The “Overlap” and “Supply Relationships” Requirements Under HSR Rules

Overview of Requirements

The “Overlap” and “Supply Relationships” sections of the revised HSR form require filers to submit short narratives that self-identify any competitive overlap or supply relationships that may be known to exist between the parties. Specifically, the requirements are for each filer to provide a brief description of:

1. Any current or planned product or service lines of the filer that, to the filer’s knowledge, compete with a current or planned product or service of the other party to the transaction;
2. Any product, service, or asset (including data) that the filer has sold, licensed, or supplied in the past year to either (i) the other party to the transaction or (ii) any other business that uses the product, service, or asset to compete with the other party to the transaction; and
3. Any product, service, or asset (including data) that the filer has purchased, licensed, or obtained in the past year from either (i) the other party to the transaction or (ii) any other business that competes with the other party to the transaction for the same product, service, or asset.

The HSR instructions refer to requirement 1, above, as the Overlap Description. The instructions refer to requirements 2 and 3 together as the Supply Relationships Description. Please note that requirements 2 and 3 both have a $10 million threshold (discussed below under “Practical Tips”).

These descriptions should be based on a reasonable businessperson’s understanding of the parties’ businesses and should be consistent with the filer’s own business documents. The parties should base their responses on the information that is already known to them either through the ordinary course of business or through normal transaction diligence; in other words, the parties should not exchange information between themselves to respond to these requirements.

How This Information Gets Used

The FTC has called the Overlap Description requirement a “key reform” of the revised HSR rules. By requiring the parties to self-identify any known overlaps, the HSR form provides the Federal Trade Commission and Department of Justice (“Agencies”) with the parties’ candid self-assessment of any known or believed areas of “horizontal” (i.e., head-to-head) competition or potential competition between them. This information directly informs the Agencies’ decision whether to investigate more closely to determine whether the transaction may tend to substantially lessen competition.

The purpose of the Supply Relationships Description is more nuanced. Rather than identifying areas of “horizontal” competition between the parties, the Supply Relationships Description is instead used to identify any “vertical” (i.e., supplier-to-purchaser) relationships between the parties, or between one party and the other party’s competitors. This information, in turn, helps to inform the Agencies’ analysis as to whether the proposed transaction may cause harm to competition through a “vertical” theory, such as by creating an ability and incentive for the combined firm to foreclose rivals from accessing a competitively important input or customer.

The Overlap and Supply Relationships Descriptions also serve another purpose in the revised HSR form. To the extent the parties report any overlap or supply relationships, the parties are then required to provide additional information about these operations, including a list of top customers, information about certain prior acquisitions and certain “plans and reports” about the parties’ overlapping lines.

Illustration

Suppose that “CoffeeCo,” a vertically integrated coffee conglomerate, is acquiring “Beans,” a regional chain of retail coffee shops. CoffeeCo has retail stores that compete with Beans directly. CoffeeCo also sells bulk roasted coffee on a wholesale basis to third-party retailers, including to Beans. CoffeeCo also sells bottled iced coffees to various third-party coffee shops, but not to Beans; instead, Beans buys bottled iced coffees for resale from a competitor to CoffeeCo, called “Java To Go.” Confidentially, however, Beans has plans to launch its own line of bottled iced coffees in the near future, but because this information is competitively sensitive, Beans has not yet shared these plans with anybody at CoffeeCo.

In this scenario, both parties would report in their Overlap Descriptions that the parties compete in the retail sale of coffee. However, because the Overlap Description should be based on the parties’ own knowledge and documents, the parties could very well use different terminologies to describe this overlap. For instance, CoffeeCo might describe this overlap as the “retail sale of coffee, tea, pastries, and related products,” while Beans might describe this overlap as “retail coffee shops.” Whatever the terminology, this information would identify for the Agencies the possibility that the transaction might lessen head-to-head competition between the parties for the retail sale of coffee.

In their Supply Relationship Descriptions, both parties would report the sale (by CoffeeCo) and the purchase (by Beans) of roasted coffee on a wholesale basis. Again, the parties could very well use different words to describe this supply relationship. For instance, CoffeeCo might describe the supply relationship as the “wholesale sale of roasted coffee,” while Beans might describe the supply relationship as the “purchase of bulk coffee beans.” Whatever the terminology, this information would identify for the Agencies the possibility (however unlikely) that the transaction might foreclose other coffee shops from selling bulk coffee to Beans or might foreclose other third-party coffee shops from purchasing bulk coffee from CoffeeCo.

With respect to the sale of bottled iced coffees, CoffeeCo would report the “wholesale sale of bottled iced coffees” (or whatever terminology CoffeeCo uses in the ordinary course of business) as a relevant supply relationship, to reflect that CoffeeCo supplies those products to competitors of Beans. Similarly, Beans would identify its “purchase of bottled iced coffees” (or whatever terminology Beans uses in the ordinary course of business) from Java To Go as a relevant purchase relationship, to reflect that Beans buys those products from a company that competes with CoffeeCo for those products. This information would identify for the Agencies the possibility that the transaction might, for instance, unreasonably foreclose Java To Go from the sale of bottled iced coffees to Beans.

Finally, with respect to Beans’s plans to launch its own line of bottled iced coffees, Beans would report in its Overlap Description the “planned future sale of bottled iced coffee.” This information would identify for the Agencies the possibility that the transaction might substantially lessen competition for bottled iced coffees in the future, even though Beans does not sell its own line of bottled iced coffees today. However, because these plans are not known to CoffeeCo, CoffeeCo’s Overlap Description would not report a competitive overlap for bottled iced coffee. This omission from CoffeeCo’s HSR filing is fine and indeed entirely proper, because the Agencies should view it as a good thing that CoffeeCo does not know of Bean’s confidential plans to compete in this segment.

Practical Tips

• The Overlap and Supply Relationships should reflect any overlap or supply relationships that exist between buyer, buyer’s ultimate parent entity, and any legal entity that shares an ultimate parent entity with the buyer, on the one hand, and the business that is being acquired, on the other hand. Therefore, if “Buyer” is acquiring “Business Unit X” from “Seller,” then Buyer and Seller should each report any overlap or supply relationships that exist between Buyer (including its ultimate parent entity and any other commonly controlled entities) and Business Unit X. But if Seller has other business units that are not part of the transaction at issue, then the parties should not identify any overlap or supply relationships that exist between Buyer and those other, unrelated business units of Seller.

• The Overlap and Supply Relationships should reflect any competitive overlaps or supply relationships that exist anywhere in the world. For example, if the parties do not compete with each other in the United States but do compete head-to-head in Australia, then the parties’ Overlap Description should reflect their head-to-head competition in Australia. Of course, in that case the parties would be well served to make explicit in their filings that their competitive overlap takes place exclusively outside the United States.

• The Supply Relationships Descriptions requires identifying any sales, purchases, or “licens[ing]” of “asset[s] (including data).” This can require identifying, for example, licenses of patents, licenses of trademarks, licenses of software, or licenses of research or datasets. These sorts of supply relationships can be challenging to identify and describe, so parties should consult with experienced HSR counsel when these sorts of supply relationships are present.

• In response to a comment by this Firm, the FTC created an exception to the Supply Relationships requirement for sales or purchases that, in aggregate, represented less than $10 million in the most recent year (including internal transfers). While this exception is useful for certain truly de minimis overlaps, it is also quite narrow. It only applies if the filer’s total sales of the relevant product to all customers (or its total purchases of the relevant product from all suppliers) — including intra-person sales (or purchases) — was less than $10 million in the most recent year.

• The FTC has advised that, in appropriate cases, filers may be able to determine that their products or services do not compete with one another due to geographic separation. For instance, to modify the illustration provided above, if CoffeeCo’s retail coffee shops were all located in California and Beans’s coffee shops were all located in Florida, and neither party had plans to enter the other’s state, then there would be a reasonable basis for the parties’ respective businesspeople to conclude that their coffee shops do not actually compete with one another. But this is an easy example, and the analysis would be more difficult if the parties’ coffee shops were located in, say, adjacent states or in different regions within the same state. The FTC’s guidance is that the “assessment should be based on a businessperson’s understanding of the acquiring person’s or target’s (as appropriate) business operations and be consistent with business documents.” However, in difficult cases, parties should consult with experienced HSR counsel for specific guidance based on the unique circumstances of the particular transaction at hand.

Frequently Asked Questions

Q. Why should we self-report a competitive overlap? Couldn’t we just say “None”?

A. The HSR form needs to be certified, under penalty of perjury, by an authorized officer, director, or equivalent individual at the filer’s ultimate parent entity. Therefore, if the filer genuinely believes in good faith that there is not a competitive overlap, then the filer’s form should say so. But if the filer knows there to be a bona fide competitive overlap or supply relationship between the parties, the filer is required to self-identify that overlap or relationship in the HSR form.

Q. How are we supposed to prepare the “Overlap” and “Supply Relationships” descriptions? Do we need to hire an economist? Should we engage in any argument or advocacy?

A. The Overlap and Supply Relationships descriptions should be based on the filer’s existing knowledge of the other parties’ business — in other words, the parties should not exchange information for purposes of answering these items — and they should be drawn from and consistent with the filer’s own business documents. The FTC’s Statement of Basis and Purpose (SBP) indicates that descriptions should be prepared by “the individuals who best know the business,” based on “a businessperson’s understanding of the filer’s business operations and consistent with other business documents and materials submitted with the HSR Filing.” The SBP adds that the Agencies do not intend for these descriptions to necessarily correspond with a relevant antitrust “market.”

The Agencies do not expect the parties to hire an economist, draft an antitrust analysis or “white paper,” or supply arguments or advocacy in their Overlap or Supply Relationships descriptions. To the contrary, the Agencies ask that these descriptions be “brief,” and the SPB “discourage[s] lengthy responses or unnecessary commentary beyond what is strictly required.” That said, in appropriate cases — for example, a competitive overlap that exists only outside of the United States — a high-level explanation and/or light advocacy may be appropriate and helpful for the Agencies.

Q. Should we ask the other side how they plan to describe any Overlaps or Supply Relationships?

A. The instructions to the HSR form are explicit that the parties “should not exchange information for the purpose of answering” the Overlap or Supply Relationships items. This instruction reflects comments — including those submitted by this Firm — that competitively sensitive information is often deliberately kept away from business executives as a part of the antitrust safeguards adopted in connection with due diligence and integration planning. Instead, the SBP explains, the Overlap and Supply Relationship descriptions should be answered “on the basis of information known to [the parties] in the ordinary course of their business or through normal transaction diligence” and should only be answered “based on the knowledge and belief of the filing person.” This process “should not require information-sharing beyond what is absolutely necessary.”

All of that said, in appropriate cases the parties’ respective HSR teams — as opposed to the parties’ business teams — may choose to consult on a common-interest and/or outside-counsel-only basis, to ensure that no competitive overlaps or supply relationships are inadvertently omitted or misstated.

Q. How are the “Overlap” and “Supply Relationships” requirements different than the requirement to report revenue by NAICS codes?

A. There are several differences. First, the requirement to report revenue by NAICS codes applies only to United States operations (i.e., sales in or from the United States), whereas the Overlap and Supply Relationships requirements apply to operations conducted anywhere in the world.

Second, while the Agencies use NAICS codes as a proxy for identifying competitive lines of business, the reality is that NAICS codes were never designed for identifying competitive overlaps and are at best an imperfect proxy for this purpose — particularly in innovative technology sectors, where NAICS codes may not reflect the current state of the art. There are transactions where the parties may meaningfully compete with one another but not have a NAICS code overlap. For example, a full-service “Department Store” (NAICS code 455110) might compete with a specialized “Jewelry Retailer” (NAICS code 458310) even though they report under different NAICS codes. By the same token, there are transactions where the parties may have a NAICS code overlap but not compete with each other. For example, given the breadth of NAICS code 518210 “Computing Infrastructure Providers, Data Processing, Web Hosting, and Related Services,” a cloud-storage firm and a cryptocurrency miner might both report revenue under that same NAICS code even though their operations are not competitive in any way. Additionally, a Snack and Nonalcoholic Beverage Bar (NAICS code 722515) (e.g., a coffee shop) located in Florida will not meaningfully compete with a Snack and Beverage Bar located in California, even though they report under the same NAICS code.

Third, whereas the NAICS code requirement only identifies existing sources of revenue, the “Overlap” description requires identifying competitive business lines that are known to be “planned,” i.e., business lines that are currently in development. For example, if the buyer does not compete with the target today but is actively developing a product that would compete with the target in the future, then that “planned” competitive business line would need to be disclosed in the “Overlap” section, even if there is no NAICS code overlap today.

Finally, while the requirement to report revenues by NAICS code serves as a proxy for identifying competition between the parties, it does not identify any supply relationships that might exist between them or involving other competitors. Therefore, the Supply Relationships requirement is uniquely designed to identify supply relationships that may be relevant in a potential vertical merger analysis.

Q. What happens if the Agencies disagree with a filer’s Overlap or Supply Relationship description?

A. Because the SBP is clear that the Overlap and Supply Relationships should reflect “a businessperson’s understanding of the filer’s business operations,” there is no requirement or expectation that the descriptions follow any specific format or convention.

Importantly, however, the Agencies will scrutinize a filing to verify that the Overlap and Supply Relationships are consistent with the business documents the parties submit in their filings and to determine if there may be any Overlap or Supply Relationships that were not disclosed. For instance, if the parties identify a NAICS code overlap but do not report a competitive overlap, then the Agencies may follow up with the parties to explain that result. If the Agencies discover a material deficiency in the descriptions as a result of their scrutiny of a filing or transaction, then the Agencies may require the parties to submit a corrective HSR filing which, in turn, may result in the HSR waiting period being delayed or restarted.

If you have questions about Overlap and Supply Relationships under HSR rules, contact the authors or your Foley & Lardner relationship attorney. Click here to access all of the Foley Antitrust & Competition Practice Group’s HSR Primers.