- Final Changes to HSR Act Notification Form Announced
- July 13, 2011 | Authors: Rita D. Sinkfield Belin; Matthew P. Hendrickson; Brian C. Mohr; Joseph P. Nisa; Neal R. Stoll
- Law Firms: Skadden, Arps, Slate, Meagher & Flom LLP - New York Office ; Skadden, Arps, Slate, Meagher & Flom LLP - Washington Office ; Skadden, Arps, Slate, Meagher & Flom LLP - New York Office
On July 7, 2011, the Federal Trade Commission (FTC) published final rules (Final Rules), arising from an almost year-old rulemaking proceeding, with respect to certain long-anticipated changes to the HSR Act Premerger Notification and Report Form (the Notification Form). The Final Rules were published on the FTC website and will become effective 30 days after they are published in the Federal Register.1
The Final Rules substantially revise a number of items in the Notification Form, amend others and change certain of the HSR regulations, primarily to make them consistent with the changes to the Notification Form.2 However, the proposed changes that attracted the most significant negative comments during the rulemaking proceeding from various interested parties, including members of the HSR bar, namely, the addition of Item 4(d) and certain changes to Items 5, 6(c) and 7, including the addition of a new definition of the term “associate,” were adopted, for the most part, as originally proposed.
Pursuant to the Final Rules, filing parties will now need to compile, collect and provide additional information and documents that could prove to be burdensome, time-consuming and expensive for certain parties, particularly private equity, hedge and other types of investment funds and master limited partnerships in the energy sector. Three of the final changes have the most potential to increase materially the burden of preparing a Notification Form: (i) requiring certain information about a brand new type of HSR Act “entity,” defined as an “associate”; (ii) expanding the types of studies, evaluations and analyses relating to markets and competition that must be submitted, even if not prepared or created for the transaction for which the Notification Form is being filed; and (iii) tracking and reporting revenues from sales into the U.S. that are attributed to international manufacturing operations, but using NAICS manufacturing codes instead of NAICS wholesale codes.
The final changes will require a filing person to provide certain information about a new type of HSR Act entity — the “associate.”3 These requirements stand in stark contrast to the current HSR Rules that limit reporting obligations to information about the ultimate parent entity (UPE) of each of the acquiring and acquired persons and all entities “controlled” by each UPE.4 Specifically, the changes to the Notification Form will require the acquiring person to identify, to its knowledge or belief, information regarding the holdings and operations of each “associate,” if the associate reports revenues in the same six-digit NAICS code(s) as the acquired person in the transaction for which a filing is being made.
This requirement will likely create a significant burden for general partners and investment managers or directors of investment funds, who will now need to keep track of, and report the holdings of, each “associated” investment fund they manage, which could number in the dozens, even though each such fund’s holdings may change on a weekly, if not a daily basis. Further, additional analysis will need to be done to ascertain whether any such “associates” have investments in entities with businesses or products that may “overlap” with the acquired person in the transaction for which a Notification Form is being filed, likely causing delays in making filings.
Additional difficulties could arise because Items 6(b) and 6(c) of the Notification Form are no longer limited to corporations and will now require responsive information about minority holdings in or by unincorporated entities, such as partnerships and LLCs. The scope of Item 6(b) has also been expanded to include identifying all general partners and any other holders of a five percent or greater economic interest in any unincorporated entities controlled by the person filing notification. In responding to Item 6(c)(i), both the acquiring and acquired person will now have to identify all of their minority holdings in any and all entities that derived revenues in any six-digit NAICS code(s) in which the persons filing notification have an overlap. And perhaps most significantly, Item 6(c)(ii) will now require the acquiring person to identify all minority interests held by any of the acquiring person’s “associates,” where there is or may be any overlapping six-digit NAICS code(s) with the acquired person. Finally, in Item 7, an acquiring person must now also provide the required information for any and all associate entities that are identified in response to Item 6(c)(ii).
These are unusual and potentially daunting tasks. Under the Final Rules, an acquiring person must now provide information about the minority holdings of any “associate” it may have that holds a minority interest in another company, even though the acquiring person filing notification may not have detailed NAICS code information about the business operations of any such minority-held firms, a potentially troubling requirement when the person filing notification must certify the completeness of its filing under pain of perjury.5
The Final Rules also broaden the categories of documents required to be submitted with the Notification Form. Currently, the obligation to produce market or competition analyses (so-called “4(c) Documents”) is contained only in Item 4(c), which requires the filing person to produce all “studies, surveys, analyses, and reports which were prepared by or for officers or directors ¿ 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.”
A new Item 4(d) will now require the filing person to submit three additional categories of documents: (i) all offering documents, including confidential information memoranda; (ii) so-called “banker’s books,” even if unsolicited, that were prepared within a year of the filing, by investment bankers or other third-party consultants, if prepared for an officer or director, if they contain the same type of content as 4(c) Documents, specifically relate to the sale of the acquired person’s stock or assets and were developed during an engagement or for the purpose of seeking an engagement; and (iii) analyses of synergies or efficiencies concerning the notified transaction. Importantly, new Item 4(d) does not limit responsive documents to those prepared to analyze the transaction for which the instant Notification Form is being filed.
Items 4(d)(i) and (iii) codify the existing practice of producing offering memoranda and documents that evaluate transaction efficiencies and synergies in response to Item 4(c) or as a voluntary submission and thus are unlikely to add materially to the current burden of collecting all 4(c) Documents. Requiring the production of unsolicited third-party documents, however, could substantially increase the time and expense of searching for all such materials.
Reporting of Revenues
While the Final Rules eliminate reporting base year (currently 2002) revenues, a positive development, two changes to Item 5 may generate more data collection difficulties. First, 10-digit NAICS manufacturing codes and revenues, currently reported by virtually all U.S. corporations to the U.S. Census Bureau only every five years, will now need to be provided on a “most recent year” basis, something heretofore not required by any U.S. government agency.
Second, the revised Notification Form will, going forward, require the person filing notification to report U.S. revenues for products manufactured outside the U.S. and sold in the U.S. under the more complex 10-digit NAICS manufactured product codes and not under the currently required and simpler six-digit NAICS industry wholesale codes, likely generating problems for filing persons with ex-U.S. manufacturing facilities, who must now report any U.S. revenues by codes not maintained in their ordinary course of business.
Impact of Final Rules The collection of the additional information will be dependent on the elements of the specific transaction. Accordingly, it will be more difficult to have an “on the shelf” filing, ready to be updated, finalized and filed for a time-sensitive transaction. As a result, provisions in acquisition agreements requiring that an HSR filing be made within a short amount of time (as little as five business days) after the execution of the definitive agreement may need to be revisited, as it may not be feasible to complete the document and information-gathering process within that time frame.
In addition to increasing the time and cost of preparing HSR Act filings, the Final Rules may also portend a sea change in other areas of the government’s premerger enforcement practice. For example, with the adoption of the Final Rule defining “associate,” there likely will be an increase in the number of Civil Investigative Demands or subpoenas duces tecum that the FTC and DOJ issue to investment fund managers or directors and the general partners of any such funds. The additional “associate” information also will inform the agencies concerning the scope and depth of second requests. In addition, filing parties may find the need to include many more statements of reasons for noncompliance to be able to certify substantial compliance with the revised Notification Form.
Skadden HSR attorneys are available to provide more client-specific advice about the Final Rules and the soon-to-be-effective changes to the Notification Form. Our HSR practice group in-cludes Neal Stoll and Joseph Nisa, two of the authors of the treatise Acquisitions Under the Hart-Scott-Rodino Antitrust Improvements Act. Thus, Skadden can help clients evaluate the practical implications of the changes to their obligations and burdens to comply with the HSR requirements.
1 Accordingly, clients expecting to make HSR filings within 30 days of the Federal Register publication can continue to use the old form. However, any filing contemplated to be made 30 days after such publication must utilize the new Notification Form.
2 Statement of Basis and Purpose of the Final Rules and the Form. The Final Rules revise or eliminate Items 2(e), 3(b), 3(c), 4(a), 4(b), 5(a), 5(b)(i), 5(b)(ii), 5(d) 6(a) and 6(b) of the old Notification Form and amend Items 2(d), 5(c) and 8, with other minor Rule changes adopted. These minor changes are to HSR Rule § 801.1 (but not including the addition of the definition of “associate”) and HSR Rules §§ 801.15, 801.30, 802.4, 802.21, 802.52, 803.2 and 803.5 (which all conform the Rules to include “unincorporated” entities).
3 “Associate” is defined in Final Rule § 801.1(d)(2): “For purposes of Items 6 and 7 of the Form, an associate of an acquiring person shall be an entity that is not an affiliate of such person but: (A) has the right, directly or indirectly, to manage the operations or investment decisions of an acquiring entity (a ‘managing entity’); or (B) has its operations or investment decisions, directly or indirectly, managed by the acquiring person; or (C) directly or indirectly controls, is controlled by, or is under common control with a managing entity; or (D) directly or indirectly manages, is managed by, or is under common operational or investment decision management with a managing entity.” The Final Rules also contain 12 examples (and 3 illustrative charts to the examples), to assist in understanding the definition of “associate.”
4 Generally, “control” for HSR purposes is defined as having 50 percent or more of the outstanding voting securities of a corporation or the right to 50 percent or more of the profits or assets, in the event of dissolution, for a noncorporate entity. Under HSR control rules, a general partner with a 1% economic interest in a partnership, who directs the activities of the LP or oversees all of its investments, is not deemed to control that partnership, a factor that can lead to misunderstandings when control is used differently in other (e.g., SEC) contexts.
5 The Final Rules permit some relief from this requirement, if NAICS code information is not available, by accepting a Notification Form based on knowledge and belief, of a minority position in a company that operates in the same industry, or will permit a listing of all minority holdings of an associate. However, the FTC warns that such a general response may lead to delay, as the reviewing agency will have to determine for itself whether the minority holding is in a related industry. Finally, a Notification Form may include a statement of reasons for noncompliance, if the information regarding associates is completely unobtainable.