Recently, the Federal Trade Commission (“FTC”) proposed changes to the Hart-Scott Rodino Antitrust Improvements Act (“HSR”) and to the Premerger Notification and Report Form (“Form”) required to be filed by companies with the FTC or Antitrust Division of the U.S. Department of Justice (“Agencies”) for their review of certain proposed transactions with a value in excess of $63.4 million (the current size of the transaction threshold).
While the Agencies have stated that the proposed changes are intended to streamline the Form, the changes will create additional disclosure obligations for some filers, particularly investment funds and similar entities with portfolio companies under common management. Among the changes that have been proposed are (1) new reporting requirements regarding “associate” entities of the acquiring company intended to target investment funds and master limited partnerships in the energy industry, (2) the addition of Item 4(d) to the Form, (3) certain adjustments to the reporting of revenues in Item 5 and (4) new reporting requirements for “unincorporated entities.” These proposed changes may be materially burdensome to certain filers.
- Expansion of Reporting Requirements Regarding “Associate” Entities of the Reporting Company
Under the proposed changes, reporting companies will be required to provide information concerning the “associate” entities of the acquiring person. An “associate” of the acquiring person would be defined as an entity (1) that is under common management with the acquiring person, (2) that has the right to manage or direct the acquiring person’s affairs or investments or (3) with respect to which, the acquiring person has the right to manage or direct its affairs or investments. The existing Form requires reporting companies to provide only certain information regarding the ultimate parent entities (“UPEs”) of each party and the entities that are under common HSR “control” of each UPE. The proposed changes would require acquiring persons to provide the following information to complete Items 6(c) and 7(d) of the Form:
- Each associate’s significant minority holdings of voting securities and non-corporate interests of 5 percent to less than 50 percent interest in entities whose revenues in 6-digit North American Industrial Classification System (“NAICS”) codes overlap with the 6-digit NAICS codes of the acquired business; and
- Names and geographic information of such entities that are “controlled” by associates with revenues in 6-digit NAICS codes that are believed to overlap with the 6-digit NAICS codes of the acquired business.
The Agencies acknowledge that acquiring persons may not be privy to information regarding the operations of their associates. As such, the proposed change provides that acquiring persons would be required to supply information based on their knowledge and belief about their associates.
These proposed changes will likely have the most significant impact on general partners of limited partnerships and investment funds because these entities often manage multiple entities that they may have a significant equity interest in but do not “control” for HSR purposes. Under the proposed changes, general partners and investment funds, when filing as an acquiring person, will be required to include additional information on all “associate” entities that is not currently required.
- Addition of Item 4(d)
Another significant change is the proposed addition of Item 4(d). Under the existing Form, Item 4(c) requires reporting companies to produce all studies, surveys, analyses, and reports which are prepared by or for officers or directors for the purpose of evaluating or analyzing certain competitive aspects relating to the transaction. The proposed rules do not change Item 4(c) but would add a new Item 4(d) which would require information in the following three categories, regardless of whether the documents otherwise fall within the ambit of Item 4(c):
- All offering memoranda (or similar documents) that reference the acquired entity or its assets. Such offering memoranda is required regardless of whether it was prepared for or by any officer or director of the reporting company for the purpose of evaluating or analyzing certain competitive aspects of the transaction;
- All materials prepared for any officer or director of the reporting company by the investment banks, consultants or other third party advisors which evaluates or analyzes certain competitive and references the acquired entity or its assets, irrespective of whether it relates to the proposed transaction; and
- All documents prepared for or by any officer or director of the reporting company which discuss synergies and/or efficiencies likely to result from the transaction. Financial models without stated assumptions would not be required to be filed under this Item.
Notably, while at first glance many of the above types of documents may fall within Item 4(c), proposed Item 4(d)will reach many documents that are not currently required to be filed under Item 4(c).
The Agencies have proposed a time limitation on the production documents falling into two of the three categories under Item 4(d). The filing parties would be required to produce offering memoranda (or similar documents) and materials regarding competition of the acquired person (both as stated above) prepared within the two years preceding the filing of the Form. The proposed change does not state a time limitation on documents that discuss synergies and/or efficiencies.
- Adjustments to Reporting of Revenues
In Item 5, the proposed changes to the revenue reporting requirements would eliminate reporting the historical base year 2002 revenues and require reporting only of revenues from the most recent fiscal year. The elimination of base year disclosure will be very helpful to many filing parties.
The proposed rules, however, would require filing parties to disclose their U.S. revenues for products manufactured outside of the U.S. and sold in the U.S. under the more-detailed 10-digit NAICS product codes. Currently, this information is not required for products manufactured outside the U.S.
- New Reporting Requirements for “Unincorporated Entities”
Under the proposed changes, filers would be required to report certain information regarding unincorporated entities, such as partnerships and limited liability companies. For instance, under Item 6(b) and Item 6(c) of the Form, filers would be required to provide information regarding interests held in unincorporated entities in addition to the existing obligations to report such information regarding incorporated entities (i.e., corporations). With respect to interests in partnerships, filers would be required to provide the name of the general partner but not the limited partners.
- Comments and Additional Information
The FTC is seeking public comments on the proposed changes. Public comments will be accepted until October 18, 2010. A complete copy of the proposed changes can be found here. It is uncertain whether the proposed changes will be adopted and if so, when adopted changes will become effective. However, it is unlikely that these proposed changes to the Form will go into effect by the end of the year. Companies that are likely to have HSR filings should consider the possible effects of the proposed changes to their reporting requirements.