Antitrust and Trade Regulation Alert
September 2, 2010
Authors:
Brian K. McCalmon
brian.mccalmon@klgates.com
+1.202.661.6230
Scott M. Mendel
FTC’s Proposed Changes to the
Hart-Scott-Rodino Reporting Requirements
Take Direct Aim at Investment Companies
and Private Equity Firms
scott.mendel@klgates.com
+1.312.807.4252
Thomas A. Donovan
thomas.donovan@klgates.com
+412.355.6466
K&L Gates includes lawyers practicing out
of 36 offices located in North America,
Europe, Asia and the Middle East, and
represents numerous GLOBAL 500,
FORTUNE 100, and FTSE 100
corporations, in addition to growth and
middle market companies, entrepreneurs,
capital market participants and public
sector entities. For more information,
visit www.klgates.com.
As we noted in our August 24, 2010 alert, FTC Proposes Extensive Changes to HSR
Premerger Notification and Report (click title to read), the Federal Trade
Commission ("FTC") has proposed significant changes to the Hart-Scott-Rodino
("HSR") Premerger Notification and Report Form. Some of the changes will expand
the information that must be provided by investment companies and private equity
firms when they or their investment funds make a reportable acquisition. The
expanded reporting obligation suggests that the FTC and the Antitrust Division of the
Department of Justice (“DOJ”) intend to more closely examine acquisitions by
investment companies and private equity firms to determine if they raise
anticompetitive concerns.
The HSR reporting regime was initiated over thirty years ago to permit the U.S.
antitrust enforcement agencies to review proposed transactions for potential
anticompetitive concerns before the transactions are closed. Generally, both the
acquiring and acquired person must file premerger notification forms with the FTC
and DOJ if the proposed transaction is valued at more than $63.4 million. The
parties must wait thirty days after filing their reports to close the transaction so that
the agencies have time to determine if a further investigation is warranted. Among
the information required by the report form is a description of the proposed
transaction, the submission of certain financial statements and deal documents, and
the provision of revenue data by industry generated by all entities controlled by the
reporting party. The revenue data permits the agencies to determine if the acquiring
and acquired companies, or any entities they control, compete in the same industry.
The failure to make a premerger filing and wait the required thirty days before
closing can subject the companies to fines of up to $16,000 per day.
Before the proposed amendments, the premerger notification form only requires the
acquiring person to report information about the entities it "controls." The HSR rules
define "control" narrowly to include those entities in which the acquiring person
holds at least 50 percent of the voting securities of a corporation, or has the right to
50 percent of the profits or assets upon dissolution of a non-corporate entity or the
contractual power to designate 50 percent of the directors (or those performing the
same function in a non-corporate entity). With the proposed amendments, the FTC
recognizes that investment funds and private equity firms are organized in such a
way that the existing report form, limited to entities controlled through ownership or
proxy, does not capture relevant information about entities that the investment fund
or private equity firm controls in other ways. For example, the same general partner
may manage several limited partnerships, but not have the right to half the profits or
assets of those partnerships. The current HSR form does not require the general
Antitrust and Trade Regulation Alert
partner to report the activity of the limited
partnerships it manages when the general partner
makes a reportable transaction. Thus, the current
report form does not reveal when one of the limited
partnerships managed by the general partner is a
competitor of the entity being acquired by the
general partner. The proposed changes to the report
form are designed to capture this information.
To accomplish this, the FTC is proposing to
introduce a new defined term, "associate." While the
definition is quite involved, it essentially provides
that an associate is any entity that is under common
management with the acquiring person, but is not
under the control (as defined under HSR) of the
acquiring person. Thus, associates of a managing
general partner could include all limited partners of
which that same entity is the general
partner. Similarly, all investment funds managed by
the same entity would be considered associates of
each other and of the managing entity. The proposed
definition of associate contains seven examples to
help illustrate its application.
If an investment company or private equity firm
proposes to make an acquisition that is reportable
under HSR, it will have to include in its HSR form
the following information regarding its associated
entities:
•
•
An identification of each industry in which any
associated entity and the acquired entity or
assets both derive revenue (Item 7(a)).
•
The name of the associated entity and any entity
it controls that derives revenue in the same
industry as the acquired entity or assets (Item
7(b)).
•
An identification of the geographies in which
the associated entity or any entity it controls
derives revenue in the same industry as the
acquired entity or assets (Item 7(d)).
Comments are invited until October 18, 2010.
Obviously, if adopted as proposed, the requirement
to provide this information will place significant
additional burdens on investment companies and
private equity firms making reportable
transactions. Some of this information may be quite
difficult to obtain. In addition, this information may
alert the FTC and the Antitrust Division to areas of
competitive overlap of which they would not
otherwise have notice. This could result in delays in
the HSR process, and the closing of the transaction,
while the FTC or the Antitrust Division investigates
the overlaps and determines if they raise
competitive concerns.
The names of all entities in which the acquiring
company's associates hold at least a 5 percent,
but less than 50 percent, interest and which
derive revenues in the same industry (as defined
by the NAICS codes)1 as the acquired entity or
assets (Item 6(c) of the HSR form). Thus, if a
private equity fund proposes to enter into a
transaction that must be reported under HSR, all
of the other funds, registered or private, that are
under common management and that derive
revenue in the same industry as the acquired
company would have to be disclosed.
1
The NAICS codes are industry codes published by the Office
of Management and Budget and are used to divide the
economy into different industry classifications. The antitrust
agencies use the NAICS codes as an initial indicator of
whether the parties to a transaction operate in the same
industry and therefore may be competitors.
September 2, 2010
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Antitrust and Trade Regulation Alert
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September 2, 2010
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