The Federal Trade Commission (“FTC”) has approved final rules that implement several changes to transactional parties’ reporting requirements under the Hart-Scott-Rodino (“H-S-R”) Act. The new rules take effect for all filings made on or after August 18, 2011.
The 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, certain amendments 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) 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, (ii) produce certain documents that were not prepared in connection with the notified transaction and (iii) report manufacturing revenues for the most recently concluded fiscal year at a 10-digit North American Industrial Classification System (“NAICS”) Code level.
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 new rules add the concept of “associate” to define entities under common investment or operational management with the person filing notification. “Associates” will 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. An exception to the definition of “associate” is an individual who is a general partner of a limited partnership, or a managing member of an LLC. Such an individual will not be deemed an “associate” unless there is a separate contract that gives the individual the right to manage the investment decisions of the limited partnership or LLC.
Under the concept of “associate,” an acquiring fund will have to identify its general partner. The fund will 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 will 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 new rules, the firm will 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.
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 amendments require the parties also to produce documents that discuss synergies and/or efficiencies that may result from the notified transaction. More importantly, the changes require parties to produce documents prepared in the last year by investment banks and other outside consultants for an officer or director of the person filing notification during an engagement or in the course of pitching for an engagement and that relate to the business or assets to be acquired. Parties will also be required to produce all confidential offering memoranda or similar documents prepared within one year prior to filing. Significantly, FTC has clarified that parties do not need to do a search of files of third-party advisors who may have advised on the reported transaction.
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 amendments eliminate the requirement that parties report manufacturing revenues for the base year. Instead, parties will be required to report manufacturing revenues only for the most recently concluded fiscal year, but at a 10-digit NAICS Code level. The parties will 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 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.