On July 7, 2011, the U.S. Federal Trade Commission published final rules amending the Hart-Scott-Rodino (HSR) Premerger Notification Rules, the Premerger Notification and Report Form and the instructions to the Form.1

Before certain mergers and acquisitions are permitted to close, the parties must file the Form and observe a waiting period to allow the FTC and Department of Justice (DOJ) time to consider the competitive effects of the proposed transaction and, if appropriate, to challenge and seek to prevent its consummation. The Form provides the FTC and DOJ with the information and documents needed to initially review a transaction for anticompetitive effects during the waiting period. The amendments streamline the Form and capture new information that will help the FTC and DOJ review a proposed merger or acquisition.

The new Rules and Form will go into effect 30 days from their publication in the Federal Registrar (expected in the next few days) and must be used for all transactions notified on or after that date. The most substantive changes are discussed below.

Increased Reporting for Private Equity and Other Investment Funds

An acquiring person must provide on its Form information about all entities included within it at the time of filing. The FTC and DOJ were concerned that not all entities that are commonly managed by the acquiring person are currently included on the Form because these associated entities are not controlled by the acquiring Ultimate Parent Entity (UPE). This is particularly the case with families of investment funds, such as private equity funds and master limited partnerships common in the energy industry. "Control" for HSR purposes means (i) for a corporation, holding 50% or more of the outstanding voting securities or currently having the contractual power to designate 50% or more of the directors; or (ii) for an unincorporated entity, having the right to 50% or more of the profits or the right to 50% or more of the assets upon dissolution. On the basis of this definition, under current HSR Rules, a general partner is typically not deemed to control a limited partnership.

The amendments add a new concept of "associate" of a fund or other limited partnership to pick up reporting of these entities by the acquiring person only.

  • "Associate" is defined as an entity that "(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 management with a managing entity."
  • The amendments require an acquiring fund making an HSR filing to provide the following information about all associates, in addition to the information it must report about its own holdings:
    • Minority holdings of associates: A list of minority investments of each associate (5% to less than 50%) in a company that derives revenues from a NAICS2 code that the filing person knows or believes overlaps with the target's codes. The name of the associate and the entity in which it invests and percentage interest held must be provided, but holdings of companies with less than $10 million in assets may be omitted. The FTC will allow the filing person to rely on its regularly prepared financials (and that of its associates) that list investments, provided that the financials are no more than three months old.3 The acquiring person is permitted to list all minority holdings of its associates instead of only those in the overlapping industries; however, in this case, the FTC notes that "the review of the filing could be delayed and the parties may be more likely to receive follow up requests from staff to obtain the information." If the information is completely unobtainable, the acquiring person can rely on a statement of reasons for non-compliance.4 (Item 6(c)(ii))
    • Subsidiaries of associates: A list of all NAICS codes or industries in which the filing person knows or believes both the target entity and any associate, including its majority-owned subsidiaries (50% or greater interest), generate revenue. The name of the subsidiary generating the revenue, the name of the associate and a list of states in which the subsidiary derives revenue from the overlapping codes must be provided. (Item 7)

New Document Submission Requirements

The new Form expands the set of documents required to be submitted beyond the Item 4(c) requirements. Currently Item 4(c) requires the submission of documents prepared by or for any officer or director "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 new Form requires the submission of these additional documents:

  • All confidential information memoranda (or if there are none, documents serving the same function) that specifically relate to the sale of the target or its assets and that were prepared within one year of the submission of the Form. Ordinary course documents and/or financial data shared in the course of due diligence can be excluded unless these materials served the purpose of a confidential information memorandum. (Item 4(d)(i))
  • Investment bank, consultant and other third-party adviser documents prepared during the course of an engagement or for the purpose of seeking an engagement within one year of submission of the Form, for an officer or director of the acquiring person, target and UPE, even if unsolicited and not used to evaluate or analyze the transaction, provided that such documents contain competitionrelated "4c" content and specifically relate to the sale of the target entity or its assets. (Item 4(d)(ii))
  • Documents evaluating or analyzing synergies and/or efficiencies prepared by or for any officer or director to evaluate or analyze the acquisition. Financial models without stated assumptions are not responsive. (Item 4(d)(iii))

Revenue Reporting and Foreign Manufactured Products

Currently, Item 5 requires filing parties to report their dollar revenues by 6-digit NAICS industry code for operations conducted in the United States during the 2002 base year and the most recent year. If the filing party derives revenue from manufacturing in the United States, revenues must be reported by 7- digit NAICS product code for the most recent year and 10-digit product code for the base year.

The amendments eliminate the revenue-reporting requirement for the base year, removing the burdensome task of retrieving 2002 information. The amendments also require (i)revenue for manufactured products to be reported by 10-digit manufacturing codes only, even if sold through a separate warehouse or retail establishment; and (ii) revenue to be reported from products manufactured outside the United States but sold in or into the United States. Revenue derived from non-manufacturing services provided outside the United States to customers in the United States remains excluded from Item 5 reporting.

Corporate Structure Information Requirements

  • Subsidiaries: The Form now requires the filing person to list only its U.S. subsidiaries and foreign subsidiaries with sales into the United States, rather than all entities within it, and then only by name and city/state or city/foreign country rather than the full address. (Item 6(a))
  • Minority shareholders: Only the holders of 5% or more of the acquired entity, the acquiring entity and the UPE of the acquiring entity must be listed, rather than the minority holders of all subsidiaries of the UPE. The Form clarifies that information regarding the minority holders of non-corporate entities is also required. Only general partners, not limited partners, of limited partnerships must be disclosed. (Item 6(b))
  • Minority holdings: The acquiring person and target are now required to report their holdings of between 5% and 50% of the voting securities of corporate issuers or non-corporate entities that they know or believe derive revenues in the same 6-digit industry code or have operations in the same industry as the target or acquiring entity, respectively.5 (Item 6(c)(i))

Footnotes

1The text of the amended Premerger Notification Rules (the Rules), the Premerger Notification and Report Form(the Form) and instructions published by the FTC can be found here.

2 North American Industry Classification System.

3 If the acquiring person and its associates make quarterly filings regarding their investments in publicly traded companies with the Securities and Exchange Commission, those lists can be relied on to respond to Items 6(c)(i) and (ii) of the Form, provided that they are no more than three months old.

4 16 CFR § 803.3.

5 Just as with reporting of minority holdings of associates, (i) the filing person is permitted to list all minority holdings instead of only those in the overlapping industries; however, this may prompt the FTC to ask follow-up questions and delay the review; and (ii) the FTC will allow the filing person to rely on its regularly prepared financials or quarterly filing with the Securities and Exchange Commission that lists investments, provided that they are no more than three months old.

Torys has offices in Toronto, New York and Calgary

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.