Hart-Scott-Rodino Premerger Notification Program: Basics and

UpdatesABA Section of Antitrust Law Mergers & Acquisitions Committee and

Young Lawyers Division Antitrust Committee Program

Carla Hine, McDermott Will & Emery LLPJohn Ingrassia, Proskauer

Rose LLPEllen Jakovic, Kirkland & Ellis LLP

May 14, 2012

2

HSR Act and Rules

•

The Hart-Scott-Rodino (“HSR”) Antitrust Improvements Act of 1976 (15 U.S.C. §

18A, or Clayton Act §

7A) became effective in 1978•

Implemented to provide the FTC and DOJ with an opportunity to review certain transactions prior to consummation

•

Designed to highlight transactions that are likely to have the most significant commercial impact

•

Form aims to capture competitively relevant information to enable the agencies’

initial review•

The Federal Trade Commission (“FTC”) implemented changes to the HSR Rules and form on August 18, 2011–

Changes eliminate requirements for less meaningful information and add requirements designed to capture additional information useful for substantive review

3

HSR Act and Rules (Cont’d)

•

The FTC’s Premerger Notification Office (“PNO”) is responsible for administering the HSR program and promulgating the HSR Rules

•

The HSR Rules are found at 16 C.F.R. Parts 801, 802, 803–

Part 801: HSR Coverage Rules–

Part 802: HSR Exemption Rules–

Part 803: HSR Transmittal Rules•

Additional Resources–

http://www.ftc.gov/bc/hsr/index.shtm

(includes instructions, guidelines, informal interpretations, and more)

–

Premerger Notification Practice Manual (4th

ed., 2007) (“PNPM”)–

Statement of Basis and Purpose (43 F.R. 33450) (http://ftc.gov/bc/hsr/sbp.shtm)

4

Key Terms

•

Person: The ultimate parent entity (“UPE”), which includes all entities the UPE directly or indirectly controls (801.1(a)(1))

•

Ultimate Parent Entity: An entity that is not controlled by any other entity (801.1(a)(2))–

A natural person can be an UPE–

An “entity”

does “not include any foreign state, foreign government, or agency thereof (other than a entity engaged in commerce), nor the United States, any of the states thereof, or any political subdivision or agency of either (other than a corporation or non-corporate entity engaged in commerce).”

(801.1(a)(2))•

Control (801.1(b))–

Corporation: Holding 50% or more of the outstanding voting securities of an

issuer, or having the contractual power to designate 50% or more of the directors

–

Non-Corporate Entity: Having the right to 50% or more of the profits or 50% or more of the assets upon dissolution

–

Not-for-Profit Entity: Having the contractual power to designate 50% or more of the directors–

Trust: Having the contractual power to remove and replace 50% or more

of the trustees•

Hold: Direct or indirect beneficial ownership (801.1(c))–

Holdings of spouses and minor children are aggregated–

“A person holds all assets and voting securities held by the entities included within it[.]”•

Associate: An entity that is not included within the acquiring person, but is under common investment decision-making authority with the acquiring person or its controlled entities (801.1(d)(2))

5

What Does the HSR Act Potentially Cover?

•

Transactions where at least one party is engaged in commerce (or in any activity affecting commerce) (7A(a)(1), 801.3)

•

Acquisitions of–

Voting Securities–

Assets–

Controlling interest in a non-corporate entity•

Formations of joint venture corporations or non-

corporate entities–

Formation of most not-for-profit corporations or unincorporated entities exempt (802.40)

•

Revised HSR Rules do not impact whether a transaction is reportable in most instances

6

Thresholds

•

Size-of-Transaction (7A(a)(2))–

Where –

as a result of the transaction –

the acquiring party will hold voting securities, assets, and/or a controlling interest in a non-corporate entity valued at more than $200 million (as adjusted), or

–

Where –

as a result of the transaction –

the acquiring party will hold voting securities, assets, and/or a controlling interest in a non-corporate entity valued at more than $50 million (as adjusted), but less than $200 million (as adjusted), where the parties also meet the size-of-person threshold

•

Size-of-Person (7A(a)(2)(B), 801.11)–

In general, threshold is met if•

One “person”

has net sales or total assets of $100 million (as adjusted) or more•

One person has net sales or total assets of $10 million (as adjusted) or more–

Net sales as stated on the last regularly prepared [consolidated] annual statement of income and expense for that person

–

Total assets as stated on the last regularly prepared [consolidated] balance

sheet for that person

–

Special circumstances for UPEs

without regularly prepared balance sheets or annual financial statements (801.11(e))

7

“As Adjusted”

•

HSR thresholds are adjusted annually to reflect the increase or decrease in gross national product during the prior fiscal year ended September 30 (7A(a)(2)(A))

–

Includes size-of-transaction, size-of-person, notification, most exemption, and filing fee thresholds

•

Adjusted thresholds typically published in January and become effective in February

•

Current Thresholds (as of February 27, 2012)

Original Threshold Adjusted Threshold

$10 million $13.6 million

$50 million $68.2 million

$100 million $136.4 million

$110 million $150.1 million

$200 million $272.8 million

$500 million $682.1 million

$1 billion $1,364.1 million

8

Exemptions

•

Exemptions included in HSR Act (7A(c)) and in HSR Rules (Part 802)

•

Selected Exemptions–

Acquisitions of goods (802.1) or realty (802.2, 802.5) in the ordinary course of business (7A(c)(1))

–

Acquisitions of voting securities or non-corporate interests of entities holding $50 million or less (as adjusted) in non-exempt assets (802.4)

–

Acquisitions of voting securities solely for investment purposes

(802.9)–

Stock dividends, splits, and restructuring of corporate and non-corporate entities (802.10)

–

Acquisitions of voting securities not meeting or exceeding greater notification threshold (802.21)

–

Intraperson

transactions (802.30)–

Acquisitions of foreign assets (802.50) or voting securities of a foreign issuer (802.51) without significant U.S. sales or assets

9

Overview of HSR Form

•

Preliminary Information –

Filing fee; corrective filings; foreign filings; cash tender offer; acquisition in bankruptcy; early termination

•

Item 1 –

General data about party filing•

Item 2 –

Names of UPEs, type and value of acquisition•

Item 3 –

Description of acquisition and assets, non-corporate interests, and/or voting securities to be held a result of the transaction

•

Item 4 –

Identification of SEC filers, financial information, documents analyzing transaction with regards to markets, market share, competition, synergies/efficiencies, etc.

•

Item 5 –

Revenue data by NAICS code•

Item 6 –

Subsidiaries, equity holders, significant minority holdings, and certain significant minority holdings of associates

•

Item 7 –

NAICS code overlaps between acquiring person or its associates and the target, and related geographic market information

•

Item 8 –

Description of Acquiring Person’s prior acquisitions within same industry

10

Preliminary Information

•

Filing fee information (if applicable)•

Corrective filing?•

Foreign filings?•

Cash tender offer?•

Bankruptcy?•

Early termination?

11

Item 1: General Data

•

1(a) –

Name of person (UPE) filing•

1(b) –

Acquiring, acquired, or both? (Can be both)

•

1(c) –

Corporation, non-corporate entity, natural person, trust?

•

1(d) –

Data furnished by fiscal or calendar year?

•

1(e) –

Is UPE or subsidiary filing?•

1(f) –

Is a subsidiary making acquisition / being acquired?

•

1(g) –

Contact information (two)•

1(h) –

Who will receive Second Request on behalf of foreign person?

12

Item 2: Identify the Parties and Type of Transaction

•

2(a) –

Names of UPEs

for all

parties

•

2(b) –

Type of Acquisition?•

2(c) –

For Acquiring Persons acquiring voting securities only

–

what notification threshold will Acquiring Person cross? See 801.1(h).

•

2(d)(i)-(x) –

Value of voting securities, assets, and/or non-

corporate interests to be held as a result of the transaction

13

Item 3(a): Briefly Describe the Transaction

•

Keep it short and simple•

Must include the following:–

What is being acquired–

Consideration for transaction–

Conditions to closing–

Expected dates for any major events required for consummation of transaction

–

Expected closing date•

For asset acquisitions, describe the business the assets to be acquired comprise

•

Identify unusual aspects of transaction

–

Portions that are exempt–

Related transactions

14

Item 3(b): Provide the Transaction Agreement

•

Provide a copy of the executed transaction agreement–

Provide any non-compete agreement, too (may be provided in draft)

15

Item 4(a): SEC Filers

•

Provide the names of all entities within UPE (including the UPE)

that file annual reports (i.e., 10-K or 20-F) with the SEC, and the Central Index Key number for each entity

•

No longer need to provide copies or links to 10-K, 10-Qs, Proxy Statements, 8Ks, or Schedule TOs

(in case of Tender Offer)

16

Item 4(b): Annual Report and/or Annual Audit Report

•

For unconsolidated U.S. entities–

Most recent annual report–

Most recent annual audit report (e.g., Form 10-K for public companies)•

No longer require most recent regularly prepared balance sheet

17

Item 4(c): Competitive Analyses

•

Item 4(c) remains unchanged•

Documents prepared by or for an officer or director “for purposes of evaluating or analyzing the acquisition with respect to market shares, competition, competitors, markets, potential for sales growth or expansion into product or

geographic markets”•

Broad definition:–

Includes any

kind of document, even hand-written notes and marginalia–

Includes documents prepared by third parties, e.g., bankers books, information memoranda, management presentations

–

Drafts not required if

final version exists–

Must provide documents created up until day of filing•

Provide name and title of person(s) that prepared document•

Must include privilege log for any documents redacted or withheld because of privilege claims

•

Documents cannot be redacted to exclude information extraneous to transaction–

One exception: Board meeting minutes•

Ordinary course documents not used to analyze transaction

are not 4(c) documents•

See PNO’s

April 26, 2012 “Item 4(c) Tip Sheet,”

http://ftc.gov/bc/hsr/4cTipSheet.pdf

18

Item 4(d)(i): Confidential Information Memoranda

•

If none prepared, then documents meant to serve the same purpose

•

Prepared by or for (or received by) an officer or director•

Specifically related to the sale of the business being transferred in the transaction–

Does not

need to contemplate sale to the particular buyer –

Does not

need to address 4(c) content (i.e., competition, competitors, markets, market shares, etc.)

•

Prepared within year prior to filing

19

Item 4(d)(ii): Bankers Books and Third- Party Studies

•

Studies, surveys, analyses and reports•

Prepared by investment bankers, consultants or third-party advisors engaged or seeking engagement in connection with a possible transaction

•

Prepared for (or received by) any officer or director•

Specifically related to the sale or acquisition of the business being transferred–

Does not

include newsletters, industry reference materials, periodicals–

Does not

need to contemplate sale to any particular buyer –

Does

need to address 4(c) content, i.e., competition, competitors, markets, market shares, potential for sales growth

•

Includes evaluation of the transferred business in those areas, even if not evaluating any “acquisition’s”

impact on those metrics–

Prepared within year prior to filing•

Includes unsolicited materials

20

Item 4(d)(iii): Synergies and Efficiencies

•

Studies, surveys, analyses and reports•

Prepared by or for (or received by) any officer or director

•

Analyzing the transaction•

In terms of –

Potential synergies and efficiencies•

Sales / revenue synergies traditionally captured by Item 4(c) (i.e., potential for sales growth)

•

Documents on efficiencies / cost saving synergies are now required (and would not have been required by Item 4(c))

•

Financial models without stated assumptions do not need to be provided

2121

Item 5(a): Revenues by NAICS Code

•

Requires only most recent year revenues

by 6-digit NAICS industry code for non-manufacturing activities and 10-digit NAICS product code for manufacturing activities

–

Include revenues from U.S. operations and from products manufactured abroad and sold in or into the U.S.

–

Report revenues from sales of manufactured products only

in 10-digit NAICS codes (not 10-

digit manufacturing codes and 6-digit wholesale/retail codes), even if products are sold from establishments separate from manufacturing facility

–

Report contract-manufactured products (manufactured by third parties for sale by

reporting person) under wholesale/retail codes

–

See “Reporting Revenues in Item 5”

on FTC website, http://ftc.gov/bc/hsr/item5notes.shtm•

Acquiring person must provide revenue data for itself and all entities it controls

•

Acquired person must provide revenue data only with respect to assets being acquired and/or entities whose voting securities or non-corporate interests are being acquired (including their controlled entities)

•

Report revenues based on entities included within reporting person at time of filing

–

Include revenues of any businesses acquired since most recent year–

Remove revenues of any businesses divested since most recent year

2222

Item 5(a): Revenues by NAICS Code (Cont’d)

•

Use most current NAICS codes available (currently 2007, but 2012

coming soon); see http://www.census.gov/eos/www/naics/

•

List NAICS codes in ascending order•

Check box for 6-digit non-manufacturing overlaps and 10-digit manufacturing overlaps

•

Footnote anything that is unusual or needs explanation (e.g., estimates)•

Sources for revenue data–

Finance department or finance officer–

Prior HSR form (check wholesale/retail codes; foreign-manufactured products sold into U.S.)–

Website (general description of business/products)–

Annual reports–

Double-check vs. your understanding

2323

Item 5(b): Joint Venture Formation

•

Applies to formation of corporate joint venture or unincorporated entity

•

Less burdensome than prior version•

Identify 6-digit and 10-digit NAICS codes in which joint venture or unincorporated entity will derive revenue

•

Check “Not Applicable”

box if your transaction is not a formation

2424

What Is An “Associate”?

•

Associates are entities that are not under common control with the buyer for HSR purposes, but are under common investment management with the buyer (or that control or are controlled by such entities)

•

Only acquiring persons

need to provide information about associates

•

The associate definition is intended to apply primarily to private equity funds and master limited partnerships

•

The associate rules generally will not apply to traditional corporate filing persons

•

The associate concept was developed to capture competitively significant overlaps between related entities, such as separate PE funds whose investment decisions are managed by a common entity, that were not disclosed on the prior HSR form

2525

Identifying Associates

•

Determining what entities are associates can be complicated•

The PNO has developed some general guidelines: –

The general partner of a partnership or the managing member of an LLC that is not an individual is considered an associate

–

Individuals who are officers, directors, employees, general partners, or managing members are not

considered associates unless

they have the contractual authority to manage the entity’s investments separate from the authority provided in the entity’s governing documents

–

An investment consultant that merely makes non-binding recommendations without decision-making authority is not

an associate–

A property or operations manager is not

an associate because it does not have investment management authority

•

See “Decision Tree for Identifying Associates”

on FTC website: http://www.ftc.gov/bc/hsr/decision-tree.pdf

2626

Item 6

•

Whom do you control?•

Who holds an interest in you?

•

In whom do you hold an interest?•

In whom do your associates hold an interest?

•

Acquired persons: –

No need to complete Item 6 if only assets

are being acquired–

Provide information only with respect to entities whose voting securities and/or non-corporate interests are being acquired

•

See “Tips on Completing Item 6 of the HSR Form”

on FTC website: http://www.ftc.gov/bc/hsr/item6.shtm

2727

Item 6(a): Controlled Entities

•

List name, city, and state/country of all U.S. entities and all foreign entities that have sales in or into U.S. included within reporting person–

Do not need to provide headquarters addresses–

Include both corporate and non-corporate entities

•

May omit entities with less than $10 million in total assets

•

Permissible to list all entities included within reporting person

2828

Item 6(b): Equity Holders

•

Identify third parties that hold 5% or more, but less than 50% of the acquired entity or the acquiring entity and its UPE–

For natural persons, provide information with respect to the top

level corporate or unincorporated entity(ies)

•

List issuer/non-corporate entity, equity holder and its headquarters mailing address, and percentage held

•

Applies to corporate and non-corporate entities•

For limited partnerships, list only the general partner(s) (regardless of percentage held); do not list limited partners, headquarters address, or percentage held

•

Do not omit issuers/non-corporate entities with less than $10 million in total assets

2929

Item 6(c)(i): Minority Holdings

•

List the reporting person’s minority holdings (5% or more, but less than 50%) in entities that derived revenues in the most recent year in the same NAICS codes

as the other party to the transaction –

Acquiring person should limit its response to minority interests

in entities that derived revenues in same 6-digit NAICS code(s) as target, based on knowledge or belief

–

Acquired entity should limit its response to minority interests in entities that derived revenues in same 6-digit NAICS code(s) as the acquiring person, based on knowledge or belief

–

If NAICS codes not available, list holdings in entities that have operations in the same industry, based on knowledge or belief

–

Provide name of issuer/non-corporate entity, and percentage held–

Issuers or non-corporate entities with less than $10 million in assets may be omitted

–

Foreign entities are not reported unless they have sales in or into the U.S. in a 6-

digit NAICS overlap code

•

Permissible to list all minority holdings, without regard to NAICS code overlap, but doing so may delay the agencies’

review

3030

Item 6(c)(ii): Minority Holdings of Acquiring Person’s Associates

•

Identify each associate

of the acquiring person that holds 5% or more, but less than 50%, of the voting securities or non-corporate interests of

–

The target, or–

Entities that derived revenues in the most recent year in the same 6-digit NAICS code(s) or industry(ies) as the target, based on knowledge or belief

•

For each such holding, report the top level associate, the issuer/non-

corporate entity in which the minority interest is held, and the

percentage held

•

May omit issuers/non-corporate entities with less than $10 million in assets

•

Permissible to list all minority holdings (5% or more, but less than 50%) of associates, without regard to NAICS code overlap with the target, but doing so may delay the agencies’

review (also likely would be burdensome for acquiring person)

•

Even if the acquiring and acquired persons have no overlapping NAICS codes, the acquiring person must report any overlaps between the target and any minority holdings of its associates

3131

Item 7: Competitive Overlaps

•

Item 7(a): List each 6-digit NAICS code in which the acquiring person or any of its associates derived revenues in the most recent year in any of the same NAICS codes as the target

–

Checking boxes in Item 5 will auto-

populate Item 7(a)

–

Be sure to indicate whether the filing person or associate or both has the overlap with respect to each 6-digit overlap code

•

Item 7(b)(i): List the UPE of each other party to acquisition (and the relevant entity(ies) within such UPE) that also derived dollar revenues in the overlapping 6-digit NAICS code(s)

•

Item 7(b)(ii): (Acquiring Person only) List each associate (and the relevant entity(ies) within such associate) that derived revenues in the same 6-digit NAICS code(s) as the target

3232

Item 7: Competitive Overlaps (Cont’d)

•

Items 7(c)/7(d): Report certain geographic information about the filing person’s and associate’s operations depending on the overlap codes (refer to HSR form instructions)

•

Use two-letter state abbreviations for Item 7(c)

•

Except for 7(c)(iv), may respond “national”

if business is conducted in all 50 states

•

For 7(c)(iv), arrange response alphabetically by state, county, city or town, and street address

•

List responses separately for each associate and, if different, the entity that derives the revenues

•

See “Tips on Completing Item 7 of the HSR Form”

on FTC website: http://www.ftc.gov/bc/hsr/item7.shtm

3333

Reporting Information about Associates

LLC(General Partner)

Fund I LP

(Acquiring Person) Fund II LP

Corp 1 Corp 2Corp 3

(Derives revenues in same 6-digit NAICS code as the target)

Corp 4

Fund III LP

Corp 5

(Derives revenues in

same 6-digit NAICS code as the target)

Report in Item 7(b)(ii)

Report in 6(c)(ii)

Report in 6(b)

30%

3434

Item 8: Prior Acquisitions

•

Applies to acquiring persons only•

Report acquisitions made in the past five years of assets, voting securities, or non-

corporate interests that derived revenues in any 6-digit NAICS code that overlaps with the target

–

Acquisitions of 50% or more of the voting securities or non-corporate interests of an entity with annual net sales or total assets greater than $10 million in the year prior to acquisition

–

Acquisitions of assets valued at or above the statutory size-of-transaction test at the time of the acquisition

•

For each qualifying prior acquisition, list:–

The name of the entity acquired–

The headquarters address of the entity prior to the acquisition–

Whether voting securities, non-corporate interests, or assets were acquired–

The consummation date of the acquisition; and–

The 6-digit NAICS code listed in Item 7 in which the acquired entity derived revenues•

Do not report prior acquisitions made by an entity currently included within the acquiring person if, at the time of the prior acquisition, such entity was included within another person

3535

Declaration and Certification

•

Officer or director (or general partner for non-corporate entities) of UPE or an authorized subsidiary must sign declaration and certification

•

Instead of notarizing signatures, signatory can swear or affirm under penalty of perjury pursuant to 28 U.S.C. § 1746

–

Persons located in U.S.: I declare under penalty of perjury that

the foregoing is true and correct.

–

Persons located outside U.S.: I declare under penalty of perjury

under the laws of the United States of America that the foregoing is true and correct.

•

May file with scanned signature pages, but must provide originals as soon as possible (PNPM #237)

•

Declarations must state:–

Person’s good faith intention to consummate the notified transaction–

That an agreement in principle has been executed•

801.30 Transactions–

Acquired person does not include a declaration (803.5)–

Acquiring person’s declaration must state that the required notice has been received by the target and, in the case of a tender offer, the intention to make the tender offer has been publicly announced

3636

Filing Fees

•

Filing fee depends on size-of-transaction•

Buyer responsible for filing fee under HSR (803.9), although parties may negotiate who will pay the fee

•

Filing fee typically submitted by wire transfer–

Include taxpayer ID number, bank from which funds were transferred, name of payer (if different than filing party), and wire transfer confirmation number on form and in cover letter

–

Be careful –

some banks will deduct a wire transfer fee from amount to be wired, leaving payment $25-30 short

Filing Fee Size of Transaction

$45,000 > $50 million (as adjusted), but < $100 million (as adjusted)

$125,000 ≥

$100 million (as adjusted), but < $500 million (as adjusted)

$280,000 ≥

$500 million (as adjusted)

3737

Questions?

Checklist for a Successful Committee Program Conference Call * Before Planning *

√ Give ABA Staff the name and telephone number of a technical person at your site who can resolve any

microphone problems. √ If program materials are going to be provided and available on the website, it must be sent to the Staff at least

two days prior to the program along with completing the SAL form. Remember to use the ABA Presentation Slide template located on the Portal for any PowerPoint presentations.

√ Firm logos are not to be displayed on Section program materials except on the first page of a presentation along

with the identification of the author. √ Copyrighted material should not be copied and distributed for Section business or on Section discussion lists or

in other Section communications without permission of the copyright holder. This does not preclude reference to such material or fair use quoting of particular passages that are the subject of comment.

√ Additional information on Section communications policies is on the Leadership Portal of the Section website. √ The Model Reprint Permission Request Form for copyrighted material along with Instructions can also be

found on the Leadership Portal in the Programs Handbook. -------------------------------------------------------------------------------------------------------------------------------

*Day of Program * √ Please start your program on time. It’s not fair for the attendees to have to wait. Dial into the

Moderator/Speaker line ONLY (20 minutes) before the program begins. At that time the operator can perform a sound check and go over any instructions and answer any questions you might have.

√ Each moderator/speaker should have his or her own handset or headset in the event there is only one speaker, a

speaker phone can be used. Should a speaker phone be used, eliminate any noises such as rustling papers or moving of the speaker phone. Limit/eliminate side conversations.

√ Enunciate clearly. Don’t speak in a monotone. Phone equipment is not always high quality and has limited

frequency range √ When the program is ready to begin, the operator will announce the title of the program and the moderator/or

speaker names, unless the moderator has instructed the operator otherwise. √ Moderator: Announce to your listeners to mute their speaker phones to enhance their listening quality. Attendees are in a listen-only mode until the question and answer session begins. √ The moderator should briefly announce the Section’s upcoming programs and give our website address for

more details (http://www.americanbar.org/groups/antitrust_law.html) REMEMBER: THE MODERATOR MAY REQUEST OPERATOR ASSISTANCE AT ANY TIME DURING CONFERENCE CALL BY SIMPLY PRESSING *0. If you have any other questions before the program, please Diane Odom at 312/988-5702 or diane.odom@americanbar.org.