The Federal Trade Commission has proposed amendments to the rules governing what information parties to mergers or acquisitions must report to the FTC and Department of Justice under the Hart-Scott-Rodino (HSR) Act. The amendments would change the HSR Premerger Notification Rules ("Rules") and revise the HSR Premerger Notification Form ("HSR Form"). The primary goal of the revised rule is to ensure the government receives information on businesses that are under the same management as the acquiring entity making the HSR notification. Under the current rules, that information is not reported because those businesses are not part of the acquiring entity. The proposed new rule will primarily affect transactions where the acquiring party is owned by a partnership or investment fund and managed by a general partner or management team that also manages competing businesses.
First, the proposed changes would require parties filing HSR Forms to include additional information about corporate structure and "associated" entities, even though not controlled by the entity making the filing. These changes will be particularly important for investment funds, partnerships, and non-corporate entities, which now would be required to disclose these associates.
Second, the proposed changes would require parties to submit additional types of revenue information and documents relating to the transaction that are not currently required in all filings. This will necessitate that parties search for and submit additional materials. For most filers, the changes also will simplify the process of collecting sales revenue data.
The proposed changes are open for public comment until October 18, 2010, although it is likely the final revisions will be substantially similar to the proposal. The revisions should be finalized in early 2011.
The proposed changes will require information about "associated" entities, even if the filing party does not "control" it. Under the current HSR rules, "control" means (i) holding 50% or more of an entity's voting securities, or (ii) for an entity that has no voting securities, having the right to 50% or more of its profits or, upon dissolution, 50% or more of its assets, or (iii) having the contractual power presently to designate 50% or more of the corporate directors or individuals exercising similar functions.
Under the proposed changes, acquiring persons must identify "associates," which are not controlled by the acquiring person, but may be under common management with the acquiring person. Currently, for example, where a limited partner or investment fund is its own "ultimate parent entity" (that is, not controlled by any other entity), it need not indicate whether its associated partnerships or funds derive revenues from the same type of activity as the acquired entity.
- On Item 7 of the HSR Form, acquiring firms would have to disclose, for both the acquiring firm and any associates, overlapping North American Industry Classification System ("NAICS") codes with the acquired firm.
- On Item 6(c) of the HSR Form, acquiring firms would have to disclose associates' holdings of voting securities and non-corporate interests of between 5 and 50 percent in any entities that report revenues under the same 6-digit NAICS code as the acquired entity. This change in particular has the potential to broaden the amount of information the antitrust agencies will receive about each transaction from investment funds, limited partnerships, and other types of non-corporate entities.
Changes in revenue reporting and documents to be submitted
The proposed revisions should simplify the collection of revenue data for most filers, but may in some instances make revenue collection more complicated. The proposed changes would eliminate the requirement to report revenues for a "base year" (currently 2002), thus eliminating the task of collecting or estimating revenues for any entity acquired after the base year. The proposed revisions, on the other hand, increase the level of revenue detail filers must provide for manufactured products in the most recent year – requiring that filers provide revenues by the more detailed 10-digit NAICS codes, rather than by the 7-digit codes currently used.
The proposed revisions also require new types of documents be included with the filing:
- non-competition agreements entered into as part of the transaction must be submitted with the HSR Form, whether executed with the agreement or in draft
- any offering memoranda prepared by the acquired entity
- materials prepared by third-party advisors (such as investment bankers or consultants) for any officer or director for the purpose of evaluating market shares, competition, competitors, markets, potential for sales growth or expansion into product or geographic markets, within two years of the date of filing the HSR Form
- documents discussing synergies likely to result from the transaction.
While many of these documents currently would fall within the existing Item 4(c) of the HSR Form, the revision will allow the antitrust agencies to obtain the parties' internal analyses of efficiencies that they anticipate from the transaction, which might not in every instance qualify as "4(c) documents" under the current regulations.
The FTC August 13, 2010, press release and accompanying materials can be found on the FTC website.