The Federal Trade Commission (“FTC”) is proposing to implement several changes to transactional parties’ reporting requirements under the Hart-Scott-Rodino (“H-S-R”) Act. The proposed revisions are for the most part ministerial, and several changes reduce the parties’ reporting burden by deleting items that FTC no longer considers necessary for its initial review of a notified transaction.
However, the FTC notice includes certain amendments that will potentially increase the compliance burden of parties filing notification under the H-S-R Act, particularly private equity entities. These amendments require the parties to (i) produce certain documents that were not prepared in connection with the notified transaction, (ii) report information concerning investments held by an acquiring fund’s affiliates in addition to, as required under the current regulations, the investments held by the acquiring fund itself and (iii) report manufacturing revenues for the most recently concluded fiscal year at a 10-digit North American Industrial Classification System (“NAICS”) Code level.
Parties are currently required to produce all studies, reports, surveys or analyses that were prepared by or for an officer or director (or persons exercising similar functions) to analyze the notified transaction and that discuss market shares, competition, competitors, markets, potential for sales growth, or expansion into product or geographic markets.
The proposed amendments would require the parties also to produce such documents that discuss synergies and/or efficiencies that may result from the notified transaction. Financial models that do not contain stated assumptions will not be required.
More importantly, the proposed changes would require parties to produce documents prepared in the last two years by investment banks and other outside consultants for an officer or director of the person filing notification if such documents merely reference the entity or assets to be acquired (expanding the current requirement that parties provide such documents that analyze the specific transaction subject to notification), as well as discuss market shares, competition, competitors, markets, potential for sales growth or expansion into product or geographic markets. Parties would also be required to produce all confidential offering memoranda or similar documents prepared during the last two years. These proposed changes could significantly increase the parties’ compliance burden because they are not limited to documents that were prepared specifically to analyze the transaction being notified.
Investments Held by Affiliated Funds
The current H-S-R Act rules define “control” to mean holding 50% of the voting securities or having the right to appoint a majority of the directors of incorporated entities, and having the right to 50% of the profits or assets upon dissolution of unincorporated entities such as limited partnerships and limited liability companies. The fact that a family of private equity funds may be under common management is not determinative of control. As a result, private equity funds that file notification as an acquiring person are not required to disclose information concerning affiliated funds that have the same general partner or are part of a family of associated investment funds.
The proposed new rules would add the concept of “associate” to define entities under common management with the acquiring person. “Associates” would include general partners of a limited partnership, other partnerships with the same general partner, other investment funds whose investments are managed by a common entity or under a common investment management agreement, and investment advisers of a fund.
Under the concept of “associate,” an acquiring fund would have to identify its general partner. The fund would also have to disclose whether any of its associated investment funds (including early funds that are no longer actively investing) have controlling interests in portfolio companies that derive U.S. revenues in the same industry as the target, and if so to disclose information concerning the geographic areas from which such associated controlled portfolio companies derived the revenue. This change is intended to assess the competitive impact of investments where the acquiring fund does not have a controlled portfolio company that competes with the target, but an associated fund does.
The investment fund filing notification would also have to disclose the minority investments held by its associated funds that derive U.S. revenue in the same industry as the target. This change is intended to assess whether on an aggregated basis a group of associated investment funds have a significant or controlling interest in a particular company or industry, even though on an individual basis the funds do not.
The following example illustrates the effect of the proposed rule change. Assume that a private equity firm makes investments through a principal investment fund that is the third in a series of funds. The investment is made through an acquisition vehicle in which the principal investment fund holds a majority of the interests and affiliated smaller funds with the same general partner (such as a fund for executives) hold minority interests. Presently, the private equity firm is required to report data in an H-S-R Act notification only with respect to the main investment fund’s majority and minority interests. Under the proposed new rules, the firm would also be required to report information concerning majority and minority interests of both the smaller co-investment funds and the prior investment funds to the extent these interests are in companies with revenue in the same NAICS codes as the company proposed to be acquired.
Manufacturing Revenue Reporting
Parties engaged in manufacturing are currently required to report revenues from U.S. operations at a 10-digit NAICS Code level for 2002 (the year for which the most recent U.S. Economic Census data is available) and a 7-digit NAICS Code level for the most recently concluded fiscal year.
The proposed amendments would eliminate the requirement that parties report manufacturing revenues for the base year. Instead, parties would be required to report manufacturing revenues only for the most recently concluded fiscal year, but would have to report at a 10-digit NAICS Code level. The parties would also have to report revenues at a 10-digit level for products manufactured outside the United States but sold into the United States. These revenues attributable to products manufactured outside the United States are currently required to be reported in a 6-digit wholesaling NAICS Code. These proposed changes could increase the burden on parties engaged in manufacturing because they are required to report 10-digit NAICS Code information to the U.S. Census Bureau only every five years, and therefore may not track manufacturing revenues at a 10-digit NAICS Code level on a yearly basis.
These proposed amendments are open to public comment until October 18, 2010. The preliminary response to the amendments appears to be favorable in that many of the changes would streamline the reporting obligations under the H-S-R Act. The most concern appears to be over the proposal to require the submission of documents created during the last two years that were not prepared in connection with the current transaction being notified. Among the concerns we have heard is that this change may open the door for the FTC and the Department of Justice Antitrust Division to expand the scope of Civil Investigative Demands and Second Requests to include fund managers and other affiliates of the reporting investment fund, and could be construed to require that privileged documents that are not currently responsive be identified on a privilege log submitted with the notification. We believe this proposal is the one most likely to be modified prior to implementation of the new rules. While certain of the rules are clearly targeted to private equity firms, we currently believe that the remainder of the proposed amendments will likely be implemented with little if any modification.