President Barack Obama this month ordered federal agencies to review business rules already on the books with an eye toward eliminating “outdated regulations that stifle job creation and make our economy less competitive,” according to his opinion piece in the Wall Street Journal.
This will surely lead to some good. But given the lengthening roll of red tape facing financial sponsors, it must have been tough for them not to stifle a sarcastic chuckle.
Indeed, Buyouts magazine was first this month to report on an eleventh-hour effort by mid-market buyout shops to delay or eliminate a requirement imposed by the Dodd-Frank Act that firms with more than $150 million in assets under management register with the Securities and Exchange Commission as investment advisers. Registration would make covered buyout shops subject to a host of time-consuming and expensive filing requirements and compliance rules.
Meanwhile, in a less noted action, the Federal Trade Commission last summer proposed changes to its Hart-Scott-Rodino pre-merger notification rules that would give it more information upfront about buyouts and other M&A deals to determine if they raise antitrust concerns.
The FTC, together with the U.S. Department of Justice, reviews proposed acquisitions above a pre-determined size to ensure they don’t run afoul of legislation designed to prevent monopolistic behavior. The agency requires the ultimate parent of both the target and acquirer—unless exempted—to file a so-called “Notification and Report Form” to get the review started, and buyout firms and their targets typically file after signing a purchase agreement.
While easing some filing requirements, overall the proposed new rules would “increase the burden on private equity companies significantly” to obtain antitrust clearance, said John Sipple Jr., a counsel at the law firm Weil Gotshal & Manges LLP who earlier in his career spent 15 years running the pre-merger notification office at the FTC. Sipple said the changes appear to require filers to provide upfront the kind of information that the FTC and DOJ used to request only after their initial screen turned up a potential problem. He estimates that, in the past, about 15 percent of transactions merited close examinations, while in just a small percentage of cases did the agencies issue a formal second request for information.
One of the most contentious additions to the form, for example, would require acquirers and their targets to locate and submit market analyses and related documents prepared within the last two years by investment banks or other third-party advisers—even if the documents weren’t prepared in connection with the proposed transaction, and even if the documents were unsolicited. Today’s rules cover only documents produced in connection with the transaction at hand. The added document-gathering would raise the time requirement and costs of compliance. And, depending on who is consulted—the search could in some cases go beyond officers and directors of the filing parties—the process could raise the risk that news of the deal would leak prematurely to the press.
The FTC has also proposed that “associates”—defined broadly to include general partners and all of the funds that they manage—be subject to both new and existing reporting requirements. Among the new requirements, the acquirer would have to report minority interests, as defined, held by associates in entities that potentially compete with the target company. In an expansion of existing requirements, the acquirer would also have to identify potentially common lines of business in the most recent year of operations among itself, its associates and the potential target.
This second category of changes would translate into extra legwork by buyout shops that manage more than one partnership, since they would have to look for potential competitive overlap between the target and every one of their portfolio companies, regardless of which partnership they reside in, according to Ellen M. Jakovic, partner in the antitrust and competition practice of law firm Kirkland & Ellis LLP.
In its comments on the FTC proposal, the Private Equity Growth Capital Council wrote “that certain of the FTC’s proposed amendments to the Rules and Form will increase substantially the burden on reporting persons and agency staff without significantly enhancing the effectiveness of the anti-trust review conducted by the Agencies.” It recommended that some of the new rules be eliminated, including the one requiring the production of market reports unrelated to the proposed transaction. The council also suggested tightening up the definition of “associates” to ensure parties beyond GPs and their funds aren’t included.
Although the FTC could issue a new proposal, Sipple said the more likely route is for the FTC to issue final rules in March or April. An FTC spokesperson, declining to comment on other aspects of the proposal, said to expect final changes within the next couple of months.
In light of President Obama’s new executive order, let’s hope federal agencies like the FTC consider not just the elimination of existing rules but also the nixing or toning down of proposed rules as well.