New Merger Rules: Boon or Bane?

Newly proposed Federal Trade Commission disclosure rules could both streamline and stymie finance departments, lawyers suggest.
David KatzAugust 30, 2010

Highly acquisitive companies and private-equity firms eager to get mergers and acquisitions done fast have a new reason to either applaud or boo, depending on the law firms they consult. New rules proposed earlier this month by the Federal Trade Commission would both trim and add to the information required for antitrust filings in the run-up to a deal, the lawyers say.

Speaking for the defense of the proposal, as it were, is Harry Robins, a partner in the antitrust practice of Morgan, Lewis, and Bockius. “For private-equity firms or any acquisitive company, [the changes are] going to reduce their burdens, and they’ll be able to put their filings in much more quickly,” he says. “It won’t have any effect on the volume of deals that they’ll do. It’ll just decrease the fees that they pay their lawyers and the time that they need to spend on putting together filings.”

A number of other firms, however, think the proposal, introduced August 16 and currently in a comment period through October 18, could impose heavy new information requirements. “The proposed changes would broaden the scope of documents that must be submitted with the filing,” according to a client alert issued by Cleary, Gottlieb, Steen, and Hamilton.

A similar alert from Davis, Polk and Wardwell cautions clients about a provision that would compel parties to include detailed information about “associate” entities (units under common management with the acquirer), as well as information about their own holdings. “Depending on the extent of the relationships among funds and their advisers, this could impose a substantial additional burden in preparing [the] filing,” the firm opines.

CFOs who work for private-equity firms and other serial acquirers typically must spend a great deal of time and effort culling the data they need to fill out the form required under the Hart-Scott-Rodino Act (HSR) of 1976. The form’s purpose is to give the FTC and the U.S. Department of Justice a chance to look at the possible anticompetitive effects of certain deals before they’re done. After filing the form, the parties to a merger must wait for a specified period, usually 30 days (15 days in the case of a cash tender offer or a bankruptcy sale), or be granted early termination of the wait before the deal is sealed.

From Robins’s point of view, the benefits to companies of the FTC’s proposals, which he thinks are likely to be enacted as they stand, far outweigh the burdens. In particular, he notes, acquirers would no longer have to provide such information as the 2002 numbers and classes of voting stock of companies to be acquired. (Currently, they must provide data for that year, a Department of Census baseline period.) Such information, the FTC says in its proposal, “is typically too outdated to be of use” to itself and the DoJ.

The need to dig up such data has plagued finance departments, particularly those of private-equity firms. “If a private-equity shop does 10 or 15 deals a year, [company finance officials] have to collect data for each of those companies” for 2002, according to Robins. Because the books and records for the target companies might not even exist for that year, they have to do estimates of the required data, he says, “and that’s pretty burdensome.”

Under the proposal, acquirers also would no longer have to unearth the most recent balance sheets for every unconsolidated U.S. issuer within its corporate structure. That process can be difficult, particularly if a company is trying to close a deal rapidly. For instance, if a private-equity holding company consists of five funds, with each fund consisting of 20 companies, obtaining balance sheets for all of them could be laborious, the antitrust lawyer says. “Private-equity shops like to get their deals done as quickly as possible so they can start realizing the economic efficiencies from the acquisition.”

While acknowledging such benefits to companies, other lawyers seem to suggest the negatives of the proposal outweigh the positives. They seem most concerned about the increased filing of information about “associate” firms that the FTC would require. Currently, acquirers must supply information about all entities in which they own a 50% or more stake. But they don’t have to include information about companies they own part of but don’t control.

As a result of that situation, the FTC and the DoJ “do not receive the information they need to get a complete picture of potential antitrust ramifications of an acquisition,” according to the proposal. The new rules would change all that by requiring an acquirer to provide information on the revenue it derives from both controlled and noncontrolled companies associated with it. Instead of providing the revenue information by company, however, it would have to categorize the data by industry under the North American Industry Classification System, the standard method used by federal statistical agencies.

Overall, the FTC proposal would “expand dramatically the information and documents” that filers must supply “regarding affiliated entities under common management,” according to a Morrison and Foerster client alert.

Despite their disagreements about the general effect of the proposal, attorneys agree that one provision packs a particular peril: filers must provide analytical reports created by investment bankers or industry consultants about the competition, sales growth, and product or geographic expansion of target companies issued up to two years before the HSR filing.

If the prose of dealmakers or consultants in such reports has been hyperbolic, it could attract regulatory scrutiny by the FTC or the DoJ, the lawyers fear. The authors of third-party reports “need to understand that what they write down is going to be discovered by the agencies,” says Robins. “They have to be careful to write accurately and not say things like ‘this is a great transaction because we’re going to be able to screw consumers’ or whatever.”

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