The Federal Trade Commission ("FTC") and the Antitrust Division of the U.S. Department of Justice (together, the "Agencies") recently announced final amendments to the Hart-Scott-Rodino ("HSR") Premerger Notification Rules (the "Rules"), the Premerger Notification and Report Form (the "Form") and associated Instructions in order to streamline the Form and capture new information that will help the Agencies conduct their initial review of a proposed transaction's competitive impact. The amended Rules and new Form will apply to all HSR filings on or after August 18, 2011.
Although a number of changes will reduce filing burdens, the new Form requests additional information that could increase the reporting burdens for certain filing persons. These additional requirements focus on three types of information:
- Documents, such as Confidential Information Memoranda or documents serving that purpose and competition-related reports and analyses prepared by third-party advisors relating to the entity(ies) or assets being acquired, produced within the year prior to the date of the HSR filing, even though not related to the transaction being reported, and documents evaluating or analyzing the synergies and/or efficiencies to be achieved by the acquisition;
- Sales in the United States of products manufactured abroad; and
- Overlap and geographic market information regarding the acquiring person's "associates" who have operations in the same NAICS code(s) as the acquired entity or that are attributable to the assets to be acquired.
These additional requirements are described in greater detail below.
"Item 4(d)" Documents
The amended rules create a new category of responsive documents under Item 4(d) of the new Form. Likely to become know as "4(d) documents," the following are the three categories of documents that must be submitted with the new Form under Item 4(d):
(i.) Confidential Information Memoranda (or if none exist, documents meant to serve the function of a Confidential Information Memorandum) that were prepared by or for any officer(s) or director(s) (or, in the case of unincorporated entities, individuals exercising similar functions) of the filing person that specifically relate to the sale of the acquired entity(ies) or assets that were produced in the year prior to the date of the filing.
(ii.) Studies, surveys, analyses and reports prepared by investment bankers, consultants or other third-party advisors for any officer(s) or director(s) (or, in the case of unincorporated entities, individuals exercising similar functions) of the filing person or of the acquiring or acquired entity(ies) 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 acquired entity(ies) or assets that were produced in the year prior to the date of the filing.
(iii.) 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.
Item 4(d) is closely related to existing Item 4(c), which requests " studies, surveys, analyses and reports . . . 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 with respect to market shares, competition, competitors, markets, potential for sales growth or expansion into product or geographic markets." However, Item 4(d) seeks different documents. Item 4(c) requests just those competition-related documents that evaluate or analyze the transaction for which notification is being filed, while Items 4(d)(i) and 4(d)(ii) seek competition documents relating to the acquired entity(ies) or the acquired assets during the one-year period prior to the filing regardless of any relationship to the transaction for which notification is being filed. Documents responsive to Item 4(c) often include some analysis or discussion of synergies and/or efficiencies, but under Item 4(d)(iii) documents prepared by or for officers and directors containing analysis or discussion of synergies and/or efficiencies must be submitted even without the competition-related content required under Item 4(c).
Foreign Manufactured Products
The current form requires filing persons to report most recent year revenues and lines of commerce at three NAICS levels with respect to operations conducted within the United States – namely, "operations conducted within the United States, including its commonwealths, territories, possessions and the District of Columbia." In the new Form, the filing person must also include revenues for each product manufactured outside the United States but sold in or into the United States. The FTC has posted an updated Item 5 Tip Sheet that provides more specific instructions.
"Associate"—A New HSR Concept
Under the current rules, the acquiring person is required to provide information about the ultimate parent entity of the acquiring person and all the entities controlled directly or indirectly by it. For corporate entities, control arises from the ownership of 50% or more of the voting securities of an entity or the power to designate 50% or more of its board of directors. Under the amended rules, for certain items of the Form, the acquiring person must also include information about "associated" entities that are not controlled by the acquiring person but that have a direct or indirect management relationship with the acquiring person. As discussed below, in the new Form, the acquiring person must identify any industry in which both the acquired entity or the acquired assets and the acquiring person's controlled entities or "associates" earn revenues.
Definition of "Associate." The final amended HSR Rules define "associate" as an entity that is not a controlled affiliate of the acquiring person but that:
- has the right, directly or indirectly, to manage the operations or investment decisions of an acquiring entity (a "managing entity"); or
- has its operations or investment decisions, directly or indirectly, managed by the acquiring person; or
- directly or indirectly, controls, is controlled by, or is under common control with a managing entity; or
- directly or indirectly manages, is managed by, or is under common operational or investment management with a managing entity.
Increased Scope of Reported Information
Under the current rules, the acquiring person must provide information about its minority investments (holdings of 5% or more but less than 50%) and those of the entities it controls and acquired persons must provide information about the acquired entity's minority investments (holdings of 5% or more but less than 50%)—pursuant to Item 6(c)—and identify any NAICS codes in which both the acquiring person and acquired entity or assets earned revenues—pursuant to Item 7. Under the final amended Rules, the acquiring person must also identify its associates' minority investments in any entity that also derived revenues in the same NAICS codes as the acquired person as well as list its associates, and if different, the entities controlled by its associates deriving revenues in the same NAICS codes as the acquired person and provide geographic market information about those revenues of the acquiring person's associates and the controlled entities of the acquiring person's associates.
Example. The final amended Rules provide the following example for an acquisition by an investment fund that is a limited partnership with its own ultimate parent entity for HSR purposes and one of several funds managed by the same general partner:
ABC Investment Group has organized a number of investment partnerships. Each of the partnerships is its own ultimate parent, but ABC makes the investment decisions for all of the partnerships. One of the partnerships intends to make a reportable acquisition. For purposes of Items 6(c) and 7, each of the other investment partnerships and ABC Investment Group itself are associates of the partnership that is the acquiring person. In response to Item 6(c)(i), the acquiring person will disclose any of its 5 percent or greater minority holdings that generate revenues in any of the same NAICS codes as the acquired entity(ies) in the reportable transaction. In Item 6(c)(ii) it would report any 5 percent or greater minority holdings of its associates in the acquired entity(ies) and in any entities that generate revenues in any of the same NAICS codes as the acquired entity(ies). In Item 7, the acquiring person will indicate whether there are any NAICS code overlaps between the acquired entity(ies) in the reportable transaction, on the one hand, and the acquiring person and all of its associates, on the other.
This example assumes that each partnership that ABC Investment Group manages will have access to detailed information about the operations of the other partnerships. This may not be the case, and the FTC recognizes that "it may be difficult for a filing person to determine in what NAICS codes an entity derives revenues if it does not control the entity." That is, if an acquiring person cannot provide information about the minority holdings of its associates at the NAICS-code level, it could instead opt to respond on the basis of industry and provide a list of its associates’ minority holdings that fall into the same industry as the target, such as pharmaceuticals, mining, healthcare, etc.
Firms Must Get Informed About Their "Associates." Firms managed by third parties need to familiarize themselves with and remain current about the operations of their "associates." The extent to which they will be able to do so will turn on the agreements governing the related investment vehicles. Investment fund managers should discuss with fund counsel these new disclosure obligations and how they may impact the duties the fund managers owe their investors.
© 2011 Perkins Coie LLP