On July 7, 2011, the Federal Trade Commission (“FTC” and, together with the Antitrust Division of the Department of Justice, the “Agencies”) publicly announced the final amendments to the rules (the “HSR Rules”) promulgated under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”), the Premerger Notification and Report Form (the “Form”), and the related instructions. The revisions will become effective 30 days after the date of publication in the Federal Register, which is expected to take place within the next few days. According to the Agencies, the changes were intended to streamline the Form by eliminating the need to report information that has not proved useful in the Agencies’ review of proposed transactions, as well as to address certain shortcomings in the current Form by eliciting more information in other areas. The new requirements that will take the most effort for filing parties and their counsel to conform to and address are those relating to “Associates” (Item 6(c)(ii) and Item 7), additional documents (Item 4(d)), and revenue information (Item 5).
Information Regarding Associates: New Item 6(c)(ii) and Revised Item 7
Currently, acquiring persons are only required to report information regarding its ultimate parent entity (“UPE”) and any entities that the UPE “controls” (as defined by the HSR Rules). The newly defined term “Associate” directly impacts the way acquiring persons will report under Items 6(c)(ii) and 7. An “Associate” of an acquiring person is an entity that is not under common control with the acquiring person but: (A) has the right, directly or indirectly, to manage the operations or investment decisions of an acquiring entity (a “Managing Entity”); (B) has its operations or investment decisions, directly or indirectly, managed by the acquiring person; (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.
Under new Item 6(c)(ii) and revised Item 7, acquiring persons are required to report all Associates’ minority holdings (i.e., five percent or more but less than 50 percent) of entities that, to their knowledge or belief, operate in the same six-digit NAICS industry code as the target entity(ies) or assets, and provide geographic information regarding the activities of controlled investments of such Associates that, to their knowledge or belief, overlap with the target entity(ies) or assets. Identifying and tracking Associates and their five percent or greater investments greatly expands the recordkeeping and disclosures required to be made by certain buyers, particularly private investment firms and master limited partnerships, which may have complicated structures encompassing many separately-operated portfolio companies controlled by numerous UPEs, the ownership and management of which is spread across a web of unconsolidated entities. While filing parties are permitted to list all minority holdings of Associates, the Agencies have expressed a preference for the response to Item 6(c)(ii) to be limited to such holdings that overlap with the target entity(ies) or assets, as it allows them to determine more quickly whether there are competitive issues with such holdings and the proposed transaction. If the filing party is unable to obtain the six-digit NAICS codes for minority holdings of Associates, general industry categories (e.g., pharmaceuticals), based on the filing party’s knowledge or belief, may be substituted in determining whether there is an overlap for purposes of Item 6(c)(ii). The expansion of Item 7 means that geographic information regarding overlapping activities must now be provided for Associates and their controlled or managed investments, as well as entities controlled by the acquiring person.
Enhanced Document Production Requirements Under Item 4(d)
Under Item 4(c) of the Form, filing parties have already been required to submit “studies, surveys, analyses and reports which were prepared by or for any officer(s) or director(s) (or, in the case of unincorporated entities, 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.” However, to reconcile various filing parties' interpretations of Item 4(c), the FTC introduced a new Item 4(d), which encompasses the three general categories of documents set forth below.
Item 4(d)(i): Confidential Information Memoranda.
Even though some parties previously submitted confidential information memoranda (or “CIMs”) and similar documents under Item 4(c), Item 4(d)(i) now requires CIMs to be submitted even if they do not contain any analysis with respect to market shares, competition, competitors, markets, potential for sales growth or expansion into product or geographic markets. Furthermore, such documents must be submitted even if they were not prepared to evaluate or analyze the specific acquisition that is the subject of the filing, so long as the document relates to any sale of the target entities or assets. However, Item 4(d)(i) is limited to documents prepared by or for any officer(s) or director(s) (or, in the case of unincorporated entities, individuals exercising similar functions) of the UPE of the filing party or of the buyer or target entity(ies). Unlike Item 4(c), which does not have a specific time restriction, documents only need to be produced under Item 4(d)(i) if they were prepared up to one year prior to filing.
To the extent that no actual CIM exists that would be reportable under Item 4(d)(i), filing parties must submit any documents given to any officer(s) or director(s) of the buyer meant to serve the function of a CIM. The FTC has indicated that company overviews circulated to a prospective buyer would serve the function of an offering memorandum, and therefore should be produced if there was no CIM. Item 4(d)(i) specifically exempts any ordinary course documents and/or financial data shared in the course of due diligence, except to the extent that such materials served the purpose of a CIM.
Item 4(d)(ii): Studies, surveys, analyses and reports prepared by investment bankers, consultants or other third party advisors. The FTC has indicated that many filing parties already submit various third party materials, which assist the Agencies in their initial review due to the competition-related content contained therein. The main differences are that new Item 4(d)(ii) now requires the submission of third party materials prepared during or for the purpose of seeking an engagement, even if they do not specifically contemplate the proposed transaction, or if they were unsolicited. To be reportable under Item 4(d)(ii), a third party-prepared document must evaluate or analyze market shares, competition, competitors, markets, potential for sales growth or expansion into product or geographic markets that specifically relate to the sale of the target entity(s) or assets. Similar to Item 4(d)(i), parties will need to submit third party documents that were prepared up to one year prior to filing for any officer(s) or director(s) (or, in the case of unincorporated entities, individuals exercising similar functions) of the filing party’s UPE, the buyer or the target entity(ies).
It should be noted that many of the documents now required to be submitted under Item 4(d)(ii) may be subject to confidentiality agreements with third parties, and may require filing parties to obtain waivers unless appropriate carve out language is included. Other potentially responsive documents may be privileged and will require special treatment.
Item 4(d)(iii): Studies, surveys, analyses and reports evaluating or analyzing synergies and/or efficiencies. New Item 4(d)(iii) captures documents relating to synergies and efficiencies to the extent they were prepared by or for any officers or directors (or, in the case of unincorporated entities, individuals exercising similar functions) for the purpose of evaluating or analyzing the acquisition. While new synergy arguments may be introduced at any time, the Agencies note that “documents submitted with an HSR filing in response to Item 4(d)(iii) may carry greater weight with the Agencies than materials claiming synergies created and submitted at a later time during an investigation.”1
Revenue Information: Revised Item 5
The process of collecting and presenting revenue information under revised Item 5 will be substantially different from before. The key addition to Item 5 is the requirement to report revenues by 10-digit NAICS product codes for products manufactured outside the U.S. but sold in or into the U.S., including sales to entities within the same filing person. This addition is intended to capture competing sales within the U.S., where one of the filing parties has its manufacturing operations abroad. To the extent that the filing person manufactures a product outside the U.S. but sells it within the U.S., revenues are required to be reported both as the transfer price under the ten-digit NAICS product code and as the sales price under the six-digit NAICS industry code.
The current requirement to provide base year (previously 2002) revenue information under Item 5 has been deleted under the new HSR Rules, which may significantly reduce the burden of compliance, particularly for financial buyers who may have had difficulty gathering outdated revenue information for entities or assets that may have only been recently acquired. The reporting of joint venture details under Item 5 has also been streamlined.
Company websites. The Agencies review company websites in order to “learn more about the filing person, as well as to find information that might relate to the structure of the transaction,”2 and now company website information is specifically required to be listed under revised Item 1(a). Filing parties should review any company websites that are listed to make sure that they are up-to-date and accurately describe the nature of the investment and the filing party’s business.
Reconciling the treatment of corporate and non-corporate entities. The Agencies are implementing changes to several sections in order to bring the treatment of non-corporate entities more in line with the treatment of corporations. While this may not substantially increase the burden of compliance to all parties, repeat filers whose structures include non-corporate entities should be aware of the changes and plan accordingly, particularly when certifying Items 6(b) and 6(c) which previously did not require the disclosure of certain ownership details for non-corporate interests.
Non-compete agreements. Non-compete agreements must be included in addition to acquisition agreements under re-designated Item 3(b).
Other streamlined sections. Certain other changes have streamlined the Form in order to only include details that the Agencies find helpful in their initial review. Items 4(a) no longer requires filing parties to include copies or links to SEC filings. The names of entities that file annual reports on Form 10-K or Form 20-F, along with their CIK numbers, will suffice. The most recent regularly prepared balance sheet is no longer required to be included in Item 4(b). To the extent that the annual report or annual audit report does not show that the size of person test will be met, the Agencies will allow the filing party to stipulate as such if the size of person test is relevant. Item 6(a) no longer requires filing parties to list full headquarters mailing addresses (only the city and the state or foreign country, as applicable), and need not include foreign entities that do not have sales in or into the United States. Filing parties may rely on their regularly prepared financial statements (for Item 6(c)(i)) and those of their associates (for Item 6(c)(ii)) that list their respective investments, provided the financial statements are no more than three months old. While these changes should save time in preparing the Form for new filers, repeat filers should remove any non-relevant information when updating the Form for a new transaction.
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The changes to the HSR Rules are likely to cause filing parties and their HSR counsel to take longer to gather and compile the required information and documents than they have in the past. Therefore, as transaction documents are being drafted, counsel should be wary of any covenants that impose a requirement to submit HSR filings within a very short timeframe. HSR counsel should be involved as early as possible in order to ensure that the new requirements can be adhered to on a timely basis.