On 7 July 2011 the Federal Trade Commission (FTC) and the Department of Justice (DOJ) announced revisions to the Hart-Scott-Rodino (HSR) premerger notification rules and the HSR form. The new rules and form changes will take effect 30 days after publication in the Federal Register. The purpose of some of the changes is to make the HSR filing less burdensome by elimination of requests for information that the agencies have not found useful in their antitrust assessment of transactions. Other changes, however, particularly those involving the new concept of "associate" and those requiring production of a new category of documents (new Item 4(d)), will add to the burden of completing the form. However, according to the agencies, these changes are justified because they will result in the production of information and documents useful to their antitrust assessment of reportable transactions. Some of the most significant changes are as follows.
Production of additional documents (Item 4)
Filing parties often find that collection and review of documents responsive to Item 4(c) of the HSR form are the most time-consuming and costly part of the HSR filing process. Item 4(c) requires the production of all documents (including e-mails and handwritten notes) prepared by or for an officer or director "for the purpose of evaluating or analyzing the acquisition with respect to market shares, competition, competitors, markets, potential for sales growth, or expansion into product or geographic markets." This Item, which is intended to provide the antitrust agencies with information useful to its assessment of the competitive effects of the reported transaction, remains unchanged. However, the FTC has added three additional categories of documents that must be included in addition to the Item 4(c) documents.
Item 4(d)(i): This new Item will require the production of confidential information memoranda that were prepared by or for officers or directors of the ultimate parent entity of the acquiring or acquired person or of the acquiring or acquired entity and that specifically relate to the sale of the entity or assets to be acquired. If no such documents exist, parties must produce any documents given to any officers or directors of the buyer that served the same function as a confidential information memoranda. This item is limited to documents produced within one year of the filing.
Item 4(d)(ii): This new Item will require the production of all documents prepared by investment bankers, consultants, or other third party advisors (engaged by or seeking an engagement with the filing party) for any officers or directors of the ultimate parent entity of the acquiring or acquired person or of the acquiring or acquired entity if such documents contain "4(c) content" and specifically relate to the sale of the entity or assets to be acquired. This item is also limited to documents produced within one year of the HSR filing.
Item 4(d)(iii): This new Item will require the production of all documents evaluating or analyzing synergies and/or efficiencies if they were prepared by or for an officer or director for purposes of evaluating or analyzing the reportable transaction. Financial models without stated assumptions do not need to be provided.
Filing parties should anticipate an increase in the time and cost associated with searching for and identifying documents responsive to new Item 4(d). In addition, parties will also need to be mindful that the officers and directors covered by the requests in Items 4(c) and 4(d) now differ depending on the specific item. Items 4(c) and 4(d)(iii), for example, apply to officers and directors of the ultimate parent entities of the acquiring and acquired persons and of all entities within their HSR control.1 Items 4(d)(i) and 4(d)(ii), on the other hand, apply only to officers and directors of the ultimate parent entities of the acquiring and acquired persons and of the acquiring and acquired entities, and not any other entities they control. Finally, there is likely to be uncertainty in complying with new Item 4(d)(i) to the extent that parties do not have confidential information memoranda. In such cases, the new instructions require the production of "ordinary course documents and/or financial data shared in the course of due diligence" if such served the purpose of confidential information memoranda.
Inclusion of information relating to "associates" (Item 6(c) and Item 7)
The current HSR rules require that the ultimate parent entity of the acquiring person provide information in its HSR form with respect to all entities under its HSR control. As a result, information about entities that are under common management with an acquiring person, but not under common HSR control, is not included in the present form. The agencies believe information about competitive overlaps between the acquiring person (including entities under common investment or operational management with the acquiring person) and the acquired entity/assets is important to provide a full picture of the competitive effects of the proposed transaction. The agencies have therefore introduced a new concept – associate – and will now require the acquiring person to provide information about its associates and certain of their holdings.
An "associate" is defined in the new HSR rules as an entity that is not under common control with the acquiring person but:
(a) has the right, directly or indirectly, to manage the operations or investment decisions of an acquiring entity (a "managing entity"); or
(b) has its operations or investment decisions, directly or indirectly, managed by the acquiring person; or
(c) directly or indirectly, controls, is controlled by, or is under common control with a managing entity; or
(d) directly or indirectly manages, is managed by, or is under common operational or investment management with a managing entity.2
Both Items 6(c) and 7 are affected by these changes.
Item 6(c): The form will have a new Item – 6(c)(ii) – that only the acquiring person will complete. Specifically, the acquiring person must provide information about each of its associates that holds either at least five per cent but less than 50 per cent of the voting securities or non-corporate interests of the acquired entity, or at least five per cent but less than 50 per cent of a corporation or the non-corporate interests of an unincorporated entity which derived U.S. revenues in the most recent year in any 6-digit North American Industry Classification System (NAICS) Code in which the acquired entity/assets also derived U.S. revenues. If the NAICS Codes of the entities in which associates hold minority interests are not known, the acquiring person should answer this new item based on whether its associates hold minority interests in entities that operate in the same industries as the acquired entity/assets. In addition, the acquiring person may rely on regularly prepared financials if they are no more than three months old to identify its and its associates' minority investments.
Item 7: Item 7 currently requires identification of NAICS Code overlaps between the acquiring person (including all entities under common HSR control with such person) and the acquired entity/assets. In addition to this information, new Item 7 will also require the acquiring person to identify the names of any of its associates that also derived revenues in the 6-digit NAICS Code(s) used by the acquired entity/assets and certain information about the geographic areas in which its associates derived revenues in such overlapping codes.
These revisions will primarily affect certain types of acquiring persons – such as master limited partnerships and private equity funds. However, they will certainly increase, in many cases quite substantially, the burden of completing HSR forms by such acquiring persons.
Modifications to revenue reporting requirements (Item 5)
Item 5 of the HSR form currently requires the parties to a transaction to report certain U.S. revenues classified by NAICS Codes for the most recent year and for a "base" year – currently 2002.3 The most significant change to Item 5 is the elimination of the requirement to report historical (currently 2002) U.S. revenues. In addition, parties will no longer be required to provide information on "added or deleted" manufactured products. Instead, the parties will be required only to provide revenues for the most recent year, broken down by 6-digit NAICS Codes for non-manufacturing activities (as is currently required) and by 10-digit NAICS Codes for manufacturing activities (instead of the 7-digit NAICS Codes currently required).
Another change to Item 5 relates to the proper NAICS Codes to use in connection with a party's manufacturing outside of the U.S. of products that are sold into the U.S. The new form will require that parties provide revenues related to manufacturing operations conducted outside of the U.S. to the extent that such operations result in sales in or into the U.S. whether at the wholesale or retail level or directly to customers. Such revenues would be reported under a 10-digit manufacturing NAICS Code.
The revisions to Item 5 will decrease the burden of responding to Item 5 significantly.
Revisions to the requirement that parties identify all entities under their HSR control (Item 6(a))
Item 6(a) currently requires that filing parties list and provide the full addresses for entities under their (or in the case of the acquired person, under the acquired entity's) HSR control, regardless of whether the entity is located in the United States, with total assets of at least US$10 million. This requirement can be particularly burdensome for large corporations with numerous foreign subsidiaries. The new form decreases the burden by requiring that filing parties list (i) responsive U.S. entities under common HSR control and (ii) responsive foreign entities under common HSR control that have sales into the U.S. In addition, filing parties will only be required to provide a city, state, and country (not a street address) for all entities listed in Item 6(a).
Revisions to information required about third parties who hold at least five per cent but less than 50 per cent, of certain entities (Item 6(b))
Item 6(b) currently requires information about the third parties who hold at least five per cent, but less than 50 per cent, of the voting securities of corporations under common HSR control with the acquiring person or of the voting securities of corporations under common HSR control with the acquired entity. New Item 6(b) would require information about the third parties who hold at least five per cent of the voting securities or non-corporate interests of corporations or unincorporated entities only for the acquired entity and only for the acquiring entity and its ultimate parent entity. For natural persons, third party holders of at least five per cent of corporations or unincorporated entities would only need to be identified for the top level corporate or unincorporated entities under the HSR control of such natural persons. In addition, this Item would be extended to request identification of the general partners of limited partnerships, regardless of what percentage they hold in such partnerships.
Revisions to information required about minority holdings of filing parties (Item 6(c))
New Item 6(c) requires, in addition to the above noted changes with respect to associates, that both filing parties list their minority holdings – of at least five per cent but less than 50 per cent – of the voting securities or non-corporate interests of an issuer or unincorporated entity with total assets of at least US$10 million. (Current Item 6(c) requests information only on five percent stockholders of corporations.) In addition, under the new form, the acquiring person would list only its responsive minority holdings of entities that derived dollar revenues in the most year in the same 6-digit NAICS Code(s) as the acquired entity/assets. Likewise the acquired entity would list only its minority holdings in entities that derived revenues in overlapping 6-digit NAICS Code(s) with the acquiring person.
Elimination of need to provide certain financial or SEC documents (Items 4(a) and 4(b))
Item 4(a) currently requires that filing parties provide documents or Internet links to certain documents submitted to the U.S. Securities and Exchange Commission (SEC), such as their most recent 10-K filing. The changes to the HSR form would simplify this requirement. Under new Item 4(a) parties will only provide the names and Central Index Key (CIK) number for all entities under common HSR control with them that file annual reports with the SEC.
Item 4(b) currently requires that filing parties provide the most recent annual report, annual audit report, and regularly prepared balance sheet of the person filing notification and each unconsolidated U.S. issuer included within that person. New Item 4(b) would require parties to provide only the most recent annual report and/or annual audit reports (and not the most recent balance sheet) of the person filing notification and each unconsolidated U.S. entity included within such person.
Significantly natural persons who are filers would only need to provide annual reports and/or annual audit reports for the highest level entities under their control. Personal balance sheets would no longer be required.
Addition of non-compete agreements
Currently, and with some exceptions, parties are now required to file copies of their executed agreement. This request (re-numbered new Item 3(b)), will be extended to require as well that parties file executed agreements not to compete. If at the time of the HSR filing, the parties' most recent version of a non-compete is still in draft and not yet executed, they would be required to produce the most recent draft.
There are other changes to the HSR form intended to streamline the notification process. We encourage companies to review all changes, particularly those related to the production of additional documents (Item 4(d)) and those related to the new "associate" concept, and consult counsel in advance to evaluate the impact of these changes on the HSR notification and review process. In addition, parties should assume that the time to prepare the new filing, and the costs of doing so, will increase at least in the short run. Private equity funds and other entities should also consider identifying their "associates" as part of the ordinary course of their business to decrease the time it will take them to prepare HSR filings when needed.