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Revisions to the HSR form

by contributors Gary W. Kubek and Kyra K. Bromley, Debevoise | Published December 21, 2011 at 2:18 PM

On Aug. 18, the Federal Trade Commission implemented long-anticipated amendments to the premerger notification rules and the notification and report form that is used to report certain mergers and acquisitions under the Hart-Scott-Rodino Act. While many of the modifications simplify preparation of the form by removing outdated data and documentary requirements, others expand the burden of HSR compliance, especially for private equity firms.

The FTC initially proposed amendments to the form on Aug. 13, 2010, and received a number of comments objecting strenuously to certain of the changes. The FTC's final version of the amendments scales back and revises some of the more controversial changes, and the agency has also indicated in subsequent meetings with practitioners that it will interpret the amended rules narrowly.

Welcome changes to the form include elimination of the requirements to provide certain Securities and Exchange Commission filings by the filing party and its controlled subsidiaries, balance sheets for the filing party and its unconsolidated U.S. subsidiaries, and "base year" revenue data by North American Industry Classification System code. In addition, the amendment limits the sometimes burdensome requirement to provide a list of all entities controlled by the filing party to those located in the U.S. or making sales into the U.S.

Less welcome changes include a requirement that acquiring parties provide information about competitive overlaps between the target business and entities they manage but do not "control" for HSR purposes, and a new Item 4(d), which somewhat expands the scope of documents previously required to be provided under Item 4(c).

The revised form requires acquiring parties to provide limited information concerning "associates" that overlap competitively with the target, associates being defined as any entity (a "managing entity") that has the "right, directly or indirectly, to manage the ... investment decisions" of an acquiring entity, as well as any entity that has its "investment decisions, directly or indirectly, managed" by the acquiring person or by a managing entity. This change is specifically aimed at private equity firms and other capital management groups (such as master limited partnerships) whose investments are made through entities that are under common management, but not under common control for HSR purposes because no investor owns a 50% or greater equity interest.

Under the HSR rules, each private equity fund is generally its own "ultimate parent entity" because it is not "controlled" by any limited partner, general partner or manager. Thus, a form reporting an acquisition by such fund (or its controlled portfolio company) previously did not include any information relating to other funds under common management or those funds' investments. Such information might be of obvious interest to the antitrust agencies where, for example, a portfolio company of a related fund is a competitor of the target.

Thus, the amendments impose new information requirements with respect to an acquiring person's associates. Revised Item 7 requires an acquiring party to report not only competitive overlaps between it (and its controlled entities) and the target business, but also, based on its knowledge or belief, any such overlaps between any of its associates (including their controlled entities) and the target business. The new Item 6(c)(ii) similarly requires the acquiring party to disclose its associates' minority investments in entities having competitive overlaps with the target business, or in the target entity itself.

Item 4(c) of the HSR form requires submission of documents prepared by or for officers or directors of either party for the purpose of evaluating or analyzing the proposed transaction with respect to markets, market shares, competition, competitors, or the potential for sales growth or expansion into product or geographic markets. The amendments add a new Item 4(d) to the form, which requires submission of three categories of documents. This requirement largely codifies, but also somewhat expands, the FTC's existing interpretation of Item 4(c).

Item 4(d)(i) calls for any confidential information memorandum, or CIM, that was prepared by or for an officer or director of either party (or their ultimate parent entities) and that specifically relates to the sale of the acquired business, or, if no such CIM exists, any documents given to an officer or director of the buyer that were meant to serve the function of a CIM.

Item 4(d)(ii) requires documents prepared by "investment bankers, consultants or other third-party advisors," during an engagement or for the purpose of seeking an engagement, for an officer or director of either party (or their ultimate parent entities), if they contain content of the type responsive to Item 4(c) and specifically relate to the sale of the acquired business. This provision makes clear that even documents generated by advisers or potential advisers at the earliest stages of a transaction are required.

Item 4(d)(iii) calls for all documents "evaluating or analyzing synergies and/or efficiencies" that were prepared by or for an officer or director of either party (or their ultimate parent entities) for the purpose of evaluating or analyzing the proposed transaction. Previously, documents discussing revenue synergies were considered responsive to Item 4(c), but documents exclusively considering cost synergies were not. This amended provision now clearly picks up the latter, but excludes financial models without stated assumptions concerning synergies.

Revised Item 5(a) expands the revenue reporting requirement to include all sales into the U.S. of products manufactured by the filing party's foreign operations, whether those sales are made directly or through a U.S. establishment. The new HSR instructions also modify revenue reporting with respect to manufactured products that the reporting person both manufactures and sells at wholesale or retail, to eliminate potential double counting.

A filing party must use only the more granular 10-digit NAICS codes to report U.S. revenues from products that it manufactures and sells (even if sold through a separate wholesaling or retail establishment). The six-digit NAICS wholesaling or retailing codes are to be used only to report revenues of nonmanufacturing U.S. operations and U.S. revenues from foreign operations of products that are manufactured by a third party under contract for the filing party.

In addition, as noted above, Item 5 has been simplified by eliminating the requirement to report "base year" revenues, so that only revenues for the most recent fiscal year need be included.

The FTC's amendments also include numerous other minor changes to the HSR form, some of which address omissions from a prior FTC rulemaking (for example, inclusion of unincorporated entities in Items 6(b) and 6(c)), and many of which are ministerial or organizational (for example, requesting the filing party's website address).

In sum, these amendments are likely to result in a less burdensome data collection effort for most HSR filers, except for private equity firms and other capital management groups acquiring a target business in the same industry as an existing portfolio company.

Gary W. Kubek is a partner and Kyra K. Bromley is counsel in the New York office of Debevoise & Plimpton LLP. They are members of the firm's antitrust practice, which is part of the litigation department. A version of this article originally appeared in the summer 2011 issue of the Debevoise & Plimpton Private Equity Report.

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