On July 7, 2011, the FTC and DOJ (the “Agencies”) announced the final revisions to the Hart-Scott-Rodino (“HSR”) Premerger Notification Rules and the Premerger Notification and Report Form. The changes were made to reduce the filing burden and streamline the form parties must file when seeking antitrust clearance of proposed mergers and acquisitions under the HSR Act and the Premerger Notification Rules.
The proposed amendments make substantive as well as ministerial revisions, deletions and additions to the HSR form. The ministerial changes mostly revise or delete various requests for information that Agencies have not found useful in their antitrust assessment, such as historical revenue data by NAICS Codes, descriptions of assets to be acquired and detailed information in relation to voting securities to be acquired.
Item 3 – Agreements between Filing Parties Expanded to Non-Compete Agreements
Under the current Item 3, parties are required to file copies of their executed agreement. This request would be extended to executed agreements not to compete, or the most recent draft for a non-compete agreement.
Items 4 (a) and (b) – Certain Financial or SEC Documents.
Currently, filing parties are required to provide documents or internet links to certain documents submitted to the U.S. Securities and Exchange Commission. This requirement would be simplified by the HSR form changes, as the new Item 4(a) would require parties to only provide names and the Central Index Key number for all entities under common HSR control.
Under the current Item 4(b), parties are required to provide the most recent annual report, audit report and the regularly prepared balance sheet of the person filing the notification and include each unconsolidated U.S. issuer. The new Item 4 would only require the most recent annual report and/or the annual audit report.
Item 4(d) – Additional Documents for Evaluating or Analyzing Acquisition
A significant substantial change would be the addition of Item 4(d) to Item 4(c). Item 4(c) requires the production of all documents prepared by or for an officer or director for the purpose of evaluating or analyzing the acquisition with respect to market shares, competition, markets, potential for sales growth, or expansion into product or geographic markets. This Item is intended to provide the antitrust agencies with useful information for their (initial) substantive assessments of the competitive effects of the reported transaction.
With the new Item 4(d), the Commission intends to maximize the effectiveness of Item 4 by adding “categories of documents [that] are quite useful for the Agencies’ initial substantive analysis of transactions”. The Commission reasoned that parties have differing interpretations as to whether the documents are called for under current Item 4(c) so an Item 4(d) would enumerate these discrete categories of documents and require their submission with the HSR form.
The 11 comments that were filed with the Commission on the proposed amendments all expressed concerns regarding Item 4(d), raising the overarching issue of the relationship with Item 4(c). The Commission stated that Item 4(d) sought different documents from those covered by the language of Item 4(c). The argument was made that the collection and review of documents that had to be submitted under Item 4(c) of the HSR form was already costly and time-consuming. The amendment includes three additional categories of documents (confidential information memoranda, studies by third party advisors and studies for analyzing the synergies and/or efficiencies) with the HSR form, in addition to the documents listed in Item 4(c), which would increase the time and cost of the filing.
Item 5(a) – Revenue Reporting Requirements Adjusted
A second significant substantive change would be the revision of Item 5(a). The current Item 5 requires the parties to report certain U.S. revenues classified by NAICS Codes for the most recent year and for a “base” year (currently 2002). The amendment eliminates the requirement to report these historical U.S. revenues. Parties would also no longer need to provide information on “added or deleted” manufactured products. The person filing the form only has to provide revenues for the most recent year, broken down by 6-digit NAICS Codes for non-manufacturing activities and by 10-digit NAICS Codes for manufacturing activities (currently 7-digit codes). This reporting gives the Agencies a more accurate understanding of products in the United States.
Another new addition would be the requirement of reporting revenues related to products manufactured outside the United States and sold in the United States at the wholesale or retail level, or directly sold to the customer in the United States. These revenues will need to be reported under a 10-digit manufacturing NAICS Code. These revisions would decrease the burden of responding to Item 5 significantly.
Item 6(a) – Requirement of Identification of All Entities under HSR Control
The current Item 6(a) requires the filing parties to provide the full addresses for entities under their HSR control, even if the entity is located outside the United States. The new form would decrease the burden of responding to this Item by only requiring the parties to list responsive U.S. entities under common HSR control and responsive foreign entities under common HSR control that have sales into the United States. A street address will also no longer be required; a city, state and country will suffice.
Item 6(b) – Information about Third Parties Who Hold 5-50% of Voting Securities
A third significant substantive change would be the information on controlling minority interests of “associates” (see below under Items 6(c) and 7) with overlapping NAICS Codes. Currently, information is required about the third parties who hold at least 5% but less than 50% of the voting securities of corporations under common HSR control with the acquiring person or the acquired entity. The new Item 6(b) would require information about third parties who hold at least 5% of the voting securities or non-corporate interests of corporations or unincorporated entities only for the acquired entity and only for the acquiring entity and its ultimate parent entity. For natural persons, third party holders of at least 5% of corporations or unincorporated entities would only need to be identified for the top level entities under HSR control of such natural persons. This Item would also be extended to request information of the general partners of limited partnerships, regardless of what percentage they hold in such partnerships.
Items 6(c) and 7 – Reporting Requirement Expanded to “Associate” Entities under Common Management
Also new would be the requirement to submit information relating to “associates”. The current HSR rules require the ultimate parent entity of the acquiring entity to provide information with respect to all entities under its HSR control (§801.1(d)). So, entities under common management with an acquiring person, but not under common HSR control, are not included in this definition. The Agencies believe information about competitive overlaps between the acquiring entity and acquired entity would give a full picture of the competitive effects of the filed transaction if it included information about entities under common investment or operational management with the acquiring entity.
Hence, a new concept would be added: “associate”. The acquiring person would need to provide information about its associates and some of their holdings, next to the information about affiliates that was already required. The definition of “associate” can be found in the new 16 CFR 801.1(d)(2) (“An entity that is not under common control with the acquiring person but has the (in)direct right to manage the operations or investment decisions of an acquiring entity; or has its operations or investment decisions (in)directly managed by the acquiring person; or (in)directly controls/manages, is controlled/managed by or is under common control/management with a managing entity”).
A second point was added to Item 6(c), to be completed by the acquiring person. It requires an acquiring person 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(s) and in entities having 6-digits NAICS industry code overlaps with the acquired entity(s) or assets. The new Item 6(c) would also revise the information required about minority holdings of filing parties. While currently only information about 5% stockholders is requested, the parties would need to list their minority holdings of more than 5% but less than 50% of voting securities or non-corporate interests of an issuer or unincorporated entity with total assets of at least U.S.$ 10 million. In addition, the acquiring party would only list its responsive minority holdings of entities that derived dollar revenues in the most recent year in the same 6-digit NAICS Codes.
Item 7 was also amended to include the information regarding associates. Where it currently requires identification of NAICS code overlaps between the acquiring person (and entities under common HSR control) and the acquired entity/assets (new Item 7(a)(i)), the new Item 7 would also require identification of any associate that also derived revenues in the 6-digit NAICS Code(s) used by the acquired entity/assets (new Item 7 (a)(ii)). The new Item7 would also require certain information about the geographic areas in which the associates derived revenues in those overlapping NAICS Codes (new Item 7 (b) and (c)).