The Federal Trade Commission recently announced and asked for comments about proposed changes to the Hart-Scott-Rodino (HSR) premerger notification rules and report form. The changes would require a reporting person to identify and quantify sales in the United States of products that the person makes abroad, and to provide competition-related reports and analyses for as far back as two years before the date the HSR report is filed. Controversially, the new rules would increase reporting burdens for investment and other firms that manage, but for HSR purposes do not control, multiple partnerships and companies. The comment period for the proposed new rules ends October 18, 2010.
Increased Reporting Obligations
Although several proposed changes would simplify the report form and reduce the burden on filing persons, other changes could markedly increase it. These include a rule requiring reporting firms to identify and quantify sales to customers in the United States of products that the reporting firms made abroad. Other proposed changes would require reporting firms to submit copies of offering memoranda and other reports and studies prepared during the two years preceding the filing by the firm's investment bankers, consultants or other third-party advisors that evaluate or analyze the target firm's market shares, competitors, markets, or potential for sales growth or expansion into product or geographic markets. Unlike the current HSR rules which require such documents only in connection with the reported transaction, under the new rules the documents need not be related to that transaction and could, for example, consist of reports prepared by the target firm's investment bankers two years earlier for the potential sale of the target to a different buyer.
"Associate"—A New HSR Concept
Under the current rules, the acquiring person consists of an ultimate parent entity and all 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. The most controversial proposed new HSR rule change would designate a new type of entity called an "associate" that manages or is managed (but not controlled) by the acquiring person. As we discuss below, the acquiring person would have to identify in its HSR report any industry in which both the target firm and the acquiring person's controlled entities or associates have operations.
Definition of "Associate." The proposed new HSR rule defines an associate as an entity that is not a controlled affiliate of the acquiring person but:
- has the right, directly or indirectly, to manage, direct or oversee the affairs and/or the investments of an acquiring entity (a "managing entity"); or
- has its affairs and/or investments, directly or indirectly, managed, directed or overseen 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, directs or oversees, is managed by, directed by or overseen by, or is under common management with a managing entity.
Increased Scope of Reported Information
Under the current rules, acquiring and acquired persons must provide information about the filing person's minority investments (holdings of 5% or more but less that 50%)—pursuant to Item 6(c)—and identify any North American Industry Classification System (NAICS) codes in which both the acquiring and acquired persons earned revenues—pursuant to Item 7. Under the proposed new rules, however, the acquiring person will also have to identify any associate that also derived revenues in the same NAICS code as the acquired person and provide geographic market information about those revenues.
Example. The Notice of Proposed Rulemaking provides 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), the acquiring person will disclose any minority holdings of its own, or of any of these associates, in any other entity that generates revenues in any of the same codes as the acquired entity in the reportable transaction. In Item 7, the acquiring person will indicate whether there are any NAICS code overlaps between the acquired entity in the reportable transaction, on the one hand, and the acquiring person and all of its associates, on the other.
The 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." In such cases, based on its "knowledge and belief," the acquiring person may identify the industries (rather than NAICS codes) in which both its associate and the target firm have operations.
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 corporate "associates." How 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 that the managers owe their investors.
This Update is only intended to provide a summary of proposed changes to the Hart-Scott-Rodino premerger notification rules and report form. You can read the full text of the announcement of the proposed changes at http://www.ftc.gov/opa/2010/08/hsrcarilion.shtm.