On July 7, 2011, the US Federal Trade Commission (FTC) issued the most significant changes in decades to the premerger Notification and Report Form (the “Form”) required under the Hart-Scott Rodino Act. Under the new regime, companies will have substantially greater reporting requirements relating to their ownership of minority interests in other companies as well as enhanced requirements relating to reporting of revenue information. The new requirements also identify additional documents that will have to be submitted with the filing regardless of whether there is any competitive overlap.
While the revisions eliminate some antiquated requirements, such as providing historic revenue information, the new regulations likely will increase costs to filing companies. The regulations governing the new Form will become effective in approximately the middle of August, 30 days after they are published in the Federal Register.
The most important changes are as follows:
New Requirements Regarding Minority Shareholders and Shareholdings. The new regulations require parties to submit substantial information about their minority interests and affiliates, including the following:
- An acquiring firm now must report certain information regarding entities that are not affiliates (e.g., parents, subsidiaries), but that are “associates.” An unaffiliated entity will be an associate if it (A) has the right to manage the operations or investment decisions of an acquiring entity (a “managing entity”); or (B) has its operations or investment decisions managed by the acquiring firm; or (C) is controlled by, or is under common control with a managing entity; or (D) manages, is managed by, or is under common operational or investment management with a managing entity.
- An acquiring party also must list any minority holdings that overlap with the acquired entity’s assets. This includes listing each associate that holds a minority position of 5 percent or more in an entity, including a minority position in a non-corporate entity, and that derived dollar revenues in the most recent year from operations in industries that overlap with the acquired company. Further, for each such holding by an associate, the acquiring party must identify the entity in which the interest is held and the percentage held. Companies will also be required to list each associate of the acquiring party who in the prior year generated revenue in the same industry as the acquired company.
- A filing company must identify all minority positions of 5 percent or more, including minority positions in non-corporate entities, that it holds in the same industries in which the acquired company operates, and report the industries in which these companies operate.
Additional documentary requirements. The new regulations require parties to furnish a number of additional documents with their filing, including the following:
- Confidential Information Memoranda, without regard to whether they discuss competitive issues;
- Any document received by officers or directors from third-party advisers that discusses competitive aspects of the deal or market conditions, regardless of whether those third parties are actually retained;
- Any document that discusses synergies or efficiencies of the deal, even if the discussion of these issues does not reference competitive issues; and
- The submission of any Agreement Not To Compete together with the purchase agreement.
- Reporting Foreign Sales. The new regulations require that revenue from sales made by a foreign manufacturing facility directly to a US customer be reported.
- Elimination of the 2002 base year revenues. Under the new regime, companies no longer have to provide revenues from a base year, which most recently has been 2002. This requirement had often caused companies to make difficult calculations, accounting for changes in the company such as acquisitions or divestitures.
Overall, the new FTC guidelines increase the burden that companies will face when collecting required documents and consolidating shareholder and subsidiary information. Companies should carefully consider how these changes impact their compliance with Hart-Scott-Rodino filing requirements. Because transactions are often very time-sensitive, we suggest that companies planning to engage in transactions take the following steps:
- Collect most recent revenue information as it becomes available, and sort that revenue information by 6-digit North American Industry Classification System (NAICS) industry code. This should include the collection of sales revenue directly into the United States by foreign entities.
- Identify each potential associate of the firm, and the industry in which that associate participates.
- Identify each entity where the company has a minority interest of 5 percent or more, and the industries in which the entity competes. Where possible, identify in advance each entity’s specific 6-digit NAICS industry codes.
- Put in place procedures to limit the unsolicited distribution of materials from third-party advisers to officers and directors of the company.
We will continue to monitor the practical application of the new rules once they are in effect, and issue further Legal Updates on any staff interpretations and other developments.