The Federal Trade Commission (FTC) has announced significant revisions to the information required in premerger notification filings made under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR), which will apply to all filings made on or after August 18, 2011. Parties intending to merge, purchase or sell voting securities, non-corporate interests or assets, or engage in certain other acquisition transactions are required by HSR to provide both the FTC and the Antitrust Division of the Department of Justice (DOJ) with information regarding their operations and the proposed transaction, if certain minimum jurisdictional thresholds are met. Based on HSR’s purpose to allow the FTC and DOJ time to detect and potentially address any perceived anti-competitive effects of a transaction, HSR stays the consummation of a covered transaction for the waiting period specified by law.
Revisions to the Premerger Notification and Report Form
The changes announced by the FTC significantly impact the information required to be included on the Notification and Report Form (Form) which is filed with both the FTC and the DOJ in transactions subject to HSR requirements. The new revisions eliminate or streamline a few items on the Form while, at the same time, adding other items particularly applicable to certain types of parties, including private equity funds and other families of investment funds where the acquiring person and other entities are under common investment or operational management.
While prior HSR rules limited the information required to that of “affiliates” of the parties which are entities controlled (for these purposes, generally 50 percent or more owned) directly or indirectly by such parties, the new rules add the term “associates” which is applicable to the acquiring party. An “associate” is an entity that is not an affiliate but nevertheless:
- has the right, directly or indirectly, to manage the operations or investment decisions of an acquiring person (a managing entity)
- has its operations or investment decisions, directly or indirectly, managed by the acquiring person
- directly or indirectly controls, is controlled by, or is under common control with a managing entity, or
- directly or indirectly manages, is managed by, or is under common operational or investment decision management with a managing entity
For example, if ABC Investment Group1 has organized several different investment partnerships, each with its own ultimate parent entity for purposes of HSR, but ABC makes the investment decisions for all its other partnerships, the new rules will require (i) a listing of minority holdings of each of the partnerships of between 5 percent and 50 percent in certain other entities, and (ii) a listing of applicable North American Industry Classification System (NAICS) codes with respect to ABC Investment Group itself as well as all of the other partnerships in an HSR filing made by any one of the partnerships as an acquiring party. The new information required is limited, however, in each case to the extent the businesses of the other entities and the applicable NAICS codes overlap with those of the acquired person in the transaction.
One additional scenario specifically referenced by the FTC in its release of the new rules points to transactions in the energy sector and the frequent use of master limited partnerships, where competitive overlaps among limited partnerships with the same general partner may have gone undetected under the prior rules which required reporting only as to affiliates but would now be included under the associates concept. By requiring information not only on entities controlled by the acquiring party but also those commonly managed, the regulators hope to get a more complete picture of potential antitrust ramifications of an acquisition.
Another new requirement is submission of additional documents which are required to be submitted with an HSR filing pursuant to item 4(d) of the Form. Under this additional item, copies of each of the following are required to be submitted:
- any confidential information memoranda (or any documents meant to serve the function of a confidential information memorandum) that specifically relate to the sale of the acquired entity(s) or assets and that were produced up to one year before the date of the HSR filing
- certain studies, surveys, analyses and reports prepared by investment bankers, consultants or other third-party advisors specifically relating to the sale of the acquired entity(s) or assets and that were produced up to one year before the date of the HSR filing
- studies, surveys, analyses and reports evaluating or analyzing synergies and/or efficiencies with respect to the transaction
Many of these types of documents were previously required to be submitted under the broader language of item 4(c) of the Form – which generally requires copies of all studies, surveys, analyses or reports which were prepared by or for any officer(s) or director(s) (or individuals exercising similar functions) for the purpose of evaluating or analyzing the acquisition with respect to market shares, competition, competitors, markets, or potential for sales growth or expansion into product or geographic markets. The new rules specifically mandate submission of certain types of documents the regulators have found particularly relevant to their analysis of a transaction, regardless of whether the documents also meet the language of current item 4(c).
For example, a confidential information memorandum that was prepared within one year before the date of the HSR filing will now be required to be included regardless of whether it was prepared in connection with the specific acquisition being filed so long as it relates to the sale of the acquired entity(s) or assets based on the FTC’s assertion that confidential information memoranda are particularly useful documents for their analysis – even if there was no acquisition at the time the documents were prepared. Likewise, the additional item regarding studies, surveys, analyses and reports prepared by investment bankers, consultants or other third-party advisors is meant to capture “pitch books” or “bankers’ books” which are developed by investment bankers either during an engagement or for the purpose of seeking an engagement as the FTC indicates that these materials often provide a useful overview of the relevant industry and the potential courses of action available to a company, again whether or not they were prepared in connection with the acquisition.
Item (iii) regarding documents analyzing synergies and/or efficiencies with respect to the transaction now requires submission of any such documents regardless of whether the documents meet the competition-related language of existing item 4(c) provided, however, that financial models without stated assumptions need not be supplied in response to the item. In releasing the new rules, the FTC noted that such synergy analyses submitted with an HSR filing may carry greater weight with the agencies than materials claiming synergies which may be created and submitted at a later time during the investigation of the transaction.
On the other hand, the prior HSR requirement of providing historical revenue data by NAICS code for each of the parties, including information from the base year 2002, has been eliminated. Instead, parties will now be required to report revenues by NAICS code only for their most recent fiscal year with respect to manufacturing and non-manufacturing revenues from operations conducted within the United States as well as manufacturing revenues from products manufactured outside the U.S. and sold in or into the U.S. However, all manufacturing revenues, including those for products manufactured outside the U.S. and sold into the U.S., will now be reportable by 10-digit NAICS product codes while non-manufacturing revenues will be reportable by six-digit NAICS industry codes.
Current Thresholds Remain in Effect
These changes do not impact the size-of-person or size-of-transaction thresholds or exemptions applicable to HSR filings. The thresholds will continue to be adjusted annually based on changes in the gross national product. The current size-of-person threshold will generally be met if one party to the transaction has total assets or net sales of $131.9 million or more and the other party to the transaction has total assets or net sales of $13.2 million or more – provided that this threshold will not apply to transactions valued at $263.8 million or more. The size-of-person threshold is measured at the ultimate parent entity level of each party and includes all entities controlled by each ultimate parent entity. The current size-of-transaction threshold is met if, as a result of the transaction, the buyer party will hold voting securities, assets and/or non-corporate interests of the seller valued in excess of $66.0 million.
While the new rules do not impact the reportability of transactions subject to HSR, the changes will, in many cases, increase the amount of information and documents which will need to be gathered to prepare an HSR filing. It is strongly suggested that parties begin the HSR process as soon as possible in a transaction to anticipate the additional requirements under the new rules.