What you need to know
New Hart-Scott-Rodino requirements will take effect soon, including (i) expanded review of strategic planning documents and (ii) disclosure by private equity funds of competitive portfolio companies in their affiliated funds.
What you need to do
Companies should consider the potential for future antitrust review whenever they engage a strategic planning consultant. Private equity funds should consider the competitive impact of acquisitions in light of portfolio companies held in their affiliated funds.
On July 7, the Federal Trade Commission and the US Department of Justice Antitrust Division announced changes to the Form used for Hart-Scott-Rodino filings. The HSR Form provides advance notice of large mergers to the FTC/DOJ, which use the Form to assess whether a proposed merger raises antitrust questions. More than before, companies should anticipate that documents written by their strategic advisors may come before the FTC/DOJ as part of an HSR filing.
Changes to the HSR Form
The new HSR Form will be published in the Federal Register soon, and it will take effect 30 days after that. The basic HSR filing process will remain the same. The new Form does not alter the rules that dictate which transactions require a filing, and the new Form does not change the filing fee or the HSR waiting period. Changes to the Form may make a material difference, however, to the review process for some transactions.
A broadened set of strategic documents must be reviewed for submission to the FTC/DOJ.
For many years a company filing an HSR Form has been required to provide copies of selected business documents concerning the proposed transaction. Item 4(c) of the HSR Form requires a copy of any Confidential Information Memorandum used in the transaction, as well as any other documents prepared by or for officers or directors for the purpose of the transaction, on subject matters of interest to the FTC/DOJ. Item 4(c) identifies these subject matters as: “market shares, competition, competitors, markets and potential for sales growth or expansion into product or geographic markets.”
The new HSR Form will require additional documents on the same subject matters. In addition to the Confidential Information Memorandum (or equivalent documents), the new Item 4(d) will look to other documents prepared by “investment bankers, consultants or other third party advisors” that address these subject matters. Required documents include “materials developed by third party advisors during an engagement or for the purpose of seeking an engagement.” Companies and their advisors will need to review such documents, going back one year before the date of the HSR filing, in order to determine whether any of them “specifically relate to the sale of the acquired entity(s) or assets.”
This expanded requirement may affect the FTC/DOJ review process in some instances, such as when a Company in a crowded industry engages a consultant to explore its strategic options. Suppose the consultant wrote a report last year that focused on Rival X as the major obstacle thwarting the Company’s growth, recommended a competitive initiative to combat Rival X, and also noted that the Company could consider putting itself up for sale. Suppose that this year the Company decides to merge with Rival X instead. When the Company goes to file its HSR Form this year, the Company will need to submit a copy of last year’s consultant report. The analysis of last year could make it more difficult to explain why the FTC/DOJ should permit the merger. Sometimes strategic planning documents make exaggerated claims. In order to make sure their documents reflect a reasonable perspective, companies in strategic industries should pause to consider antitrust issues every time they engage an investment banker, consultant or other third party advisor.
Private equity funds will need to report competitive overlap in fund families.
The new HSR Form broadens the required reporting by families of private equity funds. Often, where two or more funds are subject to the same management, each fund is treated separately for HSR purposes, as a result of technical HSR definitions. The new Form does not change the rules as to when a fund is required to make an HSR filing, but it does expand the scope of the information that must be reported on the Form. For the new Form, the acquiring party must check whether its sibling funds hold positions in companies that compete against the acquisition target. This is a new requirement.
Base year revenues are no longer required.
The HSR Form requires each party to list revenues broken down into codes under the North American Industrial Classification System. Up until now, this has required reporting revenues for a base year (2002), which has been an onerous task for many companies. The FTC has now eliminated this requirement.
Other technical changes.
The new HSR Form makes other technical changes as well, which may require careful attention in preparing the filing for any given transaction.
Under the new HSR Form, documents written by strategic advisors may be required for submission to the FTC/DOJ. Shifting strategic alliances are an important part of competition in many sectors of our economy. Companies in those sectors should consider deploying antitrust guidance as part of any strategic planning process.