In the dog days of August 2010 the Federal Trade Commission (with the concurrence of the Antitrust Division of the Department of Justice) published a Notice of Proposed Rulemaking to overhaul the reporting required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR”).1 Commenters on the proposal unanimously applauded the effort to simplify HSR reporting and eliminate requests for information that the reviewing agencies no longer found useful. At the same time, they were alarmed by those parts of the proposal that would extend the reach of HSR reporting into new areas.  

The agencies listened to their critics – mostly. The final rule (see full text at http://www., confirmed the simplification efforts proposed last year, while narrowing somewhat the scope of new and potentially burdensome “4(d)” document requests. The final rule will be most disappointing to families of private equity funds and similarly structured affiliated investment entities, which will need to include additional data on “associate” entities – information that has never been required in the past as part of an initial HSR notification.

Some Much Needed Simplification

The HSR Notification and Report Form, as revised, eliminates the need to provide detailed descriptions of voting securities, assets or non-corporate interests (such as LLC or partnership interests). A filer will no longer be required to provide or list its recent submissions to the Securities and Exchange Commission, nor will it be required to provide interim balance sheets. This is a particular boon to founders and other individual owners who often had to provide a personal balance sheet in addition to financial information on companies they owned.

Revenue reporting will also be simplified. The reporting system still relies on the North America Industrial Classification System (NAICS) to allocate past revenues across product and industry segments, but no longer will filers provide this information for a “base year” (or any year other than the most recent year). In exchange for this concession the agencies will require more detail in the reporting of revenues from manufacturing. First, the most recent year’s manufacturing revenues must be reported by 10-digit product codes instead of 7-digit product class codes. Second, it eliminates the $1 million minimum for reporting non-manufacturing revenue. Finally, it seeks more detailed information about products manufactured abroad and then sold by the manufacturer into the United States. Revenue from those products must now be reported using the 10-digit product classification system instead of a 6-digit non-manufacturing codes used to describe wholesale or retail activity.

Unfortunately, these much needed simplifications may be far outweighed by complications and new burdens imposed by other parts of the HSR Form.

Additional Information Required of Private Equity Funds and Certain Investment Vehicles

The final rule complicates reporting of buy-side transactions by private equity funds, master limited partnerships and other investment vehicles where investment or operational management may be separate from the “ultimate parent” filing the notification. Up until now, the HSR form collected information about the ultimate parent and entities that the ultimate parent controls. Now, the form will collect information about “associates” of the filing party, such as management companies and general partners (each, a “managing entity”), and other funds or investment vehicles managed or advised by such managing entities. An “associate” of the buy-side filer is an entity that:

  • has the right, directly or indirectly, to manage the operations or investment decisions of an acquiring entity; or
  • has its operations or investments decisions, directly or indirectly, managed by the acquiring person; or
  • 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 management with a managing entity.

Information about associates is required only with respect to those parts of the HSR Form that identify affiliate relationships and industry overlaps (i.e., associates engaged in an industry or industries in which the target is engaged). The acquiring party must deliver, with respect to any relevant associate:

  • a list of all minority holdings (greater than five percent but less than fifty percent of the equity) of (1) the target and (2) any associate that, to the knowledge or belief of the filer, derives revenue in the same industry or NAICS code as the target entity or assets;
  • a list of all NAICS codes or industries in which the filer believes both the target entity and any associate (including all entities the associate controls through holdings of at least fifty percent of the equity) generate revenue; and
  • for each overlapping NAICS code or industry identified, the geographic region in which the associate or controlled affiliate of an associate generates revenue in that code or industry.

Fund families where a single general partner or management company manages or advises several different funds will need to examine the holdings of all sister funds and understand and quickly identify the industries and geographic regions in which they operate. If no current database exists with this information, buy-side filings by private equity funds and similar investment vehicles may be substantially delayed until the data can be gathered and analyzed.

Item 4(d) – An Extension of the 4(c) Search

Companies that have filed in the past are familiar with the search for 4(c) documents. A filer is asked to identify and produce all studies, surveys, analyses and reports:

  • that were prepared by or for any officer(s) or director(s) of “ultimate parent” of the filer, or any entity controlled by the ultimate parent and
  • were created for the purpose of analyzing the proposed acquisition with respect to market shares, competition, competitors, market share, potential for sales growth or expansion into new product or geographic markets.

The new category 4(d) documents stand adjacent to 4(c) documents in concept. The instructions for Item 4(d) are designed to capture documents that are helpful to the agencies in their understanding of the business being sold and its market position, but that may fail to meet one or more of the 4(c) criteria.

This category set off alarms when first proposed – commenters feared that any company file that mentioned the target business might need to be produced, even if it was created as long as two years before the transaction. The final rule makes clear that only documents prepared by or for an officer or director (or, in the case of unincorporated entities, individuals exercising similar functions) would make the 4(d) cut. Except for those listed in the third bullet below, the instruction is further limited to officers or directors of the ultimate parent entity and the target entity or business. The timeframe has been reduced from two years to one year before the transaction, and the agencies have made clear that corporate subscriptions to periodicals, market reports or industry databases are excluded, as are any unsolicited materials. That leaves three new 4(d) categories:

  • Item 4(d)(i) asks for (1) all confidential information memoranda (“CIMs”) for a target business that “specifically relate to the sale of the acquired entity(ies) or assets” (whether or not provided to the buyer), and (2) all documents given to the buyer that are “meant to serve the function of” a CIM (but only if no CIM exists).
  • Item 4(d)(ii) asks for (1) documents prepared by investment banks, consultants, or other outside advisers (2) that analyze or evaluate market shares, competition, competitors, and potential for growth or expansion and (3) that specifically relate to the sale of the acquired entity, entities or assets, even if the documents were not prepared to analyze the notified transaction. Further, such documents must be produced only if they were prepared by the outside adviser “during an engagement or for the purpose of seeking an engagement.” Investment bankers’ “pitch books” were identified as particularly helpful to the agencies. Unfortunately, the requirement is not further limited to those pitch books prepared pursuant to an invitation from the company, thus encompassing completely unsolicited – and possibly poorly founded – pitches for work.
  • Item 4(d)(iii) asks for documents presenting efficiencies and synergies analyses prepared to analyze or evaluate the proposed transaction, but only if such analysis or evaluation was prepared by or for an officer or director. Unlike the other two 4(d) categories, the instruction is not limited to officers or directors of the ultimate parent and the target, but may extend to officers or directors of other entities under the ultimate parent’s control. Financial models may generally be excluded, but spreadsheets with detailed statements about assumptions or inputs should be reviewed with some care.

The agencies acknowledge that each category of 4(d) document may have been identified in the past as a 4(c) document and included with the 4(c) exhibits. The instructions make clear that any document produced as a 4(d) document does not need to be separately produced as a 4(c) document. The harder problem is not whether a particular document is a 4(c) document or a 4(d) document, but whether a particular document qualifies as a 4(d) document at all. The agencies have indicated that they expect only documents that reflect a serious analysis of the target entity or assets, and not those that simply list the target in a passing reference. As with many of the evolutionary developments in the HSR arena, the exact parameters of Item 4(d) will be developed through consultation with agency staff on particular documents or categories of material.

What to do?

  • Companies with deals or investments on the near horizon will want to evaluate whether to notify the deal under the current reporting structure or wait until the final rule is effective and file using the new Form and instructions. The effective date is expected to be in mid-August, 30 days after the Federal Register publication.
  • Private equity fund families should plan to develop a mechanism to track “associates” of their potential filers, and to identify the industry codes in which those associates conduct their business.
  • Internal memoranda and instructions for 4(c) searches should be expanded to capture the new category of 4(d) documents.
  • Each company will want to update its NAICS code database to report manufacturing revenues by product code, including foreign manufacturing revenue, if the products are sold in the United States.