On July 7, 2011, the Federal Trade Commission (“FTC”) and U.S. Department of Justice (“DOJ”) announced significant amendments to the Rules and Regulations under the Hart-Scott-Rodino Act of 1976 (“HSR Act”), which imposes premerger notification and waiting period requirements on transactions meeting certain thresholds. These amendments are the most comprehensive set of changes since the HSR Act became effective in 1978.
Several of the changes streamline the filing process by eliminating certain sections of the Premerger Notification and Report Form (the “Form”) that have long been considered obsolete. On the other hand, other changes will likely increase HSR compliance burdens for filing companies, including the cost and amount of time needed to prepare for a filing. In particular, they will fundamentally change the way some companies prepare HSR filings, to include (1) the types of documents that must be collected; (2) the methods by which companies maintain and compile annual financial data; and (3) the systems in place to collect certain information from non-controlled “associates” of the acquiring person.
The amendments will be effective 30 days after publication in the Federal Register, which is likely to occur within the next few days. Any transactions notified to the agencies on or after that date must use the newly amended Form.
New Item 4(D) Documents — Expands Range Of Documents That Must Be Submitted With All HSR Filings
Item 4(c) of the Form currently requires the production of documents created "by or for" officers or directors of the filing party for the purpose of evaluating or analyzing the transaction with respect to "market shares, competition, competitors, markets, potential for sales growth, and the potential for expansion into new products or geographic markets." The requirements for Item 4(c) remain unchanged under the new Rules. However, the amendments require production of a new category of documents known as “Item 4(d) documents,” which include:
- Confidential Information Memoranda
Under the current HSR Rules, transaction-specific memoranda must be included with a filing only if they constitute 4(c) documents, as described above. New Item 4(d) will expand the scope of search and production to include all Confidential Information Memoranda (“CIMs”) prepared within the past year that specifically relate to the sale of the acquired entity or assets, even if such documents were not prepared in connection with the transaction triggering the filing requirement and do not contain 4(c) content. If no such memoranda exist, the new Rules require parties to submit all information given to any officer(s) or director(s) of the buyer meant to serve the function of a CIM. The agencies do not define the types of documents that serve the function of a CIM, but suggest that a seller’s pre-existing presentation given to a buyer as an introduction to the company/assets would qualify. In response to concerns during the comment period that Item 4(d) could encompass a large volume of documents exchanged during due diligence, the FTC asserted that the Item is not intended to require ordinary course documents and/or financial data shared in the course of due diligence, except to the extent that such materials are shared specifically to serve the purpose of a CIM.
- Third-Party Analyses
In addition to CIMs, the agencies have revised the Form to require production of documents prepared by investment bankers, consultants or other third-party advisors. In particular, new Item 4(d) requires the production of all documents which specifically relate to the acquired entity or assets, and which were prepared by third-party advisors for an officer or director over the previous year for the purpose of analyzing market shares, competition, competitors, markets, potential for sales growth or expansion into product or geographic markets. This Item is aimed at the production of “bankers” or “pitch” books, or documents developed by third party advisors during an engagement or for the purpose of seeking an engagement, created within one year of filing, and which address competitive issues. In response to concerns raised during the comment period, the agencies clarified that this Item does not require the submission of corporate subscriptions to market research, information received by financial investors or unsolicited financial and market analyses from investment bankers. As the agencies note, many filing parties already submit similar material in response to Item 4(c). However, while Item 4(c) only requires the submission of materials created for the purpose of evaluating or analyzing the proposed acquisition, new Item 4(d) seeks to obtain third party documents which relate to the to-be-acquired entity or asset. Under the new rules, all parties would be required to submit these materials at the outset with their HSR filing, even if the proposed transaction poses no competitive concern.
- Efficiencies/Synergies Documents
New Item 4(d) also requires submission of all studies, surveys, analyses or reports evaluating or analyzing synergies and/or efficiencies that were prepared by or for an officer or director in connection with the transaction. Under the prior rules, parties were not required to submit such documents in the absence of separate, competition-related (i.e., 4(c)) content. However, in adopting the new requirement, the FTC concluded that the benefits to the agencies in receiving these documents outweighed the burden on the filing parties to produce them. The agencies fail to outline what types of documents fall within this sub-category of Item 4(d), but do specify that financial models without stated assumptions need not be provided.
Revisions To Item 5 Revenue Data — Some Requirements Eased, But Significant New Burdens Imposed
Item 5 currently requires reporting of revenue from the reporting party’s “operations conducted in the United States” classified by North American Industrial Classification System (“NAICS”) codes for the “base year” (currently 2002) and the most recently completed fiscal or calendar year. Additional revenue data for products added or deleted (“add-delete”) between the base year and the most recent year also are required. Under the new rules, the requirements to report the base year and the "add-delete" information have been eliminated.
For many multinational companies, the benefit of eliminating the base year and the add-delete sections may be more than offset by increased burdens associated with a new requirement to report, under NAICS manufacturing codes, revenues for foreign-manufactured products sold into the U.S. Presently, revenues from a filing person’s foreign manufacturing operations need only be reported in Item 5 if the goods in question pass through related "U.S. operations" of the filing person, such as warehouses, and then only under relatively simple wholesaling codes. Direct shipments from foreign manufacturing operations to U.S. customers currently fall outside Item 5 reporting because there are no U.S. operations involved. However, under the new rules, direct shipments will have to be reported under detailed NAICS manufacturing codes, as will shipments from a company’s foreign manufacturing plants to its U.S. sales operations. These changes will significantly increase the compliance burden on companies that have foreign manufacturing operations selling into the U.S.
New Item 6(C)(II) — Requires Acquirers To Identify Minority Holdings Of "Associates" In Entities That Overlap With The Target/Acquired Entity
Item 6(c) now requires filing persons to report investments of 5% or more (but less than 50%) in other corporations. However, new Item 6(c) will expand reporting by acquiring persons to include minority investments held by its “associates,” which are entities under common management with the acquiring person, but not under common “control” as defined by the HSR regulations. Examples of associates include general partners of a limited partnership, other investment funds whose investments are managed by a common entity, other partnerships with the same general partner and oil and gas “master limited partnerships.” Under the newly-announced rule, an acquiring person must report all of its associates’ minority investments of 5% to 49% in entities that derive revenue in any of the same 6-digit NAICS codes as the target. The agencies have acknowledged that some filing parties will face an increased burden in initially gathering this information and, as a result, parties may rely on regularly prepared financials that list investments, provided such financials are no more than three months old at the time of filing.
Revisions To Item 7 — Expands Requirements For Reporting Product Overlaps
Item 7 currently requires all filing persons to identify NAICS code “overlaps” between the parties to the transaction. In a change most directly aimed at private equity firms and master limited partnerships, this requirement is now extended to identify overlaps with “associates” (as described above). An acquiring person must now identify overlaps for each entity that is controlled by its “associate” and has NAICS codes that overlap with the acquired entity or assets.
The revisions to the HSR Rules and Regulations remove several categories of information currently required in the Form, but also call for new categories of information and documents beyond what was previously mandated by the agencies. As a result, companies may need to consider internal changes in the processes and systems that they have in place to meet current HSR reporting requirements. In addition, other important transaction-specific considerations should also be taken into account, such as contract commitments setting a date certain by which each party must submit its respective HSR filing. With the expanded scope of data collection under Items 5 and 6 of the Form, standard contract provisions requiring the parties to file under the HSR Act within, for example, five days of signing may need to be reconsidered, particularly with regard to a party’s first filing pursuant to the new rules.
The final rule and associated federal register notice are available here.