The Federal Trade Commission and Department of Justice Antitrust Division have announced changes to the Notification and Report Form, instructions and regulations under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Those changes are scheduled to be published July 19, 2011, to take effect August 18, 2011.
The changes shorten the form substantially and eliminate the need to provide information that sometimes presented burdens. But they also require new materials—information about jointly managed “associates” of the buyer, as well as confidential information memoranda, third-party studies and analyses of potential synergies and efficiencies—that may themselves be burdensome to gather and that could present greater risks on the merits in the merger review process.
Elimination of Unnecessary Information
The good news is that the form has been streamlined and items of minimal substantive value that had been carried forward for three decades have now been eliminated. Chief among these is historical “base year” revenue data by North American Industry Classification System code. The process of locating data, identifying appropriate NAICS codes, and detailing entities, operations and products added or deleted since the base year often proved a time-consuming task having little relevance to any potential antitrust issue. The focus now is on the most recent year data.
One expansion of current data reporting could create problems for some filers, though. A party that manufactured goods outside the United States previously could report its US sales of those goods under a broad wholesale or retail code. Now, detailed product-code information must be provided even if goods are manufactured abroad, which could increase the number of competitive overlaps flagged by the filings.
Other items that have been eliminated are listing general classes of assets acquired and allocating the purchase price among them, as well as detailing the voting securities outstanding and to be acquired. The form also now limits the identification of entities controlled by a filing party to “U.S. entities and any foreign entities that have sales into the U.S.,” and that of non-controlling (5% or more) shareholders to the acquiring and acquired entities and the acquiring entity’s Ultimate Parent Entity.
Information on “Associates” of the Acquiring Person
One of the hallmarks of the HSR process has been its use of bright-line “control” tests to determine which entities are included in the filing “person” about which detailed information must be provided. Given the emergence of new types of business entities and ownership structures over the last 30 years, the new regulations introduce the concept of an “associate” entity, which is defined as one outside the HSR “control” group that “has the right, directly or indirectly, to manage the operations or investment decisions of an acquiring entity (a ‘managing entity’),” that has its operations or investment decisions directly or indirectly managed by the acquiring person, or that is directly or indirectly linked to a managing entity through control or operational/investment management relationships.
The rule cites private equity funds and Master Limited Partnerships as examples of modern management structures that create “associate” management relationships through general partners—and potentially relevant competitive overlaps not evident under a “control” test. But it refused to limit “associates” to those entities, saying “[n]ew types of entities … may emerge in the future” and should not escape similar scrutiny.
Only acquiring parties must furnish information about “associates.” Detailed information is required about holdings by “associates” of 5% or more (but less than 50%) of the acquired entity or any other issuer that has revenues in the same NAICS codes or industries as the acquired issuer or assts. Each “associate” with revenues—including revenues of companies the "associate" controls—in the same NAICS code or industry as the acquired entity must be listed, with geographical information about "associates'" operations.
How burdensome the “associate” concept will be remains to be seen. The rule acknowledges the burden and potential unavailability of information, and provides potential shortcuts such as using lists of "associates" from regularly prepared financials no more than three months old at the time of the HSR filing. But it concluded the need for this information outweighs whatever burden might be required.
Applying the “associate” rule could involve complex factual analysis. Acquiring parties will need to anticipate the issue and begin work on it early in the process so as not to delay the filing.
Confidential Information Memoranda, Third-Party Studies and Synergy/Efficiency Analyses
The other major addition calls for analytical documents that may not necessarily have been covered by Item 4(c), which catches competitive analyses of the acquisition prepared by or for an officer or director. New Item 4(d) requires both parties to produce three categories of documents: Confidential Information Memoranda, studies by third-party advisors and studies analyzing synergies or efficiencies.
Those documents may have been produced in the past if they met the tests for Item 4(c) material, although the rule acknowledges there were differences of opinion about how to apply those tests. The Agencies have now decided to require they be produced.
What must be produced varies according to the type of document. The key points are:
Confidential Information Memoranda must be produced if they were prepared by or for any officer or director of the Ultimate Parent Entity of either party or the Acquiring or Acquired Entity and specifically relate to the sale of the entity or assets being acquired.
- If there is no CIM but other documents given to an officer or director of the buyer were “meant to serve the [same] function,” they must be produced.
- Unlike Item 4(c), this is not limited to materials analyzing the specific acquisition for which the HSR form is filed; it instead extends to any CIMs covering the assets or entity being sold.
- In each case, only documents produced up to a year before the HSR filing are called for—a limitation the rule emphasizes does not apply to Item 4(c) materials.
Studies by investment bankers, consultants or other third party advisors must be produced if they were prepared by or for an officer or director of the Ultimate Parent Entity of either party or the Acquiring or Acquired Entity for the purpose of evaluating any of the Item 4(c) competitive issues (market shares, competition, competitors, markets, sales growth, market expansion) and specifically relate to the sale of the entity or assets being acquired.
- This includes materials developed by third party advisors either during an engagement or for the purpose of seeking an engagement; in other words, investment bankers’ pitchbooks are included even if the bankers are not retained.
- This too is not limited to materials analyzing the specific acquisition for which the HSR form is filed; it consequently could call for more general strategic planning documents.
- This requirement also is subject to a one-year cutoff.
All studies evaluating or analyzing synergies or efficiencies prepared by or for an officer or director for the purpose of evaluating or analyzing the transaction must be produced.
- Here, the relevant officers and directors are not limited to the Ultimate Parent Entities and the Acquiring and Acquired Entity, as they are in the other two categories.
- There is no one-year cutoff for synergy/efficiency documents, but “[f]inancial models without stated assumptions need not be provided.”
- “[T]here is the possibility that documents submitted with an HSR filing in response to [this Item] may carry greater weight with the Agencies than materials claiming synergies created and submitted at a later time during an investigation.”
The new materials called for could have an impact on the merits of the Agencies’ analysis that is as significant as “smoking gun” Item 4(c) documents. This makes it even more important to consider from the outset what is being committed to paper that may have to be submitted with the HSR filing.
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While the HSR changes remove some underbrush, they present real challenges for filing parties. Investment funds, MLPs and many other parties will face a substantial task in developing information on “associates” and keeping that information up to date. And all filers will need to expand the scope of their search for documents that are potentially responsive to Item 4.
But the impact of these changes is not limited to process. Including “associates” and listing products a party manufactures abroad as US manufacturing is likely to increase the number of overlapping NAICS codes that could appear to present competitive issues. The additional documents required in the HSR filing—CIMs, investment banker pitchbooks and analyses of synergies/efficiencies—also could lead to greater scrutiny on the merits. The need to produce such documents, and the FTC’s suggestion that early internal synergy analyses may be given greater weight than later data developed for presentation to the Agencies, underscore how important it will be to ensure that potential questions are understood and rigorous analysis applied from the earliest stages of the transaction.