United States: What Counsel Should Know About Hart-Scott-Rodino Before Consummation Of A Merger Or Acquisition

For any attorney with a client contemplating a merger or acquisition, familiarity with the Hart-Scott-Rodino Antitrust Improvements Act of 1976, 15 U.S.C. § 18a (the "HSR Act" or the "Act") is essential. Failure to understand and comply with the requirements of the HSR Act can result in delays in consummating a transaction, make eventual compliance more burdensome, and, in the case of non-compliance, result in rescission of the transaction and significant civil fines. The purpose of this brochure is to provide a brief overview of the requirements of the HSR Act and the implementing regulations that have been promulgated by the Federal Trade Commission. See 16 C.F.R. § 801 et seq. While by no means a comprehensive review, reference to this brochure should be sufficient to put counsel on notice with respect to important deadlines in the HSR process and the scope of his or her client’s compliance burden.

What is the HSR Act?

The HSR Act requires parties to a merger or acquisition that meets certain dollar thresholds to file premerger notification reports with the Federal Trade Commission and the Department of Justice and to wait statutorily prescribed periods before consummating the transaction. The HSR Act is designed to give the federal agencies time to conduct antitrust reviews of the proposed acquisition and, if deemed appropriate, to challenge the transaction under Section 7 of the Clayton Act, 15 U.S.C. § 18, before the transaction is consummated. The fact that a transaction raises no possible antitrust issue does not, in and of itself, exempt the transaction from the Act. Any transaction meeting the Act’s threshold requirements triggers a filing unless one of several specific exemptions applies.

Which Transactions Require HSR Filings?

In general, there are two thresholds that must be satisfied before a transaction is reportable under the HSR Act – the "size of the persons" test and the "size of the transaction" test. The "size of the persons" test refers to the size of the parties to the transaction. The test is satisfied where there is, on one side of the transaction, a "person" with $113.4 million or more in total assets or annual net sales and, on the other side of the transaction, a "person" with $11.3 million or more in total assets or annual net sales. 15 U.S.C. § 18a(a)(2). Where the acquired person is not engaged in manufacturing, the threshold applicable to that person is $11.3 million in total assets or $113.4 million in annual net sales. Id.

The "person" for purposes of this test is the ultimate parent of the entity making the acquisition or the entity whose assets or voting securities are being acquired, and includes any other entities controlled, directly or indirectly, by that ultimate parent.

For purposes of the Act, "control" is defined as (i) with respect to a corporation or other entity that issues voting securities, holding 50 percent or more of the outstanding voting securities, or having a contractual right to designate 50 percent or more of the board of directors, or (ii) with respect to a partnership or other unincorporated entity, having the right to 50 percent or more of its profits or assets upon dissolution. 16 C.F.R. § 801.1(b).

Annual net sales and total assets of a "person" are those appearing on the ultimate parent’s last regularly prepared, consolidated annual statement of income and expense and on its last regularly prepared, consolidated balance sheet. 16 C.F.R. § 801.11.

The "size of the transaction" test refers to the size of the acquisition. A merger or acquisition is reportable only if the buyer will, as a result of the transaction, hold assets or voting securities of the seller, or any combination of the seller’s assets and voting securities, valued at more than $56.7 million. 15 U.S.C. § 18a(a)(3). Transactions valued at more than $226.8 million are reportable regardless of the size of the persons.

Assets must be valued at the higher of the acquisition price or fair market value. 16 C.F.R. § 801.10. In an asset acquisition, the acquisition price includes the value of any consideration paid for the assets plus the value of any assumed liabilities. Id. at § 801.10 (c)(2).

The fair market value must be determined by the board of directors of the acquiring person’s ultimate parent, or the board’s designee, acting in good faith. Id. at § 801.10(c)(3).

The rules for valuing voting securities differ depending on whether the securities are publicly traded. If the securities are traded on a national securities exchange or authorized to be quoted on an interdealer quotation system of a national securities association registered with the U.S. Securities and Exchange Commission ("SEC"), the voting securities are valued at the higher of the market price or the acquisition price. Id. If the securities are not traded on such exchanges, (e.g., for a private, closely-held corporation) the voting securities are valued at the acquisition price, if determined, or the fair market value. Id.

Note that the acquisition of "nonvoting" securities, i.e., securities that do not confer the right to vote for the board of directors or similar body, are not covered by the HSR Act.

Secondary Acquisitions. Whenever, as a result of an acquisition, an acquiring person obtains control of a corporate or non-corporate entity that holds voting securities of another issuer that the entity does not control, the indirect acquisition of the other issuer’s voting securities is considered a "secondary acquisition" that is separately reportable if it independently meets the Act’s jurisdictional thresholds. See 15 U.S.C. § 801.4. Note that secondary acquisitions of non-controlling interests in non-corporate entities (e.g., an indirect acquisition of a 30 percent interest in a partnership as a result of acquiring control of the corporation or unincorporated entity that holds that interest) are not reportable because acquisitions of interests in non-corporate entities are reportable only if they confer control.

Which Acquisitions are Exempt from the HSR Act?

The HSR Act and the regulations implementing the statute provide that many acquisitions meeting the "size of the persons" and "size of the transaction" tests are nonetheless exempt from the Act’s premerger filing and waiting period requirements. Some of the more frequently invoked exemptions are described below.

The "Investment Purposes Only" Exemption. The HSR Act provides that any person may acquire up to 10 percent of an issuer’s voting securities (regardless of the value of those securities) without making a premerger filing if the acquisition is "solely for the purpose of investment." 15 U.S.C. § 18a(c)(9). See also 16 C.F.R. § 802.9.

The exact scope of the "investment purposes only" exemption is unclear, but it is not available to a party who seeks to acquire control of the issuer, intends to influence the basic management decisions of the issuer (e.g., by holding a management position with the issuer) or intends to obtain a seat on the issuer’s board of directors (including by exercising a right to nominate or appoint a director). An acquiring party may intend to vote its shares and still have an "investment only" intent.

A party may acquire stock subject to the investment only exemption and then change its investment intent. No filing would be required for previously acquired stock. A filing would be required before any further acquisitions. 16 C.F.R. § 802.9, Example 3.

The "Ordinary Course of Business" Exemption. Section 18a(c)(1) of the HSR Act exempts acquisitions of goods or realty transferred in the ordinary course of business. See 15 U.S.C. § 18a(c)(1).

Upon this statutory basis, Rule 802.1 exempts acquisitions of: (i) new goods; (ii) inventory and supplies held for consumption, resale, or lease; (iii) used durable goods held solely for resale or lease; (iv) used durable goods, where those goods have been or will be replaced by the seller within six months of the transaction; or (v) used durable goods used by the seller solely to provide management and administrative support services for its business operations, where the seller has contracted in good faith with another person to obtain services substantially similar to those provided by the goods being sold. 16 C.F.R. § 802.1.

Rule 802.1 specifically excludes from the exemption acquisitions of goods as part of an acquisition of all or substantially all the assets of an "operating unit." 16 C.F.R. § 802.1(a). An "operating unit" is defined as "a business undertaking in a particular location or for particular products or services." Id. An "operating unit" may be a single store or production facility, and need not be a separate legal entity. See id.

Property Exemptions

Non-income Producing Property. In the past, the FTC’s Premerger Notification Office ("PMNO"), which is responsible for administering the HSR Act, had interpreted the exemption in Section 18a(c)(1) for real estate acquisitions narrowly and applied it only to certain limited types of real estate deemed by the PMNO to be non-income producing and/or not likely to raise antitrust concerns, including raw land, residential properties, and office buildings. The FTC also had applied the exemption to acquisitions by Real Estate Investment Trusts ("REITs") that are consistent with a REIT’s special tax status under the Internal Revenue Code. Rule 802.2, which took effect in April 1996, codifies the FTC’s previous positions on raw land, office and residential property, and creates several additional exemptions. See 16 C.F.R. § 802.2. Likewise, Rule 802.5 provides a broad exemption for acquisitions of investment rental property. See id. at § 802.5. Neither Rule 802.2 nor 802.5 narrows the pre-existing exemptions for acquisitions by REITs. Note that with respect to each of the exemptions contained in Rules 802.2 and 802.5, the

acquisition of any assets not covered by the particular exemption remains subject to the HSR Act as if those assets were being acquired separately, and will be reportable if valued at more than $56.7 million, unless another exemption applies.

New Facilities. The acquisition of new facilities is exempt from the reporting requirements of the HSR Act. 16 C.F.R. § 802.2(a). A new facility is one that has produced no income and was either constructed by the seller for resale or held by the seller solely for resale. Id. Also exempt are acquisitions from lessors by lessees that have had sole and continuous use of a facility since it was new. Id. at § 802.2(b).

Unproductive Real Property. Likewise, acquisitions of unproductive real property are exempt from the HSR Act. 16 C.F.R. § 802.2(c). In general, unproductive real property is real property, including natural resources and improvements (but excluding equipment) that has not generated total revenues in excess of $5,000,000 in the previous 36 months. Id. at § 802.2(c)(1). This does not include: (i) facilities that have not yet begun operation; (ii) facilities that were in operation any time in the previous 12 months; or (iii) real property that is adjacent to or used in connection with productive real property that is included in the acquisition. Id. at § 802.2(c)(2).

Office and Residential Property. Acquisitions of office and residential property are exempt. 16 C.F.R. § 802.2(d). To qualify, the property must be used "primarily" for office or residential purposes. Id. at § 802.2(d)(2). Although the Rule does not define "primarily," the comments accompanying the Rule indicate that the FTC will interpret this term to mean that at least 75 percent of the space in the property being sold is used for offices and/or residences. 61 Federal Register ("Fed. Reg.") 13666, 13676 (1996). In making this calculation, the total space being measured should consist of real property, the acquisition of which is not exempted by any other provision of the HSR Act or Rules. For example, any portion of the building consisting of retail rental property, the acquisition of which is exempt under Rule 802.2(f), should not be included. Assets incidental to the ownership of office and residential property (e.g., cash, prepaid taxes or insurance, rental receivables, and common areas) also are covered by the exemption. 16 C.F.R. § 802.2(d)(2). Note that if the acquisition includes a business that is conducted on the property, the value of the portion of the property used by that business is not exempt. Id. at § 802.2(d)(3).

Hotels and Motels. Acquisitions of hotels and motels, including improvements such as golf, health, restaurant, and parking facilities, are exempt. 16 C.F.R. § 802.2(e). This exemption does not cover the acquisition of a ski facility, however. Id.; See also 61 Fed. Reg. at 13676. This exemption also covers acquisitions of assets incidental to the ownership and operation of a hotel or motel, including management contracts and licenses to use trademarks. Id. Comments accompanying the Rule, however, state that acquisition of a hotel management business or the trademark itself, such as in the acquisition of one hotel chain by another, would not fall within this exemption. 61 Fed. Reg. at 13677. Those assets would have to be separately valued and aggregated with any other non-exempt assets in order to determine whether the $56.7 million threshold has been exceeded and a filing is required. Id. (The PMNO has taken the position, however, that acquisition of a management company used solely to manage the property being acquired is included in the exemption.) Finally, any hotel that includes a gambling casino is excluded from this exemption. 16 C.F.R. § 802.2(e)(2).

Recreational Land. Acquisitions of recreational land, including assets incidental to the ownership of such land, are exempt. 16 C.F.R. § 802.2(f). Such acquisitions would include the purchase of land used primarily as a golf, swimming or tennis club facility. Id. According to comments accompanying the Rules, and consistent with Rule 802.2(e), recreational land does not include ski facilities, multi-purpose arenas, stadiums, racetracks, and amusement parks. 61 Fed. Reg. at 13677.

Agricultural Property. Acquisitions of agricultural property, including assets incidental to the ownership of agricultural property, are exempt. 16 C.F.R. § 802.2(g). Agricultural property does not include slaughtering, processing or packing facilities, or property adjacent to or used in connection with such facilities. Id. at § 802.2(g)(1). When this exemption was enacted in 1996, it included "associated agricultural assets" such as inventory (e.g., livestock, eggs and crops), structures that house livestock raised on the property, fertilizer and animal feed. Associated agricultural assets were removed from the exemption effective April 2002. See 67 Fed. Reg. 11898 (2002).

Retail Rental Space & Warehouses. Acquisitions of retail rental space (including shopping centers) and warehouses, including assets incidental to the ownership of such properties, are exempt from the Act. 16 C.F.R. § 802.2(h). This exemption will not apply, however, where the acquisition includes a business that is conducted on the property. Id. Such acquisitions might include the acquisition of a department store located in a shopping center, or a wholesale distribution business conducted in a warehouse. In such cases, the value of the portion of the property used by that business is not exempt, though this exemption still will apply to the remaining portions of the property that qualify for the exemption, (e.g., other portions of the shopping center not used by the department store).

Investment Rental Properties. Acquisitions of investment rental properties, i.e., real properties that will be held solely for rental or investment purposes, and assets incidental to the ownership of such properties (e.g., cash, prepaid taxes and insurance, and rental receivables), are exempt. 16 C.F.R. § 802.5. Rentals must be to parties not controlled by the buyer, other than rental of space for the sole purpose of maintaining, managing or supervising the operation of the property. Id. Note that the intent of the buyer, rather than the current use of the property, controls the availability of this exemption.

Carbon-Based Mineral Reserves. Acquisitions of reserves (or rights to reserves) of oil, natural gas, shale or tar sands are exempt if their value does not exceed $500,000,000. See 16 C.F.R. §802.3(a). Similarly, acquisitions of reserves (or rights to reserves) of coal are exempt if their value does not exceed $200,000,000. Id. at §802.3(b). The exemption covers associated exploration and production assets, as long as those assets are dedicated to the reserves in question. See id. at §802.3(a),(b). The exemption does not include any pipeline or pipeline system or processing facility that transfers or processes oil and gas after it passes through the meters of a producing field located within reserves being purchased or any pipeline or pipeline system that receives gas directly from wells for transportation to a natural gas processing facility or other destination. See id. at § 802.3(c).

Voting Securities or Non-Corporate Interests in Entities Holding Certain Assets the Acquisition of which is Exempt. The exemptions provided by 16 C.F.R. §§ 802.2, 802.3 and 802.5 apply only to acquisitions of assets. Rules 802.4, however, also exempts acquisitions of the voting securities or non-corporate interests in any entity that holds assets the direct acquisition of which is exempted by any exemption in the Act or the Rules, including exemptions that apply to real estate, certain foreign assets, cash, acquisitions made in the ordinary course of business, and acquisitions made solely for the purpose of investment, so long as the entity does not hold more than $56.7 million in non-exempt assets. See C.F.R. § 802.4. For purposes of this Rule, the assets of all issuers and unincorporated entities controlled by the acquired entity are included in determining if the limitation for non-exempt assets is exceeded. See id.

Acquisition of Stock Options, Warrants, and Convertible Voting Securities. The acquisition of stock options, warrants and convertible voting securities is generally exempt. Options, warrants and convertible voting securities are defined as "voting securities" for purposes of the HSR Act. 16 C.F.R. § 801.1(f). However, acquisitions of voting securities that do not confer present voting rights are exempt. 16 C.F.R. § 802.31. The exercise of an option or warrant or the conversion of a convertible security, so that the holder acquires voting rights, is covered by the HSR Act. 16 C.F.R. § 801.32.

Acquisitions by Securities Underwriters. Acquisitions of voting securities by a securities underwriter — in the ordinary course of the underwriter’s business and in the process of underwriting — are exempt. 16 C.F.R. § 802.60.

Intraperson Transactions. An acquisition in which the acquiring and at least one of the acquired persons are the same by virtue of a controlling interest in voting securities or non-corporate interests is exempt. Unlike the prior version of the Rule, the exemption applies in the same manner to both corporate and non-corporate entities. Thus, a transfer of voting securities, assets, or non-corporate interests between two corporate or non-corporate subsidiaries in which the acquiring person has a controlling interest (50 percent or more) is exempt. The amended Rule also broadens the exemption by allowing it to apply if at least one of the acquiring persons is the same as the acquired person. The former rule did not apply if there were two ultimate parents (e.g., a 50-50 joint venture) because all of the acquiring persons were not the same as the acquired person. Thus, if A and B each owned 50 percent of corporation C, and A contributed assets to C valued in excess of the statutory threshold, there was no exemption for either A or B; under the new Rule 802.30, A is exempt from filing because it is both an acquiring and acquired person, but B must file because it is an acquiring person, but not an acquired person. See 16 C.F.R. § 802.30.

Stock Dividends and Splits; Reorganizations. Rule 802.10 has been amended to conform the treatment of transactions involving corporate and non-corporate entities that do not result in a change in the acquiring person’s percentage of ownership. For instance, former Rule 802.10 exempted acquisitions of voting securities pursuant to stock splits and pro rata stock dividends. Amended Rule 802.10 adds an exemption for acquisitions of interests in unincorporated entities or voting securities where an entity is being converted into a new entity if (a) no new assets will be contributed to the new entity as a result of the conversion, and (b) either (i) the transaction does not increase the acquiring person’s per centum holdings in the new entity relative to its per centum holdings in the original entity or (ii) the acquiring person controlled the original entity.

Acquisition of Non-Corporate Interests in Financing Transactions. The FTC created an exemption for acquisitions of non-corporate interests that confer control of a new or existing unincorporated entity where the acquiring person is contributing only cash for the purpose of providing financing, and the terms of the financing agreement are such that the acquiring person will no longer control the entity after it realizes its preferred return. See 16 C.F.R. 802.65.

Acquisition of Non-U.S. Interests. A number of exemptions also are available with respect to acquisitions of foreign assets or the voting securities of foreign issuers. In general, applicability of these exemptions is determined by the extent to which the transaction has a connection to U.S. commerce. See 16 C.F.R. §§ 802.50, 802.51.

Acquisitions of Foreign Assets. A transaction in which a U.S. or non-U.S. person is acquiring assets located outside the United States is exempt if (a) there are no sales in or into the United States attributable to the assets, or (b) U.S. sales are attributable to the assets, but the acquiring person will not hold assets of the acquired person to which more than $56.7 million in U.S. sales are attributable as a result of the transaction. 16 C.F.R. § 802.50(a).

Where the foreign assets being acquired had more than $56.7 million in sales in the most recent fiscal year, the acquisition is nevertheless exempt if:

  • both the acquiring and acquired persons are foreign;

  • the aggregate sales of the acquiring and acquired persons in or into the U.S. were less than $124.7 million in their respective most recent fiscal years;

  • the aggregate total assets of the acquiring and acquired persons located in the U.S. are less than $124.7 million; and

  • the transaction is not valued at more than $226.8 million. 16 C.F.R. § 802.50(b).

Acquisitions of Voting Securities of a Foreign Issuer By a U.S. Person. A transaction in which a U.S. person is acquiring voting securities of a foreign issuer is exempt unless the issuer (including all entities it controls) (a) holds assets located in the United States having an aggregate fair market value of over $56.7 million (not including cash, government issued securities and certain other investment assets), or (b) made aggregate sales in or into the United States of over $56.7 million in its most recent fiscal year. 16 C.F.R. § 802.51(a).

Acquisitions of Voting Securities of a Foreign Issuer By a Foreign Person. A transaction in which a foreign person is acquiring voting securities of a foreign issuer is exempt unless the transaction will (a) confer control of the issuer and (b) the issuer either (i) holds assets located in the United States that have an aggregate fair market value of

over $56.7 million (not including cash, government issued securities and certain other investment assets); or (ii) made aggregate sales in or into the United States of over $56.7 million in its most recent fiscal year. 16 C.F.R. § 802.51(b)(1). If controlling interests in multiple foreign issuers are being acquired from the same ultimate parent, the assets located in the U.S. and sales in or into the U.S. of all the issuers must be aggregated to determine whether either $56.7 million threshold is exceeded. 16 C.F.R. § 802.51(b)(2).

Where the thresholds of 802.51(b)(1) are exceeded, the acquisition is nevertheless exempt if:

  • both the acquiring and acquired persons are foreign;

  • the aggregate sales of the acquiring and acquired persons in or into the U.S. were less than $124.7 million in their respective most recent fiscal years;

  • the aggregate total assets of the acquiring and acquired persons located in the U.S. are less than $124.7 million; and

  • the transaction is not valued at more than $226.8 million. 16 C.F.R. § 802.50(b).

Finally, certain acquisitions to or from foreign governments and certain foreign banking transactions are exempt. 16 C.F.R. §§ 802.52 (foreign governments) and 802.53 (foreign banking).

Acquisitions by Creditors. Certain acquisitions by a creditor, including acquisition of collateral or receivables, foreclosures, loan work-outs, acquisitions upon default, and acquisitions in connection with the establishment of a lease financing are exempt if the acquisition constitutes a bona fide credit transaction entered into in the ordinary course of the creditor’s business. 16 C.F.R. § 802.63. Similarly, an acquisition made by an insurer pursuant to a condition in a contract of insurance relating to fidelity, surety or casualty obligations is exempt if made in the insurer’s ordinary course of business. Id.

Acquisitions by Institutional Investors. Acquisitions of voting securities by certain institutional investors (including but not limited to banks, bank holding companies, savings and loans, trust companies, insurance companies, investment companies registered with the SEC, finance companies, broker-dealers, pension trusts and certain non-profits) are exempt provided a number of conditions are met, including that the acquisitions are made in the ordinary course of business, solely for the purpose of investment, will not result in the acquiring person controlling the issuer, and will result in the acquiring person holding 15 percent or less of the voting securities of the issuer. 16 C.F.R. § 802.64.

This exemption does not apply if the acquisition is of the voting securities of an institutional investor of the same type as any included in the acquiring person, or if an entity within the acquiring person that is not an institutional investor holds any voting securities of the issuer whose voting securities are to be acquired. Id.

When are Acquisitions by Newly Formed Entities, Formation of Corporations and Non-Corporate Entities, and Acquisitions of Non-Corporate Interests Exempt?

Under certain circumstances, an acquisition by a newly formed entity valued between $56.7 million and $226.8 million does not require premerger filings under the HSR Act because the newly formed entity does not satisfy the "size of the persons" test. As noted above, for acquisitions in this range, one party to the acquisition must be an $11.3 million person and one party must be a $113.4 million person in order for the acquisition to be reportable. If the buyer does not have $11.3 million in annual net sales or total assets, no acquisition by that entity can trigger a filing.

Because acquisitions by a corporation, partnership or other non-corporate entity (e.g., LLC) are considered to be acquisitions by the individual or firm, if any, that controls the corporation or non-corporate entity, the initial question when determining the size of a newly formed entity is whether there is a "controlling person." The assets and sales of any "person" that controls or is controlled by the entity must be included in calculating the size of a newly formed entity.

A corporation, or other entity that issues voting securities, is controlled by any shareholder that holds 50 percent or more of the corporation’s voting securities or by any individual or firm with the contractual right to designate at least 50 percent of the corporation’s board of directors. 16 C.F.R. § 801.1(b).

A partnership, or other non-corporate entity (i.e., an entity that does not issue voting securities), is controlled by any person who has a right to 50 percent or more of the entity’s profits or assets upon dissolution of the entity. Id. Thus, a general partner in a limited partnership is not deemed to control the partnership for HSR Act purposes unless the general partner has a right to 50 percent or more of the partnership’s profits or assets.

The difference in the control tests for corporations and non-corporate entities may have some bearing on the structure of an acquisition. For instance, a partnership acquisition vehicle is sometimes preferred because a general partner can retain wide discretion over partnership decisions without being held to "control" the partnership for Hart-Scott-Rodino purposes. But an acquisition may not be structured in a particular way solely to avoid an HSR filing. 16 C.F.R. § 801.90.

Note that for both the corporation and non-corporate entity tests, holdings by spouses and minor children must be aggregated in determining whether the 50 percent threshold has been met. 16 C.F.R. § 801.1(c)(2).

Assuming that a newly formed entity is not controlled by any individual or firm, and itself controls no other entities, the next question is whether the newly formed entity has $11.3 million in assets (a new entity formed solely through contributions of cash would not have annual sales; on the other hand, a new entity may have annual sales where it is formed in whole or part through the contribution of one or more previously existing entities). The amount of assets of a newly formed entity is determined by reference to the entity’s last regularly prepared balance sheet. A newly formed entity that has no regularly prepared balance sheet must prepare an initial balance sheet to determine whether the entity meets the $11.3 million size of the persons test.

Money borrowed in order to make an acquisition is not an asset in determining whether the $11.3 million test is met. 16 C.F.R. § 801.11(e). Thus, if a group of executives forms an acquisition corporation to make a leveraged buyout, and that corporation has no assets other than cash to be used for the acquisition, the acquisition corporation would have no assets for HSR purposes, it would not meet the "size of persons" test, and no premerger filing would be required before the buyout is consummated. (As noted above, this exemption would not apply to any transaction valued in excess of $226.8 million because the size of the persons test would not apply to such a transaction.)

The formation of a corporation (as opposed to an acquisition by a newly formed corporation) sometimes can trigger the notice and waiting period requirements of the HSR Act. Concerns arise when unrelated parties of substantial size form and take back stock in a corporation with significant assets. See 16 C.F.R. § 801.40. In evaluating whether the formation of a corporation is reportable, all assets contributed to the new corporation by the parties forming it are counted in calculating the size of the corporation, even those assets that will be used to make the corporation’s first acquisition. Id. It therefore is possible that the formation of a new corporation being used to make an acquisition will be reportable even though the acquisition itself will not be reportable under the exemption described above. In many instances, however, parties forming a new corporation to make an acquisition will contribute only cash in exchange for the stock they are taking back. When that is the case, formation of the corporation will be exempt under Rule 802.4 because the only assets held by the newly formed corporation will be exempt assets. See Rules 801.21 and 802.4.

Under the prior version of the Rules, the formation of a partnership, or the acquisition of a partial interest in a partnership, was not reportable under the Act because, by informal interpretation of the PMNO, partnership interests were considered neither assets nor voting securities. See 43 Fed. Reg. at 33485-33487 (July 31, 1978) and 50 Fed. Reg. at 38745 (September 24, 1985); See ABA Premerger Notification Practice Manuel, Third Edition, 2003 ("ABA Premerger Manual"), Interpretation No. 73. As a result, the acquisition of such interests was not reportable unless the acquisition resulted in the acquiring person holding 100 percent of the ownership interests. See ABA Premerger Manual, Interpretation No. 73.

In 2005, the FTC adopted several amendments to the HSR Act that harmonized the treatment of partnerships and other unincorporated entities with the treatment of corporate entities. Under the amended Rules, the formation of a partnership or other non-corporate entity (e.g., LLC), or an acquisition of ownership interests in an existing partnership or non-corporate entity, are reportable if (a) the formation or other acquisition results in at least one acquiring person obtaining a controlling interest in the non-corporate entity (i.e., a right to 50 percent or more of the entity’s profits or assets upon dissolution) and (b) the interest that the acquiring person will hold is valued at more than $56.7 million, and the size of the persons test, if applicable, is satisfied. See 16 C.F.R. § 801.50 and 801.2(f). The value of the non-corporate interests acquired is the acquisition price of the interests if determined or, if the acquisition price is undetermined, the fair market value of those interests. See 16 C.F.R. 801.10(d). Additionally, fair market value will be used to value the acquisition of interests in a non-corporate entity when the acquiring person already holds interests in that unincorporated entity. See Id. The total assets of a newly-formed entity are determined in accordance with Rule 801.40(d), which provides that the assets of a newly-formed corporation are any assets persons contributing to the formation of the corporation have agreed to contribute at any time plus the value of any amount of credit or any obligations of the corporation that persons contributing to the formation of the corporation have agreed to extend or guarantee at any time.

What are the Requirements when a Premerger Filing Must be Made?

If a premerger filing is required, the buyer and seller must make separate filings. In a stock acquisition, such as a tender offer, in which the buyer is buying stock from holders other than the issuer, the buyer must notify the issuer, at the time the buyer files, of the buyer’s acquisition plans and of the issuer’s obligation to make a filing. 16 C.F.R. § 803.5.

In their respective filings, the parties must provide information about the transaction (including copies of any signed letter of intent or purchase agreement), copies of documents filed with the Securities and Exchange Commission (including most recent proxy statement, Forms 10-K, 10-Q and 8-K), most recent annual audit report and most recent regularly prepared balance sheet, consolidated revenue figures broken down by lines of business using the Department of Commerce North American Industrial Classification System ("NAICS") Codes, information about subsidiaries, minority shareholders, and minority shareholdings in unaffiliated entities, a description of any geographic area of line of business overlap, and any competitive studies prepared by or for an officer or director of the acquiring or acquired person (or any of that person’s subsidiaries) for purposes of evaluating the acquisition.

Filings are submitted to the Federal Trade Commission and the Antitrust Division of the Department of Justice. The buyer’s filing with the FTC must be accompanied by a filing fee, the amount of which depends on the value of the transaction. For transactions valued at less than $113.4 million, a $45,000 fee is due; for transactions valued between $113.4 million and $567.0 million, a $125,000 fee is due; for transactions exceeding $567.0 million in value, a $280,000 fee is due.

Filings are kept confidential. The agencies will not disclose the contents of one party’s filing to the other party. The filings are not subject to release under the Freedom of Information Act. The two agencies’ sole task is to determine whether the proposed transaction is anticompetitive. On rare occasions, however, filings may be made available by the FTC or Justice Department in response to a request by a Congressional committee, or in the course of an administrative or judicial proceeding. 15 U.S.C. § 18a(h).

As a matter of practice, the agencies divide responsibility for conducting substantive antitrust reviews and parties must deal with only one of the two.

The Premerger Waiting Period

Where stock is purchased from a party other than the issuer (except cash tender offers) the buyer may not purchase the stock until 30 days after the agencies have received the buyer’s filing. If the acquisition is a cash tender offer, the waiting period expires 15 days after the buyer files. In all other transactions (i.e., stock purchased from issuer, mergers or asset acquisitions) there is a 30-day waiting period that begins only when both parties have filed. In all transactions, the waiting period does not begin until the buyer has paid the filing fee. 16 C.F.R. § 803.10. If the final day of the waiting period falls on a weekend or legal holiday, the waiting period does not expire until the end of the next business day.

The 30-day and 15-day waiting periods may be terminated early if both agencies agree to early termination. 16 C.F.R. § 803.11. Early termination of the 30-day period is common where transactions pose no antitrust concerns. Early termination notifications are published in the Federal Register. Id. The Federal Register listing includes the names of the ultimate parents of the buyer and seller, the name of the particular entity whose assets or voting securities are being acquired, the transaction number assigned to the acquisition by the FTC, and the date on which early termination was granted. Publication usually takes 10 days to two weeks following the grant of early termination. Similar information becomes available on the Federal Trade Commission website and a telephone recording as early as the day following the grant of early termination.

Either agency may extend the initial 30-day waiting period an extra 30 days by issuing a request for additional information (a "second request") to the parties for the purpose of conducting a more in-depth antitrust review of the transaction. The 15-day waiting period may be extended 10 days. 15 U.S.C. § 18a(e)(2). Again, if the final day of the waiting period falls on a weekend or legal holiday, the waiting period does not expire until the end of the next business day.

The extended waiting period does not begin running until the parties have complied with the second request. Second requests, which are essentially subpoenas, generally are very broad and compliance can take up to six months or more. The agencies have the discretionary authority to waive burdensome or irrelevant portions of second requests. If the reviewing agency insists on certain information that the parties claim would be unduly burdensome to produce, or a dispute arises with respect to whether the parties have substantially complied with the request, the parties may appeal to the Director of the Bureau of Competition at the FTC, or the Deputy Assistant Attorney General for Mergers at the Antitrust Division of the Justice Department. The agencies can extend the second request period only by court order, id., or with the consent of the parties. If there is a genuine antitrust issue raised by a proposed transaction, the parties may wish to consider negotiating with the reviewing agency and providing additional information before a second request is issued. If, at the end of the second request period and any extension, the reviewing agency determines that the transaction will violate the antitrust laws, and the parties indicate that they still plan to go forward, the agency may seek an injunction barring consummation of the transaction. Alternatively, the acquiring party may attempt to negotiate a consent agreement with the reviewing agency under which the proposed transaction would be modified in a manner that addresses the reviewing agency’s concerns, e.g., by divesting assets or licensing patents.

What are the Penalties for Noncompliance with the HSR Act?

Fines of up to $11,000 per day may be imposed against "any person" who fails to comply with the HSR Act. Fines of up to $11,000 per day also may be assessed against officers, directors or partners of entities in violation of the HSR Act. 15 U.S.C. § 18a(g).

A court may order divestiture of illegally acquired voting securities or assets or "grant other equitable relief as the court in its discretion determines necessary or appropriate." Id. Requested remedies may include rescission of the transaction.

Only the government may sue to enforce the HSR Act. Private parties may complain to the Federal Trade Commission and Justice Department about alleged violations, but private parties may not enforce or obtain damages under the HSR Act. See Hammermill Paper Co. v. Icahn, No. 80-47-B (W.D. Pa. 1980) (Slip. Op.).

Copyright © 2007, Mayer, Brown, Rowe & Maw LLP. and/or Mayer Brown International LLP. This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

Mayer Brown is a combination of two limited liability partnerships: one named Mayer Brown LLP, established in Illinois, USA; and one named Mayer Brown International LLP, incorporated in England.

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