On August 13, 2010, the Federal Trade Commission (FTC) issued a notice of proposed rulemaking that would make literally dozens of changes in the specific requirements for completion of a Notification and Report Form (the Form) for premerger notification of mergers and acquisitions under the Hart-Scott-Rodino (HSR) Act (15 U.S.C. § 18a). The FTC's press release and Federal Register notice is available on the FTC's website through the following link: http://www.ftc.gov/opa/2010/08/hsrcarilion.shtm.
The proposals do not affect the HSR reportability of proposed mergers and acquisitions. Instead, the proposals would affect the information and documents that must be supplied initially to the FTC's Bureau of Competition and to the Antitrust Division of the U.S. Department of Justice (DOJ) in connection with such transactions. Although the changes would not alter the substantive standard under Section 7 of the Clayton Act (i.e., whether the proposed transaction may "substantially lessen competition"), the additional information and documentation that parties would be required to provide to the DOJ and FTC could have timing and procedural implications for future mergers. One key proposal would increase the scope of transaction-related documents the parties to a reportable transaction are required to identify and produce to the FTC and DOJ.
Issuance of the proposed changes for public comment was approved both by the FTC and by the DOJ. Public comments must be submitted to the FTC by October 18, 2010. Thereafter, the agencies will consider and respond to comments and presumably issue final rules. In light of the controversies that certain of these proposals may engender, the proposed changes may not be enacted as final rules and become effective before the end of this calendar year.
Four areas in which the proposed rules would significantly expand HSR reporting requirements:
The FTC's proposal contains significant changes and/or enlargement of the information required in four broad areas.
- The "Item 4(c)" requirement to supply certain documents that analyze or evaluate the competitive impact of the proposed transaction would be significantly expanded by the addition of several new categories of documents that must be provided with the HSR form.
- The initial premerger notification filings would seek information about the holdings of "associates" of the filing party that, while not "controlled" by the filing party, are under common investment management with the filing party.
- There are some significant changes in the revenue reporting and classification requirements of the filing parties.
- Several items on the Notification Form that have previously been limited to corporations would be expanded to include holdings by and holdings of "non-corporate entities" such as partnerships and LLCs.
Expansion of "Item 4(c)" documents
As most HSR practitioners know, Item 4(c) has caused some of the greatest controversies of any of the HSR rules. Item 4(c) currently requires filing parties to provide copies of documents that (a) were prepared by or for an officer or director of either party, (b) for the purposes of analyzing or evaluating the proposed transaction, (c) with respect to competition, competitors, markets, market shares, or opportunities for sales growth or expansion into new product or geographic markets (these topics are often referred to collectively as "Item 4(c) content"). In an informal interpretation published in the Federal Register some years ago, but never formally adopted, the FTC took the position that the parties also must provide copies of "offering memoranda," "bankers books" or other "pitch" documents seeking expressions of interest from potential acquirors that were prepared by or for the acquired entity.
The proposed rules purport to leave the existing Item 4(c) requirements unchanged but add a new "Item 4(d)" that identifies additional materials to be provided with the HSR form. Specifically:
- Proposed Item 4(d)(i): This provision would codify and expand the "offering memoranda" requirement under Item 4(c). Any confidential information memorandum or its "equivalent" referring to the target company or the to-be-acquired assets and prepared within the previous two years would be required to be submitted regardless of whether the document was prepared by or for an officer or director.
- Proposed Item 4(d)(ii): This provision would require that the parties produce documents prepared within the previous two years by investment bankers, consultants or other third-party advisors if they were prepared for any officers or directors of the transacting parties, provided they contain content relating to Item 4(c) subjects and make "reference" to the acquired entity or assets.
- Proposed Item 4(d)(iii): This provision would require the parties to submit documents "evaluating or analyzing synergies and/or efficiencies" if they were prepared "by or for any officers or directors" for the purpose of evaluating or analyzing the acquisition. The terms "synergies" and "efficiencies" are not defined in the proposal. However, this provision appears to expand the current 4(c) subject areas to include analyses of possible cost savings that may result from the transaction (among other areas, the current 4(c) definition includes the "potential for sales growth," which covers revenue synergies, but not cost savings). Notably, this particular item does not have the two-year time limitation that the other provisions of proposed Item 4(d) would include.
It remains to be seen how these new requirements will be interpreted in practice. However, it is not uncommon for the parties to a transaction to prepare documents that discuss markets, market shares, competition, competitors, or other Item 4(c) topics but do not analyze or evaluate the proposed transaction with respect to such topics. The addition of Items 4(d)(i) and 4(d)(ii) may be read as an attempt by the agencies to loosen to some extent this limitation that has often served to exclude documents discussing such topics from the scope of Item 4(c).
Reporting information relating to "associates"
The antitrust enforcement agencies have been increasingly concerned that the competitive implications of proposed mergers and acquisitions may turn on relationships between the to-be-acquired target company (or assets) and entities that while not owned by the acquiror, may be under common investment management with the acquiror. The typical example is a "family" of limited partnerships separately organized by a common manager and funded by investors, where the manager makes investment and other business decisions on behalf of the entire family of funds and their portfolio companies. Under current rules, for example, the HSR Notification Form for a reportable acquisition by one such fund would not normally disclose that another of the commonly managed funds happens to control a competitor of the target. Existing HSR rules generally focus on the "ultimate parent entity" of the acquiror, along with entities in which it holds half or more of either the voting stock or the board of directors positions (in the case of a corporation) or a majority equity investment (in the case of a non-corporate entity). An entity outside that control "chain" is generally ignored when the ultimate parent prepares and files its Notification Form.
The proposed rules seek to expand the information the agencies request to evaluate competitive issues by defining a new kind of entity — an "associate." Basically, an "associate" of the acquiring person is any entity: (i) that manages the affairs or investments of the acquiring person; (ii) whose affairs or investments are managed by the acquiring person; or (iii) whose affairs or investments are under common management with the acquiring person.
Item 7 of the current Notification Form requires the parties to identify any overlaps between the activities of the acquiring person and any of its controlled affiliates, on the one hand, and the target company (or the assets to be acquired), on the other. The proposed rules would require that the acquiring person also separately identify any overlaps between any "associates," as defined in the proposed new rule, of the acquiring person, on the one hand, and the target company (or to-be-acquired assets) on the other.
The practical effect of this change would be to require any acquiring person in preparation for filing first to identify all of its "associates" and then to determine the most recent year's revenues for each associate, classified by NAICS codes. In coordination with HSR counsel for the acquired person, the acquiror would then have to determine any overlaps between any of its controlled entities or its associates, on the one hand, and the target company or to-be-acquired assets on the other. Thus, the amount of information on overlaps disclosed under Item 7 will be increased in some cases.
It bears noting that, as is currently the case, identification of a NAICS code overlap may flag a potential competitive relationship between the parties, but it is not conclusive evidence that the parties, in fact, compete.
Changes in Item 5 revenue reporting
Over time, the strength of the rationale for requiring filing parties to reconstruct their revenues earned in the calendar year covered by the Census Bureau's quinquennial survey of manufactures (currently 2002) has weakened, while the difficulty faced by filing parties in attempting to reconstruct such historical revenues has increased. The proposed rules would do away with all revenue reporting applicable to such years, replacing it with a requirement that filing parties provide revenues for the most recent year (as they do now), broken down by 6-digit NAICS codes for non-manufacturing activities (as they do now) and by 10-digit NAICS codes for manufacturing activities (only a 7-digit breakdown is currently required). In most cases, this will require some additional effort, but unless the manufacturing activities are extensive and varied, the difference should not normally be very burdensome.
Current rules require filing parties to limit their responses to revenues derived from "operations conducted in the United States." The proposed rules would require revenues derived from a filing party's manufacturing operations outside the United States to be included to the extent that such operations result in sales in or into the United States. Again, complying with this proposed rule would require some additional effort by the parties, but many filing parties will presumably have this kind of data readily available. The proposed requirement does not extend to third-party contract manufacturing operations conducted for the acquiring person outside the United States.
Information concerning "non-corporate entities"
Various items in the current Notification Form such as Item 6(b) (minority shareholders), Item 6(c) (minority shareholdings) and Item 8 (previous acquisitions) require disclosure of information relating only to corporate entities. The new rules would require information relating to non-corporate entities as well.
There are dozens of other proposed changes, many of which are technical and essentially non-substantive. For example, more detail would be required concerning the anticipated revenue sources of proposed joint ventures. Few of these proposed changes warrant detailed discussion here.
Firms should consult HSR counsel for advice on the impact of these and other changes to HSR reporting requirements
Although the new rules are not yet effective, firms considering future transactions should take note of the potential changes, particularly as they relate to potential Item 4(c) (and, if the rules are finalized, Item 4(d)) documents.
As always, firms should be mindful of the fact that any documents created internally or by third-party advisors for purposes of analyzing a transaction may ultimately need to be produced to the antitrust enforcement agencies, who will carefully review such materials in considering whether the proposed transaction raises antitrust concerns. In addition, firms planning transactions should consult experienced antitrust and HSR counsel in advance to consider the potential impact these rule changes may have on HSR reporting requirements.