GH&C Update: Changes To Disclosure Requirements For Hart-Scott-Rodino Premerger Notification Rules And Form
January 1, 1900
July 15, 2011 - Red Bank, NJ - On July 7, 2011, substantial revisions to the Hart-Scott-Rodino (HSR) Premerger Notification Rules (the HSR Rules) and the HSR Notification and Report Form (the HSR Form) were announced by the Federal Trade Commission (FTC) and the Department of Justice (DOJ). The Hart-Scott-Rodino Anti-Trust Improvement Act of 1976, as amended (the HSR Act), generally requires parties to notify the FTC and the DOJ of certain proposed transactions that meet the HSR Act’s jurisdictional thresholds and to observe certain statutory waiting periods while a review of the competitive impact of the transaction is performed by those agencies. The new HSR Rules and HSR Form will go into effect 30 days after their publication in the Federal Register, which is expected within the next 7-10 days.
The revisions to the HSR Form generally include the elimination of certain disclosure requirements for information that the FTC and the DOJ found to be no longer helpful in their review of transactions, including the elimination of (i) certain requirements to submit SEC filed documents and other financials, (ii) certain revenue reporting requirements and (iii) the need for filing parties to gather certain base-year revenue data. However, certain proposed changes to the HSR Form will impose substantial additional burdens on certain filing parties. The most significant changes to the HSR Form are set forth below.
Item 4(d) – Additional Document Disclosure Requirements
The HSR Form will now include a new Item 4(d) that will require filing parties to submit additional categories of documents, including Confidential Information Memoranda prepared by or for officers, directors or managers of the Ultimate Parent Entity of the Acquiring Person/Entity and the Acquired Person/Entity that specifically relate to the sale of the Acquired Person/Entity or its assets. If no such Confidential Information Memorandum exists, a filing party must submit any document(s) given to any officer, director or manager of the buyer meant to serve the function of a Confidential Information Memorandum. This disclosure requirement does not include ordinary course documents and/or financial data shared in the course of due diligence, except to the extent that such materials served the purpose of a Confidential Information Memorandum when no such Confidential Information Memorandum exists. However, documents responsive to this item are limited to those produced up to one (1) year before the date of filing.
Item 4(d) also includes new disclosure requirements involving production of studies and reports prepared by third party advisors for any officers, directors or managers of the Ultimate Parent Entity of the Acquiring Person/Entity or the Acquired Person/Entity for purposes of evaluating or analyzing market shares, competition, competitor’s markets, potential for sales growth or expansion into product or geographic markets that specifically relate to the sale of the Acquired Person/Entity or its assets. This disclosure requirement only requires materials developed by third party advisors during an engagement or for the purpose of an engagement. However, documents responsive to this item are limited to those produced up to one (1) year before the date of filing. Finally, Item 4(d) also requires production of studies and reports prepared by or for officers, directors or managers of a filing party evaluating or analyzing synergies and efficiencies of a proposed acquisition.
Revenue Data Reporting Changes
The current HSR Form requires certain revenue data to be reported in Item 5 by North American Industry Classification System (NAICS) Codes for the base year 2002 and the most recently completed fiscal year of a filing party. Based on comments from many filing parties over a number of years that revenue reporting requirements for base year 2002 lacked relevance to a current antitrust analysis of a transaction, the FTC and the DOJ determined to eliminate the requirement for reporting revenue data for base year 2002, and now require the reporting of revenue data from the most recently completed fiscal year of a filing party. If such data has not been compiled for the most recently completed fiscal year, estimates of dollar revenues by NAICS Codes can be provided if a statement describing the method of estimation is furnished. Filing parties may also omit reporting on any industries for which the dollar revenues total less than $1 million in the most recently completed fiscal year (applicable only to non-manufacturing NAICS Codes). However, Item 5 now requires the reporting of manufacturing revenues to be reported by 10-digit NAICS product codes, instead of the previously required 7-digit NAICS product codes. Additionally, Item 5 now also requires reporting of revenues for each product manufactured outside of the United States but sold in or into the United States, whereas the existing HSR Form only requires revenue reporting with respect to operations conducted within the United States.
The changes to Item 5 of the HSR Form will increase the burden on certain filing parties to report revenues based on more detailed NAICS Codes and will require multi-national businesses that maintain foreign manufacturing operations that sell in or into the United States to report revenue data from those foreign operations. However, the elimination of the 2002 base year revenue reporting requirement will ease the reporting burdens on all filing parties.
Reporting Requirements for "Associates"
One of the more significant aspects of the proposed changes to the HSR Form, particularly for investment funds, involves the expansion of certain reporting requirements regarding "Associates" of the Acquiring Person/Entity. The FTC determined that under the existing HSR Form, an Acquiring Person/Entity is required to provide information with respect to all entities included within it at the time of filing. However, in some instances, particularly with families of investment funds, entities that are commonly managed with the Acquiring Person/Entity are not included because these "associated" entities are not "controlled," as defined in Section 801.1(b) of the HSR Rules by the acquiring Ultimate Parent Entity. As a result, the FTC and the DOJ believed that they were not receiving the information they needed to get a complete picture of the potential antitrust ramifications of certain acquisitions.
To capture information on overlaps between entities commonly managed with the Acquiring Person/Entity and the Acquired Person/Entity, the FTC has introduced and defined the term "Associate," created a new Item 6(c)(ii) and revised Item 7 to require the submission of information on minority and controlling interests of "Associates" that overlap with the entity(s) or assets that are being acquired. Consistent with the foregoing, the FTC defines an "Associate" of an Acquiring Person/Entity to be an entity that is not an affiliate of such Acquiring Person/Entity, 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/Entity; 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. This definition essentially includes entities under common management and also entities that may be managed or controlled by an Associate of an Acquiring Person/Entity.
An acquiring party will be required to report all of its Associates’ holdings of voting securities and non-corporate interests of 5% or more but less than 50% in the Acquired Entity and in entities having 6-digit NAICS industry code overlaps with the Acquired Entity(s) or assets, as well as those entities controlled by Associates of the acquiring party that derive revenues in NAICS Codes that overlap with the acquired business in the most recently completed fiscal year. An acquiring party will also have to report geographic information for such entities that derive revenues in the overlapping NAICS Code in the most recent fiscal year. However, the FTC included caveats in the language in the instructions to Items 6(c)(i) and 6(c)(ii) that the information be provided based on the knowledge or belief of the acquiring party, and that if the information is completely unobtainable, the acquiring party can rely on a statement of reasons for noncompliance.
Although some of the changes to the HSR Form will increase the reporting requirements for certain filing parties, some of the proposed changes to the HSR Form are minor in nature and simply formalize informal positions taken by the FTC and the DOJ in the past with respect to certain reporting requirements on the existing HSR Form. However, clients with foreign manufacturing operations that sell in or into the United States and acquiring parties that have “Associates” will have certain additional reporting requirements not currently required under the existing HSR Form. Parties that intend to file HSR premerger notifications in the coming weeks should continue to monitor the date on which the HSR Rules are published in the Federal Register, as the HSR Rules and the changes to the HSR Form will take effect 30 days thereafter, and different disclosures may need to be made depending on the filing date of the HSR premerger notification.
This Update is not considered to be legal advice, and is intended for educational purposes only. For more information regarding the HSR Pre-Merger Notification Rules and the HSR Pre-Merger Notification and Report Form, please contact Patrick Convery.
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