In the first substantial change to the U.S. premerger filing requirements since 2005, the Federal Trade Commission and Department of Justice have issued a revised Premerger Notification and Report Form ("HSR Form") and final amendments to the rules governing the information reporting parties must submit to the FTC and Department of Justice under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act"). The long-anticipated amendments will take effect 30 days following their publication in the Federal Register, which is anticipated later this week. Parties reporting transactions after the effective date must comply with the new rules.
The new rules require reporting parties to submit new categories of financial information and documents. The new rules also change how revenues from manufactured products are treated. These and the numerous other technical changes in the final rules will not impact how the federal antitrust agencies evaluate the merits of proposed transactions.
The revisions as initially proposed in August 2010 received numerous public comments criticizing the breadth of new categories of financial information and documents that reporting parties would be required to submit to the federal government. Although the final rules refine these new categories of information to alleviate some of the most common concerns, most filers will be faced with additional burdens when reporting transactions under the HSR Act.
Confidential Information Memoranda and Other New Categories of Documents
The revised rules expand the types of documents that all filing parties must submit with the HSR Form. Parties currently must submit certain "Item 4(c)" documents that analyze the reported transaction with respect to market shares, competition, competitors, markets, potential for sales growth or expansion into product or geographic markets. The new rules add synergies and efficiencies to that list. The new rules also require reporting parties to include noncompetition agreements among them. Finally, the parties must produce confidential information memoranda and certain other documents analyzing the target entities or acquired assets, even if not prepared in connection with the reported transaction, if such documents were created by or for an officer or director (or, in the case of unincorporated entities, individuals exercising similar functions) of the buyer, its ultimate parent, the target entity, or its ultimate parent.
- Parties must produce "all studies, surveys, analyses and reports evaluating or analyzing synergies and/or efficiencies prepared by or for any officer(s) or director(s) (or, in the case of unincorporated entities, individuals exercising similar functions) for the purpose of evaluating or analyzing the acquisition. Financial models without stated assumptions need not be provided in response to this item."
- Parties also must produce all non-competition agreements entered into as part of the transaction, whether executed with the agreement or in draft form.
- All Confidential Information Memoranda produced up to one year before the date of filing that specifically relate to the sale of the target or the acquired assets, or, if no such Confidential Information Memorandum exists, any document given to an officer or director of the buyer meant to serve the function of a Confidential Information Memorandum.
- All studies, surveys, analyses and reports prepared by investment bankers, consultants or other third party advisors ("third party advisors") up to one year before the date of filing for the purpose of evaluating or analyzing market shares, competition, competitors, markets, potential for sales growth or expansion into product or geographic markets that specifically relate to the sale of the target or the acquired assets. This item requires only materials developed by third party advisors during an engagement or for the purpose of seeking an engagement.
The revised rules resolve certain persistent inconsistencies between the treatment of corporations and non-corporate entities, such as partnerships and limited liability companies. Under the new rules, parties will be required to report holdings of non-corporate interests to the same extent that they current report holding of voting securities in corporations. Parties also must list all general partners of limited partnerships, regardless of the general partners’ percentage interests in the limited partnership.
The final rules expand the information acquiring persons must provide to include certain information about "associate" entities that operate in the same industry segments as the acquired person. Currently, an acquiring person need only disclose the activities of entities that it controls. The purpose of the change is to provide the antitrust agencies with information concerning competitively relevant minority holdings of entities that are under common investment or operational management with the acquiring person, but not controlled by the acquiring person.
Under the new 16 C.F.R. § 801.1(d)(2), an "associate" "(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." For example an investment fund that has the right to manage the investments of a corporation is an "associate" of the corporation, under the new rules, as is any other entity that controls or is controlled by, manages or is managed by the investment fund, or is under common control or common investment management with the investment fund.
An acquiring person must include in its HSR Form information about its associates under the following circumstances:
- First, if an associate controls another entity that derives revenues from one or more of the same NAICS codes as the target, the HSR Form must list the associate, the subsidiary, and geographic information about where the subsidiary derives revenues from the overlapping NAICS codes.
- Second, if an associate holds a minority position between five and fifty percent in the target company or in another company that derives revenues under one or more of the same NAICS codes as the target, the HSR form must list the associate, each entity that derived revenues under one or more of the same NAICS codes as the target, in which the associate holds a minority interest, the percentage interest held, and geographic information pertaining to the overlapping NAICS codes.
Revenue Reporting and Treatment of Revenues from Manufacturing
The new Form limits revenue reporting to the most recent fiscal year, eliminating the requirement to report revenues for the base year of 2002. U.S. revenues derived from manufacturing, whether domestic or foreign, must be reported under 10-digit manufacturing NAICS codes. Currently, revenues from products manufactured in the U.S. are reported at the 7-digit level, while revenues from products manufactured abroad and sold into the U.S. are reported under the appropriate wholesale NAICS codes.
These revisions should, on balance, simplify the collection of revenue data for most filers, even though more detailed 10-digit NAICS codes, rather than the 7-digit codes will be required for revenues from manufacturing.
The final revisions do reduce the burden of providing certain types of revenue information in connection with filing under the HSR Act. However, on balance, most filers will have to provide a broader range of documents than has previously been required, and some acquirers may face substantial burdens with respect to providing information concerning the investments of associate entities not controlled by the acquirer.
The July 7, 2011 joint FTC and DOJ press release and accompanying materials can be found here.