Major changes are coming to the U.S. premerger notification program - changes that could significantly increase the burden on filing parties to provide information and documents, particularly for private equity funds, investment funds, master limited partnerships and similar entities. The changes include a significant expansion of the pitch books, industry analyses, synergies analyses and other banker materials that must be submitted.
The U.S. premerger notification program was implemented in 1978 under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (HSR Act) and the Rules promulgated thereunder.The HSR Act requires that parties wishing to consummate a merger or acquisition above a certain size 1) provide notification to the U.S. Federal Trade Commission (FTC) and U.S. Department of Justice (DOJ) by filing a Premerger and Notification Report Form (Form); and 2) wait a prescribed period of time before closing the transaction.
Since its implementation 33 years ago, the program has been modified periodically. However, the changes that become effective on August 18 are arguably the most sweeping changes in HSR history. The current changes were proposed by the agencies in August 2010, and public comments were invited. The proposed changes have now been adopted with some modifications based on comments received.
With these changes, the agencies are attempting to achieve dual aims - to obtain information that will better enable assessment of the competitive impact of the transactions submitted for review, and to eliminate certain types of information requested by the prior Form that did not prove to be very useful but constituted a burden on the filing parties. Unfortunately, the added burden of the first goal could well outweigh the decreased burden contained in the second. While the agencies have stated a belief that the changes to the program would result in an overall decrease in the amount of time spent to prepare a filing, it seems likely that the burden on at least some filing parties will increase, and for certain types of parties, perhaps significantly.
In addition to several ministerial changes to the Form and the HSR Rules, the major changes fall into three primary categories, each of which present possible challenges: certain information about the holdings of "associates" of the filing party, an expansion of the scope of deal-related documents to be submitted, and increased information about goods manufactured outside the U.S. and sold in the U.S.
1. Additional reporting requirements for entities "associated" with the filing entity
The most significant change to the Form is the requirement to report certain data for entities that are "associates" of the "ultimate parent entity" (a defined term under the HSR Rules, referred to here as "Parent") and its controlled entities when completing the Form. The "associate" concept captures corporate and non-corporate entities that manage or are under common management with the acquiring party. Previously, information was reported only for entities "controlled" by the Parent of the acquiring entity, under a strict definition of control (generally, 50 percent interest). Under the structure typically used by private equity funds, the portfolio companies belonging to related funds often were not considered under common "control" by the Parent, and detailed information about those other portfolio companies was not required.
Examples of entities captured by the term "associate" 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.
The revised Form requires information about the majority and minority holdings of these associated entities where their lines of business overlap with the company or assets to be acquired. Overlap is measured by revenues as broken down into North American Industry Classification System (NAICS) codes, the standard codes used by Federal agencies for the purpose of collecting, analyzing, and publishing statistical data related to the U.S. business economy. If precise NAICS codes are not known, filers must list holdings in entities that have operations in the same industry, based on the knowledge or belief of the Parent.
This new requirement is potentially the greatest added burden for filing parties, particularly those structured as private equity funds or similar investment companies. Comments to the proposed changes noted that information about associates' holdings is generally not kept in the ordinary course of business, and that determining the appropriate NAICS reporting code for the holdings of associates will be difficult and time consuming. In response, the FTC stated that filing parties may rely on regularly prepared financial statements not more than three months old when responding to the new requirements about associates' holdings. However, given that such regularly prepared financials often do not identify the industry of the companies, it is unclear how much this concession will lessen the burden. The FTC did redefine "associate" in response to comments that the original definition was too vague.
The increase in information requirements is somewhat counterbalanced by a decrease in required information addressing the Parent's other holdings. It is no longer necessary to list every entity "controlled" by the Parent to the transaction. Only entities located inside the U.S. or having sales in or into the U.S. are reported. The requirement to provide information on minority outside shareholders of the Parent and each of its controlled entities is also no longer required. This information must be provided only for the Parent and the entity that is a direct party to the transaction.However, this category of information now covers not just companies with voting securities, as was formerly the case, but also non-corporate entities. General partner(s) of limited partnerships must also be reported. Finally, minority shareholdings in outside companies must only be listed if those companies derive revenues in the same NAICS codes as the target company or assets.
2. Expansion of documents required to be submitted with the Form
The scope of the documents to be submitted with the HSR filing has increased under new Item 4(d) of the Form. Previously, the only documents submitted with the filing included a copy of the agreement between the parties; certain securities filings and accounting materials; and the documents called for by Item 4(c) of the Form: "all studies, surveys, analyses and reports which were 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." The revisions eliminate the need to submit copies of public securities filings but expand the document submission requirement to include the following:
• Item 4(d)(i): offering memoranda, or documents serving that function, prepared by or for any officer or director of the Parent, or the acquiring or acquired entity that reference the entity or assets to be acquired, even if not prepared specially for the transaction, created within the last year;
• Item 4(d)(ii): studies, surveys, analyses and reports prepared by investment bankers, consultants or other third-party advisors for any officer or director of the Parent or the acquiring or acquired entity that reference the entity or assets to be acquired in terms of certain competition-related factors, even if not prepared specially for the transaction, created within the last year; and
• Item 4(d)(iii): documents prepared for any officer or director analyzing potential synergies or efficiencies of the transaction.
Comments in response to the original proposed Item 4(d) argued that the requirement was overly broad and ambiguous, and that without limiting the request to documents prepared for the transaction, the request would require searching persons who may not be aware of the transaction, thus compromising confidentiality. In response to these comments, the FTC modified Items 4(d)(i) and 4(d)(ii) to reduce the proposed timeframe from two years to one, limit the officers and directors to those of the Parent and acquiring or acquired entity only, and clarify that the documents need to contain more than a passing reference to the company or assets that are the subject of the present acquisition, but must in fact "specifically relate to the sale of the acquired entity(s) or assets." However, documents not prepared specifically for the transaction are still caught.
3. Changes to revenue reporting
A third category of changes to the Form relates to revenue reporting. Filing parties are no longer required to provide information about U.S. revenues derived in the so-called "base year," which is currently 2002.This should significantly reduce the burden on filing parties that face difficulty locating the proper figures from so long ago.
However, filers are now required to report on manufacturing revenues not only for those products made in the U.S., but also for products manufactured outside the U.S. and sold within the U.S. This is a significant change from the prior requirement. Previously, products manufactured outside the U.S. and sold to U.S. customers were either reported in a wholesale code or were not reported on the Form at all if they were shipped directly to the customer. In addition, filers need to provide information with regard to most recent fiscal year manufacturing revenues by 10-digit NAICS code, rather than the previously required 7-digit codes. While many of the comments to the proposed rule focused on the increased burden of identifying NAICS codes for manufacturing operations taking place outside the U.S., the FTC deemed the burden not too great, and the benefit to the agencies to be greater.
Time and practice with the new Form will tell, but at present, it appears that certain types of filing parties should be prepared to spend significantly more time preparing their premerger notifications for the U.S. agencies.
The FTC's press release, along with the full text of the Federal Register Notice announcing the proposed changes, may be found at http://www.ftc.gov/opa/2011/07/hsrform.shtm.
Timothy Cornell is a Counsel in the U.S. Antitrust Practice of Clifford Chance. Mr. Cornell has significant experience in assisting clients through government antitrust investigations, representing targets of governmental investigations and non-parties cooperating with the government. Elizabeth Chen is an Associate at Clifford Chance in the U.S. Antitrust Practice. She specializes in premerger notification filings under the Hart-Scott-Rodino Antitrust improvement Act.