Expanded Information and Document Requests Increase Burdens for Private Equity Firms and Other Filers
On July 7, 2011, the Federal Trade Commission (“FTC”) and Antitrust Division of the Department of Justice (“DOJ”) announced final modifications to the Hart-Scott-Rodino (“HSR”) Premerger Notification Rules (“Rules”) and Report Form1 that will become effective in early August 2011.2 Issued after a public comment period, these final amended rules contain revisions to the agencies‟ draft modifications initially released in August. The initial draft modifications were discussed in a prior Fried Frank Alert. See FTC Proposes Amendments to the HSR Act Form (August 16, 2010).3
In many respects, as discussed below, the revised HSR Form streamlines and reduces the burden on filing parties by eliminating and narrowing certain information requests. However, the revised HSR Form contains two important changes that impose potentially significant additional burdens on filers. These changes, though, have been scaled back from the modifications that were initially proposed in August 2010. They include:
- The expansion of several information requests to cover “associates” of the filing party; and
- The inclusion of a new document request category, Item 4(d), which broadens the scope of documents required to be submitted beyond specific transaction-related documents that are currently submitted under Item 4(c) (known as “4(c) documents”).
Additional Information for “Associates”
The new rules will expand certain reporting requirements (principally for information on overlapping businesses) to cover “associates” of the filer that are not covered by the current HSR Form requirements. For example, Item 7 of the Form requires parties to report information for overlapping products based on NAICS industry codes. This requirement will be expanded to cover overlaps of “associates” of the acquiring person.
The purpose of requiring information for associates is to allow the agencies to analyze information from entities “under common investment or operational management” with the filing party.4 As the FTC has explained, the expanded information requests for “associates” target Master Limited Partnerships, common in the energy industry, and investment fund families (e.g., private equity funds), in order to provide a more complete picture of the possible antitrust impact of a transaction. The FTC believes that the current form does not always elicit sufficient information about ties between the acquiring funds and other associated entities that may have overlapping investments with the target.
Under existing rules, an acquiring party must submit information only for itself and for any entities that it controls. The HSR rules provide bright line economic tests for control5 that may not reflect the practical realities of certain organizational structures. For example, a general partner of a limited partnership typically does not “control” the partnership for HSR purposes, even though it is managing the partnership. By expanding coverage to “associates,” parties now are required to provide information for entities that are under common management with the acquiring person, but that are not under common control with the acquiring person for HSR purposes. This may include general partners of a limited partnership, other partnerships with the same general partner, investment funds whose investments are managed by a common entity, and investment advisors of a fund.
The new rules could be a significant change for private equity firms that often invest through multiple funds or a family of funds. These funds are often treated as separate persons (and therefore separate filers) for HSR purposes. For example, whereas the current HSR form may require revenue data for only the fund making an acquisition, including its respective portfolio companies, the new form will require revenue data for the general partner and its other funds and their portfolio companies, even though those other funds may have no involvement in the transaction being reported. Funds that have diverse investments and other financial relationships may have numerous associates for which additional information may be required.
New Item 4(d) Document Requests
The addition of Item 4(d) will require parties to submit certain categories of documents in addition to the documents already called for by Item 4(c).6 The new Item 4(d) now requires submission of three additional categories of documents.
- Confidential Information Memoranda. All “Confidential Information Memoranda” (“CIMs”) that (i) specifically relate to the sale of the acquired entity(s) or assets, and (ii) were prepared by or for any officer or director (or persons exercising similar functions for unincorporated entities) within one year of the filing date. If no such “CIM” exist, parties must submit any documents provided to any officer or director of the buyer that serve the same function of a CIM. The revised instructions clarify that this request is not intended to capture documents prepared in the ordinary course of business or financial data shared in due diligence, except to the extent that such materials served the purpose of a CIM when no CIM exists.
- Third Party Materials. Documents (i) prepared within one year by any investment bankers, consultants or third-party advisors (“third party advisors”) during an engagement or for the purpose of seeking an engagement, (ii) that specifically relate to the sale of the acquired entity(s) or assets, (iii) and that were prepared by or for any officer or director (or persons exercising similar functions for unincorporated entities). Typical examples of such documents include “pitch books” and “banker books.”
- Synergies/Efficiencies Documents. Analyses of synergies or efficiencies prepared by or for any officer or director (or persons exercising similar functions for unincorporated entities) for the purpose of evaluating the proposed transaction. The instructions further explain that financial models without stated assumptions are not required for this Item.
The FTC has explained that these new categories will provide additional competition-related content that would be useful to the agencies‟ initial substantive review of the competitive impact of a transaction.
To address certain concerns expressed by commenters about the scope of and burden imposed by the requests for CIMs and Third Party Materials, the new rules have been scaled back in a number of important ways. Most significantly, unlike the original draft rules, the new requests are explicitly limited to (i) documents within one year of the filing date (rather than two years), (ii) documents prepared by or for officers or directors, and (iii) documents specifically relating to a sale of the target. Further, they generally exclude “ordinary course” documents. However, the new rules would still require parties to produce CIMs and Third Party Materials that are not specific to the transaction being notified (e.g., those relating to prior sales processes and/or sales to other potential buyers).
Item 4(d)‟s expansion of the document requirements still introduces potentially significant additional burden and expense into the pre-merger clearance process, even for transactions raising no substantive issues. The potential for delay as a result of the expanded scope of the documents that parties would be required to collect and review could also be an issue for time-sensitive transactions.
The new rules also contain several proposed changes that are designed to reduce the burden on filing parties by eliminating or modifying requests that have proven to be unhelpful to the Agencies in conducting their initial review of proposed transactions. For example, filers will no longer need to report Item 5 revenue data for a base year (currently 2002), parties will not be required to submit SEC filings (or links to SEC documents on the Internet), and Item 4(b) will no longer require the submission of a company‟s most recent regularly prepared balance sheet. For these provisions, there have been no changes from the proposed rules issued in August 2010, which we discussed in our prior Alert.7
Although the FTC‟s efforts to streamline the filing process are welcome, the proposed Item 4(d) and “associate” requirements create potentially significant additional burdens that filing parties should be aware of and account for, particularly with respect to timing considerations. Further, by design, the expanded information and document requests could result in an increased number of investigations. Compliance with the new HSR Form requirements will likely require more advance planning, input from counsel, and consideration of potential substantive antitrust risks at an earlier stage than under the previous rules.