approximately 20% of the transactions eligible for a second request).
Size is not Necessarily Probative of Antitrust Concerns
While there is some correlation between size of a transaction and the likelihood of a second request (almost 60% of reported transactions in fiscal 2010 were below $300 million in transaction value; approximately 44% of second requests were with regard to transactions below $300 million), a significant number of challenged transactions were below $300 million in transaction value (20 out of 46 transactions in fiscal 2010).
HSR Reportability is not Determinative of Antitrust Concerns
It is important to remember that the HSR filing thresholds are simply that – they are arbitrary rule-based filing thresholds and not determinative of whether a particular transaction raises antitrust concerns. Illustrative of this — and perhaps not surprisingly with a lower filing case load — the FTC has stepped up its challenges of consummated transactions (with six in fiscal 2010). With the exception of one transaction, none of the challenged transactions in fiscal 2010 were reportable transactions. This serves as a reminder that a transaction will not necessarily escape antitrust scrutiny solely by virtue of falling below the Hart Scott Rodino reporting thresholds, and that every transaction should be reviewed for possible antitrust concerns.