Recently adopted changes to the notification requirements under the Hart-Scott-Rodino Anti-trust Improvements Act of 1976 (“HSR”) will likely substantially increase the quantity of information and documentation which must be submitted to the federal government in connection with certain merger and acquisition transactions. These changes will require M&A transaction parties to plan carefully for possible HSR filings during the initial stages of the transaction process in order to avoid possible delays while awaiting clearance of the transaction from the federal government.
Overview of HSR
HSR requires parties considering a merger or acquisition of a certain size to prepare and file a notification regarding the transaction to the Federal Trade Commission (“FTC”) and the Antitrust Division of the Department of Justice (“DOJ”). Any transaction that involves:
- An acquisition of voting securities or assets for consideration that exceeds $66 million and one party to the transaction (including affiliates) that has total sales or assets in excess of $131.9 million and another party to the transaction that has total sales or assets in excess of $13.2 million; or
- Any acquisition of voting securities or assets for consideration that exceeds $263.8 million,
is subject to HSR and a waiting period (typically 30 days) before such transaction (an “HSR Transaction”) can be consummated to allow the FTC and DOJ to review the transaction’s potential competitive effects on the relevant industry. If the FTC or DOJ believe the transaction will substantially lessen competition in the relevant market or industry, the FTC or DOJ may seek to block the transaction, or in some instances, delay the closing pending completion or an in-depth investigation by FTC or DOJ.
The FTC and the DOJ recently enacted significant changes to the HSR Pre-Merger Notification Rules (the “HSR Rules”). The changes to the HSR Rules were intended to ensure that the DOJ and FTC were receiving relevant information to support their review of an HSR Transaction. While some aspects of the changes to the HSR Rules simplify the filing process, others substantially increase the burden in providing additional documentation. It is crucial that parties considering an HSR Transaction understand the major changes to the HSR Rules and be proactive in considering the burden of such changes in the pre-transaction planning process.
Summary of changes
One of the more significant changes to the HSR Rules is the addition of Item 4(d) to the HSR form. Item 4(d) supplements existing Item 4(c), which requires the parties to provide the FTC and DOJ with copies of analyses of the transaction prepared by or for officers and directors that discuss one or more of the following (collectively, the “Item 4(c) Data”):
- Market shares
- Markets or the potential for sales growth or expansion into new product or geographic markets
New Item 4(d) now specifically requires the production of three sets of documents that were in some cases, but not all, already provided under Item 4(c). To ensure that these specific documents are now always provided for HSR review, Item 4(d) specifically lists and requires the provision of the following items with the HSR filing:
- Any Confidential Information Memorandum (“CIM”) or documents serving the purpose of a CIM,
- Any bankers’ books or other consultants’ analyses of the transaction prepared within one year of the HSR filing that include Item 4(c) Data and,
- All documents evaluating synergies or efficiencies, which may include for example, analyses of headcount reductions, financial synergies, facility consolidations and other business aspects not directly related to competitive activity.
While Item 4(d) potentially increases the burden for filing if such documents were not already being provided under Item 4(c), the HSR form has been modified so to no longer require regularly prepared balance sheets. This change should be welcome to all filers, including private equity firms which previously had to compile balance sheets for all portfolio companies and natural persons.
Since the “control” definition of the HSR Rules does not always capture entities that are under common investment or management with the buyer, the FTC and DOJ now also require that buyers report the holdings of their “associates” – firms whose operations or investment decisions are under common investment management with the buyer – in any entity that overlaps in the same line of business with the seller. This requirement will mostly affect private equity funds and other entities that use limited partnership structures and increase their burden in filing. The FTC and DOJ have sought to temper complaints regarding these new burdens by claiming that the burden will be limited to first-time filers. Nonetheless, entities contemplating HSR Transactions should create and maintain updated lists of all the businesses conducted by their portfolio companies, categorized by NAICS industry codes.
In the last major change to the HSR Rules, a filer is no longer required to make base year financial reporting – only the most recent year’s revenues, itemized by 2007 NAICS code (10 digit code for manufacturing industries and six digit code for non-manufacturing industries) must be provided. However, in the agencies’ effort to obtain better information regarding foreign manufactured products, filers must also report sales of any products manufactured outside of the U.S. and sold into the U.S.
The intent of the changes to the HSR Rules was to provide the FTC and DOJ with the most relevant information for HSR review, which, in most cases, means more information. With the requirements for increased document production, parties considering HSR Transactions must be cautious in creating deal-related documents, including items such as the CIM, which might not have previously been a required disclosure. HSR filers must not only be proactive in obtaining the extensive information that is now required for inclusion with the filing, but also be fully cognizant of the competitive aspects of the potential transaction and moreover, be able to clearly articulate the rationale for the transaction to the various audiences that will be reviewing such documentation. Parties contemplating an HSR Transaction should involve their counsel early in the transaction to help assure that the materials which must be submitted to the FTC and DOJ contain accurate information regarding the proposed transaction and to make certain that proper planning to obtain HSR clearance for the proposed transaction is built into the overall transaction planning process.
For more information, please contact:
Anthony D. Konkoly
or any of our mergers and acquisitions attorneys at McDonald Hopkins by clicking on the link below:
Our attorneys are highly skilled in the art of the deal. In fact, our experienced attorneys have executed hundreds of acquisitions and divestitures. We have honed our skills in every stage of the process– crafting the transaction, conducting due diligence, securing financing, negotiating terms, and documenting the result. We handle transactions involving privately-held companies, private equity firms and divisions of public companies. Our transaction team is supported by legal experts in other specialties, such as tax, labor and employment, employee benefits, environmental law, real estate, and intellectual property.
Carl J. Grassi, President
600 Superior Avenue, East, Suite 2100, Cleveland, Ohio 44114
West Palm Beach
IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any tax advice contained in this communication (including any attachments), was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding any penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any transaction matter addressed herein.
© 2011 McDonald Hopkins LLC All Rights Reserved. This Alert is designed to provide current information for our clients, friends and their advisors regarding important legal developments. The foregoing discussion is general information rather than specific legal advice. Because it is necessary to apply legal principles to specific facts, always consult your legal advisor before using this discussion as a basis for a specific action.