US takeover rule changes to impact PE

Private equity's fight for favourable takeover rules was lost this week as US competition authorities unveiled sweeping changes in the way firms report mergers and acquisitions.

This week the Federal Trade Commission, the US body responsible for overseeing mergers and acquisitions, unveiled a number of changes to its pre-merger notification rulebook that will increase firms’ reporting costs.

Most notably, firms will be required to report “associates” in a filing – a term competition authorities will take to mean funds under common management. So if, for instance, a fund attempted to acquire a widget maker, the firm must now report any competing widget manufacturers owned by one of the firm’s sister funds, explained law firm Katten Muchin Rosenman in a client memo.

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In a consultation period regarding the changes last year, the Private Equity Growth Capital Council, the industry’s US lobbying arm, argued the “associate” concept would “significantly increase the burden and complexity” of compliance. It is worth noting the FTC tightened its definition of “associate” to in part address this concern.

Another new reporting requirement relates to a private equity firm's non-US activity. Pre-merger filings must now include any US-sourced revenues a firm’s foreign funds or operations generate within the same industry as a takeover target. The PEGCC argued such information would be difficult to collect as foreign businesses are not familiar with US revenue reporting methods.

Materials prepared by investment bankers, consultants or other third party advisors alongside any confidential offering memoranda relating to the sale of the takeover target will also be included in firms’ filings going forward. The government said documents prepared by outside advisors and marketing materials provide the commission a useful overview of a takeover target’s industry and an in-depth look into the target’s operations. The PEGCC in its submission argued such information could be redundant given the scope of current reporting requirements.

However, here too US competition authorities conceded ground regarding GPs' new reporting duties. Language was revised to reduce the number of documents that should be included in a filing – a point of concern for the buyout industry. The time period capturing which documents would need to be submitted was also shortened to one year from the original proposal of two – a concession the PEGCC lobbied for in its consultation submission.

In the end, “compiling and updating the additional information required by the form changes likely will be very time-consuming. Reporting parties should expect to spend additional time preparing HSR filings and should adjust their transaction timelines accordingly”, said law firm Kirkland & Ellis in a memo.