The Hart-Scott-Rodino Act requires notification to the Federal Trade Commission and the Department of Justice (the “Agencies”) of mergers and acquisitions above a certain size before the transaction may be completed. The parties to a qualifying transaction must submit a Premerger Notification and Report Form (the “Form”) to the FTC and DOJ with certain information about the companies’ businesses and the proposed merger, which is intended to be a first step to help the Agencies analyze whether it may, if consummated, violate the antitrust laws.
On August 13, 2010, the FTC published a Notice of Proposed Rulemaking (“Notice”) that would revise the Form as well as the HSR Premerger Notification Rules (the “Rules”). The proposed revisions are primarily intended to eliminate certain information requests that have proven unnecessary to the Agencies’ competitive analysis and to add other requests to capture information that the Agencies believe will better inform and expedite that analysis.
Some of the more significant proposed amendments are discussed below. The full text of the Notice can be found here.
Potential Impact of Proposed Amendments
Most of the proposed amendments are minor adjustments to the prior Form, but a few have the potential to significantly affect the type and amount of information required in a party’s HSR filing. Most of the amendments are not likely to substantially increase a party’s burden in completing the Form (and indeed, the FTC claims that the burden for collecting and reporting is estimated to decrease by approximately 5 percent). Notice, p. 51. The introduction of the “associate” concept, however, may require investment funds and limited and other partnerships to provide a great deal of additional information.
The proposed Item 4(d) may also substantially increase a party’s burden in collecting and identifying competitive analyses that must be submitted with its HSR filing. By adding another category of documents that must accompany the filing, the changes would also significantly heighten the need to avoid loose statements about potential competitive effects of the transaction by parties and their representatives that could be misconstrued.
Definition of “Associate” in HSR Rules
The current HSR Form requires information relating to the “ultimate parent entity” of each party, which is an entity that controls the buyer or seller and is not itself controlled (as defined by the Rules) by anyone else. One of the more significant revisions would add the term “associate,” defined as an entity that is under common management with the acquiring person, but who is not under common control.
This proposed revision is intended to allow the identification of competitive overlaps across entities who are under the effective control of a single entity as the result of common management, but who are not currently required to be identified. Examples of such associates include “general partners of a limited partnership, other partnerships with the same general partner, other investment funds whose investments are managed by a common entity or under a common investment management agreement, and investment advisers of a fund.” See Notice, p. 10.
The instructions to the HSR Form would also be revised to reflect the additional information sought from acquiring parties relating to their “associates.” As discussed more fully below with respect to Items 6 and 7, the additional information would include (1) an associate’s significant minority holdings of entities with NAICS industry codes that overlap with the acquired party and (2) names of entities that the associate controls and that the acquiring party believes derive revenues in NAICS codes that overlap with the acquired party.
Item 4 — Request for Documents Relating to Parties and Transaction
The FTC also proposes an important revision to Item 4 that has the potential to substantially increase the burden associated with an HSR filing, as well as the importance of counsel’s involvement in the creation of relevant analyses. Specifically, a new Item 4(d) would enumerate particular documents that may fall outside of the definition of Item 4(c), but must be submitted if prepared within two years of the date of the filing.
First, the new Item 4(d) would require the submission of offering memoranda, regardless of whether they were prepared by or for any officer or director, if prepared “for the purpose of analyzing the acquisition with respect to market shares, competition, competitors, markets, potential for sales growth, or expansion into product or geographic markets.” Id. at 22. Similarly, documents discussing synergies and other efficiencies would need to be submitted if prepared by or for an officer, for purposes of analyzing the acquisition. Id. at 25.
Most significantly, however, the new Item 4(d) would require the submission of materials prepared by investment bankers, consultants or third-party advisers if (1) they were prepared for an officer or director; (2) they mention the acquired entity or asset; and (3) they were prepared “for the purpose of analyzing market shares, competition, competitors, markets, potential for sales growth, or expansion into product or geographic markets.” Id. at 23. There is no requirement that the document be created for purposes of analyzing the transaction, and it therefore potentially calls for any competitive analyses prepared by a third party during the ordinary course of business over the course of two years prior to the proposed transaction.
Item 5 — Information Regarding Revenues and Industry Codes
In addition to some minor revisions to Item 5, the FTC proposed several significant changes that would require more detailed NAICS industry code and revenue information.
This item currently requires information relating to revenues and commerce during a company’s most recently completed fiscal year and a base year, which is currently 2002. The FTC first proposes eliminating the base year reporting requirements. It further proposes that manufacturing revenues be reported according to the more precise 10-digit product codes, as opposed to the 7-digit codes currently required. Amended Item 5(a) would thus require filing parties to list manufacturing revenues by 10-digit product codes and non-manufacturing revenues by 6-digit product codes for the most recent year only. Id. at 27-28.
The Form would also require additional information relating to foreign manufactured products that are imported and sold in the United States, which is not required on the current Form. For example, on the current Form, if a filing person manufactured a product abroad, imported it into the United States, and sold that product at the wholesale or retail level, the party would report revenues derived from those sales using a wholesale or retail NAICS industry code only. The revised Item 5(a) and the related instructions would require filing parties to also identify the 10-digit NAICS manufacturing product codes and revenues for those products. Id. at 30.
The FTC also proposes changes to Item 5(d), which requires certain information relating to the formation of joint ventures. The revisions would eliminate a lot of the information currently requested, while also adding another request for information on the expected source of the joint venture’s dollar revenues by 6-digit (non-manufacturing) or 10-digit (manufacturing) NAICS industry code. Id. at 32.
Item 6 — Shareholders, Holdings, and Entities Within Person Filing Notification
Item 6(a) currently requires the filing party to identify all entities within it having total assets of $10 million or more, including foreign entities. The proposed Item 6(a) would limit the entities that must be listed in Item 6(a) to those located in the U.S. and those foreign entities that have sales in or into the U.S., and would require only city and state or city and foreign country designations. Id. at 33.
Item 6(b) currently requires the filing person to identify shareholders holding 5 percent or more of the voting securities of any entity included within the filing person (including the ultimate parent entity) having total assets of $10 million or more. The FTC first proposes amending Items 6(b) to include non-corporate interests. It also proposes to limit the response to Item 6(b) to the acquired/acquiring entity and that entity’s ultimate parent entity, such that no response is necessary for any other entities included within, but not wholly owned by, the ultimate parent entity. The FTC also proposes the elimination of the $10 million asset threshold, which would require the identification of relevant shareholders or interest holders regardless of the amount of assets held. Id. at 33-34.
Item 6(c) currently requires the filing person to list its minority voting stock holdings of 5 percent or more in any issuer having total assets of $10 million or more. Similar to the changes to Item 6(b), the proposed Item 6(c) would expressly include non-corporate interests and eliminate the $10 million asset threshold. The response, furthermore, would be limited to entities that derive revenues in the same 6-digit NAICS industry code as that person based on the party’s “knowledge or belief.” As described above, Item 6(c) would also be amended to require information from the acquiring party relating to the minority holdings of the party’s “associates” as well. Id. at 36.
Item 7 — Dollar Revenues
The FTC first proposes amending Items 7(a) and 7(b) to require dollar revenue information relating to “associates.” Id. at 39. In addition, in proposed Item 7(b), the filing party would not only be required to list the name of the party that also derived dollar revenues in the 6-digit NAICS industry code but also, if different, the name of the entity(s) that actually derived those revenues. Id. The acquiring party would also be required to list the name of each of its associates that also derived dollar revenues in the 6-digit industry and, if different, the name of the entity(s) that actually derived those revenues. Id.
For each identified overlap between the two parties that falls within certain enumerated 6-digit NAICS industry codes, Item 7(c)(iv) requires additional detailed geographic information. The FTC proposes updating the list of NAICS codes in Item 7(c)(iv) to require this information for some new industries and to delete certain industries that are currently listed, for which this detailed geographic market information is not necessary. Id. at 40. New Item 7(d) would capture this same geographic market information with respect to the acquiring party’s “associates.” Id.
Any comments on the proposed rules must be received by the FTC by October 18, 2010. The revised HSR Form and Rules, if adopted, should also be read in conjunction with the recently revised Horizontal Merger Guidelines, issued on August 19, 2010. The Guidelines generally explain how the agencies evaluate a transaction’s potential competitive impact and shed light on how the information provided in an HSR filing will be used in the Agencies’ competitive analysis.
Bingham antitrust attorneys are available to discuss any questions or concerns about the Guidelines and proposed Rules and to guide parties through the reportability, reporting and competitive analysis of potential transactions.
For more information, please contact any of the lawyers listed below:
This article was originally published by Bingham McCutchen LLP.