On July 7, 2011, the Federal Trade Commission (FTC) released changes to its Hart-Scott-Rodino (HSR) Premerger Notification Rules that eliminate certain information items previously required from all filers, but also expand the data to be provided by certain complex business entities such as investment funds and partnerships. The changes were formally published in the Federal Register today, and they will go into effect for transactions filed on or after August 18, 2011.
The HSR Act requires an individual or entity contemplating a merger or acquisition of voting securities or assets that meets or exceeds certain thresholds to file notification forms with the FTC and the U.S. Department of Justice Antitrust Division, and to wait a designated period of time before consummating the transaction.
According to the FTC, the new rules, which modified proposed changes originally released in August 2010 in response to public comments, will improve the efficiency and reduce the burden of the HSR process by eliminating the need for parties to provide (1) historical revenue information prior to the most recent year, (2) information on “added or deleted” manufactured products and (3) certain financial and securities-related documents.
Nevertheless, several categories of changes implemented by the amended rules are likely to increase the burden on filing parties. These changes will (1) expand reporting requirements for “associate” entities under common management with a filer, (2) broaden the scope of deal-related documents that must be submitted in conjunction with the HSR form and (3) modify revenue reporting requirements. The following briefly summarizes the key new changes:
- Associate Entities
The old HSR rules required an acquiring person to provide information for all entities under its control. Generally, these rules defined “control” as having at least a 50-percent ownership interest in the entity or other objective measures of majority control, such as right to appoint directors or receive assets upon dissolution. In response to a concern that the agencies were not receiving sufficient information regarding entities like private equity funds, investment funds or master limited partnerships that are commonly managed but not controlled by the acquiring party, the FTC expanded the reporting requirements to include all “associate” entities. “Associate” entities, as defined by the new rules, are those entities under common management with the acquiring person. The acquiring person must now disclose information about the revenues and minority investments of each and every associated entity that overlaps with the target company’s activities—and the entities each controls, which could further expand the reporting requirements.
This change requires an acquiring person to identify all entities that could be classified as “associates,” gather the most recent year’s revenues for all of the entities it controls and classify them by the statistical code under the North American Industry Classification System (NAICS) to determine what overlapping revenues and minority investments must be reported. Under the new rule, limited partnerships and investment funds that previously may have only had to report information about entities directly controlled by the partnership or fund filing the form will now be required to provide revenue information for all of the investments under common management. In the case of complex private equity or other investment funds, this may add substantial burden to the preparation of an HSR form.
- Deal Documents
Under Item 4(c) of the HSR form, both parties to a transaction must produce competitive analysis documents, or documents a filer determines were prepared by or for an officer or director of the party for the purpose of analyzing or evaluating the acquisition with respect to market shares, competition, competitors, markets or potential growth into new markets. The rules now include an Item 4(d), which requires the filer to submit certain additional documents created by or for the officers of the ultimate parent entities of the acquiring or acquired party during the previous 12-month period that specifically relate to the sale of the assets or entity to be acquired. The additional documents required include (i) all confidential information memoranda and (ii) all materials prepared by investment bankers, consultants or other third-party advisors if they contain 4(c)-type content. Additionally, the new Item 4(d)(iii) requires the submission of all documents discussing synergies and/or efficiencies that are likely to result from the transaction. Though some documents, such as confidential information memoranda, have often been submitted by filers under Item 4(c), Item 4(d) explicitly requires their production.
- Revenue Reporting
Currently, the HSR form requires detailed reporting of manufacturing revenues in the United States based on 10-digit NAICS codes, with revenues for products manufactured outside of the United States and sold in or into the country reported in a six-digit wholesale code. The new rules expand the requirement for products manufactured abroad, but sold into the United States, requiring the parties to provide 10-digit codes for those revenues. This change is intended to eliminate “double counting” of revenues for both the manufacture and the sale of a product.
Finally, filers will also be required to report all manufacturing revenues using 10-digit NAICS codes for the most recent year. The burden of this change varies depending on the range of the filer’s manufacturing activities.