Changes Made to Hart-Scott-Rodino Premerger Notification Rules Increase the Reporting Burden on Certain Investors
On July 19, 2011, the U.S. Federal Trade Commission (the “FTC”) and the U.S. Department of Justice, Antitrust Division (the “DOJ”) issued a Final Rule Publication with respect to a number of revisions (the “Revisions”) to the Hart-Scott-Rodino Premerger Notification Rules (“HSR”). The Revisions became effective on August 18, 2011.
The FTC and the DOJ adopted the Revisions as part of their continuing efforts to streamline HSR compliance paperwork by eliminating certain reporting requirements. However, the Revisions also increase the burden on filing entities, especially certain investors such as private equity firms, who acquire other companies through multiple investment vehicles.
The prior HSR rules only required the reporting of information related to the “ultimate parent entity” of the acquiring party and the entities directly or indirectly controlled by the ultimate parent entity. The Revisions now require the acquiring entity to also report information with respect to its “associates.” An “associate” includes any person that is under common management with the acquiring entity (not just under common control). The Revisions provide that associates 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.”
To give effect to the expansion of the HSR reporting requirements, Item 6(c)(ii) of the HSR form now requires the acquiring entity to identify all of its associates’ investments of five (5%) percent or more (up to fifty (50%) percent) in other companies that either report earnings in the same North American Industry Classification System (“NAICS”) revenue code or that fall into the same industry category as the acquired company.
The FTC and the DOJ have provided that the reason for including this additional reporting requirement is to allow them to determine whether there are any competition issues raised as a result of an acquiring entity’s associate’s ownership in a company that operates in the same industry as the acquired entity.
This expanded reporting requirement may have a notable impact on certain investors, namely private equity firms and other multiple investment vehicles, who acquire companies through different acquisition entities (including limited partnerships), where all of such entities are under common management (or have the same general partner). Investors will now have to review all possible NAICS overlaps, increasing the burden on them when reporting under HSR. While the new reporting requirement may be viewed by some investors as unduly burdensome, in order to alleviate the burden, acquiring investors should try to maintain detailed records with respect to all associates, including the NAICS codes for all associates, so that when they must file an HSR form, the information requested in revised Item 6(c)(ii) is readily available.
