On August 13, the Federal Trade Commission ("FTC" or
"Commission"), with the concurrence of the Department of
Justice (collectively, the "Agencies"), proposed
significant modifications to the Hart-Scott-Rodino
("HSR") Act Notification and Report Form
("Form").1 These changes are designed to
provide the Agencies with more information relevant to their
antitrust analysis of notified transactions. However, the proposed
changes will, in many cases, increase the burden on filers.
Revisions to Items 1-3 (Identification of Parties and Description of Transaction)
The Commission proposes a number of minor changes to Items 1 through 3 of the Form; generally, these changes eliminate duplicative questions and requests for non-relevant information (for example, the request that the filing person separately identify and describe the type and number of securities of the to-be acquired entity). There is one proposal of significance: the FTC proposes to require the filing person to provide -- in addition to the main agreement between the parties -- a copy of any "Agreements Not To Compete."
Revisions to Items 4(a) and 4(b) (Request for Financial Statements)
The Commission first proposes several helpful changes to the
financial information requested at Items 4(a) and
4(b).2
Item 4(a) would be amended to require only that the filing person
list all entities within it that file annual reports3
with the Securities and Exchange Commission, and to provide the
Central Index Key ("CIK") number for each
entity.4 Item 4(b) would be amended to eliminate the
requirement that the filing person provide its most recent balance
sheets (whether consolidated or unconsolidated), but would be
expanded to require the filing person to provide annual reports
and/or audit reports of any unconsolidated non-corporate U.S.
issuer (e.g., L.P., LLC, or LLP) within the filing person.
Proposed New Item 4(d) (Request for New Classes of Documents)
The Commission proposes no change to one of the most important aspects of the Form, Item 4(c), which calls for documents prepared in connection with the transaction that analyze or provide guidance on the competitive effect of the transaction.5 But, in a significant change, the FTC is introducing a new Item 4(d). It would require the filing parties to provide: (i) all confidential information memoranda or offering memoranda that reference the to-be acquired entity or assets; (ii) all studies, surveys, analyses, and reports prepared by investment bankers, consultants, or other third party advisors for any officer(s) or director(s)6 of the filing person that meet the competitive information prong of Item 4(c) and reference the acquired entity or assets; and, (iii) all studies, surveys, analyses or reports evaluating or analyzing synergies or efficiencies, prepared by or for any officer(s) or director(s)7 for the purpose of evaluating or analyzing the acquisition. Proposed new items 4(d)(i) and 4(d)(ii) would require the filing person to provide responsive documents prepared within two (2) years of the HSR filing date.
Proposed Revisions to and Expansions of Item 5 (Revenue Information)
The Commission also proposes significant changes to Item 5. Item
5 presently directs the filing person to provide U.S. revenue
information by a 6-digit NAICS code for manufactured and
non-manufactured products and, additionally, by a 10-digit NAICS
code for manufactured products for a base year (presently 2002), as
well as similar data (by either a 7-digit or a 6-digit NAICS Code)
for the most current completed year.8 Recognizing the
limited value of base year data, the FTC proposes eliminating the
request for this data.9
However, the FTC also proposes expanding the information requested
for current year operations in two significant ways. First, a
filing person would be required to allocate manufacturing data by a
10-digit NAICS code, rather than by a 7-digit NAICS code. Second,
the filing person would also be required to provide information on
products manufactured outside the U.S. but sold in or exported into
the United States by a 10-digit NAICS code.10
Revisions to Item 6 (Request for Information on Ownership Structure)
The Commission proposes substantial and substantive changes to
Item 6. This item identifies the entities within the filing person,
any minority shareholders of corporate entities, and minority
share-holdings of the filing person.
Proposed changes to Item 6(b) would require the filing person to
identify significant minority owners11 of any
non-corporate entity controlled by the filing party. (Recognizing
the limited role that limited partners play in limited
partnerships, the modified form would require identification of the
general partner of non-corporate entities controlled by the filing
party, but not any of the limited partners.) Item 6(c) would be
modified to allow a filing person to limit its response to the
identification of minority-owned interests, in both corporate and
non-corporate entities, to those from which the minority-held
entity derived revenue in its most recent completed year within any
6-digit NAICS code in which the acquiring and acquired person also
derived dollar revenues.
Introduction of New Item 6(c)(ii): (Identification of Associates of Filing Party)
Proposed new item 6(c)(ii) would require the acquiring person to
identify any "associates" with significant minority
ownership12 of any corporate or non-corporate entity
that derived dollar revenues, in its most recent completed year,
within any 6-digit NAICS code in which the acquired entity also
derived dollar revenues.
Associates, a new term, is defined as an entity that:
- (A) 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
- (B) has its affairs and/or investments, directly or indirectly, managed, directed or overseen 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, directs or overseas, is managed by, directed by or overseen by, or is under common management with a managing entity.13
The addition of the concept of an associate to the HSR filing
process is a significant change and reflects the Agencies'
increasing concern over the competitive effects of minority
shareholdings in or among competitors or common persons.
The Commission is seeking comment on the proposed rule changes; comments are due on or before October 18, 2010.
Footnotes
1 In addition, the FTC proposes some corrective changes to
the HSR Regulations (available at 16 C.F.R. 801.1 et. seq.).
2 Item 4(a) requires the filing person to provide copies of, or
links to, certain of its filings and the filings of the entities
within it with the United States Securities and Exchange
Commission. Item 4(b) requires the filing person to provide its
most recent consolidated annual financial statements and audit
report, and similar reports for any unconsolidated U.S. corporation
within it. Item 4(b) also requires the filing person to provide its
most recent regularly-prepared consolidated balance sheet and the
balance sheet of any unconsolidated U.S. issuer.
3 Form 10-Ks and 20-Fs.
4 The CIK is a number given to an individual or company by the SEC
to identify the filings of a company, person, or entity in online
databases, including the EDGAR database.
5 Specifically, Item 4(c) of the HSR Notification and Report Form
requires that filing parties include with 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."
6 In the case of unincorporated entities, this requirement includes
individuals exercising similar functions.
7 In the case of unincorporated entities, this requirement includes
individuals exercising similar functions.
8 A filing party is also required to identify products added or
deleted between 2002 and the most current completed year.
9 This would also eliminate the requirement that the filing party
identify products added or deleted between the base year and the
current year.
10 Products manufactured outside the United States and sold through
a U.S. wholesale operation would be identified twice, as both
manufactured products (sold at their transfer price) and as
products sold at wholesale (and/or retail). The FTC also proposes
slight modifications to Item 5(d) – applicable if the
parties are filing for the formation of a joint venture –
to eliminate some sections (the name and the address of the joint
venture and the description of any credit guarantees) and to
require the parties to provide information on the expected source
of the joint venture's dollar revenues by a 6-digit
(non-manufacturing) or a 10-digit (manufacturing) NAICS code.
11 Interests of 5% or more, but less than 50%.
12 Significant minority ownership is considered more than 5% but
less than 50% of outstanding interests (or voting
securities).
13 The FTC also proposes that filing parties identify, at Item 7,
any NAICS code overlaps between the acquired entity and associates
of the acquiring person.
O'Melveny & Myers LLP routinely provides advice to clients on complex transactions in which these issues may arise, including finance, mergers and acquisitions, and licensing arrangements. If you have any questions about the operation of the applicable statutory provisions or the case law interpreting these provisions, please contact any of the attorneys listed on this alert.
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